45

8. Singh Preeti, (2004) Investment Management : Security Analysis

and Portfolio Management, Himalaya Publishing House New Delhi

**********

CHAPTER – 2

ROLE OF GOVERNMENT AND OTHER

DEVELOPMENT AGENCIES

CHAPTER – 1

2.1 Introduction

2.2 Outreach Efforts to Women and Disadvantaged Groups

2.3 National Small Savings Fund

2.4 National Savings Institute

2.5 Activities of National Savings Institute

2.6 Grievance/ Complaint

2.7 NSI and International Cooperation

2.8 Department of Posts

2.9 Role of State Government

2.10 Role of other Financial Institutions

2.11 Transformation of Savings into Capital Assets

2.12 References

46

2.1 Introduction

The foundation of the first savings institution in India was laid in the year 1833. The

Presidency bank in Calcutta was established to provide for investment of the savings

of all classes – British and native. In October, 1943 the Government of India set up a

“National Savings Central Bureau” in Shimla with a small number of staff. The basic

objective of the bureau was:-

i) To promote the habit of thrift;

ii) To counteract the inflationary trends in the economy caused

by the Second World War and

iii) To collect funds to finance the war.

After independence in 1947, it was felt that more of an impetus has

to be given to the savings movement. With the encouraging result

achieved in the steady mobilisation of resources for the country, the

Government of India reorganised the Savings Movements in May, 1948 in

order to sustain and develop the public interest in the movement and the

National Savings Organisation (NSO) was created. The objectives of the

national savings movement in this age of development and planning in

India are mainly:-

To promote and motivate the people to cultivate the habit of thrift;

47

To tap the unauthorized monetary resources of the people for

utilizing them in various developmental welfare activities of t he

nation and

To render to the depositors of small savings, the security and

profitability of the savings and to render Income Tax relief where

applicable.

Small savings were considered a priority concern of the

Government. The Constitution of India, adopted in 1949, lists the „Post

Office Savings Bank‟ in its Seventh Schedule, Item No. 39. Utilizing the

Government Savings Certificates Act of 1959 and the Public Provident

Fund Act of 1968, the Ministry of Finance (MoF) framed numerous small

savings plans under these acts.

The primary objective of the small savings programme has been to

promote the habit of thrift and savings among citizens of the country. The

emphasis, as the words “small savings” suggest, is to bring the small

depositor into the fold of the savings movement. The Post Office Savings

Bank has been the main vehicle for these plans across the length and

breadth of India since its establishment 123 years ago. Post Office Savings

Banks were opened in 1882. Some of the small savings schemes i. e. Public

Provident Fund and Senior Citizen‟s Savings Scheme are also operated

through designated branches of nationalised banks and 4 private banks i.e.

ICICI, IDBI, HDFC and UTI Bank.

48

The population of India has surpassed one billion. Assuming an

average family size of five, there are some 200 million families in India.

As of 31 March 2005, there were 115 million accounts under small

savings, and it is estimated that more than 50 million households are small

savings depositors.

The NSO under the Ministry of Finance has been entrusted with the

work of promotion and publicity of Small Savings products or schemes.

The organization also provides training and support to Agents, State

Government Officials, and Postal Authorities. There were different

Savings products or schemes introduced by Government to cater to the

needs of different segments of small savers in the society. These schemes

are operated through the network of over 1,55,000 post offices and more

than 8,000 branches of the public sector and private banks.

2.2 Outreach Efforts to Women and Disadvantaged Groups

In addition to savings products, the Government of India has also devised

extension agencies, which cater to the needs of subscribers all over th e

country. There are three agency systems which authorize agents to canvass

for small savings on a commission basis. One of these agency plans, the

„Mahila Pradhan Kshetriya Bachat Yojana‟ (Women‟s Savings Agency

Plan). The Mahila Pradhan Kshetriya Bachat Yojana plan uses women

agents for canvassing house to house to receive savings from women at

their doorsteps for deposit into the Post Office Recurring Deposit Plan

49

Women are considered thrifty and are known to systematically put

away some of the household budget for a rainy day. In 1972 the

Government introduced the Post Office Recurring Plan targeted

specifically to women to help them save small, fixed sums of money each

month.

