Question

State two reasons for low capital formation in a developing economy.

Discuss any two reasons for low capital formation in India.

Answer 1

The rate of capital formation in India is low as compared to developed countries. The main reasons for lower rate of capital formation in India are as follows:

1. People in India are poor and thus have low saving ability.
2. The banking facilities where necessary savings can be made are inadequate in India.
3. High level of taxes in India affects the saving and capital accumulation adversely.
4. Most people in India are in the habit of hoarding their savings in their houses. These savings are of no use.
5. Due to high inflation, people find themselves unable to save.