Investment Models - Importance, Types, Facts of Investment Models

By K Balaji|Updated : June 9th, 2022

Investment Models, true to their name, are ways in which funds are invested in a diversified portfolio of assets that, in turn, earn income. This income appreciation is the increase of the value of an asset over time. A good when purchased as an investment, the intention behind it is not to consume it but use it as a means to generate wealth.

An investment model is concerned with the lay of capital (time, effort, money, or any asset) for a greater future payoff. Investment Models UPSC is an important topic in economics and highly relevant in both UPSC Prelims and mains.

Table of Content

What is an Investment Model?

An investment Model is a profit-yielding exchange that is often cyclical as the profits from one asset become investments for another asset. While investment can have different meanings in finance and economics, the basic concept remains the same- putting funds into assets for financial gains or production.

This is why an investment model becomes key to the future growth and development of any country. A government's investment in a multitude of fields generates employment for its population. Catering to a country as vast and diverse as India is not an easy task. Therefore, a more all-rounded and successful investment model in India is where the government and the private sector become involved in the creation of investment opportunities.

There is a multitude of factors that affect the results of investment and by extension, an investment model. Income and rate of interest are the primaries that impact it directly. Meanwhile, factors such as infrastructure, taxation, savings rate, inflation, etc. are more implicit in their effect.

Types of Investment Models

There are three primary types of investment models, namely:

  1. Public Investment Model
  2. Private Investment Model
  3. Public-Private Partnership Model

Public Investment Model: As the name suggests, in this particular model, the investment is made by the government. The revenue generated through the public sector is invested by the center of the state into goods and services.

Private Investment Model: India's vast population asks for a lot of resources and often public revenue is not enough to cater to the needs of the times. The private sector becomes an intangible cog in the economy because of this very reason. Government always invites private players to invest in its ventures.

Public-Private Partnership Model: This model brings the best of both worlds together to form a long-term cooperative arrangement between two or more players from the public and private sectors. The 3P model is already quite prevalent in India with some major sectors like health, power, urban housing, and railways under its wing.

The investment can be from within the country or from abroad. Foreign investment is of two types: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).

  • A foreign direct investment (FDI) is an investment made by a firm or an individual in one country into business interests located in another country.
  • A foreign portfolio investment (FPI) refers to investments made in securities and other financial assets issued in another country.

An FDI can give great aid to the country in the forms of infrastructure and employment, making it one of the more sought-after options of investment.

Other Types of Investment Models

Further classified, there are a few investment models that are listed below:

On the basis of where the investment comes from, there are two types:

  • Domestic Investment Model: this can be a public or a 3P venture.
  • Foreign Investment Model: this can be a foreign-domestic mix or a majorly foreign-led investment.

On the basis of where the investment goes, there are again two types:

  • Sector-Specific Investment Models: in this, the investment can be made in Special Economic zones or other allied sectors.
  • Cluster Investment Models: In this, investment is made in business clusters. Investment in manufacturing is a self-explanatory example of this model.

Investment Models In India

A nation's economy is dynamic and subjective. Every country has its own challenges and shortcomings which is why strategies for development and growth are to be modified for every country. Especially in a country like ours, with its economic and societal disparity, an investment model that makes development sustainable and inclusive is required.

The need for a reliable investment model was dire when India finally gained independence from the British. India started its planning process in 1951 and there were different investment models implemented in an attempt to mobilize resources. These models can be divided into 4 phases, as discussed below:

Phase 1 (1951-69)

Newly independent, the Government of India mobilized every internal and external means to utilize the needed resources. The areas that demand the most resource allocation were infrastructure and the social sector.

The Mahalanobis model was a product of this stage. The entirety of the financial and tax system along with the fiscal policy saw revamping as it was regulated to lead to maximum funds for the government to meet its expense.

Phase 2 (1970-73)

The implementation of the Industrial Policy of 1970 saw the GoI siding with the inclusion of private capital. The process of planned and sustainable development was the involvement of the private sector,

This plan focused on making the private sector come up in areas that were open to them but they refrained due to technicalities and financial constraints.

