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Fw: Congratulations on B. R. Shenoy on the Internet!



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The late Professor B. R. Shenoy was the sole  Indian economist -- and he 
really was an economist, unlike e.g. P.  C. Mahalanobis, who was trained 
in statistics and anthropology --  to have the the courage to stand 
alone against almost everyone else who was gassing about economic policy 
at the time.    Rabindranath's famous refrain was Jodi tor dak shuney 
kyeu na ashe, tobe akla cholo re...    "if none hearkens to your call, 
then stand alone".  Well, that was what Shenoy did, right through the 
1950s and 1960s.

What I was told by (a) his daughter; and (b) N. Georgescu-Roegen about 
1982 in Virginia; and I think by Peter Bauer and Milton Friedman too, 
was that Shenoy had become a student or a disciple of F. A. Hayek at the 
London School of Economics, before he returned to his job at the RBI.    
His Note of Dissent made him notorious among the Indian 
Stalinists/Maoists then in power (some of whose disciples have become 
Jeffersonian liberals now).   He was hounded out of one job or another, 
considered of course to be a "CIA agent", and had difficulty finding 
employment until the Sarabhai family created a chair for him at the 
University of Ahmedabad where he survived until his passing.  His widow 
lived in Delhi at least until the 1980s.   I do not know if she may 
still be there but I am sure she would be happy to know all this is 
happening now.   His daughter used to be in Australia or New Zealand, 
and is an "Austrian"-school economist.    His successor at Ahmedabad is 
Professor M. P. Bhatt whom I had the privilege of meeting at the Mont 
Pelerin meetings of 1984; he had kept Shenoy's name alive in India as 
best he could. 

Thank you for publishing him on the Internet.  I am sending a copy of 
this to Professor Milton Friedman.   I would do so to Peter Bauer too 
but I doubt if he has or has any interest in email.

Subroto Roy.




-----Original Message-----
From: Dr. Sanjeev Sabhlok <sanjeev@sabhlokcity.com>
To: debate@indiapolicy.org <debate@indiapolicy.org>
Date: Thursday, March 30, 2000 12:44 PM
Subject: Shenoy is up.


