MCom I Semester Business Environment Saving Notes Study Material
Table of Contents
MCom I Semester Business Environment Saving Notes Study Material : Saving and Income Domestic Saving Rate of Saving Sources of Savings Factors Affecting Savings and Capital Formation in India Mall Savings Measures to Increase Savings Reason For Low Rate of Saving s Long Answer Questions Short Answer Question Objectives Question :
CTET Paper Level 2 Previous Year Science Model paper II in Hindi
Saving
In short period propensity to consume remains constant, when the income increases, consumption expenditure also increases but by a some what smaller amount. The reason is that as income increases, consumers want to get more and more satisfied with the result that it is no larger necessary to spend the additional increase in income on consumption. The expenditure on consumption will definitely increase but not in the same proportion in which income increases. The part of income which is not spent on consumption is saving. Economy is in equilibrium when total income is equal to total expenditure. Therefore, it is essential that the part of income which is not spent on consumption should be invested. At the equilibrium level of national income saving and investment should be equal. According to Keynes saving and investment are closely related.
According to Keynes, saving is the excess of income over expenditure. Saving is the function of income. Saving refers to that part of income which is not spent on consumption. In the form of equation :
S = Y-C
Where,
S = Saving
Y = Income
This equation equally applies on individual and social and national savings. Social savings are the sum total of individual savings. Saving is the determining factor of investment. But its impacts are different.
Classical economists like Hobson opposed saving. According to them, saving creates the situation of low-consumption, which reduces demand and ultimately increases unemloyment and economic crises. Keynes, as opposed to the lavish praises bestowed by the classicists on saving, thrift and frugality (because they led in their opinion, directly to capital formation), Keynes advocated spending and thriftlessness during depressions. For Keynes, while spending was a virtue, saving was an unmitigated evil,”Savers are the villains in the Keynesion economic mythology, the desire to hold liquidity is the great curse on humanity.” Keynes launched a vigorous attack on thriftiness and saving that they result in the curtailment of effective aggregate demannd and hence, of employment.
Keynes condemned saving as a social vice and regarded spending as social virtue. He argued that increasing expenditure led to an increase in effective demand, an increase in investment and finally an increase in output, income and employment, but, according to new thinking among U.S. economists, increased spending adversely affected capital formation, investment, output and employment. Increasing expenditure, both private and public, was only increasing inflation without in any way increasing, income, output and employment in the American economy. The U.S. economists, therefore, called for a brake on the rapidly mounting public expenditure in the country and asked for encouragement to saving, private, as well as, public.
SAVING AND INCOME
Saving is always a part of national income. Saving is the function of income. In equation :
S=F (Y)
As the income of a person increases, his saving goes up. Saving depends upon the propensity to save. Saving function expresses relationship between two quantities – income and saving. The size of saving can be derived from the propensity to consume. The propensity to consume plus propensity to save is equal to total income. If propensity to consume is deducted from 1, we are left with the propensity to save. The formula can be expressed in the following from:
Propensity to consume and propensity to save are interdependent. The propensity to consume remains more or less constant over a short period of time and propensity to save is also an constant function of income. On being propensity to save constant, increase in income increases consumption. Therefore, marginal propensity to save is always more than zero and less than one. In the form of equation
save-(ASSO Marginal propensity to save = 1
Generally, level of saving and consumption depends upon the level of national income. The marginal propensity to consume is higher in poor country and lower in the case of a rich country. In the case of a rich country, most of the basic wants of the people have already been satisfied, and all the additional increments of income are saved, resulting in a higher marginal propensity to save but in a lower marginal propensity to consume. In a poor country, on the other hand, most of the basic wants of the people remain unsatisfied so that additional increments to income go to increase consumption, resulting in a higher marginal propensity to consume but in a lower marginal propensity to save.
DOMESTIC SAVINGS
Investment comes from the savings. There are two sources of savings :
1 Domestic savings
2. Foreign savings
1 Domestic savings : The volume of domestic savings can be increased by imposing curbs on domestic consumption. The volume of real domestic saving should be increased so that the resources that have been used for consumption are released for investment.
2. Foreign saving: Domestic saving alone may not be sufficient for planned investment. A part of investment may, therefore be financed by the import of foreign capital.
The Indian economy had outlined a path of capital accumulation in which a major part of resources were to be supplied by real domestic saving and a part by inflow of capital from abroad. Indian domestic capital is inadequate for purposes of economic growth and it is necessary to invite foreign capital.
