Model Answer
0 min readIntroduction
The concept of ‘balanced growth’, popularized by Ragnar Nurkse, advocates for simultaneous development of various sectors of the economy to avoid supply-side constraints and demand deficiencies. The statement highlights a crucial aspect of this strategy: investment decisions must consider not only the demand created by other sectors (derived demand) but also the ultimate consumer demand (final demand). In the context of a developing economy like India, where resource allocation is often constrained, understanding this interplay is vital for sustainable and inclusive growth. The question asks us to analyze whether this principle is primarily about avoiding sectoral imbalances or promoting a policy of import substitution.
Understanding Derived and Final Demand
Derived Demand refers to the demand for goods and services that arises from the demand for other goods and services. For example, the demand for steel is derived from the demand for automobiles, construction, and infrastructure. Final Demand, on the other hand, represents the demand for goods and services directly by consumers, government, or for export. A balanced growth strategy necessitates aligning investment in sectors generating derived demand with the sectors experiencing final demand.
Implications of Misaligned Investment
When investment patterns are solely based on derived demand, several issues can arise:
- Bottlenecks: Over-investment in sectors supplying intermediate goods without corresponding investment in sectors generating final demand can lead to supply bottlenecks. For instance, increased steel production without sufficient demand from the automobile or construction sectors will result in excess capacity and underutilized resources.
- Excess Capacity: If investment focuses on sectors with limited final demand, it results in excess capacity, leading to lower profitability, potential bankruptcies, and wasted resources.
- Demand-Supply Mismatch: A disconnect between what is produced and what consumers actually want can lead to structural imbalances in the economy.
Conversely, focusing solely on final demand without considering derived demand can also be problematic:
- Supply Constraints: Rapid growth in final demand without adequate investment in supporting industries can lead to supply constraints, inflation, and hinder sustained growth.
- Increased Import Dependence: If domestic industries supplying intermediate goods are underdeveloped, the economy may become heavily reliant on imports to meet the derived demand, making it vulnerable to external shocks.
The Statement and Avoiding Bottlenecks/Excess Capacities
The statement primarily emphasizes the need to avoid these bottlenecks and excess capacities. By considering both derived and final demands, policymakers can make informed investment decisions that ensure a more efficient allocation of resources. This approach is crucial for maximizing the impact of investment and achieving sustainable economic growth. For example, the ‘Make in India’ initiative (2014) aimed to boost domestic manufacturing, but its success hinged on simultaneously strengthening both the supply side (derived demand – raw materials, components) and the demand side (final demand – consumer goods, exports).
Link to Import Substitution
While the statement doesn’t explicitly advocate for import substitution, it can indirectly support it. If domestic industries supplying intermediate goods are weak, relying on imports to meet derived demand becomes necessary. A balanced growth strategy, by prioritizing investment in these domestic industries, can reduce import dependence and promote self-reliance. However, it’s crucial to note that import substitution should not be pursued indiscriminately. It should be selective, focusing on industries where India has a comparative advantage and where import substitution can lead to long-term cost reductions and increased competitiveness. The import substitution policies adopted in India during the 1960s and 70s, while aiming for self-reliance, often led to inefficiencies and a lack of innovation due to limited competition.
Sectoral Examples in India
Consider the Indian automobile industry. Investment in automobile manufacturing (final demand) needs to be accompanied by investment in the production of auto components, steel, rubber, and electronics (derived demand). Similarly, the growth of the IT sector (final demand) requires investment in telecommunications infrastructure, power generation, and education (derived demand). Failure to address these derived demands can hinder the growth potential of the IT sector.
| Sector | Final Demand | Derived Demand |
|---|---|---|
| Agriculture | Food Consumption | Fertilizers, Irrigation, Farm Machinery |
| Manufacturing | Consumer Goods, Exports | Raw Materials, Energy, Transportation |
| Services (IT) | Software Exports, Domestic IT Services | Telecommunications, Power, Skilled Labor |
Conclusion
In conclusion, the statement underscores the importance of a holistic approach to investment planning, considering both derived and final demands. While it doesn’t inherently promote import substitution, a balanced growth strategy can indirectly support it by strengthening domestic industries and reducing reliance on imports. The key lies in avoiding sectoral imbalances – bottlenecks in supply and excess capacities – to ensure sustainable and inclusive economic development. Effective implementation requires careful analysis of inter-sectoral linkages and a long-term vision for economic growth.
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.