Q. With reference to physical capital in Indian economy, consider the following pairs :

How many of the above pairs are correctly matched?

• Only one
• Only two
• Only three
• All four

Answer: (b) Only two

• A farmer’s plough is considered fixed capital because it is a long-term asset used over many planting seasons.
• A computer is considered fixed capital because it is a durable good used in the production process over several years.
• Yarn used by the weaver is considered working capital because it is used up in the production process to make fabrics.
• Petrol is considered working capital because it is consumed in the production process and needs to be replenished regularly.

Fixed Capital

• Fixed capital refers to long-term investments that help businesses generate revenue over time.
• These assets are not consumed or sold within the operating cycle but are essential for business operations. Companies allocate fixed capital for acquiring physical assets, upgrading infrastructure, or implementing advanced technology that provides long-term value.
• Examples of Fixed Capital:
  • Manufacturing Equipment: A car manufacturing company investing in automated robotic arms and conveyor belts to improve efficiency and production speed.
  • Real Estate: A retail chain purchasing commercial properties for stores or warehouses to expand operations and ensure long-term stability.
  • Technology Infrastructure: A software company investing in high-performance servers, cloud computing systems, and cybersecurity measures to enhance operational efficiency.
  • Vehicles: A logistics company purchasing a fleet of delivery trucks to streamline supply chain management and reduce transportation costs.
• Key Characteristics of Fixed Capital:
  • Long-term Investment – Fixed capital is allocated for durable assets that contribute to business growth over several years.
  • Depreciation Applies – Fixed assets lose value over time due to wear and tear, requiring companies to account for depreciation in financial statements.
  • Not Easily Liquidated – These assets cannot be quickly converted into cash, making fixed capital a long-term commitment.

Working Capital

• Working capital is the capital needed for day-to-day business operations.
• It represents the difference between a company’s current assets (cash, accounts receivable, inventory) and current liabilities (short-term debt, accounts payable). A healthy working capital ensures smooth business operations, timely payments to vendors and employees, and sufficient cash flow to handle unexpected expenses.
• Examples of Working Capital:
  • Raw Materials: A clothing brand purchasing high-quality fabric and dyes to manufacture garments, ensuring continuous production.
  • Salaries: Monthly payroll payments to employees, ensuring workforce motivation and productivity.
  • Utility Bills: Covering electricity, internet, and water bills required for business operations, maintaining seamless workflow.
  • Short-term Debt Payments: Repaying business loans or credit lines that finance immediate operational needs and prevent financial bottlenecks.
• Key Characteristics of Working Capital:
  • Short-term in Nature – Working capital is used to cover immediate expenses and keep the business running efficiently.
  • Highly Liquid – Unlike fixed capital, working capital consists of assets that can be quickly converted into cash.
  • Directly Impacts Cash Flow – A positive working capital ensures smooth operations, while a deficit can lead to financial distress.

Fixed Capital vs. Working Capital