UNIVERSITY OF MUMBAI

DEPARTMENT OF ECONOMICS
DEVELOPMENT STRATEGY INITIATED
DURING THE II
nd
FIVE YEAR PLAN : A CRITICAL REVIEW
BY
AJIT KARNIK
WORKING PAPER 97/15
FEBRUARY 1997
DEVELOPMENT STRATEGY I NI TI ATED DURI NG THE SECOND
FI VE YEAR PLAN: A Cr i t i cal vi ew

Aj i t Kar ni k
Depar t ment of Economi cs
Uni ver si t y of Bombay
1. I NTRODUCTI ON
The l ast f ew year s, especi al l y af t er t he i ni t i at i on of
economi c r ef or ms i n I ndi a, have seen a l ot of soul sear chi ng wi t h
r espect t o t he devel opment st r at egy t hat had been f ol l owed i n
t hi s count r y over t he l ast t hr ee and hal f decades. To be f ai r
t her e have been mi sgi vi ngs i n cer t ai n quar t er s r egar di ng t he pat h
t hat I ndi a has char t ed out si nce 1991- 92, as wel l . These
mi sgi vi ngs and appr ehensi ons have been shar ed acr oss t he
i deol ogi cal spect r um: t he l ef t vi ews t he i mpor t ance bei ng gi ven
t o mar ket s as an abdi cat i on of i t s r esponsi bi l i t i es by t he St at e;
t he r i ght , on t he ot her , bel i eves t hat mar ket s st i l l cont i nue t o
be shackl ed and t he St at e has st i l l not r el i nqui shed enough of
i t s cont r ol s f or t he mar ket t o r eal l y del i ver benef i t s. Al ongsi de
t hi s i nt r ospect i on wi t h r espect t o I ndi an pl anni ng t her e have
been compar i sons wi t h t he success st or i es i n East Asi a. I t i s
wel l known t hat r oost of t he East Asi an "Ti ger s" began t hei r
pr ocess of devel opment ar ound t he same t i me t hat I ndi a di d, but
choosi ng a di f f er ent st r at egy of gr owt h, have f or ged f ar ahead of
I ndi a. Thi s sense of bei ng l ef t behi nd has, been coupl ed wi t h
angui sh t hat had I ndi a chosen di f f er ent l y, i t woul d have been
among t he r anks of t he "Ti ger s". Thi s angui sh i s not over come by
r at i onal i sat i ons such as "even t hough l i f e can best be under st ood
backwar ds, i t has t o be l i ved f or war d" i . e. i n r et r ospect t he
deci si on t aken ear l i er may seemi nappr opr i at e t hough at t he t i me
i t was t aken, i t may have been r easonabl e . Consequent l y, t her e
has r aged a cont r over si al debat e r egar di ng t he consci ous choi ce
of I ndi a' s devel opment st r at egy i n t he mi d- 1950s. The pl an of t he
paper i s as f ol l ows: Sect i on 2 deal s wi t h what I have cal l ed
Mahal anobi s' wor l d vi ew, a di scussi on of whi ch, I bel i eve, t o be
i mpor t ant f or appr eci at i ng t he devel opment st r at egy of t he Second
Pl an. Sect i on 3 i s concer ned wi t h exami ni ng di f f er ent aspect s of
t he Mahal anobi s model such as heavy i ndust r i al i sat i on, i mpor t -
subst i t ut i on, empl oyment , et c. Sect i on 4 br i ef l y di scusses a
speci f i c r ol e of t he St at e, namel y; t he one r el at ed t o equi t y i n
soci et y; t he negl ect ed cont r i but i on of mar ket s i n at t empt i ng t o
i nt r oduce soci al j ust i ce i s poi nt ed out . Sect i on 5 concl udes.
* Much of t he r esear ch connect ed wi t h t hi s paper was done dur i ng
t he cour se of t wo t er ms spent at St . J ohn' s Col l ege, Cambr i dge
i n 1995. The encour agement and hel p of Pr of essor Par t ha
Dasgupt a and Dr . J er emy Edwar ds i s gr at ef ul l y acknowl edged.
1
2- MAHALANOBIS WORLD-VIEW
I n appr eci at i ng t he cont r i but i on of Mahal anobi s t o t he
I ndi an pl anni ng pr ocess, I bel i eve, i t i s qui t e i mpor t ant t o have
a good i dea about hi s vi ew of t he wor l d si t uat i on i n t he l at e
1950s and I ndi a' s posi t i on i n i t . Thi s wi l l t hen enabl e r oe t o
compar e Mahal anobi s wor l d- vi ew wi t h t he si t uat i on as i t pr evai l ed
t hen and poi nt out any cont r adi ct i ons t hat mi ght exi st bet ween
t he t wo, The i mpor t ance of t hi s compar i son cannot be emphasi sed
mor e si nce Mahal anobi s' pl anni ng st r at egy was a di r ect out come of
hi s wor l d- vi ew. Shoul d t he wor l d si t uat i on pr evai l i ng t hen be
seen t o be di f f er ent f r omMahal anobi s' wor l d vi ew, t hen t he whol e
pl anni ng st r at egy i ni t i at ed i n t he Second Pl an coul d be cal l ed
i nt o quest i on. The Second Pl an, i n many ways, char t ed out t he
pat h t hat t he I ndi an economy was t o f ol l ow f or t he next t hr ee and
hal f decades, al bei t wi t h subst ant i al di l ut i on of t he Nehr u-
Mahal anobi s vi si on, but , nonet hel ess, wi t h t he same emphasi s on
t i ne publ i c sect or and shackl es on t he pr i vat e sect or .
2- 1 Export Pessimism
One of t he basi c pr emi ses of t he Mahal anobi s model was t hat
I ndi a woul d not be abl e t o make a br eakt hr ough i n expor t mar ket
devel opment i n vi ew of t he t r adi t i onal char act er of I ndi an
expor t s and t hei r pr i ce i nel ast i ci t i es ( Sengupt a, 1996) . Thus t he
model nei t her consi der ed any anal ysi s of compar at i ve advant age
among i ndi vi dual l i nes of pr oduct i on nor exami ned t he possi bi l i t y
of any gai ns f r omt r ade. Mahal anobi s sought t o demonst r at e wi t h
hi s model how I ndi a coul d conf i dent l y opt i mi se al l ocat i on of
i nvest ment and l ong r un gr owt h f or a gi ven t echnol ogy scenar i o
i r r espect i ve of devel opment s i n t he r est of t he wor l d. Thus t he
Mahal anobi s model was per meat ed, accor di ng t o Par i kh ( 1996) wi t h
" expor t pessi mi sm t hat was wi despr ead i n post - Wor l d War I I
year s". As a mat t er of f act t hi s st at ement of Par i kh i s not qui t e
accur at e i n t hat expor t pessi mi sm was not expl i ci t l y st at ed i n
t he Second Fi ve Year Pl an. The f ol l owi ng quot e of Bhagwat i and
Sr i ni vasan ( 1971, p. 12) i s qui t e i l l umi nat i ng:
" I t i s i nt er est i ng t hat t he Second Pl an di d
not expl i ci t l y st at e t he r at i onal e of t he
shi f t t o heavy i ndust r i es i n t er ms of f or ei gn
t r ade const r ai nt s, so t hat t he l at er
j ust i f i cat i on of t hi s st r at egy by al l udi ng t o
' st agnant wor l d demand' f or expor t s comes
cl ose t o an ex post f act o r at i onal i zat i on"
Fur t her , i t i s poi nt ed out t hat t he di scussi on i n t he Second
Pl an document about I ndi a' s expor t ear ni ngs i s so cur sor y t hat i t
seems i mpl ausi bl e t hat t he assumpt i on of expor t - pessi mi sm was
ser i ousl y made. Thi s st at ement may be suppl ement ed by poi nt i ng
out t hat expor t vol umes i n dol l ar t er ms r ose al most cont i nual l y
over t he Fi r st Pl an per i od ( see Bhagwat i and Desai , 1970) , Tabl e
18. 2, p. 371) and t hat t he bal ance of payment s posi t i on over t hi s
Pl an was comf or t abl e ( Bhagwat i and Desai , 1970, p. 369) . Thus,
I ndi an evi dence ar ound t hat t i me per i od does not sees suppor t t he
2
Vi ewt hat export pessi mi sm, was wi despread.