Out of countrywide network of more than 1,55,000 post offices,

1,30,847 are located in the rural areas. Each post o ffice has the facility to

maintain small savings plans. As the infrastructure of post offices exists in

every nook and corner of the country, the public has easy access to them.

Small savings plans are uniformly operated in rural and urban areas. The

minimum entry subscription is also very low in contrast to instruments in

the securities market and encourages even low-income depositors to save.

(Source: NSI)

The small savings movement serves the twin objectives of

inculcating the habit of thrift among the people and also of raising

resources for national development. Small savings are investments which

help the nation in defence and development. It is not a contribution or a

donation or a subscription or a gift. It is just like putting money in a bank

and getting the interest on it. Small savings is one of the schemes for

raising money by borrowing internally to finance the Five -Year Plans of

the country. The small savings movement was started in India in 1945.

Systematic mobilization of resources from the people through

investment in small savings schemes is being pursued by the National

50

Savings Organisation since its inception in 1948. The net collections in

the small savings schemes (gross collections minus withdrawals by

subscribers) have risen from `100 crore in 1948-49 to `96,788 crore (Net)

in 2004-2005. 100 per cent of net collections mobilized in small savings

schemes in a State/UT are transferred to the concerned State/UT

Government as investment in special securities issued by that

Government.

2.3 National Small Savings Fund

All deposits under small savings schemes are credited to the „National

Small Savings Fund‟ (NSSF), established in the Public Account of India

with effect from 1.4.1999. All withdrawals by the depositors are made out

of the accumulations in this Fund. The balance in the Fund is invested in

special Government securities as per norms decided from time to time by

the Central Government. The liability of outstanding balances under

various small savings schemes at the close of 31s t March, 1999 was borne

by the Central Government by treating the same as investment of NSSF in

special Central Government securities. The net small savings collections

(deposits minus withdrawals by the subscribers) from 1999 -2000 to 2001-

02 were shared by Central and State Governments through investment in

special securities issued as per their respective share. However, with

effect from 1st April, 2002, the entire net collections in a State / Union

Territory (with legislature) are being invested in speci al securities issued

by the concerned State / Union Territory Government. The sums received

51

in NSSF on redemption of special securities are being reinvested in

special Central Government securities. The debt servicing of Central/State

Government securities is an income of the Fund while the cost of the

interest paid to the subscribers and cost of management of small savings

schemes are expenditure of the Fund.

2.4 National Savings Institute (NSI)

National Savings Institute was set up in 1948 in the name o f National

Savings Organisation and working under, the Ministry of Finance,

Department of Economic Affairs, Government of India. It is entrusted

with the task of mobilisation of small savings. The Institute discharges its

role through national level publicity of small savings with feed back to the

Ministry for policy intervention and redressal of customer‟s queries and

grievances.

The Institute is headed by a Director and has its Headquarter at

Nagpur with ten different Regional Centres at: -

i) Chandigarh Regional Centres which cover the states of

Punjab, Haryana, Himachal Pradesh, J&K and UT of

Chandigarh.

ii) Lucknow Regional Centres which cover two state i.e. Uttar

Pradesh, Uttaranchal.

iii) Guwahati Regional Centre cover eight sister states of North

East India Assam, Arunachal Pradesh, Manipur, Meghalaya,

Mizoram, Nagaland, Tripura, Sikkim.

52

iv) Kolkata Regional Centre which cover the states of Bihar,

Jharkhand, West Bengal, Orissa, A&N Island.

v) Bangalore Regional Centre covers two states o f Andhra

Pradesh & Karnataka.

vi) Chennai Regional Centre which cover the states of Tamil

Nadu, Kerala, UTs of Pondicherry, Lakshadweep.

vii) Mumbai Regional Centre spread in the states of Maharashtra

except Nagpur region, Goa, UTs of Daman & Diu, Dad ra

Nagar Haveli.

viii) Jaipur Regional Centre which cover the states of Rajasthan &

Gujarat.

ix) Nagpur Regional Centre which cover the states of Madhya

Pradesh, Chhattisgarh and Nagpur Region.

x) Delhi.

