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Investment models in Planning

Models Used in the Planning Process  

  • Harrod – Domar Growth Model 
  • Mahalanobis Strategy of Economic Growth  
  • Planning Model Adopted in India 

Infrastructure Investment Models  

  • Public-Private Partnership (PPP) in Infrastructure  
  • EPC MODEL  
  • Swiss Challenge Model 
  • Hybrid Annuity Model 

Models of Foreign Investment 

  • Foreign Direct Investment  
  • Foreign Institutional Investors 

Harrod – Domar Growth Model 

Harrod and Domar analyzed the dynamic nature of investment and demand and showed how variations in capital and in demand were responsible for instability in economic growth. 

Therefore, this model suggests that the economy’s growth rate depends on two factors: 

  • Level of savings; and 
  • Productivity of investment i.e. Capital to Output ratio. 

Harrod and Domar arrived at the following relation: 

Growth Rate = Investment * (1/Capital-Output Ratio) 

Relevance of Harrod-Domar Model for Developing Countries 

Harrod-Domar model was formulated primarily to protect the developed countries from chronic unemployment and not for developing economies.  

The model was primarily based on populace which had high propensity to save and COR remained stable over time. On the contrary, developing economies’ main problrm to increase the propensity to save. Also COR is usually high and fluctuating in these countries 

Also, this model assumes no government intervention, fixed prices and no institutional changes. All these assumptions too make it inappropriate. 


Mahalanobis Strategy of Economic Growth 

Prof. P.C Mahalanobis prepared a growth model in which he showed that to achieve a self-sustained growth quickly in the country, it would be essential to devote a major part of the development outlay to building basic heavy industry, e.g. steel and the engineering industry for making different types of machines, the multipurpose river valley projects for irrigation and power. 

According to Prof. Mahalanobis, the rate of real capital formation in a country like India did not depend merely on savings in the form of money but it depends on the capacity for making capital goods. The reason is that consumer goods industry cannot grow without sufficient capital goods 

Thus, according to Prof. Mahalanobis if we did not make huge insvestments in the heavy basic and capital goods industry, the country will forever remain dependent on foreign countries for the imports of steel and capital goods like machinery for economic development and real capital formation.  

Since it is not possible for India to earn sufficient foreign exchange for the purpose by increasing exports, the capital goods cannot be imported in sufficient owing to foreign exchange constraints. The result will be that the rate of economic growth and the rate of real capital formation in the country will be slow indeed.  


Planning model adopted in India 

The second five year plan was based on the Nehru-Mahalanobis strategy of development, which guided the planning practice for more than three decades until the end of the Seventh Five Year Plan.  

The draft outline of this plan was based on the Mahalanobis Model which was viewed as a variant of the Soviet Planning model. The basic elements of this strategy can be summed up as: 

  • Raising the rate of investment. It involved stepping up domestic and foreign savings also 
  • Rapid growth of the productive capacity of the economy by directing public investment toward development of industries. Simultaneously, promotion of labor-intensive, small and cottage industries 
  • Import substitution for self-reliance 
  • An elaborate system of controls and industrial licensing 
  • Predominance of public sector in capital goods industries 

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