income saving and investment behaviour in india...
TRANSCRIPT
CHAPTER ll
INCOME SAVING AND INVESTMENT BEHAVIOUR IN INDIA - A PROFILE
2.1 Introduction
The developing countries like India face the enormous task of finding
sufficient capital in their development efforts. Most of these countries find it
difficult to get out of the -vicious circle of poverty of low income, low saving,
low investment, low employment etc. With high capital output ratio, India
needs very high rates of saving and investments to make a leap forward in her
efforts of attaining high levels of growth. Since the beginning of planning, the
emphasis was on saving and capital formation as the primary instruments of
economic growth and increase in national income. In order to have production
as per target, capital fonnation was considered the crucial determinant and
capital formation had to be supported by appropriate volume of saving.
Growth will set in motion a self reinforcing process by which investment is
encouraged, investment enhances growth and increased income raises saving.
As Rao (1980)' has rightly pointed out, "increase in saving, use of increased
saving for increased capital formation, use of increased capital formation for
increased saving for a further increase in capital formation constituted the
strategy behind economic: growth. This process of increased capital formation
leading to increased saving and increased saving leading to increased capital
formation will continue t:.ll saving, capital formation and income reach desired
' Rao, VKRV (1980), Op.cit., p.965.
levels after which saving and capital formation gets stabilised and there would
be a steady and self sustaining increase in national income.
2.2 Growth Rate - The Indian Experience
In the years since independence India has achieved considerable
progress in terms of real GDP growth, real volume of saving and real
investment. However, as was pointed out by Ray and Boss (!997)2, the growth
trajectory of the Indian economy is often conceived in terms of transitional
dynamics from one crisis 1.0 another. Starting from the average low growth
rate called "the Hindu growth rate" termed by Raj Krishna (1983)', and
passing through the unsustainable high growth path of the eighties, India has
reached the high growth trajectory after major policy reforms in the nineties
with occasional crisis years in between. During this process of growth, the
Indian economy has undergone gradual structural transformation, the pace of
the transformation being rapid in the last decade. For the analysis of the
growth trends, the time period classification resorted to is the five-year plan
periods, the interim periods being treated separately.
The researchers have gone into various aspects of India's growth
experience since 195 1. The main focus of attention has been on the long tenn
rate of growth of 3.5 percent by Rajkrishna , improvement in GDP growth rate
from early 1980's by Dandekar (199214 and higher rate of growth since late
Ray, Partha and Dhritidyuti.Bo:;e (l997), op cit., pp. 98-143. Raj Krishna (1983), "Grouth, Investment and Poverty in the Mid-tern Appraisal of Sixth Plan", Economic and Political weekly, 18(47), pp.1972-77.
4 Dandekar, V.M. (1992), "Forty years after Independence", in Bimal Jalan (ed.): The Indian Economy, Problems and Prospects, New Delhi, Penguin.
seventies by Dholakia (199415, to mention a few. The above studies clearly
point to the fact that there are different trends in the growth trajectory of India. I
Table 2.1
Gross Domestic Product at factor cost at current and constant prices
prices are considered Sources: (I) Government of India, National Accounts Statistics.
(2) Government of India, Ministry of Finance, Economic Division, Economic Survey, 2001.
(in Rs. crores)
In analyzing the growth rate of the Indian economy during the plan
periods, five extra ordinary years, termed as the crisis years, in which growth
c
* Dholakia, Ravindra H. (195'4), "Special Diversions of Accelerations of Economic Growth in India", Economic and Politial Weekly, 29(35), pp.2303-9.
Year
1951-52
1955-56
1960-61
1965-66
1968-69
1973-74
1978-79
1984-85
1989-90
1996-97
2000-2001
* Up to
I I
1989500*
1996-97-1980-81 prices are considered, 1997-98 onwards - 1993-94
11.4 1209600* 6.0
rate has been negative or exceptionally low should be treated separately. If the
growth of the economy during the rest of the period is considered as a whole,
the average works out to be 4.4 per cent.
At the end of the first plan period, GDP at constant prices was
Rs.51173 crores with an average annual growth rate of 3.6 per cent during the
plan period. The economy grew at a higher rate of growth of 4.2 per cent
during the second plan. However, during the next plan period, the extra
ordinary environment that existed in the economy, namely the two wars and a
draught brought down the growth rate to 2.8 per cent. Since the mid-sixties, as
was observed by Ahluwalia (198516, "the emergence of a number of latent
strains as well as a few new factors which were to change the course of
industrialization in the following period" brought down the pace of industrial
growth. Added to this, the first shock of 1972-73 has been responsible for a
low growth rate of GDP during the fourth plan.
Since the mid seventies due to an industrial turn around and better
performance of the agricu:ltural sector the economy broke through the "Hindu
rate of growth". However, the higher growth rate did not persist as the
economy faced the next oil shock of 1979-80 bringing down the growth rate
immediately. In the eighties, the stagnation seemed to be over and the
economy shifted to the high growth path during the sixth and the seventh
plans.
6 Ahluwalia, Isher Judge (19E85) Industrial Growth in India; Stagnation since the Mid- Sixties, Delhi, Oxford University Press, p.8.
The impressive growth path of the eighties could not be sustained due
to the deterioration of a number of macro economic indicators. The crisis of
1991 revealed that the growth experiences of eighties was unsustainable. The
average growth rate came down during the crisis years which underlined the
fragility of a rather good performance of the eighties.
Due to a major shift in the economic policies oriented towards
liberalization and globalisation, steady and sustained improvements in growth
rate could be achieved in the nineties. Growth rate of 6.8 per cent was
achieved during the eight11 plan. Even though the industrial sector suffered a
set back in the initial years of the ninth plan, as the reform process was
continued and due to the better performance of the agricultural sector, the
higher growth rate could he maintained during the ninth plan.
2.3 Sectoral composition of Gross Domestic Product (GDP)
Every economy shows some kind of structural tranformation in the
development process. Kuznets (1955)' explains this in terms of migration of
labour from agriculture to industry. In the Indian development experience, the
share of agriculture in the GDP has declined whereas the shares of industry
and services have increased
- 7 Kuznets, Simon (1955), "Towards a Theory of Economic Growth", in Robert Lekachman
(ed): National Policy for Economic Welfare at Home and Abroad, New York, Doubledey p.185.
Table 2.2
Gross domestic product by industry of origin (at constant prices)
Primary Year Secondary sector sector
Tertiary sector
-- - -
GDP at factor cost
* at 1993-94 prices.
Sources: (1) Government of India, National Accounts Statistics, various issues (2) Government of India, Ministry of Finance, Economic Division,
Economic Sunrey, 2001.
Agriculture and allied activities accounted for the lions share in the
national output at the beginning of the five year plans. From 54.8 per cent
(Table 2.2) in 1951-52, the share of this sector declined steadily to be the
lowest contributor towards the GDP with a share of 25.2 per cent in 1999-
2000. The fall in the share: of this sector has been notably steep during the
liberalization period. But with the decline in the share of agriculture there has
not been a corresponding fall in the labour force in the sector. According to
Kurian (1992)' "the fact that a sharp fall in the share of agriculture in national
income in India is accompan.ied by a fairly stable proportion of labour force in
that sector shows that there has been a relative decline in productivity there".
