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CONTENTS
1.1 Introduction
1.2 Objective of the study
1.3 Scope of the study
1.4 Methodology
1.5 Limitation
1.6 Chapter plan
3.1 Trends in domestic savings and
capital formation in India since 1950-51
3.2 Has domestic savings been Crowded Out by
foreign savings in India?
3.3 Magnitudes And Composition of Flows in India
3.4 Savings And Capital Formation
4.1 Findings
4.2 Suggestions
4.3 Conclusion
4.4 Bibliography
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Post Graduate Department of Commerce
Samanta Chandrasekhar (A) College, Puri
Pin No. 752002, Odisha, India, 06752-222955
CERTIFICATE
MR. JAGANNATH PRASAD PATTANAIK
Reader In P.G. Department Of Commerce
S.C.S. (A) College.
PURI-752002
This is to certify that the Project Report entitled, Trend in Domestic
Saving & Capital Formation in India has been carried by Premanjali Behera,
under my guidance and supervision. It is a record of this independent project work
done during the period of study for the Bachelor of Commerce Course and this has
not previously formed the basis for the award of any degree to the candidate.
Prof. (Dr.) Uma Chand Lal. Jagannath Prasad Pattanaik
H.O.D.
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DECLARATION
I do hereby declare that this piece of project work entitled Trend in
Domestic Saving & Capital Formation in India is submitted by me to the
Department of Commerce, S.C.S. (A) College, Puri or published at any time
before.
Place: Puri Premanjali Behera
Date:
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ACKNOWLEDGEMENT
I am acknowledgement with deep gratitude to my revered sir, Mr. Jagannath
Prasad Pattanaik, a reader in P.G. Department of commerce, S.C.S. (A) College,
Puri, for his valuable and enlightened guidance with critical appraisal of ideas
expressed in this Project Report. I am doubly grateful to him kind cooperation and
timely guidance and advise, without which this could not have attained the present
shape.
I am also thankful to all my revered teachers of Commerce Department and
all my friends who always stood in my back and acted as the Philosopher and
guide for the completion of this Project Report.
At last but not the least, I think my parents, friends and all my dear ones who
were always there when I needed them.
Premanjali Behera
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y The need for capital formation in India.y Sources of capital formation in generaly The domestic savings as an important source of capital
formation in India.
y Trends in domestic savings and capital formation inIndia since 1950-51.
y Has Domestic Savings Been Crowded Out by ForeignSavings in India?
y Magnitudes And Composition Of Capital Flows InIndia
y Savings and Capital Formation
y Findings.y Conclusion.y Suggestiony Bibliography
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CHAPTER-IINTRODUCTION
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CHAPTER-2SOURCES OF CAPITAL FORMATION
AND DOMESTIC SAVINGS
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CHAPTER-3ILLUSTRATED DATA ANALYSIS
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CHAPTER-4CONCLUSION
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1.1 INTRODUCTION:
Capital formation is an indispensable factor for economic development of
Indian economy and the role of domestic saving is of great importance. This
study intends to analyze the process of domestic capital formation by making
intensive study on the Trend in domestic saving and capital formation in
India.
Among the many factors responsible for under development lack of capital
formation is considered to be of prime importance. Capital formation is an
importance step towards economic development of a country. In simple words,
capital formation means all that reproduced wealth by which more accumulationof wealth is possible directly or indirectly. Mostly, the word capital formation is
used in narrow sense as well as in a broader sense. However in a narrow sense, it
means with physical capital stock which includes machines, machinery etc.
capitalized goods while in a broader sense, it includes non-physical capital or
human resources consisting of public health, efficiency, craft, visible and
invisible capital.
On the contrary, capital formation refers to increasing the stock of real
capital which obviously helps in raising the level of production of goods and
services. The word capital indicates the part of current produce is used for
further production instead of being consumed immediately. Similarly, capital
formation indicate the part of the currency product which is directed to the
making those goods facilitating production. Therefore capital formation broadlyinvolves a sacrifice of immediate consumption in order to obtain a larger flow of
consumption goods in future.
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According to Prof. Nurkse, The meaning of capital formation is that
society doesnt apply the whole of its productive activity to the needs and
desires of immediate consumption but directs a part of it to the making of capital
goods, tools and instrument, machines and transport facilities, plant and
equipment- all the various forms of real capital that can so greatly increase the
efficiency of productive effort.
In the words of Dr. Singla, Capital formation consists of both tangible
goods like plants, tools and machinery and intangible goods such as high
standard of education, health, scientific tradition and research.
According to Prof. Simon Kuznets, Domestic capital formation would
include not only addition to constructions, equipment and inventories within the
country, but also other expenditure expect those necessary to sustain output at
existing lands. It would, include outlay on education recreation and material
luxuries that contribute to the greater health and productivity of individual and
all raise the moral of employment population.
According to F.H. Harbison, Human capital formation is the process of
increasing knowledge, skill and the capacities of all people of the country.
1.2 OBJECTIVE OF THE STUDY:
The study aims at analyzing the need for domestic savings and its
importance in Indian capital formation. This study carries out the following
objectives.
i) To highlight the role of domestic savings in capital formation.
ii) To analyze the trend of domestic saving in both private govt.
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and household sector.
iii) To asses the stability of domestic savings for achieving higher
rate of growth of capital formation in India.
1.3 SCOPE OF THE STUDY:
On the preparation of the project, I mainly studied about the capital
formation and GDP of the nation. So far as this purpose, I have taken the GDP
and GDS of different years. All the data relating to this has been collected from
secondary source.
