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PREFMj!
In recent yea s, most of the countries have been
fecing the pro lam of in fiatlon with all its
pl1cation s.
Bven afnuent societl€!s have been sUffering from t he
onslauehts of :tr.fiation.
The developing societies h ve
s u f fered the most as mo s t of tho peo le in th -se countries
are poor.
Ind 1a i9 no
xception.
The Ind.1all economy
l:1ls been eXperiencing the strange phenomenon of steep
rise in prices in certain sectors of th e cco omy coupled
with stagnation in certa in scctOl'S of t he economy.
This
pa radoxical sItuation has been ri htly called as
'stagflation '.
~
During t he First
ive Year Plan p,eriod (1951-56 ),
there was , as a ma tter o f f e ct, a moderate d cl ine in
,
the general price level.
The Second FIve Ye r Plan,
mainly on account of rdical chnnge in the s t rate.gy of
developmental planning ; witnessed a rise of 35 .'0 in the
general price level.
However, the 1'1 e in price level
recorded upto the end of' the Second Plan period was
modera te and this was mare or less in confirmlty with
the commonly-held view
th~ t
in
a developing economy
pr ices tend to rise and a mU d price rise IS the index
of the good health
0
f t he economy.
Dur ing t he Th ird
F ive Ye r Plan period, the position on the price front
started causing con cern a s the rise was obn oxious
at
the
end of the plan, although the Third Plan pe"ci. od
(1961.. 66)
ag~1n
regist ered a rise of 35;,1 , in the
general price level.
A ft~r
the Third Five Year Plan period, India
could ~ot trome nor implement
fa.
r egul r
.I.
ive Ye r Plan .
There waS more or less plan holiday for about three
years.
The three annual plans following the T ird
Yeer Plan were eyetoJAsh in the name of plann.ing.
tempo o f - ' vestment slacltened.
lve
The
This coupl d with
consecutive draughts for twe yenrs and decline in
agricultural and industrial production ere ted an
~ l.rm ing
situ t ion on
the pr ice
rr ant.
Dur.ing the Fourth Five Year Plan period (1969-74)
th~
rise in prices went on unabr- ted.
The
level during this period incre:a sed by 451 .
gener~ l
price
Thus, during
a period of about 24 yea.rs the general price l evel in
India went up by 170%.
a ttraet
The problem of inna tion ~ s
d the a tten tlon of academic1ans and the policy-
framers alike.
VarioUS
f, ct01'S
have been a t tributed to t his
phenomenal rise in' prices, the most important among such
factors have been v riously mentioned by different
economists as stagna.nt a gricultural and Industr1al
production, rapid increase in the money sup ly,
inn · tional"Y menns of financin g the development 1
pla.n~,
r lse 1.'1 non .... de"~elop mental expend ! t ure, an:i inclu ion of
e. 1 rge number of
c ap1 t~1-intenslve
long-gastation period etc.
of f a ctors.
\' e
projects bl ing
'J go on a,d dm " t he Ii t
International factors, such asrepe ted, an d
frequent upward revIsion of prices of crude oll by the
major On-produc:tng countries and the r1 e in the general.
price level a llover the world, have also b( erl tb e caustive
factor,s of inflation .
All these f a ctors combined have
started process of snow-balling on the price-trent.
No system tic r tudy ha s been carried out in recent
yea
on the problem of inflation Iu India.
The present
study is an ,humble attemp t in this direction.
The
athol'
of the present study bel i eves, tl' t in India, inn.a tioD
is mainly the consequence of rapid mere se 1n mon ey s u l y e
This study est.ablishes tha t money supply and price s
move in
uni~on.
The cal culation of
coe ffici~nt
correL, tion .g va a verv high de"'rco of
bet'!leen the t"10 (.84).
of
<)s1tive co relation
I "': hes also been fo und tha t with
t he increa se i n mon.ey sUp ly by 100 units, price s c
nge
by 96.35 units, presuming other things to be const :mt.
