From The Archives: B R Shenoy On Mismanagement Of The National Economy

Over- investment, Over-spending And Deficit Financing

India adopted policies of centralised planning in 1951-52. The relative policy programmes grew to be functionally significant in 1954-55. Inflation became a serious problem in 1955-56 and has continued since, with brief breaks. By the end of 1957-58, which had been filled to overflowing during World War II, were heavily depleted. Exports remained semi-stagnant, the annual average of the index of the volume of exports being 103 (1958=100) during the 10 years ending 1962, and 101 during the following five years, 1963 to 1967 (1963=100); and more or less acute balance of payments difficulties have persisted since 1957-58, notwithstanding the steep rise in (utilised) foreign aid from $25 million in 1954-55 to to about $1 1/2 billion today. Though investment shot up to over three times during the past 1 1/2 decades, unemployment rose from 5.3 billion in 1955-56 to about 10 million in 1966-67.

In spite of these difficulties, however, the Indian national income continued its upward trend for some time. It grew at an annual rate of 4.3 percent, from 1955-56 to 1960-61, or faster than the population growth of the period (2.2 percent). But the position changed thereafter. Except for a temporary spurt in 1964-65, attributable mainly to the timely and good monsoons, the national product suffered near stagnation per capita income remaining around Rs 296 per year from 1960-61.

Prime Objective Of Planning

The twofold objective of centralised planning was speeding up economy growth and social justice. The achievement on the social justice front is even more disappointing than that on the national income front. Mass indigence has grown. It has spread to the erstwhile prosperous salaried middle classes. Social and political tensions and disturbances, which are, doubtless, related to the deteriorating economic situation, threaten to assume alarming dimensions. This has given rise to serious law and order problems in the larger cities and also in the rural areas, more especially in the states of Kerala and Bengal, where Communist are stronger than elsewhere in the country.

On the other hand, unforeseen and unmerited abundance has accrued to a privileged fraction of society, comprising the old entrepreneurial and managerial classes and a large body of fresh additions to their number. Their affluence strike strikes the eye, much more in the urban areas than in the semi-urban or rural areas. Overseas visitors do not fail to notice the rise in luxury living by the few, at every succeeding visit.

Inapt Policy Measures

It is incorrect to blame all this, as some have been doing, on two droughts in 1964-65 and 1965-66, on three weeks of the Indo-Pakistan war in September 1965 and on four weeks of the Chinese attack on India’s northern frontiers in October-November 1962. This may engender a feeling that there is nothing basically wrong with the economy. The roots of the maladies go deeper than, and date well beyond these misfortunes, though they have, doubtless, added to India’s difficulties.

It would be misleading, too, to describe India’s problems as a case of cyclical recession, as it frequently done. The key characteristics of cyclical recessions are, first; retarded investment activity, showing up in a surfeit of savings and low interest rates and, secondly, a continual downtrend in the wholesale prices index, the result of demand lagging behind output and stocks. The Indian economy, on the other hand, is confronted by a scramble for savings, the quantum of which is on the decline, oppressive interest rates, and an ever-expanding money supply, with prices continually edging upward.

Most of the ailments cited above have their roots in Indian economic policies of the past one and a half decades. The Planning Commission first formulates production targets in the various sectors on the basis of the “needs” of the people and then determines the quantum of investments for achieving the target, regardless of the availability of savings to match; rather than proceed the other way about— assess, to begin with the available flow of savings and, then, continually adjust investments to savings.

The topsy-turvy procedure of the Planning Commission has involved over-investment and over-spending, despite massive aid. Currently, aid (due adjustments being made for the market worth of the import goods acquired against aid) is about 75 percent of India’s own savings. The budget gap, resulting from such over-investment and over-spending, being covered by “deficit financing”, a euphemism for the use of printing press, prices have been rising. The general price index today is rising is over six times the pre-war average; prices have more than doubled during the past decade; during the four years ending 1967-68 they went up by 48 percent, or by an average of 12 percent per year.

Stagnant exports and recalcitrant balance of payments difficulties are direct consequences of the continued inflationary deficit spending. The link between the two— inflationary deficit spending and balance of payments difficulties— is still not recognised by policy makers in India, as in under-developed countries generally, though this link can be easily discerned. Inflationary money incomes, ensuing from printing press finance, flow into the market and appropriate, for domestic consumption or investment, equivalent goods from the national product. This correspondingly reduces the goods available for export; and export suffers.

In 1966-67, for instance, the national product thus diverted for home use amounted to Rs 274 crores, the inflation-covered budget deficit of the year. Statistics yield evidence of the impact on exports of the persisting budget deficits. The Indian national product rose by 45 percent during the 12 years ending 1966-67. But more and more of this product having been retained for home use on account of deficit financing, exports declined from 6.4 percent of the Indian national product in 1954-55 to 4.7 percent in 1966-67. Exports expressed at constant (1957-58) prices, fell from Rs 664 crores in 1954-55 to about Rs 577 in 1966-67.

We have here the familiar complex of policy measures— over-investment causing inflation and inflation giving rise to balance of payments difficulties— which has led country after country in the undeveloped part of the globe into further policy errors; and these latter, instead of taking these countries forward, have been hindering their economic and social progress.