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Economic Growth and Economic Development

Economic Growth and Economic Development are two very basic concept to understand the
level and status of an economy. Though these two terms are sounds very similar, however
these are different from each other. Economic growth is quantitative in nature while Economic
Development is it also measures qualitative changes in the economy. Lets us understand both
the term broadly:

Economic Growth:
• Economic Growth is defined as the increase in the money value of goods and services
produced by all sectors of the economy in a specific time period.
• It is a quantitative measure that shows the possible increase in the number of commercial
transactions in an economy.
• It can be measured as a percentage increase in real gross domestic product. Where a gross
domestic product (GDP) is adjusted by inflation. i.e it can be measured using economic
concepts such as GDP and GNP.
• GDP is the market value of final goods & services which is produced in an economy or nation.
• Economic growth is a much narrower concept when compared to Economic Development.

Economic Development:
• Economic development is broader in nature. It not only includes the quantitative change but
also includes certain qualitative changes in the economy. Such as overall improvement in
health, well-being, and academic level of the general population of a nation.
• Economic development means not just increase in the real per capita income but also
reduction in economic-divide, poverty, illiteracy and unemployment.
• Thus, economic development includes both economic growth as well as social welfare.
Economic development should focus on inclusive growth – growth that includes all sectors of
the economy and all sections of the society.
• It is the qualitative improvement in the life of citizens of a country and is most appropriately
determined by Human Development Index (HDI).
• The economic development measures all the parameter on which the overall development
of a country is based such as standard of living, technological advancements, living conditions,
improvement in self-esteem needs, quality of life, the creation of job opportunities, per capita
income, infrastructural and industrial development, GDP and much more.

Economic Growth Economic Development

Economic Development is much broader
Economic growth is a narrow
concept than economic growth.
1. concept than economic
Economic Development= Economic growth
development.
+ Standard of Living
While Economic Development is considered
Economic Growth is considered as
as multidimensional phenomenon because
single dimensional in nature as it
2. it focuses on the income of the people and
only focuses on the income of the
on the improvement of the living standard
people of the country.
of the people of the country.
3. It is a short term process It is a long term process
It is Both qualitative and quantitative
Quantitative terms: Increase in real terms: Human Development Index (HDI),
4.
GDP. Human Poverty Index, Infant Mortality
rate, literacy rate etc….

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The Economic Development is related to

Economic Growth is related to the
5. the underdeveloped and developing
developed countries of the world.
countries of the world.
6. It is for a certain period It is a continuous process.

Conclusion
• Economic growth is the continuing increase in the volume of production in one country. while
economic development is not only quantitative but also qualitative changes that lead to better
meet their needs.
• Economic development is associated with the accumulation of capital. Under the capital we
mean permanent production goods that serve as a work tool in the production of other goods.
• Under the concept of investment we mean investing in fixed and revolving funds, but it is
used for replacement and construction of new capacity.
• Investments are divided in different ways according to purpose, according to their technical
structure and according to the criteria of funding sources.
• According to the purpose, the most important is the division into fixed investments and
investments in revolving funds.
• According to the criterion of sources of financing those investments that are financed from
the current distribution of national income categorize as net investments, and those
investments that are financed from the current distribution of national income and the
corresponding depreciation from gross investment funds call.
• The third macro-economic categories of investment are new investments, which are located
between the size of gross and net investment.
• When the accumulation of greater investment over saving than investing, and when the
accumulation less than an investment, the more it consumes, which initiates an increase in
production, employment and capacity.

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Sustainable Development Goals (SDGs)

The sustainable development goals (SDGs) are a new, universal set of goals, adopted by the United Nations General
Assembly in 2015. 193 member countries, including India, got committed to the 17 Sustainable Development Goals that
require efforts to end all forms of poverty, fight inequalities and tackle climate change while ensuring that no one was
left behind. This agreement marks an important milestone in putting our world on an inclusive and sustainable course.
India played a significant role in making the declaration and its progress in achieving these goals are crucial for the world
as it is home to about 17% of the world population. NITI Aayog is the national body primarily responsible for
implementing the SDGs in India.

