UPSC Prelims 2018 Q50: Indian Economy – National Income & Economic Growth
- (a) weak administrative machinery
- (b) illiteracy
- (c) high population density
- (d) high capital - output ratio
Answer: (d) high capital - output ratio
Explanation
Capital Formation and Output - Role of Capital-Output Ratio (COR)
Capital-Output Ratio (COR) = Capital needed to produce one unit of output. High COR means more capital investment is required to generate the same output, so a given level of savings/investment yields less output growth.
| Option | Explains low output growth despite high savings? | Detail |
|---|---|---|
| (a) Weak administrative machinery | PARTIAL | Contributory but indirect - weak administration slows project execution, but does not directly determine capital productivity. The Harrod-Domar link runs through the technical capital-output ratio, not administrative efficiency. |
| (b) Illiteracy | PARTIAL | A human capital concern that lowers labour productivity, but not the direct capital-to-output link. It affects growth over the long run rather than the immediate output yield of a rupee of investment. |
| (c) High population density | NO | A distributive/per-capita issue - a large population dilutes per-capita income but does not, by itself, raise the capital-output ratio. Growth per unit of capital depends on technology, sectoral mix and utilisation. |
| (d) High capital-output ratio | YES | Direct answer. Growth = Savings rate / COR (Harrod-Domar). If COR is high, capital formation yields less output growth - even a high saving economy underperforms. |
Answer: (d) High capital-output ratio.
Why each option is right or wrong
- (a) Incorrect. Administrative weaknesses cause delays and inefficiency but the direct arithmetic link between savings and output growth is COR.
- (b) Incorrect. Illiteracy affects labour productivity but the specific link between capital and output is COR.
- (c) Incorrect. Population density affects per-capita measures, not the productivity of capital per se.
- (d) CORRECT. Harrod-Domar model: Growth rate = Savings rate / COR. A high COR means capital investment translates into less output growth.
Key point
Harrod-Domar growth equation: g = s / v (s = savings rate, v = capital-output ratio). High COR = low return on investment = slow growth despite high savings. India's COR historically 4-5.
Remember
A high capital-output ratio means that a lot of capital investment is required to produce each additional unit of output. Under the Harrod-Domar model, growth rate equals savings rate divided by capital-output ratio - so even a high-saving economy can experience slow output growth if its COR is high. India historically had a high COR (~4-5), one reason for its lower-than-expected growth despite decent savings.
Common mistakes
- Confusing COR (capital needed per unit output) with capital-labour ratio (capital per worker) - different metrics.
- Assuming savings automatically produce growth - it also depends on capital productivity (inverse of COR).
- Missing India's high COR problem historically - one reason for slow growth despite decent savings rates.
Exam tip
Harrod-Domar shorthand: g = s/v. To raise growth, either increase savings (s) OR reduce COR (v) - i.e., invest in high-productivity sectors, improve efficiency, better project selection.
Sources
- NCERT Class 12 - Introductory Macroeconomics
- Roy F. Harrod — "An Essay in Dynamic Theory", The Economic Journal, vol. 49 (1939)
- Evsey D. Domar — "Capital Expansion, Rate of Growth, and Employment", Econometrica, vol. 14 (1946)