How to overcome the

scarcity of capital and low

rate of capital formation

Group 12 – GLOWING STARS

• GEETHAANJALI K

• PARINITHA S

• SUGANDHA

• BANNENAVAR AKSHAY ADITYA R

• GIRISH T D

• MANJUNATHA M S

• R REVANTH KUMAR

• SANJEEV KUMAR K

• THARANATHA P
“In circumstances of restrained economic growth and industrialization,
capital formation should be understood to be limited to machinery,
instruments and inventories which are directly capable of being used in
work.”

- PROF. KUZNETS
 • Capital formation is a term used to describe the net
capital accumulation during an accounting period for a
particular country. It refers to additions of capital goods,
such as equipment, tools, transportation assets, and
electricity
•  "capital formation" has in more recent times been used
in financial economics to refer to savings drives, setting
DEFINITIO up financial institutions, fiscal measures, public
borrowing, development of capital markets, privatization
N of financial institutions, development of secondary
markets
• It consists of both tangible goods like plants, tools and
machinery and intangible goods like high standards of
education, health, scientific progress and research.
• The higher the capital formation of an economy, the
faster an economy can grow its aggregate income.
Process of Capital Formation:

•The process of capital formation occurs in

three stages, which we shall discuss in
detail. But one fundamental aspect must be
borne in mind that for the accumulation of
capital goods (capital formation), part of
current consumption must be sacrificed.
•The three stages of capital formation are:
• Creation of Savings,
• Effective Mobilization of Savings, and
• Investment of Savings.
 1. Creation of Savings:
It is the savings which are transformed into capital.
The savings are created by individuals, who defer their
present consumption by curtailing their expenditures on
consumer goods, but the saving by individuals depends more
or less upon:
 Ability (or power) to save,
 Willingness (or desire) to save, and
 Opportunity to save.
Stages of 2. Effective Mobilization of Savings:
capital It is not only enough to have more savings. The capital
formation cannot occur, unless the savings of the people are
formation actually utilized (i.e. invested) for producing capital goods. But
for achieving this goal, the savings of various households and
individuals need to be effectively mobilized and made available
to businessmen and entrepreneurs for investments.

3. Investment of Savings:
The savings of the people must be properly invested for the
purpose of producing capital goods by a good number of
honest and venturesome entrepreneurs in different productive
systems, such as agriculture, industry, trade, public works,
transport, communication and improved technical know-how.
Gross Capital
Formation of
India (% Of GDP)

Gross capital formation (% of GDP) in

India was reported at 28.42 % in 2020,
according to the World Bank collection of
development indicators, compiled from
officially recognized sources. India - Gross
capital formation (% of GDP) - actual
values, historical data, forecasts and
projections were sourced from the World
Bank on December of 2021.
GROWTH dashboard
• India's economy expanded by 8.4 % year-on-year in July-
September 2021, following a record 20.1 % growth in
the previous three-month period and matching market
expectations.
• The reading marked a 4th straight quarter of expansion,
as coronavirus-related disruptions continued to ease and
as the economic activity rebounded helped by a faster
pace of vaccinations and a drop in cases.
• By sectors, service activity growth was supported by
increases in trade, hotels, transport & communication
(8.2% vs 34.3%), financial, real estate & professional
services (7.8% vs 3.7%), and public administration,
defense & other services (17.4% vs 5.8%). In addition,
output rose for manufacturing (5.5% vs 49.6%), mining &
quarrying (15.4% vs 18.6%), utilities (8.9% vs 14.3%),
construction (7.5% vs 68.3%), and agriculture (4.5%, the
same as in July-September).
• The Reserve Bank of India has forecast annual growth of
9.5 % in the current.
 •Low Saving Ability
•Poverty
•Lack of willingness
•Poor banking facilities in rural areas
•Higher spending and borrowing
•Rising prices

• Inflation
• Increase in money supply
but less output
• Increase in govt
expenditure(Non
Reasons for low rate of capital development)
• Inadequate agriculture and
industrial growth
14 main reasons for low
rate of capital formation in
an economy. 

1. Low Level of National Income and

Per Capita Income:
2. Lack in Demand of Capital:
3. Lack in Supply of Capital:
4. Small Size of Market:
5. Lack of Economic and Social
Overheads:
6. Lack of Skilled Entrepreneurs:
7. Immobility of Savings
14 main reasons for low
rate of capital formation
in an economy. 

•8. Backwardness of Technology:
•9. Demonstration Effect:
•10. Lack of Effective Fiscal Policy:
•11. Lack of Investment Incentives:
•12. Deficit Financing:
•13. Unequal Distribution of Income and
Wealth:
•14. Demographic Reasons:
 Tax result
The taxation policies should be revised and adequate tax reliefs
should be allowed to industrialists and salaried individuals.
Encourage savings
Intensify and motivate small saving schemes like provident fund,
compulsory deposits, insurance etc.
Facilitate investment and production

Suggestions Many more avenues of investment and production should be

increased by establishing and implementing schemes in
agriculture, industry, transport, banking, insurance, trade, etc.
Maintenance of law and order
The law and order condition in every part of the country should
be improved and security of life and property must be ensured.
 Equal distribution of wealth
There should be a proper distribution of wealth according to the
requirement.

Improving and developing basic utilities

General facilities like means of transportation, communication,

Suggestions
technical training, etc., should be improved and developed in an
adequate way.

Cheap capital
The investors avail credits from various agencies for their growth, but
the rates of interest at which credit is available to them is high, thus
increasing the cost of capital results in low profit margins for
investors. A lower rate of interest will increase the profit and stimulate
investments.

Identification of investments
The productive investments should be encouraged and unproductive
should not be entertained thereof, so that capital formation and
economic progress are accelerated to a desired rate.
Thank You