Factors affecting investment

  • Agriculture
    • The majority of the population in India is engaged either in agriculture or in its allied activities and it contributes considerably to the growth of the Indian economy
    • With the increasing agricultural income, the demand for industrial products and services increases
    • Hence, the performance of agricultural sector has a great bearing on industrial production and corporate performance in our country
  • Change in the level of National Income or GDP
    • If the level of national income keeps on increasing, it is likely to result in a continuous rising demand for customer goods in the market
    • Since consumption is a function of income, at higher levels of GDP, people are likely to spend more on consumer goods. The higher consumption expenditure would mean higher demand for goods and more revenue to the producers
    • To meet the increasing demand for consumer goods and make larger profits by increasing their production, the entrepreneurs would naturally go in for purchase of new capital equipment and thus increase the investment to rise
    • On the other hand, a fall in GDP and a consequent reduction in the demand for consumer good would reduce the demand for capital goods and thus, affect the level of investment in an adverse manner.
  • Inflation
    • Higher rates of inflation erode purchasing power of consumers, thereby resulting in lower demand for products; thereby affecting the performance of industries and hence the investment
  • Rates of interest
    • Having worked out the marginal efficiency of capital(MEC), the investors would compare it with the market rate of interest, because while the MEC denotes the returns to capital, the rate of interest is its cost; i.e. cost of borrowing funds for investment
    • Hence, reduction in the market rate of interest would encourage investment, while any risen in it would discourage new investment.
  • Innovation and Technical Progress
    • Both innovations and technical progress move hand-in-hand and open up more profitable opportunities for the entrepreneurs.
    • This leads to a much greater demand for capital goods and increase the volume of investment
  • Population Growth
    • Rapid expansion in the size of population offers more markets for the goods
    • The investor, in expectation of a higher demand and greater profitability, would naturally like to make expansion in their plant and equipment and thus, undertake more new investments
    • The economics history of the modern advanced nation’s shows that the period of rapid population growth have also been the periods of massive outbursts in investment activity
  • Rates of Taxation and Government Policy
    • Tax forms a deduction from the income of the entrepreneurs and thus high rates of taxation reduce the amount received by the entrepreneurs, thereby reducing the expected profitability of investment
    • Higher rates of taxation, thus act as deterrent to investment, whereas low tax rates, or tax exemption, will provide an incentive for investment
    • Similarly, if the government gives increased subsidies to the new entrepreneurs and provide them other benefits, this might act as incentives for new investment