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Q92 (IAS/1995) Economy › Growth, Development, Poverty & Employment › Economic growth theories Answer Verified

The main reason for low growth rate in India, in spite of high rate of savings and capital formation is

Result
Your answer: —  ·  Correct: D
Explanation

The main reason is a high capital‑output ratio (high ICOR). A high capital/output ratio means more capital is needed to generate one unit of output, so even with large savings and capital formation growth remains sluggish; an economy with a high capital‑output ratio will show low growth despite high investment [1]. The ICOR framework formalises this: required investment share = ICOR × desired growth rate, so a higher ICOR raises the needed investment for any target growth, constraining actual growth performance [2]. Moreover, domestic savings alone do not guarantee high growth without efficiency and complementary factors (infrastructure, technology, human capital), reinforcing that high ICOR can be the binding constraint [3].

Sources

  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
  2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
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