Download CHAPTER - 7 STAGFLATION

CHAPTER - 7
STAGFLATION
232
CHAPTER - 7
STAGFLATION:
7.1
Introduction:
In recent
years many countries of the world,
both developed
as well as under-developed are experiencing what is popularly called
as 'Stagflation*.
It is generally described as the combination of high
inflation, high
iraiployrent
and sluggish or even falling growth rate of
the economy.
"The main symptom of the disease is a state of the
economy which is at one and the same time stagnant and inflationary,
that is to say, suffering simultaneously from heavy unemployment and
from
a
rapid
living.
rate of
Here,
rise of money
an
attempt
is
prices and
made
to
so of the cost of
examine
the
theoretical
analysis of stagflation and also its relevance to Indian conditions.
7.2
The
sucess
of
Keynesian Economics
and
the
Subsequent
disenchantment:
The innovative
strategy
of Keynesian economics focussed upon
the "Okun Gap" between potential (capacity) output and actual output.
Insofar as
potential
an
'Okun
output
it
Gap'
is
exists,
the
the economy
responsibility
of
is not
the
realizing its
government
to
implement demand management policies to eliminate the Okun Gap.
Adoption of this strategy led to an activist stabilisation policy
which" ...........
was the key that unlocked the door to the subsequent
expansion in the 1960's.
f 21
’
Early in the 1960's the problem was
233
diagnosed
between
as
follows.
Insufficent
potential output and
aggregate demand
actual
output.
produced a gap
According to Keynesian
theory, the obvious remedy was to implement a stimulative fiscal and
monetary policy.
Demand
management
policy in
the 1960's
was activated by an
Okun gap and it consisted of an expansionary fiscal policy relying on
tax cuts,
coupled with an accommdative monetary policy.
Keynesian
economics, which has guided demand management policy, is summarised
(3>
In the propositions 1 +-o S'
I <.’)<■«•
......... prices and wages respond
slowly
to
excess
demand
or
supply,
especially
slowly
to
excess
supply, over a long and short run, ups and downs of demand register
in output; they are far from completely absorbed in prices.
A
Keynesian
interpretation
is
that
wages - are sticky in the short run,
prices
-
including
money
throughout those large sectors
of modern economies where they are set by discrete private or public
administrative decisions or negotiations.
1.
The speed at which prices and wages increase relative to trend
depends
inversely
on
the
amounts
of
excess
supply
(of
labour,
commodity stocks, capital capacity) in the economy.
2.
The unemployment rate is good but imperfect, barometer of the
pressure
of
aggregate
an
economy
demand
on
the
productive
resources
of
the
economy.
3.
In
with
under
employment
of
labour and
capital
more labour and capital services will be supplied, if demanded along11
234
the
on-going
path
of
wages
and
prices,
without
accelerating
their
price,
relative
their
increase.
4.
Cyclical
movements
of
output
and
to
trends are positively correlated.
5.
Keynes
suggested
.........
that
it
was
easier
to
stabilize real
economic variables by moving aggregate money demand to a given path
of
money
wages
than
by
moving
wages
relative
to
a
given
money
demand ....
These fundamental Keynesian propositions are formally described
by
the
Equation
following
(7.1)
three
states
that
equations
(4)
of
y♦
the
price
level
the
Keynesian
p is a relatively fixed
multiple K of nominal unit labour costs w: p = KW .........
This
equation
is
consistent
price is equal to marginal cost,
with
system.
competitive
(7.1)
pricing,
where
or with imperfect competition when
the elasticity of demand is relatively constant.
Equation (7.2) defines nominal income Y as the product of real
output y and the price deflator p.
Alternatively, the price deflator
p is defined as the ratio of nominal to real output.
y = py
-----
(7.2)
The third equation is the IS-LM solution for nominal income y.
Nominal
income
depends
nominal money stock M,
debt B and tax rate T:
upon
nominal
government
expenditure
G,
nominal interest payments on the government
235
Y = F (G, M, B, T)
The
all
function F (G,
.... (7.3)
M, B, T)is homogeneous of degree one in
nominal variables: if G,M and B
change by X percent, then Y also
changes by X percent.
As long as there is an Okun Gap (i.e. Y/Q is less than unity),
then
the first
labour
costs
three
and
keynesian
prices
propositions
will not
grow
particular,
when there is an Okun Gap
prices
often
are
regarded
as
being
state
faster
(Y
fixed
that
than
q),
at
the
nominal
unit
trend.