Phase 3 (1974-90)

The enactment of the Foreign Exchange Regulation Act of 1974 (FERA) brought the idea of 'foreign capital' to the forefront for the first time. The area of resource mobilization saw some dynamic changes in the period after 1985 as the Planning Commission had suggested the globalization of the economy twice. The aim was to open up the Indian market to private and foreign capital in the industrial area which was earlier reserved for the government.

Phase 4 (1991 onward)

The Gulf Crisis of 1991 was brought by inferior fundamentals of economics that followed the Gulf War I. There was a severe discrepancy in the Balance of Payments causing India to go to the IMF for monetary and financial aid. India was to restructure its economy and hence, the GoI commenced reforms in 1999.

The main elements that made this investment model truly radical were:

  • Opening more sectors to private investment
  • The idea of Public-Private Partnership (PPP or the 3P model) was articulated.
  • Infrastructure Development Find was set by the GoI to support the private sector in mobilizing their share of funds in the infrastructure PPP. This also had the provision for Viability Gap Funding (VGF) which provided capital support to PPP projects which would not otherwise be financially viable.
  • A cheap interest rate regime was set up to take care of the spending and investment needs of the general public. This along with the right financial environment, stable inflation, and exchange rate, formed the basic pillars to support this reform.
  • The main idea was to unshackle the true potential of the private sector and harbour it to reap the maximum benefit for the nation's economy. The government became a facilitator and regulator that took care of the marginalized and subjugated so that the eventual goal of an inclusive and growing economy can be realized.

Harrod Domar Model

The Harrod–Domar model is more of a 'One-Sector' model where economic growth is dependent on policies that will focus on increasing savings and technological advances. It explains a nation's economic growth rate in terms of savings and capital. It comments on how there is no natural reason for an economy to have balanced growth.

The model was developed independently by Roy F. Harrod in 1939 and Evsey Domar in 1946. The Harrod–Domar model served as the precursor to the exogenous growth model namely, Solow Swan Model.

The Harrod–Domar model explains that there are three kinds of growth:

  1. Warranted Growth
  2. Actual Growth
  3. Natural Growth

Types of Investment Models in India

Apart from Harrod Domar Model, check the other types of Investment Models mentioned below.

Solow Swan Model

This is an extension of the Harrod-Domar Model that puts special attention on productivity growth by focusing on technological progress in the longer run. The Solow Swan model was developed independently by Robert Solow and Trevor Swan in 1956.

It asserts that the outcomes of the "total factor productivity (TFP) can lead to a limitless increase in the standard of living in a country.

It superseded the Keynesian Harrod–Domar model. The Solow model is recognized to be one of the most widely used models in economics to explain economic growth.

Feldman-Mahalanobis Model

A Neo-Marxist model notices a shift in the pattern of industrial investment towards building up a domestic consumption goods sector. It dwells on the need to invest in building production capacity to achieve a high standard of consumption.

Rao Manmohan Model

Founded in 1999, this was named after Narasimha Rao and Dr. Manmohan Singh, this model focuses on economic liberalization and bringing FDI into the country. It took down license-raj (except 18 topics), reduced import barriers, and granted more autonomy to businesses. This model is credited to have ushered in structural changes in society through its reforms.

Investment Model UPSC

Investment Models are an important topic in the economics syllabus and is hence, an important topic for the UPSC Prelims and Mains. Investment Models UPSC Notes will aid you to cover all the necessary details about the concept, its purpose, implementation, etc. it can also be read using NCERTs or an ideal UPSC course book. You can also download the Investment Models PDF.

Download Investment Models Notes PDF for UPSC Exam Preparation

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FAQs on Investment Models

  • The investment model is an important topic in the UPSC Syllabus for both; Prelims and Mains. It can be defined as ways to invest funds in assets to earn income.

    • Investment models can e divided into three broad categories: 
    • Public Investment Model 
    • Private Investment Model 
    • Public-Private Investment Model (PPP or 3P model)
  • Harrod Domar growth model is a Keynesian type of investment model that explains a nation's economic growth rate in terms of savings and capital

  • The name is self-explanatory. A sector-specific investment model observes investments that are targeted for a particular sector or Special Economic Zones (SEZ).

  • The PPP Investment Model or the Public-Private Investment Model is a cooperative arrangement where the public and private sectors invest in different sectors. Multiple sectors in the Indian economy follow this model like health, power, railways, etc.

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