LOW CAPITAL FORMATION

AND INDUSTRIAL
SICKNESS
INTRODUCTION
 LOW CAPITAL FORMATION
 Capital Formation is defined as “That Part Of
Country's Current Output And Imports
Which Is Not Consumed Or Exported
During The Accounting Period, But Is Set
Aside As An Addition To Its Stock Of
Capital Goods”. Total Capital Formation can
be broadly classified into. Gross Fixed Capital
Formation.
REASON’S FOR Low Rate of Capital
Formation in an Economy
1. Low Level of National Income and
Per Capita Income.
 The Root Cause Of Capital Deficiency In Under-
developed Countries Is Low Level Of Real National
And Per Capita Income Which Limits To The
Motives Of Savings And Investments.
Due To Lack Of Desired Investments, Capital
Formation Has No Increase. Hence, Due To Low
Production, There Is Low National And Per Capita
Income And, In Turn, This Forces To Low Capital
Formation.
2. Lack in Demand of Capital:
 Another Cause Of Low Rate Of Capital
Formation In Under-developed Countries In
Lack Of Demand Of Capital. In The Words Of
Prof. Nurkse, “Low Productivity In Under-
developed Countries, People Have Low Real
Income And, Thus, Purchasing Power Is Low
And So Due To Low Demand, Investment
Has Effect Which Again Reduces National
Income And Productivity And Rate Of Capital
Formation Remains Low”.
 3. Lack in Supply of Capital:
Like Demand Of Capital, Lack Of Supply Of Capital
Is Responsible For Low Capital Formation.
However, Due To Lack Of Necessary Supply Of
Capital In Under-developed Countries, The Process
Of Capital Formation Is Not Boosted Up. As A
Result, Capital Formation Remains At Low Level.
Therefore, In The Opinion Of Prof. Nurkse, Due To
Low Rate Of Real Income Per Capita In Under-
developed Countries, There Is Low Saving
Capability, Hence, There Is Less Capital. Due To
Lack Of Capital, There Cannot Be Established Basic
Business And Industries So The Production Falls
Down.
4. Small Size of Market:
Due To Small Size Of Domestic
Market, Investment Is Not
Encouraged In Poor Countries. It
Does Not Expand The Work Of
Economic Development And
Modern Machines Cannot Be Used
As Extra Quantity Produced Has No
Market Access.
5. Lack of Economic and Social
Overheads:
 Basic Overheads Like Roads, Buildings,
Communication, Education, Water,
Health Etc. Are Generally Lacked In
Under-developed Countries Which
React As Improper Atmosphere For
The Capital Formation And Slow
Process Of Capital Formation.
6. Lack of Skilled Entrepreneurs:
 Able And Efficient Entrepreneurs Are Not
Available In Under-developed Countries.
It Is The Only Reason For Low Rate Of
Capital Formation. Due To Absence Of
Risk-taking Entrepreneurs, Establishment
Of Industries And Expansion Is Quite
Limited And Industrial Diversification Is
Not Carried Out And No Balanced
Development Of Economy Is Possible.
7. Immobility of Savings:
 Immobility Of Saving Also Causes Low
Rate Of Capital Formation. Due To Lack Of
Banking And Other Credit Institutions,
Poor Countries Have Limited Financial
Activities. Whatever, These Financial
Institutions Exist, They Are Of Small Size
And Unable To Collect The Savings From
Distant Places, Thus, Resulting In No
Enthusiasm To Savings In A Society. This
Creates The Problem Of Hoarding And
Saving Is Used For Non­-productive
Purposes.
8. Backwardness of Technology
 Under-developed Countries Also
Face The Problem Of Technical
Knowledge. Production Is Carried
On Old And Less Productive
Techniques. As A Result, These
Countries Have Low Productivity
And Per Capita Production And
Income’s Low Quantity, Lowers The
Standard Of The Rate Of Capital
Formation.
  INDUSTRIAL SICKNESS

The problem of sickness has

adversely affected the "health" of
the industrial sector in
PARTICULAR and the economy in
GENERAL.
 MEANING
 TO LAYMAN-SICK UNIT IS ONE WHICH
IS NOT HEALTHY.
 TO AN INVESTOR-ONE WHICH SKIPS
DIVIDEND.
 TO AN INDUSTRIALIST-A UNIT WHICH
IS MAKING LOSSES.
 TO A BANKER-WHICH INCURRED
CASH LOSSES IN PREVIOUSE YEAR &
LIKELY TO REPEAT PERFORMANCE IN
CURRENT & FOLLOWING YEARS
 Causes of industrial sickness

1. Wrong location
2. Technological factors
3. Inexperienced promoters
4. Investment in unproductive capital assets
5. Long gestation period
 EFFECTS OF INDUSTRIAL
SICKNESS
1. UNEMPLOYMENT
2. WASTAGE OF
3. LOSS ECONOMY AND
GOVERNMENTRESOUCES
INSTITUTIONS
4. LOSS OF BANKS AND FINANCIAL
5. INDUSTRIAL UNRES
 THANK YOU