1.4 METHODOLOGY:
This study is carried on with the secondary statistical data to be collected
from various books in Indian economy magazines journals and other published
materials for analysis and conclusion.
1.5 LIMITATIONS:
On preparation of the project, I faced many problems of the following
constraints.
1. Inadequacy of data: - The structure of the capital formation is very large.So it is very difficult to collect all the adequate data.
2. Time constraints: - the time allowed to me i.e. between the registration ofthe title of project and presentation of the project before the department isvery short. So it is very difficult o prepare a update project within this
short period.
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3. Financial Constraints: - For the preparation of a project, it needs hugeamount of finance. So I prepared this project in very shortcut manner.
1.6 CHAPTER PLAN:
This project has four chapters. They are as follows:
Chapter-1 Introduction to Present study
Chapter-2 Sources of Capital Formation & Domestic
savings
Chapter-3 Illustrated Data Analysis
Chapter-4 Conclusion
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2.1 INTRODUCTION:
Capital formation or accumulations regarded the key factor in economic
development of an economy. According to Prof. Nurkse, Capital is a necessarybut not a sufficient condition of progress, since capital formation is an
essential determinant of economic growth. The absence of capital is the biggest
handicap with the under developed countries and thus occupies the central and
strategic position in the process of their economic development. India is an
under developed country and it is poor in capital. So capital formation is
necessary in India.
2.2 NEED FOR CAPITAL FORMATION IN INDIA
The need of capital formation is earmarked in the following field of
economic activity in the development process.
1.Formation of Sound Infra-structures:The foremost significance of capital accumulation, specially in its initial
stages is that it promotes the establishment social overhead in the poor country
as these countries need these infrastructure at a priority level. Infact, the
possibility of economic development gets strength on the size and extent of the
available conditions in the economy as of transportation, communication
banking power and other social security steps. In this way, capital formation
goes a long way in the development of basic capital goods in under developed
countries.
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2. Use of Round-about methods of Production:In a backward country, the process of capital formation makes possible the
use of round about or complex methods of production which makes division in
different stages on the basis of modern techniques and production process leads
to specialization. This further leads to rapid growth in production and large
scale. Thus by capital formation modern machines and instruments are utilized
on the basis of modern techniques with cyclic methods.
3. Maximum Utilization of Natural Resources:In under developed countries, there is increase in the capacity of risk
taking by capital formation by which fresh sources of natural resources aremade available. It is made possible through proper and thoughtful exploitation
of natural resources. Besides extra capital formation exploits the economy in
normal resources on the basis of modern techniques and divisional imbalances
are prevented by finding new fields of natural resources.
4.Proper use ofHuman Capital Formation:Capital formation plays an extra-ordinary role in the qualitative
development of human resources. Human capital formation depends on the
peoples education, training, health, social and economic security, freedom and
welfare facilities for which sufficient capital is needed. So capital formation is
essential in development of human resources.
5.Improvement in Technology:In under developed countries, capital formation creates over head capital
and necessary environment for economic development. This
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helps to instigate technical progress which make impossible, the use of more
capital in the field of production and with increase of capital in production, the
abstract form of capital changes. It is seen that present changes in the capital
structure lead to changes in the structure and size of technique and public there
by more influenced. Infact technical progress has become necessary condition
for present day economic progress and speed of economic progress depends
upon the rate of technical progress.
6. High rate of economic growth:The higher rate of capital formation in a country means the higher rate of
economic growth. Generally the rate of capital formation is very low incomparison to advanced countries. In the case of poor and under developed
countries, the rate of capital formation varies between 1% to 5% while in the
later case, it even exceeds to 20%. In brief, higher rate of capital formation is the
indicator of higher rate of economic growth in a country.
7.Agricultural and industrial development:Modern agricultural and industrial development needs adequate funds for
adoption for latest mechanized techniques inputs, setting of different industries
heavy or light without sufficient capital at their disposal, leads lower rate
development, thus capital formation infact, the development of these both
sectors isnt possible without capital accumulation.
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8.Increase in National income:Capital formation improves the conditions and methods for the
production of a country. Hence there is much increase in national income and
per capital income. This leads to increase in quantity of production which leads
again raise in national income. The rate of growth and quantity of national
income necessarily depends on the rate of capital formation. So increase
national income is possible only by proper adoption of different means of
production and productive use of the same.
9.Increase in economic welfare:,,
By increase in rate of capital formation, public is getting more facilities. Asresults, common man is more benefited economically. Capital formation leads
to unexpected increase in their productivity and income and this improves
their standard of living. This leads to improvement and enhancement in the
chance of work. This helps to raise the welfare of the people in general.
Therefore, capital formation is the principal solution the complex problem of
poor countries.
10.Less dependence on foreign capital:In under developed countries process of capital formation increases
dependence on internal resources and domestic saving by which dependence
on foreign capital is declined. Economic development leaves burden of foreign
capital, hence to give interest on foreign capital and bear expenses of foreign
scientists. Country has to be burdened by improper taxation to the public. Thisgives set back to internal savings. Thus by the way of capital formation, a
country can attain self sufficiency and can get rid of foreign capitals
dependence.
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2.3 SOURCES OF CAPITAL FORMATION IN GENERAL
The sources of capital formation are divided into two categories:
1. External Source2. Domestic Source
1. External Source:As the domestic sources are insufficient to meet the requirements of
underdeveloped countries, it is to be supplemented by capital import.
These external sources of capital formation are also considered. The
following are some external sources of capital formation.