With the fall in the share of agriculture and allied activities, the shares
of industry and services have increased. The share of industry has shown a
steady increase from 16.6 per cent at the beginning of the first plan to as much
as 31.0 per cent by the end of the eighth plan. Since then this share has
declined marginally to reach 26.9 per cent by 1999-2000.
Like the secondary sector, the tertiary sector has also shown a steady
increase in its share. From 28.6 per cent in 1951-52, this sector's share
increased to 47.9 per cent in 1999-2000. In the post liberalization period the
growth in the services sector has been tremendous. The upsurge that was
experienced by this sector since the eighties has imparted resilience to the
economy, especially in times of adverse agricultural shocks.
But the structural transformation that took place in the Indian economy
differs from that of the advanced countries in the sense that the increase in the
share of the services sector was achieved in a short span of time. The economy
jumped from the stage of lower order value addition associated with the
agricultural sector to higher order value addition associated with the services
sector which can be explained in terms of a late starter in the development
paradigm.
8 Kunan, C.T. (1992), The Economy - An Interpretive Introduction, New Delhi, Sage Publications, p.342.
2.4 Trends in Domestic saving and Investment
Almost from the inception of economic planning, the prevailing low
level of saving and investment was assessed by the planners and then targeted
to achieve a self reliant and self sustaining economic growth by achieving a
sharp increase in the saving 2nd investment rates.
Table 2.3
Domestic Saving by institutions (as per cent of GDP)
Household sector
Q = Quick estimate. Sources:(l) Government of India, National Accounts Statistics, various issues.
(2) Government of India, Ministry of Finance, Economic Division, Economic Survey.
Looking at the figures in table 2.3 it is quite evident that the saving
ratio shows a secular trend to rise even though there are fluctuations.
According to Rao (1980)' the increase in saving in spite of the fact that
poverty is increasing points to the fact that the increase in money income is
getting largely into the hancls of the people who are using it to increase their
Rao, V.K.R.V., Op cit,p.967
consumption and into the hands of the higher income groups who have a high
propensity to save. It is also due to the transfer of household saving to the
government and corporate sectors and partly by physical capital formation by
the better off households.
In the first three plan periods, the increase in saving rate was slow.
From 10.4 percent of GDP, GDS rose to 14.5 percent at the end of the third
plan. However, during this period, the financial infrastructure was established
in the economy. During this period the household sector saving increased from
7.7 percent of GDP in 19210-51 to 9.9 percent in 1965-66. The public sector
saving during the period increased from 1.8 percent of GDP to 3.1 percent of
GDP, whereas the private corporate sector saving stagnated. This low rate of
domestic saving during the first three plan periods was because of low
propensity to save in the agricultural sector, (Chakravarthy), (1973)1°, and
because of the larger shares of agriculture in GDP.
During the annual plans and the fourth plan the saving rate steadily
went up to reach 18.4 percent of GDP in 1973-74. This rate of growth in
saving was made possible by the increase in household saving with
nationalisation of the major commercial banks along with rapid branch
expansion and also by the setting up of regional rural banks. With green
revolution, the income distribution in the agricultural sector became skewed
and with this the propensity to save in agricultural sector increased, as was
-
10 Chakravarthy, S. (1973): "lieflections on the Growth Process in the Indian Economy" in Charan Wadhawa (ed) Someproblems of India's Economic Policy, 1977, New Delhi, Tata McGraw Hill. P.121
pointed out by Krishnamurthy and Saibaba (1981)" The public saving rate
declined marginally and the private corporate saving rate stagnated.
The period 1975-70 is considered to be the high saving phase in the
Indian economy. The saving rate in the economy increased to 23.2 percent of
GDP by the end of the fifth plan. The tremendous growth in the saving rate
was achieved because of the higher rate of saving achieved in the household
sector and public sector whereas the increase in the saving rate of the private
corporate sector was marginal. The special factors that were responsible for
the increase in the household saving in this period were the increased foreign
inward remittances which enhanced saving in the non-agricultural sector as
was noted by Krishnamurthy and Saibaba (1981)12 and the expansion in bank
deposits as a result of branch expansion by nationalised banks as pointed out
by Majumdar et. al (1980)". Raj Committee (1982)14 has found that the
physical saving also increased during this period.
The sixth plan saw the fall in the GDS from 23.2 percent of GDP at the
end of the fifth plan to 18.2 percent of GDP at the end of the sixth plan. This
fall in the saving rate was caused due to the decline in the saving rate of all the
three sectors. Ghosh (1990)'~ finds that the decline in household physical
saving is a reflection of the non-agricultural sector providing a greater
I 1 Krishnamurthy, K and P. Saibaba(l981) op cit., pp. 225-249 '' (1981), Ibid. 13 Majumdar, N.A., T.R. Venkatachalam and M.V. Raghuvachari, "The High Saving Phase
of the Indian Economy" KBI occasional papers, 1-32. l4 Raj, K.N., et a1 (1982) "Capital Formation and Saving in India 1950-51 to 1979-80",
Report of the Working Group on Saving, RBI. I S Ghosh, Arun (1990), "Saring in India: Some Broad Reflections", in Datta, Roy Choudhari
and Bagchi (1990). (ed) Domestic Savings in India; Trends and Isuues, New Delhi, Vikas Publishing House Pvt. Ltd., p.54.
quantum of saving. Chakravarthy (1990)'~ finds the growth in consumption
leading to dampened household saving. The declining trend of public sector
saving rate is on account of the increased dissaving by the government
administration.
There was a recovery in GDS to 22.41 percent of GDP by the end of
the seventh plan. This growth rate has been almost steady. The corporate
sector saving started showing steady improvements whereas the public sector
saving drifted downwards due to the growth of defence expenditure, interest
payments and subsidies.
During the eighth plan, the saving rate in the economy reached a new
high of 25.1 percent of GDP in 1995-96, a rate comparable to developed
European countries and that of the East Asian economies. This increase was
made possible by the increase in the household sector's saving to 20.3 percent
of GDP and that of the private corporate sector to 3.9 percent of GDP. The
public sector saving was on the downward path because of the dissaving of the
government administration to the tune of 2.4 percent of GDP. Even though the
saving rate reached a new high in 1995-96, the initial years saw a fall. This fall
is explained as 'spurious' by the Economic Survey (1995)" as it is not
consistent with the economic fundamentals. This view calls for a review of the
methodology for estimated saving and capital formation in the economy. Rao
(1995)'' and Economic and Political Weekly Research Foundation (EPWRF)
l6 Chakravarthy, S. (1990) "Inaugural Address" to a seminar at National Institute of Public Finance and Policy, reprinted in Datta, Roy Choudhari and Bagchi (1990) (eds.),op cit., p.25.
11 Government of India, Ministry of Finance, Economic Survey, 1995, p.3. I8 Rao, C.H. Hanumantha (11>95), "Budget, Welcome Social Focus", The Economic Times,
April 19, p.8.
