PRICE POLICY FOR THE THIRD PLAN
PRICE Policy in a developing economy has to concentrate on two main objectives : (a) it must ensure that the movements of relative prices accord with the priorities and targets that have been set in the Plan; and (b) it must prevent any considerable rise in prices of essential goods that enter into the consumption of low income groups. Both these aspects were stressed in the First and the Second Plans, and various measures were taken in the course of these Plans to correct or moderate undesirable trends. Prices, however, fluctuated widely in the First Plan period and they have shown a rising trend through the Second Plan period. At the commencement of the Third Plan, the levels of wholesale prices and cost-of-living are already high and it is essential to ensure that there is no accentuation of inflationary pressures in the course of the Third Plan and that the levels of living of the more vulnerable classes in society are safeguarded.
PRICES IN THE FIRST PLAN 2. Table 1 on the following page indicates the price trends over the First Plan period. The index of wholesale prices at the end of the Plan was about 22 per cent lower than in March 1951. It must be borne in mind however that this is a somewhat misleading comparison as inflationary pressures were at their height in 1951 because of the Korean boom. As compared to 1950, the fall in the general index of prices was lower-about 8 per cent; prices of food articles fell by about 14 per cent; some of the other groups such as fuel, power, light and lubricants and manufactures showed a rise. With the end of the Korean war and following the dis-inflationary fiscal and monetary measures taken by Government in the course of 1951, prices recorded a marked fall, the index coming down from 125.2 in March 1951 to 99.9 in March 1952. The index was more or less steady around this level for the next two years. The bumper crop of 1953-54 resulted in a sharp fall in prices, especially in the prices of foodgrains; the index for food articles came down from 102.2 in March 1953 to 98.6 a year later and further to 82.9 in March 1955. It was in this situation that the ceiling for Plan outlays was raised and some purchases of foodgrains were made on Government account. By July 1955, a distinctly upward trend in prices emerged. This trend continued for the rest of the Plan period. The index of wholesale prices in March 1956 was 98.1, i.e., only slightly below the 1952-53 level.
3. The all-India working class cost-of-living index (1949=100) was 103 in March 1951. It varied considerably from year to year declining to a level of 94 in March, 1955, but rising again to 100 by the end of the Plan period. Over the five years, the index showed a fall of about 3 par cent, but an upward trend had already started before the First Plan ended, the
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rise in the index in the twelve months ending March, 1951, being more than 6 per cent.
4. While it is true that the level of prices at the commencement of the First Plan was unduly high and a corrective fall was necessary, there is little doubt that the decline in foodgrains prices that occurred about the middle of the Plan period was excessive and harmful. This downward trend could not be arrested in time because there was considerable doubt for some time as to the appropriate level at which Government ought to buy.
PRICES IN THE SECOND PLAN 5. The Second Plan has been characterised by a persistent upward trend in prices though, of course, part of the rise in prices was a corrective to the earlier decline. Over the five-year period, the rise in the general index of wholesale prices has been about 30 per cent; food articles as a group have gone up by some 27 per cent; industrial raw materials by 45 percent; manufacturers by over 25 per cent. Table 2 on the following page indicates these trends.
6. It will be observed that the index for cereals which was below 100 in March, 1956 rose sharply over the next three years; pulses also showed a similar trend. The index for cereals was back to 100 in March, 1961, that for pulses was 93. It is the rise in the other constituents of 'food articles' that accounts for the continued uptrend in the index for that group. Relative shortage of foodgrains was the major factor accounting for price rises in the early stages of the Second Plan. In the later parts of the Plan period, the leading factor in the upward trend of prices has been shortage of agricultural raw materials. Of the rise of 14 per cent in the index of wholesale prices since March 1959, some two-fifths is attributable to the rise in raw material prices, and another two-fifths accounted for by the rise in the prices of manufactured goods-partly in consequence of the in raw material prices.
7. The major explanation of the continued uptrend in wholesale prices in. the Second Plan period is undoubtedly the rising pressure of demand resulting from the growth of population and of money incomes. Supply factors have also played their part from time to time. In 1957-58, the production of foodgrains was 6 million tons less than in the previous year. In 1959-60, again, foodgrains production was about 4 million tons less than in the previous year. The output of cotton in that year was 18 per cent below that in the previous year; that of jute was 12 per cent lower and that of oilseeds was short by about 8 per cent. These shortfalls and fluctuations in agricultural production have reacted adversely on the price level as a whole. The level of foodgrains prices at the end of the Second Plan cannot be considered too high, but it has to be recognised that there have been large fluctuations in these prices in the course of the Second Plan period; in fact, if one compares the average level of cereal prices in 1960-61 with that in 1955-56, the rise was as large as 37 per cent. The relative stability of foodgrains prices latterly has been due largely to P.L. 480 imports.
8. As in the case of wholesale prices, the trend of the working class cost-of-living index was upward all through the Second Plan period. The index (1949=100) rose from 100 at the commencement of the Second Plan to 124 by the close of the Plan. In the earlier part of the Plan, the rise in the index was mainly because
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of the increase in foodgrains prices. The relative stability in these prices in the last two years has not, however, kept the cost-of-living from going up. This is because items other than foodgrains in the food group and several other elements in the cost-of-living have recorded an increase.
