CHAPTER 26 CAPITAL STOCK AND CONSUMPTION OF FIXED CAPITAL Introduction 26.1 Capital stock of a country is broadly referred working out the estimates are discussed in to as that part of national wealth which is the following paragraphs. reproducible; it consists of all resources which contribute to the production of goods Concepts of capital stock and and services. The changing relationship consumption of fixed capital between output and capital stock is an 26.3 The guidelines issued by the United Nations important aspect of the study of changes in Statistical Office (UNSO) in 1977 defined the productive efficiency in the various industries national wealth as 'total of various kinds of of a developing economy. Firm estimates of net tangible and intangible non-financial capital stock enhance the ability to associate assets of residents, plus financial claims on capital formation with economic growth and non-residents less financial liabilities to to project future production possibilities, non-residents'. Tangible assets have been thereby leading to formulation of policies further classified into (i) reproducible tangible designed to achieve the desired economic assets (i.e., capital stock) comprising fixed objectives. These also provide a firm basis for assets and stocks (i.e., inventories) and (ii) estimating capital consumption needed to non-reproducible tangible assets comprising arrive at the estimates of various land, timber tracts and forests, sub-soil macro-economic aggregates on net basis. assets & extraction sites, fisheries and historical monuments. The reproducible fixed 26.2 Present estimates of capital Stock are based tangible assets (i.e., fixed assets used for the on the recommendations of the Advisory production of goods & services) commonly Committee on National Accounts, working known as fixed capital stock comprise assets Group on saving, set up by the Govt. of India in the form of residential buildings, in May 1981 under the chairmanship of Prof. non-residential buildings, dams, irrigation & K.N. Raj, and Expert Group on Saving & flood control projects, other construction Capital Formation appointed in 1995 under works, transport equipment, machinery and the chairmanship of Prof. Raja J. Chelliah. In equipment, breeding stock, draught animals, pursuance of their recommendations, studies dairy cattle and the like, and capital on the construction of life-table of assets and expenditure on land improvement, estimation of Net Fixed Capital Stock (NFCS) plantations, orchard developments and using Perpetual Inventory method (PIM) were afforestation. The fixed assets include initiated in the National Accounts Division uncompleted construction assets also. The (NAD). The NAD concentrated its efforts to stocks include the inventories of goods prepare firm estimates of capital stock as on producing industries, trade, other industries 31 March, 1981 so that the corresponding and stocks of government services. These estimates of Consumption of Fixed Capital comprise stocks of finished and semi-finished (CFC) based on these estimates could be goods and young livestock except breeding prepared for use in the series with base stock, dairy cattle and the like which form 1980-81 and also for subsequent series. To part of the fixed assets. However, the begin with, the estimates of NFCS were durable goods in the hands of households attempted by type of institution, i.e., public which are not used for further production of sector, private corporate sector and goods and services such as automobiles, household sector. These estimates were, refrigerators, washing machines, furniture, however, deficient in as much as the private sewing machines, etc., as well as fixed assets non-profit institutions were not covered for mainly meant for defence purposes such as want of data. The NAD in its subsequent warships, fighter aircrafts and war materials exercise constructed life-table of assets, do not form part of the fixed capital stock as separately for the public and private sectors these are assumed to have been consumed and prepared the estimates of NFCS by as soon as they are purchased. However, the industry of use. It may be useful to mention construction works undertaken by the that the estimates prepared by NAD as early households including buildings and capital as in 1981 were compiled by carrying forward expenditure on residential dwellings for the bench mark estimates of NFCS at the end defence personnel, border roads, ordnance of 1949-50, available in the paper entitled factories etc., form part of the fixed capital "An Estimate of the Reproducible Tangible stock. The details of various types of assets Wealth of India", Review of Income and which constitute reproducible and Wealth, Series VIII. by M. Mukherjee and non-reproducible wealth are given in N.S.R. Sastry (1959). The conceptual details Appendix 26.1. and the method of estimation used in National Accounts Statistics-Sources & Methods, 2007 Î 220 CHAPTER 26 26.4 As per SNA 1993 (Para 6.199) gross capital Appropriate price indices are to be stock is the value of all fixed assets still in identified and applied to the estimates of use at the end of an accounting period, at the GFCF to convert them to constant prices; actual or estimated current purchasers’ prices for new assets of same type, irrespective of The estimates of GFCF at constant prices age of the assets. The net or written-down are then aggregated for 'L' years to obtain values of all the fixed assets is equal to the the estimates of GFCS at constant prices at actual or estimated current purchaser’s price the end of the year; of new assets of same type less the cumulative values of consumption of fixed The GFCS of an asset is then divided by 'L' capital accrue up to that point in time. CFC is to obtain the estimate of capital the cost of production. It may be defined in consumption at constant prices; general terms as the decline, during the course of the accounting period, in the The price indices are used to convert the current value of the stock of fixed assets estimates of capital consumption to current owned and used by a producer as a result of prices; physical deterioration, normal obsolescence or normal accidental damage. It excludes the The estimates of NFCS (i.e. GFCS for the value of fixed assets destroyed by acts of war year 'Y' minus accrued capital consumption or exceptional events such as major natural during 'L' years) for the year 'Y' are first disasters which occur very infrequently. Its calculated at constant prices and then value may deviate considerably from converted to current prices using depreciation as recorded in business appropriate price indicators; and accounts. Thus CFC, in short, can be defined as that part of gross product which is Having arrived at the capital stock at the required to replace fixed capital used up in end of the year 'Y', it is maintained the process of production during the period of year-by-year by the same procedure as account. This flow is based on the concept of outlined above. economic life time of the individual assets. 26.7 The above steps obviously involve collection, 26.5 CFC is calculated for all fixed assets i.e. compilation and categorization of tangible and intangible fixed assets owned by considerable amount of data on various types producers except the following cases: of assets and their prices for estimation of Valuables (precious metals, precious stones fixed capital formation and CFC separately for etc.). each class of assets and working out the Depletion or degradation of the non- same at constant prices under certain produced assets such as land, mineral, etc. assumptions about their average life. Livestock. Assumed life of assets Perpetual inventory method 26.8 As mentioned earlier, PIM necessitates the 26.6 SNA 1993 recommends that the estimates of availability of reliable estimates of average CFC should be compiled in conjunction with age of various types of fixed assets in the estimates of capital stock. These can be different industries. However, no life table of built up from the data on gross fixed capital fixed assets is currently available in India. formation in the past combined with Based on extensive discussions held by CSO estimates of the rate at which the efficiency with the concerned agencies like Ministry of of fixed assets declined over their service Industry; Railway Board; Bureau of Industrial lives. This method of estimation of capital Costs & Prices; National Productivity Council; stock and changes in capital stock overtime is Departments of Posts and known as the perpetual inventory method Tele-communications; Central Road Research (PIM). Estimates of CFC are obtained as a by Institute; Central Water Commission; product of the PIM. The various steps Ministry of Shipping, Road Transport and involved in PIM are as follows: Highways, Indian Roads Congress etc. the Assumptions are made about the average requisite information on average age of length of life of each class of assets various assets have been obtained. Data on separately distinguished; average life of machine tools in the reports of Censuses of Machine Tools (1968 & 1986) GFCF is then estimated for each class of conducted by Central Machine Tools Institute, assets for 'L' years prior to 'Y', where 'L' is Bangalore, are also examined. The average the average life of an asset and 'Y' is the life of assets on the basis of depreciation year for which capital consumption and provision under Income-Tax Rules as well as gross stock are to be estimated; in the Companies (Amendment) Act, 1988 have also been considered. On the basis of National Accounts Statistics-Sources & Methods, 2007 Î 221 CHAPTER 26 the above materials as well as discussions non-departmental commercial undertakings held with concerned experts, the average life (NDCUs). For each of the sub-sectors for each type of assets has been estimated.