(1995)19 hold the view that the decline in the saving rate in the immediate
years after the introduction of reforms is 'real' and is an unintended
consequence of the reform process. EPWRF (1995)" argues that it is beyond
doubt that the definitive 1:hrust of the new economic policy is to promote
higher economic growth by promoting consumption by the middle and high
income classes. The household saving rate fell from 20 per cent of GDP in
1990-91 to 15.9 percent in 1993.94. This decline in household saving is due to
a decline in household physical saving from 11.3 percent of GDP in 1990-91
to 5.6 percent in 1993-94.. Thus, the explanation for the decline in overall
saving rate lie in the behaviour of household saving in physical assets.
According to Athukorala and Sen (199512', it is evident that the apparent
decline in household investment in physical capital which has in turn, reflected
in a significant decline in the total saving rate in the economy since 1991, has
largely emanated from an under estimation of gross domestic capital formation
in recent years.
In the last year of the eighth plan and in the three years of the ninth
plan, the GDS show a falling trend. By the year 1999-2000, the public saving
rate has become -1.2 percent of GDP and there is a fall in the corporate saving
rate during these years even though the household saving rate has improved
marginally.
l9 Economic and Political Weekly Research Foundation (EPWRF) (1995): "Economic Reforms and Rate of Saving", Economic and Political Weekly, vo1.30, Nos. 18-19, May 6- 13,pp.1021-41.
20 EPWRF, Op cit., p.1040. " Athukorala, Premachandra and Kunal Sen (1995), "Economic Reforms and Rate of Saving
in India", Economic and Political Weekly, Sept.2, p.2187.
2.5 Sectoral compositio~~ of saving
For a better understanding of the domestic saving picture, a
disaggregated analysis of saving, breaking it into the household sector, private
corporate sector and public sector is needed.
2.5.1. Household Saving
Comparable data on net saving of the household sector are available
from 1950-5 1 onwards with a break up between financial saving and saving in
physical assets. From 73.'7 percent in 1950-51, the share of household sector in
GDS increased to 88.8 percent in 1999-2000. There have been fluctuations in
this share in different years in the period.
Table 2.4
Sectoral composition of saving
Year
1950 - 51 1955 - 56 1960 - 61 1965 - 66 1968 - 69 1973 - 74 1978 - 79 1984 - 85 1989 - 90
total household total household
1996 - 97 73.3 1999 - 20004 1 88.8
39.4 60.6
Q = Quick estimates Sources:(l) Government of India, National Accounts Statistics, various issues.
(2) Government of India, Ministry of Finance, Economic Division, Economic Survey-200 1.
47.0 53.0
Table 2.5
Household Saving-Composition of Financial Ass'ets (Share in per cent)
Years
a) Financial saving
Financial assets
Shares & debentures 140.24/ 9.94 124.951 1.99 1 6.86 1 1.22 1 2.63 ( 7.38 1 13.18 1 6.17 1
Provident fund and pension fund 35.74 20.38 23.73 20.62 25.58 16.80
m d
b) Physical saving 58.6 71.87 57.81 62.48 43.49 54.93 39.81
household saving
39.54 51.63 43.30 45.94 32.64 44.61 30.94
5.6 5.8 8.11 7.98 10.64 5.45 9.92 8.09
Source: Government of India, National Accounts Statistics, 1997.
A
It is worthwhile to look at the distribution of household saving into
financial instruments, which represent a transfer of their use to other sectors
w \ O m w w
d ' C ) V , w w 2 2 2
and physical assets, which represent saving invested by households
themselves. The share of financial saving has consistently increased from
A
12.81 percent of the total household saving in 1950-51 to 60.6 percent in
1996-97 and declined to 53.0 percent in 1999-2000, in the quick estimates.
- t.
d t.
The phenomenal growth in financial institutions and their differentiated
Z m P
E",
m P
ob r- 5
Ln m
8 z
0 m d m 2
t. a,
6 m - a,
structure together with the multitude of financial instruments available are the
reasons for the growth of financial saving by the household sector. The
indivisibility of physical saving and the regular income earned from the
financial assets have also prompted investments in financial assets. The wide
variety of instruments available along with government policies like
compulsory deposit schemes have also been instrumental in diverting saving
to the financial assets.
2.5.1.1Composition of financial assets in household saving
Pandit ( 1 9 8 5 ) ~ ~ finds that the volume of financial saving determines the
demand for financial assets. Given the volume of saving, the household
determines about its allocation among competing assets, depending on a)
availability of various assets b) their respective rates of return and c) the rate
of return on physical assets. In the financial saving of the household sector,
there is a decline in currency held by the households. The diversification of the
financial structure, and the switching over to new financial instruments have
been instrumental in thiz,. The largest increase in non-contractual assets is in
the deposits. When the capital markets offer better returns there is a switching
over to shares and debentures and units of mutual funds. Shares and
debentures attracted investments by the households sector to the tune of 13.18
percent of financial saving of the sector in 1989-90. However, with depressed
conditions in capital market this share came down to 6.17 percent. The net
claims on government increased to higher levels to reach 16.2 percent of
household financial saving by the end of the seventh plan, which declined to
22 Pandit, B.L. (1985) , op cit., p.89.
7.67 percent by 1996-97. However, in the asset preference among the different
financial assets any speci tic trend was not visible.
2.5.1.2 Share of Physical Assets in Household Saving
The share of physical assets in household saving has declined from
87.19 percent in 1950-51 to 39.81 percent at the end of the eighth plan.
However, this fall in physical saving has not been a smooth one. The quantum
jumps and subsequent decline in physical assets formation was responsible for
a similar behaviour in total household saving, whereas household saving in
financial assets show a steady upward trend. The upward trend in the ratio of
household saving in financial assets was considered by Rakshit (1982)~' and
Shetty and Menon (1980:1~~ and found that the household financial saving were
exaggerated due to certain extraneous developments such as the bunching of
financial asset growth due to procurement and foreign inward remittances.
Thus, household saving have been and continue to be of critical importance to
physical asset formation in the economy. Not only they undertake almost half
the aggregate physical investment, but, by transferring saving they make
possible greater investment in the public and private corporate sectors.
2.5.2 Private Corporate Sector Saving
The importance of corporate sector saving and public sector saving in
the growth performance of economies has been highlighted with reference to
East Asian economies by Woo ( 1 9 9 1 ) ~ ~ and Akyuz and Gore (1994 )~~ .
21 Rakshit, Mihir (1982): "Income, Saving and Capital formation in India", Economic and Political Weekly, 18 (May): pp.753-766.
24 Shetty, S.L., and K.A. Menon (1980) "Saving and Investment Without Growth", Economic and Political Weekly, 15 (May 24), pp. 927-36.
*' WOO, Jung En (1992): Race to the Swiji: State and Finance in Korean Industrialisation, New York, Columbia University Press, pp.58-66
Table 2.6
Private corporate saving (in current prices)
As a percent of corporate I Corporate saving As a percent of GDS 1 saving
Source: Government of India, National Accounts Statistics, 1997.
