Question map
Despite being a high saving economy, capital formation may not result in significant increase in output due to
Explanation
The capital-output ratio indicates the amount of capital required for producing one unit of output, and a low capital-output ratio is always[1] desired in an economy. An economy with high capital-output ratio will have a sluggish economic growth in spite of having high level of savings and investments.[1] This directly answers the question: even if an economy has high savings (which fund capital formation), a high capital-output ratio means that large amounts of capital are needed to produce relatively little output, making the conversion of savings into economic growth inefficient.
While factors like weak administration, illiteracy, and skilled labor quality do affect economic outcomes, domestic savings rate cannot solely push economic growth, and many enabling factors are also responsible such as infrastructure, ease of doing business, skilled labour, technology, tax reforms, global economic scenario, FDI inflows, etc.[2] However, the capital-output ratio is the most direct measure of the efficiency with which capital translates into output. A high capital-output ratio specifically captures the inefficiency in converting capital formation into output growth, making option D the precise answer to why high savings may not yield significant output increases.
Sources- [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
- [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
PROVENANCE & STUDY PATTERN
Full viewThis is a classic 'Definition Application' question. It doesn't ask 'What is ICOR?', but rather describes the *symptom* of high ICOR (high savings, low growth) and asks you to identify the diagnosis. Standard books (Singh/Singhania) cover this in Chapter 1 explicitly.
This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.
- Statement 1: Can weak administrative machinery prevent capital formation from resulting in a significant increase in output in a high-saving economy?
- Statement 2: Can widespread illiteracy prevent capital formation from resulting in a significant increase in output in a high-saving economy?
- Statement 3: Can high population density prevent capital formation from resulting in a significant increase in output in a high-saving economy?
- Statement 4: Can a high capitalāoutput ratio prevent capital formation from resulting in a significant increase in output in a high-saving economy?
- Directly states that ICOR (incremental capitalāoutput ratio) depends on governance and related factors ā linking administrative quality to capital efficiency.
- Implies weak governance raises ICOR (lower output per unit of capital), so capital formation may not translate into higher output.
- Explicitly says savings alone cannot push growth; lists enabling factors (infrastructure, ease of doing business, skilled labour, technology) that determine whether investment yields output.
- These enabling factors are shaped by administrative capacity, so weak administration can block the translation of capital into output.
- States that a high capitalāoutput ratio leads to sluggish growth despite high savings and investments ā showing that inefficient capital use can prevent output gains.
- Provides the mechanical link: capital formation does not guarantee output increase if capital is not productive.
- Explicitly links incremental capital-output ratio (ICOR) to quality of labour, which depends on education/skill levels.
- Gives the mechanism: unskilled (illiterate) labour cannot use machines properly, reducing output even when capital is available.
- States that savings provide capital but are not sufficient alone for growth.
- Lists skilled labour and other enabling factors (infrastructure, technology, governance) as necessary for savings to translate into higher output.
- Explains that a high capital-output ratio (low efficiency of capital) yields sluggish growth despite high savings/investment.
- Implies that factors (like poor labour quality) that raise the capital-output ratio can block output gains from capital formation.
- Explicitly states high population density can have negative effects (congestion, crime) that reduce the efficiency of agglomeration economies.
- Reduced agglomeration efficiency implies that gains from capital and scale (e.g., from capital formation) can be limited.
- Notes that population increases (from births or immigration) interact with savings behavior.
- Specifically, some types of population increases can diminish savings and thus reduce the net contribution to the country's pool of savings/capital, weakening the potential impact of capital formation on output.
Explicitly lists 'high population density' among reasons why, despite high saving, capital formation may not raise output.
A student could combine this with basic demographic data (population per km2, urban/rural split) to check whether regions with higher density show weaker output gains from investment.
Defines capitalāoutput ratio (higher ratio means more capital required per unit output) and links a high ratio to sluggish growth despite high savings/investment.
One could infer that if high density raises the effective capital/output ratio (via overcrowding, low land per worker), then capital formation might yield smaller output increases; testable by comparing ICOR across areas with different densities.
States ICOR depends on governance, quality of labour (education/skill), and technology; poor skill raises ICOR even with adequate capital.
A student could examine whether high-density areas have lower per-worker skills or worse governance indicators and thus higher ICOR, weakening the output response to capital.
Notes that saving rate alone cannot drive growth; enabling factors like infrastructure, skilled labour, and governance matter for translating savings into growth.
Combine this rule with spatial data: check if high-density regions suffer from infrastructure bottlenecks or skill deficits that blunt the effect of capital formation.
Explains the chain: higher savings ā more production of capital goods ā investment ā future output, but implicitly relies on effective conversion of capital into output.
Use this chain to frame an empirical check: in high-density areas, is the conversion rate from savingsāinvestmentāoutput lower than elsewhere?
- Explicitly states that a high capitalāoutput ratio leads to sluggish growth despite high savings and investment.
- Directly links high K/O ratio with poor translation of capital formation into output gains.
- Defines capitalāoutput ratio as amount of capital required per unit of output and notes higher ratio implies lower capital efficiency.