I t i s, possi bl y, not f ai r t o si ngl e out Mahal anobi s f or t hi s
wor l d vi ew si nce t hi s vi ew was wi del y pr eval ent i n I ndi a. The
obj ect i ve of sel f - r el i ance was a maj or t heme i n t he r epor t s of
t he Nat i onal Pl anni ng Commi t t ee set up under t he Chai r manshi p of
Nehr u i n 1938 ( Bose, 1996) . I t was f el t t hat t he i ndust r i al
wor l d of t he l at e 1940s and 1950s was domi nat ed by economi es of
scal e, t he wor l d mar ket was deepl y segment ed and nat i ons wer e
separ at ed by pr ot ect i oni sm( Guha, 1996) . Gi ven t hi s i nt er nat i onal
mi l i eu what r ol e coul d a densel y popul at ed poor economy l i ke
I ndi a pl ay? I mpor t subst i t ut i ng i ndust r i al i sat i on wi t hi n an
aut ar ki c economy t hus became t he model t hat came t o be adopt ed i n
t he Second Pl an.
How r eal i st i c i s t hi s vi ew of t he wor l d? How i mpor t ant was
i t t o pl an devel opment i n an aut ar ki c f r amewor k? Was t hi s vi ew of
t he wor l d shar ed by ot her count r i es who wer e st ar t i ng of f on t he
pat h of devel opment i n t he 1950s? I t r y t o answer t hese quest i ons
bel ow.
2. 2 Experiences in East Asia
The wor l d was changi ng qui t e r api dl y dur i ng t he 1950s. By
1953 t he Kor ean war had al r eady ended; st eps t owar ds t he
f or mat i on of OECD wer e al r eady bei ng t aken whi ch was subsequent l y
est abl i shed i n 1961; t he pr ecur sor t o t he OECD, t he Or ani sat i on
f or Eur opean Economi c Cooper at i on <OEEC) had been i n exi st ence
si nce 1948; mul t i nat i onal cor por at i ons wer e begi nni ng t o oper at e
and i nvest i n Thi r d Wor l d count r i es by t he mi ddl e of t hi s cent ur y
( Sengupt a, 1996) ; vol ume of wor l d t r ade was al r eady begi nni ng t o
pi ck up dur i ng t he 1950s; i mpor t ant l y t he i ncr ease i n t he r eal
wage r at es i n devel oped count r i es meant t hat t he i nt er nat i onal
di vi si on of l abour was wor ki ng t o t he advant age of devel opi ng
count r i es. Si gni f i cant l y, Asi an count r i es such as Sout h Kor ea and
Tai wan wer e r eady t o t ake advant age of t he changi ng wor l d
si t uat i on wher ei n expor t pessi mi sm of t he i mmedi at e post Wor l d
War - I I year s was st ar t i ng t o wane. At about t hi s same t i me when
t he wor l d was openi ng up and Asi an count r i es wer e about t o l aunch
t hei r expor t l ed gr owt h, I ndi a was i n t he pr ocess of pul l i ng down
shut t er s. The wor l d vi ew t hat pr evai l ed i n I ndi a was not so much
wr ong as i t was compl et el y mi sunder st ood.
The Kor ean exper i ence wi t h i mpor t subst i t ut i ng
i ndust r i al i sat i on ( I SI ) f r om 1954 t o 1960 was a pr oduct of t he
pecul i ar hi st or i cal ci r cumst ances of t hat count r y. Af t er t he
col oni al per i od ended i n 1945, Kor ea was di vi ded i nt o Nor t h Kor ea
( suppor t ed by t he Sovi et Uni on) and Sout h Kor ea ( backed by t he
U. S. A. ) . Dur i ng t he t r ansi t i on, i n 1950, f r om t he Amer i can
Mi l i t ar y Gover nment t o t he Syngman Rhee gover nment , t he Kor ean
war br oke out and l ast ed t i l l 1953. Af t er t he war ended t her e
wer e si gni f i cant doubt s about t he ver y sur vi val of Sout h Kor ea as
a nat i on- st at e. The obj ect i ves of t he Rhee gover nment wer e sol el y
shor t t er m: r econst r uct i on of t he nat i on and mai nt enance of
mi ni mum st andar ds of consumpt i on. I mpor t subst i t ut i on was
3
i nt r oduced by t he Rhee r egi me pur el y i n t he i nt er est of
mai nt ai ni ng mi ni mum consumpt i on and usi ng scar ce f or ei gn
exchange t o i mpor t essent i al commodi t i es. However , Kor ea had
al ways been t r ade- dependent dur i ng col oni al t i mes* and t he
necessi t y of expor t pr omot i on was r ecogni sed as ear l y as 1951,
when t he expor t - i mpor t l i nk scheme was i nt r oduced ( Dat t a-
Chaudhur i , 1981) . The syst em was r ei nf or ced i n 1953 and 1955 by
i ncr easi ng t he pr opor t i on of expor t ear ni ngs t hat coul d be used
f or i mpor t i ng goods, The f i r st i nst r ument s of expor t pr omot i on
wer e hi ghl y di scr et i onar y; expor t er s wer e suppor t ed wi t h mul t i pl e
ex- change r at es, di r ect cash payment s, per mi ssi on t o use f or ei gn
exchange f or pr i vat e use, et c. ( Wor l d Bank, 1987) . Af t er 1955, by
i nt r oduci ng t he dol l ar - denomi nat ed deposi t syst em, expor t er s wer e
i nsur ed agai nst exchange r i sks, as wel l . Thus, even t hough, Sout h
Kor ea had a phase of I SI , t her e was never any doubt r egar di ng t he
di r ect i on i n whi ch Rhee want ed t he syst emof St at e i nt er vent i on t o
move: i t was t owar ds a r egi me of l i ber al i sed t r ade wi t h a
syst emof sel ect i ve i nt er vent i on t o pr omot e i ndust r i al gr owt h and
expor t s ( Dat t a- Chaudhur i , 1981) .
An i mpor t ant f eat ur e of i mpor t subst i t ut i on as pr act i ced i n
Kor ea was t hat t her e was a di st i nct sl owi ng down of t he economy:
GNP gr owt h peaked i n 1957 at 7. 7%and f el l t o 1. 9%by 1960. The
st andar d i nt er pr et at i on f or t hi s i s gr owi ng i nef f i ci ency and
exhaust i on of i mpor t subst i t ut i on ( Haggar d et al , 1990) . A
si mi l ar scenar i o was unf ol di ng i n Tai wan at ar ound t he same t i me
and f or t he same r easons: by t he l at e 1950s, gr owt h was sl owi ng
down ( Li t t l e, 1981) .
Even i n t he br i ef epi sode of I SI t hat was wi t nessed i n
Kor ea, some of i t s unheal t hy pol i t i cal mani f est at i ons wer e
st ar t i ng t o become evi dent . I t i s possi bl e t o at t r i but e t he
sl owi ng down t hat was t aki ng pl ace i n Kor ea dur i ng t he l at e 1950s
t o excessi ve pol i t i cal mani pul at i on of t he economy by t he Rhee
r egi me f or par t i san ends. Rhee used i nst r ument s of economi c
pol i cy, such as al l ocat i on of f or ei gn exchange, i mpor t l i censes,
bank cr edi t , t o sust ai n and bui l d suppor t bases ( Haggar d et al ,
1990) . I t i s i ndeed i r oni cal t hat when t he per i l s of mani pul at i ve
St at e i nt er vent i on and t he i nef f i ci enci es of I SI wor e bei ng
wi t nessed i n Kor ea and Tai wan, I ndi a was embar ki ng on t he same
pat h and wi t h much gr eat er vehemence. The Kor ean and Tai wanese
f l i r t at i on wi t h I SI , i t must be r emember ed, was wi t h i t s easy or
pr i mar y phase, mai nl y conf i ned t o manuf act ur i ng of consumer goods
such as t ext i l es, cl ot hi ng and wood and l eat her pr oduct s ( Li t t l e,
1981) . I n t he I ndi an case, however , i mpor t subst i t ut i on was bei ng
pur sued i n as many sect or s as possi bl e, of t en causi ng a ver y t hi n
di st r i but i on of scar ce r esour ces over t oo many sect or s ( Sengupt a,
1996) .
