Question

Discuss the causes of the low rate of capital formation in India.

Answer 1

Causes of the low rate of capital formation in India are:
a) Low level of national income: The root cause of capital deficiency in under-developed countries is the low level of real national and per capita income which limits the motives of savings and investments.

b) Low rate of capital formation: Another cause of the low rate of capital formation in under-developed countries in the lack of demand for capital.

c) Lack of supply of capital: Like demand of capital, lack of supply of capital is responsible for low capital formation. However, due to a lack of necessary supply of capital in under-developed countries, the process of capital formation is not boosted up.

d) The small size of the market: Due to the small size of the domestic market, investment is not encouraged in poor countries. It does not expand the work of economic development and modern machines cannot be used as extra quantity produced has no market access.

e) Immobility of savings: Immobility of saving also causes a low rate of capital formation. Due to lack of banking and other credit institutions, poor countries have limited financial activities.