2.4.1 Mandate of National Savings Institute:

The following are the man mandate of NSI: -

- Collection and collation of data.

- Providing policy inputs to the Ministry of Finance on

structuring of different financial products/schemes.

- Designing, structuring and launching of new financial

products/instruments.

- Printing and supply of savings instruments through India

Security Press to Central Stamp Depots.

53

- Training of Officers of NSI, State Governments, Banks, Post

Offices and half a million agents.

- Detection & prevention of frauds commit ted by agents,

investors and other agencies.

- Liaison and Coordination with State Governments, Banks,

Department of Posts and Extension Agencies.

- International Cooperation in the field of small savings.

2.4.2 Vision of NSI

National Savings Institute is a dynamic, vibrant, high tech, result -oriented

organisation and a centre of excellence in the area of small savings.

Following are few objectives of National Savings Institute in the country:

* To inculcate the habit of thrift and saving among the people

specially people in the rural and semi urban areas.

* To improve the access of small investors to secure avenues of

saving through provision of various savings instruments.

* To facilitate provision of efficient services to the investors in

Small Savings Schemes through coordination with the

different agencies involved in the implementation of these

schemes.

2.4.3 Progress of Small Savings

Systematic mobilization of resources from the people through investment

in small savings schemes is being pursued by the National Savings

Institute. The net collections in the small savings schemes (gross

54

collections minus withdrawals by subscribers) have risen from `100 crore

in 1948-49 to `2,15,568 crore in 2009-10.

2.4.4 Organisational Chart of N.S.I.

Fig. 2.1

Sources : www.nsiindia.gov.in

2.4.5 National Savings Products:

2.1. ORGANISATIONAL CHART OF N.S.I

Director/ Addl. Director (1)

Jt. Director (2)

Regional Centres

Regional Director

Dy. Director (11)

Asst. Director (19)

Dy. Director (5)

Asst. Director

Regional Director

UDC (1)

Statistical

Investigator

Administrative

Data Entry

Hindi SPA (1)

Sr. Steno (1)

Steno (1)

HQ

55

It has been the endeavour of the NSI for the last five decades to provide

savings instruments which are suitable to the needs of various strata for

the society. There are eight National Small Savings Schemes through

which the public may invest their surplus money. They are:

(i) Kisan Vikas Patra (KVP).

(ii) Post Office Monthly Income Scheme (POMIS).

(iii) 15-Year Public Provident Fund Account (PPF).

(iv) Post Office Time Deposits (POTD).

(v) 5-Year Recurring Deposit Account (RD).

(vi) Post Office Savings Account (POSA).

(vii) National Savings Certificate (VIII Issue) (NSC).

(viii) Senior Citizens Savings Schemes, 2004 (SCSS).

All these eight National Small Saving Schemes were operating

under the direct supervision of Department of Posts and (iii) and (viii)

were also operating at Nationalised Banks.

2.4.6 Extension Agencies

The work of popularization of Small Savings Schemes and securing

investments from the public is carried out through extension agencies. The

Standardised Agency System (SAS), Public Provident Fund Agency (PPF),

Mahila Pradhan Kshetriya Bachat Yojna (MPKBY) agents provide services

at the door steps of the investors. The Pay Roll Savings Groups in

Government, Public Sector and Private establishments help the employees

to save regularly every month a specified amount which is deducted from

56

the salary of the employees at source, for investment in selected small

savings schemes.

In order to have effective interface with the investors, agents and

organisations involved in mobilization of savings, NSI has framed Do‟s

and Don‟ts for SAS/MPKBY/PPF agents and investors.

