16.1 16.2 }16.3 16.4 16.1 ) INDIA Learning Objectives Meaning of Capital Formation Role of Capital Formation in Economic Development Stages of Capital Formation Trends in Capital Formation in India 164.1 Sector-wise Distribution of Capital Formation 1642 Reasons for Low Rate of Capital Formation Trends in Domestic Saving 165.1 Sectoral Components of Gross Domestic Saving 1652 Reasons for Low Rate of Saving in India Measures to Raise Rate of Saving and Capital Formation Human Capital Formation 16.7.1 Concept of Human Capital and Human‘ 16.7.2 Sources of Human Capital 16.73 Role of Human Capital F 16.75 Problems of Human C it Summary Review Questions MEANING OF C Capital formation simply: formation is defined as accounting year, is also called in16.2 Tdi Ifa nation wants to accelerate the pace of its growth, it has to an Be invest more. More investment leads to higher level of output and into a economy. 16.2 ROLE OF CAPITAL FORMATION IN ECONOMic ¥ DEVELOPMENT Capital formation plays a key role in raising economic development, OF aco It is clear from the following points : 7 1, Agricultural and Industrial Development Capital formation plays a crucial role in agricultural and industrial deye} ofa country. Agricultural and industrial development requires large amount funds for the adoption of modern techniques of production and use of, inputs. Also, large resources are required to develop modern indu. particularly heavy industries. Thus, a large amount of capital is Needed tg undertake simultaneous development of agricultural and industrial sectors in the country. - 2. Provision of Employment Capital accumulation is essential for raising production and Providing employment. In an underdeveloped country like India, where Population is growing at a fast rate, capital formation is necessary to give jobs to the growing population. 3. Increase in Output Increase in the stock of capital enables an economy to enjoy the advantages of large scale production and increased specialisation. Also, capital accumulation enables an economy to use better techniques of production. Asa result, efficiency in production will increase. In short, capital formation enables an economy to bring about changes in the scale and technology of production and thereby, increase in national output. 4. Technical progress Capital formation leads to more supply of tools and machinery per Jobs performed by hands are now performed with the help of tools, imple and mechanical devices. Addition of more capital per worker would in output per capita. This leads to an increase in output and income of ac 5. Development of Human Capital Capital formation also plays a significant role in the qualitative d human resources by increasing their skills, education level and iies) Formation in India ities are essential for stimulatin; ment. v i Thus, development of infrastructure is essential for Effective Utilisation of Natural Resources untries have rich endowment of natural resources. But these resources not being effectively utilised in less developed countries. Capital will enable these countries to have effective and efficient f natural resources. Breaking the Vicious Circle of Poverty gme economists maintain that underdevelopment of a country is in terms of a ous circle of poverty. Low productivity is regarded as the main source of jous circle of poverty. As such, the vicious circle of poverty can be broken ising Economic Welfare il formation helps in increasing economic welfare of people in a country. ital formation results in an increase in total output and factor productivity. leads to rise in per capita income. This, in turn, raises the standard of ¢ In other words, capital formation leads to increase in economic welfare Less Dependence on Foreign Capital formation, a country can become self-reliant by increasing internal way, capital formation plays an important role in raising economic ent of a country. STAGES OF CAPITAL FORMATION ar that without savings, there can be no capital formation. But this is ly result in production fact that saving does not directly and automaticalFormation in India 16.7 ery high. Its sha , arly Ble are in GDCF D the increased rate of investment has been v increased from 2.8 per cent in the e; early eighties. Therefter, the share o; after 1990-91, as a result of the New to about 6.5 per cent in 2002. GDP. " The share of private sector increase fro around 10.9 per cent in 1986-87, Private sector has bee: major role under the New Economic Policy, tei private sector in GDCF increased from 10.9 © per cent in 1992-93. It was 25.2 percent investment dominates the overall investment T 10 per cent in the creased, particularly Y. Its share declined was 7.4 per cent of Economic Poli¢ -03. In 2014-15, it ™m 8.1 percent in early fifties to assigned a share of the Per cent in 1986-87 to 14.7 in 2014-15, Thus, private {trate at present Reasons for Low Rate of Capital Formation or Investment responsible for low rate of investment are : AS a result, the Rate of Saving of investment is basically determined by the rate of saving. However, the saving has failed to increase at the desired rate. The rate c of saving has ased by modes’ magnitude because of a variety of factors like low per fa income, working of demonstration effect, exemption of agricultural from income tax, low saving in the corporate sector, very low and even ive net saving in the public sector, lure of Public Sector fic sector enterprises have failed to generate large surplus to be used for ¢ in investment. Public sector enterprises have failed to generate large is for further investment because of longer gestation period, low level of ency, lower profitability and underutilisation of the installed capacity ower Increase in Private Investment iment in the private sector has not increased at the expected rate. It is due Ortage of infrastructural facilities like electricity, oil and transport, high fates, sluggish capital market, slackening in demand for durable consumer , and underutilised installed capacity in many of the consumer goods tries. ffective Resource Mobilisation irce mobilisation in India has not been very effective. It is both inadequate fective. Banks and other financial institutions have not been very effectiveIndian Eeonomy ws eople, particularly those living in the rural in developing banking habits among p areas. 5, Inadequate Fiscal Measures The government has not been using fiscal measures for mobilising the savin, potentiality, specially in the agricultural sector, Income of big farmers hive substantially as a result of introduction of new techniques in the ector. But the government has not done anything to tax these income used for investment. of rich farmers, which could have been 6. Disinvestment Policy of the Government Since 1991, as part of the privatisation policy, the government has pursued the policy of disinvestment, The government has sold out the share of public sector enterprises to the private sector, As a result, the government investment has declined. This has adversely affected the process of capital formation in the country16.6 MEASURES TO RAISE THE RATE OF SAVING AND CAPITAL FORMATION cessary to develop to increase saving by the three sectors—household private corporate sector and the public sector. Some measures suggested to raise the rate of saving are : 1, Steps should be taken to discourage consumption of status goods by imposing heavy excise and custom duties. fective small saving scheme should be launched so as to promote saving habits in people belonging to low income groups. ationary pressure should be controlled so as to keep the price level ly stable and thereby create an appropriate environment for saving. in income tax on household savings should be increased. ucture should be rationalised so that it may have a positive effect ability and desire to work, save and invest. ultural income should be brought in the income tax net. In particular, income of the rich and big farmers should be taxed. ency of the public sector undertakings must be raised to enableIndian them to increase their profitability. This will increase 20Vern savings. : 8. The government should ensure that banks lend adequate amount of, at a low rate of interest, to small investors to enable them to Undertake investment. 16.7 HUMAN CAPITAL FORMATION 16.7.1 Concept of Human Capital and Human Capital Formation Human capital refers to the stock of skill, ability, expertise, education and knowledge in a nation at a point of time. It is the stock of, Professionals and skilled people of all types who are engaged in the production Process Human Capital Formation is the process of adding to the stock of human capital overtime. In other words, it is the process of acquiring and raising the number of skilled and experienced people. ‘Good human capital (like doctors, engineers, etc) products other human capital That is, we need investment in human capital to produce more human _ capital out of human resources. | j