Process of Capital formation
The process of capital formation has three distinct stages, which are:
1. Increase in savings:
saving is the first stage of the process of capital formation. Saving is that part of income which is not consumed. The part of income which is saved by the people is used for the creation of capital goods. The rate of saving increases with the increase in income in an economy. However, increase in saving depends upon many factors such as willingness and power to save, distribution of income, imposition of taxes, rate of interest etc.
2. Mobilization of savings:
Since the people who save are different from the people who invest. So, the mobilization of savings is essential. it is done through the various financial and non-financial institutions such as banks, insurance companies, capital markets, etc. these institutions accept the savings from the people and give loans to the investors.
3. Investment of savings:
The investment of saving is the last stage of the process of capital formation. The part of investment which goes to the capital goods creation leads to the capital formation. There are certain class in the country, which invest for the production of goods and services both in agricultural as well as industrial sector.