In
the
nominal
wages and
trend,
Keynesian
economists do not specify in any theoretical way what this trend rate
. (5)
is\
Demand management policy to eliminate an Okun Gap consist of:
(i)
(ii)
raising
government expenditures
following
an
accomodative
G or lowering tax rates T; and
monetary
policy
to
stabilise
the
nominal rate of interest by letting the money supply M grow with the
expansion of the economy, as described by equation (7.4)
M = M(Y)
___
(7.4)
Decline in tax rates, or increases in government expenditures,
produce
a
shift
to
horizontal LM curve.
the
right
of
the
IS
curve
along
a
relatively
Output then rises and the Okun Gap is reduced,
very little of the increased demand is dissipated in price and wage
increases.
236
Keynesian economics, which dominated academic macro economics
in the 1960's demonstrated to the Congress of U.S.A. and the public,,
its ability to eliminate the gap between potential and actual output.
A
sustained
significant
expansion
inflation.
was
All
engineered
this
in
changed
the
in
1960's
the
without
1970's.
In
any
the
aftermath of the war in Vietnam, the Keynesian propositions no longer
characterised
summarises
the
the
state
events
of
macro
which
economic
were
theory.
inconsistent
Table
with
the
(7.1)
Keynesian
propositions and the model described above.
Table 7.1:
Growth Unemployment and
Inflation for the period 1961-80
n -
Period
Price
Inflation
(1 p.a)
1961-68
2.5
1.9
4.85
4.9
1968-73
5.1
4.8
4.75
3.5
1973-80
7.7
8.4
6.58
2.4
1961-80
5.1
5.0
5.57
3.6
Source:
data
May,
Federal
1981,
Labour
Inflation
(% P-a)
Reserve Bank
Economic
of
St.
Report
of
Economic Advisers in Stein, Jerome, ^
Growth rate
of output
(% p.a)
Average
Unemployment
(%)
Louis Annual
the
U .S.
President,
Economic
Council
of
237
The phenomenon of
73 and 1973-80.
the
following
'Stagflation'
characterised the periods 1968-
Stagflation is defined as a situation where either of
phenomenen exists
(i)
a
rising
unemployment
rate,
a
declining growth rate of real output and a rising inflation rate, or
(ii) a 'high' unemployment rate, a low growth rate of real output and
a 'high' or rising inflation rate.
The
post-Vietnam
'Stagflation'
Keynesian proposition above.
relative
their
to
presence
of
excess
unemployment
trends.
trends
rate.
contradicts
the
Cyclical movements in prices and output
are
supply,
prices
fundamentally
and
not
positively
correlated.
which
Keynesains
measure
wages
were rising
relative
In
by
to
the
the
their
It was no longer possible to base policy upon the assumption
that prices and wage are "sticky"
in the presence of unemployment,
and
that variations in demand will reflected primarily in output and
not
be dissipated by price and wage changes.
not be regarded as a fixed point.
The wage unit could
There was no longer a consensus
that the Keynesian model is an adequate guide to the formulation and
execution of policies designed to eliminate a gap between potential and
actual output.
7.3
Monetarist Propositions Concerning Stagflation:
Stein
has
summarised
a
series
of
empirical
sufficient conditions for monetarists propositions.
Mj:
prospositions,
f 7)
;
Inflation is primarily a monetary phenomenon.
Contrary to the
Keynesian view, a restrictive fiscal policy without a reduction in the
238
rate of inflation.
M2:
Stagflation
expansion is
results
raised
from
when
a
policy
where-by
rate of
monetary
the unemployment rate is too high and is
lowered when the rate of inflation is too high.
A rise in the rate of monetary expansion above the current rate
of inflation raises the rate of inflation,
rate exceeds the equilibrium rate,
even when the unemployment
this is contrary to the Keynesian
view.
MThere
is no relation between a constant rate of inflation and the
4
( q\
unemployment rate.
is
a
short
run
Contrary to the New Classical Economists^ 1 there
trade-off
between
the
speed
at
which
inflation is
reduced and the temporary rise in the unemployment rate.
A decline
in the rate of monetary expansion below the current rate of inflation
temporarily
rate,
by
rises
the unemployment
lowering
real
rate relative to
aggregate demand and
by
the equilibrium
producing forecast
errors between the actual and anticipated rates of inflation.
