Investment Models Used in India Since Independence

Since 1951, India experimented with different investment and growth models to guide planning, resource mobilisation, and industrialisation. Each model had its own assumptions, policy implications, and relevance to India’s economic situation at the time.

1. Harrod–Domar Model (1950s onwards)

• Core Idea: Economic growth depends on savings rate and capital-output ratio (ICOR).
  • Growth (g) = Savings Rate (s) ÷ Capital-Output Ratio (v).
• Relevance in India:
  • Adopted during the First Five-Year Plan (1951–56).
  • Focus was on raising savings and investment to push growth.
  • Suggested that higher savings and efficient capital use were essential for development.
• Application: Agriculture, irrigation, and community development programmes were emphasised to boost savings and productivity.
• Limitation: Neglected role of technology and labour productivity, leading to slow industrialisation.

2. Feldman–Mahalanobis Model (Second Plan, 1956–61)

• Core Idea: Heavy-industry-led growth model.
  • Based on Feldman’s (1928, USSR) idea of allocating more investment into capital goods sector to accelerate long-term growth.
  • Mahalanobis adapted it for India, stressing heavy industries and public sector dominance.
• Relevance in India:
  • Adopted in the Second Five-Year Plan (1956–61).
  • Core industries (iron & steel, coal, heavy machinery, power) prioritised.
• Application: Set up PSUs like Bhilai and Rourkela steel plants, BHEL, HEC.
• Outcome: Built the foundation for industrialisation and self-reliance in capital goods.
• Limitation: Neglected consumer goods and agriculture → shortages, unemployment, inflation in the 1960s.

3. Solow–Swan Model (from 1960s, implicit)

• Core Idea: Long-run growth depends not only on savings and capital accumulation but also on technological progress and labour force growth.
  • Emphasises diminishing returns to capital → sustained growth possible only through innovation and productivity improvements.
• Relevance in India:
  • While not formally adopted, its influence is visible in later planning phases, especially from the 1980s onwards.
  • Highlighted the need for technology imports, R&D, and human capital formation.
• Application: Green Revolution, technology missions (telecom, IT, biotechnology).
• Limitation: India lagged in R&D investments, so benefits were uneven.

4. Rao–Manmohan Model (1991 reforms)

• Core Idea: Market-oriented growth model introduced during BoP crisis of 1991.
  • Led by Prime Minister P. V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.
  • Shift from state-controlled to liberalised, private-sector-led economy.
• Key Features:
  • Liberalisation of industrial licensing (end of Licence Raj).
  • Promotion of Privatisation and Globalisation.
  • Opening up to foreign capital (FDI, FII).
  • Greater role for PPP in infrastructure.
• Application: New Industrial Policy 1991, trade reforms, financial sector reforms.
• Outcome: India became one of the fastest-growing emerging economies post-2000s.
• Limitation: Created inequalities; benefits not uniform across regions and sectors.