Use app×
Join Bloom Tuition
One on One Online Tuition
JEE MAIN 2025 Foundation Course
NEET 2025 Foundation Course
CLASS 12 FOUNDATION COURSE
CLASS 10 FOUNDATION COURSE
CLASS 9 FOUNDATION COURSE
CLASS 8 FOUNDATION COURSE
0 votes
1.2k views
in Economics by (49.5k points)
closed by

Define capital formation. Explain any four causes of low capital formation in a developing economy.

1 Answer

+1 vote
by (46.2k points)
selected by
 
Best answer

Capital formation means the creation of capital. A change in the stock of capital in any economy during any particular time period is called capital formation. 

Four causes of low capital formation in a developing economy:

1. Lack of Ability to Save: The chief cause of the low rate of capital formation is the low rate of savings. The low rate of saving, in turn, is explained by a number of factors. Among these, the inability to save is the most important. Because of the problem of poverty, the vast majority of the people of India are not in a position to save more than a negligible part of their incomes. 

2. Lack of Willingness to Save: It is true that a significant part of the Indian population does not have the willingness to save. Even today there are parts of the Indian economy where a feudal types of economic system prevails. Under this system even those who have the ability to save (for instance, the landlords) spend most of their incomes on consumption or on conspicuous consumption.

3. Insufficient Opportunity to Save: In some cases people in India also do not have sufficient opportunity to save. Inadequate expansion of the public sector banks and other financial institutions in the rural areas, lack of faith of the people upon the indigenous bankers, lack of knowledge of the people regarding the secured savings opportunities, etc. are borne of the reasons for such insufficient savings opportunity in India. 

4. Inadequate Mobilization of Savings: India also suffers from the problem of inadequate mobilization of savings. The savings that are made by the people are not always used for capital formation. People often keep their savings in the form of cash and gold at home. These are not productively used. This is partly due to inadequate development of the banking habits of the people and partly due to the underdeveloped state of the banking and financial network particularly in the rural areas.

Welcome to Sarthaks eConnect: A unique platform where students can interact with teachers/experts/students to get solutions to their queries. Students (upto class 10+2) preparing for All Government Exams, CBSE Board Exam, ICSE Board Exam, State Board Exam, JEE (Mains+Advance) and NEET can ask questions from any subject and get quick answers by subject teachers/ experts/mentors/students.

Categories

...