9. The experience of the Second Plan period reinforces the point that given a substantial investment programme, the degree to which prices can be kept relatively steady depends vitally on how far agricultural production, that is, the production of food as well as raw materials, can be increased. Industry, mining and transport have to develop rapidly if an adequate rate of growth of the economy is to be achieved. But, all this development must rest on the foundation of a more efficient and progressive agriculture. It follows that since agricultural output is subject to the vagaries of the monsoon. a programme of rapid industrialisation can be carried through without creating economic instability only if there are adequate stocks with Government to meet these periodical shortages. Moreover, agricultural prices are subject to large seasonal and regional variations, which are often aggravated by speculative hoarding. These variations have also to be moderated through judicious purchases and sales; by Government.
OUTLOOK FOR THE THIRD PLAN 10. The question now is as to the outlook in respect of prices for the Third Plan. Clearly, the pull of demand factors in a growing economy must necessarily be upward. The Plan envisages a step-up in investment from the current level of 11 per cent to about 14 per cent by the end of the five year period. This will generate money incomes against which there must be an additional supply of goods. The increased volume of investment will have to be financed by fiscal measures which will involve selective price rises. The Plan postulates a large increase in savings. External assistance of a substantial order is envisaged, but it will be essential to secure an increase in domestic savings from the present level of 8.5 per cent to about 11.5 per cent in the course of the next five years. This cannot be achieved if all types of consumer demands have to be met; less essential consumption will have to be restrained so as to release resources for the investment programmes in the Plan. Moreover, the situation in respect of foreign exchange reserves is much more difficult than in the Second Plain. A part of the inflationary pressures generated by the growth of investment in the Second Plan was neutralised by the drawing down of foreign exchange reserves. This moderating factor is not available for the Third Plan. In fact the Third Plan calls for the fullest effort to raise exports. This would tend to raise the prices of exportable commodities for the domestic consumer.
11. As to the supply side the Plan targets for production of the basic essentials of consumption and of raw materials have been fixed on a careful examination of the likely requirements both for domestic consumption and for exports. The output of foodgrains is to be increased by over 30 per cent so as not only to meet the increase in demand because of the growth of population and incomes but also to cover the present deficit which is being met through imports. The increase in the production of rice and wheat have been planned at a higher rate to take into account the tendency for substituting superior for inferior grains as incomes rise. Production of cotton is planned to increase by 37 per cent, that of oilseeds by 38 per cent and that of sugar by 25 per cent. Provision has been made for an increase in per capita consumption of cloth from 15.5 yards in 1960-61 to 17.2 yards in 1965-66. The output of cloth from mills, powerlooms and handlooms is scheduled to go up by 25 per cent. The increase in national income that is envisaged during the Plan period leaves scope for moderate increases in per capita consumption despite the proposed step-up in investment. The fact that at the beginning of the Third Plan Government have in hand about 2.8 million tons of foodgrains and that about 14.4 million (metric) tons of wheat are expected in the next few years under P. L. 480 gives reasonable assurance that the price of wheat-and to an extent of food grains as a group-will not rise significantly in the next few years if the monsoons do not misbehave seriously.
12. The production potential of the country has been strengthened considerably in the last few years, both in agriculture and in industry. The Third Plan envisages a substantial increase in the availability of fertilisers. The delays in utilisation of irrigation facilities are being reduced. Industrial production has risen impressively in recent years and, although difficulties in respect of imported raw materials and components will, continue, the outlook for the Plan period is, on the whole, promising. The scheme for mobilising the financial resources required for the Plan proposes deficit financing on a strictly limited scale; every effort will be made to restrict the increase in money supply both on account of Government and of the private sector to the genuine requirements of production. Thus, the Plan has been formulated with due regard to the need for minimising inflationary pressures end for keeping a balance between the growth of essential demands and the availability of supplies to match them.
13. These balance and safeguards notwithstanding. the possibilities of significant-and even distributing price rises cannot be entirely eliminated. Firstly, there is the usual uncertainty in regard to monsoons. A five per cent shortfall in agricultural output in a single year can reduce the marketable surpluses substantially and raise prices more than proportionately. Secondly, the various restraints on consumption implicit in the Plan may not always operate to the full extent, so that a situation of excess
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demands may well persist over a part of the Plan period. Thirdly, while the Plan envisages a certain balance between the rates of growth in various sectors, some imbalance is almost certain to appear from time to time; investments and outputs in various lines cannot, in actual practice, be phased out with precision; there might well be 'tags' in the system at various stages.
14. There is, then, no doubt that it will be necessary during the Third Plan to keep a close watch on prices, especially on prices of essential commodities, and to be prepared in advance with a strategy for corrective action before difficulties actually become acute. By and large, what has to be guarded against is an upsurge of inflationary pressures, although a situation of relative abundance in respect of some commodities with consequential price fails can emerge from time to time. Measures to counteract both types of trends have to be kept in readiness. Even apart from any persistent price rises or lads, large seasonal fluctuations and regional price disparities will call for corrective action. Stable and reasonable prices for what the farmer produces are likely to provide him a better incentive than high but fluctuating and uncertain prices.
