Académique Documents
Professionnel Documents
Culture Documents
Author(s): D. R. Khatkhate
Source: Economic Development and Cultural Change, Vol. 7, No. 3, Part 1 (Apr., 1959), pp. 363376
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1151642
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D. R. Khatkhate
The Reserve Bank of India
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364
The Mechanics
of Inflation
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ECONOMIC DEVELOPMENT
.AND CULTURAL
CHANGE
365
tend to enhance their consumption of that item when their money incomes rise.
Now, this increased
consumption of food tends to raise the prices of food and
rural incomes
though in fact the increased
thereby the incomes in the rural sector,
For one thing, the windfall rise in
are not generally spent on industrial products.
the money incomes of the peasantry initially tends to remove the incentive for more
For another, the agriculturists
less is produced.
and on the contrary,
production,
tend to consume a larger proportion of whatever output they produce, leaving a
smaller margin to be exchanged for industrial goods.
Thus, the benefit of exother than agrigoes to industries
panded demand for consumption goods scarcely
situation wherein sagging markets in industrial
culture, and we find a paradoxical
consumption goods coexist with buoyant markets for food.
of this is obvious for the process of inflation.
The implication
Normally,
when the demand
in many advanced countries,
situations experienced
in inflationary
for consumption goods expands, the profits of consumer goods industries
spurt up
inasmuch as a larger proportion of profit
and eventually create stable conditions,
ratio in a developOn the other hand, the profit-wages
earners' income is saved.
As
at any rate in the initial stages.
ing economy moves in a downward direction,
who benefit from a growing demand
we have seen above, the agricultural
classes,
for food, do not raise their profits because they tend to reduce their output. It
has its ricocheting
producing consumption goods other than
impact on the industries
of industrial wage
the cost of subsistence
food. Since the food prices increase,
to allow wage increases.
earners increases
pari passu, which forces the industries
ratio and therefore the rate of saving.
This brings about a fall in the profit-wages
The falling tendency in industrial profits is further fortified by sluggish demand
more than
conditions for industrial goods, because the demand for food increases
as
in proportion to the rise in money incomes of the community.
Furthermore,
in the initial stages of economic development,
capital outlay is incurred on projects
with a long gestation period; profits do not accrue till the projects are completed,
but at the same time, wages form a substantially
high proportion of total investment outlay.
ratio, because of all these reasons,
Thus, the falling profit-wages
and
that normally operates in advanced countries,
removes the natural stabilizer
are more acutely felt on the available food
in consequence
inflationary
pressures
supply.
conditions
here that the type of such inflationary
It has to be emphasized
in the economy; it
does not necessarily
emerge from a rising rate of investment
may as well result from a steep decline in food output without any change in the
A perceptible
fall in food makes, thus, even the existing level
rate of investment.
of investment
untenable.
Though a lack of an adequate quantity of food can be a serious limiting factor in the process of growth, the changes in the stocks of food are perhaps more
of food in a growing economy.
crucial insofar as they determine the availability
The proportion of the output that is marketed is very significant in the case of food
than in regard to comwhere subsistence
predominating
farming is comparatively
Because of this, the magnitude of changes in marketed surplus is
mercial crops.
between technical
Any small discrepancy
larger than that of changes in production.
conditions of demand for food and supply of food brings about a more than proporIf demand is expected to
in prices.
tionate variation in the stocks and, therefore,
to inand consumers
exceed the supply of food, it induces the producers,
traders,
crease their stocks in view of the expectation of a price rise, and its impact is
Thus, in the wake of economic development of underdevelvery much magnified.
tne crucial role of stock variation has to be recognized.
oped countries,
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366
Indian Experience
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ECONOMIC DEVELOPMENT
AND CULTURAL
CHANGE
367
Table I.
Year
1951-52
1952-53
1953-54
1954-55
1955-56
1956-57
1957-58
Volume
of Investment
and Availability
Private
investment
(in millions
of rupees)
Public
investment
(in millions
of rupees)
Total
investment
(in millions
of rupees)
% change
over
previous
year
3,630
3,730
4,250
4,220
4,790
5,940
5,670
1,820
1,970
2,490
3,880
4,960
5,100
6,710
5,450
5,700
6,740
8,100
9,750
11,040
12,380
- 6.2
+ 4.6
+18.2
+20.2
+20.4
+13.2
+12.1
of Food
Availability
of food
(in thousands of tons)
% change
over
previous
year
56,956
61,711
71,166
68,198
67,010
73,367
+ 2
+ 8
+15
- 4
- 2
+ 9
This would throw in bold relief that, because the food availability
increased
till 1953-54, the money demand generated by rising investment
expenditure in the
on general prices.
