nehru model of growth
TRANSCRIPT
-
7/25/2019 nehru model of growth
1/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 /
MahalanobisGrowth Model and
Heavy-IndustryStrategy ofDevelopment
by Supriya Guru Economics
Advertisements:
Mahalanobis Growth Model and Heavy-
Industry Strategy of Development!
At the time of the formulation of the Second
Five Year Plan, Prof.P.C. Mahalanobis who
was friend and adviser to Late Prime Minister
Jawaharlal Nehru and who was one time
member of Planning Commission, prepared a
growth model with which he showed that to
achieve a rapid long- term rate of growth it
would be essential to devote a major part of
the investment outlay to building of basic
heavy industries.
Mahalanobis strategy of development
http://www.yourarticlelibrary.com/category/economics/ -
7/25/2019 nehru model of growth
2/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
emphasising basic heavy industries which
was adopted first of all in the Second Plan
also continued to hold the stage in Indian
planning right up to the Fifth Plan which was
terminated by the Janata Government in
March 1978, a year before its full term of five
years.
In critique of the Mahalanobis heavy industry
development strategy, Professors Vakil and
Brahmanand of Bombay University put
forward a wage-goods model of development
and suggested a development strategy which
accorded a top priority to agriculture and
other wage-goods industries in sharp contrast
to the Mahalanobis heavy industry biased
strategy of development. In this article we
shall critically examine the heavy industry
biased strategy of development in the next
chapter we shall discuss wage-goods model of
development.
Mahalanobis Model of Growth:
It will be useful to explain first Mahalanobis
model of growth which provided a rationale
for the heavy industry biased development
strategy. An important point to note is that
Mahalanobis identifies the rate of growth of
-
7/25/2019 nehru model of growth
3/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
investment in the economy not with rate of
growth of savings as is usually considered by
the economists but with rate of growth of
output in the capital goods sector within the
economy.
The growth of capital goods sector in turn
depends upon the proportions of total
investment allocated to the capital goods
sector and output-capital ratio in the capital
goods sector. Given the output-capital ratio in
capital goods sector (i.e. heavy industries), he
proves that if the proportion of total
investment allocated to the capital goods is
relatively greater, the rate of growth of
output of capital goods will be greater and
hence, given the Mahalanobis assumption,
the future rate of growth of investment in the
economy will be greater.
Now, the greater the rate of investment, the
greater will be the long-term rate of growth.
We thus see that with the rate of growth of
output of capital goods industries.
Mahalanobis shows that the proportion of
total investment resources allocated to the
capital goods industries for each year is the
most important factor determining the long-
term rate of growth of national income. Let
-
7/25/2019 nehru model of growth
4/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 4
us represent his two- sector model in the
mathematical form.
In his basic two-sector model Mahalanobis
divides the economy into two sectorsthe
sector C produces consumer goods and sector
K produces capital goods.
Let
t0 = Initial rate of investment.
k and c = Proportions of total investment
allocated to capital goods and consumer
goods sectors respectively.
Therefore k + c = 1
K and c = Marginal output-capital ratio inthe capital goods and consumer goods sectors
respectively. In other words, they represent
ratio of increment of income to investment in
the sector K and sector C respectively.
Y0, C0, I0 = The national income, consumption
and investment in the base period.
Yt Ct It = The national income, consumption
and investment respectively in period t.
In Mahalanobis model, the net investment in
-
7/25/2019 nehru model of growth
5/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 5
any period can be divided into two
components; the one kIt, going to capital
goods sector K and cIt going to consumer
goods sector C. Therefore it follows that,
It = kIt + cIt
Let lt stands for increase in investment (i.e.
addition to the stock of capital goods) and Ct
for increase in consumer goods in nay period
t depend on the net investment in the
previous period t-1. Now, given the output-
capital ratios, k and c of the capital goods
and consumer goods sectors respectively, the
relationship between investment and the
resultant increment in output in capital goods
can be worked out as follows:
It = k k It 1 Or It It 1 = k k It 1
(i)
This implies that the increase in investment
in period t is equal to the increment in output
of capital goods. The increase in output of
capital goods (k k It 1) in period t is given
by investment in period It 1 multiplied by
the proportion of it going to capital-goods
sector (k) and the output-capital ratio (k) in
the capital goods sector.
-
7/25/2019 nehru model of growth
6/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 6
It is clear from above that Mahalanobis takes
into account only the physical aspect of
investment and makes it dependent on the
proportion of investment allocated to capital
goods sector k and output-capital ratio k in
the capital goods sector.
