trend in domestic saving & capital formation in india

8/2/2019 Trend in Domestic Saving & Capital Formation in India

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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

trend in domestic saving & capital formation in india

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