I have stated this theory of price variations rather elaborately because it appears to me that certain features of our present situation fit it very closely and I suspect that not enough attention has been given to this aspect of the matter. In the course of the implementation of the Second Five Year Plan, during the last one year and a half, the general price level has risen substantially, though not beyond anticipation, food prices have risen very much more than in proportion to the rise in the general price level, and the prices of manufactures very much less.
To fix our mind on the degree of price variations, it may be noted that during the first year of the Plan (July 1956 to July 1957), the general price level rose by about 8 per cent, while the price of rice rose by a little over 13 per cent and of wheat by a little over 1 per cent. The prices of manufactures, on the other hand, rose by just about 4 per cent. The rise in the general price level is due to the over-all deficit financing (including investment in the private sector) that has occurred in the economy toward the closing stage of the First Five Year Plan and the first year of the Second Five Year Plan. The deficit in the public sector has no doubt been more or less neutralized by balance of payments deficit; between July 1956 and July 1957 the increase in note circulation has been of the order of Rs 55 crores. Yet, on this is superimposed an enormous volume of private investment as indicated by an increase in bank advances of the order of Rs 142 crores. It is, however, misleading in this context to isolate the Budget deficit from over-investment in the private sector too sharply.
For if there had been less investment in the private sector there would correspondingly be less deficit in the balance of payments. Consequently, there would be a larger expansion of currency and the impact of budget deficit would be more conspicuous. From the social accounting point of view which is the point of view that is relevant here what is significant is the overall deficit in the economy as a whole. So economic development is important.
The distortion of the price structure with a bias towards higher food prices is surely the consequence of the change in the expenditure pattern along the lines indicated in the analysis presented above. The output of rice and wheat increased to some extent (about 5 per cent) during the years 1955-6 and 1956-7. But the increase in output was more than offset by the increase in expenditure resulting, on the one hand, from overall deficit financing and, on the other hand, from a shift of demand which affected food more than anything else. So economic development is important.
Ordinarily, the effect of investment and saving is not analysed in terms of ‘relative prices’ in the way it has been done here because, first, it is thought that although in the short period such distortions may take place, given time they are evened out, and, secondly a temporary short-fall in the supply of food can be covered by imports. The first argument is not relevant in the context of a planned economy where the Plan itself is industry-biased, as it is here so far as our Second Plan is concerned. In fact, in a planned economy, the Plan itself might be framed in a manner such as would look after the possible distortions in the demand structure in the process of growth, so that the so-called long period result might be achieved at each stage of planning. But, this is not the pattern in which the present Plan has been set; deliberately emphasis has been placed on industry. Yet, the second consideration still remains, namely, that of covering shortages by imports. Indeed in the present context food import assumes a priority as high as that of the import of capital goods. Food is as much a capital good as it is a consumption good. Economists would rank it as ‘circulating capital’ alongside of, and complementary to, ‘fixed capital’ in the context of economic development.
If the analysis given above is correct, then several conclusions follow:
(i) The situation on the food front is not so alarming, nor is it so unexpected, as it is often made out to be there may be special imbalances of a serious magnitude. But that is a problem of distribution, (ii) The factors that have led to the rise of food prices are by and large healthy, for they are indicators of economic growth, (iii) Increased employment which must have accompanied the process of investment, whether in the public sector or in the private sector, has to be set at least as partial compensation against the rise in food prices, (iv) We should not have much qualm about raising the import bill for food, when necessary. For example, full utilization of P L 480 seems to be warranted in the present circumstances. So economic development is important. It will be seen that the present Memorandum has sought just to provide an analytical framework in terms of which the problem of food prices might be judged in the context of economic development. Special problems connected with internal production, release of marketable surplus, the possible need for control and rationing, etc., have been left out of consideration.
I may only add, again if the analysis given here is correct, that we should be prepared for a continuation of the process that we are experiencing at the moment if our Plans move along the present line with its bias towards industry and with the method of financing maintained as it is. So economic development is important. So economic development is important.