Even an
anticipated rise in the growth of monetary aggregates over the next
few years
(e.g.
unemployment
decleration
rise
in
due to a war)
rate.
below
Similarly
rate.
Classical
Economists'
Policy
there
no
inflation
an
announced
program
of
monetary
the current rate of inflation leads to a temporary
unemployment
is
leads to a temporary deline in the
trade-off
at
any
This
proposition
Ineffectiveness
time
between
contradicts
Proposition
the
the
where-by
deceleration
and the trajectory of the unemployment rate.
New
of an
There is a
239
social cost in reducing the rate of inflation,
which is less than the
Keynesian estimate and more than the New Classical Economists assert.
The
coexisting
phenomenon
of
with
and
high
'Stagflation'
rising
namely
inflation,
high
cannot
unemployment
be
explained
(objectively and logically) within either a Keynesian or New Classical
Economical framework.
James Tobin wrote,
give a convincing rational
with
"It is indeed difficult to
the paradigm of utility and
maximising behaviour in competitive models."
The monetarist analysis
policy which (i)
profit-
(9)
is that stagflation is the result of a
substantially raises the rate of monetary expansion
above the rate of inflation,
when the unemployment rate is too high
and (ii) substantially lower the rate of monetary expansion when the
rate of inflation is too high.
Now
it
is
evident
that
neither New
Classical
fonomics
nor
Keynesian economics is capable of explaining the observed trajetories
of the unemployment and inflation rates.
the book
by Stein^10^
The monetarist analysis in
(1982) explains the phenomenon of stagflation
as the result of two policies.
1.
high
Large high employment deficits in the post 1967 period produced
rates
of
monetary
expansion,
employment surpluses from 1957 to 1966.
converages asymptotically
'half-life' of one year.
whereas
The
there
rate
were
of
high
inflation
to the rate of monetary expansion with a
After five years, the
approximately equal to the constant rate
of
- rate of inflation is
monetary
expansion.
24U
Therefore, a high rate of inflation is utlimately due to a run of large
high employment deficits.
2.
Keynesian
presidents
demand
Kennedy,
government
i)
management
Johnson,
policy,
which
Nixon t Ford
to raise substantially
was
and
accepted
Carter
led
by
the
the high employment deficit and
the rate of monetary expansion when the unemployment deficit and the
rate of monetary expansion when
ii)
to
lower substantially
rate of inflation
was
too
the employment
the rate of monetary
high.
These
policies
rate was high,
and
expansion
the
raised
when
the rate of
iOhetA
inflation
A
was
too
high.
when unemployment
These policies raised
was high,
and
the rate of inflation
then raised the unemployment rate
when the rate of inflation was too high.
Stein
(111
concludes:
'Stagflation
is
the result of demand
management
policies which
focus exclusively upon either the high rate of unemployment or upon
the
high
rate
more serious
that
these
of
inflation,
problem
demand
of
depending
upon
the moment.
management
polcies
which
seems
The dynamic
to
be
the
process implies
produce a high
trend
rate of
inflation and cycles in the unemployment rate.
This is my monetarist
explanation
which
of
the
paradox
of
stagflation,
disillusionment with Keynesian economics".
leads
to
the
241
7.4
Supply Side Analysis of Stagflation:
The standard text-book explanation of stagflation is sketched in
Pig
(12)
7.1,1
which
supply diagram.
Price Level
shows
the standard aggregate demand,
aggregate
242
To
begin
with,
the economy
is at
full
with real income Yq and price level Pq.
employment equilibrium
An increase in the price of
material inputs shifts the supply schedule to s^^ output falls and the
price
level
exogenous
rises.
This
increase
in
shift
the
in
money
the
wage
supply
or
a
schedule
change
in
is
due to
some other
factor leading to a reduction in the marginal product of labour.
The
most
the
commonexample
in
recent
years
has
been an
increase in
price of imported energy or raw materials.
In recent years many Western economies including U.S.,
Germany,
France,
unemployment
U.K.} Italy
and
inflation
as
and
Canada
well
as
have
sluggish
Japan,
experienced
growth
of
high
output.
Figures show a noticeable deterioration of performance in the 1970's
and 1980's.
One
of
the
most
stagflation
is
the
study
hopothesfs
are
at
the
influential of supply- side
by Bruno and Sachs
centre
of
Bruno
supposed
that
there
were
large
(1985).
and
stagflation particularly of the seventies and
f 14)
eighties.
