Before we begin to describe the various types of investment models in existence, one must understand the basic definition of investment and the factors that govern it.
In simpler terms investment means exchange of money for a profit yielding asset. The same profit earned is used to invest in other assets as well. As far as the economic well being of the country is concerned, investment is important as it contributes to growth and development.
When the government invests in business, agriculture, manufacturing or supporting industries it can generate employment opportunities for its population. But a robust investment scenario is when the government and the private sector join hands to create investment opportunities.
Also keep in mind that the following factors come into play when making an investment and by proxy, choosing an investment model:
— Savings Rate.
— Tax Rate in the country. (Net income available after tax).
— Rate of Interest in Banks.
— Possible Rate of Return on Capital.
— Availability of other factors of production – cheap land, labour etc and supporting infrastructure – transport, energy and communication.
— Market size and stability.
Three major investment model:
Public investment model : For a government to invest, it needs revenue (mainly tax revenue), but the present tax revenues of India are not sufficient enough to meet the budgetary expenditure of India. So India cannot move ahead in the path of growth without private individuals; even for government to have a share in the investment, they need tax revenue from the private investors.
Private investment model : The private investment can come from India or abroad. If it’s from abroad – they can be as FDI or FPI. (Details will be discussed later.) As India’s Current Account Deficit is widening due to increased Oil Import, in this age of globalization, we cannot say NO to FDI or FPI. Why private investment in India: For a country to grow and increase its income, the production has to be increased. More goods and services has to be produced. Infrastructure to support production – transport, energy and communication – should also be developed. But how can a nation with near 30% of population below poverty line, invest in production or infrastructure? Who has money to invest? Government?
Public private partnership model : PPP means combining the best benefit from both public and private investments. Some of the Project Finance Schemes are as below:1. BOT (build–operate–transfer).2. BOOT (build–own–operate–transfer).3. BOO (build–own–operate).4. BLT (build–lease–transfer).5. DBFO (design–build–finance–operate).6. DBOT (design–build–operate–transfer).7. DCMF (design–construct–manage–finance).
Investment Models in Relation With India
Hope it’s clear by now that capital formation is necessary for any country to grow. But the process is not easy. The savings rate in India is now near 30%. Percapita Income of Indians is very low and hence the capital available for investing too is low. Investments should be studied from three angles – Households, Corporates and Government. Investments expect a return – be it from Government side or Private side. Though the return on investment in terms of profit or margin is the main motive behind investments, its effect on the welfare side and development should not be neglected.