The 17 Sustainable Development Goals are:

1. End poverty in all its forms everywhere
2. End hunger, achieve food security and improved nutrition, and promote sustainable agriculture
3. Ensure healthy lives and promote wellbeing for all at all ages
4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive employment, and decent work for
all
9. Build resilient infrastructure, promote inclusive and sustainable industrialisation, and foster innovation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts (taking note of agreements made by the UNFCCC forum)
14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat
desertification and halt and reverse land degradation, and halt biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build
effective, accountable and inclusive institutions at all levels
17. Strengthen the means of implementation and revitalise the global partnership for sustainable development.
The SDGs were officially adopted at a UN summit in New York in September, and became applicable from January 2016.
The deadline for the SDGS is 2030. These Goals were born at the United Nations Conference on Sustainable Development
in Rio de Janeiro in 2012.
UN Millennium Development Goals (MDGs)
At United Nations Millennium Summit held in New York in September 2000, 8 international development goals agreed
to be achieved by 192 UN Members and 23 International organisations by 2015. These goals are called Millennium
Development Goals (MDGs).
Those eight goals are:
1. Eradicate Extreme Hunger and Poverty
2. Achieve Universal Primary Education
3. Promote Gender Equality and Empower Women
4. Reduce Child Mortality
5. Improve Maternal Health
6. Combat HIV/AIDS, Malaria and Other Diseases
7. Ensure Environmental Sustainability
8. Develop a Global Partnership for Development
1. Eradicate Extreme Hunger and Poverty: there were two targets under this goal-
• The first target under this goal was between 1990 and 2015, halving the proportion of people whose income is less
than $1 a day.
• The second target under this goal was between 1990 and 2015, halving the proportion of people who suffer from
Hunger.
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2. Achieve universal primary education:

• Under this goal it was ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full
course of primary schooling. More than half of all out-of-school children are in sub-Saharan Africa.
• Progress has been made in lifting school enrolment rates for primary and secondary education although the pace of
improvement has slowed in recent years. In developing regions, the enrolment rate for children of primary school age
rose from 82 to 90 per cent between 1999 and 2010.
3. Promote gender equality and empower women: There were two targets under goal
• Achieve full and productive employment and decent work for all, including women and young people
• Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no
later than 2015
4. Reduce child mortality: Under this goal the target was to
• According to the United Nations Development Programme (UNDP), on average in developing countries, for every 1,000
children, 100 die before the age of five. Therefore, reduce it by two thirds, between 1990 and 2015, the under-five
mortality rate.
5. Improve Maternal Health
• In 2000, more than half a million women died in childbirth or from pregnancy-related complications.
• Ninety-nine percent of these deaths, many of them preventable, occur in developing countries. Infections, severe
blood loss and unsafe abortions account for the majority of deaths.
• Goal 5 calls for reducing the rate of maternal mortality by 75 % by 2015.
6. Combat HIV/AIDS, Malaria and Other Diseases
• The rampant spread of infectious diseases threatens to reverse development progress, reduce life expectancy and cut
productivity.
• With an estimated 40 million people living with HIV/AIDS and 20 million deaths since the disease was first identified,
AIDS poses an unprecedented health, economic, and social challenge on a global scale.
• Therefore, under this goal the target was have halted by 2015 and begun to reverse the incidence of malaria and other
major diseases

