SAVING AND INVESTMENT IN INDIA &

RESOURCE MOBILISATION FOR PLANNING

DR. LAXMI NARAYAN ASSISTANT PROFESSOR OF ECONOMICSGOVT. COLLEGE FOR WOMEN, BHODIA KHERA

LECTURE OUTLINE

Role of Saving and Investment.

Analysing Trends in Saving and Investment in India.

Causes of Low rates of Saving and Investment and Suggestions to Improve them.

Plan Financing in India.

Deficit Financing and External Financing.

SAVING

AND

INVESTMENT

IN INDIA

Saving: Definition

Saving(S) is the excess of income flows(Y) over consumption flows(C) during an accounting year in the economy.

S=Y-C Saving(S) can be increased either by raising the level of income or by reducing consumption in the economy.

In LDCs it should be raised by raising the level of income because consumption level is already low and it may dampen the inducement to invest.

Investment: Definition

Investment is the expenditure on acquisition of production capacity.

Investment enhance production capacity by adding to the stock of capital.

Expenditure on acquiring capital requires savings.

Investment is funded through saving.

Investment increases income.

Increased income makes larger savings possible.

THE VICIOUS CYCLE

Economy Trapped in Low Level Equilibrium

Rate of Saving & Investment needs to be raised to break the cycle

THE VIRTUOUS CYCLE

Savings when invested

leads to greater

generation of income

COMPONENTS OF SAVING

A. Household Savings Savings of the individuals/families. Savings on non-profit private institutions, serving households Viz.

School, Hospitals, Colleges etc. Savings of non-corporate business enterprises, referring to small

business establishments like local medicine shops and small grocery outlets.

B. Corporate Savings Savings of the private companies Savings of the Corporate Banks.

C. Public Sector Savings Savings of the departmental enterprises(like P&T, Railways). Savings of the non-departmental enterprises(like AIR, Indian

Airlines etc. which are like private corporations)

GROSS DOMESTIC SAVINGS

INVESTMENT IN INDIA

A. Investment(Capital Formation) Increase in the stock of capital is called Capital Formation Investment Occurs when saving is used for purchase of new

machines and tools, or for building of roads, factories, powerhouse etc.

Capital Formation includes (a) Fixed Capital Formation (b) Increase in Stocks

Rate of Gross Capital Formation = Gross Investment x 100

GDP

Rate of Net Capital Formation = Net Investment x 100

NDP

Where Net Investment = Gross Investment - Depreciation

GROSS DOMESTIC CAPITAL FORMATION (GDCF)

SAVING INVESTMENT GAP

INFLOW OF FUNDS FROM ABROAD

CAUSES OF LOW RATE OF CAPITAL FORMATION

Low Level of SavingsPopulation ExplosionConsumerismTaxationFinancial SystemInterest Rate StructureInflationInfrastructural Bottlenecks

SUGGESTIONS TO INCREASE RATE OF SAVING AND INVESTMENT

Increase in Domestic SavingsExpansion of Banking InstitutionsRural SavingsRational Tax StructureReduction in Non-Development

ExpenditurePrice StabilityLiberal PolicyIncrease in Productivity Standards

REASONS OF HIGH ICOR IN INDIA

Western Model of GrowthPredominate Role of Public

SectorNatural FactorsLack of Political WillLack of Loyalty and

Faithfulness

RESOURCE

MOBILISATION

FOR

PLANNING

Financing for Plans

Plan Financing refers to the SOURCES, METHODS and POLICIES of the government in regard to financial resources for planned development of the country.

Planners are required to strike a balance between the targets of the plans and resources required to achieve those targets.

For every plan government draw a comprehensive programmes for mobilising required resources.

SOURCES OF PLAN FINANCE

COMPONENTS OF BUDGETARY RESOURCES

IMPORTANT COMPONENTS OF RESOURCE MOBILISATION FOR NINTH, TENTH AND ELEVENTH PLANS

COMPONENTS OF BUDGETARY RESOURCES

Meeting the revenue deficit of the Government by issuing more currency

Rational of Deficit Financing- Lack of sufficient voluntary savings Taxation Socially unwarranted

Deficit financing is discontinued as a source of financing after 9th plan.

Deficit Financing

Employment of unutilised resources

Generates additional resources

Combats Recession

Infrastructural Development

Coping with increased demand for money

Favourable Impact of Deficit Financing

Unfavourable Impact of Deficit Financing

Changes in the pattern of Investment Increase in money supply and Price

Level Increase in Consumerism BOP Deficit Price Rise and Inequality Increase in the Cost of Planning

Rate of Domestic Saving Saving-Invetsment Gap BCR ARM

Gross domestic Capital Formation Incremental Capital Output Ratio Deficit Financing External Resource Mobilisation Domestic Resource Mobilisation

NEW/KEY TERMS

Jain & Majhi, “Economic Development and Policy in India” V.K. Global Publications.

R.K. Misra & V.K.Puri, “Indian Economy” Himalaya Publications.

Ruddar Dutt and K.P.M. Sundaram, “Indian Economy” Sultan Chand.

Uma Kapila, “Understanding the Problems Of Indian Economy” Academic Foundation.

REFERENCES

Discuss the main source of financing India’s Five Year Plans?

Explain the role of foreign capital in financing India’s Five Year Plans?

Critically examine the role of deficit financing in Indian economic planning.

Do you think present rates of savings and capital formation are adequate in India? How these can be improved?

Critically examine the recent trends in Savings and investment in India?

FAQs