Blog by Asst. Prof. Baljit Kaur (Dept. of Commerce)

 Capital Formation

The income can be used for savings and investments. These two factors play a significant role in the economic development of an economy. The income which is not spent consumption is called saving. Further, when these savings are used for construction of roads, dams, purchase of raw materials, stocks, machinery, transport etc is called investment. It is al known as capital formation. Capital formation further leads to increased productive capacity of an economy. It helps to increase employment, per capita income and overall development of the country. The growth of an economy is highly dependent upon available resources. It implies an economy can achieve better growth if there is continuous increase in the resources. In the less developing countries the economy depends upon capital accumulation. If the rate of investment increases, it increases the national income. On the other hand, if investment falls national income also falls. To break the vicious circle of poverty we will have to increase the investment by increasing the savings in the country.
Some of the importance of capital formation are discussed as under.
(1)  Capital formation helps the country to become self-sufficient in the sense that a country does not have to rely on foreign investments, since savings of people get converted into investments.
(2) Capital formation helps an economy to achieve its desired economic growth. Increase in economic growth helps to improve the overall living standard of the people of the country which is important for any country.
(3) With the help of capital formation, a country can make better use of the natural resources for the benefit of itself and for the rest of the world. A country can produce and export high quality goods at globally competitive rates. Increase exports help to boost the economy of the country.
(4) Capital formation is beneficial for both companies and employees. On one side, capital formation provides finance for expansion at cheaper rates and on the other hand, expansion of business leads to more job opportunities.
(5) Capital formation increases the stock of Machineries equipment, raw materials etc. It helps to increase the productivity of an economy. Further, it leads to an increase in the rate of economic development.