It is true that the
economy did not exert excessive
pressure
food supply did decline in 1954-55 by about 4 percent as compared to the peak level
reached in the preceding year.
However, it did not result in price rise in the
same year, because of the inevitable lag that intervenes
between production and its
manflow to the market.
After 1954-55, as we have observed above, the stresses
in food prices.
It so happened that an expanding investment
exifested themselves
penditure was set against a falling or stationary level of food supply, so that the
the aggregate demand for food which
higher level of money incomes increased
could not be met at the old level of prices.
of the
Thus, from the juxtaposition
rate of investment
and level of food availability,
it is apparent that the bottleneck
of food made it difficult to sustain the rising rate of investof relative insufficiency
ment projected in the Second Five Year Plan.
But mere technical maladjustment
between demand and supply conditions2
does not explain either the accelerated
price fall in 1954-55 or the accelerated
1.
2.
For an illuminating
see S. Sachi, "Changes in
analysis of food problems,
Stocks and Fluctuation in Food Prices,
The Economic Weekly, November
23, 1957.
by V. V.
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368
price rise since 1955 onward; the behavior of stocks which is the most volatile
factor did play a significant role in accentuating the price trends in either direcThe distinction has to be drawn between the tendency for food prices to
tion.
When the food position is comfortable
change and the actual extent of that change.
in relation to the current demand, the stocks all along the line--with
producers,
of a price fall
to decline in view of the expectations
and traders--tend
consumers,
between demand and supply is very much magnified in
and the initial discrepancy
reverse
takes
the
place in the opposite situation when demand for
consequence;
the same seems to have happened
food tends to outstrip the supply.
Precisely
the variations in
It is very difficult to assess
in India over the last few years.
regarding volume
quantitative terms, because of the dearth of relevant statistics
Whatever little evidence there is to support
of stocks with producers and traders.
some statistics
our hypothesis is of a qualitative nature.
However,
regarding the
changes in marketed surplus which can be taken as a good indicator of stock variation with the producers are available from the Foodgrains Enquiry Commission's
report, published some time towards the close of 1957.
Table II.
Marketed
Surplus
of Rice
Marketed
surplus
as a % of
production
in each year
Year
% change in
production
% change
in prices
% change in
marketed
surplus
Nizamabad
1954-55
1955-56
1956-57a
-24.4
+14.0
+ 4.0
-24.0
+20.6
+26.2
+64.3
-10.2
+ 8.3
35.1
27.7
24.8
Mahboobnagar
1954-55
1955-56
1956-57a
+22.3
+ 0.8
+22.1
-15.4
+11.8
+17.6
+32.5
- 3.5
+34.9
28.4
27.2
27.2
Warrangal
1954-55
1955-56
1956-57a
-35.4
+ 1.8
+34.4
-25.2
+27.4
+22.5
+ 3.7
+18.5
-10.3
25.6
29.8
16.8
District
a. Nine months.
Source:
Report of the Foodgrains
EnquiryCommittee,
pp. 188-189.
It would be clear from the above table that the marketed surplus of rice,
in 1954-55 in relation to 1953-54 when prices declined
by and large, increased
On the other hand, during 1955-56
even when production had fallen substantially.
less
and 1956-57, the marketed surplus either decreased
sharply or increased
As a rethan in proportion to expansion of production because of the price rise.
sult, the actual extent of price rise since 1955 was much more than the technical
This conclusion
between aggregate demand and supply warranted.
discrepancy
was further supported by the firsthand qualitative information collected by the
which stated, "With a situation thus generally
Foodgrains Enquiry Committee,
in production and
favourable to prices of foodgrains,
it was first the short-fall
later the slowing down in market arrivals which released the spring, as it were,
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ECONOMIC DEVELOPMENT
and pushed the prices of foodgrains
3
they had falled in 1954-55".
AND CULTURAL
sharply
CHANGE
369
to which
the traders could and did aggravate the presTogether with the producers,
the stocks beyond the normal level to take adsure on food prices by increasing
are available about the stocks
No data, however,
vantage of the rise in prices.
with traders,
though bank advances against foodgrains may give a fair idea about
the variation in traders' stocks.
