An investment is an asset or item purchased to generate income or appreciation. An increase in the value of an asset over time is referred to as appreciation.
For eg: When a person buys a good as an investment, the intention is not to consume the good but rather to use it to build wealth in the future.
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Investment: Factors
- Investments are heavily influenced by the overall state of the economy, which includes elements such as GDP growth, inflation rates, interest rates, and employment levels.
- Favourable political policies, such as tax breaks, infrastructure development, and supporting legislation, can entice investors, whereas unfavourable policies or political insecurity can deter them.
- Market volatility, liquidity, and investor sentiment can all have an impact on the profits and risks associated with various forms of investments.
- Financial health, management quality, competitive position, and development potential all become essential considerations when investing in specific companies.
- Every investor’s risk tolerance varies, which determines their investment decisions.Factors such as age, financial aspirations, and personal circumstances can all have an impact on risk tolerance.
- Geopolitical conflicts, trade policies, natural calamities, and global economic trends can all wreak havoc on the performance of various investment possibilities.
Investment and growth:
- Increased investment can result in increased output, employment creation, and technical improvements, all of which contribute to economic growth.
- Investments have an economic multiplier effect. When firms invest, it creates demand for a variety of goods and services, which has a knock-on effect throughout the economy.
- Investments in R&D, technology infrastructure, and innovation-driven sectors have the potential to revolutionise economic growth.
- Economic growth can foster a hospitable climate for investment. Growing economies provide higher earnings, stronger consumer demand, and better business circumstances, which can attract both domestic and foreign investment.
- Investments help to grow the stock of physical and human capital in an economy, which is referred to as capital accumulation. Productivity development, in turn, can support economic growth by increasing total efficiency and competitiveness.
Investment Models: Types
Domestic Investment Models: Domestic investment models might be public or private-public collaborations.
- The Public Sector Led Investment Model is a development strategy in which the government is fundamental to generating investment and economic growth.
- The government takes the lead in selecting critical sectors, determining investment priorities, and mobilising resources for development projects under this paradigm.
Pros:
- With the public sector dominating investment, the government has greater control over determining strategic priorities that are consistent with national development goals.
- The government can intervene to address market failures such as insufficient investment in critical infrastructure or underinvestment in economically disadvantaged areas.
- Long-term investments driven by the public sector are more likely to focus on sustainable development and the well-being of future generations.
- Investments driven by the public sector prioritise the public interest by focusing on sectors and initiatives with a direct impact on public welfare, such as healthcare, education, transportation, and social infrastructure.
- Certain risks connected with large-scale investments, such as political, environmental, or social hazards, are best managed by the public sector. The presence of the government can give investors and lenders stability and reassurance, aiding project funding.
Cons:
- The public sector may be less pushed by market forces and competition, which may result in restricted innovation and efficiency gains as compared to private-sector-led investments.
- Public-sector investments can be hampered by bureaucratic delays, red tape, and inefficiencies, which can stymie project implementation and impede development.
- Political concerns and shifting government goals can result in inconsistent decision-making and policy revisions, jeopardising the stability and continuity of public-sector-led initiatives.
- Public-sector-led investments rely on government money, which is limited and this can limit the scope and pace of investment, especially during times of fiscal constraint.
- Government agencies may lack the specialised knowledge and expertise required for certain complicated initiatives, potentially resulting in inferior results or reliance on external consultants.
Private Investment Model: It is a strategy in which private organisations, such as people, corporations, and investment funds, play a prominent role in investment decisions and driving economic growth. Private investors in this model allocate their resources to diverse assets, enterprises, and initiatives to earn profits.
Pros:
- The private sector, in particular, takes entrepreneurial risks, which is critical to how investments are translated into wealth development and income generation.
- The private sector can play the role of a chief agent in creating employment, providing funds, building competitiveness and driving innovation – all essential instruments for growth.
- The private sector has been instrumental in India’s development, driving phenomenal growth since the economy was opened up in 1991.
- Gross fixed capital formation, a measure of investment, is estimated to grow by 11.5 per cent in 2022-23 as compared to a growth of 15.8 per cent recorded in 2021-22.About two-thirds of this was accounted for by the private sector, which included small businesses in the household sector.
- Green growth and climate change action require significant investments, making the private sector’s leadership essential in mobilizing resources and fostering ecological and economic sustainability.
Cons:
- The profit-driven strategy of the private sector may prioritise commercial viability over social well-being, potentially disregarding vital industries or underserved regions.
- Private-sector-led investments might present regulatory issues such as insufficient oversight, regulatory capture, or noncompliance with environmental and labour norms, necessitating effective regulatory frameworks and enforcement.