2. 3 Autarky
I ndi a' s choi ce of I SI was combi ned wi t h- an emphasi s on sel f -
r el i ance or aut ar ky. Such an i sol at i oni st pol i cy meant t hat I ndi a
was cut of f f r om t he r est of wor l d: cut of f f r om i nt er nat i onal
compet i t i on as wel l as t echnol ogi cal pr ogr ess out si de I ndi a. I n
4
t he absence of ei t her of t hese benef i t s t hat woul d have been
avai l abl e had I ndi a i nt egr at ed wi t h t he r est of t he wor l d,
pr oduct i on wi t hi n t he count r y was not cost - compet i t i ve f r om an
expor t poi nt of vi ew; f ur t her , si nce I ndi a was al ways t r yi ng t o
cat ch up wi t h t echnol ogi cal devel opment i n t he r est of t he wor l d,
pr oduct i on qual i t y suf f er ed. Emphasi s on sel f - suf f i ci ency of t he
ki nd t hat I ndi a adopt ed was obser ved i n a f ew ot her count r i es
such as Kor ea, Tai wan, Sovi et Uni on and Chi na, but t hei r
ci r cums t ances wer e vas t l y di f f er ent . I have al r eady made
r ef er ence t o t he hi st or i cal ci r cumst ances i n Kor ea, whi ch l ed t o
i t s br i ef exper i ment wi t h I SI and aut ar ky. As f ar as Tai wan,
whi ch was a J apanese col ony t i l l 1945, was concer ned i t f ound i t s
i ndust r y l ar gel y dest r oyed dur i ng t he war . Subst ant i al Amer i can
ai d hel ped i t t o over come i t s macr oeconomi c pr obl ems, not abl y
massi ve i nf l at i on, onl y i n 1952. Pr i mar y I SI , mai nl y i n consumer
non- dur abl es, cont i nued h i l l I 960, by whi ch t he f ami l i ar i l l s of
t hi s st r at egy had begun t o show up ( Li t t l e, 1981) .
I n t he case of t he Sovi et Uni on and Chi na aut ar ky was f or ced on
t hese count r i es by t he necessi t y of havi ng t o l i ve i n a
host i l e envi r onment . Sur r ounded as t hese count r i es wer e by t he
" enemi es of communi sm" , i t was i nevi t abl e t hat sel f - suf f i ci ency
woul d be a desi r abl e obj ect i ve. I n t he case of I ndi a, however ,
aut ar ky was a del i ber at e choi ce: I ndi a had not gone t hr ough t he
r avages of war as had Kor ea and Tai wan, nor was i t sur r ounded by
enemi es whi ch made aut ar ky i nevi t abl e. Thi s choi ce r ef l ect ed a
desi r e on t he I ndi an gover nment ' s par t t o di st ance i t sel f f r om
t he er st whi l e i mper i al i st power s; i n t he west and t hei r mi l i t ar y
al l i ance and t o gener at e a new Wor l d For ce, t he so- cal l ed Thi r d
Wor l d ( Nachane and Kar ni k, 1992, 1992a) . The aut ar ki c nat ur e of
I ndi a' s devel opment pol i cy was t hus a nat ur al concomi t ant of t he
desi r e t o pl ay a l eader shi p r ol e i n t he Thi r d Wor l d and r emai n
non- al i gned i n a pol ar i zed wor l d.
I n a sense I ndi a' s devel opment pol i cy was an ext ensi on of
Nehr u' s wor l d vi ew, as wel l as, t hat of t he Fabi an Soci al i st s who
saw i n Communi sm " t he l i vi ng, vi vi f yi ng expr essi on of somet hi ng
hi t her t o hi dden i n t he consci ousness of humani t y" ( Nachane and
Kar ni k, 1992) . The r i gour s of St al i ni sm wer e, mi st akenl y, f el t t o
be acci dent al and ver y much t i ed t o t he per sonal i t y of St al i n
r at her t han t o t he nat ur e of t he communi st syst em i t sel f . Thus a
humane appr oach t o communi sm was cobbl ed t oget her under t he name
of Fabi an Soci al i sm and I ndi a became t he exper i ment f or t hese
r eci pes. The maj or f eat ur es of t hi s exper i ment wer e i nt r usi ve
St at e cont r ol (as, oper at i onai l sed by a power f ul bur eaucr acy) , a
publ i c sect or st r addl i ng t he " commandi ng hei ght s" and, what we
have al r eady di scussed, aut ar ky.
Li ke Nehr u, Mahal anobi s was al so gr eat l y i nf l uenced by t he
devel opment s i n t he Sovi et . Uni on: " . . . i t appear s qui t e pl ausi bl e
t o ar gue t hat Mahal anobi s. . . . . was i mpr essed wi t h Sovi et t hi nki ng
on i ndust r i al i sat i on, wi t h i t s emphasi s on t he bui l di ng up of t he
capi t al goods base, wi t hout f ul l r ecogni t i on of t he f act t hat
such a st r at egy pr e- supposes const r ai nt s on domest i c and f or ei gn
t r ansf or mat i on t hat need t o be empi r i cal l y ver i f i ed" ( Bhagwat i
5
and Chakr avar t y, 1971, p. 11) . The i mpr essi on t hat t he Sovi et
Uni on had on Mahal anobi s i s al so qui t e appar ent f r om hi s
wr i t i ngs; see, f or exampl e, Mahal anobi s ( 1958, 1985, 1935a) .
I n t he f i nal anal ysi s one coul d ver y wel l ar gue t hat
devel opment pol i cy of t he Second Pl an was f ashi oned by a vi ew of
t he wor l d whi ch was al r eady changi ng. By t he mi d- 1950s, Kor ea and
Tai wan wer e al r eady t aki ng t hei r f i r st st eps t owar ds i nt egr at i on
wi t h t he r est of t he wor l d and wer e al so f i ndi ng out t he per i l s
of i sol at i on as oper at i onal i sed by I SI . The geo- pol i t i cal
condi t i ons f aci ng t he Sovi et Uni on and Chi na wer e compl et el y
di f f er ent t hose f aci ng I ndi a and yet I ndi a consci ousl y chose t o
i sol at e i t sel f f r omt he r est of t he wor l d. I t does not appear t o
me, as Guha ( 1996> seems t o suggest , t hat I ndi a had no choi ce but
t o choose t o i sol at e i t sel f f r omt he r est of t he wor l d. I t seems
mor e t he case t hat due t o r easons of i deol ogy as wel l as due t o
an out - of - dat e and mi sunder st ood vi ew of t he wor l d, t he Second
Pl an del i ber at el y chose a devel opment st r at egy t hat woul d set
I ndi a on a pat h t hat was qui t e at var i ance wi t h t hat f ol l owed by
t he mor e successf ul Asi an economi es.
2. 4 Vaki 1- Br ahmananda Cr i t i que
One shoul d not get t he i mpr essi on t hat t he i nappr opr i at eness
of t he Sovi et exper i ence f or I ndi a i s bei ng r ecogni sed her e onl y
wi t h hi ndsi ght . I n f act , t her e wer e schol ar , especi al l y at t he
Bombay School of Economi cs, who had war ned agai nst emul at i ng t he
Sovi et st r at egy of heavy i ndust r i al i zi ng but unf or t unat el y, t hese
war ni ngs wer e not heeded. I r ef er t o t he wor ks of Vaki l and
Br ahmananda. Thei r maj or wor k ( Br ahmananda and Vaki l , 1956) was,
pr obabl y, t he onl y r i val t o t he Mahal anobi s appr oach t o pl anni ng
( Bhagwat i and Chakr avar t y, 1971) . But her e I woul d l i ke t o dr aw
at t ent i on t o an ear l i er cont r i but i on, namel y. Vaki l and
Br ahmananda ( 1955) :
". . . . i t may be poi nt ed out t hat t he syst emf or
an expansi on of heavy i ndust r i es i s based on
t he exper i ence of t he Sovi et Uni on whi ch
concent r at ed i n t he f i r st f ew year s on t he
devel opment of heavy i ndust r i es and l at er on
t he devel opment of consumer goods i ndust r i es
i ncl udi ng t hat of agr i cul t ur al pr oduct i on. I t
woul d be danger ous t o ar gue on t he basi s of
t he exper i ence of a count r y whi ch had had a
di f f er ent economi c backgr ound t o f ace i n
pl anni ng. May we poi nt out t hat t he pr obl emi n
t he case of t he Sovi et Uni on was mor e one of
def i ci ency of mar ket abl e sur pl us r at her t han
of over al l pr oduct i on, wher eas i n t he case of
I ndi a, we have bot h pr obl em of r el at i vel y
l ower pr oduct i on as wel l as a l ower pr opor t i on
of mar ket abl e sur pl us . . . . . ( I n t hi s
connect i on) , i t may al so be poi nt ed out t hat
t he i nt er nat i onal cl i mat e under whi ch t he
Sovi et i ndust r i al i sat i on pr ocess was car r i ed
6
out was not f avour abl e f or t he i mpor t s of
capi t al equi pment i nt o t hat count r y.