Loans, grants and aid from foreign Govt.:
Under developed countries are getting a good number of foreign capital in
form of loans, grants and aid. According to Nurkse. Previous experience shows
that a receipt of foreign credit by govt. investing in the forms of the over head
capital is the best for economic development. The country is free to use according
to its need. A huge amount of foreign loans is quite burden some for the under
develop countries. Thus care must be taken for investing such loans in
productive purpose.
Private foreign direct investment:
Foreign direct investment is an important means of capital formation from
external source. Under the present regine of economic liberalization foreign
direct investment being permitted.
Import restriction:
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In order to raise capital from foreign sources, putting restriction on import
is needed. By imposing restriction a huge amount of foreign exchange can be
saved.
Favorable shift in the terms of trade:
Shift in the terms of trade is a potential source of external finance
increasing international price of the product leads to sufficient foreign exchange
which can be invested other wise.
Thus in the initial stage, external sources of finance is provided big
support for development.
2. Domestic Sources:
A country trying to attain economic development must tap its various
domestic sources of capital formation, steps must be taken to curtail the level of
consumption as well as of utilize the existing productive capacity to the
maximum extent. The following are some of the important domestic sources of
capital formation.
Domestic saving:
Domestic saving indicates surplus of production over the minimum
consumption requirement of the community as a whole. Countries attaining
higher surplus are in position to attain higher rate of capital formation. Domestic
saving is also considered as the most reliable source of capital formation. In order
to increase the rate of domestic saving, the volume of investible surplus must beincreased. Domestic may come in the form of
a. Private Savingb. Corporate Savingc. Govt. Saving
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In under develop country; there are certain factors which tend to limit the
rate of saving to poor level.
Taxation:
Revenue surplus are a being source of capital formation. In an
underdeveloped country, a high degree of potential surplus can be realized by
the govt. through taxation. Thus taxation is considered as an effective instrument
of fiscal measures to reduce consumption and to transfer the required resource
for productive investment. There are two ways by which taxation can help a
country in its process of capital formation.
a. By diverting adequate private resources to the state for itsproper utilization.
b. By providing necessary incentive to the private sector forincreasing investment and production.
Deficit financing:
Most of the underdeveloped countries are suffering from low rate of saving
and narrow tax base. Under this precarious financial condition, deficit financing
has been considered as an important source. Although it is considered largely as
an inflationary source but it can be neutralize by adopting both monetary and
fiscal measure. Therefore, most of the countries are adopting deficit financing as
a source of capital financing.
Utilization of disguise unemployment:
Another important source of capital formation lies in the utilization of
disguise unemployment, in the recent times, the vast idle
man power available in underdeveloped countries are not being consider as a
liability. The saving potential concealed in disguise unemployment has been
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utilized properly in China as to certain to a considerable degree of economic
progress.
2.4 DOMESTIC SAVING AS AN IMPORTANT SOURCE OF
CAPITAL FORMATION IN INDIA PARTICULAR
In India domestic saving considerable as one of the master source of
capital formation. The Central Statistical Organization (C.S.O.) has been
preparing the estimates of domestic saving for the entire planning period of the
country. Saving has been defined by C.S.O. The excess of current income over
current expenditure and is the balancing items on the income and outlay
accounts of producing enterprise and households, govt. administration and
other final consumers.
For the estimation of domestic saving the whole economy is broadly
classified into 3 institutional sectors. Those includes:-
i. Householdii. Private corporate andiii. Public.
The saving of household section can be measured by
(a) Total financial saving
(b) Saving in the form of physical assets.
The financial saving includes possession of currency, net deposits, investment in
shares, debentures and govt. securities and small savings where as, the physicalassets includes machinery, equipments,
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construction, inventories etc. held by the individuals. Secondly, the saving of
private corporate sector constitutes as reverted from the profit
and loss accounts placed in the balance sheet of those companies. Thirdly, the
saving of the public sector includes the net saving of both department and non
departmental enterprises and savings of administrative departments shown as
the excess of current receipts over current expenditure of the government.
Estimates Gross Domestic Saving and Gross Capital Formation:
The central statistical organization has prepared an estimates of Gross
Capital Formation and saving from the period 1950-51 to 1995-96 just to show the
growth of capital formation and saving and its various. Gross Capital Formation
is consisting of the components such as gross domestic saving and net capital
inflow from abroad.
Table-1
Gross domestic saving and Gross capital formation at Current prices
Year
Rs.(cores) As % of G.D.P
GrossDomesticSaving
NetcapitalInflowFromAbroad
GrossDomesticCapitalFormation
GrossDomesticSaving
NetCapitalInflowFromAbroad
GrossDomesticCapitalFormation
1950-51 887 -21 866 8.9 -0.2 8.71960-61 1989 481 2470 11.6 2.8 14.41970-71 6649 394 7043 14.6 0.8 15.41980-81 27136 2094 29230 18.9 1.4 20.31985-86 54167 6234 60401 19.5 2.2 21.71990-91 131340 18196 149536 23.1 3.2 26.31991-92 143908 3377 147285 22.0 0.5 22.51993-94 193621 4791 198412 22.5 0.6 23.11994-95 251463 11895 263356 24.8 1.2 26.01995-96 298195 20780 318975 25.1 1.7 26.81996-97 316923 17738 334661 23.2 1.3 24.5
1997-98 358250 22302 380552 23.1 1.5 24.6
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1998-99 386732 18087 404819 21.1 1.0 22.7
1999-00 466640 21988 488628 24.1 1.0 24.3
2000-01 490049 8130 498170 23.5 0.6 23.8
2001-02 532274 -18731 513543 23.4 -0.3 22.6
2002-03 642298 -32010 610288 26.1 -1.3 24.8
2003-04 776420 -49552 726868 28.1 -1.8 26.3
2004-05 907416 32139 939555 29.1 1.0 30.1
2005-06 948526 33090 981616 32.4 1.6 34.0
2006-07 947262 20262 967524 30.4 0.2 32.4
2007-08 968765 30059 998824 33.2 1.8 35
2008-09 982345 16584 998934 40.28 4.98 45.26
2009-10 10,00,000 30,000 10, 30, 000 35.2 1.8 37
Source 1- Central Statistical organization.