>---------------------------------------------------------------------
>Please help make the Manifesto better, or accept it, and propagate it!
>---------------------------------------------------------------------
>A NOTE OF DISSENT ON THE MEMORANDUM OF THE PANEL OF ECONOMISTS by Prof. =
B.
>R. Shenoy is now available at
>
> http://www.indiapolicy.org/debate/notes.html
>
>Part III of this can be easily distributed to IAS OTs at LBS.
>
>Some examples of Shenoy's wisdom:
>---------------------------------
>
>* I presume that planning in India would be consistent with democracy =
and
>democratic institutions.
>
>* I apprehend that reliance on legislation and administrative measures =
to
>increase the rate of saving which will permit a bigger and bolder Plan,
>may, by degrees undermine our democratic social order, which would be =
too
>high a price to pay for accelerated economic development. Legislative =
and
>administrative action should be directed to ensuring the specially most
>effective uses of democratically generated savings, rather than risk =
undue
>infringements of the liberty of the individual
>
>* Amendments to the constitution which should be rare, should much =
rather
>be in the direction of adding to the liberties, privileges and rights =
of
>the common man than otherwise.
>
>* I would oppose general extension of nationalisation on principle.
>
>* Efficient management of business and industrial concerns in a =
competitive
>market economy is a highly specialised function and demands qualities =
which
>a civil servant is not required to, and in the ordinary course of his
>training may not, acquire.
>
>*  Controls and physical allocations are not a necessary adjunct to =
planning.
>
>*  There are great advantages in allowing freedom to the economy, and =
to
>the price system in the use and distribution of the needs of =
production.
>
>*   Price support of agricultural produce in India is a risky venture =
and
>we should be forewarned of the inherent dangers of it.
>
>For those who can't download Word documents, the text in full:
>
>A NOTE OF DISSENT ON
>THE MEMORANDUM OF THE
>PANEL OF ECONOMISTS*
> Prof. B. R. Shenoy
>
>I am unable to subscribe wholly to the views of my colleagues on (1) =
the
>Size of the Plan, (2) Deficit Financing as a means of raising real
>resources for the Plan, and (3) certain Policy and Institutional
>Implications of the Plan Frame. I may set out, briefly, my views on =
these
>subjects.
>
>I. SIZE OF THE PLAN
>The Plan Frame is built on the basis of a 25 to 27 per cent, increase =
in
>the national income in five years. The targets of production in the =
several
>sectors, which correspond to this rise in income, would require an =
increase
>in net investment (or savings) from 6.75 per cent of the national =
income in
>1955-56 to 10.95 per cent in 1960-61. This relationship yielded a =
figure of
>a total net investment of Rs. 5,600 crores in five years; Rs. 3,400 =
crores
>of this expenditure would be in the public sector and Rs. 2,200 crores =
in
>the private sector.=20
>The total developmental outlay corresponding to a net investment of Rs.
>3,400 crores in the public sector would be Rs. 4,300 crores. Adding to =
this
>an expenditure of Rs. 4,500 crores outside the Plan, the total outlay =
of
>the Centre and the States would be Rs. 8,800 crores in five years. The =
Plan
>Frame proceeds to finance this expenditure in the following manner:
>
>1. Revenue and other current Receipts at the of 8.5%  of the National =
income
>2. Railway surplus
>3. Loans and Small Savings
>4. Foreign assistance=20
>5.     Additional taxation, compulsory savings, and   higher profits =
from
>government enterprises
>6.     Deficit Financing
>Total
> (Crores of Rupees)
>
>5,200=20
>200
>1,000
>400
>
>800-1,000
>1,000-1,200
>8,800
>
>
> If we separate from the above the total developmental outlay on the =
Plan
>(Rs. 4,300 crores) the resources for the public sector of .the Plan =
would
>be derived probably as under :=20
>
>
>1 . Loans and Small Savings
>2. Foreign assistance
>3. Revenue Surplus on the basis of Revenue Receipts at the current rate =
of
>8.5% of the national income.
>4. Additional taxation, compulsory savings, and higher profits from
>government enterprises
>5. Deficit Financing
>Total (Crores of Rupees)
>1,000=20
>400
>
>
>900
>
>800-1,000
>1,000-1,200
>4,300
>
>My colleagues have stated that the increase in investment required for =
the
>Plan Frame is "fairly ambitious" and they "stress that the effort =
involved
>in this increase is considerable, and will strain the economy a very =
great
>deal" (para. 7). Earlier however, they have observed that "given a
>determined bid to put forth a maximum measure of effort", the national
>income objective, which this rate of increase in investment would =
yield,
>"can be attained" (para. 4). This, to my mind, does not adequately =
indicate
>the risks which an investment attempt on this scale may involve (unless
>foreign assistance becomes available in an incomparably larger measure =
than
>envisaged in the Plan Frame). To force a pace of development in excess =
of
>the capacity of the available real resources must necessarily involve
>uncontrolled inflation. In a democratic community where the masses of =
the
>people live close to the margin of subsistence, uncontrolled inflation =
may
>prove to be explosive  and might undermine the existing order of =
society.
>In such a background one cannot subsidise communism better than through
>inflationary deficit financing. Probably the greatest enemy of the
>Kuomintang in China was the printing press. Alternatively, if =
appropriate
>"physical measures", familiar to a communist economy, were adopted (in =
an
>effort to prevent inflation) we would be writing off, gradually or =
rapidly,
>depending upon the exigencies, of the plan, individual liberty and
>democratic institutions by administrative or legislative action. We =
should
>be, therefore, forewarned of the dangers of an over-ambitious plan. A =
wide
>gap between targets and achievements as has been hither to the case =
with
>the first plan was a third possibility This depended, however, upon the
>rigour with which we may resist temptations for inflationary finance, =
and
>the pressure to encroach upon the liberty of the individual. Such
>resistance may prove to be difficult under the natural enthusiasm to =
reach
>the targets. It may entail, moreover, some wastage incidental to a =
revision
>(to match in the available resources) of a plan in progress which had =
been
>based on a larger blue print.
>The Plan Frame begins by prescribing the increase in national income =
which
>the Plan would set to achieve. Its authors, then, proceed to find the =
real
>resources necessary for the corresponding rate of investment. In making =
the
>national budget, it is permissible to determine expenditure first and =
then,
>raise equivalent funds, as the Receipts of the State form but a part of =
the
>total national income. The budget can grow by drawing on the rest. This
>procedure cannot be applied to the budget of a Plan, which embraces the
>entire monetised saving and investment activity of the nation. Here the
>availability of real resources must be assessed first and the =
investment
>plan must match it. In a communist economy the volume of savings may be
>made to vary within fair limits by restricting allocations to the =
consumer
>trades. Within these limits a communist plan can determine expenditure
>first, and, then, proceed to find the requisite resources. In a =
democratic
>society the scope for variation in savings, which is largely the result =
of
>individual choices, is comparatively limited.
>The availability of real resources must depend on the reliability of =
the
>estimates of saving. Under no circumstances can total net investment
>(excluding external assistance) exceed the total net savings of the
>community. Revenue surpluses, surpluses of State business undertakings,
>loans, ploughing back of profits, deficit financing, credit creation, =
and
>so on, are but devices of appropriating the savings of the community =
for
>purposes of the Plan. There is no device of creating real resources =
which
>are not saved.
>A paper on "Capital Formation in India" supplied to the Panel of =
Economists
>estimates net domestic capital formation India, in the recent past, as =
under :
>Net Domestic Capital Formation in India
> (1) (2) (3)
> (Rs. in Crores)=20
> Net Domestic Capital formation National Income 1 as % of 2
>
>1948-49
>1949-50
>1950-51
>1951-52
>1952-53
>1953-54 446
>524
>589
>672
>659
>71 9 8,580
>9,000
>9, 500
>10, 000
>9,800
>10, 500 5.2
>5.8
>6.2
>6.7
>6.7
>6.8
>
>During the first three years of the First Five Year Plan, (1951-52 to
>1955-56), net capital formation, as a percentage of national income was
>more or less stationary, the increase in the national income being
>presumably absorbed, in large part, partly by an increase in the =
population
>and partly by an increase in consumption. Relatively to 1949-50, =
capital
>formation (as a percentage of national income) in 1953-54 rose by 17.24 =
per
>cent, an annual increase of 4.56 per cent. Under the Plan Frame net =
capital
>formation (10.95%) at the close of the Second Plan (1.960-61) would be
>61.98 per cent higher than (6.75%) at the close of the First Plan =
(1955-56)
>or an annual increase of 12.40 per cent.
>The over-ambitious character of the Plan Frame is also reflected in the
>rate of increase it aims at in the national income. Allowance being =
made
>for favourable monsoons, the increase in national income during the =
First
>Plan is estimated at 12 to 13 per cent, or an annual increase of 2.4 to =
2.6
>per cent. The corresponding increase in the Plan Frame is 5 per cent =
per
>annum or 25 to 27 per cent in five years.
>Statistics of the growth of national income in certain overseas =
countries,
>quoted by the Plan Frame, show that in Canada, Switzerland and Germany =
the
>rate of growth in national income generally approximated to the rate of
>growth experienced in India during the First Five Year Plan. In U.S.A. =
the
>rate of growth was 4.5 per cent until 1913 and 3 per cent from 1929 to
>1950. Both in per capita income and the capacity to save we are far =
behind
>these countries. In the Soviet Union, Poland, Czechoslovakia, Hungary =
and
>Bulgaria, the rate of growth in recent years is stated to vary between =
12
>to 16 per cent. If these statistics are comparable, the more rapid =
progress
>of communist economies reflects the relative efficiency of totalitarian
>devices.
>Judging from our own recent experience, and also the experience of =
other
>democratic countries, the available real resources (savings) for
>development cannot for sometime be expected to be of an order that =
would
>permit anything like a doubling of the rate of growth in national =
income.
>The current rate of savings in India is generally estimated at 7 per =
cent
>or under of the national income. During the past five years it has =
risen by
>about 1 per cent. It would be too optimistic to assume that the rate of
>increase may be accelerated in the next five years. A reduction in the
>inequalities of income distribution, which is the declared policy of =
the
>Government, would tend to reduce overall savings. The consumption of =
food
>of the vast masses of the people being both below the national average =
and
>below the minimum nutritional standards, it has been estimated that =
about
>50 per cent of an increase in consumer expenditure is liable to be =
utilised
>in India on foodgrains. In conformity with traditional experience, a
>succession of good harvests, which we have experienced, may be followed =
by
>a couple of years or so of bad or indifferent harvests. Under the
>circumstances, it may not be safe to assume a rate of saving of much =
higher
>than 8 per cent at the end of the next five-year period. The =
possibility of
>this conjecture proving too high cannot be ruled out. The size of the =
Plan
>needs to be, therefore, revised to match the real resources as =
indicated by
>this rate of savings and the estimate of the rate of increase in =
national
>income should be adjusted to conform to the investment equivalent to =
this
>rate of saving.
>The rate of increase in income would depend upon the bias of the Plan =
for
>labour intensive schemes and for cottage industries. The probable
>magnitudes of the investment and of the growth in income remain to be
>worked out. This it is not possible to do immediately. On a rough =
estimate
>the order of magnitude of the investment would be probably about Rs. =
3,500
>to Rs. 4,000 crores. Considering that the total investment in the =
public
>sector in the three years of the First Plan did not exceed Rs. 885 =
crores
>(38.65 per cent of the target of Rs. 2,290 crores for five years), this =
is
>not too low a target to aim at in the Second Five Year Plan. Investment =
in
>the public sector may roughly correspond to the target fixed for the =
First
>Plan. If at the end of the five year period, the actual investment, at
>constant prices should be about 70 per cent of the target, the =
investment
>in the public sector of the Second Plan would be about 43 per cent =
higher
>than that in the First Plan.
>As no plan can be bigger or bolder than the available resources, the =
size
>of the investment programme should be reviewed periodically to ensure =
that
>it keeps within the limits of savings. If such a review should reveal a
>shortage of resources it would be short-sighted to fill the gap by =
credit
>creation or deficit financing as this will be self-defeating. A =
deficiency
>of total real resources for development will get manifested, in the =
sphere
>of finance, by a failure to secure finance otherwise than through an
>excessive creation of credit, or deficit financing. The inability of =
the
>Plan Frame to place more than about 75 per cent of the resources =
required
>for the Plan under the usual sources and the reliance on deficit =
financing
>for the rest is broad evidence that the size of the plan far exceeds =
the
>available savings.
>The deficiency of resources, in fact, may be larger than the magnitude =
of
>the deficit financing, as the assumed Receipts from other sources may =
prove
>to be over-optimistic. To mention one item, it would appear exceedingly
>unlikely that from an average of Rs. 45 crores per year during the past
>seven years, the Revenue surplus would jump up to an average of Rs. 180
>crores per year in the Second Plan, the figure assumed in the Plan =
Frame.
>The available real resources were inadequate even for the comparatively
>moderate First Plan. This is reflected in the disparity between
>achievements and targets. Economic development is not merely a matter =
of
>credit creation or deficit financing. Scarcity of savings manifests =
itself
>in a scarcity of the needs of production, and in administrative and
>organizational difficulties, which limit the pace of development and =
which
>credit creation cannot correct.
>Indian poverty and the massive rural under-employment are conceivably =
the
>result of a continued shortfall of savings and investments below the
>demographic rate (or a rate of investment necessary to maintain per =
capita
>income undiminished with a growing labour force). It is not to be =
expected
>that full solution of this problem would be possible in five years. The
>employment potential of the First Five Year Plan has been estimated at =
9 to
>9.5 million persons. This is roughly equal to the natural growth in the
>labour force during the period. We may presume, therefore, that with a
>higher rate of investment, than during the First Plan period, the =
Second
>Plan would begin to provide relief to the under-employed in addition to
>absorbing the annual increase in the labour force. The unemployment
>position may be worsened if the programme of investment proving
>over-ambitious inflation should develop, as this would dissipate =
savings,
>and, in due course, reduce the employment potential of a given volume =
of
>savings.
>The size of the Plan Frame has been unduly inflated as a result, on the =
one
>hand, of an over-optimistic growth in national income, which it aims =
at,
>and, on the other, of an unduly high average rate of saving as applied =
to
>this assumed growth in income. A much lower figure would result if both
>these rates were more realistic projections of Indian experience of the
>recent past. Though a certain measure of accelerated progress may =
result as
>incomes grow and savings increase, a steep upward movement from a
>background in which the mass of the people live on the margin of
>subsistence may not be possible except in a totalitarian regime.
>
>II. DEFICIT FINANCING
>The case for deficit financing, briefly, would appear to be that, (1 ) =
for
>"initiating a process of higher investment and higher incomes by fuller
>utilization of unemployed and under-utilized resources" credit must be
>taken "in advance for the additional savings" that will be forthcoming, =
in
>the future, from the larger incomes, and that "some initial credit =
creation
>therefore, is an essential part of a development programme" (Paper No. =
2,
>Section II) (2) that "a larger money supply will be needed as the =
monetised
>sector expands relatively to the non-monetised sector" (Paper No. 2, in
>Section II); (3) that a larger money supply will be needed with an =
increase
>in the national income: (4) that, there being no current inflationary
>pressures in the economy, there was no danger in undertaking deficit
>financing in a limited measure; and (5) that the apparently large =
budgetary
>deficits of recent years have not produced adverse consequences.
>My colleagues have cautioned "against any tendency to undue optimism as
>regards the extent to which the use of deficit financing may avoid the
>awkward necessity of a deliberate endeavour to mobilise resources" (p. =
4) I
>wish to join them in this cautioning. I also generally agree with (2), =
(3)
>and (4) above as offering justification and scope for a certain measure =
of
>deficit financing. With regard to (1) above, a distinction must be made
>between unemployment in industrial economies and underemployment in
>under-developed economies. A mistaken analogy between them has been
>responsible for erroneous policy approach in under-developed economies. =
The
>problems of the two economies differed in fundamental respects. In
>under-developed economies the only factor of production that was in
>abundance was unskilled labour. There was a scarcity of the other needs =
of
>production machinery, materials, and skilled personnel with the
>technological and managerial know-how. This reflected continued below =
the
>demographic rate of saving and investment. The simplest form of =
investment
>needed some equipment and technical know-how at some stage. In =
industrial
>economies, on the other hand, the rate of saving being generally above =
the
>demographic rate, unemployment of labour was accompanied by =
unemployment or
>underutilization of the complementary real resources of production. =
Credit
>creation could bring two together. Deficit financing or credit creation
>here is a device of mobilizing the real resources. We cannot seek in =
this a
>solution to the problem of development of under-developed economies. In =
the
>latter it was a question of a scarcity of savings, for which created =
money
>was no substitute. Under-employment in under-developed economies, thus,
>offered no criterion for deficit financing in the way unemployment in =
the
>industrial economies offered such criterion.
>A paper on "Installed Capacity and its Utilization in Indian =
Industries"
>(Paper No. 9 of Section III) presented to the Panel shows that =
appreciable
>percentages of unutilized capacity exist in a number of industries
>including jute, sugar, certain heavy chemicals, machines and machine =
tools.
>It is conceivable that there may exist, in the case of some at least of
>these industries, complementary skilled personnel, which are unemployed =
or
>under-employed; there may also exist in the economy the materials of
>production required to employ these personnel. The reasons for the =
partial
>idleness of the plants may vary. This would require individual studies =
on
>these industries. In some cases it may reflect export difficulties or
>competition from imports, which, conceivably, may be related to the
>over-valued exchange rate. Deficit financing or credit creation cannot =
meet
>the needs of such cases. The economic significance of this unused =
capacity
>to the total activity of even the organized private sector would be
>negligible. Some of them may justify extension of credit by the banking
>system or by the State Credit Corporations. They cannot be said to =
provide
>a case for deficit financing of the public sector.
>Regarding (5) the amount of the deficit financing with a monetary =
effect,
>undertaken since August 15, 1947 to March 31, 1954 has been =
comparatively
>moderate. Excluding the purchase of sterling by the Government in 1948
>against ad hoc Treasury Bills, which had no monetary impact, and =
allowance
>being made for the variations, in the public debt holdings of the =
Reserve
>Bank and the commercial banks, the deficit financing of the period =
averaged
>about Rs. 50 crores per annum. Between 1947-48 and 1953-54 the =
Whole-sale
>Price Index rose from 308 in the former year to 435 in 1951--52 and =
stood
>at 398 in 1953-54. Part of the rise in the price index may be due to =
the
>activation of latent inflation. But its effect could not have lasted =
beyond
>the early part of this period. The amount of the latent inflation in =
India
>was in any case moderate. It would seem significant that =
notwithstanding
>the moderate amount of the deficit financing, prices continued to rise
>until 1951-52 and were about 29 per cent higher at the end of the =
period
>relatively to the beginning of the period. This experience lends =
support to
>our estimate of the magnitude of deficit financing which may be deemed =
safe
>and necessary.=20
>My colleagues consider that for a year deficit financing at a rate of =
Rs.
>200 crores is safe and even necessary and for the five-year period they
>would put it at within Rs. 1,000 crores. I consider these figures far =
too
>excessive. The formula on which they are based is not known.
>Deficit financing does not create real resources. Together with the =
issue
>of loans, collection of Small Savings, etc., it is one of the devices =
of
>appropriating, for the public sector, the real resources which exist in =
the
>economy. The necessity for deficit financing arises from the fact that =
an
>individual converts a part of his real income into cash balance, the =
rest
>of it being either consumed or invested (through the stock exchange or
>otherwise). The cash balances, like the investments and the amounts =
spent
>on consumption, tend to grow with the growth in income. As they form a =
part
>of the savings, there exist somewhere in the economy equivalent real
>resources. Deficit financing provides the individual with the cash =
balances
>and acquires the real resources for investment in the Plan. If the =
demand
>for the increase in cash balances is not adequately met, prices would
>decline and there may ensue unemployment. Part of the cash balances =
would
>be provided by the banking system through the creation of credit. In =
this
>case the equivalent real resources would be acquired by the private =
sector,
>in whose favour the banking system would create credit.
>The amount of the deficit financing and the amount of the credit =
creation
>should be together limited to the increase in the cash balances. The =
rate
>of increase in the cash balances would depend upon the rate of increase =
in
>the Indian national product during the Five Year Plan. An estimate of =
the
>magnitude of the credit creation and of the deficit financing under =
this
>head would require a closer study than is immediately possible. The
>Bernstein Fund Mission estimated deficit financing and credit creation =
by
>the banking system at about Rs. 33-1/3 crores per annum for the last =
three
>years of the First Five Year Plan. Assuming constant prices, we may =
place
>it at a round figure of Rs. 35-40 crores per annum for the next Five =
Year
>Plan. This is only a conjecture. But it indicates the order of =
magnitudes
>involved. What part of this amount would constitute deficit financing =
and
>what part credit creation by the banking system, would depend upon the
>ratio in which the increase in the cash balance real resources of the
>public sector would be divided between the public and private sectors.
>To the amount of the deficit financing under this head must be added =
the
>sterling releases acquired for the public sector, to arrive at the =
total
>figure of the deficit financing that might be safely undertaken. The =
total
>amount of the sterling releases during the five-year period has been =
placed
>at Rs. 100-150 crores by the Plan Frame. Part of this would have to be
>allocated to the private sector and will be matched by equivalent =
credit
>creation by the banking system. If we may assume a division of the cash
>balance resources and the sterling release between the public and the
>private sectors, respectively, in the ratio of 2:1, the order of =
magnitude
>of aggregate deficit financing would be Rs. 180-235 crores for the five
>years, or an annual rate of Rs. 35-47 crores. Post- Independence Indian
>experience lends support to the comparative safety of this order of
>magnitude of deficit financing.
>Since the precise amount of the deficit financing is contingent upon =
the
>actual rate of increase in the national product and the actual =
withdrawals
>from the cash reserves, both of which may be subject to wide variation =
in
>an economy where weather conditions significantly influence output and
>prosperity, it may not be prudent finance to take advance credit for =
the
>amount of the deficit financing even if the order of magnitude were =
larger.
>The preference of the public for cash balance may, moreover, change =
with
>their confidence in the honesty of the rupee. Under the circumstances =
these
>sources should be held in reserve to help meet possible shortfalls in =
the
>receipts from other sources.
>I realise that this is less than cat's meat before the order of =
magnitude
>of the deficit financing proposed in the Plan Frame and that approved =
by my
>colleagues. But, if the above analysis is correct, I do not see how a
>significantly different conclusion may be arrived at. Even on the
>assumption of a doubling of the rate of growth of the national income, =
the
>demand for the additional cash balances cannot be of an order to =
justify
>deficit financing on a scale equivalent to 50-60% of the money supply. =
If a
>third of the central bank money proposed to be put into circulation =
through
>deficit financing went to augment the reserves of commercial banks, and =
if
>they built on it a volume of credit six to seven times, the total money
>supply at the end of the Plan period may be more than double the money
>supply at the beginning of the period. This would be clearly =
inflationary.
>An increase in the rate of growth of national income from 13 per cent =
to 27
>per cent would not require a doubling of the total money supply.
>Deficit financing is essential in an under-developed economy to permit =
full
>use of the scarce real resources. By the same token, deficit financing
>should stop severely short of the point at which inflation begins.
>Inflation does not, on balance, add to the aggregate real resources. It
>creates wasteful or socially less useful demands on the limited =
savings.
>Investment gets diverted into luxury trades to meet the demand for =
their
>products resulting from inflation incomes. It diverts an undue =
proportion
>of savings into urban property and real estate, into gold hoards and
>jewellery, and into foreign exchange, as a result of the effort of the
>savers to protect the value of their savings. The resources available =
for
>the plan would be, as a result, correspondingly less, and overall =
economic
>development would be impeded.
>Inflation tends to be self-perpetuating. With the rise in price and =
wages,
>the original estimates of the cost of the projects taken in hand will =
be
>out of date. More deficit financing would be necessary for their
>completion. And, as they cannot be left half finished, there would be a
>pressure for further deficit financing. At any given moment, the whole =
of
>the currently available savings being invested either in the public or =
the
>private sector, or outside the Plan, there would be no idle savings to =
draw
>upon. Real resources would have to be drawn into the Plan by force, =
which
>would render the distortions and wastages referred to above =
unavoidable.
>This takes away from the practical value of the caution, that the
>inflationary situation should be kept under watch. Once inflation =
begins,
>it tends to gather momentum, and while it runs its course we are apt to =
be
>more or less helpless witnesses. The best protection against inflation =
is
>to prevent it by keeping the investment programmes within the available
>real resources.
>
>III. POLICY AND INSTITUTIONAL IMPLICATIONS
> In this section we shall deal with legislative and administrative
>measures, taxes on lower income groups, extension of nationalisation,
>continuance of controls, price support of agricultural produce, and the
>proposed National Labour Force.
>
>(i) Legislative and Administrative Measures
>No plan can be bigger or bolder than the available real resources. The
>taxation Inquiry Commission has estimated net savings in India at about =
7
>per cent of the national income in 1953-54, which is about Rs. 730 =
crores.
>This is an overall figure and, therefore, includes savings utilised for
>capital formation in the organized private sector (about Rs. 75 =
crores),
>public savings, urban savings, rural savings, and also non-monetised
>savings. Other estimates of savings are more or less of the same order. =
To
>the extent this estimate is reliable, it is a measure of the total
>permissible investments in India. Any attempt to exceed this limit =
would
>raise prices, and would impede overall economic development. Consistent
>with individual freedom and democratic institutions, there is no device =
of
>significantly adding to the volume of the flow of savings, though, with
>proper inducements (which should include an honest rupee and an =
unpegged
>interest rate), it may be possible to stimulate the flow somewhat. The
>situation, however, may be significantly different under a totalitarian
>regime, which may impose authoritarian reductions in consumption. =
Overall
>savings, then, are no longer dependent upon individual choices. I =
presume
>that planning in India would be consistent with democracy and =
democratic
>institutions.
>I am unable to agree to the following recommendation of my colleagues :
>"It is only when there is a firm legislative and administrative base =
that
>it is possible to think in terms of doubling the rate of progress in =
the
>Second Plan period, of increasing capital formation, of raising levels =
of
>living and providing the machinery for accelerated development in the
>future. We cannot, therefore, emphasise too strongly the importance of
>facing up boldly and without hesitation to the legislative and
>administrative implications of a bigger and a bolder plan".
>I apprehend that reliance on legislation and administrative measures to
>increase the rate of saving which will permit a bigger and bolder Plan,
>may, by degrees undermine our democratic social order, which would be =
too
>high a price to pay for accelerated economic development. Legislative =
and
>administrative action should be directed to ensuring the specially most
>effective uses of democratically generated savings, rather than risk =
undue
>infringements of the liberty of the individual, without which, to quote =
our
>Prime Minister, "We lose what is the greatest value in life". It would
>appear preferable to explore the scope for more ample but unicumbered,
>foreign aid and foreign loans and a larger flow of unicumbered foreign
>private capital to supplement domestic saving for accelerated economic
>development. In view of the vast scope of profitable investments, this
>would be imminently worth-while, the net profits of the projects may be
>expected more than to cover the amortisation of the foreign capital =
within
>a reasonable period. Economic history does provide instances of =
national
>economic development being financed by foreign capital in the early =
stages
>with no loss or sacrifice or sovereignty.
>
>(ii) Taxes on Lower Income Groups
>There is hardly room for a further reduction in the standard of living =
of
>the lower income groups in India. Finance for the Plan must be raised =
from
>the middle and the upper income groups. Measures of taxation and other
>devices, which would tend to reduce further the consumption of the =
lower
>income groups, should be avoided. I am unable, therefore, to agree to =
my
>colleagues' recommendation to amend Article 286(3) of the Constitution =
in
>order to permit taxation of articles "essential to the life of the
>community". Amendments to the constitution which should be rare, should
>much rather be in the direction of adding to the liberties, privileges =
and
>rights of the common man than otherwise.
>
>(iii) Extension of Nationalisation
>I agree with my colleagues that the scarcity of administrative and
>specialised personnel, and the necessity of conserving savings for the =
plan
>are factors against extension of nationalisation. But they have no
>objection for such extension on principle. I would oppose general =
extension
>of nationalisation on principle. Nationalisation should be ordinarily
>limited to public utility concerns and to concerns, involving national
>security. Otherwise, State intervention should be concerned with the
>prevention of monopolies or quasi-monopolies. Efficient management of
>business and industrial concerns in a competitive market economy is a
>highly specialised function and demands qualities which a civil servant =
is
>not required to, and in the ordinary course of his training may not,
>acquire. This function is best left to private entrepreneurs, in the
>prevailing socio-economic order, which is dominated by the market =
economy
>and the pricing system.
>
>(iv) Continuance of Controls
>I do not feel convinced of the economic importance of continuing the
>remnants of controls. Decontrols have proved a noteworthy success. =
Controls
>and physical allocations are not a necessary adjunct to planning. The
>distribution of productive resources, including the ratios in which =
they
>are used, are subject to variation and depend upon diverse =
technological,
>economic and price considerations. It is quite impossible to take into
>account these complex and changing considerations and arrange anything =
like
>a satisfactory allocation of resources. There are great advantages in
>allowing freedom to the economy, and to the price system in the use and
>distribution of the needs of production. I am unable to agree with my
>colleagues that a case exists for continuing what controls now remain.
>Steps should be taken to remove controls as early as may be possible.
>Controls and allocations are an essential characteristic of communist
>planning. They do not very well fit in, under planning in a free =
enterprise
>market economy.
>
>(v) Price-support of Agricultural Produce
>I wish to join my colleagues in the matter of the urgency and =
importance of
>completing speedily the scheme for licensed ware-houses, and for the
>provision of credit and marketing facilities to farmers. My colleagues =
have
>stated that the ware-housing system "should be used by the State for
>purchase and sales of buffer stocks of agricultural commodities not =
only
>for the purpose of dealing with any sharp falls in agricultural prices =
such
>as we are witnessing today but also with the objective of preventing =
any
>sharp seasonal fall or rise in prices".
>In theory it may be possible to distinguish between seasonal price
>movements from the long-term price trends, and to prescribe that =
seasonal
>fluctuations should be smoothed out by State purchases in times of =
harvest
>and sales between harvests. In practice, however, such distinctions may
>prove to be difficult and seasonal interventions may turn into =
long-term
>price support operations.
>Price support of agricultural produce in India is a risky venture and =
we
>should be forewarned of the inherent dangers of it. About 50 per cent =
of
>Indian national income is drawn from Agriculture. A policy of price =
support
>is, in essence, a subsidy, by the rest of the community to the =
producers of
>the price- supported commodity In countries, where agriculture is a =
minor
>sector of the national economy, the incidence of the subsidy may be =
spread
>out thinly on the larger sector of the economy and the proceeds may =
provide
>substantial relief to farmers. The reverse would be the case in India. =
The
>strain of the subsidy will manifest itself in a shortage of budget
>resources for the open market purchase and storage of agricultural =
produce.
>This, in due course, would lead to either abandonment of the price =
-support
>policy or inflation. In either case damage would result. If the dilemma
>does not appear in one season, it is likely to come in the next, as
>successful price support would stimulate production. In the Indian =
context,
>a policy of price support of agricultural produce may force the economy
>down the inclined plane of inflation. Even in the United States, where
>agriculture is a minor sector of the national economy, price support =
has
>only survived. It has not succeeded. It has led to undue stockpiling of
>agricultural commodities and, in the past, had involved a great deal of
>wastage of stocks through deterioration. Selective price support policy =
is
>a poor answer to this difficulty. The distinction between crops would =
be
>invidious, the relief provided may prove to be a token, and it might =
cause
>a distortion in the pattern of agricultural production and economic
>instability.
>The price situation in India today was too complex to be resolved by =
price
>support of agricultural commodities or other inflationary measures such =
as
>a deficit financing. The price decline was neither universal nor =
uniform.
>The prices of some major commodities had moved in opposite directions. =
The
>fall was heaviest among foodgrains, oilseeds, and black pepper. Some
>agricultural produce, e.g., tea, raw hides and lac, which were export
>goods, and raw jute, among import goods, had risen almost as high as =
some
>other agricultural prices had fallen. The prices of manufactures were
>either steady or showed a slight upturn on the average. The cost of =
living
>index was either steady or had fallen only slightly. In a background of
>dissimilar price movements, simple monetary remedies may aggravate the
>complexity and difficulty of the price structure. It may, on balance,
>adversely affect the employment position by stiffening the already =
rigid
>cost structure. Price support and deficit financing were no remedies to
>individual over-production, and to export difficulties which are
>attributable to quality and to domestic costs or exchange =
overvaluation.
>Price support and deficit financing might, in fact, aggravate these =
maladies.
>The complex problems of the prevailing price situation emphasise the
>importance of economic rationalisation, for progress with stability,
>whereby the fiscal, the investment, the monetary, the interest rate, =
the
>tariff, and the exchange rate policies are rendered mutually consistent =
and
>harmonious.
>
>(vi) National Labour Force
>I apprehend more risks than I see advantages in the proposed National
>Labour Force. It may create a privileged class of workers, who may =
prove to
>be relatively more expensive to keep and to move. The availability of =
this
>force may impede relief to the regional underemployment problems. The
>necessity for such a force may not arise until labour becomes a =
bottleneck
>in economic development.
>
>
>
>------------------------------------------------------------------------=
--
>This is the National Debate on System Reform.       =
debate@indiapolicy.org
>Rules, Procedures, Archives:            =
http://www.indiapolicy.org/debate/
>------------------------------------------------------------------------=
-
>=20

