Dr. Matthai’s Budget: The Problem of Inflation
BY P. RAMA RAO, B. A.
(Hons.)
“The crux of the problem
of inflation,” said Dr. John Matthai in the course of his Budget speech, “is
increased production. I do not believe that the monetary factor of inflation is
as important in this country as in others. If we want to find a solution of the
problem of inflation, we can do so effectively only by increasing the quantity
of goods and services available in the country.” It is this realistic diagnosis
of the problem of inflation in this country by our shrewd Finance Minister that
constitutes the logical basis for his tax-concessions to the saving and
investing classes in this country. It is not difficult for one to agree with
the Finance Minister when he says that the problem of Indian inflation is
largely different from that in other countries, particularly in the advanced
countries of the West. England and the U.S.A. are industrially advanced. They
have exploited their material resources and man-power and attained a high level
of domestic employment. In the recent war, their governments could not get
command of the bulk of their national resources required for war purposes
without resorting to some degree of inflationary finance and ‘created’ money.
This is because there were not adequate unemployed resources at the outbreak of
the war. Thus, in the industrially advanced countries, the problem of inflation
was more one of increase in monetary demand and less one of lack of production.
But the case in India is different. She being an undeveloped country with
enormous quantities of almost untapped resources, production could still be
infinitely increased in India to combat inflation, though the latter had been
generated mainly by monetary factors. The problem of inflation in India is,
therefore, mainly one of production.
Thus far, it is easy to
agree with the Finance Minister. But it not so easy to agree with him when he
places excessive confidence in the efficacy of the tax-concessions as an
effective stimulant of the production machine. We do not for a moment say that
the tax concessions provided in the Budget are either uneconomical or inexpedient;
they are necessary preliminaries to bringing about an appreciable increases in
the level of national production. The present level of taxation in the country
is uneconomic, in the sense that the economy of the country cannot bear it, and
that it is positively inflationary, because the very high level of taxation
which reduces the margin of savings available for investment is really a
potentially inflationary force. But we maintain that the tax-concessions,
however important and necessary they might be, cannot by themselves achieve
anything substantial and immediate in increasing production and bringing down
the general price level. The wheels of our production machine have been
clogged, so to speak. It is, therefore, too optimistic to bank excessively on
attempts at increasing production in this country as the most direct and
feasible measure of controlling the inflationary pressure on our economy. Dr.
Moranjan has aptly observed: “For this remedy to succeed, production must rise to
such an extent as to bring down the price index from 380 to 200. To expect the
nation to do this with its present capital equipment is sheer moonshine.”
Mere provision of
tax-concessions cannot increase in any appreciable measure the savings of the
community, which depend primarily upon the level of national income and
employment. There seems to be much truth in the thesis of Lord Keynes that the
proportion of income set apart as saving is greater among richer classes and
communities than among the poorer ones. India being a more or less backward
country with a low national income, it is but natural to witness paucity of savings
and capital available for investment. Even the little of savings that are
annually available either declined or got scattered over a larger number of
people when the profits inflation of the war-period reduced itself into an
income inflation in the post-war period, thereby diverting the distribution of
national income in favour of the agricultural and working classes who are not
used to banking and investment. What is, therefore, required is to increase the
saving capacity of these classes and to create the necessary institutions which
would collect the savings of the community and make them available for
investment. While the proposed provision of tax-concessions would tend to
enlarge the margin of savings of the richer and middle classes and encourage
potential investors, attempts should also be made to set up banking
institutions in rural areas in order to tap and encourage savings among the
agricultural classes. The setting up of the Committee on Rural Banking charged
with suggesting ways and means of mobilising small savings and developing the
habit of saving in the rural areas is a step in the right direction.
As far as foreign trade
is concerned, we have been living, at least till lately, on our capital or
borrowing at a rate which is alarming from any standard. While striking a note
of confidence that the figures of exports in November and December were
practically record figures and sufficiently encouraging for us to hope that
there has been a definite turn for the better as regards our balance of payments.