For t unat el y, t he condi t i ons i n t he case of
I ndi a ar e somewhat bet t er . The above r easons
ar e suf f i ci ent t o pr ove t he doubt f ul val i di t y
of t he Sovi et exper i ence under condi t i ons
f aci ng I ndi a" (pp.115-116)
The extensive quot e above i s suf f i ci ent t o est abl i sh t hat
t her e wer e schol ar s at t hat t i me who had a di f f er ent and,
possi bl y, a mor e accur at e vi ew of t he wor l d, as compar ed t o t he
wor l d- vi ew t hat i nf or med t he f or mul at i on of t he Second Pl an.
Vaki l and Br ahmananda ( 1955, p. 118) went even f ur t her and ar gued
i n f avour of emul at i ng t he J apanese appr oach as opposed t o t he
Sovi et one. I n f act , t owar ds t he end of t he 1955 paper , Vaki l and
Br ahmananda ar gue f or a st r at egy f or I ndi a whi ch ant i ci pat es t he
Kor ean expor t pr omot i on dr i ve of a f ew year s l at er : "( The Second
Pl an) shoul d concent r at e on expandi ng i ndust r i es whi ch have bui l t
up expor t mar ket s and at t he same t i me expl or e t he pot ent i al i t i es
of t hose i ndust r i es whi ch can bui l d up expor t mar ket s anew"
( p. 119) .
3. CHARACTERISTICS OF THE MAHALANOBIS MODEL
3.1 Heavy I ndust r i al i sat i on
The st r at egy devel oped f or t he Second Pl an was based on t he
f r amewor k of Mahal anobi s whi ch st r essed i ndust r i al i sat i on wi t h an
emphasi s on t he devel opment of heavy i ndust r y or pr oduct i on of
capi t al goods ( Rangar aj an, 1996) . I n a devi at i on f r omt he Har r od-
Domar gr owt h model whi ch f ocused on shor t age of savi ngs,
Mahal anoni s f ocused on t he bot t l e- neck t hat mi ght be cr eat ed by
shor t age of capi t al goods. The novel f eat ur e of t he Mahal anobi s
model ( 195 3) was t he ext ensi on of t he Har r od- Domar model t o an
opt i mi si ng f r amewor k. The t wo sect or model di vi ded t he economy
i nt o a consumer goods i ndust r y ( C) and t he i nvest ment goods
i ndust r y ( I ) . Tot al i nvest ment , 1( 0) , was f i xed f or mi ng t he dat um
f or t he model . The t ar get var i abl e was t he r at e of gr owt h of
nat i onal i ncome ( Y) . The i nst r ument s wer e 0I and 0c, t he r el at i ve
shar es of i nvest ment i n t he t wo sect or s ( 0I + 0c = 1) ; whi l e t he
st r uct ur al par amet er s, I and c, wer e t he r eci pr ocal s of t he
I CORs i n t he t wo sect or s. Assumi ng f ul l capaci t y ut i l i sat i on and
a si ngl e per i od l ag bet ween i nvest ment and out put , yi el ded t he
Mahal anobi s i ncome gr owt h equat i on ( see Rao and Kar ni k, 1994 f or
det ai l s) :

Thi s equat i on makes i t cl ear t hat hi gh val ues of 6j woul d be
associ at ed wi t h l ower r at es of gr owt h i n t he i ni t i al st ages but
wi t h t he passage of t i me hi gher val ues of 8j woul d i mpl y a hi gher
r at e of gr owt h of i ncome i n t he f ut ur e ( Rao and Kar ni k, 1994,
p. 204) . Thus t he pol i cy pr escr i pt i on t o emer ge f r om t he gr owt h
equat i on was t hat pr i or i t y was t o be gi ven t o t he devel opment of
t he capi t al goods or i nvest ment goods sect or i f t he r at e of
gr owt h of consumpt i on was t o be hi gher i n t he l ong r un and t hat
t hi s st r at egy was t o be pur sued even t hough t he consumpt i on goods
i ndust r y had a hi gher out put - capi t al r at i o.
The t wo sect or model of Mahal anobi s was concer ned wi t h
i nt er t empor al al l ocat i on of i nvest ment , whi l e t he f our sect or
model ( Mahal anobi s, 1955) was r el at ed t o t he i nt er sect or al
a l ocat i on of i nvest ment . The f our sect or s consi der ed wer e
i nvest ment goods (I) , f act or y pr oduct i on of consumer goods ( C1) ,
Househol d pr oduct i on of consumer goods ( C2) and ser vi ces ( C3) . I n
spi t e of t hi s det ai l i ng, however , 8j , t he i nvest ment shar e of t he
capi t al goods sect or r emai ned t he key pol i cy par amet er as i n t he
t wo sect or model .
Bot h of t hese model s of Mahal anobi s f or med t he
phi l osophi cal basi s of t he Second Pl an and pr ovi ded t he r at i onal e
f or a shi f t i n i ndust r i al i nvest ment t owar ds bui l di ng up a
capi t al goods base. The Second Pl an r at her sur pr i si ngl y assumed
t hat I ndi a had a compar at i ve advant age i n heavy and basi c
i ndust r y and t hat an emphasi s on t hem was j ust i f i ed ( Par i kh,
1996) , So f ar as I can see, Mahal anobi s* bi as t owar ds heavy
i ndust r i al i sat i on and agai nst agr i cul t ur e st ems f r omhi s vi ew of
t he wor l d and t he power pl ay bet ween t he West er n nat i ons
( not abl y, U. S. A. ) , t he Sovi et bl oc and t he under devel oped
nat i ons. Thi s i s especi al l y appar ent i n Mahal anobi s ( 1985a) wher e
i t i s poi nt ed out t hat exper i ence has shown t hat i t i s not
possi bl e t o i mpr ove t he l evel of l i vi ng beyond a cer t ai n l i mi t on
t he basi s of agr i cul t ur al pr oduct i on al one. Fur t her , i n
under devel oped agr i cul t ur al economi es a ver y smal l gr oup of
f ami l i es have t he l ar gest shar e of weal t h, i ncome and pol i t i cal
and economi c i nf l uence and i t i s ver y easy f or a f or ei gn power t o
exer t i nf l uence on a smal l gr oup of power f ul per sons. Rel at i ons
bet ween f or ei gn power s and under devel oped count r i es,
Mahal anobi s ar gues, ar e t hus unst abl e. The pr ocess of
i ndust r i al i sat i on woul d br oaden t he base of soci al and pol i t i cal
deci si ons; consequent l y, t he ext er nal r el at i ons bet ween f or ei gn
power s and t he now i ndust r i al i sed ( f or mer l y devel opi ng) count r i es
woul d be mor e st abl e and cont r i but e t o decr easi ng t ensi ons
bet ween East and West . Thus, f or Mahal anobi s , t he
i ndust r i al i sat i on of under devel oped count r i es, especi al l y I ndi a,
was an i ndi spensabl e condi t i on f or wor l d st abi l i t y and peace.
The di f f i cul t i es t hat a nat i on such as I ndi a woul d have i n
1950s t o pur sue a pr ogr amme of heavy i ndust r i al i sat i on wer e
scar cel y r ecogni sed. Thus, Mahal anobi s ( 1985a, p. 189) not es:
" I n I ndi a i t woul d be economi cal ( emphasi s
added) t o est abl i sh a heavy machi ne bui l di ng
i ndust r y whi ch woul d manuf act ur e heavy
machi nes and equi pment r equi r ed f or t he
i nst al l at i on of f act or i es f or t he pr oduct i on
of st eel , f er t i l i zer s, al umi numet c . . . . . . . . I t
woul d be al so economi cal ( emphasi s added)
gr adual l y t o est abl i sh l ar ge scal e i ndust r i es
f or t he manuf act ur e of synt het i c r aw mat er i al s
8
of many ki nds . . . . I t f ol l ows t hat a bi g
count r y woul d r equi r e a compar at i vel y smal l
amount of out si de capi t al ".
