BCom Savings and Investments in India Notes Study Material
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BCom Savings and Investments in India Notes Study Material
The Indian economy has undergone a gradual transformation during the post-independence period, the pace of such transformation, however, being relatively rapid since the last decade. India is trying very hard to increase the growth rate to improve the employment opportunities and wellness of the common people of society at large. With the Indian economy shifting to a high growth path during last two decades, it is evidence that the economy is emerging from a phase of stagnation.(BCom Savings and Investments in India Notes Study Material)
If a country desired to accelerate the economic growth rate, key microeconomic variables are noticeable to ensure adequate employment, positive balance of payment, sectoral growth etc. Savings and investments are two important variables which ensures sustainable economic growth in future.
CONCEPT OF SAVING
Savings refers to that part of one’s income which is not spent on presenter immediate consumption. It is a fact that most of individuals do not spent the whole of the income earned by them. Therefore the amount which is not spent by them becomes savings and the source of investments.
In other words, saving is excess of income over consumption expenditure for future use. There is direct relation between savings and rate of interest. If rate of interest is high, savings will be high. If rate of interest is low, savings will be low because people will start thinking that it is better to spend than to save. Savings also have a positive correlation with income. If income is high savings are also high and vice versa. So that the relationship between savings, income and consumption can be explained as below:
Savings (S) = Income (Y) – Consumption (C)
or Y= S + C.
FACTORS AFFECTING SAVINGS
Major factors affecting level of savings are given below:
(i) Income Level: There is positive correlation between income level and savings. If income level is high, then savings are also high. Higher income level helps the people to save more.
(ii) Enlarged Future Income: With the expectation to earn more in future, people consume less and save more and invest their savings.
(iii) Unforeseen Emergencies: To overcome of future uncertainties, people may save more through sacrifice their present consumption.
(iv) Status in Society: With expectation of high status in society they will save more and more. Business Motive: To meet future demand and uncertainties of business or occupatic people save more and more in order to smooth operation of business.(BCom Savings and Investments in India Notes Study Material)
(vi) Economic Independence: In our society some people want to be independent person in respect of financial matter. So that they save more in order to maintain financial independence in future.
(vii) Miserly in Nature: A miser person saves more because misers do not expend money and he will prefer to save his maximum income by reduce his current consumption and needs.
(viii) Modernisation of Business: A business essentially requires modernisation to success in future. Therefore, with a view to provide sufficient financial resources a business man saves more and more.
(ix) Demonstration Effect: Always a rich people want to maintain a gap to poor and poor people try to approach richer. In this race the saving habit of poor people will be less due to demonstration effect.
(x) Change in Population: When population increases, saving will be become less because as population increases demand also increases. It is the cause of price hike (high prices) and high prices means less saving or less purchase capacity.(BCom Savings and Investments in India Notes Study Material)
REASONS FOR LOW RATE OF SAVING
Followings are the main causes which responsible for low savings:
- Low per capita Income: Saving ability totally depends on per capita income. People can’t save much due to low per capita income. In India or other developing nations, per capita income of people is relatively lower than developed countries. Thus, there saving level is lower.
- Rapid Growth of population: Rapid growth of population causing very small increase in per capita income and resulting into low rate of savings.
- High Rate of Taxations: High taxation rates suck extra money from people and saving will be lower. Extra tax load and high prices are two main causes for low saving.
- Demonstration Effect: Demonstration effect that induces people to copy superior life style and desire to imitate living standard also adversely affects savings of people.
- Price Level: High prices and inflation are cause of reduction purchasing power. When expenditure is more, consequently saving lower. Thus, high price leads to reduction in real income and it decreases savings.
SUGGESTIONS FOR RAISING THE SAVING RATIO
Saving is very helpful in the economic growth of a country because it helps to produce more for rapid economic development. Followings measures are required to raise the savings of the country:
(i) Through awareness programme, people should be initiated to develop habit for savings by reducing their unnecessary expenditure.
(ii) The government should promote to the private sector units to make more savings and further investments.
(iii) The Government must impose the tax on agricultural income and other related sectors which are not being taxed at present.
(iv) The Government should impose heavy tax on luxury products.
(v) Taxation system should be strengthened to check tax evasion.
(vi) A reasonable ceiling should be fixed on salaries and perquisites of upper level company officials.
(vii) The government departments should be initiated to reduce the wasteful expenditure.(BCom Savings and Investments in India Notes Study Material)
(viii) The rate of interest, on savings should be more attractive, that will be helpful in savings for future.
(ix) To provide banking facility among rural people commercial banks will have to introduce flexibility in their banking and banking hours for access banking to common man.
(x) The Government should try to reduce inflationary pressure to restrict price hike.(BCom Savings and Investments in India Notes Study Material)
CONCEPT OF INVESTMENT
Investment refers to a part of capital which is being used for the generation of further income. It includes (i) Buying stocks and shares of companies, (ii) Buying new machines, new factory, new plant, infrastructure etc. It is notable that, the first type of investment is called financial investment because it leads to transfer of ownership only and that impacts is zero on employment. On the other hand, second type of investment is called real investment because it leads to an increase in income, output and Employment.
