Types of Investment Models - Indian Economy Notes

Investment Models define the methods by which funds are invested in specific assets in order to generate income. Investments are one of the driving factors of any economy in terms of its growth and overall well-being. Therefore different types of investment models are explored in the economy to maximize the economic and social returns on investment. It is a crucial topic in the Economy syllabus for the UPSC Examination. The article below briefs the Types of Investment Models followed by detailed explanations.

What is an Investment?

• Simply put, investment is the exchange of money for a profit-generating asset.
• The same profit is invested in other assets with the same profit.
• In terms of the country's economic well-being, investment is critical because it contributes to growth and development.
• When the government invests in businesses, agriculture, manufacturing, and other supporting industries, it can create jobs for its citizens.
• A strong investment scenario, on the other hand, occurs when the government and the private sector work together to create investment opportunities.

Need for an Investment

• Investments are one of the driving factors of any economy as far as its growth and the well being of the country is concerned.
• It is essential to invest in creating and developing assets and infrastructure so that there are more jobs and increased income in the country.
• It expands the scope of large-scale manufacturing. Large-scale production units that require a lot of money can be set up in the country.
• It enables the country to employ contemporary manufacturing practices which aids in the development of scientific and technological innovations.
• It provides the essential production tools and equipment.
• It generates job opportunities. New factories, irrigation projects, and other initiatives are all on the horizon.
• It has the potential to lead to industrialization.

Domestic Investment Models

Domestic investment models can take the form of public or private-public partnerships.

Public Investment Model.

• In a Public Investment Model, the government invests in specific goods and services through the central or state government, or with the help of the public sector, using revenue generated by it.

Private Investment Model

• In India, there are times when the earnings from the public sector are insufficient to cover certain shortfalls that may occur.
• As a result, the government invites private investors to participate in some of its projects.
• This investment can be either domestic or international.
• Foreign direct investment (FDI) can help to improve current infrastructure while also creating jobs. When it comes to external investment, this model is one of the most popular.

Public Private Participation Investment Model (PPP)

• A public-private partnership (PPP, 3P, or P3) is a long-term collaborative arrangement between two or more public and private sectors.
• The Government of India has always believed in Public-Private Partnerships as far as investing in the growth of the country is concerned.
• In India, projects based on the PPP model have been implemented in the following sectors:
  • Health Sector
  • Power Sector
  • Railways
  • Urban Housing

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Foreign Investment Models

• It could be entirely foreign or a combination of foreign and domestic.

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Foreign Direct Investment (FDI)

• A foreign direct investment (FDI) is a financial investment made by a company or individual from one country into a company in another country.
• It differs from portfolio investment, which is when a company simply invests its money in assets in other countries.
• Foreign companies involved in FDI are directly involved in the day-to-day operations of the other country.
• In contrast to tightly regulated economies, FDIs are more commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor.
• Apart from capital investment, FDIs also include management and technology services.
• The key feature of FDI is that it establishes either effective control of, or at the very least a significant influence over, foreign business decision-making.
• FDI can be made in a variety of ways, such as by establishing a subsidiary or associate company in another country, or by ensuring a merger or joint venture with a foreign company

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Foreign Institutional Investor (FII)

• A foreign institutional investor (FII) is a person or company that invests in a country other than the one where it is registered or has its headquarters.
• The term "foreign institutional investor" is most commonly used in India to describe foreign entities that invest in the country's financial markets.
• FIIs are important to emerging economies because they bring funds and capital to developing-country businesses.

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Sector Specific Investment Models

• A sector analysis is a study of the economic and financial state and prospects of a specific economic sector.
• An investor can use sector analysis to make a prediction about how well companies in the sector will perform.
• Investors who specialise in a specific sector or who use a top-down or sector rotation approach to investing typically use sector analysis.
• Investors who use the sector rotation strategy actively shift their investments from one sector to the next, based on market cycles and trends that influence the potential profitability of different sectors.

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Investment Models in India

Harrod-Domar Model

• The Harrod-Domar Model is more of a One-Sector Model, in which economic growth is based on policies that increase savings and technological advancements.

Solow Swan Model

• The Harrod-Domar Model was extended by the Solow Swan Model, which placed a special emphasis on productivity growth.

Feldman–Mahalanobis model

• This model focuses on improving the domestic consumption goods sector when the capital goods sector has sufficient capacity.
• It later evolved into the Nehru-Mahalanobis model, which is a four-sector model.

Rao ManMohan Model

• The Rao ManMohan Model, named after Narasimha Rao and Dr. Manmohan Singh, is a policy of economic liberalisation and foreign direct investment (FDI) that was implemented in 1999.
• Economic development in Lewis's model is based on an unlimited labour supply.

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Infrastructure Financing

• Infrastructure financing is the process of financing those industries which the government identifies as central to the economy. Eg: roads, railways etc.
• Generally in countries there are lists of industries identified as infrastructure.
• These industries are also strategically important and therefore too much private participation in its financing won’t be allowed. Rather the governments impose regulations to avoid monopolistic tendencies.
• Infrastructure assets are sources of low risk and stable cash flows.

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Conclusion

The primary sources of investment in an economy are either the government or private players. These private players could be foreign or domestic players. The government has a great deal of risk-taking capability that the private sector lacks. The private sector, on the other hand, has a track record of being effective and innovative when good governance is in place.