Consider the following statements with respect to the “Incremental capital output ratio (ICOR)”:
1. A lower ICOR reflects a higher marginal efficiency of capital.
2. It is a key determinant of the desired investment rate.
3. India’s ICOR is higher than most of the developed countries.
Which of the adobe statements is/are correct?
(a). 1 and 2 only
(b). 2 and 3 only
(c). 2 only
(d). 1,2 and 3
Explanation Statement 1 is correct: ICOR indicates the amount of capital required to produce an additional unit of output. A lower ICOR signifies that less capital is needed for additional output, implying higher efficiency of capital use.
Statement 2 is correct: ICOR helps in assessing the investment needed to achieve a specific growth target. For instance, to attain a 8% growth rate with an ICOR of 5, an investment rate of 40% of GDP is required.
Statement 3 is correct: Historically India's ICOR has been relatively high, indicating lower capital efficiency compared to developed nations. In most developed countries the ICOR is in the neighbourhood of 3. Over the period 2012-19, the ICOR in India averaged 5.0, but in the last three years, it eased to 4.0. As these efficiency gains rise, the workforce gathers skills and the economic structure acquires sophistication and technological progress, it is possible to envisage the ICOR in the range of 3.5 to 4.
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