Similar to equation (i) we can also write:
Rationale of Mahalanobis Growth Model:
It is worth noting that Mahalanobis
recognises that output-capital ratio c in the
consumer goods sector is greater than the
output-capital ratio in the capital goods
sector. If this is the case, then it apparently
implies that growth of output or income will
be greater if more investment is made in the
consumer goods sector. But in this case the
higher rate of growth of income will be only
in the short run.
http://cdn.yourarticlelibrary.com/wp-content/uploads/2014/04/clip_image002600.jpg -
7/25/2019 nehru model of growth
7/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 7
As growth equation (iii) above shows that
after a critical range of time, the larger the
investment allocated to capital goods
industries, (k) i.e., the higher will be growth
in output or income. Elaborating this point
Prof. Raj states, The logic here is the same as
the more common proposition that a higher
rate of investment (i.e., a larger proportion of
the productive factors used for accumulation)
would result in a smaller volume of output
being available for consumption in the shortrun but that over a longer period, it would
result in higher rate of growth of
consumption; the difference is that the choice
is here stated as between investment in
capital goods and investment in consumer
goods industries.
The rationale of Mahalanobis growth model
and development strategy can be expressed
in simple words without mathematical
language. According to Mahalanobis, rate of
economic growth depends upon the capital
formation or real investment. The greater the
rate of capital formation, the greater the rate
of economic growth.
The rate of capital formation in an economy,
according to Mahalanobis, depends upon the
-
7/25/2019 nehru model of growth
8/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 8
capacity of the economy to produce capital
goods. Thus, according to him, given a closed
economy, the rate of real capital formation
depends not upon the savings of the economy
but on the capacity to produce capital goods.
Even if the rate of savings was substantially
raised in order to accelerate the rate of
capital formation, it would be futile, for
required capital goods would not be there if
there is a lack of capacity to produce capital
goods. Of course, this is based on closed
economy assumption.
Thus, according to him, if large investment is
not made in the basic heavy industries
producing capital goods, the country will
forever remain dependent on foreign
countries for the imports of steel and capital
goods like machinery for real capital
formation.
Since it is not possible for India to earn
sufficient foreign exchange by increasingexports, the capital goods cannot be imported
in sufficient quantities owing to foreign
exchange constraint. The result will be that
the rate of real capital formation and the rate
of economic growth in the country will
-
7/25/2019 nehru model of growth
9/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 9
remain low.
Thus, Mahalanobis was of the opinion that
without adequate investment in basic heavy
industries, it would not be possible to achieve
rapid self-reliant economic growth. Therefore
according to him, to achieve rapid economic
growth and self-reliance, it would be
necessary to give the highest priority to basic
capital goods industries in the development
strategy of a plan.
Employment Generation in Mahalanobis
Model:
It is necessary in this connection to mention
Prof. Mahalanobis views on increasing
employment opportunities and to achieve astage of full employment. According to him,
productive employment can be increased
only by increasing the production of capital
goods like steel, electricity, machinery,
fertilizers, etc.
Whether it is increase in employment in the
industrial sector or in the agricultural sector
it cannot be achieved without increasing the
output of capital goods. To quote him, The
only way of eliminating unemployment in
-
7/25/2019 nehru model of growth
10/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
India is to build up a sufficiently large stock
of capital which will enable all unemployed
persons being absorbed into productive
capacity. Increasing the rate of investment is,
therefore, the only fundamental remedy for
unemployment in India.
Thus, in Prof. Mahalanobis opinion, not only
to achieve the objective of rapid economic
growth but also to achieve the goal of full
employment, it is necessary to accord high
priority to capital goods industries in the
development strategy.
Import-substituting Industrialisation:
Mahalanobis emphasis on basic heavy
industries was also due to his objective ofmeeting the requirements of higher rate of
capital accumulation from within the
economy and therefore enabling the economy
to stop imports of foreign capital equipment
and machines.
To quote him, The proper strategy would be
to bring about a rapid development of the
industries producing investment goods in the
beginning by increasing appreciably the
proportion of investment in the basic heavy
-
7/25/2019 nehru model of growth
11/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
industries. As the capacity to manufacture
both heavy and light machinery and other
capital goods increases, the capacity to invest
by using domestically produced capital goods
would also increase steadily and India wouldbecome more and more independent of the
imports of foreign machinery and capital. In
fact, Mahalanobis growth model advocates
import-substitution type of industrial
development strategy.
It is important to note that Mahalanobis
assumed though implicitly that export
earnings of India cannot be sufficiently
increased. If this assumption is not valid, as
has been pointed out by several critics, then
he could not justifiably identify rate of
investment in the economy with the domestic
output of capital goods.
