The sluggish growth of private Gross Fixed Capital Formation (GFCF) as a percentage of Gross Domestic Product (GDP) at current prices has been a significant challenge for the Indian economy.
What are Capital Formation (CF) and Gross Fixed Capital Formation (GFCF)?Â
- Capital formation: It refers to the process by which resources are invested in assets like plants, equipment, machinery, etc. as well as in human capital through education, health, skill development, etc.Â
- Gross Capital Formation (GCF): It refers to the growth in the size of fixed capital in an economy. It includesÂ
- Gross Fixed Capital Formation (GFCF): Like land improvements; plant, machinery, and equipment purchases; and the construction of roads, etc.Â
- Change in stock (CIS) of raw materials, semi-finished and finished goods: Stocks of goods held by firms to meet temporary fluctuations in production or sales.Â
- Net acquisition of valuables: like gold, gems, ornaments and precious stones etc.Â
- Net capital formation (NCF) is distinguished from GCF in that NCF includes depreciation, obsolescence and accidental damage to fixed capital.
Capital goods: All goods produced for use in future productive processes. This includes machinery, equipment, plants, other buildings and structures, and producers’ stocks of raw materials etc. These are called capital goods.
GFCF includes:
- Structure equipment such as airport, roads etc.
- Addition to livestock used repeatedly (such as dairy cattle, sheep etc.)
- Addition to cultivated crops harvested repeatedly.
- Major repair and maintenance that prolong economic life of assets.
- Intangible assets like software or artistic originals
GFCF does not include:
- Transaction intended as intermediate consumption.
- Machinery and equipment intended for household final consumption expenditure.
- Losses due to natural disaster (flooding, forest fire, etc.)