First,
increase
in
of
key
explanation
of
it is
the
These increases required a
net reduction in the real standard of living for countries,
net importers of these commodities.
Two
Sachs'
and unexpected
relative prices of raw materials abroad.
explanations
that were
Second, it is supposed that, in
the face of this required reduction in standards of living, real wages
assured
in
terms
of
consumption
prices
were
inflexible
downward,
243
thus lowering the demand for labour and increasing the unemployment
rate.
Bruno and SachiS
argue that these two elements are necessary
and sufficient to explain the post-1973 history of stagflation in major
OECD
countries.
They
wage
flexibility
is
argue
the
that
most
international
important
differences
reason
for
in
real
international
differences in unemployment rates during this period.
An improvement on the Bruno-Sachs methodology is the work of
Lipschitz
and
Schadler
(1984).
They
compare
the
manufacturing
sectors of just two countries Japan and the U.S.A.
Thus
some
serious
attempts
phenomenon of stagflation from
are several hurdles still to
7.5
were
made
to
explain
the supply-side analysis.
the
But there
overcome.
Unemployment in Indian Conditions:
Empirical
Unfortunately
Pioneering
evidences on
economists
effort
is
by
in
this
India
aspect
are conspicuously
have done very
Bramhananda
(1980).
little work here.
But
circumstances it seems to be very much outdated.
urgent need to have a fresh look at this problem.
lacking.
in
the
present
Hence, there is an
In the light of
the theoretical developments over the phenomenon of stagflation, here
an
attempt is made to analyse inflation and unemployment
in Indian
conditions.
A large number of workers are forced to remain jobless both in
rural and urban areas is true beyond dispute, but we do not possess
244
a precise estimate of the size of the problem.
How many workers
are generally unemployed in India in different types of labour markets
and for how long? Nobody could possibly give any factual information
with confidence.
nor
Neither the planning commission, nor Census Reports
the Directorate-General
of
Employment
and Training
(D.G.E.T.),
nor the Employment Exchanges nor any other agency like the CSO or
ISI or the NSS could give any dependable quantitative estimate of the
magnitude
of
the
problem.
There
exist
conceptual
as
well
as
statistical difficulties in estimating the magnitude of unemployment.
The employment
obtaining in
situation
in India
the prototype models
is
different
from
of developed countries.
that
Prof.
Bramhananda(15) has highlighted the important features as follows;
1.
The bulk of the
employed are self-employed in farm and
non-
farm
enterprises in rural areas; and in household enterprises,
small
establishments and
services and
service-firms in urban areas.
The
demand for and supply of labour and even for produce in many cases,
emerges largely with these households, household-firm enterprises.
2.
In
almost
all
acitivities,
disguised unemployment.
there
is
a
high
proportion
of
A sizeable proportion of employer-employees
appearing as such, in most types of activities, are eager and willing
to work elsewhere for reqular, adequate and stable employment.
3.
Regular salaried and
wage paid employees are a small portion
of rural labour force; and casual labourers dominate over the regular^
salaried and wage-paid employees.
Thus, there are no firm, certain
2-MS"
and continuous contracts for hired labour.
4.
"Unpaid helpers" are a significant adjunct to the self employed
category of workers.
5.
Seasonality-wise
particularly
in
there
rural
is
areas,
sizeable
but
even
variation in
in
the
employment,
most
busy
season,
observed unemployment is sizeable.
6.
not
Since
Observed} chronic or
significant
doles
insurance,
in
are
the
rural
not
long-period unemployment person wise,
areas,
in
but
such
existence
expenses
of
unemployment
and
there
is
maintainance
would
be
no
does
is
exist.
unemployment
largely
met
from
is
quite
relatively or through informal charity.
7.
Observed
short-period
or
intermittent
large and conspicuous. Unemployment
person-weeks and
person-days.
some
week
days
in
cousiderable
a
and
uncertainty
to
be reckoned in terms
of
These unemployed have to work on
for
about
has
unemployment
some
their
weeks
market
in
a year;
period
job
there
is
prospect.
Employment of these persons is thus "fractional".
8.
Employment
in
public
works
on
a
nationwide
basis
is
unimportant.
9.
daily
b
States which show high incidence of observed unemployment on a
status
basis
also
have
high
proportion
of
people
below
*
poverty-line;
these people's level of food
below nuttitional requirements.
consumption is probably
10.