If exports of a country can be adequately
raised, the various capital goods can be
imported in exchange for exports. In that case
rate of investment or rate of capital
accumulation in the economy can be stepped
up without giving high priority to the basic
heavy industries provided the exports can be
adequately increased. Thus the assumption of
stagnant exports is crucial in the Mahalanobis
-
7/25/2019 nehru model of growth
12/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
growth model for providing the rationale for
a general shift in the investment pattern to
the domestic production of capital goods.
Mahalanobis Growth Model and
Development Strategy in Indias Five-Year
Plans:
As pointed out above, Mahalanobis heavy
industry first strategy of development was
put into actual practice in Indias Five-Year
Plans beginning from the Second Plan. India
started its planned development of its
economy in 1951 when First Five-Year Plan
was started.
However, the Five year Plan did not propose
any explicit strategy of development; it tookover several projects which had been worked
out earlier and some of them were already in
the process of being carried out. It laid
emphasis on stepping up the rate of saving
and therefore investment and growth by
maintaining the marginal rate of saving at asubstantially higher level than the average
rate of saving.
Although it did not present any explicit
formulation of development strategy
-
7/25/2019 nehru model of growth
13/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
regarding the pattern of investment its
emphasis was on agriculture, irrigation,
power and transport aimed at creating the
base for more rapid industrialisation of the
economy in the future.
Second Five Year Plan, based as it was on
Mahalanobis growth model, proposed an
explicit strategy of development which gave
top priority to basic heavy industries. Not
only the objectives of rapid rate of economic
growth and employment generation but also
the aim of self-reliant and self- generating
economy were sought to be achieved by the
building up of economic and social
overheads, exploration and development of
minerals and the promotion of basic
industries like steel, machine building, coal
and heavy chemicals.
Identifying under-development with depen-
dence on agriculture and thinking industrial
growth especially the development of heavy
industries as the core of development
underlined the approach and strategy of the
Second Five-Year Plan.
To quote from Second Plan again, low or
static standards of living, under-employment
-
7/25/2019 nehru model of growth
14/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1 4
and unemployment and to a certain extent
even the gap between the average incomes
and the highest incomes are all
manifestations of the basic under-
development which characterises aneconomy depending mainly on agriculture.
Rapid industrialisation and diversification of
the economy is thus the core of development.
But if industrialisation is to be rapid enough,
the country must aim at developing basic
industries and industries which makemachines to make the machines needed for
further development.
It is clear from above that in the Second Plan
there was clear shift of priorities from
agriculture to industries and within
industries to basic heavy industries. As
mentioned above, the logic of Mahalanobis in
emphasizing heavy industries was that the
growth of basic heavy industries will enable
the economy to accelerate the rate of capital
formation and therefore economic growth. In
fact, he identified the rate of growth of
investment in the economy with the rate of
growth of output in the capital goods (sector)
industries within the economy.
Mahalanobis Four Sector Model:
-
7/25/2019 nehru model of growth
15/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
Mahalanobis realised that the basic heavy
industries being capital-intensive will not
ensure rapid expansion of employment
opportunities and to bring the employment
aspect into sharp focus he put forward a foursector growth model in which he kept heavy
industry sector (i.e. K-sector) intact but
divided the C-sector (i.e. consumption goods
sector) into three sub-sectors: C1, C2, and C3
(sector C1 represented factory enterprises
using mechanised techniques and producingconsumer goods; Sector C2 represented the
household and small-scale enterprises also
producing consumer goods and Sector C3
represented provision of services).
It was sector C2 representing households and
small-scale industries which in Mahalanobis
four sector model was visualised to ensure
the increased supply of consumer goods to
meet their rising demand for them and also to
ensure, being labour intensive, expansion of
employment opportunities.
In keeping with this approach, Second Five
Year Plan put restrictions on the growth of
capacity in factory enterprises engaged in
commodity production. However, since for
these household or cottage enterprises,
-
7/25/2019 nehru model of growth
16/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
adequate resources were not provided, nor
any effort was made to improve their
productivity, they could neither fulfill their
largest of production of consumer goods nor
of generating enough employmentopportunities.
In the Third Plan (1961-66) also the strategy of
Second Plan was continued as is clear from
the following: In the Third Plan, as in the
Second, the development of basic industries
such as steel, fuel and power and machine
building and chemical industries is
fundamental to rapid economic growth.
