Q. Despite being a high saving economy, capital formation may not result in significant increase in output due to (UPSC Prelims 2018)
Answer: high capital-output ratio
Notes: The correct answer is [D] high capital-output ratio. This question explores the efficiency of investment in an economy.

• Capital-Output Ratio (Statement D – Correct): This ratio measures the amount of capital required to produce one unit of output. A high capital-output ratio indicates that the economy is inefficient; it takes a large amount of investment (savings converted to capital) to produce a relatively small increase in total production. Even if savings are high, if the machinery, technology, or infrastructure is inefficient, the resulting output will remain low.
• Weak Administrative Machinery (Statement [A] – Incorrect): While poor administration can lead to delays and corruption, it is a secondary factor compared to the direct economic relationship between capital investment and physical output.
• Illiteracy (Statement [B] – Incorrect): Illiteracy affects the "quality" of labor (human capital), but in the context of "capital formation" (physical investment), the technical efficiency of the capital itself is the primary determinant of output.
• High Population Density (Statement [C] – Incorrect): A high population might reduce "per capita" income, but it does not necessarily prevent the "total output" from increasing if capital is used efficiently.

Economic Context:The relationship between investment and growth is often explained by the Harrod-Domar Model. It suggests that the growth rate of an economy (g) is determined by the savings rate (s) divided by the incremental capital-output ratio (v):g = s/v. Therefore, even if s (savings) is high, a high v (capital-output ratio) will lead to a low g (growth/output).