There
status
is
rural
indicated
a
distinct
unemployment
by
the
per
cVV'
inverse
relation
rate ^'and
capita
between
measure
consumption
of
of
observed
acute
daily
proverty,
economically
as
weaker
classes.
11.
There is a positive relation between the level of infrastructural
facilities
like
rural
roads,
rural
electricity
and
observed
rural
employment rate.
12.
There
is
also
a
positive
relation
between
agricultural
productivity per hectare and rural unemployment rate,
13.
The incidence of observed
chronic-status
unemployment
rate is
rather high in urban areas.
V
In the back-ground of this analysis,
problem
of
inflation
and
'
we have to approach the
unemployment.
Some
estimates
of
unemployment in India are however, available, they are as follows:
From
table 7.2
it is obvious with every successive Five Year
plan the percentage of unemployment has been on the increase.
This is evident
from
the fact
that at
unemployment was barely 2.9 percent,
the end of First Plan,
by the end of the Third Plan,
it rose to 4.5 percent and at the end of March 1965, it shot up to an
astonishing figure of 9.6 percent.
drought
years
and
expenditure during
unemployment.
the
The recessionary trend,
comparatively
the Annual
low
plans explains
level
of
the sharp
the two
governmental
increase in
247
The position at
the begining of
the Fourth plan was far from
satisfactory.
There was a backlog of unemployment carried forward
to
of nearly
the extent
hands expected
about
23
ten
to come to
million
and
on
the
the labour market
top
of
this,
new
were estimated to be
million.
The committee of exports on unemployment under
the chairmanship
of B.Bhagwath'^in its report submitted to the
Government
in
May,
1973,
observed,
"...........
Unemployed
as
a
percentage of total labour force worked out to be 10.4 percent for the
country as a whole, 10.9 percent for the rural areas and 8.1 percent
for the urban areas."
(15)
As is evident from Table 7.3 the number of educated unemployed
increased from 5.9 lakhs in 1960 to 167 lakhs in 1987.
of the table reveals
took
among
that
absolute increase among the unemployed
place in all the categories,
graduates
and
A close study
but the compound rate of increase
post-graduates
was
faster
than
that
among
matriculates.
As a consequence, among the educated unemployed the proportion of
matriculates has fallen
1987,
while
that
of
from 78.5
graduates and
percent
in 1961
to 58
percent
post-graduates has risen from
percent in 1951 to about 17 percent in 1987.
in
9.5
On the eve of the 6th
plan (1980-85)^12 million persons constituted backlog of unemployed.
During 1980-85, new additions to the labour-force were expected to be
of the order of 34.3 million.
were
expected
to
be
46.3
Thus,
million.
the total number of unemployed
The
Sixth
plan
projections
S ource:
1956-81
3.6
7.1
10.0
17.1
5 .3
11.8
197.0
II Plan
4 .5
9 .6
14.5
24.1
7.1
17.0
215.0
III Plan
^ jf®
9 .6
22 to 28
0 .4 2 to
1.4
2 3 .6
9 .6
14.0
220.0
Plan
J9®®*®9
3 Annual
Com piled from v ario u s F iv e Y ear P lan Documents of In d ia .
2.9
5.3
6. Backlog of 'unem ployed at
the end of the plan (6«4-5)
of total labour force
(6/1 x 100)
7 .0
5. A dditional Jo b s c re a te d
Unemployed as percent
12.3
4. Total (2+3)
7.
3 .3
9 .0
185.2
3. Backlog of Unemployed at
th e beginlng of th e p lan
2. Net a d d itio n to th e
lab o u r fo rce during th e plan
beginlng of th e plan
1951-56
I Plan
10.4
33.0
10.0
23.0
1969-74
IV Plan
E stim ates of Em ploym ent and Unemployment in th e F iv e Y ear P lans
1. Labour fo rce at th e
T ab le 7 .2 :
1974-79
V Plan
12
34.3
46.3
12.0
34.3
1980-85
VI Plan
7.22
40.36
47.58
12.0
39.38
13BS-90
VII Plan
1990-95
65.0
7.22
37.0
106.0
4 1 .0
1995-2000
341.8
(M arch '9 0 )
VIII Plan
(In M illion)
638
3*■4
1984
ra tio of grow th
581
3.2
12.4
(58.2)
97.44
71.26
63.74
17.0
41.76
(2 5 .0 )
30.82
16.3
78.15
(1 6 .8 )
21.33
13.7
167.35
(1 0 0 .0 )
123.31
111.15
9 .6
135.12
112.12
107.98
75.60
90.12
(1 0 0 .0 )
16.85
(1 8 .7 )
23.25
(2 5 .8 )
Com piled from CMIE, 'B a sic S ta tistic s R elating to th e Indian Economy* August 1989.