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<DIV>&nbsp;</DIV>
<DIV><FONT face=3DArial size=3D2><B>-----Original =
Message-----</B><BR><B>From:=20
</B>Dr.SubrotoRoy &lt;<A=20
href=3D"mailto:sroy@vgsom.iitkgp.ernet.in">sroy@vgsom.iitkgp.ernet.in</A>=
&gt;<BR><B>To:=20
</B><A href=3D"mailto:debate@indiapolicy.org">debate@indiapolicy.org</A> =
&lt;<A=20
href=3D"mailto:debate@indiapolicy.org">debate@indiapolicy.org</A>&gt;<BR>=
<B>Cc:=20
</B>Sanjeev Sabhlok &lt;<A=20
href=3D"mailto:sanjeev@sabhlokcity.com">sanjeev@sabhlokcity.com</A>&gt;; =
Parth J=20
Shah &lt;<A =
href=3D"mailto:parth@ccsindia.org">parth@ccsindia.org</A>&gt;; Vamsi=20
Musunuru &lt;<A=20
href=3D"mailto:vamsi@siliconcorp.com">vamsi@siliconcorp.com</A>&gt;<BR><B=
>Date:=20
</B>Thursday, March 30, 2000 10:11 AM<BR><B>Subject: </B>Congratulations =
on B.=20
R. Shenoy on the Internet!<BR><BR></DIV></FONT>
<DIV>The late Professor B. R. Shenoy was the <STRONG><EM>sole&nbsp;=20
</EM></STRONG>Indian economist -- and he really =
<STRONG><EM>was</EM></STRONG> an=20
economist, unlike e.g. P.&nbsp; C. Mahalanobis, who was trained&nbsp;in=20
statistics and anthropology --&nbsp; to have the&nbsp;the courage to =
stand alone=20
against almost everyone else who was gassing about economic policy at =
the=20
time.&nbsp;&nbsp;&nbsp; Rabindranath's famous refrain =
was&nbsp;<STRONG><EM>Jodi=20
tor dak shuney kyeu na ashe, tobe akla cholo re...&nbsp;&nbsp;&nbsp; "if =
none=20
hearkens to your call, then stand alone"</EM></STRONG>.&nbsp; Well, that =
was=20
what Shenoy did, right through the 1950s and 1960s.</DIV>
<DIV>&nbsp;</DIV>
<DIV>What I was told by (a) his daughter; and (b) N. Georgescu-Roegen =
about 1982=20
in Virginia; and&nbsp;I think by Peter Bauer and Milton Friedman too, =
was that=20
Shenoy had become a student or a disciple of F. A. Hayek at the London =
School of=20
Economics, before he returned to his job at the RBI.&nbsp;&nbsp;&nbsp; =
His Note=20
of Dissent made him notorious among the Indian Stalinists/Maoists then =
in power=20
(some of whose disciples have become Jeffersonian liberals=20
now).&nbsp;&nbsp;&nbsp;He was hounded out of one job or another, =
considered of=20
course to be a "CIA agent", and had difficulty finding employment until =
the=20
Sarabhai family created a chair for him at the University of Ahmedabad =
where he=20
survived until his passing.&nbsp; His widow lived in Delhi at least =
until the=20
1980s.&nbsp;&nbsp; I do not know if she may still be there but I am sure =
she=20
would be happy to know all this is happening now.&nbsp;&nbsp; His =
daughter used=20
to be in Australia or New Zealand, and is an "Austrian"-school=20
economist.&nbsp;&nbsp;&nbsp; His successor at Ahmedabad is Professor M. =
P. Bhatt=20
whom I had the privilege of meeting at the Mont Pelerin meetings of =
1984; he had=20
kept Shenoy's name alive in India as best he could.&nbsp;&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>Thank you for publishing him on the Internet.&nbsp; I am sending a =
copy of=20
this to Professor Milton Friedman.&nbsp;&nbsp; I would do so to Peter =
Bauer too=20
but I doubt if he has or has any interest in email.</DIV>
<DIV>&nbsp;</DIV>
<DIV>Subroto Roy.</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>
<DIV><FONT face=3DArial size=3D2>-----Original Message-----<BR>From: Dr. =
Sanjeev=20
Sabhlok &lt;<A=20
href=3D"mailto:sanjeev@sabhlokcity.com">sanjeev@sabhlokcity.com</A>&gt;<B=
R>To: <A=20
href=3D"mailto:debate@indiapolicy.org">debate@indiapolicy.org</A> &lt;<A =

