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Capital Formation

Capital Formation. Definition. The transfer of savings from households and governments to the business sector, resulting in increased output and economic expansion. AP. MP. Q. Increasing Marginal Returns. Diminishing Marginal Returns. Negative Marginal Returns. Q=F(K,L). L.

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Capital Formation

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  1. Capital Formation

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

  3. AP MP Q Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns Q=F(K,L) L

  4. Capital Formation • Domestic Capital • Foreign Capital

  5. Human Capital • Money invested in training and development of the labor to effectively utilize the physical capital invested in the business, resulting in decrease in capital to output ratio.

  6. Gross Fixed Capital Formation • Investment done in Physical Capital in a country • Agricultural • Simple & Old fashioned implements & Tools • Kucha Structure • Unorganized sector

  7. Gross Fixed Capital Formation • Source: Economic Survey 2005-06

  8. Gross Domestic Capital Formation • Large public investment • Largely domestically financed. • Evaluation of investment performance • A rising rate • Strengthening of economy • Slow rise • Unnecessary Inventories • Inefficient use of capital • Unplanned investment • Incapacity for investment

  9. Types of Domestic Saving

  10. Reasons For Low Saving Rate in India • Low per capita income • Exemption on Agriculture Income from government • Demonstration effect • Failure of private sector • Failure of public sector

  11. Sources of Saving in India • Saving rate of household sector • Source: Economic survey 2004-05

  12. Sources of Saving in India • Sources of saving in private sector • In private sector during 1987-88 domestic saving was only 1.7%. • During sixteen year period of 1988-89 to 2003-04 saving rate increase that is 4.1%. • Sources of saving in public sector • Failed to achieving a stable rate of saving. • In 1982-83 it was around 4.3%. • In 1983-84 it was declined. • In 1998-99 has been negative

  13. Suggestion for Raising the Rate of Saving • HOUSEHOLD SECTOR • PRIVATE SECTOR • PUBLIC SECTOR

  14. Trends in Domestic Saving • Rise in Domestic Saving • Domestic saving was 8.9 % of GDP in 1950-51. • It increases to 24.2% of GDP in 2002-03. • Total Gross Saving in 1950-51 was 887 Crores. Which increased to 5,97,697 crores in the year 2002-03.

  15. Trends in Domestic Saving • Recent Decline & Stagnation • There is a large jump in saving since 1950-51. • In 1970 there was steep rise with rate moving upto range of 20-21%. • A stagnation as well as decline started in 1980. • The lowest was less than 18% in 1983-84 and for five years period of 1981-82 to 1986-87 it remain stuck at the low level of 18-19%.

  16. Varying Sectoral Contribution Rs in Crores • Source: Economic survey 2005-06

  17. Capital to Output Ratio • Capital to O/P ratio= Increase in capital Increase in output • Capital - o/p Ratio of Indian Economy: • Source: Economic survey 2004-05

  18. Causes of ICOR in Indian Economy • Pattern of Investment in late 60’s • Rise in price of Capital Goods • Inefficient use of Investment resources

  19. Suggestions for improving capital output ratio • Better management of capital project • Completion of project at the given time • Making the capital stock available for supplementary invest • Efficiency and competition • Proper training

  20. Conclusions

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