INDIAN ECONOMIC CRISES

Summary

B. R. Shenoy’s 1968 Forum of Free Enterprise pamphlet — drawn from a series of articles in Swarajya (Madras) — diagnoses India’s compounding economic crises as the outcome not of bad monsoons, the Chinese border war or the 1965 Indo-Pakistan conflict, but of fifteen years of avoidable policy mismanagement. The argument unfolds across four chapters (I. Anti-Social Income Shifts; II. Importance of Zero Inflation; III. PL 480 Inflation; IV. A Programme of Reform). Inflation, Shenoy insists, is the tap-root of nearly every ailment — the chronic price acceleration, the foreign-exchange scarcity, the recourse to import licensing and other ‘defences’, and the perverse income transfers that have fed luxury living among a privileged upper crust while pushing the salaried middle classes toward indigence.

The pamphlet’s central technical claim is that the inflationary finance of recent years has come almost entirely from PL 480 rupee disbursements held with the U.S. Embassy. Shenoy walks through the 1967-68 Budget arithmetic to argue that PL 480 receipts (Rs. 435 crores) exceeded the sale proceeds of PL 480 foodgrains (Rs. 285 crores) by Rs. 150 crores, demonstrating — by his reading — that PL 480 finance is inflationary by precisely that excess, contra the position taken by the Reserve Bank of India, the Ministry of Finance and USAID’s Dr. Samuel A. Costanzo. Naxalbari, gheraos, bandhs and ‘President’s rule’ are framed as surface symptoms of the deeper income shifts produced by inflation and licensing — themselves the ‘Alladin’s lamp’ that hands politicians and administrators unearned power.

The programme of reform proposed is stark: stop PL 480 deficit financing immediately and immobilise (preferably write off) the accumulated Rs. 744 crores of PL 480 rupees; abolish import licensing and replace the dual exchange-rate regime with a single market-clearing rate; cut taxes and matching government expenditures; denationalise Public Sector enterprises; and replace government-to-government aid with capital flowing through the aid-giving countries’ capital markets. Shenoy warns that fiscal measures to ensure zero inflation must receive top priority, and that without them the alternative may be ‘the demise of democracy’. The rendered pages carry the work through the opening of Chapter IV; the final pages of the reform programme (printed pages 19 onward) were not rendered for this pass.

Key points

• Shenoy attributes India’s economic crises to 1.5 decades of policy mismanagement, not to monsoons, the Chinese attack on the northern frontier, or the Indo-Pakistan war.

• Inflation is named the ‘tap-root’ of foreign-exchange scarcity, balance-of-payments deficits, import controls and the perverse income transfers producing ‘asuric’ luxury living amid mass misery.

• Inflationary finance, in his telling, has issued almost wholly from PL 480 rupee disbursements held with the U.S. Embassy — paper funds whose physical counterpart (foodgrains) has long been consumed.

• Import licensing is portrayed as a ‘veritable Alladin’s lamp’ that channels unmerited wealth (Rs. 550 crores annually in licence premia) into upper-income groups and political power into office-holders.

• Shenoy uses a reductio ad absurdum on 1966-67 Budget data to argue PL 480 operations produced a deficit of Rs. 859 crores against an overall deficit of Rs. 764 crores, refuting RBI/Ministry/USAID claims of monetary neutrality.

• He warns that tear-gas and President’s rule cannot durably suppress Naxalbari, gheraos and bandhs so long as the underlying income shifts persist.

• The reform programme: stop deficit financing, immobilise/write off accumulated PL 480 rupees, abolish import licensing and the dual exchange-rate regime, cut taxes and matching expenditures, denationalise Public Sector enterprises, and shift aid from government-to-government channels to capital-market flows.

• Currency over-valuation is shown to have caused over-capitalisation and labour-saving capital intensity beyond what employment conditions could justify, with militant trade unionism amplifying the bias.