INFLATION IN INDIA

Summary

Prof. L. G. Bapat’s prize-winning Forum of Free Enterprise essay is a textbook-style diagnosis of post-Independence Indian inflation, written for a general audience but anchored in the monetary economics of Fisher, Lerner, Hayek and Schultze. Bapat begins by defining inflation as an unanticipated, unprovided rise in prices above their normal level — and insists that in a controls-and-rationing regime it surfaces not as visible price increases but as queues, black markets and hoarding, i.e., ‘suppressed’ inflation. The villain, he argues, is the persistent attempt of under-developed economies to consume and invest more than they actually produce, a temptation aggravated by ambitious Keynesian-flavoured development plans copied from the West.

The core of the booklet is empirical. Drawing on RBI ‘Currency and Finance’ reports, NCAER’s ‘Management of Public Debt in India’ and the work of K. N. C. Pillai of the Central Statistical Organisation, Bapat tabulates money supply, real national income and wholesale prices from 1951-52 through 1970-71. He shows that Pillai’s correlation coefficient of 0.92 between excess money supply and the following year’s prices broadly holds for India in the 1960s, and traces the inflation of 1966-68 to a 9.3 per cent jump in money supply against a national-income growth of only 0.9 per cent. He singles out a less-visible channel of monetary expansion: RBI purchases of central-government rupee loans, which by the late 1960s absorbed nearly two-fifths of total issues and amounted, with ad-hoc treasury bills and overdrafts, to large-scale ‘back-door deficit financing’.

Bapat then tests rival explanations and largely rejects them for Indian conditions. Direct taxes, he argues, are net disinflationary; indirect taxes raise the price level only once, not cumulatively; and total taxation in 1967-68, at 18.7 per cent of national income, was still below Colin Clark’s 25 per cent inflationary threshold. Cost-push pressure does exist — coal miners’ wages outran productivity sharply between 1961 and 1968 — but administrative or oligopolistic inflation ‘of the type found in the U.S.A.’ is essentially absent. A separate strand of the argument concerns the agricultural marketed surplus: rice and wheat production rose through the 1960s, but the share reaching the market actually fell, because rising foodgrain prices let farmers consume more on the farm and demand fancy manufactured goods to spend the windfall on.

The booklet closes with a five-point remedy: a surplus Union budget; a public-debt policy that mobilises genuine savings instead of monetising deficits; steps to draw out a larger marketed surplus from agriculture; a halt on further tax increases; and rapid productivity gains by workers. Throughout, Bapat treats inflation as a policy failure rather than an external shock, and an inefficient public sector — Rs. 3,033 crores invested over two decades with little to show in profits — as one of the structural reasons monetary expansion has not been matched by goods.

Key points

• Defines inflation as an unanticipated, unprovided, substantial rise in prices above the normal level; under controls it manifests as queues, black markets and hoarding rather than visible price rises.

• Locates the root cause of inflation in under-developed economies’ attempt to consume and invest in excess of what they actually produce, aggravated by ambitious development plans modelled on the post-Depression West.

• Reproduces RBI data on money supply, national income and wholesale prices from 1951-52 to 1970-71 and uses K. N. C. Pillai’s 0.92 correlation between excess money supply and next-year prices as the empirical backbone.

• Identifies RBI purchases of Government rupee loans — about one-third of the total by the late 1960s — together with ad-hoc treasury bills and overdrafts as a covert channel of deficit financing in addition to the open budget.

• Shows that even as rice and wheat production grew through the 1960s, the marketed surplus fell, because high foodgrain prices induced farmers to consume more on the farm and to chase manufactured consumer goods.

• Rejects taxation as a major inflationary force in India: direct taxes are disinflationary, indirect-tax effects are one-shot, and 1967-68 total taxation at 18.7 per cent of national income falls short of Colin Clark’s 25 per cent threshold.

• Argues that administrative or oligopolistic inflation of the U.S. type is absent in India, but cost-push pressure exists where wages have outrun productivity, as in coal mining between 1961 and 1968.

• Prescribes a five-point cure: a surplus budget, a public-debt policy that taps real savings, larger agricultural marketed surplus, no further tax increases, and a rapid lift in worker productivity.