Capital investment decisions

In India the use of formal methods for appraising investment pro posals is of recent origin. It is only in the late sixties that the use of such methods gained acceptance in the practising world. There were two factors that acted as catalytic agents in the increasing use of formal approaches by the practising world. The first was the recession that the Indian economy faced in the mid-sixties. The second was the emergence of the financial institutions as the major suppliers of credit for financing capital expenditures.

Speaking about the change in the entrepreneur's psychology brought about by the recession, Sir James Lindsay observes: 'Over the 15 years since 1951, with aggregate demand keeping always ahead of aggregate supply, many industrial projects were taken up with little thought to costs, market potential, or even to availability of raw materials. Inadequately investigated and inefficiently executed, these projects were often running into trouble. But none of these mattered too much. An advancing economy covered most of the mistakes soon enough. The phase of pell-mell growth is now a thing of the past. The whole industrial environment-capital, credit, market prospects, and last but not least, overseas interest in India