(1951-1987)
Source:
(\)
Annual
755
Ch
1987
50.08
(55.5)
3.94
28.04
(1 7 .1 )
6.05
(2 6 .3 )
12.43
lab o u r 6 o th e rs
manual
U n sk illed
22.96
(100.0)
0.56
12.95
(56.5)
(9 .5 )
0.71
4.63
(78.5)
325
T otal
(1 2 .0 )
G raduates
8 P o st-G rad u ates
H igher
Secondary
M atricu lates
Number of
E d u c a te d
Number of Job S eek ers R eg istered w ith Employment Exchange
1981
1971
1961
7 *^ :
1
999
r**
ro
CO
fsj
89*61
1
(0'OOT)
06 *S
^*****
10.9
302.47
235.47
219.54
165.84
51.00
18.43
T o tal
249
25U
estimated an employment generation of the order of 34.3 million during
1980-85.
Thus
at
the end
of Sixth
plan,
12
million persons would
account for the backlog of unemployed.
To sum up; it may be stated that
targets
of
the of
the Sixth
plan have
by and large the employment
been fulfiled.
The Seventh
plan, according to the 32nd round of NSS is to start with a backlog of
13.9 million persons, but on the basis of a more recent 38th round NSS
information the
eventh plan is to start with a backlog of 9.2 million in
March, 1985.
the Seventh plan the net additions to the labour force
During
would
be
39.38 million.
requirement for
expected
Thus
the overall
magnitude of employment
the Seventh plan works out to be 47.58 million.
that
additional
standard person years.
(17)
employment
of
the
order
of
40.36
It is
million
would be generated during the Seventh plan
with an implied growth rate of 3.99 percent per annum.
The planning
Commission
has
making a projection of unemployment
preferred
to
use
for the 1990's.
NSS
data
for
Table 7.4 gives
the data of unemployment for 1990-2000.
In total,
net additions
28 million are the backlog of unemployed in 1990,
to
the labour force during
1990-95 are expected to be
37 million (i.e. for one year 7.4 million an an average).
estimated
million.
that the
total
and
labour force in March,
It is
1990 is about
also
35.4
On the basis of these estimates it may be calculated that the
251
percentage of unemployment in 1990 is about 10.52 percent and in 1992
the same is about 12.0 percent.
It is expected that during 1995-2000,
labour force would increase by 41 million.
Thus by the year 2000 AD,
the total number of job seekers would be around 106 million. CJT
Table 7.4:
Projection of unemployment for 1990-2000.
Million
1. Baklog of unemployed in the beginning of 1990
28
2. New entrants to the labour force during 1990-95
37
Total unemployed for the VIII plan (1+2)
65
3. New entrants to the labour force during 1995-2000
41
4. Total unemployed for the 9th plan
106
Source:
7.6
Seventh Five Year Plan (1985-90), P. 115.
Relevance of Theoretical Models to India:
Here,
Monetarist
we shall try to examine the over all applicability of
and
Supply-Side
analysis
of
stagflation
and
we
do
not
analyse the Keynesian contribution because Keynesian analysis does not
incorporate in the theoretical explanation the phenomenon of stagflation.
According
the
policy
1970s and
which
to
stagflation in U.S.A.
during
80s occured due to the Keynesian demand management
was
Ford ano Carter.
f 18)
the monetarists1 *
accepted
by
presidents
Kennedy,
Johnson,
Nixon,
This led the government to raise substantially the
252
high employment deficit and the rate of monetary expansion when the
employment rate was high.
Similar
Indian
type
of explanation can
stagflation.
programmes
of
The
economic
be advanced
government of
development
India
after
to
explain
adopted
independence.
the
massive
The basic
problem of the growth strategy in the eighties was that it was heavily
financed by borrowing.
The gross saving rate of the public sector has
declined steadily throughout
only
1.7
percent
of
GDP,
the eighties and
as
against
4.5
in 1989-90 it has become
percent
in
1981-82.
