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 over 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 the last two decades, it is evidence that the economy is emerging from a phase of stagnation.
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 that ensure sustainable economic growth in the future. (BCom Savings and Investments in India Notes Study Material)
CONCEPT OF SAVING
Savings refers to that part of one’s income that is not spent on presenter immediate consumption. It is a fact that most individuals do not spend the whole of their 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 a direct relation between savings and the rate of interest. If the rate of interest is high, savings will be high. If the 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 the level of savings are given below:
(i) Income Level: There is a positive correlation between income level and savings. If the income level is high, then savings are also high. The higher-income level helps people to save more.
(ii) Enlarged Future Income: With the expectation to earn more in the future, people consume less and save more, and invest their savings.
(iii) Unforeseen Emergencies: To overcome future uncertainties, people may save more through sacrifice their present consumption.
(iv) Status in Society: With the expectation of high status in society they will save more and more. Business Motive: To meet future demand and uncertainties of business or occupation people save more and more in order to smooth the operation of the business.
(vi) Economic Independence: In our society, some people want to be independent people in respect of financial matters. So that they save more in order to maintain financial independence in the future. (BCom Savings and Investments in India Notes Study Material)
(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 reducing his current consumption and needs.
(viii) Modernisation of Business: A business essentially requires modernization to succeed in the future. Therefore, with a view to providing sufficient financial resources, a businessman saves more and more.
(ix) Demonstration Effect: Always rich people want to maintain a gap with the poor and poor people try to approach the richer. In this race, the saving habit of poor people will be less due to the demonstration effect.
(x) Change in Population: When the population increases, savings will become less because as the population increases demand also increases. It is the cause of price hikes (high prices) and high prices mean less saving or less purchase capacity.
REASONS FOR LOW RATE OF SAVING
The followings are the main causes 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, the per capita income of people is relatively lower than in developed countries. Thus, their saving level is lower.
- Rapid Growth of population: Rapid growth of population causes a very small increase in per capita income and results in a low rate of savings.
- High Rate of Taxations: High taxation rates suck extra money from people and savings will be lower. Extra tax load and high prices are two main causes of low savings.
- Demonstration Effect: The demonstration effect that induces people to copy superior life style and desire to imitate living standards also adversely affects the savings of people.
- Price Level: High prices and inflation are causes of reduced purchasing power. When expenditure is more, consequently saving is lower. Thus, high price leads to a reduction in real income and decreases in savings. (BCom Savings and Investments in India Notes Study Material)
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. Following measures are required to raise the savings of the country:
(i) Through an awareness program, people should be initiated to develop habits for savings by reducing their unnecessary expenditures.
(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 wasteful expenditure.
(viii) The rate of interest, on savings should be more attractive, which will be helpful in savings for the future.
(ix) To provide banking facilities among rural people commercial banks will have to introduce flexibility in their banking and banking hours for access banking to the common man.
(x) The Government should try to reduce inflationary pressure to restrict price hikes.
CONCEPT OF INVESTMENT
Investment refers to a part of the capital that is being used for the generation of further income. It includes (i) Buying stocks and shares of companies, (ii) Buying new machines, new factories, new plants, 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 impact is zero on employment.
On the other hand, the second type of investment is called real investment because it leads to an increase in income, output, and Employment. (BCom Savings and Investments in India Notes Study Material)
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 buildings, 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 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 the economy.
(iii) It is very helpful to promote the technical progress of a country and this way improvement in the process, materials and products is possible. (BCom Savings and Investments in India Notes Study Material)
(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 adopt the latest techniques which help to improve productivity.
DETERMINANTS OF INVESTMENT
Investment plays an important role in capital formation. Following are the determinants of investment:
(1) Interest Rate: When the rate of interest is higher people make more savings and investments. In other words, the rate of interest is a reward for parting with liquidity. On the other hand with a fall in the rate of interest, the investment will decrease because people will prefer to spend more rather they will either save. (BCom Savings and Investments in India Notes Study Material)
(2) Government Policies: Government policies directly affects the investment pattern of the people of the country. If the government makes liberal policies it will lead to more investment. On the other hand, if the government imposes high taxes nobody will be ready to make investments. (BCom Savings and Investments in India Notes Study Material)
(3) Technological Advancement: New innovations and technological advancement encourage higher investment. Because new innovation and technology upgradation results in minimum per unit cost as a result profit increases. This profitability attracts more investment. (BCom Savings and Investments in India Notes Study Material)
(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. (BCom Savings and Investments in India Notes Study Material)
(5) Maintenance and Operation Cost: If maintenance and operation costs are high, no one is ready to make more investments. On the contrary, lower maintenance and operation costs encourage investors to invest in the 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 take place, and investment will become less. (BCom Savings and Investments in India Notes Study Material)
(7) Population Growth: Growth of population directly affects investment. When the population increases, demand for goods and services also increases. That’s why new and more investment takes place. (BCom Savings and Investments in India Notes Study Material)
(8) Degree of Liquidity: The need for cash also affects the level of investment. Higher liquidity preference discourages investment habits. On the contrary need for less cash facilitates making greater investments. (BCom Savings and Investments in India Notes Study Material)
(9) Territorial Expansion: With the development of new territories new investment will take place. Because there will be requirements for 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 mobilization for further investments.
