Aniruddha Pratap1

MOVING OUT OF MAHALNOBIS MODEL

The theoretical efforts for economic development in Indian economy kicked off as early as
1934 when Sir M. Visheshvraya wrote a book named ‘Planned Economy for India’. This was
followed by setting up of National Planning Committee by Indian National Congress under
the leadership of Jawaharlal Nehru in 1938, but due to outbreak of Second World War and
changes in Indian political situation its recommendations could not be implemented. After
independence Government of India set up the Planning Commission2 in 1950 to make an
assessment of physical, capital and human resources of the country in order to specify
systematically a plan which makes an effective and balanced utilisation of these resources.
The rationale of planning principle is to have a co-ordinated investment decision making.
Planning principle is opposed to market mechanism, it is not an effort to replicate the market
but to transcend the anarchy of market (by the help of taxes, subsidies etc. so that it behaves
in a certain manner).

The first plan commenced in 1951 which accorded highest priority to agriculture including
irrigation and power projects. It was followed by a very ambitious second plan3 based on the
model prepared by P. C. Mahalnobis (the then Director of Indian Statistical Institute). The
analytical substructure was a closed economy growth model with dual sectors, one engaged in
producing consumer goods and the other investment goods, and the only factor of production
being the sector-specific capital. The cardinal perception of the model was that the greater the
proportion of investment devoted to increasing the capacity of the investment goods sector,
the faster the long-run growth in consumption and investment. It intended to achieve rapid
long-run growth without sacrificing the short-run consumption by concentrating scarce
investment in expanding capital-goods-producing heavy industries.

Mahalanobis model was basically trying to argue that the problem is not of surplus labour
because there is a limit to which you can employ this labour force; the basic constraint was
that there was lack of adequate capital stock to be able to employ this labour force. So it was
not a labour constraint but capital-goods constraint and the emphasis has to be on relaxing
this capital-goods constraint. It further argued that even though you happen to be labour
1
M. Phil., 2nd Semester, 2011, Centre for Study of Law and Governance, JNU, New Delhi
2
It was not a Constitutional body and A. 282 of the Constitution was used initially for making large plan-grants
to states.
3
April 1st, 1956 to March 31st, 1961
surplus economy what you should try and do is to move a larger share of your income in the
direction of investment, and a larger share of that investment in the direction of producing
machines which further produce machines which can finally produce consumption goods.
The assumption which Mahalnobis model used was that it is possible to use the system of
taxes, subsidies, licensing etc. to be able to gear to influence consumption, savings and
investment decisions such that you can get to a level of investment and allocation of that
investment will allow you to overcome this capital goods constraint and accelerate the rate of
growth. So if you look at it as what it is trying to say is that the emphasis now is not just on
co-ordination of investment decision making the emphasis now is on what would you do
if you had a co-ordinated investment decision making plan and how could I influence the
system without complete co-ordination of investment decision making to behave in a certain
manner. You are trying to alter market incentives through taxes, subsidies, licensing etc. such
that they behave in a certain manner. The primary criticism of the Mahalanobis model was
the lack of enthusiasm towards encouragement of cottage, village and small scale industries
and policies towards the reduction of inequalities.

Now we move further to capture the shift in this strategy. In the fourth plan the number of
and outlay on centrally sponsored schemes was significantly reduced and the bulk of plan
allocations to states were to be based on a formula (which came to be known as Gadgil
formula) which had certain objective criteria about the relative position of different states.
Gadgil drew a distinction between regional planning in western literature and district level
planning in India. The former has two focuses: one is what is called ‘supra-urban space’; the
other is backward or depressed regions. Neither of these, Gadgil said, was relevant in the
context of district development planning. The district is an arbitrarily formed administrative
unit, with no necessary homogeneity in physic-economic terms. A proper approach to district
development planning, he suggested, would be to identify economically homogeneous sub-
regions for the purpose since interconnections are not only essential but also indicative of
some common base.4 The Gadgil plan with its formula for classifying sub-regions forged the
idea of decentralisation of co-ordinated investment decision making. Even though the idea of
planning from below was as old as the first plan but the idea was not articulated well enough
to catch the attention. Second five year plan also stated that one of the objectives of national
planning is to even out the regional disparities in economic development. The third five year
plan dealt with this objective by devoting a chapter on Balanced Regional Development.
4
Rath, N., ‘D. R. on Planning at the District Level’ in Economic and Political Weekly, vol. 37, no. 23 (Jun. 8-14,
2002), p. 2219
Thus, Gadgil plan was indicative of a shift to decentralized co-ordinated decision making
though it was not materialise properly.

The first eight plans concentrated on a growing public sector with investments in basic and
heavy industries, but with the coming of the ninth plan the importance of public sector has
gradually reduced and the current trend of planning manifests an indicative nature. The
major shift from the Mahalnobis model is the shift from Centralized co-ordination of
investment decision making to Decentralized co-ordination of investment decision
making. Thus by moving out of the Mahalnobis model planning at district level has been
strengthened which is evident from the current trend.