Question

Explain three causes of low capital formation in India.

Explain one cause for low capital formation in India.

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

Explain three causes of low capital formation in a developing economy.

Discuss any two reasons for low capital formation in India.

Answer 1

Reasons for the low rate of capital formation in India:

1. Lack of ability to save: Due to poverty, poor people are unable to save more than a negligible part of their earnings. Hence, low rate of savings leads to a low rate of capital formation in the Indian economy.
2. Lack of willingness to save: In certain parts of the country, there still exists a feudal economic system. Even people who have the ability to save money are not willing to save and spend all their income on day-to-day consumption.
3. Insufficient mobilisation of savings: People are not mobilising savings for capital formation. Most of their savings are kept in the form of gold and cash at home. These savings are not used productively due to poor banking knowledge and poor banking network in underdeveloped states.

Answer 2

“Formation of capital implies that society uses its present production not only for the satisfaction of its consumption but also uses a part of it on capital goods that are making machinery transport facilities or other production equipment.”

There are causes of low capital formation in a developing economy:

1. Low saving ability: The people in India have the desire to save and possess all those factors which motivate the “will to save’, like old age considerations, family affection, and social and political influence, but they have a lower per capita income. Lower per capita income leads to low savings, which leads to a lower rate of capital formation.
2. A habit of Hoarding: Most people have very little capacity to save and are more in the habit of hoarding their savings in their houses. Such savings are of no use as far as a capital formation is concerned, because these hoardings cannot be utilized for any productive purposes.
3. Inflation: Due to the inflationary trend, the prices of commodities have risen very high. Middle-class people find it very difficult to save any amount. Under such conditions of inflation, the majority of the middle class is contributing very little to capital formation.
4. Taxation Policy: The high level of taxes on property in India affects the savings and accumulation of capital adversely.
5. Lack of Infrastructure: Basic infrastructure like roads, communication, education, water, health, etc. is generally lacking in underdeveloped countries like India, which creates an improper atmosphere for capital formation.
6. Lack of Able and Skilled Entrepreneurs: Able and efficient entrepreneurs are not available in our country. Due to the absence of able entrepreneurs, the establishment of industries and expansion are quite limited.