Study of Indian Capital Goods Industry THE Nehru-Mahalanobis strategy of state- dominated industrialisation within high protective barriers, which India has implemented for over 40 years, has come under increasing criticism in recent years. One view is that the strategy was simply a mistake- that it has blocked rapid, efficient, industrialisation, thereby leaving India behind in the race to achieve higher standards of living in the developing countries. An alternative view recognises the achievements of this strategy, especially compared to conditions prevailing during the colonial period, but maintains that the strategy has outlived its usefulness and should now be replaced by a more market-oriented, open economy approach for the next phase of development. The rationale for much of the ongoing policy reform in India is provided by these views. Their analytical underpinning is provided by traditional trade theory which demonstrated that under certain conditions 'free trade' is the best policy for all countries. Indeed, this has been perhaps the single-most influential and enduring theorem of economics since the time of Ricardo. Recently a significant literature has emerged which even attempts to measure the costs of protection [Corden, 1985]. Second best variants of this theory recognised a positive role for protective tariffs, etc, as devices necessary to support second best results when the best outcomes were preempted by domestic distortions. Though learning effects and increasing return were recognised as a possible justification for protecting infant industries, as advocated originally by Fredrich list, they remained outside the cropus of formal theory.