Thus, the word investment refers to what has been added to the stock of capital goods in a year. It is an expenditure on increasing the nation’s stock of capital like building, machines, tools, bridges, dams, rails, roads etc.
SIGNIFICANCE OF INVESTMENT
Investment is more important for developing countries like India. The following points indicate the importance of investment:
(i) It increases the employment because more jobs are created by new industries and infrastructural work.
(ii) It increases the level of income because it is very useful in increasing the productive capacity of economy.
(iii) It is very helpful to promote the technical progress of a country and this way improvement in the process, materials and products are possible.
(iv) It is very helpful in the economic growth of a country because it helps an economy to produce more.
(v) It makes the country to adopt the latest techniques which help to improve productivity.(BCom Savings and Investments in India Notes Study Material)
DETERMINANTS OF INVESTMENT
Investment plays an important role in capital formation. Following are the determinants of investment:
(1) Interest Rate: When rate of interest is higher people make more savings and investments. In other words, rate of interest is a reward for parting with liquidity. On the other hand with a fall in the rate of interest, investment will decrease because people will prefer to spend more rather they will either save.
(2) Government Policies: Government policies directly affects the investment pattern of the people of country. If government makes liberal policies it will lead to more investment. On the other hands if government imposes high taxes nobody will be ready to make investment.
(3) Technological Advancement: New innovations and technological advancement encourage higher investment. Because new innovation and technology upgradation results into minimum per unit cost as a result profit increases. This profitability attracts more investment.
(4) Present Capital Stock: If the present capital stock is quite enough no investor will go to invest more. On the contrary if the capital stock presently is low, it will induce investment opportunities.
(5) Maintenance and Operation Cost: If maintenance and operation costs are high, no one ready to make more investment. On contrary lower maintenance and operation cost encourage investors to invest in future.
(6) Competition in Market: In case of less competition or monopoly investment will be high on the contrary if competition is high, fear and risk takes place and investment will become less.
(7) Population Growth: Growth of population directly affects investment. When population increases, demand for goods and services also increase. That’s why new and more investment takes place.
(8) Degree of Liquidity: Need of cash also affects the level of investment. Higher liquidity preference discourages investment habits. On the contrary need of less cash facilitates make greater investments.
(9) Territorial Expansion: With the development of new territories new investment will take place. Because, there will be requirement of infrastructural development.(BCom Savings and Investments in India Notes Study Material)
CAUSES FOR LOWER INVESTMENT
There are many causes for lower investment given as below:
(i) Lower rate of savings.
(ii) Higher rate of taxation.
(iii) Poor performance of Public Enterprises.
(iv) Low development of infrastructure.
(v) Faulty planning about underdeveloped sectors.
(vi) Less banking facilities in rural areas.
(vii) No proper resource mobilisation for further investments.
(viii) Inflationary pressure in market.
(ix) Bad experience of public sector enterprises.
(x) Low income and poverty.
RELATIONSHIP BETWEEN SAVINGS AND INVESTMENT
Savings and Investments both, make a singular process that is known as capital formation. Higher is the level of savings, higher will be the level of investments in the country. When the savings are used in further production, that is investment; it is known as capital formation.
The relationship between savings and investment may be explained by taking the following formula:
Y = C+S
Y represents Income
C represents Consumption
S stands for savings
I represents Investments
In fact the total income is equal to the consumption plus savings. In the same way it is also a fact that the income is equal to consumption and the expenditure made on investment. So that
In the above two equations as C (consumption) is the common factor, therefore it can be said that
S (Savings) = I (Investment)
Finally we can say that, if the savings are high then there will be higher level of investments in the economy and vice-versa. Thus, developing nations try to raise its level of savings to invest more and more in infrastructural sectors.
Capital formation is a process of making capital goods, machines and tools, plant, equipments and transport facilities to attain more production in future. It means the process whereby a nation creates capital assets that generate a continuous flow of income in future. According to Professor Ragner Nurkse, “The meaning of capital formation is that society does not apply the whole of its current productive activity to the immediate consumpton, but direct part of it to the making of capital goods, tools and instruments, machines and transport facilities, plants and equipments—all the various forms of real capital that can greatly increase the efficiency of productive factors.”
“The amount a country adds to its capital during a period is known as the capital formation during that period.” –Benham
In Broader sense, capital formation does not only an increase in the stock of physical capital, but human capital consisting of educated, trained and healthy people is also included in capital formation. According to F. H. Harbinson, “Human capital formation is the process of increasing knowledge, skill and the capacities of all people of the country.”
Thus, finally we can say that, Capital formation means an increase in the stock of physical and human capital.
