Higher Rate of Capital Formation or Investment

At the time of independence, one of the major problem of Indian economy was deficiency in capital stock in the form of land and building, machinery and equipment, saving, etc.

In order to continue the cycle of economic activities such as production and consumption, a certain ratio of production must go towards saving and investment. However, the required ratio was never generated in the first four to five decades after independence.

The simple reason being higher consumption of necessary items by the population of whom most happened to be poor and lower middle income class. Collective household saving was very less due to this.

Consumption of durable items was also very less. But in recent years things have charged. Economists have calculated that in order to support the growing population, India requires 14 percent of its GDP to be invested.

The saving rate of India for the year 2011 stands at 31.7 percent. The ratio of gross capital formation was 36.6 percent. This is possible because people are now able to save in banks, consume durable goods and there has been large scale investment taking place on public utilities and infrastructure.