Question map
Not attempted Correct Incorrect ā˜… Bookmarked
Loadingā€¦
Q50 (IAS/2018) Economy ā€ŗ Growth, Development, Poverty & Employment ā€ŗ Economic growth theories Official Key

Despite being a high saving economy, capital formation may not result in significant increase in output due to

Result
Your answer: ā€”  Ā·  Correct: D
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. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
82%
got it right
PROVENANCE & STUDY PATTERN
Guest preview
Donā€™t just practise ā€“ reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Despite being a high saving economy, capital formation may not result in significant increase in output due to [A] weak administrative mā€¦
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 7.5/10 Ā· 2.5/10
You're seeing a guest preview. The Verdict and first statement analysis are open. Login with Google to unlock all tabs.

This 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.

How this question is built

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?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 1: Fundamentals of Macro Economy > 1.13 Productivity, Capital Output Ratio and ICOR > p. 22
Presence: 5/5
ā€œThe incremental capital output ratio is a catch-all expression. It depends upon a multiple number of factors such as governance, quality of labour which again depends on education and skill development levels, and technology etc. For example, if the labour is not skilled and he is not able to use the machines properly then our output produced will be less and our ICOR will increase even if there is no problem with the machine/capital.ā€
Why this source?
  • Directly states that ICOR (incremental capitalā€‘output 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.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > SAVINGS RATE VERSUS ECONOMIC GROWTH > p. 581
Presence: 4/5
ā€œSavings rate does play an important role in capital formation in an economy and certainly provides necessary investments for economic growth. In simple terms, savings in banks, PPF, post offices, etc. are channelised in the form of capital for businesses to invest in the economy. India's GDP growth in the early decades after independence was largely funded by domestic savings. Many experts have argued that fall in economic growth in recent years can be attributed to declining savings rate. However, it is important to note that domestic savings rate cannot solely push economic growth. Many enabling factors are also responsible such as infrastructure, ease of doing business, skilled labour, technology, tax reforms, global economic scenario, FDI inflows, etc.ā€
Why this source?
  • 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.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 1: National Income > Capital-Output ratio > p. 13
Presence: 4/5
ā€œIt indicates the amount of capital required for producing one unit of output. In an economy, low capital-output ratio is always desired. An economy with high capital-output ratio will have a sluggish economic growth in spite of having high level of savings and investments.ā€
Why this source?
  • States that a high capitalā€‘output 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.
Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

Statement analysis

This statement analysis shows book citations, web sources and indirect clues. The first statement (S1) is open for preview.

Login with Google to unlock all statements.

How to study

This tab shows concrete study steps: what to underline in books, how to map current affairs, and how to prepare for similar questions.

Login with Google to unlock study guidance.

Micro-concepts

Discover the small, exam-centric ideas hidden in this question and where they appear in your books and notes.

Login with Google to unlock micro-concepts.

The Vault

Access hidden traps, elimination shortcuts, and Mains connections that give you an edge on every question.

Login with Google to unlock The Vault.

āœ“ Thank you! We'll review this.

SIMILAR QUESTIONS

IAS Ā· 1995 Ā· Q92 Relevance score: -0.03

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

IAS Ā· 2013 Ā· Q57 Relevance score: -4.74

A rise in general level of prices may be caused by 1. An increase in the money supply 2. A decrease in the aggregate level of output 3. An increase in the effective demand Select the correct answer using the codes given below.

IAS Ā· 2013 Ā· Q67 Relevance score: -5.45

Economic growth in country X will necessarily have to occur if