SCOPE AND LIMITS OF PRICE POLICY 15. It must be stressed that price policy has to be viewed as one aspect of overall economic policy; the question is not merely what can or ought to be done in respect of particular prices. The level and structure of prices are related to a number of basic economic decisions some of which are taken by Government, but others rest with the producers, consumers and investors who are widely scattered and act in terms of the prospects of economic gain to themselves. A plan tries to bring these related decisions into a common focus, but there are limits to which the course of prices can be altered in the short run. Each major policy decision, such as what scale of investment to undertake, what priority to give to short-term quick-maturing investm- ents, the choice between alternative modes of raising the resources required, raising or lowering of export quotas-all these carry with them certain implicit decisions as to the course of prices. Given these decisions, it must be recognised that the scope for altering the structure of prices is by no means unlimited.
16. Certain upward pressures on prices are implicit in development and they have to be accepted. The process of stepping up investment involves creation of money incomes ahead of the availability of goods and services. Investment adds to real national product after a time, and certain types of investment take a longer time to mature than certain others. The larger the investment effort, the greater is the upward pressure on prices. Similarly, the more longmaturing the projects undertaken, the greater is the resultant strain on the system. The substantial transfer of manpower and other resources to new uses, involves payment of larger monetary rewards. This also is a significant inflationary factor.
17. There are, on the other hand, factors that tend to moderate these upward pressures. To the extent that there are unused resources that call be drawn upon and in so far as in certain sectors such as agriculture, an increase in production could be secured quickly with comparatively small investment, the expansionary pressures just mentioned may be softened. Then again some of the investment made earlier add to current output, and as the level of technology and organisational efficiency improve, relatively large increases in output could be secured without a proportionate increase in costs. Factors such as these have, in favourable circumstances, made it possible for certain countries to achieve high rates of growth with a fair degree of price stability. Given the requisite production and saving effort backed by an appropriate price policy, the expansionary pressures generated by development can successfully be controlled.
18. The balance between the expansionary and the moderating factors mentioned above tends, however, to be shifting and uncertain. An underdeveloped economy has to step up investments continually over a period of years and has to convert a growing proportion of unskilled rural labour into skilled workers and technicians. Various bottlenecks arise in this process of adaptation. Since the real resources needed have to be mobilised through monetary incentives, and a fairly high degree of profitability secured for those sectors of the economy which have to be expanded more rapidly, it is essential to be prepared for a moderate rise in the price level, while directing every effort possible towards preventing a rise in the prices of essential commodities.
19. And yet, the dangers of continued or excessive price rises are obvious. If the financial outlays in the Plan are, realised only at higher prices, the real 'content of the Plan gets correspondingly reduced. An inflationary situation is not conducive to the most efficient use of resources. It distorts relative prices and tends to move resources away from the uses that have higher priority from a social point of view. The fixed income earners, among whom are some of the most vulnerable classes in society, cannot be expected to put up too long with an erosion of their real standard of living, and yet, if money incomes are increased over a wide sector, the result can only be to give a further twist to the inflationary spiral. The problem, then, is one of drawing the right line between too much intervention and too little, and of devising appropriate techniques of controls and regulation at certain vital points in the system.
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CONSTITUENTS OF PRICE POLICY 20. A major constituent of price policy in this situation is fiscal and monetary discipline Fiscal policy must be directed to mopping up the, excess purchasing power which tends to push up demands above the level of available supplies. The quantum of taxation must, in other words, be adequate to keep down consumption to the limits provided for in the Plan. The requirements of the public sector investment programme must be met by the transfer of real resources from the public rather than by creation of fresh purchasing power. In other words, fiscal policy in all its aspects must aim at restraining consumption and mobilising saving more effectively.
21. A word may be said in this context regarding the price policy of public enterprises. These enterprises have an important role in enlarging public savings. They must, therefore, operate at a profit and maintain the high standard of efficiency required for this purpose. Their price policy should be such as would secure an ade- quate return on the investment made from public funds.
22. Monetary policy has to go hand in hand with fiscal policy. Just as the latter has to avoid the creation of excess purchasing power through government operations, the former has to regulate the pace of credit creation through banks. The credit needs of a developing economy are continually on the increase and have to be provided for. Care must, however, be taken to see that the scale and pace of developments in the private sector do not go out of line with those envisaged in the Plan and thereby exert undue pressure on the limited resources available for investment. Speculative holding of commodities and accumulation of inventories need particularly to be discouraged. The policy of selective credit control followed hitherto by the Reserve Bank has latterly been supplemented by measures designed to restrict aggregate credit creation by the banks. Interest rates have gone up, and although the bank rate has not be-en raised, a system of penal rates on borrowings by banks beyond defined limits has been instituted by the Reserve Bank. Details of monetary management apart, the fact has to be recognised that capital in India is very scarce relatively to the demands for it, and that in the long run interest of the economy, the price to be paid for it should, save in special cases, reflect real costs, this is important both for assessing the priority to be accorded to various projects in the Plan and for determining the prices of the products or services emanating from these projects.