Why the Investment led growth is not considered to be sustainable? Examine citing examples.

Model Answer:
Investment-led growth model:
The higher capital investment in the form of machinery and infrastructure increases the productive capacity of the economy. The higher the investment; the higher is the profit and further is the investment. The Economic growth model of China in recent decades is most suitable example of Investment-led growth model.
Investment led growth model is successful only if people have good household income, low income disparity and high consumption capacity, especially in real estate sector, household and consumer goods. Another way to assess the impact of investment on growth is to examine whether investment adds value to the capital stock. If investment does not add value in terms of creating a future flow of goods and services then that part of investment will not contribute to the productive capital stock. In case of China; the so called Shanghai model or Chinese investment model was effective in building up production but not in ramping up the consumption base. China was successful in generating GDP growth, but far less successful in generating household income growth.The higher GDP in China is due to large foreign investment and not due to domestic investment because maximum people in china have less income and more consumption with little left to investment. Thus; investment-led growth model was that China witnessed over-investing, which led to over-capacity that resulted in wastage of resources and hence; the model is not considered sustainable.

Topics: GS-III: Investment Models