CONTENTS
1.1 1.2 1.3 1.4 1.5 1.6
Introduction Objective of the study Scope of the study Methodology Limitation Chapter plan
3.1
3.2 3.3 3.4
4.1 4.2 4.3 4.4
Trends in domestic savings and capital formation in India since 1950-51 Has domestic savings been µCrowded Out¶ by foreign savings in India? Magnitudes And Composition of Flows in India Savings And Capital Formation
Findings Suggestions Conclusion Bibliography
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, ³Trend 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 t he award of any degree to the candidate. ca ndidate.
Prof. (Dr.) Uma Chand Lal. H.O.D.
Jagannath Prasad Pattanaik
DECLARATION
I do hereby declare that this piece of project work entitled ³Trend 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 Date:
Premanjali Behera
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 thankful to all my 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 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
y y y
The need for capital formation in India. ources of capital formation in general S ources The domestic savings as an important source of capital formation in India.
y
y
y
Trends in domestic savings and capital formation in India since 1950-51. H as as Domestic Savings Been ¶Crowded Out· by Foreign Savings in India? M agnitudes agnitudes And Composition Of Capital Flows In India
y
Savings and Capital Formation
indings. F indings. onclusion. C onclusion. uggestion S uggestion Bibliography y y y y
CHAPTER-I INTRODUCTION
CHAPTER-2 SOURCES OF CAPITAL FORMATION AND DOMESTIC SAVINGS
CHAPTER-3 ILLUSTRATED ILLUSTRATE D DATA ANALYSIS
CHAPTER-4 CONCLUSION
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 Indiaµ. 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 accumulation of 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 broadly involves a sacrifice of immediate consumption in order to obtain a larger flow of consumption goods in future.
According to Prof. Nurkse, ´The meaning of capital formation is that society doesn·t 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.µ 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.µ 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.µ According to F.H. Harbison, ´Human capital formation is the process of increasing knowledge, skill and the capacities of all people of the country.µ
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.
and household sector. iii) To asses the stability of domestic savings for achieving higher rate of growth of capital formation in India. I ndia.
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 of
the title of project and presentation of the project before the department is very short. So it is very difficult o prepare a update project within this short period.
3. Financial Constraints: - For the preparation of a project, it needs huge
amount 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
2.1 INTRODUCTION: Capital formation or accumulations regarded the key factor in economic development of an economy. According to Prof. Nurkse, ´Capital is a necessary but not a sufficient condition of progressµ, 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 devel opment 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.
2. U se se
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. m ethods. 3. M aximum aximum U tilization tilization
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 are made 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 of H uman uman 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
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. H igh igh
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 in comparison 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 growt h 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 isn·t possible without capital accumulation.
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. As results, 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 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. This gives set back to internal savings. Thus by the way of capital formation, a country can attain self sufficiency and can get rid of foreign capital·s dependence.
2.3 SOURCES OF CAPITAL FORMATION IN GENERAL The
sources of capital formation are divided into two categor ies:
1. External Source 2.
Domestic Source
1.
E xternal
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 countriesµ. Thus care must be taken for investing such loans in productive purpose. Private foreign d irect 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:
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 be increased. Domestic may come in the form of«
a. Private Saving b. Corporate Saving c. Govt. Saving
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 its
proper utilization. b. By providing necessary incentive to the private sector for
increasing 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 t he vast idle
man power available in underdeveloped countries are not being consider as a liability. The saving potential concealed in disguise unemployment has been
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.
Household
ii.
Private corporate and
iii.
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 physical assets includes machinery, equipments,
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 Rs.(cores) Year
1950-51 1960-61 1970-71 1980-81 1985-86 1990-91 1991-92 1993-94 1994-95 1995-96 1996-97 1997-98
Gross Domestic Saving
887
Net capital Inflow From Abroad
As % of G.D.P Gross Domestic Capital Formation
Gross Domestic Saving
866
8.9
1989 6649 27136 54167 131340 143908 193621 251463 298195 316923
-21 481 394 2094 6234 18196 3377 4791 11895 20780 17738
2470 7043 29230 60401 149536 147285 198412 263356 318975 334661
358250
22302
380552
Net Capital Inflow From Abroad
Gross Domestic Capital Formation
11.6 14.6 18.9 19.5 23.1 22.0 22.5 24.8 25.1 23.2
-0.2 2.8 0.8 1.4 2.2 3.2 0.5 0.6 1.2 1.7 1.3
8.7
14.4 15.4 20.3 21.7 26.3 22.5 23.1 26.0 26.8 24.5
23.1
1.5
24.6
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. 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 19 85-86 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 again increased 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 2007-0 8, 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
saving has more than doubled, i.e. 8.9% in 1950-51 to 35.2% in 2009-10, which may be considered as the t he 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 of GDP in 1960-61. There after, as the country accepted the objectives of self reliance, selfsustaining growth since 3 rd plan, thus the net inflow of foreign capital gradually declined to only 0. 8% of GDP in 1970-71. During the 5 th plan, the net foreign inflow was almost nil. But, since the 6 th plan onwards the net capital inflow from abroad started to rise and then it reached the level of 2.2%of GDP in 19 85-86. The net foreign capital inflow rose considerable to the level of 3.2% of GDP in 199091. 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 19 80-81 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 199 8-99 and the same ratio
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 19 80-81, 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 199 8-99 and also there after.
