The main principles of investment planning are given below:
i) The project to be chosen must be one having lowest capital-output ratio. Normally lower value of capital-output ratio implies lower capital intensity and greater labour intensity in the process of production.
ADVERTISEMENTS:
Again, from the growth point of view it is noted that lower the capital-output ratio and higher the savings income ratio, higher will be the required or ‘warranted’ rate of growth.
In an over-populated labour- surplus and capital-poor economy such a criterion serves a very useful purpose. However, capital-intensive project becomes essential in many cases in such economies.
Image Source: blog.relayrides.com
ii) SMP Criterion indicates that the choice of projects ought to be made on the basis of the project’s capacity to maximise SMP.
By SMP is meant contribution of the project not only to increase private profit but also to increase the total income of the community as a whole. The SMP criterion differs from the capital turnover criterion (or low capital-output-ratio) in that the former takes into account both external economies and diseconomies. SMP is estimated by deducting from the addition to output due to investment, the alternative output sacrificed as a result of diversion of resources into this line from other fields of production.
ADVERTISEMENTS:
Hence in this case the factors are valued at their social opportunity cost. It is in this context that the aspect of shadow price becomes relevant.
Prof. Khan remarks that the correct criterion for obtaining the maximum return from limited resources is marginal productivity or, from the point of view of society as a whole, social marginal productivity.
iii) It is often argued that the choice of a labour-intensive, import-light project is desirable in an over-populated underdeveloped country and such a choice is believed to maximise social profitability in this context. In fact, projects which can generate immediate employment of labour are thought desirable.
iv) The time series criterion in which case both Prof. A.K. Sen and Maurice Dobb have made their valuable contributions, has provided a way-out of the problem as to which of the two alternative techniques – capital-intensive and labour-intensive – is preferable; and Sen argues, once the two alternative time series of consumption and employment are obtained, the problem is solved.
ADVERTISEMENTS:
Dobb-Sen criterion has brought into sharp focus the idea that the project which is to be chosen must be one that can yield higher returns over a period of time the community is prepared to wait.