Autonomous Investment

Autonomous investment is independent of the economy's income level and remains constant, including infrastructure projects like roads and railways for social welfare.
Autonomous Investment
3 min
18-June-2024<br><br>

In economics, autonomous investment represents the portion of total investment independent of the current economic conditions. Governments usually make these investments to develop infrastructure and provide essential public services. Let’s understand autonomous investment’s meaning in detail and learn how this spending supports long-term economic stability and boosts aggregate demand by creating a multiplier effect.

What is an autonomous investment?

Autonomous investments are investment expenditures that are not influenced by the current level of the:

  • Economic income
    or
  • Production

It is pertinent to note that these investments do not depend on the level of national income or GDP. Mostly, these investments are undertaken by the government or large institutions to ensure:

  • Continuous development
    and
  • Provision of essential services

Autonomous investments commonly include spending on projects that are necessary regardless of the economic situation, such as:

  • Infrastructure
  • Public services, and
  • Basic utilities    

Understanding autonomous investment in detail

It must be noted that autonomous investments are essential for the well-being and safety of individuals and the nation as a whole. They are not driven by the pursuit of profit and remain steady regardless of economic ups and downs. This means they occur even when there is little to no extra money to spend.

Some common examples of autonomous investments are government spending on:

  • Building and maintaining:
    • Roads
    • Bridges
    • Railways
  • Welfare schemes
  • Stimulus packages, and more

It is noteworthy to mention that autonomous investments usually receive funding and support from the taxpayer’s money. That’s because they are vital for improving the quality of life and economic potential of a country.

Example of autonomous investment

Let us look at some real-life examples of autonomous investments:

Autonomous investment examples Launch year Primary objective
Pradhan Mantri Gram Sadak Yojana (PMGSY) 2000 A nationwide plan initiated to improve rural road connectivity
Clean Mission India (also known as Swachh Bharat Abhiyan) 2014 This plan aims to achieve cleanliness and sanitation across the nation
Make in India 2014 This project aims to transform India into a global manufacturing hub by:Promoting domestic manufacturing andAttracting foreign investment
Smart Cities Mission 2015 This plan was launched to promote the development of 100 smart cities across India.


Formula of autonomous investment

As discussed above, autonomous investment is a fixed level of investment. It does not depend on the economy's current level of output or income and remains constant. Let’s understand the formula for calculating autonomous investment (c) in an economy:

Where:

  • “AE” is the aggregate expenditure. It represents the total amount spent on goods and services in the economy
  • “c” is the autonomous investment. It represents the part of spending that does not depend on the level of income
  • “Y” is the real GDP or income. It represents the total economic output
  • “b” is the marginal propensity to consume (MPC):
    • It indicates how much consumption changes with a change in income
    • It is the slope of the aggregate expenditure line.

Let’s understand the practical application of the above formula using a hypothetical example:

  • Say the government has decided to make an autonomous investment of Rs. 2,00,000 crore for the year.
  • This includes spending on infrastructure projects like:
    • The Pradhan Mantri Gram Sadak Yojana (PMGSY)
    • Rural electrification
    • Sanitation facilities under Swachh Bharat Abhiyan
  • Suppose that the marginal propensity to consume is 0.75.
  • This means that for every additional rupee of income, Rs. 75 paise is spent on consumption.
  • Let the real GDP or income (Y) be Rs. 2,00,00,000 crore.

Now, let us apply the formula:

Alternatively, if you are aware of autonomous expenditure (AE), you can plug the values in the formula and calculate any of the missing figures, including autonomous investment.

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Why does autonomous investment matter?

Autonomous investment contributes to the long-term economic development of the country by focusing on societal well-being. Let’s look at some of its major benefits:

  • Economic stability
    • Autonomous investment stabilises the economy
    • They provide a constant level of investment, which supports aggregate demand even during economic downturns
  • Long-term growth
    • It contributes to long-term economic growth
    • These investments usually fund:
      • Infrastructure projects
        and
      • Public services
  • Public welfare
    • Autonomous investments are usually made in public goods, such as:
      • Education
      • Healthcare, and
      • Transportation
    • This enhances the overall welfare and quality of life for citizens

How do autonomous investments influence aggregate demand?

In an economy, autonomous investment maintains a stable level of aggregate demand, which is crucial for economic stability. They provide buffers against economic cycles and reduce the negative effects of:

  • Recessions
    and
  • Booms

Furthermore, autonomous investments create a multiplier effect on the economy. Let's understand better through a hypothetical example:

The scenario

  • Say the Indian government launches a nationwide initiative to improve digital infrastructure.
  • They allocate Rs. 15,000 crores for this project over the next fiscal year
  • This allocation represents an autonomous investment.