(viii) Inflationary pressure in the 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. The higher the level of savings, the 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 represent Investments
In fact, the total income is equal to the consumption plus savings. In the same way, it is also a fact that income is equal to consumption and the expenditure made on the 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 a higher level of investments in the economy and vice-versa. Thus, developing nations try to raise their level of savings to invest more and more in infrastructural sectors.
Capital formation is a process of making capital goods, machines and tools, plants, equipment, and transport facilities to attain more production in the future. It means the process whereby a nation creates capital assets that generate a continuous flow of income in the future.
According to Professor Ragnar Nurkse, “The meaning of capital formation is that society does not apply the whole of its current productive activity to the immediate consumption, but direct part of it to the making of capital goods, tools and instruments, machines and transport facilities, plants and equipment—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 a broader sense, the capital formation does not only an increase in the stock of physical capital but human capital consisting of educated, trained, and healthy people are 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 that consists of 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. (BCom Savings and Investments in India Notes Study Material)
(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 funds. Thus, they play an intermediary role to mobilize savings for 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 are used for productive purposes it may bring the creation of capital for the future.
CAUSES OF LOW RATE OF CAPITAL FORMATION
Following are the main causes that 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 the 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. (BCom Savings and Investments in India Notes Study Material)
The Central Statistical Organisation has been preparing estimates of saving and capital formation as per the National Accounts Statistics (NAS). (BCom Savings and Investments in India Notes Study Material)
Recently, the CSO has shifted the base year to 1999-2000 to provide 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 the 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 self-reliance, all the plans attached great emphasis to increase 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
The household sector is the most important component of saving because of a higher rate of savings among them but the public sector has declined due to falling in the profitability of public sector undertakings and a rise in government expenditure over revenue receipts.
As it has been revealed about sectoral growth, the percentage of gross domestic savings of the Household sector at current market prices has a 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 the Public sector also declined significantly from 2.3 to 1.6 percent, whereas the private or corporate sector increased from 6.6 to 10.9 percent. (BCom Savings and Investments in India Notes Study Material)
Gross capital formation which comprises two components: Gross Domestic savings (GDS) and Capital Flow (CI) has shown a sustained increase in the last six decades. (BCom Savings and Investments in India Notes Study Material)
The Gross Domestic Capital Formation (GDCF) reached 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 the public sector was 8.3 percent and that of the private sector 26.4 percent. It gradually increased in 2009-10 with 9.2 percent for the Public sector and 25.4 percent for the Private sector.
Besides these, according to new series estimates (2011-12) of CSO, the Gross Domestic Capital Formation of the Household Sector was 8.0 percent, the Private sector was 23.3 percent and the Public sector was 1.3 percent towards a total of 32.5 percent. This is really a creditable achievement of the Indian Economy. (BCom Savings and Investments in India Notes Study Material)
Dr. Rakesh Mohan, Deputy Governor of the Reserve Bank of India in his article 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 analyzing the growth record of Indian economy, various scholarly attempt has 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 a somewhat different picture of the continued slow acceleration of growth except for the 1970s decade. The secular uptrend in domestic growth is clearly associated with the consistent trends of increasing domestic savings and investment over the decades. (BCom Savings and Investments in India Notes Study Material)
Gross domestic savings have increased continuously from an average of 9.6 percent of GDP during the 1950s almost 35 percent at present; over the same period, the domestic investment rate has also increased continuously from 10.8 percent in the 1950s to close to 36 percent by 2006-07. (BCom Savings and Investments in India Notes Study Material)
A very significant feature 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 of legitimate Pride in the Indian Economy. (BCom Savings and Investments in India Notes Study Material)
BCom 1st Year Savings and Investments in India Notes Study Material