Inflation

Excerpts from “Simple Alternate Development Strategy”

. A large amount of foreign and international aid is received in India. The aid comes in the form of foreign exchange (cash) in most cases ( only in a few cases it comes in kind) and equivalent Indian currency is released in circulation in the country (or is used to import things). This means that the currency in circulation increases to this extent. India receives financial assistance from World Bank, International Monetary Fund, Asian Development Bank, foreign governments , their agencies like the Swedish International Development Authority(SIDA), , Overseas Economic Cooperation Fund of Japan, Danish International Development Agency (DANIDA), European Economic Community Overseas Development Agency, UN Fund for Population activities (UNFPA), UNDP, UNICEF, FAO etc. All this means increase in money circulation in the country. According to the authentic statistics published in newspapers, from February 94 to February 95, money in circulation increased by about Rs. 80000/- crores or by about 18% from Rs. 426,000 crores to Rs. 504,000 crores. The inflation was stated to be only 10% – 11%. The inflation would have been nil or much less, if production has increased correspondingly. Foreign aid is also received also for works which could be carried out without foreign assistance. For example buildings are built with foreign aid. Transport vehicles are financed from foreign aid. As stated, foreign aid in cash in effect, means increase in circulation of rupees in India. Inflation will be there whether currency notes are printed for conversion of foreign currency or for meeting developmental needs. But when increase in circulation of money leads to higher production, the inflation will come down to the extent of increase in production. If the value of production is more than the currency printed, there would be deflation i.e. prices would come down.

The foreign currency would be useful to facilitate imports, but why
should there be imports ? In the recent past, it is noticed that because of comfortable foreign exchange position, non-essential and luxury goods have been allowed to be imported. .(There are suggestions for liberalising imports of capital goods and other goods just to liquidate the foreign currency accumulations.) This has not in any way contributed to the country’s development. On the other hand, unrestricted imports of certain items have damaged the local industry, though for argument sake, it can be said that the imports provide competition to local producers to improve their performance. The competition could be provided by setting up more factories in the country. This may take some time but in the country’s life, one has to think of longer term strategies. If an industry’s performance has not been good for 40 years, or 50 years, it can remain so for another 2 or 3 years or 5 years, till new factories are set up in the country itself. The large scale imports recently of granite industry machinery prevented the development of local granite machinery industry in the country. India now has quite a large granite industry, but does not have technology for making machinery. By the large scale import of granite machinery, India has only helped Italy and other granite machinery exporting countries to not only increasing their production but also improving the technology. The same is the case, to a lesser extent of leather industry machinery.
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78. In early 1995 about Rs. 70,000 crores in foreign exchange reserves were there. For part of this money, currency notes have been printed. For instance, when a foreign company participates in the equity capital of a local company with cash contribution, or when Indian companies raise loans in foreign countries, the equivalent of the foreign currency is to be paid to the Indian company by the banks/ Reserve Bank of India. This definitely increases money in circulation.

An amount of over Rs.200,000 crore (Rs.2000 billion) is said to be unaccounted ( black) money with the people i.e. the money on the earning of which tax has not been paid. Only a negligible part of this money is in circulation. There is a suggestion for bringing this money into circulation after the owners of the money have paid tax. If the entire money comes into circulation, will it not lead to inflation ? The effect would be the same as printing this much of money and bringing the same into circulation. There cannot be anything different. ( There can however be a marginal variation in that , already a very small part of this money is in circulation but then lot of unproductive work is involved in calculating and collecting tax.)

It is quite clear thus, that bringing foreign money into the country or black money in circulation in India has the same effect as printing currency notes.

Some people may argue that for printing currency notes, we should have adequate gold reserves. There is absolutely no need for this. Gold is one of the several metals. It is valuable now, because people give importance to it. It sells between US$ 300- 400/- per ounce. Tomorrow, if people of India decide not to wear jewels, and do not buy gold, the price of gold will come down to less than US$ 300 per ounce. If the people of other countries like China , Pakistan, Bangaladesh etc. also decide not to buy gold, the price of the same will come down to less than even US$ 50/- per ounce. It is therefore clear that printing of currency notes should have no relation to the gold reserve.