Investment models since independence in India

Published on 03 Mar 2025

India has used various investment models since independence to guide its economic planning and development. The key models were:

Harrod-Domar Model

• Time Period: Early 1950s

• Focus: Guided India’s economic strategy during the First Five-Year Plan (1951-1956).

• Key Ideas:

• Economic Growth and Savings: Economic growth depends on the level of savings and investment. Higher savings lead to increased investment, which fuels growth.

• Example: In the early 1950s, India focused on increasing agricultural productivity by investing in irrigation infrastructure. For instance, the construction of the Damodar Valley Project aimed to improve water supply for agriculture, enhancing crop yields.

• Capital-Output Ratio: Emphasized efficient use of capital to maximize output.

• Example: Investments in the construction of large-scale irrigation systems like the Bhakra Nangal Dam were intended to boost agricultural output through better water management.

• Investment and Employment: Investments create jobs, further stimulating economic growth.

• Example: The construction of large-scale irrigation projects, like those in Punjab and Haryana, created jobs in both the construction phase and agricultural sectors.

• Sectoral Allocation: Prioritize investments in sectors with high capital-output ratios.

• Application in India:

• Agricultural Focus: The First Five-Year Plan allocated significant resources to enhance agricultural productivity.

• Example:  Projects like the Damodar Valley Project were pivotal in increasing crop yields and ensuring food security.

Feldman-Mahalanobis Model

• Time Period: 1950s to 1960s

• Focus: Shaped the Second Five-Year Plan (1956-1961), emphasizing industrialization.

• Key Ideas:

• Heavy Industries Investment: Focused on investing in heavy industries to build a strong industrial base.

• Example: The Bhilai Steel Plant, established in 1959 with Soviet assistance, aimed to produce steel for infrastructure and industrial use, supporting industrial growth.

• Infrastructure and Capital Goods: Aimed to create infrastructure necessary for the development of other sectors.

• Example: The Durgapur Steel Plant, established in 1960, was crucial for providing steel and machinery needed for further industrial development.

• Self-Sufficiency: Focus on achieving self-sufficiency in key industrial sectors.

• Example: Investments in public sector enterprises aimed to reduce reliance on imports and build domestic capabilities.

• Economic Planning: Centralized planning to coordinate industrial development.

• Application in India:

• Public Sector Enterprises: Major investments were made in public sector industries. For instance, the establishment of the Bhilai and Durgapur steel plants marked significant steps in industrializing India.

Solow-Swan Model

• Time Period: Post-1960s

• Focus: Influenced economic planning as limitations of earlier models became apparent.

• Key Ideas:

• Technological Progress: Emphasized the need for technological advancements to sustain long-term growth.

• Example: The establishment of technology parks like the Software Technology Parks of India (STPI) in 1991 to promote IT and software development.

• Diminishing Returns: Addressed diminishing returns on capital by focusing on technology.

• Example: The liberalization of the Indian economy in the 1990s led to significant growth in the IT sector, with companies like Infosys and Wipro benefiting from technological advancements.

• Human Capital Development: Skilled labour and education are essential for innovation.

• Example: The growth of Indian IT companies, such as Infosys and Wipro, was supported by a highly skilled workforce and investment in education.

• Investment in R&D: Emphasis on research and development to drive innovation.

• Example: Government and private sector investments in technology research contributed to advancements in IT and telecommunications.

• Application in India:

• Economic Liberalization: The focus on technological progress contributed to the 1990s reforms. 

• Example: The rise of India’s IT sector, supported by investments in technology and infrastructure, spurred economic growth.

• IT Sector Growth: Investments in technology led to significant growth in the IT sector.

• Example: The expansion of IT services and software exports contributed significantly to GDP growth.

 Rao-Manmohan Model

• Time Period: 1991 and onwards

• Focus: Basis for economic reforms starting in 1991 under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.

• Key Ideas:

• Liberalization: Reduced government control to enhance market efficiency.

• Example: The reduction of import tariffs from an average of 71% in 1991 to 26% by 2000, facilitating greater trade and competition.

• Privatization: Encouraged privatization of state-owned enterprises to boost efficiency and attract investment.

• Example: The privatization of Hindustan Zinc in 2002, which improved operational efficiency and financial performance.

• Globalization: Integrated India into the global economy to attract foreign investment.

• Example: The introduction of FDI policies led to significant investments from global companies like IBM, which set up operations in India.

• Application in India:

• Economic Growth: Reforms led to rapid sectoral growth, particularly in IT and telecommunications. Companies like Infosys and Wipro saw exponential growth, becoming major global players.

Tags:
Economy

Keywords:
Investment models Harrod-Domar Model Feldman-Mahalanobis Model Solow-Swan Model Rao-Manmohan Model Public investment models Private investment models

Syllabus:
General Studies Paper 3

Topics:
Infrastructure Development