Thus, scheduled bank credit against the security
i. e., 104 percent,
between April
of foodgrains increased
by Rs. 16. 5 crores,
1955 and the end of March 1956. Even granting that a portion of this expanded
to some extent by growing economic activity in agriculture
credit was necessitated
and trade, the fact remains that a sizeable proportion of that credit was harnessed
If it is recognized
that this was the period which
to build up stocks by traders.
an upsurge in food prices and that subsequent monetary restrictions,
experienced
both quantitative and qualitative,
by the Reserve Bank of India did bring
imposed
would not be
down the credit totals and to some extent inflationary
pressures,it
difficult to see the link between the stock variations with traders and changes in
food prices.
of demand aggravated
Although food prices were under constant pressure
by a fall in food output and in marketed surplus on the one hand, and rising money
incomes on the other, the inflationary
process was not all-pervading,
bringing
within its orbit all manner of consumer goods, as usually occurs in a well-developed
but
The index of finished manufactured
articles increased
industrial
economy.
the
As a consequence,
out of step with food prices.
slowly and was subsequently
sector turned
sector and the industrial
terms of exchange between the agricultural
commodities
increased
adverse to the latter.
Thus, the prices of agricultural
by
as much as 53 percent during April 1955 to July 1957, while those of industrial
it
In such circumstances,
by only 4 percent in the same period.
goods increased
should be normally expected that an increasing
proportion of rural incomes should
the trends in foodgrains in
be spent on industrial goods such as cloth.
However,
bear out the fact that food output, instead of expanding in response to
particular
showed a fall, apart from a recognized
increase in self-consumpprice stimuli,
the demand for foodgrains
tion and stock holding by the producers.
Furthermore,
The latest series
rose more than in proportion to the increase in money incomes.
of national income statistics
reveals that money income rose by around 4 percent
Taking the best estimate of incomeduring 1955-56 and 14 percent during 1956-57.
in India of 0. 8 percent, 4 the food consumption demand must have grown
elasticity
If a rise of 2 perat a 3. 2 percent rate in 1955-56, and 11. 2 percent in 1956-57.
cent is added to this consumption demand on account of a population growth of
it would follow that the demand for food during the year
about 2 percent,
beginning
from 1955-56, was almost rising faster than the annual rise in money incomes.
This meant that a portion of income which was previously
spent on other goods was
This was why the demand for cloth slackened of late leading
now diverted to food.
on
of stocks, while at the same time, inflationary pressure
to the accumulation
food was accentuated.
3.
4.
Population
Princeton,
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370
See V. V. Bhatt's
6.
India, Planning
1957, p. 13.
7.
article
in this issue.
elsewhere
Commission,
Review
Enquiry
of the First
Committee,
op. cit.,
p. 51.
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Delhi,
ECONOMIC DEVELOPMENT
External
AND CULTURAL
371
CHANGE
Disequilibrium
Table III.
Imports
c.i.f.
1951-52
1952-53
1953-54
1954-55
1955-56
1956-57
1957-58a
962.9
633.0
591.8
683.8
750.6
1,095.6
1,174.3
Exports
f.o.b.
Trade
balance
730.1
601.9
539.7
596.6
641.1
635.1
594.5
-232.8
- 31.1
- 52.1
- 87.2
-109.5
-460.5
-579.8
1951-52 to 1955-56
of rupees)
Official
donations
+
+
+
+
+
+
+
5.3
10.8
19.0
15.8
42.0
44.7
29.2
Other
invisibles
Total
current
transactions
(net)
+ 64.9
+ 80.5
+ 80.5
+ 77.4
+ 84.4
+109.0
+100.0
-162.6
+ 60.2
+ 47.4
+ 6.0
+ 16.9
-306.8
-450.6
a. Preliminary.
from the I. M. F.,
b. Without taking credit for borrowings
during 1956-57 and 1957-58 would be Rs. 282.3 crores
respectively.
Source:
Reserve
Bank of India,
India's
Balance
of Payments
Movement
in foreign exchange
reserves
-164.7
+ 16.7
+ 28.9
- 18.1
+ 10.5
-221. 3b
-259.9b
1948-49
- 1955-56.
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372
Table IV.
1951-52a
1952-53a
1953-54
1954-55
1955-56
1956-57
1957-58b
India's
Imports
of Capital
of Rs. )
Private
%
increase
Government
%
increase
Total
155.90
131.90
118.80
173.69
237.70
371.30
321.20
-15.4
- 9.9
+46.2
+36.9
+56.3
-13.5
21.50
20.50
40.70
47.77
76.60
129.80
212.70
- 4.7
+98.5
+17.4
+60.4
+69.4
+63.9
177.40
152.40
159.50
221.46
314.30
501.10
533.90
%
increase
-14.1
+ 4.7
+38.8
+41.9
+59.4
+ 6.5
a. Estimated.
b. Preliminary
towards the fact that the economy has failed to reach its potential rate of investment.