- Implied consequence: if capital is less efficient (high K/O), additional capital yields smaller output increases.
- Explains ICOR depends on factors (governance, labour skill, technology) and that poor skill raises ICOR and reduces output from given investment.
- Provides mechanism by which high K/O can persist and blunt the impact of capital formation.
- [THE VERDICT]: Sitter. Directly solvable from the 'National Income' or 'Growth Models' chapter of any standard economy primer (Vivek Singh/Nitin Singhania).
- [THE CONCEPTUAL TRIGGER]: The Harrod-Domar Growth Model logic: Growth Rate = (Savings Rate / Capital-Output Ratio). If Savings are high but Growth is low, the denominator (COR) must be high.
- [THE HORIZONTAL EXPANSION]: Memorize the siblings: Incremental Capital Output Ratio (ICOR) vs Average COR; Capital Productivity (Inverse of COR); Gross Fixed Capital Formation (GFCF) vs Gross Capital Formation (GCF); and the 'Hindu Rate of Growth' era (high ICOR).
- [THE STRATEGIC METACOGNITION]: Distinguish between 'Causes' and 'Mechanisms'. Illiteracy (B) and Weak Administration (A) are *causes* of a High Capital-Output Ratio. But the *economic mechanism* that mathematically prevents output growth is the Ratio itself. Always choose the proximate technical term over the distant root cause in Economy MCQs.
ICOR captures how much capital is needed for extra output; references tie ICOR to governance quality, showing administration affects capital productivity.
High-yield for UPSC: explains why high savings may not produce growth; links macro indicators (ICOR) with public policy (governance). Useful across questions on investment efficiency, growth models, and policy prescriptions. Learn definitions, determinants (governance, skills, technology), and policy levers to reduce ICOR.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 21
Evidence emphasizes that savings alone are insufficient and that infrastructure, administrative ease, and human capital determine whether investment raises output.
Essential for answering why capital formation may fail to raise output; connects macro growth to governance, labour policy, and public investmentācommon UPSC themes. Prepares aspirants to argue policy mixes rather than simple savingsāgrowth narratives.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
- Exploring Society:India and Beyond ,Social Science, Class VIII . NCERT(Revised ed 2025) > Chapter 7: Factors of Production > How are the Factors Connected? > p. 178
Capitalāoutput ratio measures capital required per unit of output; a high ratio implies sluggish growth despite high investment, directly relevant to the statement.
Core concept for questions on investment efficiency and growth performance. Helps frame arguments on technical and administrative causes of low output despite high savings, and suggests metrics to evaluate policy effectiveness.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 21
ICOR measures how much capital is needed per unit of output; a high ICOR explains why investment may not raise output in spite of high savings.
High-yield for UPSC: ICOR connects savings/investment to growth performance and helps analyze efficiency of capital use; it links macro growth models to policy (investment quality, technology, labour). Master via practice calculations and by relating ICOR to real-world constraints (infrastructure, skills).
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 21
Education and skills determine labour's ability to use capital effectively; widespread illiteracy reduces productivity and raises ICOR.
Crucial for essays/GS answers on growth and development: explains why investment alone fails and motivates policies (education, skill development, labour reforms). Connects to topics like poverty, employment, and industrial policyāuse empirical examples and policy measures in answers.
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
Savings produce capital goods, but infrastructure, governance, technology and skilled labour are required for that capital to raise output.
Useful for framing balanced answers: prevents simplistic 'more savings = more growth' claims. Helps in questions on investment policy, constraints to growth, and reform priorities. Use to critique growth strategies and propose complementary policies.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > The household sector now decides to spend only Rs. 70 for its consumption purpose and save Rs. 30 out of the total Rs. 100 earned. > p. 11
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > The household sector now decides to spend only Rs. 70 for its consumption purpose and save Rs. 30 out of the total Rs. 100 earned. > p. 12
ICOR measures how much capital is required per unit of output and directly explains when capital formation may not yield proportional output gains.
High-yield concept for UPSC economics: explains why high investment/saving does not automatically translate into growth (inefficient capital). Connects to productivity, investment efficiency and growth modelling; useful in questions on investment effectiveness, growth constraints, and policy prioritisation. Master via definition, determinants, and examples of high vs low ICOR.
- Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 21
- Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
The 'Paradox of Thrift' (Keynesian concept): While high savings are good for long-term capital formation (Classical view), an increase in autonomous saving can lead to a decrease in aggregate demand and thus a decrease in gross output in the short run. UPSC may flip the question to ask about demand-side constraints next.
The 'Umbrella vs. Component' Rule. Options A (Administration), B (Illiteracy), and C (Population) are all *contributing factors* that lead to inefficiency. Option D (High Capital-Output Ratio) is the *measure* of that inefficiency itself. When three options are vague causes and one is the precise technical measurement of the phenomenon described, pick the measurement.
Mains GS-3 (Investment Models): Use this concept to explain 'Jobless Growth' or infrastructure delays. When writing answers on why India needs 'Ease of Doing Business', mention that bureaucratic hurdles increase the ICOR, making Indian industry uncompetitive despite high domestic savings.