Objectively differentiate between Demand-led, Investment-led and Consumption-led Economic Growth models. Which model suits to Indian Economy? Discuss.

Published: February 6, 2016

Model Answer:
There are several drivers of Economic Growth such as:
Demand-led Growth
The policy of fiscal stimulus or increase in government expenditure, decrease in taxes may allow people to spend more in consumption, which increases the aggregate demand for goods and services in an economy.
Investment-led growth
The higher capital investment in the form of machinery and infrastructure increases the productive capacity of the economy. The higher the investment; the higher is the profit and further is the investment. The Economic growth model of China in recent decades is most suitable example of Investment-led growth model.
Consumption-led Economic Growth
Consumption increases, which leads to higher demand in the economy. This in turn will lead to higher output and hence higher growth. This model is applicable in an economy where income is well distributed among the people with very little or no inequality. So, the consumption and demand is always high. For example, USA is based on consumption-led economic growth.
In countries like India, the growth tends to be more driven by the savings and is thus called Savings driven growth. India’s growth has mostly come from its internal sources unlikely to that of China, which is modeled on foreign investment. India has a large trade deficit; yet, India has managed to grow at reasonably high rates.

Model Questions Category: