CAPITAL AND CAPITAL FORMULATION

 

• INTRODUCTION
• DEFINITIONS OF CAPITAL
• CHARACTERISTICS OF CAPITAL
• FUNCTIONS
• CLASSIFICATION
• FACTORS INFLUENCING CAPITAL FORMATION
• CAUSES OF LOW CAPITAL FORMATION IN INDIA

YOU WILL LEARN ABOUT: CAPITAL AND CAPITAL FORMATION

Capital as a factor of production is commonly defined as that which consists of" those forms of wealth other than the land , from the use of which an income is expected." This comes to mean that all forms of wealth other than land which yields an income is capital. The other definition is"capital is wealth other than land saved and devoted to production of further wealth".Thus,capital refers to all those man-made goods which are used in further production of wealth. As such, it can be said that"All capital is wealth, but all wealth is not capital"

Definations

J.R. HICKS DEFINES:

"Capital consists of all those goods existing at present time which can be used in any way, as to satisfy wants during subsequent years"

According to Bohm Bawerk:

"Capital is produced means of production"

According to Samuelson:

"Capital goods are produced goods that can be used as a factor input for further production"

From the above definitions following facts about "Capital" can be concluded:

1. "Capital" includes all those goods which are used for further production of more goods .e.g machines, tools factory building, transport, equipment
2. "Capital" is the result of human efforts done.
3. As suggested by CAIRNCROSS, stocks,shares, government bonds and securities etc, are also included in "Capital" because all these yield income to the investors.

Characteristics of capital

Following are the Characteristics of Capital:

1. Capital is the result of Labour: Some economists consider capital as the storage of the past labour. The tools, implements used for the further production of wealth, were the products of labour.
2. Capital is Productive: Capital is combination with other factors of production like land and labour, produces goods and services. But Keynes argues that capital is not productive but it is efficient.
3. Capital is Prospective: As the accumulation of capital yields an income, it is considered much prospective.This characteristic explains the supply side of capital.
4. Capital is Temporary: It is not permanent rather it has to be reproduced and replenished from time to time.
5. A Mobile Factor: Capital is the most mobile factor of production. Its supply can be increased or decreased.
6. A Passive Factor: It alone is unable to do anything.It produces with the aid of land and labour.

Functions Of Capital

1. Capital Increases The Productivity Of Labour: Capital goods like machines and tools enable the labourer to produce more goods and services.
2. Capital Secures Continuity in Production: The production between the initial and the final stage is kept on and made continues by the use of capital.
3. Makes The Production Round About: Production with Capital, for this reason is called"a round about process.
4. Raising the Dignity of Labour: It helps to raise the dignity of labour.
5. Helpful for Capital Formation: It is a useful tool for Capital Formation.
6. Source of technical Development: It is a source to promote technical development of the country.

Classification Or Various Forms OF Capital

Capital is used in different ways. On the basis of its users,capital is classified as follows:

1. Fixed and Circulating Capital: The Fixed Capital is durable producer's goods,which are used in the production process continuously again and again. Machines,tools,roads,factories,etc. are included in the fixed capital. ON the Other hand, the capital which can be used once or which becomes useless for the second time is called Circulating Capital.Raw Materials, Coal, Kerosene Oil,Petrol etc are the circulating capital.
2. Sunk and Floating Capital: Capital is said to be sunk when it is put to some special use and it cannot be shifted to any other use .It always remains at the place where it is fixed. Factory, Machine or Road can be described as Sunk Capital. For Example, an ice Factory can provide only ice, a Shoe Factory can produce only Shoe etc. Floating Capital is that capital which can be used for several purposes or by several industries. Money can be put to any use. Leather can be used for making different types of goods like shoes, belts,toys,etc. Therefore, money and the other types of raw material are the examples of Floating Capital.
3. Internal and External Capital: When the capital of a country is used within its territory, it is called Internal Capital. On the contrary, Capital obtained from foreign countries and used in our country is called External or Foreign capital.
4. National and Internal Capital: National Capital is that which includes all the private and public capital in a country. The buildings of all the factories, private or public, are the examples of national capital. International Capital is that capital which is owned by two or more than two countries. Kosi Project is owned by India and Nepal. This is an International Capital. International Monetary Fund,World Bank etc. are the examples of International Capital.
5. Private and Public Capital: Capital which is invested in private sector or by private persons is called the private capital. Industries belonging to TATA and Birla in India are examples of Private capital. Capital which is invested buy the Government in public sector is known as public capital. Bhila and Durga Steel Plants are the examples of public capital in INDIA.
6. Individual and Social Capital: capital having personal or private ownership is called the Individual Capital. many industrialists who own factories possess Individual Capital. On the other hand, Capital which is not owned personally or individually, but it is owned by the society as a whole , is known as Social Capital. For Example, Roads, Railways, Schools etc are all social capital of a country.