2.4.7 Investors Grievances Redressal

With a view to improving the accountability to the Small Savings

Investors, agents and other concerned a single window mechanism for

redressal of investors‟ grievances and queries has been set up. To redress

the investor‟s grievances, a coordination committee has been set up at the

state level, which is chaired by the Regional Director, in charge of

respective NSI Regional Centre with a representative from State

Government, Department of Post, Banks and Agents as Members of the

said committee.

2.4.8 Right to Information

NSI is an Institute under Union Ministry of Finance (Department of

Economic Affairs), with headquarters at Nagpur (Maharashtra). One

Regional Director, NSI, Nagpur has been appointed as Central Public

Information / Nodal Officer at Headquarters, for the purpose of “Right to

Information Act 2005” and all Regional Directors of all the 10 Regional

Centres of National Savings Institute have been appointed as Public

Information Officers in respect of their Regional Centres.

2.5 Activities of National Savings Institute

57

Following are the few select activities undertaken by the National

Savings Institute in the country.

2.5.1 Training & Development

NSI at Nagpur, caters to the training needs of the officers from NSI,

State Small Savings Directorates/Banks/Post Offices and Extension

Agencies. It also conducts various International Training Programmes for

Executives of members‟ countries of the World Banks Institute.

Besides training imparted in National Savings Institute

Headquarters, all the Regional Directors also impart training to the

extension agencies at the regional level. The objective of such training is

to improve the skill and knowledge of the persons involved in operating

the small savings schemes of Government. NSI does not charge any

training fees.

2.5.2 Distribution of Small Savings Products

Small Savings Schemes are being operated through a large network

of distribution agencies, i.e. 1,55,000 Post Office spread all over the

country and also through more than 8,000 branches of the Nationalised

Banks. Recently 4 banks i.e., IDBI, ICICI, HDFC & UTI Bank have been

authorised to operate Public Provident Fund and Senior Citizen‟s Savings

Scheme in the country.

NSI is responsible to make ensuring availability of savings

certificates, forms and stationery in the Post Offices/Banks throughout the

58

country. To facilitate proper distribution, NSI has created a dynamic

Inventory Control Management System, which is operating at Nagpur with

linkage to all the Regional Centres as well as Postal Stores Depots an d

Circle Stamp Deposits.

2.5.3 Communication Policy

Different communication channels used by NSI are:

Advertising - Print media, films, leaflets, audio-visual material,

video taps, etc.

Sales Promotion - Contest, games, etc.

Fares & Exhibitions - Exhibits.

Pubic Relation - Press kits, seminars, Sanchaya magazine, etc.

2.5.4 Market Research

NSI in its new mandate has given importance to Market Research to

conduct study of specific problems and opportunities related to Small

Savings. NSI is responsible for marketing various small savings products

of the Ministry of Finance through different distribution channels i.e.,

Banks and Post Offices. The basic objective of Market Research is to

create new products and restructure the old products, to meet t he

requirements of different segments of investors and also to find different

product - preference by different segments of the investors.

Some of the areas were identified and Market Research was

conducted on under mentioned topics: -

59

1. Small Savings in Karnataka - distribution of collections

between urban and rural areas.

2. Impact of Income Tax in the transaction of Small Savings

Products among small investors.

3. Investment pattern among different income groups.

4. PPF and NSC VIII - Distribution of account and collections

between tax and non-tax payers.

5. Product preference of investors from different age groups.

6. The role of agents in marketing of small savings products.

7. Investor‟s preference for different financial distribution

channels.

To conduct the Market Research, NSI used the services rendered by

NSSO as well as the students from the different Business Schools located

in Regional Centres. During Market Research various techniques were

adopted for defining problems and research objectives, developing the

research plans, collecting various information, analysing the information

and presenting the findings of research to the Ministry of Finance,

Government of India, for taking policy decisions.

2.6 Grievance/Complaint

A website of the National Savings Institute under Government of

India, Ministry of Finance has also been launched to facilitate interface

with the public through wider dissemination of information on small

60

savings and on-line registration and settlement of investor‟s g rievances.