The table-1 reveals that the gross domestic saving at current prices which
was 8.9% of GDP in 1950-51, gradually rise to 11.6% in 1960-61, 14.6% in 1970-71
and then 18.9% in 1980-81. After suffering a set back in 1985-86 i.e. to the extent
of 19.5% of GDP the gross domestic savings again rose to the level of 23.1% of
GDP in 1990-91 and then it again declined to 21.8% and 22.5% of GDP in 1992-93
and 1993-94 domestic savings as percent of GDP again gross domestic saving as
percent of GDP again in 1995-96, the gross domestic savings as GDP againincreased to 25.1%. Again in 2004-05, the gross domestic savings as percent of
GDP was 29.1%. In 2006-07 the gross domestic saving at current prices which
was 30.4%, gradually rise to 33.2% in 2007-08, 40.8% in 2008-09 and decline 35.2%
in 2009-10. Thus, during the last 54 years of planning, the rate of gross domestic
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saving has more than doubled, i.e. 8.9% in 1950-51 to 35.2% in 2009-10, which
may be considered as the outcome of our efforts of planning for development.
Net capital inflow from abroad is also contributing towards our gross
domestic capital formation. The net capital inflow from abroad has been
determined by the policy of the govt. towards attracting Foreign Direct
Investment (FDI), import of technology and also by the flow of external
assistance for economic growth from developed countries.
In order to implement the programmed of massive industrialization
through the development of basic and heaving industries, the govt. of India
started to permit the inflow of foreign capital at a higher scale since the second
plan. Therefore, the net inflow of foreign capital has reached the level of 2.8% of
GDP in 1960-61.
There after, as the country accepted the objectives of self reliance, self-
sustaining growth since 3rd plan, thus the net inflow of foreign capital gradually
declined to only 0.8% of GDP in 1970-71. During the 5th plan, the net foreign
inflow was almost nil. But, since the 6th plan onwards the net capital inflow from
abroad started to rise and then it reached the level of 2.2%of GDP in 1985-86. The
net foreign capital inflow rose considerable to the level of 3.2% of GDP in 1990-
91.
The gross domestic capital formation which was 8.7% of GDP in 1950-51,
gradually and the again rose considerably to the level of 20.3% of GDP in 1980-81
and then again rose considerably to the level of 26.3% of GDP in 1990-91. The
gross domestic capital formation as percent of
GDP remained steady to the level of 26.0% and 26.8% in 1994-95 & 1995-96
respectively but the same ratio declined to 22.6% in 1998-99 and the same ratio
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again increased to 30.1% in 2004-05 & the same ratio again increased to 34.0% in
2005-06.
Thus, considering this trend in the ratio of gross domestic formation as
percent of GDP since 1980-81, it can be observed that the rate of domestic saving
and investment is fairly high considering the international standard. Even then
considering the downward trend in the ratio of gross domestic capital formation
as percent of GDP in 1992-93 and more particularly in 1993-94(23.1%) the govt. of
India has taken adequate measures 0 boost both the gross domestic and net
capital inflow from abroad in the budget,1996-97 and 1998-99 and also there
after.
3.1 TRENDS IN DOMESTIC SAVING & CAPITAL
FORMATION IN INDIA 1950-51
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Estimates of physical capital formation in the post independence period
have been prepared mainly by two organizations, viz, the Reserve Bank of India
(RBI) and the central statistical organization (C.S.O) from time to time.
While preparing an estimate, it is customary to divide the economy into
three sectors, the household sector which comprises productive economic units
either run on an individuals basis or partnership or incorporated business; the
corporate sector which includes the joint stock companies and the government
sector which includes the capital assets of the government as also the assets of
the enterprise run under state control. If we sum up the net change in the value
of the assets in a domestic capital formation. To this if we add the net inflow of
foreign capital we arrive at an estimates of net national capital formation for the
economy. RBI estimates saving and investment in this manner.
C.S.O prepares if estimates by the product method for this purpose, the
estimate is complied by the type of capital goods viz, Construction and
Machinery and Equipment. This part of capital formation as called fixed
capital formation. Estimates of change of stock working capital are added to
gross fixed capital to arrive at the total of gross capital formation.
The central statistical organization (C.S.O) has been preparing estimates of
saving and capital formation as a part of the National Account Statistic (N.A.S).
Recently the C.S.O has shifted the baser year to 1993-94 and to provide a long
term series to be able to make comparison over the last 5 decades, it has
presented saving and capital
formation data.
GROSS DOMESTIC SAVING IN INDIA
Table-2 presents gross domestic saving (G.D.S.) for the Indian economy during
1950-51 to 2009-10.
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It would be of high interest to take into the estimates of gross domestic
saving in India since the inception of planning. The Central Statistical
Organization (C.S.O) has estimated the gross domestic savings of the country as
a ratio of GDP at market price. In India the rate of gross domestic saving which
was very low during initial period of planning has gradually increased to a
moderate table savings since 1950-51.
