Investment Models: Importance, Different Types in India and Factors-UPSC

Investment Models , In layman’s terms, investment entails exchanging money for a’return or profit yielding asset.’ Individuals who earn money have the option to invest or consume their earnings. When he invests that money, he will be able to supplement his income in the future. As a result, if a portion of his income is set aside for investment on a regular basis, his income will continue to grow (provided that investment yield returns).

In the case of GDP growth rate, the same thing happens. The Gross Domestic Product (GDP) is the total value of all ‘final’ goods and services produced in a given economy (country). Consider it! What types of goods and services are manufactured? What happens to the goods and services that were purchased? Obviously, all types of ‘consumed’ goods and services are produced (except those imported), and some of these ‘goods and services’ are exported only to be consumed outside the country. Similarly, imported goods are made outside of India but consumed within the country. There are four commonly used GDP classifications based on aggregate consumption.

  • Private consumption – goods and services which are ‘consumed’
  • Investment – Explained in next para
  • Government Consumption – It is taken net of Taxes earned and expenditure by government
  • Net Exports: Export – Import: if export more than import – then adds difference to GDP, otherwise deduct it.

What exactly is an investment, and why is it so crucial?

  • Before we go into detail about the various types of investment models available, it’s important to understand the basics of investment and the factors that influence it.
  • To put it another way, 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.

Various Investment Models

The major investment models are listed below.

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.

Model of Public-Private Partnership: A public-private partnership (PPP, 3P, or P3) is a long-term collaborative arrangement between two or more public and private sectors. In India, projects based on the PPP model have been implemented in the following sectors:

  • Sectors of Health and Power
  • Railways
  • Housing in the City

There are also other investment options. The following are the details:

  • Domestic Investment Model: Private-Public Partnership or Public-Private Partnership
  • Model of Foreign Investment: It can be mostly foreign or a mix of foreign and domestic.
  • Investments in Special Economic Zones or other related sectors are made using sector-specific investment models.
  • Investment in Manufacturing Industries is an example of a cluster investment model.

Models of Public Private Partnership (PPP)

Commonly adopted model of PPPs include Build-Operate-Transfer (BOT) ,Build-Own-Operate (BOO), Build-Operate-Lease-Transfer (BOLT), Design-Build-Operate-Transfer (DBFOT), Lease-Develop-Operate (LDO), Operate-Maintain-Transfer (OMT), etc.

These models are different on level of investment, ownership control, risk sharing, technical collaboration, duration, financing etc.

  • BOT: It is conventional PPP model in which private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector.
  • Private sector partner has to bring the finance for the project and take the responsibility to construct and maintain it.
  • Public sector will allow private sector partner to collect revenue from the users. The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
  • BOO: In this model ownership of the newly built facility will rest with the private party.
  • On mutually agreed terms and conditions public sector partner agrees to ‘purchase’ the goods and services produced by the project.
  • BOOT: In this variant of BOT, after the negotiated period of time, project is ransferred to the government or to the private operator.
  • BOOT model is used for the development of highways and ports.
  • BOLT: In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
  • DBFO: In this model, entire responsibility for the design, construction, finance, and operation of the project for the period of concession lies with the private party.
  • LDO: In this type of investment model either the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter.

Different Models of Investment and Planning related to India includes:

  • Harrod Domar Model : The model implies that economic growth depends on policies to increase investment, by increasing saving, and using that investment more efficiently through technological advances. It suggests that there is no natural reason for an economy to have balanced growth. It was more or less a One Sector Model. —>Failed to attract investment on consumer goods in India as we lacked good capital goods industries.
  • Solow Swan Model : The neo-classical model was an extension to the 1946 Harrod–Domar model that included a new term: productivity growth.
  • Feldman–Mahalanobis model : A high enough capacity in the capital goods sector in the long-run expands the capacity in the production of consumer goods. Thus the essence of the model is a shift in the pattern of industrial investment towards building up a domestic consumption goods sector. It was a Two Sector Model which was later developed into Four Sector Model. Also known as Nehru-Mahalanobis model.
  • Rao ManMohan Model : Policy of Econmic Liberilization and FDI initiated in 1991 by Narasimha Rao and Dr.Manmohan Singh.
  •  Lewis model of economic development by unlimited labour supply.

Problems with Public-Private Partnerships

  • PPP projects have been stymied by issues such as contract disputes, a lack of capital, and regulatory roadblocks related to land acquisition.
  • In practice, the Indian government has a poor track record of regulating PPPs.
  • Metro projects become breeding grounds for crony capitalism and a means for private companies to amass land.
  • PPPs are having problems all over the world, and their performance has been very mixed, according to studies conducted by various research bodies.
  • PPP is also argued to be merely a “language game” used by governments who find it difficult to push privatization or when contracting out is politically difficult.
  • Infrastructure loans are thought to make up a large portion of the non-performing asset portfolio of India’s public sector banks.
  • PPP projects have become conduits for crony capitalism in many sectors.
  • Many PPP projects in the infrastructure sector are managed by “politically connected firms” that have won contracts through political connections.
  • PPP firms take advantage of every opportunity to renegotiate contracts, citing factors such as lower revenue or increased costs, which has become the norm in India.
  • Renegotiations were also frequent, resulting in a larger drain of public funds.
  • Because of their opportunistic behavior, these companies create a moral hazard.

Government or private players are the primary sources of investment in an economy. Foreign or domestic players may be among these private players. The goal of PPP is to combine the strengths of two people. The government has a lot of risk-taking capacity that the private sector doesn’t have. However, if good governance is in place, the private sector has a proven track record of being effective and innovative.

Such innovative arrangements are important under the concept of good governance, which holds that minimum government and maximum governance are both important. This allows the public to have more options, which leads to more competition among service providers, ultimately improving prices and quality.

However, this raises issues of accountability. When private companies handle national/natural resources like oil and coal, it’s critical to keep an eye on them to ensure fair prices. For the same reason, the Delhi High Court allowed the CAG to check the books of private Discoms while imposing some restrictions.

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