7. Ensure Environmental Sustainability: Under this goal the targets were-

• To Integrate the principles of sustainable development into country policies and programs and reverse the loss of
environmental resources.
• Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation
• Have achieved by 2020 a significant improvement in the lives of at least 100 million slum dwellers
8. Develop a Global Partnership for Development:
• To achieve above seven goals the last eighth goal is most significant. Because, without key partnerships between rich
and poor countries, the previous seven goals may not be achievable.
• Great opportunities for growth and development exist in today’s fast-changing global economy, but many poor
countries have been left behind, lacking access to new technologies as well as the resources to participate in the
globalization process.
India & Millenium Development Goals:
• The Government had launched several large programmes with regard to the MDGs. The areas that require maximum
efforts include literacy, nutrition, maternal mortality and child mortality.
• The responsibility of implementing most of the social sector programmes relating to the Goals lies with the state
governments. India has launched following programmes in an effort to achieve MDGs:
• NREGA (National Rural Employment Guarantee Scheme)
• Jawaharlal Nehru National Urban Renewal Mission
• Sarva Shiksha Abhiyan (Education for All Campaign), launched in the year 2000, is a national programme to make
elementary education accessible to all.
• National Rural Health Mission is focused on basic health-care delivery systems through a synergistic approach focusing
on sanitation, water, nutrition, and health care.

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FOREX Risks & Management & Currency

Convertibility
In this globalised world, exchange of information to capital is the common phenomena.
For the rapid growth of world trade and capital flows between countries convertibility of a
currency is desirable. Without free and unrestricted convertibility of currencies into foreign
exchange, trade and capital flows between countries cannot take place smoothly.
The foreign exchange market is a global decentralized or over-the-counter market for the
trading of currencies. Convertibility of a currency we mean currency of a country can be
freely converted into foreign exchange at market determined rate of exchange that is,
exchange rate as determined by demand for and supply of a currency.
For a smooth functioning of global trade and economy, FOREX & its risk management
along with currency convertibility plays a crucial role.
Foreign Exchange Risk

What is Foreign Exchange Risk?

Foreign exchange risk refers to the losses that an international financial transaction may
incur due to currency fluctuations. Also known as currency risk, FX risk and exchange-rate
risk, it describes the possibility that an investment’s value may decrease due to changes
in the relative value of the involved currencies.
Here are few points related to FOREX risk:
➢ FOREX risk arises when a company engages in financial transactions denominated in a
currency other than the currency where that company is based.
➢ Any appreciation / depreciation of the base currency or the depreciation / appreciation
of the denominated currency will affect the cash flows emanating from that transaction.
➢ Foreign exchange risk can also affect investors, who trade in international markets,
and businesses engaged in the import / export of products or services to multiple
countries.
➢ Fluctuations in the exchange rate could adversely affect this conversion resulting in a
lower than expected amount.
➢ An import / export business exposes itself to foreign exchange risk by having account
payables and receivables affected by currency exchange rates.
➢ This risk originates when a contract between two parties specifies exact prices for
goods or services, as well as delivery dates.
➢ If a currency’s value fluctuates between when the contract is signed and the delivery
date, it could cause a loss for one of the parties.

Types of FOREX risk

There are three types of foreign exchange risk:
1. Transaction risk: This is the risk that a company faces when it is buying a product
from a company located in another country. The price of the product will be denominated
in the selling company's currency. If the selling company's currency were to appreciate
versus the buying company's currency, then the company doing the buying will have to
make a larger payment in its base currency to meet the contracted price.
2. Translation risk: A parent company owning a subsidiary in another country could face
losses when the subsidiary's financial statements, which will be denominated in that
country's currency, must be translated back to the parent company's currency.
3. Economic risk: Also called forecast risk, refers to when a company’s market value is
continuously impacted by an unavoidable exposure to currency fluctuations.

FOREX Risk Management

Companies that are subject to FOREX risk can implement hedging strategies to mitigate
that risk. Here are some of the important FOREX risk management system:
Transaction hedging

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Firms with exposure to foreign-exchange risk may use several hedging strategies to reduce
that risk like use of money markets, foreign exchange derivatives such as forward
contracts, options, futures contracts, and swaps or with operational techniques such as
currency invoicing, leading and lagging of receipts and payments, and exposure netting.
➢ Forward and futures contracts: It allow transactions that take place in the future
for a specified price at a specified rate that offset adverse exchange fluctuations. Forward
contracts are more flexible because they can be customized to specific transactions.
➢ Currency invoicing: It is another method which refers to the practice of invoicing
transactions in the currency that benefits the firm. This does not necessarily eliminate
foreign exchange risk, but rather moves its burden from one party to another.
➢ Leading and lagging: It refers to the movement of cash inflows or outflows either
forward or backward in time to adjust the risk.
➢ Having a back-up plan, such as foreign-currency accounts, will be helpful in natural
hedging.