href=3D"mailto:debate@indiapolicy.org">debate@indiapolicy.org</A>&gt;<BR>=
Date:=20
Thursday, March 30, 2000 12:44 PM<BR>Subject: Shenoy is=20
up.<BR><BR></DIV></FONT>&gt;---------------------------------------------=
------------------------<BR>&gt;Please=20
help make the Manifesto better, or accept it, and propagate=20
it!<BR>&gt;--------------------------------------------------------------=
-------<BR>&gt;A=20
NOTE OF DISSENT ON THE MEMORANDUM OF THE PANEL OF ECONOMISTS by Prof.=20
B.<BR>&gt;R. Shenoy is now available at<BR>&gt;<BR>&gt; <A=20
href=3D"http://www.indiapolicy.org/debate/notes.html">http://www.indiapol=
icy.org/debate/notes.html</A><BR>&gt;<BR>&gt;Part=20
III of this can be easily distributed to IAS OTs at =
LBS.<BR>&gt;<BR>&gt;Some=20
examples of Shenoy's=20
wisdom:<BR>&gt;---------------------------------<BR>&gt;<BR>&gt;* I =
presume that=20
planning in India would be consistent with democracy =
and<BR>&gt;democratic=20
institutions.<BR>&gt;<BR>&gt;* I apprehend that reliance on legislation =
and=20
administrative measures to<BR>&gt;increase the rate of saving which will =
permit=20
a bigger and bolder Plan,<BR>&gt;may, by degrees undermine our =
democratic social=20
order, which would be too<BR>&gt;high a price to pay for accelerated =
economic=20
development. Legislative and<BR>&gt;administrative action should be =
directed to=20
ensuring the specially most<BR>&gt;effective uses of democratically =
generated=20
savings, rather than risk undue<BR>&gt;infringements of the liberty of =
the=20
individual<BR>&gt;<BR>&gt;* Amendments to the constitution which should =
be rare,=20
should much rather<BR>&gt;be in the direction of adding to the =
liberties,=20
privileges and rights of<BR>&gt;the common man than =
otherwise.<BR>&gt;<BR>&gt;*=20
I would oppose general extension of nationalisation on=20
principle.<BR>&gt;<BR>&gt;* Efficient management of business and =
industrial=20
concerns in a competitive<BR>&gt;market economy is a highly specialised =
function=20
and demands qualities which<BR>&gt;a civil servant is not required to, =
and in=20
the ordinary course of his<BR>&gt;training may not,=20
acquire.<BR>&gt;<BR>&gt;*&nbsp; Controls and physical allocations are =
not a=20
necessary adjunct to planning.<BR>&gt;<BR>&gt;*&nbsp; There are great =
advantages=20
in allowing freedom to the economy, and to<BR>&gt;the price system in =
the use=20
and distribution of the needs of =
production.<BR>&gt;<BR>&gt;*&nbsp;&nbsp; Price=20
support of agricultural produce in India is a risky venture =
and<BR>&gt;we should=20
be forewarned of the inherent dangers of it.<BR>&gt;<BR>&gt;For those =
who can't=20
download Word documents, the text in full:<BR>&gt;<BR>&gt;A NOTE OF =
DISSENT=20
ON<BR>&gt;THE MEMORANDUM OF THE<BR>&gt;PANEL OF ECONOMISTS*<BR>&gt; =
Prof. B. R.=20
Shenoy<BR>&gt;<BR>&gt;I am unable to subscribe wholly to the views of my =

