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12/14/2015 M ahal anobi s Gr ow th M odel and H eavy- Industr y Str ategy of D evel opm ent

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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
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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


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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


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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


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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.


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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.
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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


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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


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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


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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


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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


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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


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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


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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:


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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,


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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.


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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


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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


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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


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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.


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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.


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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,


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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


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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


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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


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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.


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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


28/39



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.


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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


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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.


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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


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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


33/39



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,


34/39



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


35/39



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


36/39



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.


37/39



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