Investment models – Part 1

What is meant by Investment?

Investment means exchange of money for a profit yielding asset, the profit from which is again used to invest in other assets.

Investment is extremely important for the economic wellbeing of the country as it contributes to growth and development.

Factors influencing the level of investment:

The performance of agricultural sector has a great bearing on the investment levels of India since the majority of the population in India is engaged either in agriculture or in its allied activities.

The rise in National Income can result in a continuous rising demand for customer goods which in turn can lead to rise in investment levels.

High rates of inflation reduce the purchasing power of consumers, which lowers demand for products which in turn results in lower levels of investment.

Reducing the interest rates can result in increasing availability of loans which in turn means a higher levels of investment.

Rapid expansion in the size of population offers more markets for the goods which can result in higher levels of investment.

Types of investment models

Part 1

Public Investment Model:

• In a Public Investment Model, investment in specific goods, services are made by the government through the central or state government or with the help of the public sector.
• This is commonly seen in countries where government enjoys immense revenue streams such as the oil rich Gulf Nations or communist nations such as erstwhile USSR.
• India cannot develop using this investment model since the present tax revenues of India are not sufficient enough to meet the budgetary expenditures.

Private Investment Model:

• When the earnings from the public sector is not enough to make up for certain shortfalls that may come about the government invites private players to invest in some of its ventures.
• The private investment can be domestic or foreign in nature, foreign investment can be through Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI).
• Foreign Direct Investment (FDI) model is one of the most sought after when it comes to external investment.