colleagues on (1) the<BR>&gt;Size of the Plan, (2) Deficit Financing as =
a means=20
of raising real<BR>&gt;resources for the Plan, and (3) certain Policy =
and=20
Institutional<BR>&gt;Implications of the Plan Frame. I may set out, =
briefly, my=20
views on these<BR>&gt;subjects.<BR>&gt;<BR>&gt;I. SIZE OF THE =
PLAN<BR>&gt;The=20
Plan Frame is built on the basis of a 25 to 27 per cent, increase =
in<BR>&gt;the=20
national income in five years. The targets of production in the=20
several<BR>&gt;sectors, which correspond to this rise in income, would =
require=20
an increase<BR>&gt;in net investment (or savings) from 6.75 per cent of =
the=20
national income in<BR>&gt;1955-56 to 10.95 per cent in 1960-61. This=20
relationship yielded a figure of<BR>&gt;a total net investment of Rs. =
5,600=20
crores in five years; Rs. 3,400 crores<BR>&gt;of this expenditure would =
be in=20
the public sector and Rs. 2,200 crores in<BR>&gt;the private sector. =
<BR>&gt;The=20
total developmental outlay corresponding to a net investment of =
Rs.<BR>&gt;3,400=20
crores in the public sector would be Rs. 4,300 crores. Adding to =
this<BR>&gt;an=20
expenditure of Rs. 4,500 crores outside the Plan, the total outlay =
of<BR>&gt;the=20
Centre and the States would be Rs. 8,800 crores in five years. The=20
Plan<BR>&gt;Frame proceeds to finance this expenditure in the following=20
manner:<BR>&gt;<BR>&gt;1. Revenue and other current Receipts at the of=20
8.5%&nbsp; of the National income<BR>&gt;2. Railway surplus<BR>&gt;3. =
Loans and=20
Small Savings<BR>&gt;4. Foreign assistance =
<BR>&gt;5.&nbsp;&nbsp;&nbsp;&nbsp;=20
Additional taxation, compulsory savings, and&nbsp;&nbsp; higher profits=20
from<BR>&gt;government enterprises<BR>&gt;6.&nbsp;&nbsp;&nbsp;&nbsp; =
Deficit=20
Financing<BR>&gt;Total<BR>&gt; (Crores of Rupees)<BR>&gt;<BR>&gt;5,200=20
<BR>&gt;200<BR>&gt;1,000<BR>&gt;400<BR>&gt;<BR>&gt;800-1,000<BR>&gt;1,000=
-1,200<BR>&gt;8,800<BR>&gt;<BR>&gt;<BR>&gt;=20
If we separate from the above the total developmental outlay on the=20
Plan<BR>&gt;(Rs. 4,300 crores) the resources for the public sector of =
.the Plan=20
would<BR>&gt;be derived probably as under : <BR>&gt;<BR>&gt;<BR>&gt;1 . =
Loans=20
and Small Savings<BR>&gt;2. Foreign assistance<BR>&gt;3. Revenue Surplus =
on the=20
basis of Revenue Receipts at the current rate of<BR>&gt;8.5% of the =
national=20
income.<BR>&gt;4. Additional taxation, compulsory savings, and higher =
profits=20
from<BR>&gt;government enterprises<BR>&gt;5. Deficit =
Financing<BR>&gt;Total=20
(Crores of Rupees)<BR>&gt;1,000=20
<BR>&gt;400<BR>&gt;<BR>&gt;<BR>&gt;900<BR>&gt;<BR>&gt;800-1,000<BR>&gt;1,=
000-1,200<BR>&gt;4,300<BR>&gt;<BR>&gt;My=20
colleagues have stated that the increase in investment required for=20
the<BR>&gt;Plan Frame is "fairly ambitious" and they "stress that the =
effort=20
involved<BR>&gt;in this increase is considerable, and will strain the =
economy a=20
very great<BR>&gt;deal" (para. 7). Earlier however, they have observed =
that=20
"given a<BR>&gt;determined bid to put forth a maximum measure of =
effort", the=20
national<BR>&gt;income objective, which this rate of increase in =
investment=20
would yield,<BR>&gt;"can be attained" (para. 4). This, to my mind, does =
not=20
adequately indicate<BR>&gt;the risks which an investment attempt on this =
scale=20
may involve (unless<BR>&gt;foreign assistance becomes available in an=20
incomparably larger measure than<BR>&gt;envisaged in the Plan Frame). To =
force a=20
pace of development in excess of<BR>&gt;the capacity of the available =
real=20
resources must necessarily involve<BR>&gt;uncontrolled inflation. In a=20
democratic community where the masses of the<BR>&gt;people live close to =
the=20
margin of subsistence, uncontrolled inflation may<BR>&gt;prove to be=20
explosive&nbsp; and might undermine the existing order of =
society.<BR>&gt;In=20
such a background one cannot subsidise communism better than=20
through<BR>&gt;inflationary deficit financing. Probably the greatest =
enemy of=20
the<BR>&gt;Kuomintang in China was the printing press. Alternatively, if =

appropriate<BR>&gt;"physical measures", familiar to a communist economy, =
were=20
adopted (in an<BR>&gt;effort to prevent inflation) we would be writing =
off,=20
gradually or rapidly,<BR>&gt;depending upon the exigencies, of the plan, =

individual liberty and<BR>&gt;democratic institutions by administrative =
or=20
legislative action. We should<BR>&gt;be, therefore, forewarned of the =
dangers of=20
an over-ambitious plan. A wide<BR>&gt;gap between targets and =
achievements as=20
has been hither to the case with<BR>&gt;the first plan was a third =
possibility=20
This depended, however, upon the<BR>&gt;rigour with which we may resist=20
temptations for inflationary finance, and<BR>&gt;the pressure to =
encroach upon=20
the liberty of the individual. Such<BR>&gt;resistance may prove to be =
difficult=20
under the natural enthusiasm to reach<BR>&gt;the targets. It may entail, =

moreover, some wastage incidental to a revision<BR>&gt;(to match in the=20
available resources) of a plan in progress which had been<BR>&gt;based =
on a=20
larger blue print.<BR>&gt;The Plan Frame begins by prescribing the =
increase in=20
national income which<BR>&gt;the Plan would set to achieve. Its authors, =
then,=20
proceed to find the real<BR>&gt;resources necessary for the =
corresponding rate=20
of investment. In making the<BR>&gt;national budget, it is permissible =
to=20
determine expenditure first and then,<BR>&gt;raise equivalent funds, as =
the=20
Receipts of the State form but a part of the<BR>&gt;total national =
income. The=20
budget can grow by drawing on the rest. This<BR>&gt;procedure cannot be =
applied=20
to the budget of a Plan, which embraces the<BR>&gt;entire monetised =
saving and=20
investment activity of the nation. Here the<BR>&gt;availability of real=20
resources must be assessed first and the investment<BR>&gt;plan must =
match it.=20
In a communist economy the volume of savings may be<BR>&gt;made to vary =
within=20
fair limits by restricting allocations to the consumer<BR>&gt;trades. =
Within=20
these limits a communist plan can determine expenditure<BR>&gt;first, =
and, then,=20
proceed to find the requisite resources. In a democratic<BR>&gt;society =
the=20
scope for variation in savings, which is largely the result =
of<BR>&gt;individual=20
choices, is comparatively limited.<BR>&gt;The availability of real =
resources=20
must depend on the reliability of the<BR>&gt;estimates of saving. Under =
no=20
circumstances can total net investment<BR>&gt;(excluding external =
assistance)=20
exceed the total net savings of the<BR>&gt;community. Revenue surpluses, =

surpluses of State business undertakings,<BR>&gt;loans, ploughing back =
of=20
profits, deficit financing, credit creation, and<BR>&gt;so on, are but =
devices=20
of appropriating the savings of the community for<BR>&gt;purposes of the =
Plan.=20
There is no device of creating real resources which<BR>&gt;are not=20
saved.<BR>&gt;A paper on "Capital Formation in India" supplied to the =
Panel of=20
Economists<BR>&gt;estimates net domestic capital formation India, in the =
recent=20
past, as under :<BR>&gt;Net Domestic Capital Formation in India<BR>&gt; =
(1) (2)=20
(3)<BR>&gt; (Rs. in Crores) <BR>&gt; Net Domestic Capital formation =
National=20
Income 1 as % of=20
2<BR>&gt;<BR>&gt;1948-49<BR>&gt;1949-50<BR>&gt;1950-51<BR>&gt;1951-52<BR>=
&gt;1952-53<BR>&gt;1953-54=20
446<BR>&gt;524<BR>&gt;589<BR>&gt;672<BR>&gt;659<BR>&gt;71 9=20
8,580<BR>&gt;9,000<BR>&gt;9, 500<BR>&gt;10, 000<BR>&gt;9,800<BR>&gt;10, =
500=20
5.2<BR>&gt;5.8<BR>&gt;6.2<BR>&gt;6.7<BR>&gt;6.7<BR>&gt;6.8<BR>&gt;<BR>&gt=
;During=20
the first three years of the First Five Year Plan, (1951-52 =
to<BR>&gt;1955-56),=20
net capital formation, as a percentage of national income =
was<BR>&gt;more or=20
less stationary, the increase in the national income =
being<BR>&gt;presumably=20
absorbed, in large part, partly by an increase in the =
population<BR>&gt;and=20
partly by an increase in consumption. Relatively to 1949-50,=20
capital<BR>&gt;formation (as a percentage of national income) in 1953-54 =
rose by=20
17.24 per<BR>&gt;cent, an annual increase of 4.56 per cent. Under the =
Plan Frame=20
net capital<BR>&gt;formation (10.95%) at the close of the Second Plan =
(1.960-61)=20
would be<BR>&gt;61.98 per cent higher than (6.75%) at the close of the =
First=20
Plan (1955-56)<BR>&gt;or an annual increase of 12.40 per =
cent.<BR>&gt;The=20
over-ambitious character of the Plan Frame is also reflected in =
the<BR>&gt;rate=20
of increase it aims at in the national income. Allowance being =
made<BR>&gt;for=20
favourable monsoons, the increase in national income during the=20
First<BR>&gt;Plan is estimated at 12 to 13 per cent, or an annual =
increase of=20
2.4 to 2.6<BR>&gt;per cent. The corresponding increase in the Plan Frame =
is 5=20
per cent per<BR>&gt;annum or 25 to 27 per cent in five =
years.<BR>&gt;Statistics=20
of the growth of national income in certain overseas =
countries,<BR>&gt;quoted by=20
the Plan Frame, show that in Canada, Switzerland and Germany =
the<BR>&gt;rate of=20
growth in national income generally approximated to the rate =
of<BR>&gt;growth=20
experienced in India during the First Five Year Plan. In U.S.A. =
the<BR>&gt;rate=20
of growth was 4.5 per cent until 1913 and 3 per cent from 1929 =
to<BR>&gt;1950.=20
Both in per capita income and the capacity to save we are far=20
behind<BR>&gt;these countries. In the Soviet Union, Poland, =
Czechoslovakia,=20
Hungary and<BR>&gt;Bulgaria, the rate of growth in recent years is =
stated to=20
vary between 12<BR>&gt;to 16 per cent. If these statistics are =
comparable, the=20
more rapid progress<BR>&gt;of communist economies reflects the relative=20
efficiency of totalitarian<BR>&gt;devices.<BR>&gt;Judging from our own =
recent=20
experience, and also the experience of other<BR>&gt;democratic =
countries, the=20
available real resources (savings) for<BR>&gt;development cannot for =
sometime be=20
expected to be of an order that would<BR>&gt;permit anything like a =
doubling of=20
the rate of growth in national income.<BR>&gt;The current rate of =
savings in=20
India is generally estimated at 7 per cent<BR>&gt;or under of the =
national=20
income. During the past five years it has risen by<BR>&gt;about 1 per =
cent. It=20
would be too optimistic to assume that the rate of<BR>&gt;increase may =
be=20
accelerated in the next five years. A reduction in =
the<BR>&gt;inequalities of=20
income distribution, which is the declared policy of =
the<BR>&gt;Government,=20
would tend to reduce overall savings. The consumption of food<BR>&gt;of =
the vast=20
masses of the people being both below the national average =
and<BR>&gt;below the=20
minimum nutritional standards, it has been estimated that =
about<BR>&gt;50 per=20
cent of an increase in consumer expenditure is liable to be =
utilised<BR>&gt;in=20
India on foodgrains. In conformity with traditional experience,=20
a<BR>&gt;succession of good harvests, which we have experienced, may be =
followed=20
by<BR>&gt;a couple of years or so of bad or indifferent harvests. Under=20
the<BR>&gt;circumstances, it may not be safe to assume a rate of saving =
of much=20
higher<BR>&gt;than 8 per cent at the end of the next five-year period. =
The=20
possibility of<BR>&gt;this conjecture proving too high cannot be ruled =
out. The=20
size of the Plan<BR>&gt;needs to be, therefore, revised to match the =
real=20
resources as indicated by<BR>&gt;this rate of savings and the estimate =
of the=20
rate of increase in national<BR>&gt;income should be adjusted to conform =
to the=20
investment equivalent to this<BR>&gt;rate of saving.<BR>&gt;The rate of =
increase=20
in income would depend upon the bias of the Plan for<BR>&gt;labour =
intensive=20
schemes and for cottage industries. The probable<BR>&gt;magnitudes of =
the=20
investment and of the growth in income remain to be<BR>&gt;worked out. =
This it=20
is not possible to do immediately. On a rough estimate<BR>&gt;the order =
of=20
magnitude of the investment would be probably about Rs. 3,500<BR>&gt;to =
Rs.=20
4,000 crores. Considering that the total investment in the =
public<BR>&gt;sector=20
in the three years of the First Plan did not exceed Rs. 885 =
crores<BR>&gt;(38.65=20
per cent of the target of Rs. 2,290 crores for five years), this =
is<BR>&gt;not=20
too low a target to aim at in the Second Five Year Plan. Investment=20
in<BR>&gt;the public sector may roughly correspond to the target fixed =
for the=20
First<BR>&gt;Plan. If at the end of the five year period, the actual =
investment,=20
at<BR>&gt;constant prices should be about 70 per cent of the target, the =

