Model Answer
0 min readIntroduction
The Mahalanobis model, formulated by Professor P.C. Mahalanobis, played a pivotal role in shaping India’s Second Five-Year Plan (1956-61). Developed in response to the limitations of the Harrod-Domar model, which focused solely on capital accumulation, the Mahalanobis model aimed to address the specific socio-economic conditions of India. It was a departure from the earlier emphasis on agriculture and consumer goods, advocating for a rapid expansion of heavy industries and capital goods production to achieve self-sustained economic growth. This model represented a conscious effort to build a strong industrial base for the nation.
Key Features of the Mahalanobis Model
The Mahalanobis model is a two-sector economic planning model designed to determine the optimal allocation of investment between capital goods (Sector I) and consumer goods (Sector II). Its core features are:
1. Two-Sector Model
The model divides the economy into two broad sectors:
- Sector I: Capital Goods Sector – This sector produces machinery, equipment, and other inputs used for further production.
- Sector II: Consumer Goods Sector – This sector produces goods for direct consumption by the population.
The model analyzes the interdependence between these two sectors and aims to determine the optimal investment ratio between them.
2. Objective: Maximizing National Income
The primary objective of the model is to maximize the long-run growth rate of national income. This is achieved by determining the optimal level of investment in each sector, considering their respective capital-output ratios and savings rates.
3. Investment Criterion & The Critical Minimum Investment
The model introduces the concept of a ‘critical minimum investment’ in the capital goods sector. This refers to the minimum level of investment required to generate sufficient capital accumulation and drive future growth. The investment criterion is based on the idea that a higher proportion of investment in capital goods will lead to a higher rate of future growth, but only up to a certain point. Beyond that point, diminishing returns set in.
4. Role of Savings and Capital-Output Ratio
The model heavily relies on the savings rate and the capital-output ratio (COR) of each sector. The COR indicates the amount of capital required to produce one unit of output. A lower COR implies higher efficiency. The model assumes that the capital goods sector has a lower COR than the consumer goods sector, justifying a higher investment allocation to the former.
5. Statistical Methodology – Input-Output Analysis
Mahalanobis pioneered the use of statistical techniques, particularly input-output analysis, to estimate the inter-sectoral relationships and the CORs. This was a significant advancement in economic planning, moving beyond simple aggregate models. The first Input-Output table for India was constructed under his guidance.
6. Emphasis on Heavy Industry
The model strongly advocated for prioritizing the development of heavy industries like steel, machinery, and power generation. This was based on the belief that these industries are crucial for building a self-reliant and industrialized economy. The Second Five-Year Plan reflected this emphasis, allocating a significant portion of investment to these sectors.
Limitations of the Model
- Data Constraints: The model’s accuracy depended heavily on the availability of reliable data, which was limited in post-independence India.
- Demand Constraints: The model largely ignored demand-side factors and assumed that sufficient demand would exist for the increased output of capital goods.
- Technological Changes: The model did not adequately account for technological advancements and their impact on the CORs.
- Implementation Challenges: The ambitious targets set under the Second Five-Year Plan faced implementation challenges, leading to some deviations from the model’s projections.
Conclusion
The Mahalanobis model was a landmark achievement in Indian economic planning, providing a sophisticated framework for resource allocation and industrial development. While it faced limitations in its implementation and assumptions, it laid the foundation for India’s industrial base and contributed significantly to the country’s economic growth during the Second Five-Year Plan. Its emphasis on statistical planning and heavy industry continues to influence economic policy debates in India even today.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.