Question

Explain how capital is a produced means of production. Discuss any two reasons for low capital formation in India and suggest remedies.

Answer 1

Capital formation is the increase in the stock of capital goods. E.g.machinery, equipment's, buildings, means of transport, factories, etc. which are used for further production.It is an net addition made by the stock of capital in an economy during a period of time.

• Reasons responsible for low capital formation:
  

1) Low per capital income - Level of saving is low because of low level of income, which is the primary source of capital formation.

2) Inflation - Higher inflation means less excess of income for a long way investment, indicates a low rate of capital formation.

• Remedies to overcome with low capital formation:
  

1) Impose high taxes on the rich.

2) Creating favourable business conditions in the economy.

3) In order to increase savings in the economy deposit scheme should bring into force compulsory.