As pointed out by Reddy (1995)~~, the growth of private corporate
saving is determined by macro-environment and also by micro conditions at
the firm level. Until late seventies the private corporate saving stagnated and
this poor performance of the private corporate sector has to be attributed to the
low profitability of the sector due to dependence on borrowed funds.
However, in the eighties and in the post reform period the corporate saving
26 Akyuz, Y and C Gore (1994) "The Development Profile Nexus in East Asian Economies" Discussion paper, No.91, October p. 35-40.
27 Reddy, Y.V. (1995) Prospects for Saving and Growth in Uma Datta and Kapila (ed), Economic Development iri India, vo1.4, p.76.
rate increased. The private corporate saving crossed the public sector saving
rate in 1988-89 and remained higher ever since. A striking feature of this rise
in private corporate sector saving is the increase in the share of financial joint
stock companies. The share of co-operative banks and societies show a
downward trend also. From. 8.07 percent of the corporate saving by the co-
operative banks in 1970-71 the share declined to 1.78 percent in 1996-97.
The improved performance of finance companies was made possible
because of the development of new financial institutions, mutual funds and the
reforms for the improvement of the strength of the financial institutions.
EPWRF ( 1 9 9 ~ ) ~ ~ attributes the more reasonable tax regime and the reduction
in corporate tax rates as the major reasons for the rise in corporate saving.
Macro economic stability and policy stance regarding interest rates and
exchange rates also had certain favourable effects on corporate saving and
investment.
2.5.3 Public saving
One important factor influencing the saving performance of the country
is the public sector saving. Contrary to the private corporate sector the public
sector has contributed substantial amounts towards national saving in the
period up to the end of the fifth plan.
From 20.6 percent of GDS in 1960-61, the share of public sector drifted
marginally to 19.8 percent of GDS in 1979- 80. This comparatively higher rate
of saving is attributed to the measures for controlling fiscal deficit in response
28 EPW Research Foundation., Op.cit., p.1023
to double digit inflation and also because of decreased government revenue
due to increased tax efforts. However, as Joshi and Little (1994)~~ have
pointed out, "drought and recession of the mid sixties resulted in reduction in
tax revenue and expenditures were reduced by reduction in capital
expenditure."
Table 2.7
Gross domestic :saving - public sector (in current prices) I
Source: Government of India, National Accounts Statistics, 1997.
The share of public sector saving peaked in 1978-79 when it was 4.9
percent of GDP and remained above 4 percent in the early eighties owing to
higher government revenues and better performance of non-departmental
enterprises. However, the government administration started to record
negative saving by the end of the sixth plan even though the non-departmental
enterprises have been performing better. The departmental enterprises also
- 29 Joshi, Vijay and I.M.D. little: India, Macro Economics and Political Economy I964 to
1991 Delhi: Oxford University Press, pp.49,50.
started to show an upward trend from this time period onwards. The net result
was a drift in public saving from the mid eighties to reach 1.9 percent of GDP
in 1996-97. The huge amount of negative saving of government administration
is principally because of the increasing subsidies and interest payments due to
rising debt. The only silver lining in the public sector saving is the steadily
increasing saving rate of non-departmental enterprises.
2.6 Trends in capital formation
Capital formation in the country represents a major production potential
and is a major determinant of economic growth. The assets in which the fixed
capital is formed, its distribution into different production sectors like the
public sector, private corporate sector, and households sector, the gestation
periods involved, the degree of utilisation of capital and the efficiency of
utilisation are all factors that influence the impact of capital formation on the
generation of income.
The gross capital formation in the economy is estimated under three
types of assets namely construction, machinery and equipment and change in
stocks. However, capital formation under these heads is not based on the
functional concept of capital as it includes residential construction, which does
not generate income. The functional role of inventories depend on their
composition by raw materials, semi-finished goods and finished goods and by
producers goods and consumers goods. (details of which are not available in
the CSO white papers) But as Rao (1980)~' points out, " with all these
limitations, however, data on fixed capital formation given in National
30 Rao, V.K.R.V.: (1980), Op sit., p.973
Accounts do represent a major production potential in the economy and as
such constitutes a crucial element in the analysis of economic growth as
represented by the NDP or national income or other national magnitudes of the
output of goods and services".
Table 2.8
Source: Government of India, National Accounts Statistics, 1997. Note: Figures in italics indicate per cent of GDP.
The estimate of public and private sector capital formation is obtained
from the national income accounts and budgets. The excess of GCF over the
organised sector capital formation is treated as household capital formation
which is equal to household physical saving. From 10.6 percent of GDP
(Table 2.10) during the first plan, the average annual capital formation
increased to 14.7 percent of GDP in the second plan. The average annual rate
of capital formation further increased to 16.4 percent during the third plan.
However, the tempo of growth has been dampened due to the shift in emphasis
of the plan objectives from quantitative targeting of investment rate to the
qualitative targets. This reorientation strategy was essential as accompanying
growth was not achieved in spite of high saving and investment. During fifth
plan, average annual rate of GCF shows further improvement to reach 20.72
percent of GDP. This wa:; achieved due to improvement in household and
private corporate investment rate in the period 1976-1977 to 1978-79, despite
the fall in public sector capital formation. During these years, the saving rate
31 . exceeded investment rate even though, as Shetty and Menon (1980) nghtly
observed, "the growth rate did not increase proportionately to the increase in
saving realised by higher fc~reign inward remittances, as these saving were not
productively invested".
During the sixth plan period, the rate of capital formation deteriorated,
till it started improving in 1984-85. This fall in investment rate was mainly
because of the fall in the household sector capital formation. During the
seventh plan period, the inflow of foreign capital increased together with
increase in domestic saving which led to the increase in the annual rate of
3' Shetty, S.L. and K.A. Menon (1 980), Op cit, p.932.
Table 2.9 Average annual sectonvise and assetwise distribution of investment during plan periods (as percentage of GDP at Current prices)
Terms1 Period Annual I plan I1 plan I11 plan VIII
IV plan V plan VI plan VII plan plan plans
IX plan*
1. Sectorwise GCF
a) household 5.72 5.92 5.14 7.73 8.16 9.2 7.38 8.58 8.62 8.47
b) Private corporate 1.36 2.58 3.5 2.17 2.27 2.15 4.34 4.52 5.98 7.12
c) Public sector 3.5 6.2 7.76 6.6 6.84 9.0 10.2 10.54 9.08 6.68
2. Asset wise GCF
a) Construction 6.76 8.06 8.48 9.06 8.76 9.92 9.98 10.42 10.44 10.33
b) Machinery & equipment 3.46 4.92 6.32 5.9 6.04 7.54 9.62 11.1 11.88 1 1.07
c) Change in stocks 0.23 1.72 1.64 1.57 2.38 2.48 2.3 2.1 1.3 0.93
3. Gross capital formation 10.58 14.70 16.4 16.50 17.26 20.72 21.92 23.64 23.68 25.92
4. GDCF 13.46 17.88 19.32 19.1 19.92 21.52 21.34 22.26 22.52 25.93
Source: I. Government of India, National Accounts Statistics, 1997-98. 2. Government of India, Ministry of Finance, Economic Survey 2001
* Average for first three years
Table 2.10
Institution-wise distribution of capital formation by type of Assets (at current prices)
Construction I Machinery and equlpmentspT -
Change in stock Share in GLF l Five year I I I I I
First plan
Second Plan
Annual Plan
Fourth Plan
Fifth Plan
4 1.24
47.94
Sixth Plan
Seventh Plan
42.5
45.52
46.56
Eighth Plan
2.7
5.06
53.62
54.34
3.36
3.44
2.44
Source: Government of India, National Accounts Statistics, 1997-98.