3.1
TRENDS
IN
DOMESTIC
FORMATION IN INDIA 1950-51
SAVING
&
CAPITAL
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 individual·s 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, ´Constructionµ and ´Machinery and Equipmentµ. 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.
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
Year
1 1950-51 1955-56 1960-61 1965-66 1968-69 1973-74 1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87
Gross Domestic Savings Household Private Public sector sector corporate sector 2
7.7 11.0 8.4 9.9 9.3 13.80 17.0 15.2 16.1 14.9 13.1 14.0 13.7 14.6 14.2
3
4
0.9 1.3 1.7 1.5 1.2 1.7 1.5 2.1 1.7 1.6 1.6 11.5 1.7 2.0 1.8
1. 8 1.7 2.6 3.1 2.3 2.9 4.6 4.3 3.4 4.6 4.4 3.3 2. 8 3.2 2.7
Total
5 10.4 13.9 12.7 14.5 12. 8 18.4 23.2 21.6 21.6 21.0 19.1 18.8 18.2 19. 8 18.7
1988-89 17.2 2.1 2.0 1989-90 18.2 2.6 1.6 1990-91 20.5 2.8 1.0 1991-92 17.7 3.2 1.9 1992-93 17.7 2.8 1.5 1993-94 18.4 3.5 0.6 1994-95 19.7 3.5 1.7 1995-96 18.2 4.9 2.0 1996-97 17.0 4.5 1.7 1997-98 17.6 4.2 1.3 1998-99 18.8 3.7 -1.0 1999-00 20.8 4.4 -1.0 2000-01 21.6 4.1 -2.3 2001-02 22.6 3.6 -2.7 2002-03 23.3 3.8 -1.1 2003-04 24.3 4.1 -0.3 2004-05 22.1 4.8 2.2 2005-06 22.3 8.1 2.0 2006-07 23.8 1.9 8.8 2007-08 22.4 7.2 2.3 2008-09 21.6 7.9 1.5 2009-10 25.2 8.1 2.2 Source: Government of India Economy Survey 2009-10 (Delhi 2010)
21.4 22.4 24.3 22.8 20.0 22.5 24.8 25.1 23.2 23.1 21.7 24.1 23.5 23.4 26.1 28.1 29.1 32.4 33.9 31.8 31.0 35.5
The above table reveals the growth of gross domestic savings as in percentage of GDP at current price since 1950-51 to 1997-9 8. 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 CS O 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 t he end of the 3 rd plan, the saving rate
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 1 8.4% which was again considered as in adequate in comparison its requirement necessitating necessitat ing continuation of the reliance on foreign aid. After the indo-pak war, India failed to acquire adequate amount of foreign aid due to t o aid due to certain political factors. The C.S.O·s 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 19 80-81, 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 6 th 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 19 89-90 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 2 8.11, 29.1% & 32.4% in 2003-04, 2004-05 & 2005-06 respectively. Then it increased increased to 33.9% in 2006-07, it decline 31. 8 & 31 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:
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
Year
1 1950-51 1955-56 1960-61 1965-66 1968-69 1973-74 1978-79 1979-80 1980-81 1985-86 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Gross Domestic Formation Public Private sector sector 3 2 2.8 8.3 4.9 8.9 7.0 8.9 8.5 8.5 5.9 9.2 7.7 10.6 9.5 12.8 10.3 12.5 8.7 12.3 11.2 13.0 9.7 15.5 9.2 13.5 15.1 8.9 13.0 8.2 8.7 14.7 7.7 18.9 7.0 14.7 6.6 16.0 6.6 14.8 6.9 16.7 6.3 16.3 6.2 16.0 5.4 17.3 5.6 17.4 7.2 20.0 5.4 25.1 6.3 27.0 7.1 28.2 6.7 27.9 10.5 29.4
Capital
Errors &
Total
4 11.0 13.8 15.9 16.9 15.1 18.3 22.3 22.9 20.9 24.2 25.2 22.7 24.0 21.3 23.4 26.5 21.6 22.6 21.4 23.7 22.6 22.2 22.7 23.0 27.2 30.5 33.3 35.3 34.6 39.9
Adjusted Total
Omissions 5 -0.9 0.5 -0.2 -1.0 -1.2 0.87 1.7 -0.8 1.8 -2.0 2.4 0.7 -0.1 1.8 2.6 0.4 2.7 2.0 1.2 1.6 1.2 0.4 2.1 3.3 2.9 3.5 3.8 4.0 3.2 4.9
Source ² Govt. of India Economic Survey, 2009-10 (Delhi, 2011)
6 10.2 14.3 15.7 16.8 13.9 19.1 23.3 22.1 22.7 22.2 27.7 27. 7 23.4 23. 4 23.9 23. 9 23.1 26.0 26. 0 26.9 24.5 24. 5 24.6 24. 6 22.6 25.2 25. 2 23.8 22.6 22. 6 24.8 26.3 26. 3 30.1 30. 1 34.0 37.1 39.3 37.8 44.8