CAPITAL FORMATION

In simple words, capital formation means all the reproduced wealth by more accumulation of wealth is possible directly or indirectly. Mostly the word CAPITAL FORMATION is used in a narrow sense, the physical capital stock which includes tools, machinery etc. Capital goods in a broader sense, include non-physical capital or human resources consisting of public health, efficiency, craft visible and invisible capital.

According to Prof.Kuznets

 "In circumstances of restrained economic growth and industrialisation, capital formation should be understood to be limited to machinery , instruments and inventories which are directly capable of being used in work."

FACTORS INFLUENCING CAPITAL FORMATION

1. Power to Save: The saving depends upon the power to save. The power to save depends on the ability to save. It is determined by national income. As the income increases the power to save increases more than proportionately. A rich nation has a great power to save than a poor one.As the productivity and the volume of production increases in a nation, its power to save also increases.
2. Willingness to Save: The will to save, depends upon one's preference of the future satisfaction to the present one and consequent desire to provide for it. This depends upon the character of an individual.
3. Rate of Interest: Interest is the price of savings . A high rate of interest encourages the will to save while the low rate discourages it. The higher the rate of interest, larger the volume of savings and lower the rate, the smaller the volume of savings.
4. Facilities of Investment: When there are more facilities to mobilise the saving , the people save more and invest more. The development of saving bank, commercial banks etc., encourage the people to save more. It is for this reason, the urban people save always more than the rural folk.
5. Inflation: We are familiar that financing of a deficit budget is done by printing new currency in the country.Generally, this process leads to inflation. So, inflation is considered a source of capital formation, if it is invested in productive channel.
6. Trade Conditions: The prosperity encourages and enhances the savings but depression reduces the savings of people.

CAUSES OF LOW CAPITAL FORMATION IN INDIA

1. Inflation: Because of inflationary trend, the prices of commodities have gone very high and the middle class people are finding it very difficult to save any amount.Rather, it is becoming increasingly impossible for them to make both ends meet. Under such circumstances, the majority of middle class is not contributing in capital formation.
2. Taxation Policy: High level of taxes on property in India affect the savings and capital formation is adversely affected.The industrialists and businessmen believe that level of taxation should be reduced so that the people's capacity to save is improved, simultaneously improving their capacity to invest.
3. Insecurity:The condition of law and order in many parts of the country is not normal.there is no adequate security of life and property in some of the regions and this has discouraged the opening of new industries in those areas. Besides above causes,frequent failures of joint stock companies have made people reluctant for investments.
4. Small size of Market: Due to small size of domestic market, investment is not encouraged in poor countries like India. It does not expand the work of economic development and modern machines cannot be used as extra quantity produced has no market access.
5. Habit of Hoarding: Most of the illeterate people having very little capacity to save, are in the habit of hoarding their savings in their house. But such savings are of no use as far as capital formation is concerned, as these hoardings cannot be utilised in any productive channel.