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Capital Formation

This document defines capital formation as the transfer of savings from households and governments to businesses, increasing output and economic expansion. It discusses different types of capital formation including domestic capital, foreign capital, and human capital. It provides data on India's gross fixed capital formation from 1950-51 to 2003-04. It also discusses factors influencing capital formation in India such as saving rates, sources of domestic saving, reasons for low saving rates, and trends in domestic saving.

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251 views20 pages

Capital Formation

This document defines capital formation as the transfer of savings from households and governments to businesses, increasing output and economic expansion. It discusses different types of capital formation including domestic capital, foreign capital, and human capital. It provides data on India's gross fixed capital formation from 1950-51 to 2003-04. It also discusses factors influencing capital formation in India such as saving rates, sources of domestic saving, reasons for low saving rates, and trends in domestic saving.

Uploaded by

NupoorSharma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Definition

The transfer of savings from


households and governments to
the business sector, resulting in
increased output and economic
expansion.

Increasing
Marginal
Returns

Diminishing
Marginal
Returns

Negative
Marginal
Returns

Q=F(K,L)

AP
MP

Capital Formation

Domestic Capital

Foreign Capital

Human Capital

Money invested in training and


development of the labor to effectively
utilize the physical capital invested in
the business, resulting in decrease in
capital to output ratio.

Gross Fixed Capital Formation

Investment done in Physical Capital in a


country
Agricultural
Simple & Old fashioned implements & Tools
Kucha Structure

Unorganized sector

Gross Fixed Capital Formation


YEAR

GFCF

Change in stock

1950-51

8.9

1.6

1960-61

12.7

1.9

1970-71

14.00

1.8

1980-81

18.5

0.2

1990-91

22.9

1.1

1999-00

23.3

2.0

2000-01

22.7

0.9

2001-02

23.1

0.6

2002-03

24.1

0.6

2003-04

24.7

0.7

Source: Economic Survey 2005-06

Gross Domestic Capital


Formation

Large public investment


Largely domestically financed.
Evaluation of investment performance
A rising rate
Strengthening of economy
Slow rise

Unnecessary Inventories
Inefficient use of capital
Unplanned investment
Incapacity for investment

Types of Domestic Saving


SAVINGS

HOUSEHOLD

FINANCIAL
SAVINGS

PHYSICAL
ASSETS

POSSESSION OF
CURRENCY

MACHINERIES

INVESTMENT IN
SHARES &
DEBENTURE

STOCKS

GOVT
SECURITIES

LIFE
INSURANCE

PROVIDENT
FUNDS

PRIVATE SECTOR

PUBLIC LTD CO
(NON GOVT,
NON FINANCIAL CO)

NET PROFIT
(FINANCIAL STATEMENT)

PUBLIC SECTOR

ADMINISTRATIVE
DEPT

ENTERPRISES

NET PROFIT
(FINANCIAL STATEMENT)

Reasons For Low Saving Rate


in India

Low per capita income

Exemption on Agriculture Income from


government

Demonstration effect

Failure of private sector

Failure of public sector

Sources of Saving in India

Saving rate of household sector


YEARS
1970-71
1973-74
1974-75
1978-79
2001-02
2003-04

HOUSEHOLD SECTOR
10.1%
72.6%
65%
71.6%
96.6%
86.5%
Source: Economic survey 2004-05

Sources of Saving in India

Sources of saving in private sector


In private sector during 1987-88 domestic

saving was only 1.7%.


During sixteen year period of 1988-89 to 200304 saving rate increase that is 4.1%.

Sources of saving in public sector


Failed to achieving a stable rate of saving.
In 1982-83 it was around 4.3%.
In 1983-84 it was declined.
In 1998-99 has been negative

Suggestion for Raising the Rate


of Saving

HOUSEHOLD SECTOR

PRIVATE SECTOR

PUBLIC SECTOR

Trends in Domestic Saving

Rise in Domestic Saving


Domestic saving was 8.9 % of GDP in 1950-

51.
It increases to 24.2% of GDP in 2002-03.
Total Gross Saving in 1950-51 was 887

Crores. Which increased to 5,97,697 crores


in the year 2002-03.

Trends in Domestic Saving

Recent Decline & Stagnation


There is a large jump in saving since 1950-

51.
In 1970 there was steep rise with rate
moving upto range of 20-21%.
A stagnation as well as decline started in
1980.
The lowest was less than 18% in 1983-84
and for five years period of 1981-82 to 198687 it remain stuck at the low level of 18-19%.

Varying Sectoral Contribution


Rs in Crores
Sources

195051

197071

1990-91

199900

200001

200304

200405

1. Household Sector

612

4634

109897

416726

446317

648634

687079

% of total domestic
saving

69

69.7

83.7

85.51

89.93

81.33

75.72

2. Private Sector

93

672

15104

87234

87017

120852

150947

%of total domestic


saving

10.5

10.1

11.5

17.9

17.5

15.1

16.6

3. Public Sector

182

1343

6279

-16659

-37062

28026

69390

%of total Domestic


Saving

20.5

20.2

4.8

-3.4

-7.4

3.5

7.6

Total Domestic
Saving(1+2+3)

887

6649

131340

487301

496272

797512

907416

Source: Economic survey 2005-06

Capital to Output Ratio

Period

Capital o/p Ratio

1951-52 to 1955-56

2.95

1956-57 to 1960-61

3.40

1991-92 to 1996-97

3.70

1997-98 to 2002-03

4.53

2002-03 to 2007-08

3.58
Source: Economic survey 2004-05

Causes of ICOR in Indian


Economy

Pattern of Investment in late 60s

Rise in price of Capital Goods

Inefficient use of Investment resources

Suggestions for improving


capital output ratio

Better management of capital project


Completion of project at the given time
Making the capital stock available for
supplementary invest
Efficiency and competition
Proper training

Conclusions

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