These industries largely determine the pace
at which the economy can become self-reliant
and self-generating. Though, to achieve self-
sufficiency in food-grains and increase
agricultural production to meet the
requirements of industry and exports was
stated to be one on the objectives of the Third
Plan, actual allocation of resources between
agriculture and other sectors did not exhibit
any difference from that of the Second Plan.
Therefore, the concern for food and
agriculture in the Third Plan appears to be
mere verbal and was not built into the
strategy of development.
-
7/25/2019 nehru model of growth
17/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
The Fourth Five-Year Plan (1969-74) which
was prepared under the Deputy
Chairmanship of Late Prof. D.R. Gadgil, tried
to give new shape to the planning strategy
and emphasis was sought to be placed on thecommon man the weaker sections and the
less privileged.
However, the Fourth Plan slightly raised the
allocation of Public Sector outlay to
agriculture and irrigation to about 23 per cent
as against 20 per cent in the Second Plan and
the Third Plan, and a good deal of hang-over
of the heavy industry biased strategy still
prevailed in this plan too.
Despite all talk of Garibi Hatao and direct
attack on poverty which preceded the
formulation of the Fifth Plan, in the Fifth Plan
allocation of public sector investment to
agriculture and irrigation was once again
reduced to about 20 per cent and the same
old heavy industry bias prevailed in the Fifth
Plans development strategy.
Critical Evaluation of Mahalanobis Heavy
Industry Strategy of Development:
Mahalanobis heavy industry first strategy of
-
7/25/2019 nehru model of growth
18/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
development has come in for severe criticism
right from the time of formulation of the
Second Plan. First, a serious mistake in
Mahalanobis model is that he identified
investment with saving.
That indicates lack of knowledge of econom-
ics. Economists have been emphasizing
especially in the context of developing
countries that increase in the rate of
investment is governed by the increase in the
rate of savings. If planned investment is not
matched by savings, then inflationary gap
will emerge which will cause prices to rise.
It is bad economics to identify investment
with savings. Savings in an economy are
determined by behavioural characteristics of
the decision-making units such as households,
the corporate sector and the Government.
Saving by the households depends upon the
propensity to consume which in turn depends
upon various subjective and objective factors.Savings by the corporate sector depend upon
the policies regarding depreciation,
distribution of dividends and undistributed
profits. Savings of the Government are
governed by its policies regarding taxation
-
7/25/2019 nehru model of growth
19/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 1
and consumption expenditure, efficiency and
profitability of public enterprises.
Thus, when the planning authority allocates
relatively more resources to heavy capital
goods industries, as is envisaged in
Mahalanobis growth model, it will lead to
more physical investment or growth of
capital stock. But there is no guarantee that
savings, governed as they are by various
behavioural characteristics of decision-
making units, will rise to the level of planned
investment.
Therefore, by envisaging higher rate of
physical investment without considering how
savings of the community could be raised to
the planned investment, Mahalanobis model
contained built-in inflationary potential.
Therefore, being unmatched by savings to
fulfill the investment targets of the plan,
recourse in actual practice had to be made to
deficit financing. No wonder that due to theexistence of inflationary gap in Indias Five
Year Plan prices began to rise from the very
beginning of the Second Plan so much so that
during the Fourth Plan period (1969-74) rate
of inflation assumed serious proportion
-
7/25/2019 nehru model of growth
20/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
reaching as high as about 30% during 1973-
74, the last year of the Fourth Plan.
A crucial weakness of Mahalanobis heavy
industry strategy of development was pointed
out by Professors Vakil and Brahmananda.
They criticised heavy industry strategy in
their now well known joint work, Planning
for an Expanding Economy.
According to them, growth of national income
and employment is determined by the supply
of wage goods. They pointed out that when
disguised unemployed are employed in
productive work on the wage basis, the
demand for wage goods will increase and
unless the adequate amount of wage goods
are not available, the disguised unemployed
and openly unemployed cannot be put to
work on the wage basis.
According to them, there exists a wage-goods
gap in under-developed countries like India
and the basic cause of unemployment anddisguised unemployment in them is the
existence of this wage-goods gap. Wage goods
act as a constraint on the growth of
industrialisation and non-agricultural
growth.
-
7/25/2019 nehru model of growth
21/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
Thus, in the determination of growth of
income and employment, while Mahalanobis
emphasised fixed capital, Brahmananda and
Vakil laid stress on the wage goods which are
also called circulating capital. As mentionedearlier, Vakil and Brahmananda put forward
a growth model in which wage goods played a
key role.
Accordingly, they suggested a developed
strategy in which top priority was given to
the agriculture which produces most
important form of wage goods i.e., food-
grains.
