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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"