44.38
56.06
47.0
5.08
4.94
54.1
51.1
53.62
6.84
22.5
34.4
41.32
40.7
39.06
33.8
42.4
48.78
24.04
27.88
44.38
42.52
20.53
19.98
17.5
36.36
53.18
37.74
30.36
27.14
40.4
46.22
40.12
40.7 22.96
54.08
100.5
25.24
30.34
32.53
27.4
41.32
-22.42
102.12
43.6
23.58
0.38
69.16
43.76
26.88
52.78
56.34
44.1
34.0
51.5
-1.7
28.84
31.8
69.94
33
42.3
42.4
48.86
40.03
39.26
43.36
38.44
11.4
17.32
46.6
44.56
55.08
40.3
13.17
13.8
12.2
25.38
46.83
46.98
44.46
19.54
19.14
36.16
33.9
33.9
capital formation. Immediately after the crisis of 1990-91, domestic
investment rate showed a decline owing to reduction in both domestic saving
and net inflows from abroad. However, from 1993-94 there is a great
improvement in aggregate investment rate due to increase in domestic saving.
The average annual gross capital formation rate peaked at 23.68 percent
during the eighth plan period. A particular feature of the Gross Capital
Formation (GCF) rate is the tremendous increase in the corporate sector
investment and a fall in the public sector investment rate, even though the
household sector investme:nt rate shows no change.
2.7 Asset-wise Distribution of Gross Capital Formation
The asset wise distribution of GCF shown in tables 2.10 and 2.1 1
present a picture of steady increase in stocks. Construction sector shows an
increase from 6.4 percent of GDP during the first plan period to nearly 10.4
percent of GDP during the eighth plan period. The greatest increase was seen
in the machinery and equipments. The effect of this increase in investments in
machinery and equipments resulted in greater production in the economy. An
interesting dimension of the increase in investment in machinery and
equipment is that nearly 40 percent of this increase was in the private
corporate sector. The investment in terms of change in stocks was on an
average 0.23 percent of GDP, during the first plan. However, these figures
steadily improved to 2.48 percent during the fifth plan and started declining
slowly in the subsequent periods. The increase in stocks reflects a bulge in the
undesired investment. The decline in inventories during the sixth, seventh and
eighth plans are reflected in the increase in machinery and equipment,
enabling the achievement of higher growth.
Asset-wise constntction has accounted for the largest share in the gross
capital formation. From 6.76 percent of GDP in the first plan, this has steadily
increased to reach 10.44 percent of GDP in the eighth plan. Only in the
seventh and eighth plans the gross capital formation in machinery and
equipment exceeded construction. In the initial periods of development, more
of investment in construction is to be expected, as this was the time for the
development of infrastructure in the economy. This has led to higher capital
output ratio in the economy. Rao (1981)~' has rightly observed , "there is
therefore, no doubt that a secular increase has taken place in the capital output
ratio in India and this is certainly a matter of great concern for our future
economic growth, especially in view of the general tendency of the average
capital output ratio to remain constant in most developed countries and in the
history of economic development in general.
2.8 Sectoral Distribution of Gross Capital Formation
Taking the whole period of 1950-51 to 1996-97, the share of public
sector in total capital formation was, on an average, 41.8 percent. The share of
private corporate sector was 17.15 percent and the average share of the
household sector was 41.05 percent. But the distribution among the public
sector, private corporate sector and household sector has been widely
fluctuating during the years.
j2 Rao, V.K.R.V. (1980), Op cit., p.974
2.8.1 Public sector capital formation
The average inveslment per year in the public sector during the first
five year plan was 3.5 percent of GDP and this share increased tremendously
in the later years to touch 10.54 percent of GDP during the seventh plan, the
peak being achieved in 1086-87 when it was 11.7 percent of GDP. In the mid
sixties, however, as Joshi and Little ( 1 9 9 4 ) ~ ~ have pointed out, there was a
downward slide in the public sector investment as restrictions were imposed to
cope with the macro ec:onomic imbalances. However, the acceleration of
public investment rate in the late seventies was achieved due to government's
response to the oil shock by expansionary adjustment. In 1986-87, the public
sector investment dwindled , as there was the need to slice down expenditure
to counter the failure of monsoons. During the eighth plan, the public sector
investment further came down to an average annual rate of 9.08 percent of
GDP as a consequence of'the fiscal adjustment of the government.
Analysing the asset-wise pattern of public sector investment (Table
2.10) it is found that the greatest investment throughout the period has taken
place in construction, poi,nting to the emphasis placed in the five year plans on
the development of infrastructure. During the third plan, the public sector
investment in construction was 58.94 percent of the total per annum. This
came down to 42.50 percent during the annual plans, picked up again to reach
54.34 percent in the seventh plan. However, during the eighth plan period, this
came down to 44.38 percent of the total. The investment in machinery and
equipment has shown an upward trend till the sixth plan. From a share of
" Joshi Vijay and I.M.D. Lit.:le (1994), Op cit., p.316.
22.50 percent of the public sector investment in the fourth plan, it increased to
44.36 percent in the sixth plan. However, it started coming down in the
seventh plan, reaching 36.36 percent during the eighth plan reflecting the
trends of privatisation and liberalisation in the economy. The share of
inventories was very high during the first two plans, reaching 1.72 percent of
GDP during the first plan. This trend continued till mid-seventies due to the
high level of food procure~nent and stock of food grains. However, the share
of public sector in inventories has come down since then to be negative during
the eighth plan.
2.8.2 Private Corporate Sector
The share of private corporate sector in the GCF has been the lowest in
all the plan periods, compared to public and household sectors. However, this
share has risen, which is a welcome feature from the point of view of the
economy. From 11.4 percent of the GCF in the first plan, the share of this
sector increased to 21.44 percent during the third plan. However, since then,
till the fifth plan, the average annual capital formation in the private corporate
sector was very low. In the early eighties the investment in private corporate
sector increased, but it could not be maintained in the latter half of the
eighties. The eighth plan is a period of higher investment in the private
corporate sector due to the favourable investment climate that was made
possible in the economy as a result of the reforms. The private corporate sector
investment contributed 33.40 percent and 32.40 percent of the total investment
in the economy in 1995-06 and 1996-97 respectively, when for the first time it
surpassed the investment of the public sector. Bulk of the investment in
private corporate sector has been in machinery and equipment. However, due
to the stagnation in the corporate saving in the early years and its delayed
acceleration a saving investment gap was created.