investment<BR>&gt;in the public sector of the Second Plan would be about =
43 per=20
cent higher<BR>&gt;than that in the First Plan.<BR>&gt;As no plan can be =
bigger=20
or bolder than the available resources, the size<BR>&gt;of the =
investment=20
programme should be reviewed periodically to ensure that<BR>&gt;it keeps =
within=20
the limits of savings. If such a review should reveal a<BR>&gt;shortage =
of=20
resources it would be short-sighted to fill the gap by =
credit<BR>&gt;creation or=20
deficit financing as this will be self-defeating. A deficiency<BR>&gt;of =
total=20
real resources for development will get manifested, in the =
sphere<BR>&gt;of=20
finance, by a failure to secure finance otherwise than through=20
an<BR>&gt;excessive creation of credit, or deficit financing. The =
inability of=20
the<BR>&gt;Plan Frame to place more than about 75 per cent of the =
resources=20
required<BR>&gt;for the Plan under the usual sources and the reliance on =
deficit=20
financing<BR>&gt;for the rest is broad evidence that the size of the =
plan far=20
exceeds the<BR>&gt;available savings.<BR>&gt;The deficiency of =
resources, in=20
fact, may be larger than the magnitude of<BR>&gt;the deficit financing, =
as the=20
assumed Receipts from other sources may prove<BR>&gt;to be =
over-optimistic. To=20
mention one item, it would appear exceedingly<BR>&gt;unlikely that from =
an=20
average of Rs. 45 crores per year during the past<BR>&gt;seven years, =
the=20
Revenue surplus would jump up to an average of Rs. 180<BR>&gt;crores per =
year in=20
the Second Plan, the figure assumed in the Plan Frame.<BR>&gt;The =
available real=20
resources were inadequate even for the comparatively<BR>&gt;moderate =
First Plan.=20
This is reflected in the disparity between<BR>&gt;achievements and =
targets.=20
Economic development is not merely a matter of<BR>&gt;credit creation or =
deficit=20
financing. Scarcity of savings manifests itself<BR>&gt;in a scarcity of =
the=20
needs of production, and in administrative and<BR>&gt;organizational=20
difficulties, which limit the pace of development and =
which<BR>&gt;credit=20
creation cannot correct.<BR>&gt;Indian poverty and the massive rural=20
under-employment are conceivably the<BR>&gt;result of a continued =
shortfall of=20
savings and investments below the<BR>&gt;demographic rate (or a rate of=20
investment necessary to maintain per capita<BR>&gt;income undiminished =
with a=20
growing labour force). It is not to be expected<BR>&gt;that full =
solution of=20
this problem would be possible in five years. The<BR>&gt;employment =
potential of=20
the First Five Year Plan has been estimated at 9 to<BR>&gt;9.5 million =
persons.=20
This is roughly equal to the natural growth in the<BR>&gt;labour force =
during=20
the period. We may presume, therefore, that with a<BR>&gt;higher rate of =

investment, than during the First Plan period, the Second<BR>&gt;Plan =
would=20
begin to provide relief to the under-employed in addition =
to<BR>&gt;absorbing=20
the annual increase in the labour force. The =
unemployment<BR>&gt;position may be=20
worsened if the programme of investment proving<BR>&gt;over-ambitious =
inflation=20
should develop, as this would dissipate savings,<BR>&gt;and, in due =
course,=20
reduce the employment potential of a given volume =
of<BR>&gt;savings.<BR>&gt;The=20
size of the Plan Frame has been unduly inflated as a result, on the=20
one<BR>&gt;hand, of an over-optimistic growth in national income, which =
it aims=20
at,<BR>&gt;and, on the other, of an unduly high average rate of saving =
as=20
applied to<BR>&gt;this assumed growth in income. A much lower figure =
would=20
result if both<BR>&gt;these rates were more realistic projections of =
Indian=20
experience of the<BR>&gt;recent past. Though a certain measure of =
accelerated=20
progress may result as<BR>&gt;incomes grow and savings increase, a steep =
upward=20
movement from a<BR>&gt;background in which the mass of the people live =
on the=20
margin of<BR>&gt;subsistence may not be possible except in a =
totalitarian=20
regime.<BR>&gt;<BR>&gt;II. DEFICIT FINANCING<BR>&gt;The case for deficit =

financing, briefly, would appear to be that, (1 ) for<BR>&gt;"initiating =
a=20
process of higher investment and higher incomes by =
fuller<BR>&gt;utilization of=20
unemployed and under-utilized resources" credit must be<BR>&gt;taken "in =
advance=20
for the additional savings" that will be forthcoming, in<BR>&gt;the =
future, from=20
the larger incomes, and that "some initial credit =
creation<BR>&gt;therefore, is=20
an essential part of a development programme" (Paper No. =
2,<BR>&gt;Section II)=20
(2) that "a larger money supply will be needed as the =
monetised<BR>&gt;sector=20
expands relatively to the non-monetised sector" (Paper No. 2, =
in<BR>&gt;Section=20
II); (3) that a larger money supply will be needed with an =
increase<BR>&gt;in=20
the national income: (4) that, there being no current=20
inflationary<BR>&gt;pressures in the economy, there was no danger in =
undertaking=20
deficit<BR>&gt;financing in a limited measure; and (5) that the =
apparently large=20
budgetary<BR>&gt;deficits of recent years have not produced adverse=20
consequences.<BR>&gt;My colleagues have cautioned "against any tendency =
to undue=20
optimism as<BR>&gt;regards the extent to which the use of deficit =
financing may=20
avoid the<BR>&gt;awkward necessity of a deliberate endeavour to mobilise =

resources" (p. 4) I<BR>&gt;wish to join them in this cautioning. I also=20
generally agree with (2), (3)<BR>&gt;and (4) above as offering =
justification and=20
scope for a certain measure of<BR>&gt;deficit financing. With regard to =
(1)=20
above, a distinction must be made<BR>&gt;between unemployment in =
industrial=20
economies and underemployment in<BR>&gt;under-developed economies. A =
mistaken=20
analogy between them has been<BR>&gt;responsible for erroneous policy =
approach=20
in under-developed economies. The<BR>&gt;problems of the two economies =
differed=20
in fundamental respects. In<BR>&gt;under-developed economies the only =
factor of=20
production that was in<BR>&gt;abundance was unskilled labour. There was =
a=20
scarcity of the other needs of<BR>&gt;production machinery, materials, =
and=20
skilled personnel with the<BR>&gt;technological and managerial know-how. =
This=20
reflected continued below the<BR>&gt;demographic rate of saving and =
investment.=20
The simplest form of investment<BR>&gt;needed some equipment and =
technical=20
know-how at some stage. In industrial<BR>&gt;economies, on the other =
hand, the=20
rate of saving being generally above the<BR>&gt;demographic rate, =
unemployment=20
of labour was accompanied by unemployment or<BR>&gt;underutilization of =
the=20
complementary real resources of production. Credit<BR>&gt;creation could =
bring=20
two together. Deficit financing or credit creation<BR>&gt;here is a =
device of=20
mobilizing the real resources. We cannot seek in this a<BR>&gt;solution =
to the=20
problem of development of under-developed economies. In =
the<BR>&gt;latter it was=20
a question of a scarcity of savings, for which created money<BR>&gt;was =
no=20
substitute. Under-employment in under-developed economies, =
thus,<BR>&gt;offered=20
no criterion for deficit financing in the way unemployment in=20
the<BR>&gt;industrial economies offered such criterion.<BR>&gt;A paper =
on=20
"Installed Capacity and its Utilization in Indian =
Industries"<BR>&gt;(Paper No.=20
9 of Section III) presented to the Panel shows that=20
appreciable<BR>&gt;percentages of unutilized capacity exist in a number =
of=20
industries<BR>&gt;including jute, sugar, certain heavy chemicals, =
machines and=20
machine tools.<BR>&gt;It is conceivable that there may exist, in the =
case of=20
some at least of<BR>&gt;these industries, complementary skilled =
personnel, which=20
are unemployed or<BR>&gt;under-employed; there may also exist in the =
economy the=20
materials of<BR>&gt;production required to employ these personnel. The =
reasons=20
for the partial<BR>&gt;idleness of the plants may vary. This would =
require=20
individual studies on<BR>&gt;these industries. In some cases it may =
reflect=20
export difficulties or<BR>&gt;competition from imports, which, =
conceivably, may=20
be related to the<BR>&gt;over-valued exchange rate. Deficit financing or =
credit=20
creation cannot meet<BR>&gt;the needs of such cases. The economic =
significance=20
of this unused capacity<BR>&gt;to the total activity of even the =
organized=20
private sector would be<BR>&gt;negligible. Some of them may justify =
extension of=20
credit by the banking<BR>&gt;system or by the State Credit Corporations. =
They=20
cannot be said to provide<BR>&gt;a case for deficit financing of the =
public=20
sector.<BR>&gt;Regarding (5) the amount of the deficit financing with a =
monetary=20
effect,<BR>&gt;undertaken since August 15, 1947 to March 31, 1954 has =
been=20
comparatively<BR>&gt;moderate. Excluding the purchase of sterling by the =