Translation hedging
Translation exposure is largely dependent on the translation methods required by
accounting standards of the home country. Firms can manage translation exposure by
performing a balance sheet hedge, since translation exposure arises from discrepancies
between net assets and net liabilities solely from exchange rate differences.
➢ Foreign exchange derivatives can be used to hedge against translation exposure.
➢ A common technique to hedge translation risk is called balance-sheet hedging, which
involves speculating on the forward market in hopes that a cash profit will be realized to
offset a non-cash loss from translation.
➢ Companies can also attempt to hedge translation risk by purchasing currency swaps
or futures contracts. Companies can also request clients to pay in the company's domestic
currency, whereby the risk is transferred to the client.
Flexible Sourcing
Policy of flexible sourcing in the supply chain management can diversify export market
across a greater number of countries.
Also, implementing strong research and development activities and differentiating its
products can help in pursuit of less foreign-exchange risk exposure

Currency Fluctuations
By paying attention to currency fluctuations around the world, firms can advantageously
relocate their production to other countries. For this strategy to be effective, the new site
must have lower production costs. There are many factors a firm must consider before
relocating, such as a foreign nation's political and economic stability.
Currency convertibility
Currency convertibility is the ease with which a country's currency can be converted into
gold or another currency. Currency convertibility is important for international commerce
as globally sourced goods must be paid for in an agreed upon currency that may not be
the buyer's domestic currency.
Types of currency convertibility
There are two popular categories of currency convertibility
1. Convertibility for current international transactions: Current Account
convertibility (partial) implies removal of all restrictions relating to purchase and sale for
current transactions for goods and services. In the case of current account convertibility,
it is necessary to satisfy the IMF that restrictions on the current account have been virtually
removed and that if there are any payment restrictions, the units are sufficiently liberal
2. Convertibility for international capital movements: It refers to the freedom to
convert the domestic currency into other internationally accepted currencies and vice
versa. Article VIII of the International Monetary Fund (IMF) puts an obligation on a
member to avoid imposing restrictions on the making of payments and transfers for
current international transactions. Members may cooperate for the purpose of making the
exchange control regulations of members more effective.
Advantages of Currency Convertibility

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➢ Export promotion: An important advantage of currency convertibility is that it

encourages exports by increasing their profitability. With convertibility profitability of
exports increases because market foreign exchange rate is higher than the previous
officially fixed exchange rate encouraging those exports which have low import-intensity.
➢ Incentive to Import Substitution: Since free or market determined exchange rate
is higher, imports become more expensive after convertibility of a currency. This
discourages imports and gives boost to import substitution.
➢ Incentive to send remittances from abroad: In India, rupee convertibility provided
greater incentives to send remittances of foreign exchange by Indian workers living abroad
and by NRI. Further, it makes illegal remittance such ‘hawala money’ and smuggling of
gold less attractive.
➢ Balancing Ability: When balance of payments is in deficit due to over-valued
exchange rate, under currency convertibility, the currency of the country depreciates
which gives boost to exports by lowering their prices on the one hand and discourages
imports by raising their prices on the other.
➢ Integration of World Economy: Currency convertibility gives the chance to an
economy to interact with the rest the world economy. The expansion in trade and capital
flows between countries will ensure rapid economic growth in the econo-mies of the world.
In fact, currency convertibility is said to be a prerequisite for the success of Globalisation.

