Assignment Q: Discuss in detail the ‘Nehru- Mahalanobis’ strategy.

Also,
discuss its main achievements and failures.

A CRITICAL BREAKDOWN OF THE ‘NEHRU-MAHALANOBIS’ STRATEGY

by Aditi Gupta
2020/838

The most significant shift in the growth of the Gross Domestic Product (GDP) of our country in
the 20th century is centred around the decades of 1950-60. It is the period of 1950-64, also
termed “the Nehru era”, a period which witnessed drastic changes in the major sectors of
post-independent India. While there are supporters of this policy, it has also been a much-debated
topic among economists who keep finding new data for a more comparative view of the
aftermath. There was resurgent growth and transformation of a stagnant colonial enclave into an
economy capable of sustained growth. A major catalyst of a lot of these growth-inducing
interventions was the economic policy introduced under the regime of Prime Minister Jawaharlal
Nehru known as the ‘Nehru Mahalanobis’ strategy.

A BRIEF BACKGROUND

Before delving into the details of the strategy and better understanding the motivations behind it,
we first need to know about the socio-economic situation of the country at that time. India was a
recently independent country striving hard to break from its immediate past and witness some
economic growth. The Britishers had left us with the legacy of a distraught country where the
economic sectors were unregulated and disorganised. The Planning Commission set up in 1950
drew out the First Five Year Plan (1951-56) that ensured a relative stabilisation of price levels
and food supply in the country; now the aim for the coming Second Five Year Plan was shifting
toward industrialising the economy. The ‘Nehru-Mahalanobis’ strategy developed by Prof. P. C.
Mahalanobis under the guidance of PM Jawaharlal Nehru (also the Chairman of the Planning
Commission) formed the basis of this Second Year Plan.
WORKING OF THE MODEL

This model planned to provide the analytical structure for the project of increasing income levels
and eliminating poverty through industrialisation by accelerating growth. Mahalanobis had taken
into consideration a two-sectored economy producing only capital and consumer goods. This
meant it was a closed economy with no government intervention and all the production would
sum up to the GDP/ national income. Here, the capital good, which is used in the production of
both the consumer good and itself, is not put under the constraint of diminishing returns. This
meant that a greater initial allocation of investment for the production of capital goods would
lead to a higher stock of the same later. The capital goods were being considered in place of the
investment here, so if a higher initial allocation is done towards the capital goods, it definitely
ensures more investment as compared to if the production was skewed more towards the
consumer goods. This would also be followed by a higher growth rate.

A CRITICAL ANALYSIS OF THE FEATURES

There has been a lot of appraisals of the strategy which convey both its shortcomings and
achievements. This model was one of a kind, with a certain ‘integrity’ to it. Here integrity meant
that this era of economic policy was comparatively freer of party politics and economic vested
interest but was more for the general welfare of the economy. Some talk of this as a ‘wasted past’
due to its lower rates of growth as compared to the remarkable current growth rates of the Indian
economy. But there are a lot of distinct characteristics of this model that need to be further
studied.

Heavy Goods Sector

A fast-growing ‘heavy goods’ (machine-building complexes with a large capacity for the
manufacture of machinery to produce steel, chemicals, fertiliser, electricity, and transport
equipment) sector was very pivotal to the Nehru-Mahalanobis strategy. There was
disproportionate investment done on heavy goods even though the short-run growth rates were
low. This led to a somewhat neglect of the consumer goods sector. But it was strongly believed
that the long-run rate of growth would be higher, even for the consumer goods sector, as it
enhances productive capacity across the economy.

Similarity to the Feldman model

There has been a lot of criticism over its similarity to the Feldman Model, a model used by the
Soviet Union for their own planning. The stormy politics and genocides of the Soviet Union had
made many wary of the nation and its methods of development including forced collectivisation.
But Mahalanobis stated that he was unaware of this model at the time of making his own model.
Even Nehru had promised that India won’t go the same path at the cost of aiming at a lower rate
of growth. It is also justified to say that a newly independent country like India could hardly have
been faulted for hoping to achieve rapid industrialisation and a resultant increase in income
within a short time as the Soviets had done.

