Deficit financing in every five year plan and improper planning led to a 40 percent rise in food grains, 45 percent in cereals and over 70 percent rise in pulses during 1961-1966. The country was in the grip of a galloping inflation. This with 1950-51 as the base year.
Keeping 1960-61 as the base year, the Fourth five year plan save the price index at an all time high of 331 in September 1974 (with 1961-62-100). This was due to a combination of several factors, the primary being the influx of refugees in large numbers from Bangaldesh and the expenses incurred by the government on them, failure of Kharif crops in 1972-73 and complete failure to take over the wholesale wheat trade. The declaration of Emergency in June 1975 resulted the arrest of price rise and a steep fall in inflation and prices of commodities.
Unfortunately, political upheavals, callous bureaucracy and an equally callous inflationary budget by the Finance Minster Mr. Charan Singh in 1979 brought all the good work reduced to nil and inflation back to an all time high, and the election of a new government in January 1980 saw that inflation was taken up as top priority. However priorities in our country kept changing due to political considerations and the rate of inflation kept going up and being pulled back again. The 1980’s saw, by and large, a controlled inflation.
The 1990’s again saw the economy and inflation rate in doldrums with double digit inflation in 1990-91 and 1991-92. The political considerations in increasing the prices of food grains was one factor, the second being the steep rise in prices of petroleum products in one go. The inflationary pressure was mainly on food grains, vegetables, cereals, sugar and vegetable oils. Due to these factors, the galloping rise in prices continued for the better part upto mid-nineties.
Inflation has been defined in the literal sense as related to economic factors as “a progressive increase in the general level of prices brought about by an expansion in demand or the money supply or by autonomous increase in costs or the rate of increase of prices.”
There cannot be any single cause for price rise of essential commodities continually over the years. Infact, over the years and even from the time of independence, there have been regular inflationary pressure on the economy partly through imbalance in demand and supply. The ever increasing demand has been primarily due to our ever increasing and bulgeoning population. Even a few decades ago it used to be around 12 to 14 million every year which has gone up to nearly 20 million every year.
This increase in population automatically creates an increased demand for food and essential commodities which results in a persistent gap between demand and supply in almost all consumer goods and services. It is indeed unfortunate that we have not been able to evolve a fixed and common norm to check the spiraling population, something which China has been able to achieve. Our politicians, monetarists and structuralists have chosen to ignore or underplay the effect of this growth on prices. India has several problems besides inflation, all affecting the citizens and creating more disparity between the rich and poor but no problem can be solved satisfactorily unless the growth of population is checked.
Mounting government expenditure over the years has also been responsible for inflation. The total expenditure of Central and State government in 1950-51 was about Rs. 750 crores only. This expenditure went upto Rs. 37,000 crores in 1980-81, further up to Rs. 5,80,000 crores in 2000-2001. Much of this has been non-development expenditure implying and increased in large money income in the hands of general public and stoking the fires of inflation. The populist measures of doubling and trebling salaries of government employees without implementing the rest of the recommendations of the Fifth pay commission has put an excessive burden on the exchequer without deriving any benefits from this.
Deficit budgeting is another reason for inflation. Mounting government expenditure financed through deficits directly pushes up money supply consequently pushing up demand. This has been responsible for the inflationary situation in the country with the State governments further adding to the problems through persistent financial indiscipline, reckless expenditures and unauthorized overdrafts.
There is considerable slush money with politicians and Government servants, mainly those dealing with licensing, registration, sales tax, trade tax, income tax etc. this slush money is used in real estates pushing up already high prices, extensive hoarding and black marketing inflation sensitive goods. The role of continual black money influx in creating inflationary pressures cannot be discounted.
The increased taxes in every budget gives an opportunity for corrupt traders to further push up taxes even beyond the levy. With fat pay packets, the higher salaried class and government services do not feel the punch what with dearness allowances applicable.
The policy of compulsory procurement by the government is another factor. With politics playing an important role in fixing procurement prices most of the time at unreasonable rates. This automatically leads to increase in prices of agricultural products.
The really serious effects of inflations are the distribution of income in india. Inflation has brought about a considerable disparity in income. The producers, traders and speculators have gained enormously through illegal gains, ever-increasing profits and windfall gains through black marketing, hoarding and speculation. But what about the working class in unorganized sectors – small establishments where wages remain constant despite continual increase in prices over the years. What about the persons living on past savings, fixed dogs, our Finance Minister has deliberately ignored them and in his latest Budget (2003) reduced interest on savings in post deposits earlier got 12 percent interest which means that earlier he was getting Rs. 12 thousand per year at the least on a deposit of Rs. 1 lakh but now gets Rs. 8 thousand or even Rs. 7 thousand per year only, this with the increased prices further reducing his purchasing power. The middle class has now been bifurcated into the border line, the lower and the upper middle class.
Inflation has brought about shifts in the distribution of income from the poor and weak to the powerful and rich. The rich have become richer and the poor have become poorer. Our democracy has the egalitarian welfare state incorporated in our constitution but has moved away from this avowed objective and instead created a situation where it has become responsible for increasing poverty and gross inequality of income and wealth.