Table-2
YearGross Domestic Savings Total
Householdsector
Privatecorporate
sector
Public sector
12
3 4 51950-51 7.7 0.9 1.8 10.41955-56 11.0 1.3 1.7 13.91960-61 8.4 1.7 2.6 12.71965-66 9.9 1.5 3.1 14.51968-69 9.3 1.2 2.3 12.81973-74 13.80 1.7 2.9 18.41978-79 17.0 1.5 4.6 23.21979-80 15.2 2.1 4.3 21.61980-81 16.1 1.7 3.4 21.61981-82 14.9 1.6 4.6 21.0
1982-83 13.1 1.6 4.4 19.11983-84 14.0 11.5 3.3 18.81984-85 13.7 1.7 2.8 18.21985-86 14.6 2.0 3.2 19.81986-87 14.2 1.8 2.7 18.7
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Source: Government of India Economy Survey 2009-10 (Delhi 2010)The above table reveals the growth of gross domestic savings as in
percentage of GDP at current price since 1950-51 to 1997-98. During these four
decades of planning, the rate of gross domestic saving has increased
considerably but this increase in the rate was not commensurate to the
expectation of the planners of our country. The CSO estimates show that the rate
of gross domestic savings was only 10.4% in 1950-51 which was again dominated
by the household sector (7.7%) difficult to achieve a 5% growth rate in GDP per
annum. During the second plan, the domestic saving rate was slightly increased
to 12.7% in 1960-61. Thus during the initial part of economic planning in India
the saving was very low. At the end of the 3rd plan, the saving rate
1988-89 17.2 2.1 2.0 21.41989-90 18.2 2.6 1.6 22.4
1990-91 20.5 2.8
1.0 24.31991-92 17.7 3.2 1.9 22.81992-93 17.7 2.8 1.5 20.01993-94 18.4 3.5 0.6 22.51994-95 19.7 3.5 1.7 24.81995-96 18.2 4.9 2.0 25.11996-97 17.0 4.5 1.7 23.21997-98 17.6 4.2 1.3 23.11998-99 18.8 3.7 -1.0 21.71999-00 20.8 4.4 -1.0 24.12000-01 21.6 4.1 -2.3 23.52001-02 22.6 3.6 -2.7 23.42002-03 23.3 3.8 -1.1 26.12003-04 24.3 4.1 -0.3 28.12004-05 22.1 4.8 2.2 29.12005-06 22.3 8.1 2.0 32.42006-07 23.8 8.8 1.9 33.92007-08 22.4 7.2 2.3 31.82008-09 21.6 7.9 1.5 31.02009-10 25.2 8.1 2.2 35.5
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was increased to 14.7%, which was still considered insufficient for financing the
development of heavily industry terminal year of the fourth plan (1973-74) the
saving rate gradually increase to 18.4% which was again considered as in
adequate in comparison its requirement necessitating continuation of the reliance
on foreign aid. After the indo-pak war, India failed to acquire adequate amount
of foreign aid due to aid due to certain political factors.
The C.S.Os estimates further reveals that this saving rate steadily to 13.2%
in 1978-79. This achieving the high rate of saving was remarked by professional
K.N. Raj as a rather dramatic improvement.
After that the saving rate declined to 21.6% in 1979-80 certain adverse
factors like poor harvest. But in 1980-81, the rate of saving remained at 21.2%
inspire of positive improvement in the real income. This declining trend
continued till the end of the 6th plan where the saving rate declined as low as
18.2% in 1984-85.
Again during the seventh five year plan the saving rate gradually started
to increase at a very slow rate and reached the level of 22.3% in 1989-90 was not
fulfilled. Again the saving rate reached the level of 23.2% in 1996-97 i.e. at the
end of 8th plan and then it increased to 28.11, 29.1% & 32.4% in 2003-04, 2004-05 &
2005-06 respectively. Then it increased to 33.9% in 2006-07, it decline 31.8 & 31
in 2007-08 & 2008-09. Then it increase 35.5% in 2009-10.
Thus through out these four decades it can be observed that among the
various heads of gross domestic savings household sector dominated the show
and both private corporate sector and the public sector maintained low profile in
the generation of savings.
GROSS DOMESTIC CAPITAL FORMATION IN INDIA:
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The C.S.O estimated the gross domestic capital formation in India as percentage
of gross domestic product for the entire planning period. The following table
shows such an estimates.
TABLE-3
YearGross Domestic Capital
FormationErrors
&
Omissions
AdjustedTotalPublic
sectorPrivatesector
Total
1 2 3 4 5 6
1950-51 2.8 8.3 11.0 -0.9 10.21955-56 4.9 8.9 13.8 0.5 14.31960-61 7.0 8.9 15.9 -0.2 15.71965-66 8.5 8.5 16.9 -1.0 16.81968-69 5.9 9.2 15.1 -1.2 13.9
1973-74 7.7 10.6 18.3 0.87 19.11978-79 9.5 12.8 22.3 1.7 23.31979-80 10.3 12.5 22.9 -0.8 22.11980-81 8.7 12.3 20.9 1.8 22.71985-86 11.2 13.0 24.2 -2.0 22.21990-91 9.7 15.5 25.2 2.4 27.71991-92 9.2 13.5 22.7 0.7 23.41992-93 8.9 15.1 24.0 -0.1 23.91993-94 8.2 13.0 21.3 1.8 23.11994-95 8.7 14.7 23.4 2.6 26.0
1995-96 7.7 18.9 26.5 0.4 26.91996-97 7.0 14.7 21.6 2.7 24.51997-98 6.6 16.0 22.6 2.0 24.61998-99 6.6 14.8 21.4 1.2 22.61999-00 6.9 16.7 23.7 1.6 25.22000-01 6.3 16.3 22.6 1.2 23.82001-02 6.2 16.0 22.2 0.4 22.62002-03 5.4 17.3 22.7 2.1 24.82003-04 5.6 17.4 23.0 3.3 26.32004-05 7.2 20.0 27.2 2.9 30.1
2005-06 5.4 25.1 30.5 3.5 34.02006-07 6.3 27.0 33.3 3.8 37.12007-08 7.1 28.2 35.3 4.0 39.32008-09 6.7 27.9 34.6 3.2 37.82009-10 10.5 29.4 39.9 4.9 44.8
Source Govt. of India Economic Survey, 2009-10 (Delhi, 2011)
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The above table reveals that during the last 50 years of economic planning
the rate of gross domestic capital formation (investment) as percent of GDP in
India has increased considerable although this increasing trend was neither
steady nor form. More ever, the rate of gross domestic capital formation as
percent of GDP in the public sector has increased considerable from 2.8% in 1950-
51 to 8.5% in 1965-66 and then declined to 5.9% in 1968-69 and again incred to
11.2% in 1985-86 and then declined to 5.6% in 2003-04 and again increased to
7.2% in 2004-05. But the rate of gross domestic capital formation in the private
sector has increased from 8.3% in 1950-51 to 15.5% in 1990-91 and again
increased to 20.0% in 2004-05.