Much bef or e t he cont r adi ct i ons of t hi s dr i ve t owar ds heavy
i ndust r i al i sat i on became appar ent , a vi r t ual pl ea was put out by
Vaki l and Br ahmananda ( 1955) t o abj ur e t he st r at egy t hat t he
Second Pl an event ual l y adopt ed. Thei r st r at egy cal l ed f or
devel opment of heavy i ndust r i es whi ch wer e anci l l ar y t o
Agr i cul t ur e; a cont i nuous st at e of excess capaci t y i n t hese
i ndust r i es woul d enabl e I ndi a t o have cont i nuousl y i ncr easi ng
suppl y of mar ket abl e sur pl us of f ood. Especi al l y because Vaki l
and Br ahmananda bel i eved t hat I ndi a' s f ood posi t i on, at t he
begi nni ng of t he Second Pl an, was not compl et el y secur e t hat t hey
suggest ed t hat I ndi a shoul d not embar k on a t ype of
i ndust r i al i sat i on whi ch woul d negl ect cul t i vat i on over a f ai r l y
l ong per i od of t i me.
I t i s per t i nent t o poi nt out her e t hat even Kor ea, whi ch had
Achi eved much success dur i ng t he 1960s, had l i t t l e sect or al bi as
i n i t s devel opment st r at egy pr i or t o t he 1970s. I t s shi f t f r om
gener al expor t pr omot i on t o heavy and chemi cal i ndust r i es ( t he
so- cal l ed HCI dr i ve) di d not happen t i l l 1973. Thi s change
r epr esent ed a maj or change i n pol i cy i n f avour of speci f i c
i ndust r i al t ar get s and a wi de- r angi ng commi t ment by Gover nment t o
usi ng t r ade and f i nanci al pol i ci es t o st eer r esour ces t o t he HCI
sect or ( Wor l d Bank, 1987) . I n spi t e of i nt r oduci ng t he HCI dr i ve
l at e i n i t s devel opment pr ocess and wi t h subst ant i al i nt er vent i on
f r om t he Kor ean gover nment i ncl udi ng a secondar y i mpor t
subst i t i on sub- phase of t r ansi t i on, i t i s wi del y accept ed t hat
t he HCI dr i ve was over ambi t i ous and r esul t ed i n ser i ous
mi sal l ocat i on of r esour ces ( Par k, 1981; Wor l d Bank, 1987) .
3. 2 I mpor t - Subst i t ut i on
The emphasi s, i n t he Second Pl an, on i nvest ment i n capi t al
goods i ndust r y went hand i n hand wi t h Mahal anobi s' wor l d vi ew
whi ch i nevi t abl y had t o assume a cl osed economy and hence sel f -
r el i ance. I ndust r i al i sat i on combi ned wi t h sel f - r el i ance
necessar i l y l ed t o i mpor t subst i t ut i on ( Sengupt a, 1996) . Sengupt a
makes t he i mpor t ant poi nt t hat I SI need not have, necessar i l y,
excl uded gr owt h of expor t i ndust r i es i n whi ch I ndi a had a
r el at i ve cost advant age because of f avour abl e f act or endowment s.
However , cont i nuous t echni cal pr ogr ess i n t he r est of t he wor l d
meant t hat successi ve r ounds of i mpor t subst i t ut i on became mor e
and mor e di f f i cul t . Thus, compar ed t o t he r est of t he wor l d,
cost s of pr oduct i on r emai ned ver y hi gh i n I ndi a and I ndi an
expor t s suf f er ed on t he scor e of cost - compet i t i veness.
Consequent l y, I SI al so concomi t ant l y meant t he negat i on of expor t
pr omot i on.
Al t hough t he Mahal anobi s model assumed a cl osed economy,
subsequent t o t he Second Pl an, gr owt h of i mpor t s became
i nevi t abl e f or t he economi c devel opment of I ndi a. Thi s was
especi al l y so i n t he case of i mpor t s of f oodgr ai ns and t hi s coul d
9
be seen as a t r agi c out come of t he negl ect of agr i cul t ur e i n t he
Second Pl an, bat mor e on t hi s sl i ght l y l at er . Apar t f r om f ood
gr ai n, I mpor t s of basi c i ndust r i al pr oduct s such as
pet r ol eum, f er t i l i ser s, chemi cal s, st eel , non- f er ous met al s and
machi ner y became necessar y Such i mpor t s pl aced maj or demands on
avai l abi l i t y of f or ei gn exchange. I n set t i ng t ar get s f or t he
Second Pl an t he gover nment had assumed a much hi gher l evel of
f or ei gn assi st ance as compar ed t o t he Fi r st Pl an and est i mat ed a
l evel of expor t s j ust bel ow t hat of t he ear l i er qui nquenni um; as
i s t ur ned out t hi s was over - opt i mi st i c and f or ei gn exchange,
const r ai nt came t o have a power f ul i mpact on t he i mpl ement at i on
of : t he Second Pl an ( Toml i nson, 1993) I nevi t abl y, t he gover nment
had t o r esor t t o r at i oni ng of scar ce f or ei gn exchange by means of
quant i t at i ve r est r i ct i ons on i mpor t s. The Reser ve Bank of I ndi a
Repor t on Cur r ency and Fi nance ( 1957- 58) Repor t poi nt s out :
"Dur i ng 1957- 58, despi t e ef f or t s t o conser ve
f or ei gn exchange, i mpor t payment s r eached an
al l t i me hi gh of Rs. 1175 cr or es. . . . . Sect or
wi se, t he ent i r e i ncr ease was under gover nment
i mpor t s whi ch r ose by as much as Rs. 201
cr or es; pr i vat e i mpor t payment s dr opped
shar pl y. . . . " ( p. 70)
The Repor t al so poi nt s out t hat t he heavy i mpor t s wer e on
account of t he Gover nment ' s expanded devel opment al act i vi t y; on
t he ot her hand, i mpor t s on pr i vat e account wer e hel d down means
of vi gor ous cont r ol measur es. The above comment s of t he 1957- 58
Repor t , come on t op of si mi l ar comment s of t he Reser ve Bank of
I ndi a Repor t on Cur r ency and Fi nance ( 1956- 57) :
"Thr oughout t he gr eat er par t of t he Fi r st Pl an
t her e had been r ecur r i ng cur r ent account
sur pl us i n t he bal ance of payment s; t hi s was
shar pl y r ever sed dur i ng 1956- 57 wi t h t he
emer gence of an over al l cur r ent account
def i ci t of Rs. 292. 5 cr or es. . . . . Thi s was
mai nl y due t o t he l ar ge i ncr ease i n i mpor t s,
par t i cul ar l y of capi t al goods. . . . " ( p. 72)
Guha ( 1996) poi nt s out t hat t he cont r adi ct i ons of t he I SI
r egi me i nt r oduced dur i ng t he Second Pl an soon became appar ent and
i mposed a subst ant i al cost on t he I ndi an economy, a par t of whi ch
we have poi nt ed out i n t he cont ext of t he bal ance of payment s
cr i si s. Guha f ur t her poi nt s out t hat combi nat i on of t he I SI
r egi me wi t h t he I ndust r i es Act , 1951 and t he I ndust r i al Pol i cy
Resol ut i on, 1956 gave t he I ndi an st at e al l t he st andar d Ol soni an
char act er i st i cs The I ndi an I ndust r i es Act , 1951 was desi gned t o
i mpl ement ( see Bhagwat i and Desai , 1970) :
1 t he devel opment and r egul at i on of i ndust r i al i nvest ment s and
pr oduct i on accor di ng t o Pl an pr i or i t i es and t ar get s;
2, t he pr ot ect i on and encour agement of smal l i ndust r i es;
3, t he pr event i on of concent r at i on of owner shi p of i ndust r i es;
4, bal anced economi c devel opment of t he di f f er ent r egi ons of t he
1.0
count r y.