PROCESS OF CAPITAL FORMATION
Capital formation is a long-run process which consists three stages as below:
(1) Creation of Surplus: It is the first step of capital formation. It makes through increasing the rate of savings to income. If the level of personal income increases savings will increase naturally. On the other way, if people abstain from current consumption to a larger extent our savings level will be higher.
(2) Mobilization of the Surplus: Mobilization of the surplus or savings depends upon the credit mechanism of an economy. Financial Institutions, Banks and other Financial Networks play an important role in the mobilization process.
Under this process these institutions collect the surplus from the surplus units and lend them to the deficit units like, industries, business houses, traders etc. who are in need of fund. Thus, they play an intermediary role to mobilize savings to capital formation.
(3) Capital Formation: It is a third and final step. It is a process of effective investment of the surplus with the object of earning income. If the borrowed funds is used for productive purposes it may brings creation of capital for future.
CAUSES OF LOW RATE OF CAPITAL FORMATION
Following are the main causes which are responsible for low capital formation:
(i) Vicious circle of poverty.
(ii) High taxation levels or tax burden.
(iii) Lack of infrastructural facilities.
(iv) Low rate of productivity.
(v) Failure of public sector.
(vi) Rapid increase in population.
(vii) Lack of banking facilities.
(viii) High rate of inflation.
(ix) Demonstration effect among people.
(x) Lack of capital mobilizing institutions.
(xi) Unequal distribution of income and wealth.
(xii) Lack of entrepreneurial ability.
TRENDS OF SAVING AND CAPITAL FORMATION IN THE INDIAN ECONOMY
Estimates of physical capital formation in the post-independence period have been prepared mainly by the Central Statistical Organisation (C.S.O.) from time to time. The Central Statistical Organisation has been preparing estimates of saving and capital formation as per of the National Accounts Statistics (NAS). Recently, the CSO has shifted the base year to 1999-2000 and to provide a long-term saving and capital formation data.
On August 15, 1947, India got independence. At that time the rate of savings was very poor. To increase the rate of savings, Planning was adopted by Indian government and hence on April 1, 1951, the first five year plan was launched. We have completed 11 five year plans after independence. To achieve the self-reliance, all the plans attached great emphasis to increase the internal savings and capital formation.
The internal sources of savings may be classified into three broad sectors:
(i) Household sector
(ii) Public or Government sector
(iii) Private or Corporate sector
Household sector is the most important component of saving because of higher rate of savings among them but public sector has declined due to fall in profitability of public sector under takings and rise in government expenditure over revenue receipts.(BCom Savings and Investments in India Notes Study Material)
As it has been revealed about sectoral growth, the percentage of gross domestic savings of Household sector at current market prices is having greater share like in 2004-05 23.6 percent falling to 18.2 percent in 2013-14. Between the years 2004-05 to 2013-14, the gross domestic saving rate for Public sector also declined significantly from 2.3 to 1.6 percent, whereas the private or corporate sector has increased from 6.6 to 10.9 percent.
Gross capital formation which comprises two components: Gross Domestic savings (GDS) and Capital Flow (CI) has show a sustained increase in last six decades. Table provides information about Gross Domestic Capital Formation (GDCF) for the last six decades.
The Gross Domestic Capital Formation (GDCF) reached at a record level of 38.0 percent in 2007-08 as against 32.5 percent in 2004-05. A brack-up of GDCF level that in 2006-07, the share of public sector was 8.3 percent and that of the private sector 26.4 percent. It was gradually increased in 2009-10 with 9.2 percent for Public sector and 25.4 percent for Private sector. Besides these, according to new series estimates (2011-12) of CSO the Gross Domestic Capital Formation of Household Sector was 8.0 percent, Private sector was 23.3 percent and Public sector was 1.3 percent towards total of 32.5 percent. This is really a creditable achievement of the Indian Economy.
Dr. Rakesh Mohan, Deputy Governor of the Reserve Bank of India in his articled entitled, “The Growth record of the Indian Economy 1959-2008: A story of sustained saving and investment”, Reserve Bank of India Bulletin, March, 2008 appreciating the sustained GDP growth along with saving and investment growth writes : “In analysing the growth record of Indian economy, various scholarly attempt have been made to identify the turning point from the “traditional” low growth to the modern high growth science the 1980s. The simple ordering of the data presented in Table 5.2 provides a somewhat different picture of continued slow acceleration of growth except for 1970s decade. The secular uptrend in domestic growth is clearly associated with the consistent trends of increasing domestic savings and investment over the decades. Gross domestic savings have increased continuously from an average of 9.6 percent on GDP during 1950s almost 35 percent at present; over the same period, domestic investment rate has also increased continuously from 10.8 percent in 1950s to close to 36 percent by 2006-07. A very significant features of these trends in saving and investment rates is that Indian economic growth has been financed predominantly by domestic savings. The recourse to foreign savings has been rather modest in the Indian growth progress.” This is really a matter legitimate Pride of Indian Economy.(BCom Savings and Investments in India Notes Study Material)
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