RATE OF SAVING
Rate of savings can be following types:
1 Gross Saving Rate (GSR): It is defined as Gross Domestic Saving divided by GDP. In the form of formula:
GDS
GSR = GDP
2. Net Saving Rate (NSR): It is defined as (Gross Saving-Consumption of Fixed Capital) + Net Domestic Product. In the form of the formula: NSD GDS – Depreciation
TRENDS OF SAVINGS IN INDIA
Saving Notes Study Material
Trends of saving in India from 1950-51 to 2013-14 is given in following
The trend in overall period of 64 years can be broadly divided into four distinct phases :
(i) Low Saving Phase (1950-51 to 1970-71): In this period GDS rate broke out of a low rate of 9-5 percent of GDP in 1950-51 and witnessed an upward trend after it with occasional oscillations of 14:3 percent in 1970-71.
(ii) Increasing Saving Phase (1970-71 to 1990-91): This period was marked by increasing saving. After 1970-91 there was a rather dramatic improvement in the saving rate which rose from 17.8 percent in 1980-81 to 22.9 percent in 1990-91
(iii) Stagnation Phase (1990-91 to 2000-01): Between 1990-91 to 2000-0 the gross domestic saving rate oscillated between 22.9 percent to 23-7 percent Hence this period may be called the phase of stagnant saving rate.
(iv) High Saving Phase (2000-01 to 2013-14): With the fast growth of the economy saving rate also recorded as impressive rise. GDS reached the level of 30-6 percent in 2013-14. This was mainly due to increase in household financial saving and private corporate sector savings as a result of the measures of economic reforms.
Gross Domestic Savings (GDS) at current prices in 2013-14 were estimated at 34,75,935 crore, amounting to 30-6 percent of DGP at market prices.
SOURCES OF SAVINGS
In India, the broad sectors accounting for domestic saving are:
(i) Family sector : In India, most of the savings is done in the household sector. Saving of the household sector consist of (i) Saving of the individual and families (ii) Saving of the non-profit making institutions like colleges, hospitals etc. (iii) Saving of non-corporate business.
(ii) Government or public sector: Government or public sector consists of (i) saving of government and department enterprises like post and telegraph railway, etc. and (ii) saving of government companies and statutory corporations like Steel Authority of India, Air India, LIC etc.
(iii) Corporate sector : This sector includes the saving of (i) Companies of private sector (ii) Corporate banks. That part of profit which is not distributed among the shareholders by the companies constitutes their savings.
Saving Notes Study Material
FACTORS AFFECTING SAVINGS
Normally, everyone likes to save because that saving will help him to tide over his difficulties in the future. Whether the propensity to save is to be high or Slow shall be determined by the following factors:
1 Level of income: Level of income is the primary factor to govern savings, It is a common phenomenon that when the income of a person increases, he uses a part of his income for the satisfaction of wants and the balance of the increased income is saved. It is possible that, to start with, a person may not save but as his income increases, he likes to save some portion of his income for the rainy days.
2, Rate of interest: If the rate of interest rises, people will consume less and save more in order to take advantage of the higher rate. On the other hand, if the rate of interest falls, people will consume more and save less. According to the classical economists, the saving varies directly with the rate of interest. The rate of interest becomes a significant factor when the consumers buy durable goods on an instalment basis.
3. Volumes of net income: The level of real net income determines the quantity of saving. If the volume of net income is high, the propensity to save is high and vice-versa.
4. Tax policy of the government : Changes in fiscal policy too, have their repercussions on the savings. Heavy indirect and direct taxation impinges on the consumption function and is likely to depress it. If the incidence of tax is high, it would adversely affect the savings as well as consumption.
5. Personal habits: Saving also affects by people’s attitude towards thrift. If the masses hold the conventional view that saving is an unmitigated virtue, then the propensity to save shall be high. If on the other hand, poeple’s attitude towards thrift is moulded along Keynesian lines, the propensity to consume shall be higher and the propensity to save shall be lower.
6. Future progpects: The propensity to save is affected not only by present changes but also by the expectations of future changes. Future uncertainties considerably affect the consumption and when people suffer heavy losses the propensity to save will increase.
7. General price level : Changes in price also affect the propensity to save. A rise in price level, by reducing the real income, shall adversely affect the savings.
Most of the factors discussed above are likely to affect saving directly or indirectly.
SAVING AND CAPITAL FORMATION IN INDIA
The term domestic capital formation refers to the invesment. Its size in any country depends on the domestic saving and capital inflow. The rate of domestic capital formation in India is now estimated as a percentage of gross domestic product. A careful analysis of data on domestic capital formation clearly suggests that during the five and half decades of economic planning the rate of gross domestic capital formation has risen considerably. However, the increase in the rate of investment has been neither steady nor firm.
Table
Gross Domestic Saving and Capital Formation
Saving Notes Study Material
It is evident from the above Table that:
1 In the first year of the first plan 1950-51, the domestic savings were only 989 crore and rose to 34,75,935 crore in 2013-14. It increased to 3,514 times during this period.