The I ndust r i al Pol i cy Resol ut i on of 1956 was even mor e
emphat i c about t he i mpor t ance of t he publ i c sect or t han t he
I ndust r i al Pol i cy r esol ut i on of 1948. Sevent een i ndust r i es ( heavy
el ect r i cal pl ant , i r on and st eel et c) wer e gr ouped i nt o one
cat egor y wher e t he St at e woul d have t ot al monopol y or have
excl usi ve r i ght t o est abl i sh new i ndust r i es. Twel ve ot her
i ndust r i es ( machi ne t ool s, f er r o- al l oys, f er t i l i ser s, et c. ) wer e
speci f i ed as t he sect or wher e t he St at e woul d pr ogr essi vel y
est abl i sh new uni t s. The r emai ni ng i ndust r i es wer e l ef t t o t he
pr i vat e sect or , t hough t he St at e had t he opt i on of ent er i ng t hese
as wel l . Thi s I ndust r i al Pol i cy r esol ut i on si gni f i cant l y di d not
r ei t er at e t he 10 year guar ant ee agai nst nat i onal i sat i on t hat was
ment i oned i n t he ear l i er Resol ut i on and t hus was mor e cl osel y
at t uned t owar ds t he goal of a soci al i st i c pat t er n of devel opment
( Bhagwat i and Sr i ni vasan, 1976) .
The i mpor t ar i d expor t pol i cy f ol l owed over t he per i od 1956-
66 and whi ch had as i t s maj or obj ect i ve oper at i onal i si ng I SI
ai med at compr ehensi ve di r ect cont r ol over f or ei gn exchange
ut i l i zat i on. Thus admi ni st r at i ve deci si ons had t o be made over
t he al l ocat i ons of f or ei gn exchange f or pr act i cal l y al l uses i n
t he economy. Fur t her , r el i ance on t he di r ect al l ocat i ve mechani sm
was al most compl et e dur i ng t hi s per i od. Bhagwat i and Sr i ni vasan
( 1976) have l i st ed out i n det ai l t he adver se ef f ect s of t hi s
i mpor t expor t pol i cy r egi me. I t l ed t o a wast ef ul al l ocat i on of
i nvest i bl e r esour ces among al t er nat i ve i ndust r i es and al so
accent uat ed t he under - ut i l i sat i on of i nvest ment s wi t hi n t hese
i ndust r i es; t he r egi me al so r educed t he degr ee of compet i t i on
t hat f i r ms i n t hese i ndust r i es had t o f ace; apar t f r om t hi s,
t her e wer e ot her pr obl ems such as del ays, l ack of co- or di nat i on
among di f f er ent agenci es, ant i ci pat or y and aut omat i c pr ot ect i on
af f or ded t o i ndust r i es r egar dl ess of cost s and di scr i mi nat i on
agai nst expor t s ( Bhagwat i and Sr i ni vasan, 1976, chapt er s 2 , 12
and 13) . The emphasi s on i mpor t - subst i t ut i on al so l ed t o soci al
i nequal i t y: The negat i on of i mpor t subst i t ut i on i . e. , "Tr ade
l i ber al i sat i on . . . . . . . t i l t s economi c act i vi t y t owar ds t he
pr oduct i on of expor t abl e commodi t i es, whi ch t end t o be l abour -
i nt ensi ve, and t hi s can be expect ed t o have, of t en enough, an
i nequal i t y r educi ng i nf l uence" ( Dr eze and Sen, 1996, p. 97) . On<i
har dl y needs r emi ndi ng t hat t hi s was pr eci sel y t he pol i cy t hat
Kor ea st ar t ed f ol l owi ng f r om t he mi d- 1950s onwar ds and t hi s was
al so t he appr oach t hat Vaki l and Br ahmananda ( 1955) had
advocat ed.
Aa Guha ( 1996) poi nt s out t he combi nat i on of I SI and t he
I ndust r i al pol i cy r esol ut i ons paved t he way f or st agnat i on i n
t he I ndi an economy due t o t he f ol l owi ng:
1. negl ect of st at i c compar at i ve advant age i n an I SI r egi me
2. excl usi on of domest i c and f or ei gn compet i t i on
3. mani pul at i on of i ndust r i al l ocat i on
4. appoi nt ment s on non- mer i t consi der at i ons
5. di ver si on of r esour ces i nt o r ent - seeki ng
11
6- del ays i n deci si on waki ng
7. el i mi nat i on, on account of l abour l aws, of t he t hr eat of
di smi ssal as a wor ker di sci pl i ni ng devi ce
8. bel i ef t hat empl oyment al one and not pr oduct i vi t y i s soci al l y
val uabl e.
33 Empl oyment
As f ar as l abour was concer ned, Mahal anobi s assumed, i n t he
manner of Ar t hur Lewi s, unl i mi t ed suppl i es of i t ( Guha, 1. 996) .
Si nce l abour was i n excess suppl y, t he Mahal anobi s model , cal l ed
f or a hi gher al l ocat i on of r esour ces f or capi t al goods, whi ch
woul d r ai se t he r at e of gr owt h of pr oduct i on, empl oyment and
consumpt i on of t he economy i n t he l ong r un ( Sengupt a, 1996) . I n a
sense t hi s was a t r i ckl e down st r at egy spr ead over a l ong per i od:
empl oyment and consumpt i on, bot h essent i al f or pover t y
al l evi at i on, woul d benef i t f r oman i ncr ease i n t he r at e of gr owt h
of t he economy. Thi s, of cour se, meant t hat al t er nat i ve measur es
woul d have t o be put i n pl ace t o i ncr ease empl oyment i n t he shor t
r un. Mahal anobi s emphasi sed t he r ol e of cot t age and smal l scal e
i ndust r i es i n suppl yi ng mass consumpt i on goods and pr ovi di ng
empl oyment i n t he shor t and medi um t er m. However , cot t age and
smal l scal e i ndust r y f i nd no ment i on i n Mahal anobi s
1
f or mal model
and i s, i n a sense, an appendage t o hi s st r at egy. Even
Mahal anobi s wr i t i ng poi nt t o t he subsi di ar y r ol e t hat cot t age and
smal l scal e i ndust r y woul d pl ay i n t he over al l st r at egy of
i ndust r i al i sat i on, whi ch was f ocused on heavy i ndust r i es
( Mahal anobi s, 1985) . We have al r eady not ed above t hat Mahal anobi s
was wel l awar e t hat a st r at egy of heavy i ndust r i al i sat i on woul d
i ncr ease empl oyment onl y i n t he l ong r un. Smal l i ndust r y can
pr ovi de empl oyment i n t he shor t r un i f t her e i s suf f i ci ent demand
f or i t s pr oduce. Mahal anobi s
1
way of accompl i shi ng t hi s was t o
i ncr ease i nvest ment i n heavy i ndust r i es, whi ch woul d gener at e
i ncome, cr eat e pur chasi ng power and boost demand. A si mi l ar
ef f ect woul d r esul t i f t he gover nment i ncr eases expendi t ur e on
soci al ser vi ces. Fur t her , Mahal anobi s f el t t hat , t he smal l scal e
i ndust r y, whi ch i s expect ed t o pl ay such a cr uci al r ol e, shoul d
be pr ot ect ed f r oml ar ge i ndust r y: t her e shoul d be no i nvest ment
i n f act or i es whi ch compet e wi t h smal l and househol d uni t s of
pr oduct i on. Even when f act or y made pr oduct s compet e wi t h smal l
and househol d i ndust r y, t her e wi l l have t o be pr ot ect i on af f or ded
t o t he l at t er : si nce t he pr i ces of out put of t he smal l sect or
wi l l be hi gher , sui t abl e exci se shoul d be l evi ed on f act or y made
goods t o mai nt ai n pr i ce par i t y. I t i s qui t e appar ent t hat
Mahal anobi s was not par t i cul ar l y concer ned about t he consumer s of
t hese pr oduct s; t he poi nt seems t o have been mi ssed t hat
empl oyees of smal l scal e and l ar ge f act or i es woul d t hemsel ves be
consumer s as wel l . Thus t he same i ndi vi dual , qua consumer , woul d
subsi di es hi msel f , qua empl oyee.