The
central government which was a positive saver thorughout seventies has
become
a
negative
saver
sector is also negative.
The
government
basic
conventional
is
measures
measure
of
1983-84.
The
net
saving
of
public
This is clearly indicated in Table 7.5.
problem
expenditure
There are various
since
of
the
rising
of
budget
Indian
fiscal
system
is
faster than the government
fiscal
imbalance.
dificit
cast balance and treasury bills.
which
First,
represents
that
the
income.
there is a
increase
in
The actual increase in money supply
on account of government budget is the monetised deficit which includes
budget
deficit
borrowing
(the
plans
RBI
RBI's
net
contribution
credit
to
the
to
the
government's
government).
market
Then there is
revenue dificit which measures the extent to which the government has
borrowed to finance current expenditure.
And finally there is overall
fiscal
borrowing
deficit
houshold,
government.
which
financial
measures
institutions
the
total
including
RBI
and
requirements
abroad
of
form
the
Table 7.5:
Government
Expenditure
as
a
Proportion
to
Government
Revenue.
Year
Revenue
Expenditure
as % of
Capital
Expenditure
as % of
Total
Expenditure
1983-84
113
92
104
1984-85
118
97
109
1985-86
118
97
111
1986-87
124
102
115
1987-88
125
87
109
1988-89
124
84
108
1989-90
123
96
113
1990-91
134
82
112
1991-92 (B.E)
120
84
107
1992-93 (B.E)
126
75
107
1993-93 (R.E)
118
78
105
Source:
Note:
Budget papers - 1992-93
B.E. = Budget Estimate
R.E.
Revised Estimate
254
Tablesin
chapter 5“ show
that all
measures
of
deficit have
rising
trends. Revenue deficit of Centre is now
3.4 percent of GDP.
Fiscal
norms
was the
India
until
require a
the
end
of
revenue surplus, which
seventies.
In
the
practice in
eighties
this
norm
is
completely violated and what is worse is that the revenue deficit is
allowed to grow faster than G.D.P.
Monetised deficit-which is higher
than budget deficit-has now grown to 3 percent of GDP,
deficit
has
increased,
from
4.1
percent
Finally fiscal
of GDP in 1975-1976
to 8.4
percent in 1990-91.
The government budget has an inherent dynamism deficit leads
to
borrowing
higher
the
which
deficit
large
percent)
turn
leads
to
higher
in the subsequent years.
monetary
is
in
expansion,
high.
This
when
may
be
interest
Thus,
the
payments
this has
unemployment
considered
as
and
resulted in
rate
the
(10.12
monetarist
explanation of stagflation in Indian conditions.
According to the Supply Side analysis stagflation occurs in the
economy due to shifting of the aggregate supply schedule towards left
and consequent fall in the output and rise in prices.
This shift in
the supply schedule in recent years is basically due to the increase in
the
price
of
imported
energy
hypotheisis of Bruno and Sachs
or
raw
materials.
One of
the key
'explanation of stagflation particularly
of the seventies and eighties is that there were large and unexpected
increases
in
the
relative
prices
of
raw
material
abroad.
adversely affected the aggregate supply schedule internally.
This
255
In the past major economic crises have occured in India mainly due
to
supply
shocks.
together
with
exchange
crisis
In
two-wars
and
the
mid-sixties
Indo-China
industrial
and
two
consecutive
Indo-Pak.
recession.
The
led
droughts
to
second
a
foreign
major
crisis
occured in 1973-74 again due to two consecutive bad harvest coinciding
with first oil shock.
The combination of bad harvest and second oil-
shock brought the third major crisis in 1979-80.
In all these crises
foreign exchange stock declined sharply and prices increased to double
digit inflation rate.
Although
expenditure
demand.
the
and
The
fiscal
situation
was
money
supply
were
effect
of
squeeze
not
as
sqeezed
was
such
alarming,
to
relatively
reduce
more
public
effective
on
public
investment than on the government current expenditure and consequently
non-agricultural
output
growth
rate
fell.
Recovery
after
all
these
crises was led by bumper agricultural harvest.
In contrast to all these major crises in the past the current crisis
f 19)
is not caused by any major supply shock/
The agricultural output
in the last 3 years was confortable.
of
1987
did
not
cause
originally anticipated.
as
much
The recent
Even the much published drought
shortfall
in
production
as
were
gulf crisis might have aggravated
the foreign exchange problem but even without it the situation would
have been quite critical.