Thus the rate of adjusted total gross domestic capital formation as percent
of GDP which was 10.2% in 1950-51 gradually increased to 23.3% in 1978-79 and
then declined to 22.2% in 1985-86 and again increased to 27.7% in 1990-91. The
same rate again decreased to 22.6% in 2001-02 and then increased to 30.1% in
2004-05. In 2005-06 the same rate again increase to 30.05% an then increased to
33.3% & 35.3% in 2006-07 & 2007-08 respectively. Then it decreased 34.6% in
2008-09 then it again increased 39.9% in 2009-2010.
Thus the rate of Gross Domestic Capital Formation as percent of GDP
during the first 5 year plan has increase moderately from 10.2% to 14.3% and
then the same rate increased very slowly during the second and third plan as if
reached 16.8% in 1965-66. Then came the worst economic crisis which reduced
the rate of investment to 13.9% only in 1968-69. Then the recovery started during
the fourth plan and at the end of the fourth plan and the same rate reached the
peak level of 23.3% in 1978-79 (i.e. just after the termination of the fifth plan).
Then during 6th plan the rate of gross domestic capital formation gradually
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increased to 24.9% at the end of the 8th plan in 1996-97 and then 22.6% in 2001-02
(i.e. at the end of 9th plan and finally to 30% in 2004-05 & lastly 44.8% in 2009-10.
3.2 HAS DOMESTIC SAVINGS BEEN ~CROWDED OUT BY FOREIGN
SAVINGS IN INDIA?
The imperative of capital inflows into developing countries is seen to
ameliorate external constraints facing such economies. The pattern of capital
mobility between countries has undergone tremendous transformation in the last
four-five decades. Official development assistance in the form of foreign aid from
multilateral and bilateral institutions has been the mainstay of external capital
flows to developing countries in the 1950s and 1960s. Later in the 198
0s,syndicated bank loans replaced official aid in magnitude in the third world
countries. However, capital flows dried up during the debt crisis of 1982-89. The
resurgence of capital flows to developing economies in the late 1980s and 1990s
has however taken a different form. Private direct investment and portfolio
investment have started playing vital part in the massive surge in global capital
flows.
But, what have been the implications of such a massive inflow of external
capital into developing countries which constantly grapple with macroeconomic
imbalances? Developing economies have generally tended to encounter
numerous problems in terms of bloated exchange reserves, exchange rate
appreciation, excessive money supply and the pressure on prices subsequently,
higher consumption than investment and consequently lower savings. The other
major concern
relates to volatility of capital flows and subsequently leading to reverse flows or
capital flight. The 1994 Mexican crisis and the financial crisis of East Asian
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economies of 1997 are the recent experience that causes concerns over such flows
for macroeconomic management.
The debate over the surge in capital inflows into developing countries and
its implications for domestic savings has resumed with renewed interest in the
1990s as capital mobility has become significant during this decade. India being
no stranger to this phenomenon of a sharp surge in capital inflows, concern is
being expressed on whether this has triggered deceleration in domestic savings.
Domestic savings in India which has witnessed its rate going up from
around 18 percent of GDP in 1990 reached a maximum of roughly 25 percent in
2005, started declining continuously since then. The start of the period of
decelerating trend in domestic savings is also the years in which capital inflows
have began to accelerate quite significantly. The following table 4 captures this
trend quite revealingly. Investment ratio too mirrored a declining trend during
this period.
While FDI as a proportion of GDP has started its onward march only since
the mid-1990s and reported to be just over one percent in the late 2000s.O
n theother hand, capital inflows as a percentage of GDP witnessed its growth from
being less than one percent in the early 1990s to close to three percent in the late
2000s. This very clearly establishes the growing magnitude of capital inflows into
the country.