I nspi t e of t hi s i mpor t ance at t ached t o smal l and househol d
i ndust r y by Mahal anobi s, when i t came t o f or mal model l i ng, t he
f ocus of at t ent i on was heavy i ndust r y. Thi s i s def i ni t el y t r ue i f
one consi der s t he t wo sect or model of Mahal anobi s; even i n t he
case of t he f our sect or model i nvest ment shar e of t he capi t al
12
goods sect or r emai n t he key pol i cy par amet er , as i n t he t wo
sect or model ( see above; al so Rao and Kar ni k, 1994 f or det ai l s) .
3.4 Agriculture
The domi nant l i ne of t hi nki ng i n t he Fi r st Pl an advi sed
at t ent i on t o t he l ar ge agr i cul t ur al sect or wi t h i t s pot ent i al f or
qui ck yi el d. I t was al so t hought t hat agr i cul t ur al pr oduct s, as
al so agr o- based i ndust r i es, woul d per mi t ear ni ng of f or ei gn
exchange t hr ough t hei r expor t s and event ual l y l ay t he basi s f or
i ndust r i al i sat i on t hr ough t he i mpor t of machi nes ( Bose, 1996) .
The depar t ur e f r om t hi s l i ne of t hi nki ng came wi t h t he Second
Pl an: nei t her t he t wo- sect or nor t he f our sect or model s of
Mahal anobi s accor ded any i mpor t ance t o agr i cul t ur e. Vai dyanat han
( 1996) , r at her val i ant l y, t r i es t o def end Mahal anobi s f r om t he
cr i t i ci sm t hat he di d not accor d suf f i ci ent i mpor t ance t o'
agr i cul t ur e. He quot es ext ensi vel y f r omMahal anobi s ( 1959, 1085b)
t o suppor t hi s poi nt . However , i t i s al so t r ue t hat Mahal anobi s
bel i eved t hat onl y i ndust r i al i sat i on, as opposed t o an emphasi s
on agr i cul t ur e, woul d enabl e devel opi ng count r i es t o have st abl e
r el at i ons wi t h f or ei gn power s; an agr i cul t ur e domi nat ed count r y
woul d be under t he undesi r abl e i nf l uence of f or ei gn power s
( Mahal anobi s, 1985b, p. 185) . Vai dyanat han hi msel f admi t s t hat
"( Mahal anobi s' ) di scussi on of t he means by whi ch ( agr i cul t ur al )
out put r equi r ed t o meet ant i ci pat ed demand was t o be r eal i sed was
admi t t edl y t hi n". So, basi cal l y, what Vai dyanat han i s suggest i ng
i s t hat t her e was a l ot of ver bal i sat i on i n Mahal anobi s' wr i t i ngs
of hi s concer n f or agr i cul t ur e, but none 6f i t r eal l y got
i ncor por at ed i nt o t he model s t hat f or med t he basi s of t he Second
Pl an. That , of cour se, i s pr eci sel y t he cr i t i ci sm. One coul d, as
easi l y ar gue, a l a Vai dyanat han, t hat t her e i s a l ot of concer n,
i n t he Pl anni ng Commi ssi on, f or gr owt h i n t he Ni nt h Pl an: not
because coher ent pol i ci es ar e bei ng r ecommended but , because
t her e i s a l ot of ver bi age about gr owt h comi ng out of t he
Commi ssi on.
Ther e wer e war ni ngs t hat wer e i ssued out dur i ng t he f r ami ng
of t he Second Pl an t hat t he opt i mi smwi t h r egar d t o f ood secur i t y
was mi spl aced ( Vaki l and Br ahmananda, 1955) . Vaki l and
Br ahmananda poi nt ed out t hat t hey wer e not at al l cer t ai n whet her
t he i mpr ovement i n f ood pr oduct i on dur i ng t he Fi r st Pl an was of a
per manent char act er and t hat i t woul d be hazar dous t o i gnor e t he
need t o st ep up cont i nuousl y agr i cul t ur al pr oduct i on. That
agr i cul t ur e was negl ect ed i s appar ent f r om a cont r i but i on of
Vai dyanat han ( 1982, Tabl e 13. 6) hi msel f : t he per cent age shar e of
agr i cul t ur e i n aggr egat e i nvest ment f el l f r om 27% dur i ng t he
Fi r st Pl an t o 19% dur i ng t he Second Pl an. Vai dyanat han i n t hi s
ver y cont r i but i on f ur t her st at es t hat t he shor t age of f oodgr ai n
t hat emer ged dur i ng t he cour se of t he Second Pl an l ent cr edence
t o t he cr i t i ci smt hat t he Pl an had i ndeed negl ect ed agr i cul t ur e.
Gi ven t hese vi ews of Vai dyanat han hi msel f , i i in cer t ai nl y ver y
sur pr i si ng t hat he has, i n a l at er wor k ( Vai dyanat han, 1996) , so
st r ongl y def ended Mahal anobi s
1
vi ews on agr i cul t ur e.
13
4. EQUITY STATE AND MARKETS
By and l ar ge, i t has been assumed i n t he cont ext of I ndi an
pl anni ng and di scussi ons of t he r ol e of t he St at e t hat r educt i on
i n pover t y and i nt r oduct i on of equi t y or soci al j ust i ce l i es i n
t he domai n of t he St at e and t hat t he mar ket has a ver y l i mi t ed
r ol e t o pl ay i n t hi s cont ext . Thus Par i kh ( 1996) st at es t hat t he
r ol e of pl anni ng i s t o l obby f or t he poor i n economi c pol i cy
maki ng, or t hat an i mpor t ant r ol e of t he gover nment emer ges i n
desi gni ng and moni t or i ng r edi st r i but i ve pr ogr ammes. Sengupt a
( 1996) poi nt s out t hat " Si nce pol i t i cal democr acy coul d
not . . . af f or d t o i gnor e t he pr obl em of pover t y f or l ong t he
devel opment pl ans began t o emphasi se t he need f or a di r ect at t ack
on pover t y ( emphasi s i n t he or i gi nal ) . . . . . Guha ( 1996) makes
t he r at her st r ange poi nt t hat , i n or der t o expand demand, t he
devel opment pol i cy f ol l owed by I ndi a ai med at - r edi st r i but i on of
i ncome t hr ough massi ve expansi on of gover nment and semi -
gover nment empl oyment t o cr eat e a homogeneous mi ddl e cl ass mar ket
f or manuf act ur es. Thi s was necessar y because t he mi ddl e cl ass i n
I ndi a was mi nuscul e and t hi s l eads Guha ( 1996) t o suggest t hat
I ndi a had t o adopt an i nwar d l ooki ng devel opment st r at egy.
I amnot ent i r el y convi nced t hat t he St at e al one has a maj or
r ol e t o pl ay i n pover t y al l evi at i on and r educt i on of
i nequal i t i es. Gr owt h, whi ch can come f r omt he pr i vat e sect or , can
al so be a ver y si gni f i cant i nst r ument f or pover t y and i nequal i t y
r educt i on. That , i n f act , i s t he maj or r esul t of Tendul kar
( 1996) :
"The message seems t o be l oud and cl eat . That
r api d gr owt h has not onl y r ai sed soci al
wel f ar e but al so r el i eved soci al depr i vat i on
i n a r easonabl y sust ai ned f ashi on. I n t he
l i ght of t hi s exper i ence i t i s necessar y t o
r ej ect t he pr emi se st at ed i n t he i nt r oduct i on
t hat t he out come emer gi ng f r om t he mar ket
f or ces woul d i nvar i abl y be di st r i but i onal l y
undesi r abl e and t hat st at e i nt er vent i on woul d
al ways i mpr ove upon t hi s out come" ( emphasi s i n
t he or i gi nal ) .