The website address is http://nsiindia.gov.in. This website is a single

window mechanism for on line redressal of grievances/complaints or

queries on the NSI website and tract its status using a unique auto

generated code number.

2.7 NSI and International Cooperation

NSI is an active member of the World Savings Banks Institute

(WSBI), Brussels, since 1970. India has been elected as President of the

World Savings Banks Institute - Asia Pacific Regional Group in 2003. NSI

had conducted training program for Senior Executives of Mongolian

Savings Bank in the field of Micro Finance and NSI conducted training

program for Vietnam Postal Savings Bank Company (VPSBC) in the field

of mobilization of resources in April 2006.

2.7.1. World Savings Bank Institute (WSBI)

World Savings Banks institute is an international apex body

representing savings banks, savings bank organisations and socially bank

organisations and socially committed retail banks from all over the world.

The World Savings Banks Institute was earlier known as International

Savings Banks Institute with Headquarter at Geneva, Switzerland. After

its re-location from Geneva, to Brussels in 1994, the WSBI operates

together with the European Savings Banks Group (ESBG) under a common

structure, the WSBI - ESBG Joint Office. The WSBI has 108 members

from 91 countries (32 members from Africa, 17 from Asia Pacific, 37 from

61

Europe and 22 from America) with assets of 6400 billion and deposits of

4600 billion, loans of 390 billion, 1,100 savings banks, 2, 00,000 branches

and 2.4 million employees.

The basic objective of WSBI is to influence various savings banks

and financial institutions, which are the members of WSBI so that they are

perceived both domestically and internationally as integral to the fin ancial

community and operate as proficient, efficient banking institutions,

actively cooperating with other WSBI members in business opportunities.

There are 5 Regional Groups of WSBI: The African Regional

Group, The Asia-Pacific Regional Group, The Europe Regional Group,

The Latin America Regional Group, Cross -regional Groups.

2.8 Department of Posts

The Department of Posts runs the savings bank as an agent of the

Ministry of Finance. Most of the National Savings Schemes are operated

and serviced by the network of Post Offices spread throughout the

Country. The Post Office savings Bank organization has been playing an

effective role for promotion of the movement in the rural areas through

extra departmental branch post masters of the village post office who are

granted incentive commission for increasing collection in their post

offices.

62

India has the largest postal network in the world with over

1,54,979 post offices (as on 31.03.2010) of which 1,39,182 (89.81%)

are in the rural areas. At the time of independence, there were 23,344

post offices, which were primarily in urban areas. Thus, the network

has registered a seven-fold growth since independence with the focus

primarily on the rural areas. On an average, a post office se rves an

area of 21.21 sq.km and a population of 7,176 people. Of which 5,682

in rural and 20,346 in urban areas. On an average 7,176 people served

by Post Office 5,682 in Rural and 20,346 in Urban Areas.

Source: India Post (RTI MANUAL-1)

2.8.1 Post Office Savings Bank (POSB)

Figure:2.2

India Post- The Last Mile Reach (as on 31.3.2010)

Urban Post 15,757 (10.10%)

Departmental Post Office

25,563

Rural Post 1,39,182 (89.81%)

Branch Post Offices(in

Rural Areas) 1,29,416

2.06 lakh Departmental

Employees

2.69 lakh Grammen Dak

Sowaks (in Rural Areas)

Post Office 1,54,979

63

Post Office in India provides certain financial services. Post Office

Savings Bank was open in 1882. The constitution of India adopted in

1949, list the “Post Office Savings Banks” in its Seventh Schedule, Item

No. 39. The Post Office, Savings Banks have been the main vehicle for

various small savings schemes across the length and breadth of the

country since its establishment 129 years ago. The Post Office Savings

Banks Scheme is an agency function performed by the Department of

Posts on behalf of the Ministry of Finance, Government of India. The Post

Office Savings Bank constitutes the main stay of the Financial Services

provided by the Department of Posts. The POSB is the oldest and largest

banking institution in the country. There are number of small savings

schemes provided by the Post Office Savings Bank and these included

Savings Account Schemes, Recurring Deposit Schemes, Time Deposit

Schemes, Monthly Income Schemes, Public Provident Fund Schemes,

Kisan Vikas Patra, National Savings Certificates and Senior Citizens‟

Savings Scheme. The Department of Posts is paid agency

charges/remunerations from NSSF on per account/per certificate basis for

deposit accounts and various categories of savings certificates.