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RBI Grade B 2020: Portfolio Investment

What is portfolio investment?
➢ A portfolio investment is ownership of a stock, bond, or other financial asset with the
expectation that it will earn a return or grow in value over time, or both.
➢ It entails passive or hands-off ownership of assets as opposed to direct investment,
which would involve an active management role.
➢ The purpose of the investment is solely financial gain in portfolio investment, in
contrast to foreign direct investment (FDI), which allows an investor to exercise a certain
degree of managerial control over a company.
➢ The term portfolio investments cover a wide range of asset classes including stocks,
government bonds, corporate bonds, real estate investment trusts (REITs), mutual funds,
exchange-traded funds (ETFs), and bank certificates of deposit.
➢ Portfolio investments can also include more esoteric choices including options and
derivatives such as warrants and futures.
➢ There also are physical investments such as real estate, commodities, art, land, timber,
and gold.
➢ In fact, a portfolio investment can be any possession that is purchased for the purpose
of generating a return in the short or long term.
➢ Portfolio investment may be divided into two main categories:
• Strategic investment: It involves buying financial assets for their long-term growth
potential or their income yield, or both, with the intention of holding onto those assets for
a long time.
• Tactical approach: The tactical approach requires active buying and selling activity in
hopes of achieving short-term gains.
➢ In a Portfolio Investment, there are two types of risk – systematic risk and
unsystematic risk.

Types of Portfolio Investment

An investment gives returns in proportion to the risk factor. Every financial investor will
have their own risk profile which is tailored to their specific investments. But the
investments available in the market are not tailored to such needs. Hence each investor
will have a specific requirement that can be maintained using a portfolio.
The different types of portfolio investment are as follows:
1. Risk-Free Portfolios: Risk-free portfolios are the ones that have investment securities
regarding treasury bonds and such where the risk is almost nil but low returns.
2. Low-Risk Portfolios: A portfolio with majorly risk-free assets combined with some
risk-based securities to give a blend of low risk, decent returns.
3. Medium Risk Portfolios: Portfolio with more risk-free securities than the high-risk
portfolio but fewer risk-based assets.
4. High-Risk Portfolios: This type of portfolio investment includes a lot of high-risk
securities that benefit with high returns.

Benefits of Portfolio Investment

➢ An individual’s risk profile can be met using the portfolio investment. It cannot be done
by searching for a financial investment that allows the individual his own risk profile.
➢ An individual can decide how to diversify his investments -by stocks, or by markets,
or by type of investments.
➢ If the investor wants to manage different points of liquidity. It cannot be managed by
one stock or one bond. But having a portfolio of assets will help him in having a steady
flow of income, or flow of income in a necessary timing.
➢ Not all stocks pay dividends. Some stocks pay dividends and some stocks are growth
stocks. If the investor’s requirements from an investment stand somewhere in between,
then they can choose to invest in a portfolio that helps them in having the benefits of
dividends and growth stocks.

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➢ Investing in such multiple assets requires minimal management. This will reduce the
transactional cost of investment and will help in saving additional costs.
➢ For people investing in multiple securities, the individual security analysis is not as
important as the conjoint analysis. This helps in reducing the social cost of the investment.

Drawbacks of Portfolio Investment

The following are the disadvantages of portfolio investments:
➢ In Portfolio investment, the movement of stock prices is more uncertain as the risk is
gauged as a whole, and hence the flow of information is uncertain.
➢ If proper research is not made and proper risk profile is not calculated, the portfolio
will not yield optimum returns.
➢ In order to calculate what the returns must be for a certain amount of risk, the person
has to analyse multiple stocks and form a portfolio. Though there are companies available
that analyse these sorts of portfolios and provide them, that still does not benefit the user
to a complete extent.
➢ Financial knowledge is mandatory for people who are trying to invest in using a
portfolio instead of individual stocks. The relations between individual stocks, between
stocks and markets, is a difficult thing to analyse.

Some relevant facts related to Portfolio Investment

➢ Portfolio investment comes under SEBI in India.
➢ Securities and Exchange Board of India (SEBI) is conceiving an idea to merge Non-
Resident Indian (NRI) and Portfolio Investment Scheme (PIS) routes with that of Foreign
Portfolio Investors (FPIs) on the recommendation of Harun Rashid Committee.
➢ The Securities and Exchange Board of India (SEBI) has doubled the minimum
investment limit for clients of Portfolio Management Services to Rs 50 lakh.
➢ Indian Councils Act, 1861 introduced the portfolio system in India.