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 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.

ADVERTISEMENTS:

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 us represent his two- sector model in
the mathematical form.
In his basic two-sector model Mahalanobis divides the economy into
two sectors—the sector C produces consumer goods and sector K
produces capital goods.

Let

t0 = Initial rate of investment.

λk and λc = Proportions of total investment allocated to capital goods
and consumer goods sectors respectively.
Therefore λk + λc = 1
ΒK and βc = Marginal output-capital ratio in the 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 any period can be
divided into two components; the one λkIt, going to capital goods
sector K and λcIt going to consumer goods sector C. Therefore it follows
that,
It = λkIt + λcIt
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, βk and βc 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 = βk λk It – 1 Or It – It – 1 = βk λk 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 (βk λk It – 1) in period t is given by investment in period It –
1 multiplied by the proportion of it going to capital-goods sector (λk)
and the output-capital ratio (βk) in the capital goods sector.
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 λk and
output-capital ratio βk 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 βc 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.
As growth equation (iii) above shows that after a critical range of time,
the larger the investment allocated to capital goods industries, (λk) 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 short
run 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 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

increasing exports, 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 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.

Mahalanobis Growth Model and Development Strategy in

India’s Five-Year Plans:
As pointed out above, Mahalanobis heavy industry first strategy of
development was put into actual practice in India’s 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 took over 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 a
substantially higher level than the average rate of saving.

Although it did not present any explicit formulation of development

strategy 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 dependence 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 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 an
economy 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 make machines 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.