An a tte:np t h s also b een made to c lcnl a to tbe
partial correls tion het'tlJeen money supply, pr ice 1nd Ices
nd production in: the economy.
r esul ts.
This sho,.,!! a.stonis hing
The anal . SiS of partj 1 <Qo"'relation has flll'ther
comp elled us to believe th t production is not slgn iflcpnt
1n the case of India.
p~oductionshould
vath the m er'ease in money su_ ply,
incre3se but the correlation between
t he t,.,o has been found to be negs tive.
The hypothesis of t he pr e sent work has been that
there is a perfect and positive correlation betwee n increase
in money su ply and increase in prices in IDiia.
cently, mone tary poliey has been u s d e xtensively
to con trol inflation in v rioue par ts of t he w rId wi t h a
g od deal of success.
Ever since, t he f ailure of the
Ke ynesian economics, and the revi val of the mon tary
policy, with emphasiS on the Quantity of money and overall
liquidity, monetary policy h,3S become a ne ce ssary part of
any effective policy to curb inflation.
The important
feature of such a monetary policy ha s been the emphasis
on the quantity ot money and not the rate ot i nterest.
Radcliffe
Co~ttee
aport (1959 ) gave further i petus
to this t ype ot thinking and recent r e searche s in the
field of r ol e of monetary policy have also been em hasi slng
the liquidity aspect of monetary policy instead of other
controls ove r the volume ot cradi t.
In India, t he
G over n~ent
h s all along been
emph sising that the prevailing inflationary conditions are
nothing but an off - sp ring of wor l d inflati on and t .e
con se Q.uence of pl anned econo nic growth.
never realise
t hat inflation may be the r e sult of other f actors also,
wl! i ch can be controlled t hrough a propriate measures.
The gap between rate of
has e ver been widening.
g ro~ th an~
The
the rate ot inflation
eserve Bank of Ind ia
ha s been trying to contain intlatiom ry p assures by
exercising mild controls over
cr~ dit
Mone t ar y policy, by and large has not
creation.
been Used fully and as a meaSure to con trol the
phenomenal rIse in pr ices.
have always
lJh Ue the India.n eeono.o i c:t s
oen sUj gest ing l onetnry remedies for
1nfl.:, tlon, the Government bas b een trying to in crea se
production by d.eficit financing and expansion of' mon ey.
The pres ent study br .1ng s forth some importan t
conclusions regard ing the antl··inn a tlonarl c.. pabllitles
of moneta.) 'Y policy_
Ho et ary me "sur es have been found
to be more sui tab le in a developing count ry like Ind ia,
to co . tnin in fl ation.
This stud.y may be divided. into th..r
first d eals with mone tary policy
and practice.
problem of
inn
The second
tion.
p~rt
D-lld
,0
parts.
Pa.... t
its role in theory
Is concerned wIt h the
In the t h lt"d . art, a comb med
study of Monet ry polIcy a nd in flation has been mad e.
The pres,e nt "lark is divided into seven chap t er s ,
t,,,o chapte rs each t<) tbe three ma In parts o f t he work
one chapter devoted to the su
~nd
Ql'Y, f'ind ings and
co elusions.
Chapter I deals with th e theoretical frnmo wory of
tIlonetnry polley wherein d i fforent a spects of' monetary
policy and t heir appliCAtion to developing countries hAS
b een stUdied.
Chapt 'e r II is con cerned wi t h the t ools of
monetary policy and t heir a pplica tion in Iud!
Cha
te~
of innation.
since 1001.
III I s an attempt to s tudy different asp cts
Inn tion in IndIa bas b om
tudled in
comparison to the 1nfia tioDf-Iry s itu tion in the world
dUl'ing recent years.
Chapter IV de ls with the anotomy
of intlatlQl'l.
Vnrlous facto t' s which have
contributed to the
j
~used
or
nat i onary pr e"sures in India have
been diseussed.
Chapt .r V throws light an the mon etary causes
o f 1. nat i on.
