INFLATION IN INDIA

Summary

Prof. L. G. Bapat’s prize-winning booklet for the Forum of Free Enterprise (Bombay, 15 November 1972) walks a general Indian reader through the theory and the Indian record of inflation. Bapat opens with definitions — inflation is an unanticipated, unprovided, rapid and substantial rise in prices above their normal level, with ‘suppressed’ inflation revealing itself through queues, black markets and hoarding when prices are held down by controls. He then canvasses the standard mechanisms: Fisher’s Quantity Theory and the German hyperinflation of the 1920s for the monetary channel; Lerner’s account of inflation as ‘real changes’ people did not intend; Charles Schultze’s asymmetric ratchet in which prices rise but never fall; and Hayek’s framing of inflation as a symptom of disequilibrium. From these he extracts the textbook trio of demand-pull, cost-push and administrative inflation.

Applied to India, Bapat treats money supply as the central villain. Citing K. N. C. Pillai of the Central Statistical Organisation, he reports a 0.92 correlation between money supply growth and the wholesale price index of the succeeding year over 1950-51 to 1960-61, and updates the picture in his own Tables I and II with RBI data for 1951-71. He argues that government has expanded money supply ‘enormously’ through deficit financing — ad hoc treasury bills, RBI purchase of nearly one-third of Government of India rupee loans, and rising state and co-operative bank securities held against RBI advances — rather than through transparent budgetary operations. Production constraints make the inflationary gap impossible to close on the supply side in an underdeveloped country; Table III shows that the marketed surplus of rice and wheat fell even as output rose, intensifying foodgrain prices.

On taxation, Bapat is unusually careful. Direct taxes, he argues, are on balance deflationary; indirect taxes raise prices but only once and by perhaps 10 per cent cumulatively over two decades. Measured against Colin Clark’s 20-25 per cent of national income threshold, Indian taxation at 18.7 per cent in 1967-68 was below the inflationary line, though the scope for further increase is limited. Cost-push pressure is real — coal-mine productivity rose 33 per cent between 1961 and 1968 while money wages rose 61.5 per cent — but administrative inflation of the American kind is absent because India has no genuine monopolies. The booklet ends with a five-point programme: a surplus budget, public-debt policy that mobilises true savings, steps to enlarge the marketed surplus, a check on further taxation, and a rapid rise in worker productivity.

Key points

• Defines inflation as an unanticipated, unprovided, rapid and substantial rise in prices above the normal level, with ‘suppressed’ inflation manifesting in queues, black markets, hoarding and rationing.

• Surveys monetary, demand-pull, cost-push and administrative theories — citing Fisher’s Quantity Theory, Lerner on unintended ‘real changes’, Schultze’s downward-rigid prices, and Hayek’s disequilibrium account.

• Uses K. N. C. Pillai’s 1950-51 to 1960-61 study from the Central Statistical Organisation, which found a 0.92 correlation between money-supply growth and the next year’s wholesale prices, and a 0.84 coefficient for later years.

• Tables I-II compile RBI data showing money supply rising from Rs. 1,804 crores in 1951-52 to Rs. 6,987 crores in 1970-71, and the RBI purchasing nearly one-third of all Government of India rupee loans.

• Argues deficit financing — ad hoc treasury bills and RBI absorption of government paper — is the principal Indian channel for unwarranted money creation, supplemented by state and co-operative bank borrowings.

• Table III shows the marketed surplus of rice and wheat falling even as production rises, so the inflationary gap cannot be closed on the supply side in an underdeveloped economy.

• Direct taxes are net deflationary; indirect taxes raised the 1967-68 price level by about 10 per cent but only once, and 1967-68 taxation at 18.7 per cent of national income was below Colin Clark’s 20-25 per cent inflationary threshold.

• Coal-mine productivity rose from 0.48 to 0.64 tonne per manshift between 1961 and 1968 (33 per cent) while per-capita earnings rose 61.5 per cent — confirming cost-push inflation; but with no real monopoly, administrative inflation is absent.

• Closes with a five-point remedy: a surplus budget, a public-debt policy mobilising true savings, steps to enlarge the marketed surplus, a check on further taxation, and rapid productivity improvement.