The Supply-Side Model

The underlying idea of the model had been that of an accounting scheme which also made it
exclusively a supply-side model. There had been no acknowledgement of a possible demand
constraint on capital accumulation and no flexibility to change the demand growth. This SS
model based entirely on the physical relationship between inputs and outputs could be possible in
command economies like the Soviet; but in a country like India where the private sector was
very much active with demand being its moving factor, a demand constraint could not be
ignored. However, it is also necessary to draw a clear distinction between the model and the
strategy. The plan (strategy) did explicitly recognise the role of demand so it would be unfair to
criticise the whole strategy based on this one flaw in the model.

An alternate model

The Vakil-Brahmananda plan was a serious challenge to the Mahalanobis plan. This plan was
centred around the ‘wage goods’ sector. According to them, the multiplier mechanism cannot
work if the wage goods are neglected, and following this, they stated that employment cannot
expand without wage goods, something that the Nehru-Mahalanobis plan was not prioritising.
Even agricultural development becomes fundamental. However, they underestimated the
important role capital goods play in agricultural growth. They also didn’t take into account the
lack of competitiveness that existed because of the scarcity of capital goods and what vulnerable
position it put us in. It also seemed that in their model, employment got determined in the labour
market independent of its price. While these inaccuracies did exist in the V-B model, there is
symmetry with the Mahalanobis model with the former downplaying the importance of capital
goods and the latter downplaying the importance of consumer goods. But at least Mahalanobis s
saw industrialisation as an input into agricultural growth and expansion of production of
consumer goods for meeting growing demand, while the V-B just neglected an important factor
of growth in the economy- the capital goods.

Excessive Government Control

The government intervention in the free market was taken for granted and was used to
manipulate the private sector’s economic activities congruent to the predicted outputs. Many
critics of Indian economic policy in the 1950s saw the Mahalanobis plan as violative of
economic freedoms due to its reliance on controls. Once the controls had been set they
proliferated to the point where no economic activity, unless of a very small scale, could be
legally pursued without obtaining various kinds of permits and licences from different
departments of government. But it should also be observed how Nehru emphasised that the only
kind of economic progress worth having was “progress by consent”. There wasn’t any direct
manipulation or force used in shaping the development of the market.

Neglect of Primary Education (Social Sector)

Primary Education was one area that was neglected very severely without any reasonable
justification. Krishnamurti (1955) wrote “… how absurdly low are the sums allotted for
education in the Mahalanobis plan” talking about them being skewed, with negligent importance
given to education and asking for a reallocation of government expenditure away from heavy
industries to this. speaking of it as being lopsided, with little importance given to education and
other social services, and calling for a reallocation to expenditure on this account from the outlay
on heavy industries. It cannot be denied that the rate of growth of output via human capital could
have been so much more had the required attention to education been given from the very start.
This led to a very non-inclusive growth for India.

The link between Agriculture and Industry

It was a huge misconception that the agriculture sector was neglected under this strategy.
Mahalanobis had instantly realised that during the 1950s agricultural growth was highly
restrained due to the unavailability of many basic kinds of industrial inputs. There was an
undeniable linkage between agriculture and industry. The improvement of one aspect of
agriculture would supply food and raw materials for the advance of one step in manufacturing
industries which then would speed up irrigation and increase the supply of agricultural inputs
like fertilisers and pesticides and help in the promotion of scientific research, which would then
lead to further improvements in agriculture. Indeed there was an acceleration in the agricultural
growth rate in the mid-1960s which was a direct result of the policies under this strategy. Data
also reveals that the largest growth in the Nehru Era was in the primary sector, largely
comprising agriculture, and had also exceeded that of the secondary sector/ industry. This is not
to say that there weren’t any problems in dealing with the agriculture sector. The allocation for
agricultural irrigation, extension, and fertilizer production should and could have been definitely
higher; and this was low on priority as compared to the industrial sector. But we need to keep in
mind the agricultural legacy of colonialism: the huge deceleration of the agriculture sector in the
first half of the 20th century and how it was remarkably reversed during the Nehru Era.