2.8.3 Household Sector
It is the capital formation in the household sector, which has led to a
respectable figure for capital formation in the country. From 55 percent of the
total capital formation during the first plan, its share decreased during the next
two plan periods to touch 31.42 percent during the third plan. During the next
three periods, this sector contributed the lion's share in the total capital
formation in the economy. However, with increase in financial saving of the
household sector, physical capital formation by this sector has come down
tremendously. According to Raj committee report ( 1 9 8 2 ) ~ ~ the increase in
household capital formation in the late sixties and seventies has been due to
the substantial growth ot'the incorporated enterprises out side the farm sector
and the larger quantities of machinery and equipment.
In the assetwise classification, the share of the sector in construction
has been very high throughout this period which include residential
construction also. The share of this sector in machinery and equipment has
been constant at arouncl 40 percent till the fifth plan, which came down to
reach 22.96 percent in the eighth plan. The household sector showed negative
inventories till the annual plans, which increased to touch 69.94 percent of the
total inventories in the eighth plan.
34 Raj, K.N. et al. (1982) Op cit., p.68
/ LOOOZ 1 5881 1 60EZ I 9ZZZ 1 619 1 99ZZ 1 0161 1 88E 1 9821 ( E9LS I LO5 I 80ZE 1 ZSEE IPL-EL61 /
E9Z#
L81EE
#l8Z
1 6PZEI 1 S85 I 8L6 1 2961 1 9S9 1 8591 1 LW I PLE 1 OSZI 1 IPEE 1 IOZ 1 P69Z / 8E8Z 169-8961 / 1 EPLPl I ZEEl I PL61 1 0181 1 95ZI I 9LEZ 1 IEl 1 98E I I8E1 I PEEP ( ELI I 80EZ I 8LPZ ( 99-5961 1
ZlEZ
OE9Z
8Z81
PEEE
9LZE
EPEZ
SLLlI
8P6L
I I'Z a1qe.L
/ 9PLS 1 ZIP I ZLS I OZZI I 86E I 569 1 9ZL I IP 1 LEI I ZSO! I ES I Z?Z! I O!E! 1 !5-OSS! I
L9ES
999E
5P8Z
L9ZI
095
ma=
Z86
E88
ZL5
PE9 I
96L
(saio~3 q)
saq!~y3e pagle 7g
arn[n3@v aw[n3@~
SL85
Z9ZP
OLSZ
5L91
86E1
aujueni) 78 ~orur14 13e~nm14
EL8Z
I EOZ
8PSZ
6LL
IOL
r(1ddns ratem 78 'sea 'l(l!aq3ala
no!t3nssuo3
566
08L
9Z5
P6P I
5001
tmmqsar v slaloq cape,^
E3gUlUI03
78 salo1S '~.lodsuq
ZLL5
910P
56LZ
POL
OS9
asn 30
Lq ~39
sa>!Nas ssamsnq 7gatqsa
'a~uemq 'a~3ue~~
WZZI
EZI8
00E8
19P
EOE
uo! ~eas~ge
3!1qnd sL~ml!~.a
sa3!,uas ~~uoscld 78 xlmn~o3
Z66Z
8blZ
OLL
015
ELP
ESEP
6PSP
9PZ5
9ZEE
5851
16LP
588P
LPPS
P6 1
89
06-6861
58-P861
6L-8L61
899 1
2851
LLLI
OL91
19-0961
95-5561
The growth rate of capital formation in agriculture has been slow
throughout the five-year plans. The growth in investment in manufacturing
was marginal during the first plan, but during the second plan, as plan
objectives stressed industry, the investment in manufacturing sector doubled.
In the periods between second and fifth plans there was an industrial
deceleration. However, it was in the nineties that the greatest increase in
investment in manufactur~ng was experienced. The policy changes in the
economy have been responsible for this notable increase in investment.
Transport and communication, finance, insurance, trade, hotels and restaurants
and electricity, gas and water supply have also experienced considerable
increase in investment.
2.9 Saving, Investment and Growth Causality
There is a debate on the form of causality between saving and growth.
For ~ o l o w ( 1 9 5 6 ) ~ ~ higher saving leads to higher per capita income in steady
state and higher growth rate in transitional trajectory. Most cross-country
studies report a strong positive effect of income growth on saving. Carrol and
Weil ( 1 9 9 4 ) ~ ~ using two data sets for two groups of countries for the period
1960-87, finds that growth causes saving and saving does not cause growth.
Deaton (1989)~' has established that consumption habit that changes with a
lag, despite increase in income may lead to higher saving rates with growth.
35 Solow, R.M. (1956): "A Contribution to the Theory of Economic Growth", Quarterly Journal of Economics, 70, pp.6:;-94.
36 Carroll, C.D. and D.N. Weil (1994): Saving and Growth: A Reinterpretation, Carnegie Rochester series on Public Polic:y,40, pp. 133-192.
37 Deaton, Angus (1984) "Saving in Developing Countries: Theory and Review", Proceedings of the World Bank: Annual Conference on Development Economics, pp.61- 108.
Extending Carrol and Vleil result for India, Balakrishnan (1996)" and
Muhleisan (1997)'~ got similar results. Ray and Boss (1997)~' find that the
causality directions are almost uniformly from growth to saving with non-
significant causality from saving to growth.
In India available evidences on long-term patterns of saving and growth
support the idea that virtuous circles of development and saving exist along
with traps of under saving and poverty. Average saving of 20 percent of GDP
is high by the standards of developing countries. Gross capital formation is
also high compared to other less developed countries. However, these saving
and investment are not reflected in the GDP growth rate of the country.
Different hypotheses have been put forward by different economists for this
low rate of growth.
Rakshit (1982)~' finds that over estimation of saving and investment
result due to three reasons, namely, upward bias in the use of commodity flow
method in investment, failure to account for the bunching effect of intra year
fluctuations in financial saving and the upward bias in the estimation of
changes in stocks. Raj Committee ( 1 9 8 2 ) ~ ~ and Chelliah Committee (1997)~'
have recognised various sources of error in the estimation of saving and
capital formation in hldia. However, Muhleisen ( 1 9 9 7 ) ~ ~ finds that the
Balahishnan, P. (1996): "Saving rate in Indian Economy since 1991 "Economic and Political Weekly Special, 'Yovember, pp.2527-35.
39 Muhleisan, Martin (1997) "Improving India's Saving Performance", IMF Working Paper, No.9714, p. 38 Ray, Partha and Dhritidyuti Bose (1997): Op.cit., p.135.
4 ' Rakshit, Mihir (1982): op cit.,p.569 42 Raj, K.N. et a1 (1982): Op cit. 43 GoVt. of India (1996): "Saving and Capital formation in India, 1950-51 to 1994-95":
Report of the Expert Group on Saving and Capital Formation, (Chairman: Professor Raja.J.Chellaiah)
44 Muhleisen, Martin (1997) Op cit., p.39
household saving for the post liberalisation period in India is to be under
estimation due to non- inclusion of assets like jewellery and gold. Athukorala
and Sen ( 1 9 9 5 ) ~ ~ agree that household physical saving is likely to be under
estimates during the nineties. Thus, estimation errors, possibly upward bias in
estimation of saving and c:ipital formation has been responsible for the high
saving low growth phenomr:non in India.
