Economic growth that increases real income per capita, reduces income inequality and decreases the count of poor people, and creates institutional changes and the technology development that affect growth is called Economic Development. It is essential for stimulating economic growth in an economy, creating new employment opportunities, and facilitating an improvement in quality of life, including increased access to opportunities through economic growth for present and future people. Indian Economic Development discusses distribution, production, and economic activities related to the people of the country which determines their standards of living.
Necessity of expanding Formal sources of credit in India
We need to extend formal sources of credit in India for the following reasons:
- Formal sector loans mainly include Cooperatives and Banks. The informal sector includes money lenders, employers, traders, etc.
- The informal sector tends to take advantage of borrowers by charging very high-interest rates.
- The formal sector is extremely important in saving people from this type of exploitation.
- The formal sector charges relatively low lending rates compared to the informal sector.
- It provides cheap and affordable credit to borrowers.
- It protects borrowers from the vicious cycle of poverty that eventually leads to debt traps.
- The Reserve Bank of India supervises the operation of the formal credit sources.
- This is done by imposing different rules and regulations to ensure that banks lend to small farmers and borrowers and not just to the traders and profit-making enterprises.
Advantages of Formal Sources of Credit
The cooperative societies and banks need to lend more for the following reasons:
- If Cooperative societies and Banks provide large amounts of credit to individuals, then disposable income will increase.
- People will get access to a better quality of goods and services through increased income.
- Small farmers and craftsmen will be able to establish small-scale or micro industries in their village area.
- People normally change to borrow through informal credit sources such as pawnbrokers to charge very high-interest rates.
- People are brutally exploited and humiliated by these informal sources of credit.
- This is mainly due to the lack of formal banking services availability in the region and the lack of awareness among the people.
- Formal credit must be distributed fairly so that the poor can also benefit from cheaper loans.
- Therefore Cheap and affordable credit is highly significant for the development of the country.
Sample Questions
Question 1: Why is the Indian economy significant to the world?
Answer:
The economy of India has a global importance. India has a large and young population and also an open democratic political system. Already it is the third largest economy in the world and also great contributor to global economic growth, but there is still considerable untapped potential.
Question 2: What are the ways to improve economic development?
Answer:
To improve economic growth:
- Lower interest rates : Lower the borrowing costs and increase consumer spending and investment.
- Increase in real wages : If nominal wages rise above inflation, then consumers will have more disposable to spend.
- Higher Global economic growth: Leads to increased spending on exports.
Question 3: What are the formal sources of credit in India?
Answer:
Formal sources of credit in India are regional rural banks, commercial banks, cooperative credit unions etc. The Reserve Bank of India monitors the operations of official lending sources. For example, we have seen that banks maintain minimum cash balances on the deposits they receive.