19-04-2017, 09:46 AM
India's economic development strategy immediately after Independence was largely based on the Mahalanobis model, which gave preference to the investment goods industry, which is of secondary importance in the services and household goods sector (Nayar , 2001) 1. For example, the Mahalanobis model placed a strong emphasis on mining and manufacturing (for the production of capital goods) and the development of infrastructure (including generation and transportation of electricity). The model minimized the role of the factory goods sector because it was more capital intensive and therefore would not address the problem of high unemployment in India. Any increase in planned investments in India required a higher level of savings than the existing one in the country. Due to the low average incomes in India, the higher levels of necessary savings were to be generated mainly by the restrictions on the growth of consumer spending. Therefore, the Indian government implemented a progressive tax system not only to generate higher levels of savings, but also to restrict increases in income and wealth inequalities.
Among other things, this strategy involved channeling resources into their most productive uses. The government and the private sector made investments, since the government invested in strategic sectors (such as national defense) and also in those sectors where private capital would not be available due to delays or the size of the required infrastructure investment). The private sector should contribute to India's economic growth in the manner envisaged by government planners. Not only did the government determine where companies could invest in terms of location, but also identified what companies could produce, what they could sell, and what prices they could charge.
Thus, India's economic development strategy meant (1) direct government involvement in economic activities such as production and sale, and (2) regulation of private sector economic activities through a complex system of controls . In addition, the Indian economy was protected from foreign competition by using the "child industry argument" and a binding restriction on foreign exchange. Imports were limited to goods considered essential for the development of the economy (such as raw materials and machinery) or to maintain a minimum standard of living (such as crude oil and food). It was also decided that exports should play a limited role in economic development, thus minimizing the need to compete in the world market. As a result, India became a relatively closed economy, allowing only limited economic transactions with other countries. Domestic producers were protected from foreign competition not only from abroad but also from India itself.