INFLATION AND ITS REMEDIES IN INDIA'S PLANNED ECONOMY *

This paper intends to examine in what way and to what extent inflation whiph is generated by the process of development may be held in check by monetary and fiscal policies with special reference to the Indian experimen.~ of planned development of her economy. But, since 'the great controversy' on inflation as an instrument qr otherwise of ecouomic development has centred round the experience of Latin American countrie~ [1] [2], a short r6~um6 of the controv~rsy is also given. It is now a commohplac~ in development literature that one of the important limiting factors in the rapid industrialization of an underdeveloped economy is the lack of capital resources, and the argument that a vicious circle constricts underdeveloped countries in their attempts to raise their lo~r level of capital C3] [4] . ~oth the demand for and the supply of capital in a backward econo~ny are under the sway of the vicious circle. This is the result of low productivity in agriculture and nianufacturing, vrhich results in low national income ~vhich implies a negligibile rate of saving and cap.ital forination : Io~v rate of capital formation means low productivity and low national income. This vicious circle inhibits both saving and investment. This vicious circle has to be broken, at the point of low capital formation, as the rate of development is a function of the proportion of income saved and invested, and also of the coefflcient of productivity [5] . Productivity itself 12~rgely depends upon investment. Further, the crucial role of inveStment can be viewed from yet another angle : if we postulate the existence of a large volume of disguised unemployment in underdeveloped countries, as has been testified to by many writers, it is seen that this is largely, if nbt solely, due to the lack of complenientary capital and technical resourcds. Moreover, it has been argued that investment is also a " pace-setter for additional investment " C6], apart from its income-generating and capacitycreating functions. Investment is thus a prime factor in the process of development. , . l~ most underdeveloped countries investment as a fraction of their GNP is extremely low, s,omething lijke a little over 5 per cent or so. It is obvious that this level is mtich below the critical minimurxl level [7] Qr the point of ' take-off ' [8] or the Big Push or Pull [9] necessary to rescue these economies