There is no doubt that Mahalanobis heavy
industry strategy overlooked the importance
of agriculture or wage goods in the growth
process of the economy. This manifested itself
in the rapid rise of prices from the very
beginning of the Second Plan.
While a relatively large investment in the
basic industries resulted in the creation ofmoney incomes and consequently in a large
increase in demand for wage goods, the
supply of wage goods did not adequately
increase due to the continued neglect of
agriculture in Indias planning strategy.
-
7/25/2019 nehru model of growth
22/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
This caused imbalance between demand for
and supply of wage goods which has been
responsible for inflationary situation in the
Indian economy. The continued neglect of
wage goods in the development strategy ofIndian Plans, right up to the Fifth Plan is quite
surprising since, as pointed out above, this
weakness of the strategy was pointed out by
Professors Vakil and Brahmananda at the
time of the formulation of the Second Plan.
The larger allocation of resources to the basic
heavy industries deprived agriculture
(including irrigation) and rural industries of
enough resources required for their growth.
It is now well-known as brought out by
Professor Lipton, B.S. Minhas that Indias Five
Year Plans beginning from the Second one,
based as they were on Mahalanobis growth
model with its emphasis on heavy industries,
suffered from relative neglect of agriculture.
The view that there has been relative neglect
of agriculture in Indian Plans has been
forcefully and effectively expressed and
provided by Professor Michael Lipton. He
writes: We have seen that neither allocations
of public money, nor incentives to the
movement of persons and other resources,
-
7/25/2019 nehru model of growth
23/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
have favoured agricultural development; that
70 per cent of the workers get less than 35 per
cent of investment finance and a far smaller
share of human skills. Several types of
pressures on opinion and policy havecombined to bias the allocation of cash, effort,
personnel and research away from rural
needs.
Like Professor Lipton, B.S. Minhas also holds
similar view about relative neglect of
agriculture in Indian Planning. He thus states,
In practical terms the most unfortunate
consequences of our adherence to this
philosophy of development has been the
appalling neglect of agriculture and rural
development.
Before Lipton and Minhas, Professors, C.N.
Vakil and PR. Brahmananda, as mentioned
above have been consistently expressing the
view, about the low priority assigned to
agriculture since the beginning of Second
Plan. Recently, C.H. Hanumantha Rao has also
deplored the neglect of agriculture in the
strategy of Indian Plans. He writes, The
failure of the present strategy to step up
public investment for agricultural
development has accentuated the problem of
-
7/25/2019 nehru model of growth
24/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2 4
unemployment in rural areas.
A serious failure of Mahalanobis
development strategy with its emphasis on
basic heavy industries is that it failed to
generate adequate amount of employment
opportunities. Pattern of industrialization has
been based on capital-intensive technology
imported from abroad and has been oriented
towards urban large-scale industries.
If the emphasis were on rural-oriented indus-
trialization promoting cottage and small-scale
industries, using intermediate technologies,
the problem of labour-surplus and
unemployment would not have been as acute
as it is now.
Besides this, attention was not paid to absorb
labour in the agricultural sector, and the
agricultural development strategy that could
absorb more labour in productive
employment was not adopted. Necessary
technological and institutional changes fordesigning such an agricultural strategy
required to create more employment were
not in actual practice made.
Many land reform measures, apart from
-
7/25/2019 nehru model of growth
25/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
abolition of big Zamindars and Jagirdars,
remained mostly on paper. Legislations
regarding tenancy reforms and ceiling on
land holdings were not actually enforced and
implemented. Being highly capital-intensivethe basic heavy industries have themselves
created very little employment opportunities.
It is no doubt true that certain products of
heavy industries such as fertilizers, steel,
cement, etc. are certainly required for the
growth of agriculture, especially in the
context of hew agricultural technology and
should, therefore, be produced, but
Mahalanobis strategy envisaged achievement
of self-sufficiency all along the line, involving
production of highly sophisticated machines
to make machines.
This autarchic nature of Mahalanobis
development strategy has been rightly
criticised. B.S. Minhas rightly writes, The
logic of the Heavy Industry First Strategy in
India sprouted from a number of
philosophical riddles. One important
conundrum runs as follows: should you
import food, or import fertilisers to produce
food at home? Rather than import fertilisers,
should you not import fertiliser materials and
-
7/25/2019 nehru model of growth
26/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
machinery in order to make fertilisers at
home? But why import fertiliser machinery?
Should you not import machines to make;
fertiliser machinery at home? On and on goes
the riddle?