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 195051 to 8.5% in 1965-66 and then declined to 5.9% in 196 8-69 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 197 8-79 and then declined to 22.2% in 19 85-86 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 2005-06 the same rate again increase increase to 30.05% an then increased to 33.3% & 35.3% in 2006-07 & 2007-0 8 respectively. Then it decreased 34.6% in 2008-09 then it again increased 39.9% in i n 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 196 8-69. 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 197 8-79 (i.e. just after the termination of the fifth plan). Then during 6 th plan the rate of gross domestic capital formation gradually
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 9 th 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 19 80s, syndicated bank loans replaced official aid in magnitude in the third world countries. However, capital flows dried up during the debt crisis of 19 82-89. The resurgence of capital flows to developing economies in the late 19 80s 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
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 domesti c 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.
On
the
other 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
Year
Domestic Savings , Investment and Capital Flows FDI/GDP
Capital
GDS/GDP
GDCF /GDP Inflow/GDP*
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
18.88 18.60 18.26 17.58 18.76 19.49 18.94 20.58 20.85 22.00 23.10 22.03 21.77 22.53 24.83 25.15 23.19 23.13 21.46 23.17 23.39
20.33 20.15 19.62 18.73 20.10 21.73 20.99 22.50 23.77 24.53 26.30 22.55 23.61 23.09 26.00 26.90 24.48 24.60 22.49 24.31 24.00
0.00 0.00 0.00 0.00 0.00 0.00 0.86 0.16 0.12 0.14 0.03 0.05 0.23 1.52 1.59 1.3 8 1.59 1.31 0.57 1.16 1.12
0.91 0.35 1.07 1.25 1.52 1.98 1.85 1.85 2.77 2.36 2.27 1.42 1.04 3.54 2.84 1.32 2.96 2.40 2.05 2.49 1.88
2011), H andbook Source: Based on RBI ( 2 andbook 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
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 (N RIs) 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 which have substantially increased to
US
US
$ 45. 8 billion,
$ 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 1990
2000-
2005-
Outflows 2009-
1990-
2000-
2005-
2009-
Total
Capital Flows of which 1.Foreign Direct Investment 2.Foreign Portfolio Investment 3.External Assistance 4.Commercial Borrowings 5.Non Resident Indian Deposits #
-91 7.2
01 11.8
06 17.9
10 25.3
91 4.9
01 9.8
06 14.7
10 20.3
0
19
1.1
2.5
0
0.2
0. 8
1.6
0
3
8.4
11.9
0
2.4
6.9
11.2
1.1
0.6
0.5
0.4
0.4
0.5
0.2
0.2
1.4
2.1
1. 8
2.3
0.6
1.2
1.5
0.5
2.3
2
2.2
2.2
1.8
1.4
1.9
1.7
Sources: Reserve Bank of India ( 2 2011)
There has been a steep decline in official capital flows with increase in nondebt 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 by Indian 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
(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 200 8-09. As a
proportion of the GDP, total central government expenditure fell from 17.2 per cent in 2000-01 to 14.7 per cent cent in 2004-05 but edged up to 15.9 per cent in 20072008. However, it is estimated at 16.1 per cent in 2009-10 compared with 16.2 per cent in 200 8-09. The growth in consumption expenditure of the Central Government is expected to decelerate from 15.3 percent in 200 8-09 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 200 8-09. 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 200910.
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 200 8-09. 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 200 809. 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 from Rs.63,928 core in 2008-09 when it declined by 5.4 per cent. As a proportion of GDP, GCF is budgeted at 2.9 per cent in 2009-2010, compared with 3.1 percent in 2008-09.