Dr. Matthai has rightly cautioned against self-complacency, saying that “a
balance of external payments which is based upon a drastic reduction of imports
and by continued releases of our accumulated balances is an unhealthy kind of
balance” It is true that the food production in the country is on the increase,
but the Government should see to it that the increase is accelerated and that
self-sufficiency in respect of food is achieved at an early date, so that the
foreign exchange reserves may be conserved and spent on purchase of productive
capital goods from abroad. Foreign capital has a fairly considerable role to play
in the economic development of this country. It is essential, in the words of
the Finance Minister, not merely for the purpose of supplementing our inadequate
resources but also for instilling a spirit of confidence among our own
investors. A steady inflow of loans and capital goods, say from America, under
the auspices of such an international organization as the World Bank, will readily
enable us to set right our war-torn economy, curb inflationary pressure, and
speed up domestic production. We will thus step up our exports, improve our
balance of payments position, and import capital goods and equipment in
increasing quantities. We can industrialise our economy and enhance our
standards of living. The recent setting-up of the Planning Commission charged with
the task of fixing priorities, coordinating the activities of different
territorial and occupational organizations, both private and governmental, and
minimising friction and imparting motive power and enthusiasm to the economic
machine, augurs well for the future development of the country.
All this paraphernalia
has to be brought into being to set the economic stage in this country for the
free-play of business incentives and a free flow of productive business
activity. It is only when this spade-work is done and the ground cleared of all
hurdles, that the
tax-reliefs granted by our Finance Minister can
exert their motive power to the full and yield concrete and beneficent results.
While underlining the importance of all these structural measures from the
point of view of stepping up our national production, it should nevertheless be
borne in mind that these several measures cannot be implemented overnight. It
takes time to increase production and disinflate the price-level to any
appreciable degree. Neither the volume of savings nor the saving-habit of the
people can be appreciably increased in the near future, except perhaps by
raising a compulsory loan or levy of an extraordinary nature, the economic and psychological
reactions of which cannot be lightly ignored. Domestic production, particularly
of foodstuffs, still remains ‘the villain of the piece’ and it does not seem to
admit of much scope for expansion with the available amount of capital equipment.
The balancing of our international accounts and the attracting of foreign
capital continue to present difficulties. International forces still threaten
to be unfavourable, particularly because, as Dr, John Matthai has pointed out,
the end of the recent war almost coincided with the talk of another war.
Rearmament was already on, and stock piling already started, with an increased
demand for basic and strategic materials. These international forces are
affecting India also, On top of it India has been faced with the difficult
problems created by Pakistan, which baffle immediate solution.
It is, therefore, not
surprising to see the Finance Minister admitting, apart from his shrewd
diagnosis of the situation and frequent notes of confidence, that he is “like a
man riding a ten-year old Jeep along a narrow mountain road, over a steep
precipice, in a moonless night.” While stating that we have considerable cause
for what may be called negative satisfaction, because of late the inflationary pressure
in the country seems to have been steadied, he frankly confesses that we have
no cause for positive satisfaction. The cost of production and of living still
remains high, and the budget proposals do not seem to hold any relief, immediately
or in the near future, to the middle classes who have been bearing for long the
brunt of inflationary pressure. It is, therefore, rightly complained in certain
responsible quarters that the Finance Minister has made a significant omission
by failing to define his monetary policy. In the short run the problem of
inflation should be tackled mainly on the monetary front. While it may be noted
that the Bank Rate policy cannot with expediency be brought into play, regret
must be expressed at the weak and faltering loan policy of the Government. More
direct and effective measures must be undertaken to mobilise small savings and
develop the banking habit in rural areas, The system of compulsory savings for
government employees, now introduced for the better-paid staff, may be extended
to the lower-paid categories as well. An agricultural levy on a modest scale, with
an element of compulsion and provision for an exemption minimum, may be tried
in the light of the more or less similar contribution raised by the British
authorities in war-time India. The monies thus raised in the form of a loan may
be earmarked for specific projects or purposes, so that the concrete nature of
the projects might inspire confidence among the contributors. The substantial
reductions in expenditure proposed, both in the current and capital accounts, must
be firmly maintained, so that they might prevent the tendency towards further
inflation which has been characteristic of Government finance in recent years.