In view of the limited resources available for
investment, the inclusion of highly capital-
intensive industries producing machines and
mother machines, exhaust a great deal of
resources, leaving relatively little for
agriculture and rural industries which
contain large employment potential.
Therefore, in our view, in initial stages of
development some intermediate products,
machines, and capital goods should be
imported if they are urgently needed for
some industries, even if in their case, we
possess comparative advantage in the
dynamic context.
However, it needs to be emphasised again
that the form of capital is crucial foremployment generation. What is required is
the small and simple types of machines and
tools which are required for the growth of
agriculture and small-scale rural industries.
-
7/25/2019 nehru model of growth
27/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
Further, the production of those types of
capital goods such as fertilizers, pesticides,
cement which will help in raising agricultural
production and employment need to be
expanded. Some large-scale industries, iftheir large size is necessary in view of
technological considerations, should play a
supporting role to the development of
agriculture and rural industries. Thus, the
strategy of growth in India should be
reoriented so that agriculture and ruralindustries constitute the main thrust of the
development effort.
From the foregoing analysis, it follows that if
the mounting unemployment problem is to be
tackled, the strategy of development adopted
need to be revised and modified. In the new
strategy, agriculture has to play a key role in
generating enough employment opportunities
for a long time to come.
The fact that 68 per cent of the Indian labour
force and majority of the unemployed and
under-employed reside in the rural areas and
further that the employment potential of the
industries of large-scale type is very little, the
promotion of agricultural and rural
development must be made the springboard
-
7/25/2019 nehru model of growth
28/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
and the leading sector for generating
productive employment for millions. There-
fore, the strategy for agricultural
development should be such as will absorb
productively the largest possible number ofworkers.
Another weakness of the heavy industry
first strategy and development was that it
chose pattern of investment with higher
capital-output ratio. In basic heavy industries
capital-output ratio was admittedly high and
in agriculture and related activities, capital
output ratio was low.
Thus, the highest priority to basic heavy
industries and low priority to agriculture in
the pattern of investment meant the choice of
high macro-value of incremental capital
output ratio (ICOR). As has been made clear
that if a higher growth rate is desired, given
the initial value of a rate of saving and annual
increments therein over the projected period,
then the criterion should be to choose a
pattern of investment with a lower macro-
value of capital-output ratio. In the case of
India, this would have implied a high priority
to be given to agricultural and related sectors
over a long period of time.
-
7/25/2019 nehru model of growth
29/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 2
Therefore, the choice of the pattern of
investment containing a high priority to basic
heavy industries and low priority to
agriculture meant a low rate of economic
growth. As has been pointed out above,Mahalanobis and others supporting his
strategy contended that their strategy would
ensure high rate of growth in the long run.
But in actual practice even 25 years (1956-80)
Mahalanobis development strategy of 1955-56
failed to ensure more than 3.5 per cent
average annual rate of growth. In the
meantime people suffered a lot due to the
inflation generated by the strategy and the
non-availability of requisite amount of
essential consumer goods.
Mahalanobis heavy industry strategy suffers
from another weakness in that it heavily
depends upon foreign exchange
requirements. Though the strategy assumed
that exports from the Indian economy could
not be sufficiently increased it required a
large amount of foreign exchange resources
to establish a network of heavy capital goods
industries which required the imports of capi-
tal equipment and machinery on a large scale
from other countries. For a self-contained
-
7/25/2019 nehru model of growth
30/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
growth model, framed in the context of a
closed economy or stagnant exports, this was
an inner contradiction. This also had two evil
effects.
Because of the low priority to agriculture and
consumer goods industries which had export
potentials, export could not rise much, and
secondly, due to the highest priority to heavy
capital goods industries large imports of
capital equipment and materials had to be
made.
Such was the large requirement of foreign
exchange to import capital equipment that
despite the liberal foreign aid received from
countries especially the U.S.A. even then the
country had to face a serious foreign
exchange crisis.
It was said in the defence of the heavy
industry strategy that it would ultimately
help in substituting imports of heavy
industrial products such as steel, cement,various kinds of machines, fertilizers etc. This
implies that import substitution when
accomplished would enable the economy to
dispense with foreign aid.
-
7/25/2019 nehru model of growth
31/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
However, it was said that in the meantime aid
was required to import equipment and
materials to set up heavy capital goods
industries. Thus it was claimed that the heavy
industry strategy envisaged getting aid toend aid.
However, the fact remains that far from
moving the economy towards self-reliance,
the heavy industry strategy increased the
dependence on foreign aid. Because of low
priority to agriculture in the strategy,
production of food-grains did not increase
adequately and as a result the imbalance
between population and food-grains further
increased during the planning period.