Another explanation for the high saving low growth phenomenon in the
country is the low productivity due to high incremental capital output ratio.
According to Rao (1980)"~ the incremental capital output ratio at constant
prices is a disquieting feature of our economic development especially in the
light of the general shortage of capital in our factor resources. Accordingly
increase in construction and inventory do have the same functional role as that
of increase in machinery and equipments. The share of construction in the
capital formation was 63.90 percent in the first plan, which declined
marginally in the subseqrient plan periods. However, in the eighth plan, its
share was still very high at 44.10 percent. Investment in construction has long
gestation periods and also household investment in construction includes
residential construction, which is not productive. Thus, the higher share of
construction and inventories has caused higher incremental capital output ratio
leading to low growth with high saving and capital formation. Raj Committee
(1982)~' finds that since the mid seventies, the price index of capital goods had
risen farther than the GI)P deflator and hence a large chunk of the capital is
45 Authukorala, Premachandran and Kunal Sen (1995) Op cit., p.2189. 46 Rao, V.K.R.V. (1980) Op ait, p.975. 47 Raj, K.N., et a1 (1982) op cit.p.55
eaten away. According to Rao (1980)~' public sector has doubled its share in
the gross capital formation and to the extent that public sector management is
less efficient than private sector management, it could be one reason for
increasing capital output ratio. Chakravarthy (1984)~' has argued that a capital
intensive agriculture in the post green revolution period, the increased cost of
energy related investment and delays in the completion of projects are causes
of increasing capital output ratio.
2.10 Growth of State Domestic Product, Saving and Capital Formation in Kerala
In the above paragraphs, we have examined the trends and pattern of
saving at the federal level. Similar discussions are appropriate at state levels
also. But the availability of time series information on different states in India
is doubtful and even if they are available their comparison are not very
meaningful because o-f the differences in geographical size, population,
infrastructure and so on. Considering these difficulties, interstate analysis is
not attempted.
A study of the determinants of saving behaviour of Kerala households
requires an analysis of the growth of income, saving and capital formation in
the state. Though data on state domestic product is published by the State
Planning Board, normally official agencies do not compile data on saving and
capital formation in the state. Hence a systematic analysis of the saving and
capital formation in the state and in the different sectors of the state is beyond
the scope of this study.
Rao, V.K.R.V. (1980) Op cit., p.975. 49 Chakravarthy,S (1984) "Aspects of Indian Development Strategy for the 1980'sn,
Economic and Political Weekly, 19 (26), pp.845-52
2.10.1 Growth of State Domestic Income
* Since the formation of the state in 1956, the Kerala economy has
undergone the process of planned development with the objective of achieving
economic growth with equity and justice.
Table 2.12
State domestic product, se1:toral composition and per capita income in Kerala at current prices (1950-51 to 1999-2000)
Source: 1) Government of Kerala, Directorate of Economics and Statistics, Statistics for Planning 1977, 1986, 1988.
2) Government of Kerala, State Planning Board, Economic Review, various issues.
State domestic product provides the most important and widely
accepted index of overall economic development of the state. The SDP of
Kerala at current and constant prices for the period from 1960-61 to 1999-
2001 are given in tables 2.12 and 2.13 on a five year period break up.
Table 2.13
at 1993-94 prices, # Estimates at current prices Source: 1) Government of Kerala, Directorate of Economics and Statistics, Statistics
for Planning 1977, 1986, 1988. 2) Government of Kerala, State Planning Board, Economic Review, various
issues.
Taking the state domestic product at current prices it is found that the
average growth rate was 5.72 per cent during the first five year period. The
state domestic product increased to Rs. 12061 86 lakh in 1990-9 1 and further to
Rs.5656282 lakh in 1998-99. However, this tremendous growth is to be
understood in the background of the inflation which reduces the growth rate in
real terms. During the 50 years from 1950-51 to 2000-01 SDP at current
prices increased by 309 tiines and in the three sectors the increase was 150
times, 308 times and 5 11 times from the primary sector, secondary sector and
tertiary sector respectively. The state domestic product at constant prices gives
a better idea about the growth performance of the state economy. However,
one problem with the data is that the state domestic product is computed and
published as different series based on different base year prices. At constant
prices, SDP doubled during the period 1950-51 to 1970-71. However, during
the decade 1970-71 to 1980-81 the growth of SDP was 1.25 times. At 1980-81
prices the growth in SDP was 1.37 times during the period 1980-81 to 1990-
91. The growth in SDP during the next eight years was 1.33 times which was
estimated at 1993-94 prices.
2.10.2 Sectoral Composition
At constant prices the share of primary sector in the SDP was 54.51 per
cent in 1950-51, which increased to 55.98 per cent in 1960-61. Since then, this
share has shown a decline to reach 50.56 per cent in 1970-71. Since 1970-71
the share of the agricultural sector shows faster decline to reach 26.36 per cent
in 1998-99 and 20.1 1 per cenl. in 2001-02. With the fall in the share of the
primary sector, the share of the other two sectors registered increase, the
increases in the tertiary sector being more pronounced. At constant prices, the
share of the secondary sector increased from 16.17 per cent to 24.63 per cent
in 1980-81 and hrther to 26.31 per cent in 1990-91. But the share of this
sector declined again to reach 20.69 per cent in 1998-99 with a marginal
increase to 20.90 per cent in 2001-02. According to Surendran (1999)'~ "since
1980-81 a boom has occurred in the construction sub-sector which is mainly
due to Gulf remittances that lifted the share of secondary sector from 17 per
cent to 24 per cent. The share of construction remained at a fairly high rate of
9 per cent for the whole period except some setbacks in recent years." The
share of tertiary sector increased steadily from 29.32 per cent in 1950-51 to
reach 40.20 per cent in 1990-91. From 1990-91 onwards, this share leaped
forward to touch 47.80 per cent in 1994-95 and further to reach 50.76 per cent
in 1998-96. According to Pillai (1994)" "at both state and national levels the
change in the sectoral composition of domestic product was indicative of the
unhealthy tendency of the tertiary sector to outgrow the secondary sector."
Thus, the tertiary sector has enjoyed more than its due share from the state
resources and made a clear dominance over the productive sectors of the
economy.
Saving and Capital Formation in the State
Due to lack of reliable data on saving mobilized in the state and on
capital formation, an analysis of these two variables are beset with problems.