The total number of accounts with Post Office has increased from

14.23 crore in 2003-04 to 24.10 crore in 2009-10. The outstanding balance

of Post Office Savings Bank accounts in 2009-10 was `5,83,789 crore.

India Post has already computerised its savings bank operations in 11,000

post offices.

64

2.8.2 Objectives of Post Office Savings Bank

In the beginning the object of the Post Office Savings Bank was to

encourage the habit of thrift among the common man but this concept has

undergone a radical change during the last three decades. From the

restrictive objective of providing a facility to the public to deposit their

small savings, the Post Office Savings Bank has become a medium to

mobilizing large resources running into hundreds of crore every year for

plan projects. As a result of the change in the role, the expectations of the

performance of the POSB have gone up very much both in the minds of

those concerned with small savings and the general public. It has also

been established that approximately 30 per cent of the total collections on

small savings in the country are drawn from the rural population. It shows

how well and deeply the POSB has penetrated the farthest and the isolated

villages of India. The POSB is now a major instrument available to the

Government for mopping up savings both in rural and urban areas.

2.8.3 Postal Finance Mart:

Postal Finance Mart is one of the new initiatives in provision of Financial

Services of Department of Posts. Postal Finance Mart (PFM) offer all the

financial products and services under one roof “One stop shop for

Financial Services” in a fully computerised office supported by

technology, at par with reputed banking institutions. During 10th Five

Year Plan, a total of 313 Postal Finance Marts have been set up across the

country. A target for setting up of 500 Postal Finance Marts has been

65

fixed for the 11th

Five Year Plan of the country, out of which 122 have

already been set up.

2.8.4 Core Banking Solution (CBS) for Post Office Small Savings

Scheme Customers

Anywhere, anytime and any branch banking i.e., Core Banking Solutions

(CBS) is included in the XIth Five Year Plan with a financial outlay of

`106 crore for development of CBS Software, Customer Relations

Management, Training Project Management Unit, Centralised Bank Office,

etc. which support Post Office Savings Bank and Savings Certificates

business with improved operational efficiency with delivery channels like

ATM, internet, phone and mobile banking services to Small Savings

Scheme customers.

2.9 Role of State Government

Small Savings are one of the biggest resources in India that are mobilised

and converted into profitable investments that benefit both investor and

the government. The whole process is a combination of national and state -

level organisations around the country. Small Savings are collected

through the Post Office savings Bank - this is an agency function

performed by the Directorate of Posts on behalf of the Ministry of

Finance, Government of India.

66

Promotion of business is mainly the concern of the National

Savings Institute (NSI), which is under the Union Government. To achieve

its objective, the organisation works in close coordination with the

respective state governments, the Directorate of Posts and other

organisations. The broad procedures include establishing institutional

arrangements for canvassing and mopping up savings. The measures

consent of developing agency systems, strengthening a cadre of agents,

using existing union and state government organisations, and enlisting

cooperation of non-official and voluntary organisations.

National Savings collections become available for development to

the Union and State Governments. Net collections in a year become

available as loans to the respective state governments. Many state

governments have set up their own small savings organisations with Small

Savings directorates at state Head Quarters and offices at lower

formations. There are also state-level advisory boards and city, district

and block savings committees.

2.10 Role of Other Financial Institutions:

Many nationalised banks are also operating schemes of National Savings

like Public Provident Fund and Senior Citizen Savings Schemes on

incentive basis and large numbers of depositors are covered both by the

post office and banks in these schemes.