In order to correct this imbalance food-grains
had to be imported on a large scale from
other countries. Whereas the imports of food-
grains into India during the First Plan period
were of the order of 12 million tonnes, it rose
to 17 million tonnes in the Second Plan
period.
The situation worsened in the Third Plan
period as the implementation of heavy
industry strategy further proceeded and 26
million tones of food-grains were imported
-
7/25/2019 nehru model of growth
32/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
during the Third Plan period. During the
three years of plan-holiday period (1966-69),
the imports of food-grains jumped to 25
million in three years period.
In the Fourth Plan period in which hangover
of the heavy industry strategy persisted, food-
grains imports continued unabated with the
exception of the Year 1972. During the six
years period 1970-76, 26.4 million tonnes of
food-grains were imported.
It is thus clear that the imbalance between
food-grains and population was the direct
result of the neglect of agriculture in Indias
heavy industry first strategy. Thus the most
distressing effect of the strategy was that the
country came to be dependent on even food-
grains.
But for the imports of food-grains under PL
480 and liberal foreign aid which was made
available, India could not have been able to
implement the Mahalanobis strategy for itsinner contradictions and its
inappropriateness to the Indian reality would
have come to surface much earlier.
The situation in the beginning of the Fifth
-
7/25/2019 nehru model of growth
33/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
Plan, i.e. in 1974 was that Indias large foreign
exchange resources were being used to meet
the needs of current consumption (i.e., to
import food-grains) rather than to import
capital equipment and materials to sustainnew investment or capital accumulation.
Thus for stepping up the rate of capital
accumulation and therefore economic growth
we came to be dependent on all the three
types of commodities (i) capital equipment,
(ii) raw materials, and (iii) food-grains. Thus,
despite the objective of achieving self-
reliance, the strategy adopted drove the
economy away from it. The philosophy of
aid to end aid proved to be myth.
Heavy industry strategy has also been
criticised for its ignoring the relevance of the
principle of comparative advantage and the
gains to be obtained from specialisation in
some selected fields. Mahalanobis formulated
his growth model on the assumption that
exports could not be expanded sufficiently.
With the help of his model he showed that it
is through the adoption of the strategy of
substituting imports by domestic production
of heavy industry products such as steel,
-
7/25/2019 nehru model of growth
34/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3 4
fertilizers, various kinds of machines and
machines to make machines, heavy chemicals
that high long-term rate of growth could be
achieved.
Thus Mahalanobis strategy involved
industrialisation of import-substitution type.
The question whether the new heavy
industries would have a comparative
advantage or not was not considered as a
relevant consideration.
The reckless pursuit of import substitution all
along the line and accordingly setting up of
all basic heavy industries such as steel,
fertilizers, heavy chemicals, machine building
and also industries which make machines to
make machines (i.e., industries producing
mother machines), and so on without
considering whether we had comparative
advantage in their production.
If we had comparative advantage in some
basic heavy industries we should haveconcentrated our resources and enjoyed
advantages of quick specialisation in selected
lines rather than thinly spreading our
resources on all types of basic heavy
industries irrespective of whether we have
-
7/25/2019 nehru model of growth
35/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
comparative advantage or not in them caused
misuse of scarce investment resources. As
seen above, as a result of this strategy of all-
round import substitution to build basic
heavy industries we came to be dependent onimports from the rest of the world than we
ever were or needed to be.
It may also be pointed out that in the
Mahalanobis heavy industry strategy
alternative policy of development of
industries which had large export potential
was not at all given any consideration. That
supplies of some capital goods could be
procured from abroad by development of
export industries was ruled out.
In this connection it was pointed out by the
followers of Mahalanobis that the expansion
of Indias exports would mean the decline in
its terms of trade. In our view, the contention
that the increase in Indias exports would
necessarily mean decline in terms of trade
was not justified.
In fact, up to 1972 (i.e. before the oil crisis)
the terms of trade had been in Indias favour.
It may be pointed out that declining terms of
trade argument was advanced by supporters
-
7/25/2019 nehru model of growth
36/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
of Mahalanobis strategy only after the
Mahalanobis model had been accepted and
put into actual practice.
Finally, it may be noted that for achieving
high long-term rate of economic growth
Mahalanobis and later Raj and Sen and
Gautam Mathur have laid the greatest stress
upon high magnitude of the ratio of
incremental plough back of heavy industry
products to the expansion of heavy industries
sector itself as compared to all other sectors.
This pattern of industrialisation, according to
them, would automatically raise the saving-
income ratio and generate a high rate of
economic growth in the long run. However
this argument is full of deficiencies and
infirmities.
