Definition
The transfer of savings from
households and governments to
the business sector, resulting in
increased output and economic
expansion.
Q=F(K,L)
IncreasingMarginalReturns
DiminishingMarginalReturns
NegativeMarginalReturns
MP
APL
Q
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 rateStrengthening of economySlow rise
Unnecessary Inventories Inefficient use of capital Unplanned investment Incapacity for investment
Types of Domestic Saving
SAVINGS
HOUSEHOLD PRIVATE SECTOR PUBLIC SECTOR
FINANCIALSAVINGS
PHYSICALASSETS
INVESTMENT IN SHARES &
DEBENTURE
POSSESSION OFCURRENCY
GOVT SECURITIES
LIFE INSURANCE
PROVIDENT FUNDS
STOCKS
MACHINERIES
PUBLIC LTD CO(NON GOVT,
NON FINANCIAL CO)
NET PROFIT(FINANCIAL STATEMENT)
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 HOUSEHOLD SECTOR
1970-71 10.1%
1973-74 72.6%
1974-75 65%
1978-79 71.6%
2001-02 96.6%
2003-04 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 2003-04 saving rate increase that is 4.1%.
Sources of saving in public sectorFailed 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 1986-87 it remain stuck at the low level of 18-19%.
Varying Sectoral Contribution
Sources 1950-51
1970-71
1990-91
1999-00
2000-01
2003-04
2004-05
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
Rs in Crores
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 60’s
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