Question

Explain five reasons for the low rate of capital formation in India.

Answer 1

Five reasons for 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 low level of real national and per capita income which limits to the motives of savings and investments.

b) Low rate of capital formation: Another cause of low rate of capital formation in under-developed countries in lack of demand of 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 lack of necessary supply of capital in under-developed countries, the process of capital formation is not boosted up.

d) Small size of market: Due to small size of 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 low rate of capital formation. Due to lack of banking and other credit institutions, poor countries have limited financial activities.