The all-round development of heavy industry
sector and the highest ratio of plough back of
heavy industry products to the heavy
industry sector involves, given the scarcity ofresources, not only the appalling neglect of
agriculture and rural development but also
the neglect of the development of export
industries and thereby enjoying the benefits
of specialisation.
-
7/25/2019 nehru model of growth
37/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
Before publishing your
articles on this site,
please read the
following pages:
Advertisements:
, Economics
Related Articles:
Differences between Eastern and WesternSchools
Significance of Micro Albuminuria
Company Responses and Adjustments
Attitude and Social Cognition (FAQ)
Social Influence and Group Processes(Q&A)
Office Budget: Meaning, Importance andLimitations of Office Budget
Essay on An Example of Attention DeficitHyperactivity Disorder
Social Psychology of a Child at Pre-SchoolYears
http://www.yourarticlelibrary.com/uncategorized/social-psychology-of-a-child-at-pre-school-years/23703/http://www.yourarticlelibrary.com/uncategorized/essay-on-an-example-of-attention-deficit-hyperactivity-disorder/748/http://www.yourarticlelibrary.com/office-management/office-budget/office-budget-meaning-importance-and-limitations-of-office-budget/69046/http://www.yourarticlelibrary.com/uncategorized/social-influence-and-group-processes-qa/42821/http://www.yourarticlelibrary.com/uncategorized/attitude-and-social-cognition-faq/42819/http://www.yourarticlelibrary.com/company/company-responses-and-adjustments/43576/http://www.yourarticlelibrary.com/health/significance-of-micro-albuminuria/64538/http://www.yourarticlelibrary.com/difference/differences-between-eastern-and-western-schools/47371/http://www.yourarticlelibrary.com/tag/articles-on-economics/http://www.yourarticlelibrary.com/ -
7/25/2019 nehru model of growth
38/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
h tt p: // w ww . you r ar t i cl el i br a r y. com / ec ono m ic s /m ah al an ob is - gr o wt h- m o de l- a nd - he av y - i ndu st r y- s tr at egy - of - de ve l op me nt /38 376 / 3
1. Content Guidelines2.
Prohibited Content3.
Plagiarism Prevention
4. Image Guidelines5.
Content Filtrations6.
TOS7. Privacy Policy8.
Disclaimer9. Copyright
10. Report a Violation
Promotion-Mix:
Meaning and Factor
Influencing
Promotion-Mix
NOVEMBER 5, 2015
Choosing a Suitable
Advertising Medium:
Top 10 Things to
ConsiderNOVEMBER 5, 2015
Personal Selling:
Meaning, Concept
and Need (With
Diagram)
NOVEMBER 5, 2015
Advertising: Concept,
Features and
Classification of Its
Media
NOVEMBER 5, 2015
Sales Promotion:
Concept and Methods
LATEST
http://-/?-http://www.yourarticlelibrary.com/sales/sales-promotion/sales-promotion-concept-and-methods-of-sales-promotion/69577/http://www.yourarticlelibrary.com/advertising/advertising-concept-features-and-classification-of-its-media/69580/http://www.yourarticlelibrary.com/marketing/personal-selling/personal-selling-meaning-concept-and-need-with-diagram/69585/http://www.yourarticlelibrary.com/advertising/advertising-medium/choosing-a-suitable-advertising-medium-top-10-things-to-consider/69588/http://www.yourarticlelibrary.com/marketing/promotional-mix/promotion-mix-meaning-and-factor-influencing-promotion-mix/69591/http://www.yourarticlelibrary.com/how-to-report-a-policy-violation/http://www.yourarticlelibrary.com/copyright/http://www.yourarticlelibrary.com/disclaimer/http://www.yourarticlelibrary.com/privacy-policy/http://www.yourarticlelibrary.com/terms-of-service/http://www.yourarticlelibrary.com/content-filtrations/http://www.yourarticlelibrary.com/image-guidelines/http://www.yourarticlelibrary.com/plagiarism-prevention/http://www.yourarticlelibrary.com/content-guidelines/prohibited-content/http://www.yourarticlelibrary.com/content-guidelines/ -
7/25/2019 nehru model of growth
39/39
12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent
Copyright 2015 YourArticleLibrary.com, All rights reserved. Sitemap
of Sales Promotion
NOVEMBER 5, 2015
http://www.yourarticlelibrary.com/sales/sales-promotion/sales-promotion-concept-and-methods-of-sales-promotion/69577/http://www.yourarticlelibrary.com/sitemap.xml