The direct spending impact

  • This spending injects funds directly into the economy
  • It stimulates economic activity.
  • Companies involved in constructing digital infrastructure receive contracts and hire workers.
  • This increases employment and boosts income generation.

The multiplier effect

  • The initial recipients of this funding, like construction firms and technology suppliers, spend money on goods and services.
  • The hired employees spend wages on consumer goods
  • Technology suppliers invest in R&D or expand operations
  • This creates a ripple effect throughout the economy and leads to additional rounds of:
    • Spending
      and
    • Income generation
  • These subsequent spending rounds boost aggregate demand

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Why is autonomous investment essential?

Autonomous investment is essential for maintaining and enhancing a country's economic stability. Let’s study some key reasons:

  • Infrastructure development
    • Autonomous investments lead to expenditure on roads, bridges, and other utilities.
    • All these investments are crucial for long-term economic growth.
    • They lay the groundwork for private sector activities and enhance productivity across the economy.
  • Reducing inequality
    • Autonomous investments ensure that essential services and infrastructure are available to all segments of society, including:
      • Underserved
        and
      • Marginalised communities
    • This eliminates social and economic inequalities by providing equal access to critical resources and opportunities.
  • Crisis management
    • During economic crises, such as recessions or natural disasters, autonomous investments play a critical role.
    • They stabilise the economy and reduce the impact of the crisis by accelerating recovery.

Factors affecting autonomous investment

Several factors influence autonomous investment. Primarily, these are driven by:

  • Broader societal goals
  • Government policies
  • Technological advancements, and
  • Other non-income determinants

Let’s study the top three factors:

Factor I: Government policies

  • Government initiatives significantly influence autonomous investment.
  • These initiatives are usually aimed at improving infrastructure, such as:
    • Transportation networks
    • Communication systems, and
    • Energy facilities
  • Also, government spending on education, healthcare facilities, and research institutions stimulates autonomous investment in these sectors.

Factor II: Social and environmental considerations

  • Increasing awareness of environmental issues and regulations drives autonomous investment in:
    • Renewable energy
    • Clean technologies, and
    • Sustainable practices
  • Further initiatives promoting social welfare influence autonomous investment.
  • Some common examples of these initiatives are:
    • Poverty alleviation programs
    • Affordable housing projects
    • Healthcare services for underserved populations

Factor III: National security and defence

  • Government allocations for national security and defence-related projects influence autonomous investment.
  • These investments generate employment and contribute to economic activity
  • Some major investment areas under this factor are:
    • Defence infrastructure
    • Military technology
    • Cybersecurity

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Autonomous investment vs. Induced investment

Autonomous investments differ from induced investments. While the latter fluctuates with levels of economic growth, the former remains steady regardless of economic cycles. Let’s study some major differences between them:

Parameters Induced investments Autonomous investments
Response to economic conditions These investments increase or decrease based on the economy's performance.When the economy grows, induced investments increase.Whereas, they fall during economic downturns. These investments occur regardless of the current economic state.They are driven by necessity rather than profit.This response ensures continued investment in essential areas even during economic downturns.
Motive The primary goal of induced investments is to generate profit. These investments are driven by welfare motives.
Nature Induced investments are more variable and can contribute to economic volatility. Autonomous investments reduce the volatility that arises from the fluctuations in induced investments.


Is autonomous investment the same as constant investment?

Yes, autonomous investment remains constant irrespective of changes in income levels within an economy. It is similar to constant investment, which remains unchanged regardless of fluctuations in income.

Mathematically, we can represent this concept as follows:

Autonomous Investment =Constant Investment

By expressing autonomous investment as a constant, the above expression shows its stability and independence from short-term economic fluctuations. Also, it is pertinent to note that autonomous investments are different from induced investments, which fluctuate with changes in income.

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Conclusion

Autonomous investments represent government spending to maintain and develop essential infrastructure and public services. These investments are independent of economic conditions and changes in the income level. Their primary objective is to provide stability to the economy and support long-term growth. While doing so, autonomous investments often create a multiplier effect in the economy and boost aggregate demand.

Also, several factors influence autonomous investments, with the major ones being government policies, social and environmental considerations, and national security.

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Frequently asked questions

What is the difference between autonomous and induced development?
Autonomous investment occurs independently of economic conditions, while changes in income levels and economic activity drive induced development.

What is an example of autonomous expenditure?
An example of autonomous expenditure is government spending on infrastructure projects, say Pradhan Mantri Gram Sadak Yojana (PMGSY).
What is autonomous funding?
Autonomous funding is financial support provided independently of current economic conditions or revenue levels.
Why does the government spend on autonomous investment?
The government spends on autonomous investment to stimulate economic growth and provide essential services to its citizens.
Can autonomous investment be zero?
No, autonomous investment cannot be zero as it represents baseline investment irrespective of income levels.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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