Q. Which of the following measures will spur the economic growth?
1. Transparent and hassle free land acquiring.
2. Availability of Skilled labour.
3. High interest rates in the economy.
4. Decrease in effective demand.
Select the correct answer using the code given below:

[A] 1 and 2 only

[B] 2, 3 and 4 only

[C] 1, 3 and 4 only

[D] 1, 2, 3 and 4

Answer: A
  • The traditional argument is that the lower the interest rate, the better for businesses as it brings down the cost of capital, making investments more attractive.
  • Any government would love this as the country would then draw higher investments leading to higher growth and more job creation.
  • Governments abhor higher interest rates as, theoretically, these push up project costs and keep investors away.
  • Capital is one of the three main factors of production, which are critical to the growth of a commercial entity, the other two being land and labour.
  • But capital is only a necessary, not sufficient, condition. Land, unless allocated by the local government, is too costly for investors seeking to set up shop.
  • On labour, even if adequate hands are available for a job, the skill quotient is still low. Training graduates to be job-ready is a form of tax that companies pay.
  • Also to be taken into account is the market environment and demand. If end users are seeing lesser money in hand than earlier, demand will certainly be impacted.
  • Therefore, in an environment where the other factors of production are not favourable for an investor, low interest rates by themselves may not prove attractive enough.
  • Any revival of economic activity will be contingent on joint efforts by the government on the fiscal front to stimulate demand, and the RBI, to keep interest rates low.

Source: Source