Shipbuilding industry can bolster ‘Aatmanirbhar Bharat’, says Survey

Shipbuilding industry can bolster ‘Aatmanirbhar Bharat’, says Survey

Subject: Economy

Section: National Income

Concept:

• Identifying the shipbuilding industry as a strategically important industry for its role in energy security, national defence, and the development of the heavy engineering industry, the Economic Survey,2022-­23 noted that it has the potential to increase the contribution of the industry and the services sector to the national GDP.
• Based on international shipbuilding statistics, if one takes a conservative Marginal Consumption to GDP Ratio (MCGR) of 0.45 for the shipbuilding sector, the investment multiplier would be approximately 1.82.
• For example, an injection of approximately ₹1.5 lakh crore in naval shipbuilding projects would accrue a circulation of ₹ 2.73 lakh crore in the shipbuilding sector due to the multiplier effect,” the survey said.

Investment Multiplier

• Investment multiplier is an important part of economic theories suggested by notable economist John Maynard Keynes.
• According to this concept, in the event of an increase in the investment activities either public or private which can be in the form of private consumption spending, government spending in an economy, there is a corresponding increase in the Gross Domestic Product (GDP) of the economy by a value more than the amount invested.
• In simple words, investment multiplier refers to the increase in the aggregate income of the economy as a result of an increase in the investments done by the government in the form of new projects.
• The size of the investment multiplier is determined by the decisions of the households in an economy in the areas of spending (which is known as marginal propensity to consume) or saving (known as marginal propensity to save).
• The multiplier can be represented by the following formula,
• K = ΔY / ΔI
• Where,
  • ΔY = Increase in GDP or National Income
  • ΔI = Increase in Investment
• Marginal Propensity to Consume (MPC)
• It measures the proportionate rise in the consumption with increase in income or we can say it measures the proportion of extra pay that is spent on consumption of goods and services rather than saving it.
• Marginal Propensity to Consume or MPC is dependent on the income level. It may vary with the income levels and it can be seen that the MPC is lower at higher income levels.
• MPC can be calculated by determining the change in consumption divided by the change in income.
• Marginal propensity to save (MPS)
• It is used by economists in order to quantify the relationship between changes in income and changes in savings. It refers to the proportion of a raise in pay that a consumer saves rather than uses for consuming goods and services.
• It is calculated by simply dividing the change in savings by the change in income.
• A larger MPS indicates that small changes in income lead to large changes in savings, and vice-versa.