2. In 1950-51, the rate of saving was as low as 9.5 percent of GDP and increased to 30-6 percent in 2013-14.
3. During the first 15 years of planned development in India, the rate of investment gradually increased and in 1970-71 was 15.1 percent of GDP. In 1950-51 gross domestic capital formation was 968 crore which rose to 30.04.130 crore in 2013-14.
SMALL SAVINGS
Small savings of people are very important from the point of view of national development. The post office provides various facilities to the people for saying their small amounts and for making profitable investments in diterent ways. The interest received in these accounts are more than other saving accounts. The facility of saving bank is available in small post office branches of rural areas. Post office saving bank is a government institution. The rate of postal saving bank is very important for economic development and capital formation of the country. State governments adopt special measures to promote small savings.
Saving Notes Study Material
MEASURES TO INCREASE SAVINGS
Even in existing framework, there is considerable scope for raising the rate of saving and improving its absorption. The following measures will be, however, necessary to achieve this objective:
1 Increase in direct taxes : The tax structure suffers from a number of defects. In addition, there is widespread tax evasion. Under this circumstances. it is necessary to make efforts in this direction. With the increasing commer cialisation of agriculture, there is no justification for exempting agricultural incomes from income tax. The government should thus extend the net of income tax to agriculture. Loopholes in the tax collection system must be plugged to check wide spread tax evasion.
2. Increasing saving in family sector: From the point of view of saving. household sector is most important. However, in India, on account of widespread poverty, mass of the population has virtually no ability to save, therefore measures which induce people belonging to upper and middle class to increase their savings must be encouraged. Exemption limit of savings from income tax should be raised. Inflationary price rise has to be kept within reasonable limits because inflation erodes both ability and willingness on the part of households to save. To inculcate banking habit among the rural population, commercial banks will have to introduce flexibility in their working.
3. Reducing government expenditure: Expenditure on unproductive activities in the government should be restricted. There is widespread belief that various government departments are overstaffed. Therefore, adequate care has to be taken in sanctioning new staff.
4. Making public undertaking profitable : Efficiency of public undertakings must be raised to enable them to increase their profits. There should be full utilisation of productive capacities of industrial units in public sector. A national administered price policy should be evolved. It can help in raising the surplus of the public sector enterprises and eliminate losses in some cases.
5. Increase in indirect taxes : Luxury items should be taxed heavily. Affluent people will buy them and this will enable the government to collect more revenue which will eventually increase saving in the public sector.
6. Increasing saving in corporate sector : Restrictions must be imposed on the expenditures of company directors and high executives. A reasonable ceiling must be fixed on the salaries and perquisites of company officials. Declaration of dividends and their disbursement by companies must be adequately controlled by the government.
In the existing situation, savings cannot be left entirely at the will of the people. From the liberalisation experience of the 1990s it is clear that the elites in the country have virtually whole of the black income will continue to indulge in wasteful consumption and do nothing to increase their savings. Hence, for meeting the present capital requirements of economic development, reliance has to be placed on physical control as well as on fiscal and monetary policies.
REASON FOR LOW RATE OF SAVINGS
The following factors are responsible for low rate of savings:
1 Inflation
2. Increasing incidence of tax burden.
3. Low level of income.
4. Unproductive expenditures.
5. Lack of facilities in collection of savings.
6. Undue expense on traditional and blind faith programmes.
7. Increasing propensity to consume.
8. No taxation on agricultural income.
9. Huge losses in public sector enterprises.
10. Demonstration effect. MW
EXERCISE QUESTIONS
Long Answer Questions
1 Define saving and discuss trends of savings in India.
2. What do you understand by savings ? Clearly explain the reasons for low rates of savings in India.
3. What is domestic savings? What are the sources of savings? Explain.
4. Explain the trends of savings in planned period.
5. Explain the factors affecting savings with suitable examples.
6. What is the savings ? Write a note on savings and investment in India.
Saving Notes Study Material
Short Answer Questions
1 What is meant by savings?
2. Define savings.
3. What is domestic savings ? Explain.
4. What is saving rate ?
5. Suggest some measures for increasing savings.
Objective Questions
Select the Correct Alternatives :
1 Saving is related with :
(a) Y
(b) s
(c) C
(d) All of above.
2. Income is related with :
(a) Y
(b) s
(d) Y-C.
3. The main reason of low rate of saving is :
(a) low level of income
(b) increased saving in corporate sector
(c) reduction in government expenditure
(d) none of these.
4. The factors affecting savings are :
(a) ageneral price level
(b) corporate sector
(c) public sector
(d) household sector.
5. In the era of independence, domestic savings were:
(a) huge
(b) very low
(c) very high
(c) very high
(d) none of these.
(Ans. 1. (b), 2. (a), 3. (a), 4. (a), 5. (b).]