Thus, the presence of stability either in the internal economic situation or
in the balance of payments is not necessarily
indicative of the maximum growth
of the economy any more than credit creation in the face of availability
of food is
of emergence
of inflationary
pressure.
suggestive
But the real impact of investment
on the Indian balance of payments was
observed in 1956-57 and 1957-58 when, under the Second Five Year Plan, a much
The total deficit on current account was as
was planned.
higher rate of investment
large as Rs. 757 crores during both the years, and a consequent draft on foreign
such a huge dip in foreign
However,
exchange assets amounted to Rs. 481 crores.
which was higher than planned for mainly due to the initial
exchange reserves,
did not arise from the internal inflationary
but was in
underestimation,
pressures,
the main related to the structure and size of the Second Five Year Plan.
Normally,
it would have been expected than an import surplus of this order would act as a
far from
In India, on the contrary,
force.
the very import surplus,
disinflationary
force as is very often believed,
was a positively
active agent
being a counteracting
This was bewhich intensified
the pressure
of demand on inelastic
food supply.
cause a major portion of imports comprised
capital goods like steel, iron, macould not satisfy the consumption
which, however,
chinery, and defense stores,
demand for food, stemming from rising money incomes in the economy (Appendix
A). The only item in the import surplus which went some way to attenuate the
demand was the heavy imports of food which aggregated
pressure
of.consumption
to Rs. 200 crores obtained under P. L. 480 from the United States.
On the other
hand, the imports of capital goods, financed mainly by drawing on foreign exchange
created demand for consumption inasmuch as they called for a compleassets,
mentary domestic investment
expenditure and thus to a great extent aggravated
domestic inflationary
conditions. 8
It is arguable that import surpluses
reduced domestic inflationary
pressures
via their impact on foreign exchange reserves;
to the extent to which they are
8.
See S. Sachi,
The Economic
"A Basic
Weekly,
Appraisal",
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ECONOMIC DEVELOPMENT
AND CULTURAL
CHANGE
373
Future
Perspective
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cit.,
374
10.
See D. Shenoy,
nomic Weekly,
The Eco-
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Appendix
Priv.
Food
Others
a. Total food
b. Consumer goods
c. Raw materials
d. Capital goods
i. Locomotives
ii. Machinery
iii. Metals
iv. Vehicles
v. Ships and aircrafts
e. Others
Total imports
(a + b + c + d + e)
(Continued
1951-52
Govt.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
15 , 590
2, 15t
30a
8,810
3, 980
2,310
A.
Composition
Total
n.a.
n.a.
n.a.
n.a.
n.a.
17,740a
30a
460a
Priv.
of India's
1952-53
Govt.
Imports
Total
n.a.
n.a.
13,954
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
13,190
2, 05o1 15, 240a
30
30a
7,630
3,460
1,610
460a
(in Rs.
Priv.
280
2,650
2, 930
11,340
19,660
11,880
50
7, 070
2,860
1,440
460a
460
-
66,820
29,470
96,290
44,270
18,611
62,881
on next page)
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45,810
lakhs)
1953-54
Govt.
Tota
6,503
6,78
460
3,11
6,963
9,89
- 11,34
300 19,96
4,070
15,95
2,550b
720
800
9,62
3,58
2,24
2,038
46
2,03
13,371
59,181
Appendix A (continued)
Priv.
Food
Others
a. Total food
b. Consumer goods
c. Raw materials
d. Capital goods
i. Locomotives
ii. Machinery
iii. Metals
iv. Vehicles
v. Ships and airc rafts
e. Others
Total imports
(a + b + c + d + e)
1955-56
Govt.
Total
3,240
3, 240
3,080
13, 200
21,290
23, 770
3,240
6,320
13, 200
21, 290
31,430
11,250b
8,210
5, 13Cb 16,380b
1,210
9,420
7,660
4,310
1,320
5,630
1, 030
3, 110
4, 140
62,370
14,010
76,380
Priv.
-
1956-57
Govt.
Total
10,610
10,610
- 10,610
9,520
18,240
37, 130 12,980
250
15,550
9,04b
15, 560
1,430C
2,510
4,370
1,400
15,540
5,560
80,430
29,150
Priv.
-
1957-58
Govt.
Total
15,240
15,240
10,610
9,520
18,240
50,110
250
24,590
16,990
6,880
15,240 15,240
7,390
7, 390
- 12,900
12, 900
32, 120 21,270 53,390
15
150
16,440 13, 760P 30, 20
5, 160 16, 80
11,640
5,780
2,350
3,430
1,400
21,100
460
15,790
12,720
460
28,510
109,580
68,200
49,230
117,43
a. Estimate.
b. Includes locomotives.
c. Iron and steel.
Note:
In the years 1956-57 and 1957-58, figures for consumer goods comprise
cutlery and ha
and rayon textiles only; whil
woolen yarn and manufactures
paper, pasteboard and stationery,
mineral oil, cotton raw and waste, jute raw and waste, dyes and colors and chemicals
only.
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