In th i s c.h apter, the rela t ionship between
money au ply and inflBt i on has been studied theoretica.lly.
Cn..'!!pter Vi is an applic tion ot the find ing s of chapter V
to t he
In : ian economy.
between
mon~
On the' ' ,as 1s of the relationship
supply and infl tIon, their association
b en s tudIed in the context ot Indian economy.
h~s
The
rele tionshlp between money supply and infle tion ha s been
found to be .T:'ostt;lve
and high.
.
The ooncluding cha.p ter VII presents the au
t his work, and the concl usions drawn thereof.
It
a ry of
sub-part
of this chapter ha.s been devoted to the suggestioI1S with
regard to a ppropriate monetary policy and an optimum
comb i n tion of' monetary and fiscal policies for IndJa .
It 1s my plea sant duty to express I!1Y profOWld
gratitude and esteemed regards to my supervisor
Dr . B. N. Singh, Head t DIvision of Eccmomic' Sciences,
lUmne . .l Pradesh !hiversIty, !limla , wIthout whose guidance
and inspiration , this work would have not been completed.
I have no 'I.-lords t.o express my gratitude to
Profe·s sor I-a lton Friedman, University of Chicago, Chicago,
who was kind enough h1 sending me the repr ints of his
publisbed papers and a tew ot the unpubllahed p pers on
'the subject, and for his guidance and sug estio ,s
trO.J:l
tilne to time, through correspondence, durin g the oourse
of this study_
I am extremely gr teM to or . B. S.Jogi, ViceChancellor, Hima chal Pradesh Un ivers ity and Dr . K.P. Pandey ,
univer sl~
Dir e ctor, Correspondence Courses, Him cha l Pradesh
who alwys 1l: sp ired and moti va ted me tor t he completion of
I am gr , tefu! to Dr • • N . Te ~ri, P. ofessor &
t his study.
Head , Department of Agricultural Economics, Il1..'1laChal
Pradesh University, who, nl\>m,ys encoura.ged me dur ing the
course of t his study.
I e.x pr · BS my thanks to the libr r ians of the
l-11nistry of' Fint::l,l1 ce Libr ry,
C'chool of
attan Tat
Libr a ry, Delhi
canomlcs, Lok Sabha Library a n d Hi ma chal
Pradesh Un lve.,.slty Library, for helping me in getting
t he relevant litera ture on the subject.
I
twa ve no words to thank my wite, JOpe,
vlha
very
patiently and cheer ful ly underwent the Sacrifices demanded
of her by a Hork of this type.
I am also t hank ful. to my collegues in t he Division
o f Economic s c iences, Himachal Pradesh UniverSity, with
whom I ttld t he pr ivUege of d iscus,slng v rious aspects of
t he problem.
,
• y special thanks
Loctu el" in
dUc::l tlon,
~
are~
to my rr lends, Sh. R. D.
~e hta ,
1rectornt e of Corresponden ce
Courses, Himachal Pr dash Univer s ity
Slld
hr 1 Umesh
Vinayak. Lecturer in Economics, D. A. V. College, Ch
d1garh,
who sustauled my enthus I asm for the completion of this
study.
I am also thankfUl to Shri Naresh Nagpal, Senior
Lecturer
jn
Commerce, Government Poly-TechnIc, Hoshm.rpur
Shrl R.P. S. 1alik , Researoh Officer, Agro- ' conomic
esearch Centre, Himacml P1-adesh Univer Ity, Simla,
and my all collegues in the Directorat e of Corresponden ce
Courses, HimAChal Pradesh university, who always encouraged
me t or t he completion of t hiS work.
Thanks
re also due to Shri ,.;ta tlsb Kuma r Arora ,
Simla, \tl o took meticul ous care in typing out the
final draft.
• r
( CHAND&'UNIL )
Lecturer in Boono ics
Directorate of Cor c spondence
Course s
Hima eml Pradesh UniversIty
Simla
December 20,
1976.