Capital formation is the process of building up the capital stock of a country through investing in productive plants and equipment. Capital formation, in other words, involves the increasing of capital assets by efficient utilization of the available and human resources of the country.

1. By Prof. Suresh Kumar Tannan
Faculty, School of Law, Raffles University,
Neemrana, Rajasthan, India
E-mail: sureshkumartannan@gmail.com,
sktannan@rediffmail.com

2.  Capital formation is the process of building
up the capital stock of a country through
investing in productive plants and
equipment.
 Capital formation, in other words, involves
the increasing of capital assets by efficient
utilization of the available and human
resources of the country.

3. The stock of capital goods can be built up
and increased through two main sources:
(1) Domestic Resources and
(2) (2) External Resources.
(1) Domestic Resources:
Domestic resources play an important part in
promoting development activities in the
country. These sources in brief are:


4. (1) Voluntary Savings. There are two main
sources of voluntary savings
(a) households
(b) business sector.
As regards the volume of personal savings of
the households.
 It depends upon various factors such as the
income per capita, distribution of wealth,
availability of banking facilities, value system
of the society, etc.
 In the under-developed countries, the saving
potential of the people is low as a greater
number of them suffer from absolute poverty.

5. (i) Voluntary Savings. There are two main
sources:
(a) households
(b) business sector.
(a) Households: As regards the volume of
personal savings of the households.
 It depends upon various factors such as
the income per capita, distribution of
wealth, availability of banking facilities,
value system of the society, etc.

6.  So far as the rich section of the, society is
concerned, they mostly spend their wealth on
the purchase of real estates. luxury goods, or
take it abroad to safe keeping.
 There is, therefore very little saving
forthcoming from the high income group.
(b) Business Sector:
 The business sector is an important source of
voluntary savings in the less developed
countries. They usually hesitate in assuming
the risks associated with investment.
 The fear of nationalization and political
instability further demands their incentive to
save and invest in the country.

7.  The statistics of many underdeveloped countries
indicate that both these sources hardly manage
to save 15% of their GDP which not even
sufficient to maintain the present standard of
living of the masses.
(c) Involuntary Savings.
 In the developing countries, the income per
capita of the people is low.
 Their propensity to consume mainly due to
demonstration effect is very high.
 As the flow of savings is inadequate to meet the
capital needs of the country, the government,
therefore adopts measures which restrict
consumption and increase the volume of savings.