Need For Stronger Capital Formation In India And China

India suffers from poor capital formation,which comes in its way of becoming a wealthy nation.Over centuries, both India and China have been depleted of its wealth by some of today's wealthy nations. It is time they got it back through the route of commerce.

In spite of having registered a handsome growth in all sectors, since independence. India still is classified as an emerging economy. So is the case with China also. Both countries are saddled with huge populations. China is number one and India is number two in population in the world. Together they have a population of nearly 2.5 billion plus.

The burden of such large population acts as a great dilutor for all achievements on a per capita basis. Today China has become the second largest economy in the world behind only USA. On a Purchasing Power Parity (PPP) basis  India is

number three in the world behind China and USA. Yet significant sections of population in both countries are poor and many are very poor.

In emerging countries capital is always in short supply and this makes it costly. On a comparative basis the cost of capital in India is more than 10-12% (interest rates) whereas in USA it is around 2-3% per annum. This indicates that capital is far more abundantly available in USA  and this is why it is cheaper than in India.

This brings us to the next question as to why capital formation in India is not taking place at a rate to make large number of Indians rich. For this we also need to go into history of India say from 1000 AD onwards. The nonstop attacks by foreigners and constant wars faced by the Indian sub-continent resulted in demolition of the existing economic structures. It was given some semblance of stability by the Mughals and then by the British. However the British took away lot of wealth from India and underpaid for its raw materials.Over such large period of 1000 years India gradually became poorer and its abilities at wealth generation were eroded considerably. Similar was the case with China, where different warlords would constantly be fighting and finally the British forced humiliating trade conditions which saw capital go out of China.

England conquered large parts of the world and transferred huge amounts of wealth from these colonies to itself. Similarly USA during second World War enriched itself considerably by supplying


armaments to European nations against gold payments. Other nations like France, Spain and Holland also enriched itself from their former colonies especially in Africa and Latin  America.

Today's advanced nations have sometime in their past, transferred huge amounts of capital and this helped to raise their standards of living considerably in a short period of time. They thus became capital abundant and with relatively less populations the per capita capital availability went up considerably in a short span of time.This capital accumulation  is seeing them through generations even after they have lost their colonies.

In cases of countries like Japan, Germany,S Korea etc. whose economies  were considerably damaged due to wars, they received liberal doses of capital help from USA under Marshal Plan. Thus capital came from an external source and it boosted their economies.

However in case of India and China capital was taken away and when both became free, there was no capital injection from any where.As a result even after six decades both countries are still short of capital which will make their common citizens as rich as their counterparts in advanced countries.

So what is the solution? It is not going to be easy to build capital reserves equivalent to say USA in short period of time.India has to invest heavily in education and create conditions which will encourage innovation. This has also to be supported by industry. India should have a good number of novel products which will sell in large numbers in world markets and thus earn wealth for the country. Also India must become attractive for Foreign Direct Investment (FDI) as this brings wealth at zero cost and along with it come latest technologies. China has already done this in a big way with very good results.

It is time that the wealth foreigners took away from our country is brought back through the same route of commerce.



Article Written By vks1000

Am a retired professional who is now into education of International Business and management topics. I enjoy writing and like reading on politics,economics,management and films. I take life as it comes and try to keep myself busy with a variety of activities.

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