Earlier Government of India paid remuneration to banks for

managing PPF and SCSS but now there is only our channel of payment of

67

remuneration to banks for handling transactions under PPF and SCSS.

Reserve Bank of India pays agency commission to banks on tran sactions

relating to PPF and SCSS at the following rates:

a) Receipts - `45/- per transaction

b) Payments - 9 paisa per `100 turnover.

Only designated branches of banks have been authorised to handle

PPF and SCSS, 2004. They are: - State Bank of India, State Bank of

Hyderabad, . State Bank of Indore, State Bank of Bikaner and Jaipur, State

Bank of Patiala, State Bank of Saurashtra, State Bank of Travancore, State

Bank of Mysore, Allahabad Bank, Bank of Baroda, Bank of India, Bank of

Maharashtra, Canara Bank, Central Bank of India, Corporation Bank,

Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank,

Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India,

Vijaya Bank and ICICI Bank Ltd.

2.11 Transformation of Savings into Capital Assets

Savings are to be transformed into capital assets through investment.

Generally savings are done by one group of people, viz., the individuals

and institutional savers while investments are done by another group of

people, viz., the businessmen, industrialists and the Government. Two

important factors on which investment depends are

(i) The marginal efficiency of capital i.e., the expected

profitability of new capital assets, and

(ii) the prevailing rate of interest.

68

Capital formation is the key factor in economic development and it

again depends on savings of the people. According to Ragnar Nurkse, the

essence of capital formation is “the diversion of a part of the society‟s

currently available resources to the purpose of increasing the stock of

capital goods so as to make possible an expansion of consumable output in

the future”.*1 Capital formation again depends primarily on savings. There

can be no capital formation if the entire income of the community is spent

on current consumption and nothing is saved.

The process of capital formation passes through three different

stages, viz., -

(i) Creation of savings by security a surplus of income over

consumption expenditure.

(ii) Mobilisation and canalisation of the savings, and

(ii) Transformation of the mobilised savings into real capital

assets.

2.11.1 Creation of Savings

Capital grows out of savings. The volume of savings against

depends on two factors viz.,

(i) ability to save and

(ii) will to save.

Ability to save depends on number of factors such as

(a) the size of the money income,

(b) regularity or otherwise of the income flow,

(c) security of life and property,

(d) degree of organisation of the capital market,

(e) size of family‟s expenditure, etc.

69

Will to save depends on a number of factors, some of which are

subjective, while others are objective.

The subjective conditions are

(a) family affection,

(b) a desire for higher standard of living,

(c) provision for unforeseen contingencies in the future,

(d) love of social distinction, etc.

The objective factors or conditions are

(a) security of life and property,

(b) existence of opportunities for gainful investment,

(c) rate of interest,

(d) existence of convenient institutional facilities for investment.

2.11.2 Mobilisation of Savings

Savings may be done voluntarily by private individuals and corporations

or compulsorily by the Government through taxation, deferred payment,

deficit, financing, etc. Mobilisation of savings can be done in two ways,

viz.

a) by a growth - oriented fiscal policy and

b) by spreading investment ideas among the people. Fiscal policy may

include what Musgrave calls, “the loss offset effort” to increase the

tempo of production investment. Other measures in this connection

include.

c) budgetary surplus,

d) economy in government expenditure,

70

e) essential imports, efficient management of public sector

enterprises, etc.

2.11.3. Capital Formation

Capital is one of the important factors which governs the quality and the

composition of output in a country. If there are increasing resources of

capital in a country, it results in technological discoveries, raises

productivity of labour, increases the rate of economic development and

provides higher standard of living for the masses.

In case, there is deficiency of capital assets such as machinery

equipment tools, dams, road, railways, bridges, etc., the country then

remains trapped in the vicious circle of poverty. Capital accumulation/

formation, thus, is at the very core of economic development.

