Despite being a high saving economy, capital formation may not result

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Despite being a high saving economy, capital formation may not result in significant increase in output due to

weak administrative machinery
illiteracy
high population density
high capital-output ratio
This question was previously asked in
UPSC IAS – 2018
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The correct answer is D) high capital-output ratio.
The capital-output ratio (COR) is an economic metric that describes the relationship between the amount of capital invested in an economy and the amount of output it produces. A high COR indicates that a large amount of capital is required to produce a given increase in output.
In a high-saving economy, a significant portion of national income is saved and potentially converted into investment (capital formation). However, if the economy suffers from a high capital-output ratio, the efficiency of converting this capital investment into actual output growth is low. This can happen due to various reasons like inefficient investment allocation, long gestation periods of projects, poor infrastructure, technological backwardness, or structural rigidities, all of which make each unit of capital less productive in generating output. Therefore, high savings and capital formation might not translate into a proportionally high increase in output if the capital-output ratio is high.

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