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To the individual and the households financial stability and prosperity are represented by a steady inflow of recurring income. Part of the income so earned could be saved and retained as permenant wealth. Traditional sources of investment are acquisition of immovable property, gold, cattle etc. But the modern world has introduced several new types of investment-products to boost savings, like stock exchange securities, bank deposits and insurance policies, mutual fund investments etc. The features of a good investment are security, liquidity, value appreciation and generating a regular and assured income. A prudent investor diversifies his investments, to eliminate possible risks. The dictum is "do not keep all eggs in a single basket".
To a corporate entity however financial strength is represented by the capital it employs and the cash flow it generates. What is wealth to an individual is Capital to the Corporate body, and income to the individual is represented by turn-over (cash flow) and profits generated therefrom. From where does the corporate entity source its capital. It is gathered from the savings invested by individuals and households. Savings therefore underlie the nucleus for economic growth, development and prosperity. Savings are generated mostly by households and individuals, it is invested and turned into capital and capital is employed by the Corporate sector. It is function of the money market and capital/debt markets to transform savings of households as capital for productive enterprises operated by corporate entities.
From A research Paper on Savings
What is capital? Savings generate investment. Investment in turn create capital. Capital can be used by the same person, who has accumulated and created it, or it can be hired/lent to others. Normally assets at your disposal are suited for a single-time use or application. If you have an apple in your hands, the minute you start biting it and enjoying it, the apple is no longer there. But wealth or capital represents assets that are put to repeated use. The residential flat you own and live in is a capital-asset that you have created for you and your family through your savings and investment. The house will be there for ever unless you sell it. After your demise your children could live in the same house.
Capital is a factor of production, along with the other factors namely Land, Labour, and Entrepreneurship (also called 'management'). It can generate value by co-acting with other factors of production and yield rent, wages, profit or interest. All these are lessons in primary economics that we studied long back in our schools and colleges.
But capital has a two dimensional countenance, i.e. one to the owner or creator of capital and the other to the hirer or user of capital. The owner is the person who generates Capital for investment. As far he is concerned capital is not a factor of production. He merely identifies it as his savings or wealth. Capital/wealth in this context represents deferred consumption, unspent current earnings kept by way of a provision or a source of sustenence for a rainy day. However to the hirer or user of capital, it is an indispensable factor of production. The characteristic of savings is to increment itself. We have studied the time value of money. A hundred rupees you save today is worth more than a Rs.100 next year. Thus a sizeable savings made by a person yields him if wisely invested, a steady additional income regularly in the future. This is called the cumulative growth of savings.
As in the case of the individual, a nation does not consume all the goods and other materials it produces in a year or over a span of time. After meeting the demands of consumption of its citizens, the country carries forward a net surplus out of the economic wealth it has created in the current time. This represents the savings of the country. India has the reputation of being a country generating a very high rate of domestic savings . Around 23% to 25% of our GDP is retained byway of savings every year. The bulk of the savings are by individuals and households. Thus there are several millions of individuals who save and accumulate capital to retain with themselves. Industrialists and businessmen particularly in the large and medium sector on the other hand need huge capital for their productive enterprises. By themselves they cannot save or accumulate all the capital needed by them. How the savings of millions of individuals and others flow to the meet the demands of the capital seekers is explained by studying the functions of the organised money market and capital market (equity & debt market). Let us now turn to discussing more about savings and investments relating to our country.
A country with a developing economy cannot depend exclusively on its domestic savings alone to fuel its economy's rapid growth. The domestic savings ofIndia is 25% of its GDP. But this can provide only a 2 to 3% growth of its economy on annual basis. The country has to maintain a 8 to 10% growth for a period of two decades to reach the level of advanced nations and to wipe out widespread poverty of its people. The gap is to be covered by inflow of foreign investment along with advanced technology.
In India domestic savings originate from three principal sectors namely:
The proportion of these three components of National saving throw more light on the structure of saving in India. The table given below provides the figure of sector wise saving in India in the year 1980-81 to 1998-99
(Amount in Crores)
[Source: Economic Survey 1999-2000]
The above table reveals that household sector saving provides the bulk of national saving. The share of total household saving to total National saving is more than three quarters. It does further suggest that the public sector saving rate declined but the corporate saving rate improved. This declining trend of public sector saving rate is due to negative saving of government administration. a decline in public savings was attributed to poor performance of government non-statutory corporations, mounting government employment and wage bill and rising trend in government purchases of goods and services. The private corporate saving rate was very low during eighties. The dampened saving impulse was owing to the growth in consumerism. It also pointed out that the low private corporate saving was due to the typical behaviour of the India corporate sector relying more on borrowed funds as against owned funds. Private corporate saving has shown a steady increase over the last two decades. This was due to liberalized environment. In the liberalized environment with increased internal and foreign competition as well as foreign direct investment in various sectors, the profits of corporate sector have been high leading to increased saving.1
The statistics furnished in the Economic Survey for the year 2002-03 published with the Union Budget for the year 2003-04 gives the following picture with reference to savings, investment & capital formation.
From the foregoing it will be clear that despite having a good savings rate, the Indian economy cannot sustain a higher rate growth and it needs much larger growth of Investments and capital formation.
As per the Development Goals and Strategy of the 10th Plan, which was recently finalised-
Role of External Assistance
The regular inflow of external capital investment is indispensable to sustain our economic growth at the planned level and this is well-recognised by the plan document itself. Next we will study our policy since independence towards external assistance and the reasons why our country is able to attract huge does of foreign investments.
1SAVINGS BEHAVIOUR IN INDIA: AN EMPIRICAL STUDY Md.Abdus Salam and Umma Kulsum (Authors are Faculty Member and Research Fellow Respectively in the Department of Economics, AMU, Aligarh)