Government in 1948<BR>&gt;against ad hoc Treasury Bills, which had no =
monetary=20
impact, and allowance<BR>&gt;being made for the variations, in the =
public debt=20
holdings of the Reserve<BR>&gt;Bank and the commercial banks, the =
deficit=20
financing of the period averaged<BR>&gt;about Rs. 50 crores per annum. =
Between=20
1947-48 and 1953-54 the Whole-sale<BR>&gt;Price Index rose from 308 in =
the=20
former year to 435 in 1951--52 and stood<BR>&gt;at 398 in 1953-54. Part =
of the=20
rise in the price index may be due to the<BR>&gt;activation of latent =
inflation.=20
But its effect could not have lasted beyond<BR>&gt;the early part of =
this=20
period. The amount of the latent inflation in India<BR>&gt;was in any =
case=20
moderate. It would seem significant that notwithstanding<BR>&gt;the =
moderate=20
amount of the deficit financing, prices continued to rise<BR>&gt;until =
1951-52=20
and were about 29 per cent higher at the end of the =
period<BR>&gt;relatively to=20
the beginning of the period. This experience lends support to<BR>&gt;our =

estimate of the magnitude of deficit financing which may be deemed=20
safe<BR>&gt;and necessary. <BR>&gt;My colleagues consider that for a =
year=20
deficit financing at a rate of Rs.<BR>&gt;200 crores is safe and even =
necessary=20
and for the five-year period they<BR>&gt;would put it at within Rs. =
1,000=20
crores. I consider these figures far too<BR>&gt;excessive. The formula =
on which=20
they are based is not known.<BR>&gt;Deficit financing does not create =
real=20
resources. Together with the issue<BR>&gt;of loans, collection of Small =
Savings,=20
etc., it is one of the devices of<BR>&gt;appropriating, for the public =
sector,=20
the real resources which exist in the<BR>&gt;economy. The necessity for =
deficit=20
financing arises from the fact that an<BR>&gt;individual converts a part =
of his=20
real income into cash balance, the rest<BR>&gt;of it being either =
consumed or=20
invested (through the stock exchange or<BR>&gt;otherwise). The cash =
balances,=20
like the investments and the amounts spent<BR>&gt;on consumption, tend =
to grow=20
with the growth in income. As they form a part<BR>&gt;of the savings, =
there=20
exist somewhere in the economy equivalent real<BR>&gt;resources. Deficit =

financing provides the individual with the cash balances<BR>&gt;and =
acquires the=20
real resources for investment in the Plan. If the demand<BR>&gt;for the =
increase=20
in cash balances is not adequately met, prices would<BR>&gt;decline and =
there=20
may ensue unemployment. Part of the cash balances would<BR>&gt;be =
provided by=20
the banking system through the creation of credit. In this<BR>&gt;case =
the=20
equivalent real resources would be acquired by the private =
sector,<BR>&gt;in=20
whose favour the banking system would create credit.<BR>&gt;The amount =
of the=20
deficit financing and the amount of the credit creation<BR>&gt;should be =

together limited to the increase in the cash balances. The =
rate<BR>&gt;of=20
increase in the cash balances would depend upon the rate of increase=20
in<BR>&gt;the Indian national product during the Five Year Plan. An =
estimate of=20
the<BR>&gt;magnitude of the credit creation and of the deficit financing =
under=20
this<BR>&gt;head would require a closer study than is immediately =
possible.=20
The<BR>&gt;Bernstein Fund Mission estimated deficit financing and credit =

creation by<BR>&gt;the banking system at about Rs. 33-1/3 crores per =
annum for=20
the last three<BR>&gt;years of the First Five Year Plan. Assuming =
constant=20
prices, we may place<BR>&gt;it at a round figure of Rs. 35-40 crores per =
annum=20
for the next Five Year<BR>&gt;Plan. This is only a conjecture. But it =
indicates=20
the order of magnitudes<BR>&gt;involved. What part of this amount would=20
constitute deficit financing and<BR>&gt;what part credit creation by the =
banking=20
system, would depend upon the<BR>&gt;ratio in which the increase in the =
cash=20
balance real resources of the<BR>&gt;public sector would be divided =
between the=20
public and private sectors.<BR>&gt;To the amount of the deficit =
financing under=20
this head must be added the<BR>&gt;sterling releases acquired for the =
public=20
sector, to arrive at the total<BR>&gt;figure of the deficit financing =
that might=20
be safely undertaken. The total<BR>&gt;amount of the sterling releases =
during=20
the five-year period has been placed<BR>&gt;at Rs. 100-150 crores by the =
Plan=20
Frame. Part of this would have to be<BR>&gt;allocated to the private =
sector and=20
will be matched by equivalent credit<BR>&gt;creation by the banking =
system. If=20
we may assume a division of the cash<BR>&gt;balance resources and the =
sterling=20
release between the public and the<BR>&gt;private sectors, respectively, =
in the=20
ratio of 2:1, the order of magnitude<BR>&gt;of aggregate deficit =
financing would=20
be Rs. 180-235 crores for the five<BR>&gt;years, or an annual rate of =
Rs. 35-47=20
crores. Post- Independence Indian<BR>&gt;experience lends support to the =

comparative safety of this order of<BR>&gt;magnitude of deficit=20
financing.<BR>&gt;Since the precise amount of the deficit financing is=20
contingent upon the<BR>&gt;actual rate of increase in the national =
product and=20
the actual withdrawals<BR>&gt;from the cash reserves, both of which may =
be=20
subject to wide variation in<BR>&gt;an economy where weather conditions=20
significantly influence output and<BR>&gt;prosperity, it may not be =
prudent=20
finance to take advance credit for the<BR>&gt;amount of the deficit =
financing=20
even if the order of magnitude were larger.<BR>&gt;The preference of the =
public=20
for cash balance may, moreover, change with<BR>&gt;their confidence in =
the=20
honesty of the rupee. Under the circumstances these<BR>&gt;sources =
should be=20
held in reserve to help meet possible shortfalls in the<BR>&gt;receipts =
from=20
other sources.<BR>&gt;I realise that this is less than cat's meat before =
the=20
order of magnitude<BR>&gt;of the deficit financing proposed in the Plan =
Frame=20
and that approved by my<BR>&gt;colleagues. But, if the above analysis is =

correct, I do not see how a<BR>&gt;significantly different conclusion =
may be=20
arrived at. Even on the<BR>&gt;assumption of a doubling of the rate of =
growth of=20
the national income, the<BR>&gt;demand for the additional cash balances =
cannot=20
be of an order to justify<BR>&gt;deficit financing on a scale equivalent =
to=20
50-60% of the money supply. If a<BR>&gt;third of the central bank money =
proposed=20
to be put into circulation through<BR>&gt;deficit financing went to =
augment the=20
reserves of commercial banks, and if<BR>&gt;they built on it a volume of =
credit=20
six to seven times, the total money<BR>&gt;supply at the end of the Plan =
period=20
may be more than double the money<BR>&gt;supply at the beginning of the =
period.=20
This would be clearly inflationary.<BR>&gt;An increase in the rate of =
growth of=20
national income from 13 per cent to 27<BR>&gt;per cent would not require =
a=20
doubling of the total money supply.<BR>&gt;Deficit financing is =
essential in an=20
under-developed economy to permit full<BR>&gt;use of the scarce real =
resources.=20
By the same token, deficit financing<BR>&gt;should stop severely short =
of the=20
point at which inflation begins.<BR>&gt;Inflation does not, on balance, =
add to=20
the aggregate real resources. It<BR>&gt;creates wasteful or socially =
less useful=20
demands on the limited savings.<BR>&gt;Investment gets diverted into =
luxury=20
trades to meet the demand for their<BR>&gt;products resulting from =
inflation=20
incomes. It diverts an undue proportion<BR>&gt;of savings into urban =
property=20
and real estate, into gold hoards and<BR>&gt;jewellery, and into foreign =

exchange, as a result of the effort of the<BR>&gt;savers to protect the =
value of=20
their savings. The resources available for<BR>&gt;the plan would be, as =
a=20
result, correspondingly less, and overall economic<BR>&gt;development =
would be=20
impeded.<BR>&gt;Inflation tends to be self-perpetuating. With the rise =
in price=20
and wages,<BR>&gt;the original estimates of the cost of the projects =
taken in=20
hand will be<BR>&gt;out of date. More deficit financing would be =
necessary for=20
their<BR>&gt;completion. And, as they cannot be left half finished, =
there would=20
be a<BR>&gt;pressure for further deficit financing. At any given moment, =
the=20
whole of<BR>&gt;the currently available savings being invested either in =
the=20
public or the<BR>&gt;private sector, or outside the Plan, there would be =
no idle=20
savings to draw<BR>&gt;upon. Real resources would have to be drawn into =
the Plan=20
by force, which<BR>&gt;would render the distortions and wastages =
referred to=20
above unavoidable.<BR>&gt;This takes away from the practical value of =
the=20
caution, that the<BR>&gt;inflationary situation should be kept under =
watch. Once=20
inflation begins,<BR>&gt;it tends to gather momentum, and while it runs =
its=20
course we are apt to be<BR>&gt;more or less helpless witnesses. The best =

protection against inflation is<BR>&gt;to prevent it by keeping the =
investment=20
programmes within the available<BR>&gt;real =
resources.<BR>&gt;<BR>&gt;III.=20
POLICY AND INSTITUTIONAL IMPLICATIONS<BR>&gt; In this section we shall =
deal with=20
legislative and administrative<BR>&gt;measures, taxes on lower income =
groups,=20
extension of nationalisation,<BR>&gt;continuance of controls, price =
support of=20
agricultural produce, and the<BR>&gt;proposed National Labour=20
Force.<BR>&gt;<BR>&gt;(i) Legislative and Administrative =
Measures<BR>&gt;No plan=20
can be bigger or bolder than the available real resources. =
The<BR>&gt;taxation=20
Inquiry Commission has estimated net savings in India at about =
7<BR>&gt;per cent=20
of the national income in 1953-54, which is about Rs. 730 =
crores.<BR>&gt;This is=20
an overall figure and, therefore, includes savings utilised =
for<BR>&gt;capital=20
formation in the organized private sector (about Rs. 75 =
crores),<BR>&gt;public=20
savings, urban savings, rural savings, and also =
non-monetised<BR>&gt;savings.=20
Other estimates of savings are more or less of the same order. =
To<BR>&gt;the=20
extent this estimate is reliable, it is a measure of the=20
total<BR>&gt;permissible investments in India. Any attempt to exceed =
this limit=20
would<BR>&gt;raise prices, and would impede overall economic =
development.=20
Consistent<BR>&gt;with individual freedom and democratic institutions, =
there is=20
no device of<BR>&gt;significantly adding to the volume of the flow of =
savings,=20
though, with<BR>&gt;proper inducements (which should include an honest =
rupee and=20
an unpegged<BR>&gt;interest rate), it may be possible to stimulate the =
flow=20
somewhat. The<BR>&gt;situation, however, may be significantly different =
under a=20
totalitarian<BR>&gt;regime, which may impose authoritarian reductions in =