TABLE-6
Total
Expenditure and Capital Formation by the Central Government and its Financing
(As per Economic and Functional Classification of the Central Government Budget) 2000-01
1.Total Expenditure out of Budgetary resources of Central government
2004-05
97947
2.GCF
i.GCF
by the central government ii.Financial assistance for capital formation in the rest of the economy 3.Gross saving of the central Govt. 4.Gap (2-3) a.Draft on other sectors of domestic economy. i.domestic Capital Receipts ii.Budgetary deficit/draw down of cash balance
2005-06
2005 89 28032
2006-07 (Rs. Crore)
224866 50279
263755 54815
2007-08
2008-09
307509 57087
339293 67602
63928
2009-10#
369272 66759
8602
17946
1 8955
20647
26075
20260
21125
19430
32333
35 860
37160
41527
4366 8
45634
-10502
-9406
-23396
-41 893
-46191
-5 8297
-65898
38534 34768
59685 55507
78211 76102
99700 96793
113793 111505
122225 120924
132657 130094
23421
42323
77012
97029
110641
11 8319
130094
11347 3766
131 84 4178
-910 2109
-236 2907
864 2288
2605 1301
0 2563
b.Draft on foreign savings (As per cent of GDP)
1.Total Expenditure 2.GCF
out of Budgetary resources of Central government i.GCF by the central government assistance for ii.Financial i cap tal formation in the rest of the economy 3.Gross Saving of the central government 4.Gap (2-3) a.Draft on other sectors of domestic economy. i.domestic Capital Receipts ii.Budgetary deficit/draw down of cash balance b.Draft on foreign savings
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
-1.8
-0.7
-1.5
-2.4
-2.4
-2. 8
-2.9
6.7 6.1 4.1 2.0
4.4 4.1 3.1 1.0 1 .0
5.1 5.0 5.1 -0.1
5.7 5.6 5.6 0.0
5.9 5. 8 5.7 0.0
5.9 5.8 5.7 0.1 0. 1
5. 8 5.7 5.7 0.0
0.7
0.3
0.1
0.2
0.1
0.1
0.1
(increase over previous year)
GCFoutofBudgetary 2. resources of Central government
-15.1
11.0
9.0
5.5
16.9
-5.4
4.4
1.Consumption expenditure (in crore) 2.Current transfers (in crore)
22359
4423 8
53090
59920
68831
79329
87984
45134
100807
111577
137611
161549
1 87899
208408
# The ratios to GDP for 200 8-2009 at current market prices are based on CS O's Advance Estimates released in January, 2010. Notes:
(i)
Gross capital formation in this table includes loans given for capital formation on a gross basis. Consequently domestic capital receipts include loan repayments to the Central Government.
(ii)
Consumption expenditure is the expenditure on wages & salaries and commodities & services for current use.
(iii)
Interest payments, subsidies, pension etc. are treated as current transfers.
(iv)
Gross capital formation & total expenditure are exclusive of loans to States. /UTs against States. / UTs share in the small savings collection.
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 postindependent period. 2. The household sector is dominating in this supply of saving for capital formation in India. 3. The private sectors contribution to domestic capital formation to greater as compared to the public sectors contribution. 4. The rate of growth of capital formation in private sector is higher than that of public sector. 5. The trend of domestic capital formation formati on is satisfactory.
4.2 SUGGESTIONS In order to increase the rate of capital formation in India by raising its level of saving and investment the following measures be followed ,
1.
Raise
the level of income i ncome and per capital income.
2.
Raise
the volume of voluntary savings.
3. Mobilizing the huge untapped savings 4. Deriving growing surplus from public sector enterprises of the country. 5. Controlling hoarding and unproductive investment. 6. Controlling inflation so as to raise the t he saving capacity of the people.
7. Introducing suitable monetary policy.
8.
Formulating suitable industrial policy to promote investment in the industrial sector
9. Attaining price stability and regulating deficit financing 10. 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 domestic capital formation for rapid economic development. b. The need for external borrowing is not more urgent in Indian economy for capital formation. c. The household sectors and private sectors are more vigilant and active in the process of capital formation by rising mobilizing saving for the purpose. d. The rate of growth of domestic capital formation in India is satisfactory. e. The public sectors need more attention and the case for effective rise in the rate of growth of capital formation. formati on. f. The household sectors and private sectors need more incentives like subsidy, 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.
BIBILOGRAPHY
Business Business
Environment
www.rbi.org.in www.rbi.org.in www.google.com www.google.com
:
P.K. Dhar.
