In an underdeveloped economy low capital formation is considered as one of the major hurdles of rapid economic growth. Gross domestic capital formation is composed of two components -gross domestic saving and net capital inflow from abroad. Gross domestic saving (measured at current price) was 10.4 percent of GDP in 1950-51, it improved to 12.7 percent by 1970-71.
Thereafter, there was rapid spurt in gross domestic saving and it improved to 21.2 percent by 1980-81. Since then, domestic saving effort fluctuated but rose to reach a level of 24.3 percent of GDP in 1990-91. Thus during nearly 42.years of planning, gross domestic saving rate has more than doubled -from 10.4 percent in 1950-51 to 23.9 percent of GDP in 1996- 97. This may be treated as a success of our planning efforts towards mobilisation of savings.
Gross domestic capital formation is an index of the level of the investment in the economy. From this point of view, it can be stated that whereas gross domestic capital formation was 10.2 percent of GDP in 1950-51, it reached a level of 22.7 percent of GDP in 1996-97. Judged | by international standards, India can legitimately I claim that the rate of domestic saving and | investment is fairly high.
Jagdish Bhagvati (1993) explaining the paradox of ‘high saving, low growth leading to the phenomenon of declining productivity, mentions: “the weak growth performance I reflects, not a disappointing saving performance, but rather a disappointing productivity performance.” Enummerating the factors that stifled efficiency and growth, Bhagvati divided them into three major groups:
1. Extensive bureaucratic controls over production, investment and trade;
2. Inward looking trade and foreign investment policies; and
3. A substantial public sector going well beyond the conventional confines of public utilities and infrastructure.
The former two adversely affected the private sector’s efficiency. The last, with inefficient functioning of public sector enterprises, additionally impaired the public sector enterprises’ contribution to the economy. Together, the three sets of policy decisions broadly set strict limits to what India could get out of its investment.
It would, therefore, be very prudent to mention that whereas it is important to raise the rate of saving in the economy, it is equally important to use those savings effectively in raising output. The efficiency of use of investment, whether it is made in public or private sector, will determine ICOR.