Savings and investments are two parameters critical for a country’s economic growth and development. The role of banks and financial institutions is to channelize the savings largely made by the households as investment by private and public firms that would help the nation’s physical capital to grow.

Physical savings include land, buildings, gold etc. whereas financial savings include term deposits in banks, saving in post offices, provident funds, buying stocks and bonds of companies.

Gross savings formation

It is calculated as gross national income less total consumption, plus net transfers. The savings in India and other countries is calculated as the difference between income and consumption, expressed as percent of GDP.

Gross capital formation 

A high number is good for long-term economic growth as current investment leads to greater future production. It consists of outlays on additions to the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include land improvements (fences, ditches, drains, and so on); plant, machinery, and equipment purchases; and the construction of roads, railways, and the like, including schools, offices, hospitals, private residential dwellings, and commercial and industrial buildings.

Investment is highly cyclical. Firms are more likely to invest if they are operating at a high level of capacity, if they expect demand to remain high and if interest rates are low. When these conditions are reversed, businesses are likely to cut back on fixed investments. However, investment projects have long lead times and a cut in new investment does not automatically imply a fall in total investment spending.

Inventories

Inventories are stocks of goods held by firms to meet temporary or unexpected fluctuations in production or sales and work in progress.

The data is generally collected in value terms and deflated into volume terms using assumptions about accounting practises, stockholding patterns and price changes.

In general the level of inventories rises as national income increases, but there are wide fluctuations which reflects the economic cycle. When demand increases unexpectedly, the first sign is a decrease in inventories before manufacturers can respond by increasing output. Alternatively, if an increase in demand is expected, inventories may be built up in advance ready to meet the extra demand.

Either way, productions can increase faster than demand for short periods during restocking or stock building. Inventories accumulate when demand turns down unexpectedly, production might fall faster than sales as excess stocks are consumed.