Endogenisation of Inventory Investment and Generalisation of Mahalanobis Model of Growth

Abstract

Mahalanobis model of development planning has decisively influenced the strategy of growth of Indian economy for a pretty long time. Naturally, the model has been examined critically from time to time. The model assigns pivotal role to investment in capital/producer goods for achieving accelerated growth. The model envisages consumer goods sectors, particularly the household industries to generate employment opportunities. But the model assumes implicitly as if investment in productive capacity alone determines growth. It totally neglects the working capital/inventory needed for the operationalisation of installed capacity. Consequently, Mahalanobis growth profiles over-estimate the growth effects of investment. The extension and modification of Mahalanobis model, attempted in the study, incorporates inventories into the model as endogenous variables to generalize it. The generalised model shows mathematically, theoretically and empirically that the inventory investment lowers growth, while disinvestment in inventories considerably accelerates growth. Solution of two sector Mahalanobis model with Indian data generates highly exaggerated growth performance. The generalised model almost approximates the actual growth performance of the Indian economy, lending empirical support to the thesis of inverse relationship between the size and accumulation of inventory capital and growth.