consumption. Overall<BR>&gt;savings, then, are no longer dependent upon=20
individual choices. I presume<BR>&gt;that planning in India would be =
consistent=20
with democracy and democratic<BR>&gt;institutions.<BR>&gt;I am unable to =
agree=20
to the following recommendation of my colleagues :<BR>&gt;"It is only =
when there=20
is a firm legislative and administrative base that<BR>&gt;it is possible =
to=20
think in terms of doubling the rate of progress in the<BR>&gt;Second =
Plan=20
period, of increasing capital formation, of raising levels =
of<BR>&gt;living and=20
providing the machinery for accelerated development in =
the<BR>&gt;future. We=20
cannot, therefore, emphasise too strongly the importance =
of<BR>&gt;facing up=20
boldly and without hesitation to the legislative =
and<BR>&gt;administrative=20
implications of a bigger and a bolder plan".<BR>&gt;I apprehend that =
reliance on=20
legislation and administrative measures to<BR>&gt;increase the rate of =
saving=20
which will permit a bigger and bolder Plan,<BR>&gt;may, by degrees =
undermine our=20
democratic social order, which would be too<BR>&gt;high a price to pay =
for=20
accelerated economic development. Legislative and<BR>&gt;administrative =
action=20
should be directed to ensuring the specially most<BR>&gt;effective uses =
of=20
democratically generated savings, rather than risk =
undue<BR>&gt;infringements of=20
the liberty of the individual, without which, to quote our<BR>&gt;Prime=20
Minister, "We lose what is the greatest value in life". It =
would<BR>&gt;appear=20
preferable to explore the scope for more ample but =
unicumbered,<BR>&gt;foreign=20
aid and foreign loans and a larger flow of unicumbered =
foreign<BR>&gt;private=20
capital to supplement domestic saving for accelerated=20
economic<BR>&gt;development. In view of the vast scope of profitable=20
investments, this<BR>&gt;would be imminently worth-while, the net =
profits of the=20
projects may be<BR>&gt;expected more than to cover the amortisation of =
the=20
foreign capital within<BR>&gt;a reasonable period. Economic history does =
provide=20
instances of national<BR>&gt;economic development being financed by =
foreign=20
capital in the early stages<BR>&gt;with no loss or sacrifice or=20
sovereignty.<BR>&gt;<BR>&gt;(ii) Taxes on Lower Income =
Groups<BR>&gt;There is=20
hardly room for a further reduction in the standard of living =
of<BR>&gt;the=20
lower income groups in India. Finance for the Plan must be raised=20
from<BR>&gt;the middle and the upper income groups. Measures of taxation =
and=20
other<BR>&gt;devices, which would tend to reduce further the consumption =
of the=20
lower<BR>&gt;income groups, should be avoided. I am unable, therefore, =
to agree=20
to my<BR>&gt;colleagues' recommendation to amend Article 286(3) of the=20
Constitution in<BR>&gt;order to permit taxation of articles "essential =
to the=20
life of the<BR>&gt;community". Amendments to the constitution which =
should be=20
rare, should<BR>&gt;much rather be in the direction of adding to the =
liberties,=20
privileges and<BR>&gt;rights of the common man than=20
otherwise.<BR>&gt;<BR>&gt;(iii) Extension of Nationalisation<BR>&gt;I =
agree with=20
my colleagues that the scarcity of administrative and<BR>&gt;specialised =

personnel, and the necessity of conserving savings for the =
plan<BR>&gt;are=20
factors against extension of nationalisation. But they have =
no<BR>&gt;objection=20
for such extension on principle. I would oppose general =
extension<BR>&gt;of=20
nationalisation on principle. Nationalisation should be=20
ordinarily<BR>&gt;limited to public utility concerns and to concerns, =
involving=20
national<BR>&gt;security. Otherwise, State intervention should be =
concerned with=20
the<BR>&gt;prevention of monopolies or quasi-monopolies. Efficient =
management=20
of<BR>&gt;business and industrial concerns in a competitive market =
economy is=20
a<BR>&gt;highly specialised function and demands qualities which a civil =
servant=20
is<BR>&gt;not required to, and in the ordinary course of his training =
may=20
not,<BR>&gt;acquire. This function is best left to private =
entrepreneurs, in=20
the<BR>&gt;prevailing socio-economic order, which is dominated by the =
market=20
economy<BR>&gt;and the pricing system.<BR>&gt;<BR>&gt;(iv) Continuance =
of=20
Controls<BR>&gt;I do not feel convinced of the economic importance of =
continuing=20
the<BR>&gt;remnants of controls. Decontrols have proved a noteworthy =
success.=20
Controls<BR>&gt;and physical allocations are not a necessary adjunct to=20
planning. The<BR>&gt;distribution of productive resources, including the =
ratios=20
in which they<BR>&gt;are used, are subject to variation and depend upon =
diverse=20
technological,<BR>&gt;economic and price considerations. It is quite =
impossible=20
to take into<BR>&gt;account these complex and changing considerations =
and=20
arrange anything like<BR>&gt;a satisfactory allocation of resources. =
There are=20
great advantages in<BR>&gt;allowing freedom to the economy, and to the =
price=20
system in the use and<BR>&gt;distribution of the needs of production. I =
am=20
unable to agree with my<BR>&gt;colleagues that a case exists for =
continuing what=20
controls now remain.<BR>&gt;Steps should be taken to remove controls as =
early as=20
may be possible.<BR>&gt;Controls and allocations are an essential =
characteristic=20
of communist<BR>&gt;planning. They do not very well fit in, under =
planning in a=20
free enterprise<BR>&gt;market economy.<BR>&gt;<BR>&gt;(v) Price-support =
of=20
Agricultural Produce<BR>&gt;I wish to join my colleagues in the matter =
of the=20
urgency and importance of<BR>&gt;completing speedily the scheme for =
licensed=20
ware-houses, and for the<BR>&gt;provision of credit and marketing =
facilities to=20
farmers. My colleagues have<BR>&gt;stated that the ware-housing system =
"should=20
be used by the State for<BR>&gt;purchase and sales of buffer stocks of=20
agricultural commodities not only<BR>&gt;for the purpose of dealing with =
any=20
sharp falls in agricultural prices such<BR>&gt;as we are witnessing =
today but=20
also with the objective of preventing any<BR>&gt;sharp seasonal fall or =
rise in=20
prices".<BR>&gt;In theory it may be possible to distinguish between =
seasonal=20
price<BR>&gt;movements from the long-term price trends, and to prescribe =
that=20
seasonal<BR>&gt;fluctuations should be smoothed out by State purchases =
in times=20
of harvest<BR>&gt;and sales between harvests. In practice, however, such =

distinctions may<BR>&gt;prove to be difficult and seasonal interventions =
may=20
turn into long-term<BR>&gt;price support operations.<BR>&gt;Price =
support of=20
agricultural produce in India is a risky venture and we<BR>&gt;should be =

forewarned of the inherent dangers of it. About 50 per cent =
of<BR>&gt;Indian=20
national income is drawn from Agriculture. A policy of price =
support<BR>&gt;is,=20
in essence, a subsidy, by the rest of the community to the producers=20
of<BR>&gt;the price- supported commodity In countries, where agriculture =
is a=20
minor<BR>&gt;sector of the national economy, the incidence of the =
subsidy may be=20
spread<BR>&gt;out thinly on the larger sector of the economy and the =
proceeds=20
may provide<BR>&gt;substantial relief to farmers. The reverse would be =
the case=20
in India. The<BR>&gt;strain of the subsidy will manifest itself in a =
shortage of=20
budget<BR>&gt;resources for the open market purchase and storage of =
agricultural=20
produce.<BR>&gt;This, in due course, would lead to either abandonment of =
the=20
price -support<BR>&gt;policy or inflation. In either case damage would =
result.=20
If the dilemma<BR>&gt;does not appear in one season, it is likely to =
come in the=20
next, as<BR>&gt;successful price support would stimulate production. In =
the=20
Indian context,<BR>&gt;a policy of price support of agricultural produce =
may=20
force the economy<BR>&gt;down the inclined plane of inflation. Even in =
the=20
United States, where<BR>&gt;agriculture is a minor sector of the =
national=20
economy, price support has<BR>&gt;only survived. It has not succeeded. =
It has=20
led to undue stockpiling of<BR>&gt;agricultural commodities and, in the =
past,=20
had involved a great deal of<BR>&gt;wastage of stocks through =
deterioration.=20
Selective price support policy is<BR>&gt;a poor answer to this =
difficulty. The=20
distinction between crops would be<BR>&gt;invidious, the relief provided =
may=20
prove to be a token, and it might cause<BR>&gt;a distortion in the =
pattern of=20
agricultural production and economic<BR>&gt;instability.<BR>&gt;The =
price=20
situation in India today was too complex to be resolved by =
price<BR>&gt;support=20
of agricultural commodities or other inflationary measures such =
as<BR>&gt;a=20
deficit financing. The price decline was neither universal nor=20
uniform.<BR>&gt;The prices of some major commodities had moved in =
opposite=20
directions. The<BR>&gt;fall was heaviest among foodgrains, oilseeds, and =
black=20
pepper. Some<BR>&gt;agricultural produce, e.g., tea, raw hides and lac, =
which=20
were export<BR>&gt;goods, and raw jute, among import goods, had risen =
almost as=20
high as some<BR>&gt;other agricultural prices had fallen. The prices of=20
manufactures were<BR>&gt;either steady or showed a slight upturn on the =
average.=20
The cost of living<BR>&gt;index was either steady or had fallen only =
slightly.=20
In a background of<BR>&gt;dissimilar price movements, simple monetary =
remedies=20
may aggravate the<BR>&gt;complexity and difficulty of the price =
structure. It=20
may, on balance,<BR>&gt;adversely affect the employment position by =
stiffening=20
the already rigid<BR>&gt;cost structure. Price support and deficit =
financing=20
were no remedies to<BR>&gt;individual over-production, and to export=20
difficulties which are<BR>&gt;attributable to quality and to domestic =
costs or=20
exchange overvaluation.<BR>&gt;Price support and deficit financing =
might, in=20
fact, aggravate these maladies.<BR>&gt;The complex problems of the =
prevailing=20
price situation emphasise the<BR>&gt;importance of economic =
rationalisation, for=20
progress with stability,<BR>&gt;whereby the fiscal, the investment, the=20
monetary, the interest rate, the<BR>&gt;tariff, and the exchange rate =
policies=20
are rendered mutually consistent =
and<BR>&gt;harmonious.<BR>&gt;<BR>&gt;(vi)=20
National Labour Force<BR>&gt;I apprehend more risks than I see =
advantages in the=20
proposed National<BR>&gt;Labour Force. It may create a privileged class =
of=20
workers, who may prove to<BR>&gt;be relatively more expensive to keep =
and to=20
move. The availability of this<BR>&gt;force may impede relief to the =
regional=20
underemployment problems. The<BR>&gt;necessity for such a force may not =
arise=20
until labour becomes a bottleneck<BR>&gt;in economic=20
development.<BR>&gt;<BR>&gt;<BR>&gt;<BR>&gt;-----------------------------=
---------------------------------------------<BR>&gt;This=20
is the National Debate on System =
Reform.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;=20
debate@indiapolicy.org<BR>&gt;Rules, Procedures,=20
Archives:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbs=
p;=20
http://www.indiapolicy.org/debate/<BR>&gt;-------------------------------=
------------------------------------------<BR>&gt;=20
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