There are factors which influence the accumulation of capital in a country. These conditions are ideally fulfilled countries like the U.S.A. and the U.K., but they are mostly lacking in India.
In our country the will to save is there. All the motives which strengthen the will to save are in operation in India.
But the power to save is lacking. There very little margin between production and consumption.
Inducement to invest is negligible and the market mechanism of investment inefficient. That is why agriculture is largely carried on in the most primitive fashion and industry is generally inefficiently organised. Means of transport and communication are inadequate. The country is not adequately equipped with banking and insurance office and other channels of investment. At present it suffers from inflation.
In many parts of the country, crime is common and law and order is in an unsatisfactory state. The businessmen think that the tax system discourages enterprise. The fear of nationalisation hanging like Damocles’ sword frightens the investors. Frequent failure of companies undermines the confidence of the people.
The middle class people, who generally save and invest, have been ruined by prolonged inflation. The industrialists often say that heavy taxation and liberal policy towards labour have seriously reduced their capacity to save. The capital market in India has, therefore, been in a state of paralysis for the last two decades.
To ensure rapid economic development, however, the Government have recently taken a number of measures to step up capital formation. The measures include tax reliefs, assurance of proper compensation in case of nationalisation, etc. Again, by increasing her own volume of investment, Government is considerably increasing capital formation in the country.
On the whole, we may say that the conditions for capital formation in India are still not very favourable. That is why capital in India is still-scarce and shy.
How should saving be encouraged to overcome scarcity of capital in the country?
The following measures may be suggested:
(i) Production should be increased in all spheres by the development of agriculture trade, industry, transport, banking, insurance, etc.
(ii) Compulsory insurance schemes should be introduced.
(iii) Provident fund schemes should be extended.
(iv) Steps should be’ taken to improve the distribution of wealth in the country.
(v) Small savings drive should be intensified and, for this purpose, attractive rates of interest should be offered. Special institutions to mobilise small sayings should be created.
(vi) Tax reliefs should be given to industry.
(vii) Investment trusts, should be created.
(viii) Industrial management should be improved by suitable amendment of the Company Law. This would minimise company failures.
(ix) Policy regarding nationalisatian should be clarified.
(x) The rule of law should be firmly established and the safety of life and property guaranteed.
(xi) The working of stock exchanges should be improved. They should be purged -of speculative activities. This would inspire confidence among the investors. It would encourage free flow of capital. It would assure the investors that they can buy and sell shares with ease and without much risk. This would no doubt encourage investment and help capital formation.
These measures, if properly implemented, will go a long way in accelerating capital formation in India.