CRITICAL ISSUES RELATING TO RISING PRICES

Summary

Published as a Forum of Free Enterprise pamphlet based on the keynote address delivered by S. S. Bhandare — Economic Adviser, Tata Services Ltd. — at a seminar on “Rising Prices” held in Bombay on 12 August 1995 as a centenary tribute to the late economist Prof. C. N. Vakil, this essay offers a rigorous data-driven audit of India’s four-and-a-half decades of inflationary experience and charts the unfinished reform agenda of the post-1991 liberalisation era.

Bhandare opens with a stark statistical record: between 1950–51 and 1994–95, the Wholesale Price Index rose more than 16.5 times, at a compound annual rate of 6.6 percent. Out of 45 years of planned development, only 16 saw satisfactory price management (defined as inflation not exceeding 5 percent per annum), and in 13 of those 45 years inflation crossed the double-digit threshold. He respectfully contests Lord Meghnad Desai’s characterisation of India as a low-inflation economy, noting that from a domestic welfare standpoint the record looks far grimmer, particularly given the adverse distributional effects on the poor. He then lays out five interlocking critical questions: the growth–inflation trade-off; the fiscal consolidation challenge; the management of revenue deficits; the urgency of raising the savings ratio; and the imperative of productivity improvement, including agricultural productivity.

On the trade-off, Bhandare provocatively proposes that India may need to accept inflation in the 7–9 percent range in exchange for GDP growth of 7 percent — the growth rate needed to make a decisive impact on poverty and unemployment — rather than sacrificing growth at the altar of 5 percent price stability. He marshals data showing that fiscal consolidation since the 1991 reforms has been fragile: the fiscal deficit-to-GDP ratio fell from 8.4 percent in 1990–91 to 5.7 percent in 1992–93 but slipped back to 7.7 percent in 1993–94 and 6.7 percent in 1994–95. Revenue deficits are growing at 14.3 percent annually while receipts grow at only 13.1 percent; left unchecked, the revenue deficit of the central government could balloon from Rs. 35,541 crores in 1995–96 to Rs. 79,443 crores by 2001. He argues that agricultural productivity — illustrated by India’s wheat yield of 2,320 kg per hectare against 7,250 kg in the UK and 3,440 kg in China — is the crucial supply-side lever without which wage-goods inflation cannot be moderated. Bhandare closes by calling for a rededication to Prof. Vakil’s agenda: fiscal discipline, higher savings, productivity gains, and expanded wage-goods production.

Key points

• Based on keynote address at a seminar in Bombay, 12 August 1995, honouring the birth centenary of economist Prof. C. N. Vakil.

• WPI rose more than 16.5 times between 1950–51 and 1994–95 at a compound annual rate of 6.6 percent; only 16 of 45 plan years showed satisfactory price management; double-digit inflation occurred in 13 of those years.

• Author challenges Lord Meghnad Desai’s “low-inflation” characterisation of India, arguing inflation disproportionately harms the poor and constitutes a serious threat to political stability.

• Proposes accepting 7–9 percent inflation as the price of 7 percent GDP growth rather than sacrificing growth for strict price stability, with the condition that at least 50 percent of growth gains reach those below the poverty line.

• Fiscal consolidation post-1991 has been fragile: fiscal deficit-to-GDP rebounded to 7.7 percent in 1993–94 after falling to 5.7 percent in 1992–93; revenue expenditure grows at 14.3 percent annually against receipts growth of only 13.1 percent.

• Revenue deficit projected to reach Rs. 79,443 crores by 2001 if trends continue unchecked; author proposes halving it by 2001 through 12 percent expenditure restraint and 18 percent revenue growth.

• Agricultural productivity gap is a major supply-side constraint: India’s wheat yield is 2,320 kg/hectare versus 7,250 kg in the UK; cotton yield is 290 kg/hectare versus 1,560 kg in Australia — unless addressed, wage-goods inflation cannot be moderated.

• Savings ratio needs to reach 28–30 percent of GDP to sustain 7 percent growth; current fiscal deficits are diverting investible resources into the revenue deficit, crowding out productive capital formation.