I negal i t ar i an di st r i but i on of i ncome i s of t en seen as a
mar ket f ai l ur e, i n t he sense t hat t he mar ket wi l l not i nt r oduce
di st r i but i onal equi t y aut omat i cal l y. Thus di st r i but i on i s seen as
an essent i al el ement of gover nment pol i cy maki ng or gover nment
budget f or mul at i on, al ong wi t h ot her f unct i ons i n t he spher es of
al l ocat i on and st abi l i sat i on. Thi s i s, of cour se, t he f ami l i ar
t hr ee way cl assi f i cat i on of t he budget pr oposed by Musgr ave
( 1959) . I t cannot , however , be t he case t hat al l t he bur den of
i nt r oduci ng egal i t ar i ani smbe pl aced on t he di st r i but i on br anch
of t he budget . To t he ext ent t hat cycl i cal unempl oyment l eads t o
pover t y and i ncr eases i nequal i t y, t he st abi l i sat i on f unct i on of
t he gover nment budget has a r ol e t o pl ay i n t he spher e of
soci al j ust i ce. I n t he cont ext of pr ovi si on of "mer i t " goods or
quasi - publ i c goods, t he gover nment ' s al l ocat i on
14
f unct i on, t oo, wi l l have a r ol e t o pl ay ( see Kar ni k, 1997 f or
det ai l s) . Thus, a f r agment ed vi ew of gover nment budget maki ng, i n
t er ms of t hr ee separ at e f unct i ons, may not be t he moat i deal way
of t ackl i ng di st r i but i onal pr obl ems. A mor e hol i st i c vi ew t hat
pr omot es ef f i ci ent al l ocat i on of r esour ces i n al l sect or s of t he
economy, mai nt ai ns t he economy at hi gh l evel s of act i vi t y coupl ed
wi t h pr i ce st abi l i t y, al ong wi t h di r ect l y t ackl i ng i ncome and
ot her i nequal i t i es pr ovi des a super i or appr oach t o st at e
i nt er vent i on i n pur sui t of soci al j ust i ce. Such an appr oach
cl ear l y br i ngs t o t he f or e t he i mpor t ance of t he mar ket i n t he
sear ch f or egal i t ar i ani sm. Speci f i cal l y, what t hi s appr oach
emphasi ses i s t he i mpor t ance of gr owt h and pr i ce st abi l i t y i n t he
pur sui t of di st r i but i ve j ust i ce. The exper i ence of t he East Asi an
count r i es seems t o cl ear l y i ndi cat e t hat i nequal i t i es wer e
r educed, not by shunni ng gr owt h, but by act i vel y pur sui ng i t ; not
by suppl ant i ng t he mar ket by St at e i nt er vent i on, but by
suppl ement i ng t he mar ket wi t h qual i t y St at e i nt er vent i on. I n
f act , t he East Asi an exper i ence can be seen as a good exampl e of
t he syner gi st i c r el at i onshi p bet ween gr owt h and equal i t y
( Bi r dsal l et al , 1995, St i gl i t z, 1996) .
I nappr opr i at e St at e i nt er vent i on, whi ch i nt er f er es wi t h
mar ket t r ansact i ons, of t en t ends t o have ef f ect s cont r ar y t o what
was i nt ended. However , st r ong ar gument s have been made f or
i nt er f er i ng wi t h t he mar ket i n some cases, eg. est abl i shi ng some
mi ni mum wage r at es, af f i r mat i ve act i on i n empl oyment s pol i ci es,
usur i ous money l endi ng, envi r onment al pr ot ect i on. Even i n t hese
cases i t may of t en happen t hat , even t hough t he i ni t i al
i nt er vent i on may have a st r ong equi t y component , i t i s possi bl e
f or per ver si ons t o set i n. Thus mi ni mum wage l egi sl at i on or
af f i r mat i ve act i on f or empl oyment may cur t ai l empl oyment as a
whol e; cur t ai l ment of money l endi ng mi ght i mpl y compl et e non-
avai l abi l i t y of cr edi t i f f or mal cr edi t mar ket s ar e under -
devel oped. Such uni nt ended r esul t ar i se si nce " i t must be
r ecogni sed t hat i nt er f er ence wi t h t he mar ket exchange may have
sever e l i mi t at i ons as a r e- di st r i but i ve devi ce" ( Dr eze and Sen,
1996, p. 94) .
The r oot s of economi c i nequal i t y i n mar ket economi es do not
l i e i n mar ket exchange per se, but i n mar ket exchange based on
unequal owner shi p. Ther ef or e, i nt er vent i ons, whi ch l eave
unal t er ed t he di st r i but i on of r esour ces, can be i nef f ect i ve and
count er pr oduct i ve. Such measur es of t en have ef f i ci ency cost s,
whi ch may be bor ne by t he i nt ended benef i ci ar i es of t he
i nt er vent i on. Fur t her , even t he r edi st r i but i ve ef f ect s of such
i nt ervent i ons may be poi nt i ng. Thus excess wage demands, benchmar ked on
t he l egi sl at ed mi ni mum wage may di st or t capi t al - l abour r at i os.
Fi nal l y, f r om a publ i c choi ce poi nt of vi ew, bur eaucr at i c
cont r ol s whi ch i mpede t he mar ket , not onl y i nvol ve excessi ve
ef f i ci ency cost s, but may t hem sel ves be a maj or sour ce of
i nequal i t y ( Dr eze and Sen. . . , 1996, p. 94)
Any pur sui t of soci al j ust i ce, whi ch st r ongl y di scr i mi nat es
agai nst t he mar ket or seeks t o aggr essi vel y cor r ect mar ket
f ai l ur es, has t o guar d agai nst t he Levi at han St at e, wi t h al l i t s
15
at t endant danger s. Fur t her , t he exi st ence of a Levi at han St at e
may not ensur e r educt i on i n i nequal i t i es. The evi dence f r om t he
f or mer USSR, Pol and, Hungar y and Czechosl ovaki a seems t o poi nt t o an
over whel mi ng si mi l ar i t y wi t h capi t al i st count r i es wi t h r espect t o
i nequal i t i es, i n spi t e of t he awowed "soci al i st i c egal i t ar i an"
obj ect i ves <Haynes, 1996) . Thi s i s t r ue whet her t he basi s of
compar i son i s ear ni ngs di st r i but i on of f ul l t i me wor ker s or
di st r i but i on of househol d consumpt i on, Even addi ng i n non- money
soci al benef i t s does not make t he compari son any f avourabl e t o east ern
Europe- On t he ot her hand t he: ri ch , and t he powerf ul i n, bot h, east
and west , had access t o pr i vi l ege; , whi ch i ncr eased i nequal i t i es
at t he t op. Thus, f or al l t he pr opaganda r het or i c, t her e wer e
ser i ous i nequal i t i es i n t he soci al i st St at es, combi ned wi t h
sever e pover t y. I n gener al , t he past emphasi s on
accumul at i on i n t he Sovi et Oni on meant t hat consumpt i on was-
suppr essed among t he mass of popul at i on but t he r el at i ve bur den
f el l heavi l y on t he poor . The pover t y r at i o of 14%i n t he Sovi et
Uni on i n 1989 masked t he f act t hat i t was as l ow as 2%i n Est oni a
whi l e i t was as hi gh as 51%i n Taj aki st an.
The above di scussi on has ser ved t o demonst r at e t hat t he
St at e need not necessar i l y be t he best i nst i t ut i on f or pover t y
r educt i on or f or i nequal i t y r educt i on. Rapi d gr owt h can pl ay a
si gni f i cant r ol e i n at t ai ni ng t hi s obj ect i ve; evi dence f r om
Tendul kar ' s paper i s qui t e compel l i ng i n Ha r espect . The St at e
wi l l have a rol e pl ayi ng but thi s rol e shoul d not be pl ayed but at t he
cost of gr owt h.
6. CONCLUDING REMARKS
Thi s paper was concer ned, f i r st l y, wi t h an exami nat i on of
t he cont r i but i ons of Mahal anobi s t o t he f or mul at i on of t he Second
Pl an and, secondl y, wi t h I ndi an pl anni ng i n gener al . Numer ous
i ssues have been di scussed above, but one t hought keeps
r ecur r i ng. Woul d I ndi a' s cur r ent economi c si t uat i on have been any
di f f er ent , had I ndi a f ol l owed some al t er nat i ve devel opment
st r at egy, say t he st r at egy t hen advocat ed by Vaki l and
Br ahr oananda? Li ke al l gr and quest i ons, t hi s one t oo has no
def i ni t i ve answer . However , l ooki ng t o t he successes of t he Asi an
"Ti ger s", one can get some i nkl i ng of what mi ght have been, but
was not . But t hi s i s an i mponder abl e and exper i ences of
successf ul economi es can r ar el y be t r anspl ant ed i n an al i en soi l .
Such r at i onal i sat i on, however , does not compl et el y bani sh t he
f eel i ng of havi ng been l ef t behi nd i n t he r ace t owar ds
devel opment .
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