Q-14 = Which are main sources of capital formation in a developing country like Pakistan. What measures are to be taken to increase Capital Formation
SOURCES OF CAPITAL FORMATIONSources of capital formation can be divided into two that is internal and external sources. Both of them have divided into other sub-sources.
INTERNAL SOURCES OF CAPITAL FORMATION
1 Voluntary savings
2 Taxes
3 Government borrowing
4 Use of idle resources
5 Deficit financing
Voluntary savings come from household and business sectors and it depends upon per capita income, distribution of national income, banking facilities and interest rate. Taxes are known as involuntary savings. Tax revenues depend upon income of people and the overall economic situation of a country. If income of the people is greater and economic activity is at brisk revenue from this source will be greater otherwise not. Government also borrows money by sale of short term and long-term interest bearings bonds. Capital formation can be increased with the utilization of idles resources of the country for example uncultivated land, unemployed manpower and other natural resources. Deficit financing means deliberate unbalancing its budget in order to inject additional aggregate demand.
EXTERNAL SOURCES OF CAPITAL FORMATION
1 Foreign loans and credits
2 Foreign Grant assistance
3 Foreign Aid
External resources are mainly included (i) loans and credit from friendly countries and special international agencies and (ii) provide assistance under specific country's programs. The Foreign Aid (loans, credits and grants) is broadly categorized as project aid, commodity aid, food aid and other aid. Project aid, which generally takes the shape of foreign loans and grants for procurement of project equipment and supply of services etc. Commodity aid is utilized for commercial imports. Goods imported under this aid are generally industrial raw materials, equipment, consumer goods, chemicals, fertilizers and such other commodities as may be specified or generally agreed to or, if the aid is untied, as the country may actually need. Commodity aid also helps to generate rupee funds, which augment the country’s rupee resources to meet its development needs. Food aid comprises of foodstuffs such as wheat and edible oils etc. In most cases, the net sale proceeds of food aid are deposited as counterpart funds, which are further utilized for development purposes. The assistance under Other Aid comprises of loans and grants from non-traditional sources generally by way of balance of payment support. Loan and grants may be obtained from Asian Development Bank, International Bank for Reconstruction and Development, Islamic Development Bank, International Development Association, World Food Program, European Economic Community, United States Agency for International Development, and different countries.
SUMMARY OF EXTERNAL RESOURCES (Rs. In Million ) Budget 2006-07
1 Project Aid 82,165,800
2 Commodity Aid (Non-food) 96,037,700
3 Food Aid 605,000
4 Other Aid 60,500,000
Total resources 239,308,500
MEASURES FOR INCREASING CAPITAL FORMATION:
1. Control on inflation
2. Discouraging consumption
3. Increase in interest rate on savings
4. Reduction in inequality of income and wealth
5. Increase in education and foresightedness
6. Increase in infrastructure facilities
7. Setting up of basic industries
SOURCES OF CAPITAL FORMATIONSources of capital formation can be divided into two that is internal and external sources. Both of them have divided into other sub-sources.
INTERNAL SOURCES OF CAPITAL FORMATION
1 Voluntary savings
2 Taxes
3 Government borrowing
4 Use of idle resources
5 Deficit financing
Voluntary savings come from household and business sectors and it depends upon per capita income, distribution of national income, banking facilities and interest rate. Taxes are known as involuntary savings. Tax revenues depend upon income of people and the overall economic situation of a country. If income of the people is greater and economic activity is at brisk revenue from this source will be greater otherwise not. Government also borrows money by sale of short term and long-term interest bearings bonds. Capital formation can be increased with the utilization of idles resources of the country for example uncultivated land, unemployed manpower and other natural resources. Deficit financing means deliberate unbalancing its budget in order to inject additional aggregate demand.
EXTERNAL SOURCES OF CAPITAL FORMATION
1 Foreign loans and credits
2 Foreign Grant assistance
3 Foreign Aid
External resources are mainly included (i) loans and credit from friendly countries and special international agencies and (ii) provide assistance under specific country's programs. The Foreign Aid (loans, credits and grants) is broadly categorized as project aid, commodity aid, food aid and other aid. Project aid, which generally takes the shape of foreign loans and grants for procurement of project equipment and supply of services etc. Commodity aid is utilized for commercial imports. Goods imported under this aid are generally industrial raw materials, equipment, consumer goods, chemicals, fertilizers and such other commodities as may be specified or generally agreed to or, if the aid is untied, as the country may actually need. Commodity aid also helps to generate rupee funds, which augment the country’s rupee resources to meet its development needs. Food aid comprises of foodstuffs such as wheat and edible oils etc. In most cases, the net sale proceeds of food aid are deposited as counterpart funds, which are further utilized for development purposes. The assistance under Other Aid comprises of loans and grants from non-traditional sources generally by way of balance of payment support. Loan and grants may be obtained from Asian Development Bank, International Bank for Reconstruction and Development, Islamic Development Bank, International Development Association, World Food Program, European Economic Community, United States Agency for International Development, and different countries.
SUMMARY OF EXTERNAL RESOURCES (Rs. In Million ) Budget 2006-07
1 Project Aid 82,165,800
2 Commodity Aid (Non-food) 96,037,700
3 Food Aid 605,000
4 Other Aid 60,500,000
Total resources 239,308,500
MEASURES FOR INCREASING CAPITAL FORMATION:
1. Control on inflation
2. Discouraging consumption
3. Increase in interest rate on savings
4. Reduction in inequality of income and wealth
5. Increase in education and foresightedness
6. Increase in infrastructure facilities
7. Setting up of basic industries