Answer: 

Introduction:

Capital formation refers to the accumulation of capital stock such as buildings, machinery, equipment, and other physical assets that are used to produce goods and services. It is that part of a country’s current output and imports which is not consumed or exported during the accounting period, but is set aside as an addition to its stock of capital goods. Capital formation is the most important factor that drives the economic development of a nation.

Body:

This capital formation needs investment. Investment can come either through domestic deposits or through foreign funding. In the case of India, it is mainly the transfer of savings from households to the business sector that leads to increased output and economic expansion.

In India, savings have contributed a lot in the economic development since the Indian economy took off in the 1960s and 70s. In the past few decades, it has been around 33% of GDP.

But high savings alone does not lead to capital formation. There are other factors that are essential for growth potential. These are:

• Infrastructure: Sound infrastructure is needed in terms of good supply of power, electricity, roads, railways and robust means of communication.
• Ease of doing business: There should be a hassle free environment to start and wind up the businesses in the economy. Bureaucratic hurdles in acquisition of land and licenses should also be minimized. Government Policies decide the pace and direction of the economy.
• Human Resource: Skilled labour force is essential for the improved productive capacity of the economy. Capability of human resources depends upon the skills, creativity, abilities and education of the labour force.
• Technology: It increases the productivity and competitiveness of the economy. Today R&D in every domain is essential to be competitive in the international and domestic market.
• Social and political factors: Social factors involve customs, traditions, values and beliefs which contribute to the growth of the economy. Political factors such as participation of people in formulation and execution of policies enhance economic development.

Conclusion:

India has a favourable demographic dividend. But to really harness it, it must launch skill development initiatives that will help utilize the young labour force. It should also improve ease of doing business and create a conducive environment for investment to improve productivity of the economy.