1.2. Mahalanobis Strategy of Economic Growth

There has been a lot of controversy in our country on the appropriate strategy to be adopted for planned economic development. There was no clear strategy in the First Five-Year Plan. But when the second plan was being formulated Prof. P.C Mahalanobis prepared a growth model in which he showed that to achieve a self-sustained growth quickly in the country, it would be essential to devote a major part of the development outlay to building basic heavy industry, e.g. of capital goods industry like steel and the engineering industry for making different types of machines, the multipurpose river valley projects for irrigation and power.

According to Prof. Mahalanobis, the rate of real capital formation in a country like India did not depend merely on savings in the form of money but it depends on the capacity for making capital goods. He argued that even if the rate of savings was substantially raised and it was desired to accelerate economic growth and capital formation by investing it in the consumer goods industries, it would be futile. The reason is that the capital goods required for the consumer goods industries are not produced in the country in sufficient quantities.

Thus, Prof. Mahalanobis was of the view that if large investment is not made in the heavy basic and capital goods industry, the country will forever remain dependent on foreign countries for the imports of steel and capital goods like machinery for economic development and real capital formation. Since it is not possible for India to earn sufficient foreign exchange for the purpose by increasing exports, the capital goods cannot be imported in sufficient owing to foreign exchange constraints. The result will be that the rate of economic growth and the rate of real capital formation in the country will be slow indeed. Thus according to him, to achieve rapid economic growth and self-reliance, it would be necessary to give a high priority to basic and capital goods industries in the development strategy of a plan.