- Private organisations may not be as transparent or accountable as their public sector counterparts, making it critical to implement systems to assure responsibility and protect public interests.
- The private sector may generate jobs but job security is a concern.
- Private-sector investments may be constrained in sectors where market dynamics or profit possibilities are unappealing, leaving key areas unserved.
Public-Private Partnership (PPP) Investment Model: The Public-Private Partnership (PPP) Investment Model is a collaborative strategy in which the public and private sectors work together to finance, create, and run infrastructure projects or offer public services. PPPs seek to harness both sectors’ skills and resources to achieve efficient and successful projects.
Pros:
- PPPs in India address the infrastructure needs and funding gap by involving the private sector in arranging and financing projects.
- PPPs in countries like India are advantageous as they relieve the public sector from solely relying on its revenues or borrowing to meet financing needs.
- In PPP contracts, risk allocation and associated incentives drive efficiency and encourage the private partner to improve performance throughout the project.
- PPPs facilitate increased infrastructure investment and improved access to infrastructure services by shifting financial responsibility from the public sector to other stakeholders.
Cons:
- The tendering and negotiation process in PPP projects can be costly, often involving the engagement of transaction advisors and legal experts.
- Due to the long-term nature of PPP contracts, careful planning and consideration of contingencies are necessary.
- Changes in the requirements or conditions faced by the public sponsor or private sector during the lifespan of a PPP project may necessitate contract modifications.
Foreign Investment model:
- FDI refers to investments made by individuals, businesses, or entities from one country in businesses or assets located in another.
- Long-term commitment and active management involvement in the foreign firm are required for FDI. It usually requires obtaining a major ownership share in the foreign company, giving the investor control over its management, operations, and strategic choices.
- Foreign direct investment (FDI) plays an important role in global economic integration by facilitating capital flows, knowledge transfer, job creation, and economic development among countries. However, it can also lead to dependency, profit outflows, and competition for local businesses.
Foreign institutional investors (FIIs):
- FIIs are companies based outside of India that make proposals for investments in the country.
- Examples of institutional investors include hedge funds, mutual funds, pension funds, insurance bonds, high-value debentures, and investment banks.
- The Securities and Exchange Board of India (SEBI) has registered approximately 1450 FIIs.
Sector-Specific Investment Models:
- Sector-specific investment models focus on specific industries or sectors when making investment decisions.
- These models analyze industry-specific traits, trends, and risks to identify investment opportunities and manage risks effectively.
- However, they also carry the danger of concentrated exposure to sector-specific risks and little diversification, which makes investments vulnerable to sector downturns.
Investment: Government initiatives
- Department for Promotion of Industry and Internal Trade (DPIIT) has introduced the Business Reforms Action Plan, a dynamic reform exercise that ranks all states and UTs in the country based on the implementation of prescribed reform parameters:
- Investment Enablers
- Online Single Window System
- Land administration and Transfer of Land and Property
- Construction Permits Enabler
- Labour Regulation Enablers
- Environment Registration Enablers
- Inspection Enablers
- Paying Taxes
- Obtaining Utility Permits
- To attract FDI, the government has established an investor-friendly approach, and the majority of sectors are open to 100% FDI under the automatic method.
- The National Monetization Pipeline (NMP) was created in 2021 to offer investors and developers a comprehensive perspective of the various infrastructure investment options.
- The overall indicative value of NMP for the Central Government’s core assets over four years has been estimated at Rs. 6 lakh crore (US$ 75.18 billion).
- The Union Cabinet established the Empowered Group of Secretaries (EGoS) and Project Development Cells (PDCs) in Ministries/Departments of the Government of India to expedite investments in collaboration with state governments.
- To make doing business easier, the Ministry of Employment and Employment has taken several initiatives to streamline employment legislation. The Government has notified four labour codes by condensing, combining, and rationalising the relevant provisions of 29 Central Labour Laws.
- To encourage new domestic firms to establish manufacturing facilities in India, the government has extended the concessional tax rate of 15% till March 31, 2024.
- The government established the India Industrial Land Bank (IILB), a GIS-based portal that serves as a one-stop repository for all industrial infrastructure-related information.
- Ministry of Heavy Industries announced a Phased Manufacturing Programme (PMP) in 2022 to encourage local manufacturing of electric cars, their assemblies/sub-assemblies, and parts/sub-parts/inputs of the sub-assemblies.
- Ministry of Commerce and Industry, Consumer Affairs, Food and Public Distribution, and Textiles, had introduced the National Single Window System (NSWS).
- The government’s top priority economic projects also include Make in India, Digital India, Smart Cities, Skill India, Housing for All, and Start-Up India. These schemes collectively view India as a high-functioning economy focusing on industry, innovation, and entrepreneurship.
