ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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An Application of Stojanovic’s Matrix of Growth

Dynamics of Economic Growth in India

Using a model based on the Stojanovic’s matrix of growth to understand India’s economic progress shows that the service sector has been the dominant mover of the economy after the start of the reforms in 1990–91. The growth pattern, according to the matrix of growth, can be interpreted as maximising long-run efficiency, and hence, it might be an appropriate investment policy to approximate the output proportions generated using the matrix of growth.

 

Production activities are a necessary prerequisite for economies to grow. The gross domestic product (GDP) is an economic indicator which reflects the health of an economy. Unsurprisingly, numerically large values of GDP are believed to be the indication of a country doing well on economic parameters. These production activities can be broadly decomposed into three principal sectors: the primary sector which involves agriculture and allied activities, the secondary sector involving much of manufacturing and industries, and the tertiary sector which principally is composed of services like hotels, transport, communication and others. The process of economic development leads to changes in the sectoral composition of the GDP. As economies grow and the basket of goods produced in the economy increases, the share of primary activities start declining with a subsequent rise in the contribution of the secondary and tertiary sectors. However, it cannot be denied that a minimum threshold level of primary activities is needed before the economies can turn to the other sectors (Kaur et al 2009; Bathla 2015). The underlying idea behind this line of thinking is that the elasticities of the secondary and tertiary sectors with respect to income and employment opportunities are much larger than that of the primary sector. Also, not all countries have witnessed the same pattern of economic development. Several countries have traversed the development process depending upon the availability of raw materials, resources, institutions and various other factors that are specific to them. India, for example, primarily being an agriculture-based economy during the 1970s, made a substantial shift to the tertiary sector and hence in doing so, it missed the process of industrialisation to a large extent (Macrae 1971).

The sectors of an economy are interlinked through their interdependencies on the supply of intermediate inputs and outputs to the other sectors. Previous studies have discussed two types of linkages, namely consumption linkages and production (Bhardwaj 1966; Dhawan and Saxena 1992). The consumption linkages between the sectors are essentially a Keynesian framework that argues for the creation of effective demand by the expansion of a complex of industries. Industrial expansion leads to the generation of incomes and distribution of such incomes among the various stakeholders, which further leads to an increase in the demand for the output produced by the industries. For instance, a good harvest in a given year would generate more incomes for the farmers, who, with their increased income, would buy products that are made by the industries such as tractors, motorbikes, etc. Similarly, an increase in the demand for outputs produced by the secondary sector would lead to the generation of incomes for the industrial workers who would, with their increased income, engage in buying commercial goods such as electrical appliances and also spend more on the services being performed by the tertiary sector. Thus, the expansion of one sector leads to an increase in the output of the other sectors through the creation of effective demand. Production or technological linkages on the other hand refer to the way outputs are produced in the sectors. A production activity absorbs inputs from other sectors, and as such, whenever it operates on a positive output level, it stimulates the production of the input providing industries. This type of linkage is termed as “backward linkages” (Bhardwaj 1966). If the sector that provides inputs to the other sectors is able to reduce the price of its output either through greater efficiency of production or utilisation of scale economies, it leads to the initiation of or increasing the output levels of the industries that absorbs its output. Such a type of linkage is termed as “forward linkages.”

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Updated On : 11th Apr, 2022
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