Balance Of Payments

While the main objective of the planning in the Nehru Era was the raising of the level of income,
Mahalanobis was further engaged with releasing India (hopefully) permanently from the balance
of payments constraint and developing independently. This was very much the reasoning behind
industrialisation. Autonomy was at the core of the Nehruvian vision of post-colonial economic
development. This couldn’t be done if India kept being in a balance of payments deficit and so
international borrowings were to be made lower. This was very much the reasoning behind
industrialisation. Further industrialisation was being achieved by greater investment in heavy
industry. A few steps like the contemplation of no additional major foreign assistance, increase in
tax savings and foreseeing significant contributions from the public sector were to make India
more self-sufficient.

Growth Rates

As stated previously, the growth in the Nehru years amply exceeded what was attained in the
final half-century of colonial rule. It was a distinctly Indian growth with no dependency on
foreign aid. Additionally, the immediate reversal and quickening of the economy that was
observed in the second half of the 20th century had been already achieved in the Nehru era itself.
Even the commodity-producing sectors grew faster than services which had been the fastest
growing sector under the imperial regime. In a new independent, poor and growing economy like
India with a low level of consumption of even the most basic goods, the quicker growth of the
commodity sector was a beneficial outcome. In comparison with the other up-and-coming
developing countries and even some far advanced economies, India was doing well in terms of
GDP growth. There was also an increase in the growth rate of the population which is always a
positive indicator of better standards of living. Lastly, the observed increase in the fertility rate
was due to improved public health outreach which also led to a decline in the incidence of
malaria and widowhood.

Public Sector and Resource Mobilisation

Currently, there is an indisputable disappointment towards the performance of the public sector.
There is no growth, lack of innovation, carelessness for social responsibility and lack of returns.
It is also basically being financed by the poor who don’t even gain returns from it. This has been
a result of poor decision making and execution of the sector, but saying that it is the causation of
Nehru’s policies would be incorrect. During the Nehru era, the public sector was assigned the
role of resource mobilisation to create funding for the state. Some of it came from sterling
balances or foreign loans and aid; and the rest from within the economy. The tax system was also
directed to collected from the increasing national income. The public sector was extended to
commercial and industrial activities for raising resources. Due to this public investment and
public savings increased. The public entreprises actually grew faster than the private ones.
However this was not at all a welfarist move. Unlike nowadays, populism was looked down
upon by the policymakers, and so there is a complete absence of it in the recommendations; there
were even some suggestions of discontinuing the practice of excluding essesntials from taxation
in the short run for financial mobilisation. The public sector’s only goal was gaining more
resources, it is now, after getting tangled with politics, post Nehru, that it has turned into a vast
machine for dispensing patronage and buying out politically the vested interests of the day.

CONCLUSION

The Nehru era had definitely been more than a decade of momentous changes for the Indian
socio-economic-political landscape. An interfering bureaucracy, hostility towards internation
trade, lack of competition, lack of populism and further low productivity were al the unfortunate
ill-effects, but it is undeniable that this era saw financial and resource mobilisation with frequent
spurts of positive growth. India was still in early stages of post-independence and all these
policies were open to corrections. One thing is clear; there really hasn’t been any other leader
like Nehru who was so involved in the planning of the economy, who was the mastermind and
execution head both, behind these policies. Even the policymakers of that time had a certain
understanding of the uniqueness of India, not in a civilisational sense but in the sense of the
challenges it faces given its economic backwardness and its democratic polity. Free of politics
and economically motivated decisions, these were perhaps the first and quite possible the last set
of policies clean of the stain of any party politics and would remain to be the foundational steps
in shaping our economy to what it is today.

References- Balakrishnan, Bhagwati and Panagaria, Vijay Joshi