Discuss the importance of Capital Formation in development, while throwing light on key obstacles to capital formation in underdeveloped economies from demand and supply side.

Capital includes only those means of production which are produced by man. For example – Plant and machinery tools and instruments. The capital formation means addition to the existing stock of capital. To generate good capital formation there must be good saving in an economy because savings are spent on capital goods, such as, machines, instruments, factories, or on increasing the stock of raw material.
Role and Significance of Capital Formation in Economic Development:

  • Capital Formation ensures a Sustained Rise in Output
  • Capital Formation generates Employment
  • Capital Formation facilitates Technical Progress
  • Physical Capital Formation prompts Human Capital Formation
  • Capital Formation and Infrastructural Development
  • Capital Formation and Self-reliance
  • Capital Formation Facilitates Exploitation of Natural Resources

Factors responsible for lower capital formation
Low Per Capita Income; Large Size of Population; Inflation; Demonstration Effect; Lack of investment-friendly environment; Complex Tax-structure and Limited extent of market.


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