One of the important forms of financial saving is the deposit mobilized by the
commercial banks, co-operative banks and regional rural banks. Rs.3433.79
50 Surendran, P. (1999) The Kerala Economy, Development, Problems and Prospects, Delhi, India Publications, p.21.
51 Pillai, P.P. (1994) Kerala Econon~y, Four decades of Developmenl. Institute of Planning and Applied Economics Researc:h, John Matthai foundation, University of Calicut, Thrissur, pp.178-79.
crores was mobilized by the banking sector in Kerala in 1986 which works out
to 54.34 per cent of the :state domestic product. 24.58 per cent of this is in the
form of NRE deposits. Total deposits increased to Rs.6620.08 crores in 1990-
91, that is, 54.89 per cent. In 1994-95, the deposits mobilized by the banking
sector show a further increase to Rs.17457.91 crores and further to
Rs.3 153 1.84 crores in 1999, which comes to Rs.55710.29 crores in 2001.
Table 2.14
Deposits and credit deposit ratio in Kerala
(Rs. crores)
1 Year 1 1 Share of Credit Deposits NRE deposits devosit ratio /
Source: Government of Kerala, State Planning Board, Economic Review, various issues.
Per cent of the SDP
However, bank deposits cannot be used as a real indicator of the
financial saving in the economy as it also includes the derived deposits of
these institutions. A point worth noting is that as much as 24.58 per cent of
these deposits were made by the non-resident citizens of the state, which
increased to 30.39 per cent in 1990. In 1995, as much as 39.44 per cent of the
deposits was from this group which increased to 45.90 per cent in 1998 which
declined marginally to 42..27 per cent in 1999.
In spite of these huge figures of deposits mobilized in the state, the
capital formation in the different sectors has been very low and has been
declining alarmingly which is manifested by the falling credit deposit ratio.
The credit deposit ratio was 61.2 in 1986, which increased marginally to 62.20
in 1990. The reform period has witnessed noticeable fall in the credit deposit
ratio to reach 44.66 in 19'95 and declined hrther to reach 43.37 in 1999 and
42.74 in 2002.
The contribution of the rural sector in the saving of the state is not little
which is evident from the increasing deposits mobilized by the primary
agricultural credit societies in Kerala, as shown in table 2.1 5.
Table 2.15 Deposits mobilized by primary agricultural credit societies in Kerala
Deposits
1'389-90
1094-95 189123
1998-99 301594
2000-2001 534181
Source: Government of Kerala, State Planning Board, Economic Review, various issues.
The primary agricultural credit societies in Kerala have mobilized an
amount of Rs.32237 lakh in 1985-86, which doubled to Rs.64703 lakh by
1989-90. By 1994-95 it increased to nearly three times, and the increase by
1998-99 was 1.6 times. By 2000-2001, this increased to a level of Rs.534181
lakh. Thus, the rural sector in Kerala has been contributing considerable
amount towards financial saving in the state.
The All India Debt and Investment Surveys have estimated average
capital formation in the rural households in Kerala and a summary of the
average gross capital expenditure and average fixed capital formation is given
in tables 2.16 and table 2.17 respectively.
Table 2.16
Average gross capital (expenditure per household in different years in rural Kerala
(Rs.1 Gross capital expenditure
Type of Residential Durable household Farm Non-farm
business business 'lots & assets Total buildings
93.20 15.92 78.11 10.59 197.82
12.36 30.05 2.45 62.5
15.22 68.71 9.0 171.36
I Cultivators 1 544.0 109 1017 1768 1 Non-cultivators / 79.0 1 k I 512
23 151 253
All household:; 104 959 1 1575
Formation for different years.
All household:j I 572
The average gross capital expenditure by rural households in Kerala
was Rs.171 in 1961-62, which increased to Rs.3947 in 1991-92. Among the
Source: Reserve Bank of India, All India Debt and Investment Survey. Report on Statistical 'Tables relating to Capital Expenditure and Capital
668
different heads under which these expenditures were made, farm business
accounted for 45.61 per cent and residential plot and buildings accounted for
2707
40.09 per cent in 1961-62. The share of farm business gradually declined to
3947
reach 14.49 per cent, whereas the share of residential plots and buildings
increased to 68.58 per cent in 1991-92. The share of non-farm business was
only 8.88 per cent in 15'61-62, which increased to 16.92 per cent in 1991-92.
Among the cultivators, the share of investment in farm business was 47.21 per
cent, which declined to 15.50 per cent in 1991-92, whereas investment in non-
farm business increased from 8.05 per cent to 17.36 per cent during the same
period. The share of residential plots and buildings was 39.49 per cent in
1961-62, which increased to 67.12 per cent in 1991-92. For the non-cultivator
households, the increase in capital expenditure was from Rs.62.50 to Rs.2115.
Table 2.17
Average fixed capital formation per household in rural Kerala in different years
(Rs.1
Year
1961 -62
197 1-72
1981 -82
199 1-92
Source: Reserve Bank of India All India Debt and Investment Survey. Report on Statistical Tables relating to Capital Expenditure and Capital Formation for different years.
Type of household
Cultivators
Non-cultival:ors
All households
Cultivators
Non-cultivators
All households
Cultivators
Non-cultivators
All households
Cultivators
Non-cultivators
All households
Total
72.58
15.29
61.37
106.79
15.89
97.98 -
11 19.0
156.00
1054
3747
1800
3322
Fixed capital formation
Farm business
22.30
0.47
18.03
22.84
1.43
20.77
135.0
1 .O
126
378
44
305
Non-farm business
10.35
7.15
9.72
20.23
1.38
18.40
93.0
23.0
88
759
276
653
Residential plots &
buildings
39.93
7.67
33.62
63.72
13.08
58.81
891.0
132.0
840.0
261 1
1480
2364
All India Debt and Investment Surveys revealed that the average fixed
capital formation has increased alarmingly during the period from 1961-62 to
1991-92. From a meagre Rs.61.37 in 1961-62, the average fixed capital
formation per household increased to Rs.3322 in 1991-92. However, the share
of farm investment has come down and that of non-farm investment and
investment on residential plots and buildings has increased.
The average value of fixed capital expenditure by urban households in
1991-92 was lower at Rs.3036 compared to that of the rural households.
Among the urban house:holds, the self-employed households have made an
average fixed capital expenditure of Rs.2203 whereas for other households
this amount is Rs.3474. For the urban households also, the average
expenditure on residential plots and buildings is 75.07 per cent of the total. For
those households who are not self-employed, this share is higher at 81.64 per
cent.
The saving and investment survey conducted by the Kerala State
Planning ~0a1-d '~ estimated that the average annual saving per household in
Kerala was Rs.1031. For the rural households this average was Rs.965
whereas for the urban households average saving amounted to Rs.1369
inclusive of all saving in all forms. In this survey it was also found that the
total financial saving by the rural households worked out to be Rs.125.48
crores as against 64.95 crores for the urban households, the total adding up to
Rs.190.43 crores. The total physical saving was estimated to be Rs.245.91
crores, that is Rs.215.00 crores from the rural households and Rs.30.91 crores
52 Kerala State Planning Board (1983), Op.cit., p.8
from the urban households. Thus, the available literature on saving mobilized
in the state points to the large volume of saving in the state economy. With
declining credit deposit ratio capital formation in the productive sectors of the
economy has been very low resulting in the low growth rate of the economy.