TABLE-4
Trends in Domestic Savings, Investment and Capital Flows
Year FDI/GDP Capital
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GDS/GDP GDCF/GDPInflow/GDP*
1990 18.88 20.33 0.00 0.911991 18.60 20.15 0.00 0.351992 18.26 19.62 0.00 1.07
1993 17.58 18.73 0.00 1.251994 18.76 20.10 0.00 1.521995 19.49 21.73 0.00 1.981996 18.94 20.99 0.86 1.851997 20.58 22.50 0.16 1.851998 20.85 23.77 0.12 2.771999 22.00 24.53 0.14 2.362000 23.10 26.30 0.03 2.272001 22.03 22.55 0.05 1.42
2002 21.77 23.61 0.23 1.042003 22.53 23.09 1.52 3.542004 24.83 26.00 1.59 2.842005 25.15 26.90 1.38 1.322006 23.19 24.48 1.59 2.962007 23.13 24.60 1.31 2.402008 21.46 22.49 0.57 2.052009 23.17 24.31 1.16 2.492010 23.39 24.00 1.12 1.88
Source: Based on RBI (2011), Handbook of Statistics on Indian Economy.
Note: - *Capital Inflow here indicates the Total Capital Account Balances. As the
foregoing clearly establishes a priori the accelerating capital inflows and
declining savings in the Indian economy in the late 1990s, this study assumes
importance in attempting to locate the reasons for the decelerating domestic
savings in India and its association to external capital inflows.
External assistance has been the mainstay of foreign capital inflow into
India since the 1950s. The proportion of net foreign aid to the total capital inflow
has been registering over 60 percent since the 1960s and at times reaching even
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90 percent (93 percent in 1969-70). Commercial borrowing as a major source of
capital inflow into India has emerged since the 1970s. And since the mid-1970s,
capital resource from Non-Resident Indians (NRIs) has started flowing whose
share in the total capital inflow is put in the range of 20-30 percent. Diverging
from these past trends and converging to the trends being witnessed throughout
the developing economies is the march of private foreign investment inflows into
India. Since the early 2000s as the
3.3 MAGNITUDES AND COMPOSITION OF CAPITAL FLOWS
IN INDIA
External sector developments in the recent period have been dominated by
strong capital flows. The net capital flows during 2009-10 were US $ 45.8 billion,
which have substantially increased to US $ 81.9 billion during April-December
2010 (Table 1). Net capital flows to India as a percent of GDP increased from 2.2
per cent in 1990-91 to 5.0 per cent in 2009-10. This, however, does not reflect the
true magnitude of capital flows to India. Gross capital inflows to India, as a
percent of GDP more than trebled from 7.2 per cent in 1990-91 to 25.3 per cent in
2009-10 (Table 1). Much of this increase has been offset by a corresponding
capital outflows on account of easy repatriation of capital by foreign investors,
Indian investment abroad and repayment of external borrowings. Capital
outflows increased from 5.0 per cent of GDP in 1990-91 to 20.3 per cent of GDP in
2009-10.
Table-5
Magnitude of Major Items of Capital Flows in India
(Per cent of GDP) Inflows Outflows1990 2000- 2005- 2009- 1990- 2000- 2005- 2009-
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-91 01 06 10 91 01 06 10
Total CapitalFlows
7.2 11.8 17.9 25.3 4.9 9.8 14.7 20.3
of which1.ForeignDirect
Investment
0 19 1.1 2.5 0 0.2 0.8 1.6
2.ForeignPortfolioInvestment
0 3 8.4 11.9 0 2.4 6.9 11.2
3.ExternalAssistance
1.1 0.6 0.5 0.4 0.4 0.5 0.2 0.2
4.CommercialBorrowings
1.4 2.1 1.8 2.3 0.6 1.2 1.5 0.5
5.NonResident
IndianDeposits
2.3 2 2.2 2.2 1.8 1.4 1.9 1.7
# Sources: Reserve Bank of India (2011)
There has been a steep decline in official capital flows with increase in non-
debt flows, particularly private foreign investments, have gained in importance
in the recent period, during 2009-10, however, there is a steep rise in the debt
creating flows, mainly on account of rise in external commercial borrowings byIndian corporate The sharp rise in external commercial borrowings may be
attributed to favourable liquidity and the interest rates in the global markets on
the one hand, and rising financing requirements for capacity expansion
domestically, on the other hand.
3.4 SAVINGS AND CAPITAL FORMATION
The Economic and Functional Classification (EFC) of the Central
Government Budget captures the fiscal impact of the Central Government
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(including those of Railways, Posts and Telecommunications) in terms of distinct
economic categories and functions/purposes. According to the EFC, the total
expenditure of the Central Government is budgeted to show a modest increase of
8.8 per cent to Rs.3,69,272 cores in 2009-10 from Rs. 3,39,293 cores in 2008-09. As a
proportion of the GDP, total central government expenditure fell from 17.2 per
cent in 2000-01 to 14.7 per cent in 2004-05 but edged up to 15.9 per cent in 2007-
2008. However, it is estimated at 16.1 per cent in 2009-10 compared with 16.2 per
cent in 2008-09.
The growth in consumption expenditure of the Central Government is
expected to decelerate from 15.3 percent in 2008-09 to 10.9 percent in 2009-10.
The consumption expenditure which constituted 3.9 per cent of GDP in 2000-01
declined to 3.2 per cent in 2004-05, and is budgeted at 3.8 percent in 2009-10.
Similarly, expenditure on current transfers are budgeted to grow by about
11 per cent in 2009-10 as against a growth of around 16 per cent in 2008-09. The
current transfers which constituted 7.9 per cent of GDP in 2000-01 declined to 7.4
per cent in 2004-05 but show an increasing trend at 9.1 per cent of GDP in 2009-10.
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Gross dissavings of the Central Government, in absolute terms, are
budgeted at Rs. 65,898 core in 2009-10 and show a deterioration of Rs.7,601 cores
compared with dissavings of Rs.58,297 cores in 2008-09.
As a proportion of GDP, gross dissavings of the Central Government are
budgeted at 2.9 percent in 2009-10, compared with 2.8 per cent of GDP in 2008-
09.