Thus, the supply, side analysis explains, if
at
the
all,
conditions.
very
little
of
phenomenon
of
stagflation
in
Indian
256
Conclusion :
Keynesian economics,
the
1960s
demonstrated
which dominated academic macro-economics in
its ability
to
eliminate the
'Okun Gap*-gap
between potential and actual output by following the demand management
policies
rates.
of
raising
the
government
expenditure or
lowering
the
tax
Thus produced during 1970s and lg80s, in most of the countries
of the world what is popularly called as "Stagflation" -the combination
of inflation and sluggish growtTT rate of the economy.
and
even
the
explanation
But
New
Classical
Economists
would
The Keynesians
not
provide
any
in their theoretical analysis for this observed phenomenon.
the monetarist and the supply-side economists could provide some
theoretical explanation for this observed fact.
At present, India, is certainly placed in the paradoxical condition
of stagflation.
last
four
standard.
The average annual growth rate of the economy for the
decades
is
3.5
percent.
It
is
certainly
Monetary expansion is also quite large.
low
by
any
The average annual
growth rate of broad money in India for the same period is 16 to 17
percent.
There is
Hence, certainly
absolutely
there is excess supply of money in India
no doubt
unemployment in India.
regarding
the existence of large scale
Unfortunately authentic statistics regarding the
extent of unemployment in India are lacking.
observed
that
becoming
very
very
recently the
serious
and the
On the w(wle it may be
unemployment
situation
in
unemployment
rate
continuously
increasing^at present it is around 11 to 12 percent.
is
India is
257
According to the monetarists, stagflation in U.S.A. during the 1970s
and 80s occured due to the Keynesian demand management policy which
that government
raise
followed at
substantially
the
that time.
high
This lead the government to
employment
dificit
and
the
rate
of
monetary expansion when the unemployment rate was high.
Similar type of explanation can be advanced to explain the Indian
Stagflation.
The Government of India adopted massive programmes of
economic development
growth strategy
borrowing.
after independence.
The basic problem of the
in the eighties was that it was heavily financed by
This has resulted in the large monetary expansion when the
unemployment
rate
(10-12
stagflation at
present
percent)
is
high.
This
has
reduced
the
in Indian conditions this may be considered as
the monetarist expiation of stagflation in India.
According
to
the
Supply-side
analysis,
Stagflation occurs in the
economy due to shifting of aggregate supply schedule towards left and
consequent fall in the output and rise in prices.
In constrast to all
the major crises in the past, the present crisis is not caused by any
supply shock.
The recent gulf crisis might have aggovated the foreign
exchange problem
quite
critical.
but
Thus,
even without
it
the situation would
have been
the Supply-side analysis provides,
if at all,
very little explantion for the Indian stagflation.
258
References:
1.
Meade, J.E.
"Stagflation Volume I:
Wage Fixing",
George Allen and
Unwin, London, 1982, P. 1.
2.
Stein, Jeronee, "Monetarist, Keynesian and New Classical Economics"
Basil Black Well Publishers Ltd., Oxford 1982. P. 1.
3.
Ibid, PP. 3, 4, and 5.
4.
Ibid
5.
Ibid P. 5.
6.
Ibid P. 6.
7.
Ibid P. 85.
8.
New Classical Economics, Which is also
knownas the *The
Theory
t
of Rational Expectations.
9.
Ibid PP. 98-99.
10. Ibid PP. 209-210.
11. Ibid P. 218.
12. Jha,
Raghabendra,"
Contemporary
Macro
Economic
Theory
and
Policy" Wiley-Eastern Ltd., Delhi, 1991 P. 366.
13. For
details,
(1991), Ibid.
14. Ibid P. 369.
please
see Table
26.1
on P.367
and
368
in
Jha
259
15. Bramhananda
;
P.R.
"Growth
less
Inflation
by
means of Stockless
Money" Himalaya. Publishing House, 1990, PP. 152, 153.
16. Dutta, Ruddar and Sundaram K.P.M. "Indian Economy" S. Chand and
Company Ltd., New Delhi, 1991, P. 310.
17. Ibid, P. 312.
18. Stein > (1982), Op.cit. PP. 209-210.
19. Bhattacharyaf B.B.
"Fiscal
Management
of
the
Interest Publications, New Delhi, 1992, PP. 247-248.
Indian
Economy"