Definition  The transfer of savings from households and governments to the business sector, resulting in increased output and economic expansion.

Q=F(K,L) Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns MP AP L 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 YEARGFCFChange in stock  Source: Economic Survey

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 INVESTMENT IN SHARES & DEBENTURE GOVT SECURITIES LIFE INSURANCE PROVIDENT FUNDS POSSESSION OF CURRENCY PHYSICAL ASSETS STOCKS MACHINERIES 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 HOUSEHOLD SECTOR % % % % % %  Source: Economic survey

Sources of Saving in India  Sources of saving in private sector In private sector during domestic saving was only 1.7%. During sixteen year period of to saving rate increase that is 4.1%.  Sources of saving in public sector Failed to achieving a stable rate of saving. In it was around 4.3%. In it was declined. In 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 It increases to 24.2% of GDP in Total Gross Saving in was 887 Crores. Which increased to 5,97,697 crores in the year

Trends in Domestic Saving  Recent Decline & Stagnation There is a large jump in saving since In 1970 there was steep rise with rate moving upto range of 20-21%. A stagnation as well as decline started in The lowest was less than 18% in and for five years period of to it remain stuck at the low level of 18-19%.

Varying Sectoral Contribution Sources Household Sector % of total domestic saving Private Sector %of total domestic saving Public Sector %of total Domestic Saving Total Domestic Saving(1+2+3) Rs in Crores  Source: Economic survey

Capital to Output Ratio  Capital to O/P ratio= Increase in capital Increase in output  Capital - o/p Ratio of Indian Economy: PeriodCapital – o/p Ratio to to to to to  Source: Economic survey

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