Gross capital formation (GCF), out of budgetary resources of the Central
Government, is budgeted to increase by 4.4 percent to Rs.66,759 core in 2009-2010
fromR
s.63,928
core in 2008
-09 when it declined by 5.4 per cent. As a proportionof GDP, GCF is budgeted at 2.9 per cent in 2009-2010, compared with 3.1 percent
in 2008-09.
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TABLE-6
Total Expenditure and Capital Formation by the CentralGovernment and its Financing
(As perEconomic and Functional Classification of the Central Government Budget)
2000-01 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10#(Rs. Crore)
1.Total Expenditure
2.GCF out ofBudgetary resources ofCentral government
i.GCF by the centralgovernmentii.Financial assistance forcapitalformation in the rest of
the economy
97947 200589 224866 263755 307509 339293 369272
28032 50279 54815 57087 67602 63928 66759
8602 17946 18955 20647 26075 20260 21125
19430 32333 35860 37160 41527 43668 45634
3.Gross saving of the centralGovt.
-10502 -9406 -23396 -41893 -46191 -58297 -65898
4.Gap (2-3)a.Draft on other sectors ofdomestic economy.i.domestic Capital Receiptsii.Budgetary deficit/drawdownof cash balance
b.Draft on foreign savings
38534 59685 78211 99700 113793 122225 13265734768 55507 76102 96793 111505 120924 130094
23421 42323 77012 97029 110641 118319 130094
11347 13184 -910 -236 864 2605 03766 4178 2109 2907 2288 1301 2563
(As per cent of GDP)1.Total Expenditure
2.GCF out ofBudgetary resources ofCentral governmenti.GCF by the centralgovernmentii.Financial assistance forcapitalformation in the rest ofthe economy
17.2 14.7 14.8 15.2 15.9 16.2 16.1
4.9 3.7 3.6 3.3 3.5 3.1 2.9
1.5 1.3 1.2 1.2 1.4 1.0 0.9
3.4 2.4 2.4 2.1 2.2 2.1 2.0
3.Gross Saving of the centralgovernment
-1.8 -0.7 -1.5 -2.4 -2.4 -2.8 -2.9
4.Gap (2-3)a.Draft on other sectors of
domestic economy.i.domestic Capital Receiptsii.Budgetary deficit/drawdownof cash balanceb.Draft on foreign savings
6.7 4.4 5.1 5.7 5.9 5.9 5.86.1 4.1 5.0 5.6 5.8 5.8 5.7
4.1 3.1 5.1 5.6 5.7 5.7 5.72.0 1.0 -0.1 0.0 0.0 0.1 0.0
0.7 0.3 0.1 0.2 0.1 0.1 0.1
(increase over previous year)
2. GCFoutofBudgetaryresources of Centralgovernment
-15.1 11.0 9.0 5.5 16.9 -5.4 4.4
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1.Consumption expenditure
(in crore)22359 44238 53090 59920 68831 79329 87984
2.Current transfers (in crore) 45134 100807 111577 137611 161549 187899 208408
# The ratios to GDP for 2008-2009 at current market prices are based on CSO's
Advance Estimates released in January, 2010.
Notes:
(i) Gross capital formation in this table includes loans given for capitalformation on a gross basis. Consequently domestic capital receipts
include loan repayments to the Central Government.
(ii) Consumption expenditure is the expenditure on wages & salaries andcommodities & services for current use.
(iii) Interest payments, subsidies, pension etc. are treated as currenttransfers.
(iv) Gross capital formation & total expenditure are exclusive of loans toStates.
/UTs against States. /UTs share in the small savings collection.
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4.1 FINDINGS:
The analysis of the above chapter with statistical table reveal following points
1. The trend of domestic savings is rising and satisfactory in the post-independent period.
2. The household sector is dominating in this supply of saving for capitalformation in India.
3. The private sectors contribution to domestic capital formation to greater ascompared to the public sectors contribution.
4. The rate of growth of capital formation in private sector is higher than thatof public sector.
5. The trend of domestic capital formation is satisfactory.4.2 SUGGESTIONS
In order to increase the rate of capital formation in India by raising its level ofsaving and investment the following measures be followed
,
1. Raise the level of income and per capital income.2. Raise the volume of voluntary savings.3. Mobilizing the huge untapped savings4. Deriving growing surplus from public sector enterprises of the country.5. Controlling hoarding and unproductive investment.6. Controlling inflation so as to raise the saving capacity of the people.
7. Introducing suitable monetary policy.
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8. Formulating suitable industrial policy to promote investment in theindustrial sector
9. Attaining price stability and regulating deficit financing10.Making systematic efforts to increase export and curtailing non-essential
imports.
CONCLUSION:
On the basis of the above findings this study concludes the following.
a. India has achieved self-sufficiency in raising funds for domesticcapital formation for rapid economic development.
b.
The need for external borrowing is not more urgent in Indianeconomy for capital formation.
c. The household sectors and private sectors are more vigilant andactive in the process of capital formation by rising mobilizing saving
for the purpose.
d. The rate of growth of domestic capital formation in India issatisfactory.
e. The public sectors need more attention and the case for effective risein the rate of growth of capital formation.
f. The household sectors and private sectors need more incentives likesubsidy, concession, bonus etc. For govt. for carrying out the growth
trend in savings and domestic capital formation in diminishing in
Indian. The importance of external capital is diminishing in Indian
capital formation during recent years.
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BIBILOGRAPHY
Business Environment : P.K. Dhar. www.rbi.org.in www.google.com