Capital formation is the process of buildings up the capital stock of

a country through investing in productive plants and equipment‟s. Capital

formation, in other words, involves the increasing of capital assets by

efficient utilisation of the available and human resources of the country. 2

2.11.4 Importance of Capital Formation in Economic Development

The vicious circle of poverty in underdeveloped countries can be broken

down only through adequate capital formation. Capital formation leads to

increase in the size of national output, income and employment and

thereby help in solving the problems of inflation and adverse balance of

payments.

71

The main objective of economic development is to build up capital

equipment on a sufficient scale to increase productivity in agriculture,

industry, mining, transport, etc. As pointed out by Arthur Lewis “the

central problem in the theory of economic development is the process of

raising domestic savings and investment from 4-5 per cent to 12-15 per

cent of national income. As Lewis point out, “No nation is so poor that it

could not save 12 per cent of its national income if it want to; poverty has

never prevented nations from launching upon wars or from wasting their

substance in other ways”.

A precondition of economic development is the existence of a group

of people who are generally interested in economic development, who

have the will to save, who possesses the required knowledge and skill to

initiate changes and who are prepared to work for some material gains.

Given the fulfilment of such other conditions, economic development

depends on increasing the rate of capital formation.

Capital formation removes market imperfections, makes economic

development possible even with growing population, breaks the vicious

circle of poverty, raises the level of social welfare, help in making the

country self-reliant and induces the burden of foreign debts. It enables

proper exploitation of the natural resources and raising the level of

economic progress. Incentives for private saving can be provided in the

form of bonuses, gifts, lottery prizes, issuing savings certificates at high

rates of interest, small savings drive, tax exemptions on purchase of

government bonds etc.

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The different sources of domestic capital formation in India area :-

(i) private savings,

(ii) saving of financial institutions,

(iii) mobilisation of gold hoardings,

(iv) corporate profits,

(v) monetary and fiscal measures including taxation, public

borrowings and deficit financing and

(vi) utilisation of disguised unemployment.

A major share of the private savings comes from the individuals

households. It has clearly shown in the below given table from the

Economy Survey of Government of India from 200-01 to 2009-10. All the

study period the gross domestic savings of household against the GDP in

term of percentages is above 20 per cent and more .

TABLE -2.1

GROSS DOMESTIC SAVINGS AS PERCENTAGE OF GDP

Year Public Corporate Household

2000 – 2001 - 1.8 4.1 21.2

2001 – 2002 - 2.0 3.6 22.0

2002 – 2003 - 0.7 4.1 23.1

2003 – 2004 1.1 4.4 24.4

2004 – 2005 2.2 6.6 23.0

2005 – 2006 2.6 7.5 24.2

2006 – 2007 3.2 7.8 23.8

2007 – 2008 5.0 9.4 22.5

2008 – 2009 0.5 7.9 23.8

2009 – 2010 2.1 8.1 23.5

Source : Compiled from Economic Survey 2005-06, 2007-08 and 2010-11.

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As the above table shows, the largest share of the gross domestic

savings comes from the household sector i.e. 23.5 per cent while that of

the public is 2.1 per cent is 2009-10. It shows a major failure on the part

of the public sector in the mobilisation of domestic savings.

2.11 References

1. Economic Survey 2005-06, 2007-08 and 2010-11, Government of

India.

2. Ministry of Finance, Government of India, Annual Report, 2007-08 Postal

News. No.1/2011

3. Ruddar Datta, KPM. Sundharam, 1998, Indian Economy, S. Chand

& Company Ltd., New Delhi Page 300.

4. S.K. Misra and V.K. Puri, 1989, Development and Planning Theory

and Practice, Himalaya Publishing House. Page 393 & 398.

5. Sukhdeva (2008) M.L CAB CALLING- 2008 “Informal Saving of the Poor :

Prospects for financial Inclusion.” Jan-March.

6. www.ecomomicconcepts.com/capital formation

7. .www.nsiindia.gov.in

6. http://foundation.moneylifein/article/agents -community-angry-over-

small-savings-committees-recommendations/12625.html

9. http://www.insmallsavings.com

10. http://oldagesolution.blogspot.com/2009/08/senior-citizen-savings-scheme-

scss.html

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