The Impact of R u p e e Devaluation on Productivity *~

By
M. R. Kumara Swamy
Poona, India, and East Lansing, Michigan, U. S. A.
With 5 Figures
(Received January 9th, 1967)

In what follows, the discussion attempts to contribute our knowledge

on the subject of the impact of rupee devaluation on productivity which,
as most of us recognize, has not been discussed with any significant
co-relation, inspire of its topical importance not only on consumption
front but also on production front.

Part I
We all recognize the point that the real world encompasses an age
of imperfect human behaviour not only on product market (which deals
with supply and demand) but also on capital market (which concerns
with savings and investment). The existence of lags between savings and
investment and between supply and demand produces dynamism into
our economic system.

Lags on Capital and Product Markets

A careful examination of lags, with the aid of the following figures,
not only on production front but also on consumption front would pro-
vide us with a useful preface to an understanding of the subject of
productivity and its relevance for economic development.

* The author wishes to express his high appreciation to Messrs. K r i s h -

n a m u r t h i of the Mysore Chamber of Commerce, A r y a of the Bangalore
Institute of Management, and G a n g a d h a r a S e t t y of the Mysore State
Productivity Council for their warm and helpful remarks. Of course, the
author is highly indebted to Micro-Macro Economic Analyst Dr. Giovm-mi
C a r a v a l e and Agriculture Economist-Vice-Chancellor of Poona University
Dr. D. R. G a d g i 1 for their helpful suggestions. The monopoly of ideas, contained
in this paper, rests with Professor Dr. Kumara Swamy.
1 The paper shall be divided into two parts. In part I, we deal with the
subject of productivity. In part II, we discuss upon the relationship between
productivity and devaluation.
 M. R. K. Swamy: The Impact of Rupee Devaluation on Productivity 461

Let us concentrate on Fig. 1: We represent price on Y-axis and supply

and demand on X-axis. -- The fundamental human relationship which is involved
here is between suppliers (producers) and demanders (consumers). The rationale
of a consumer is to demand the product at lower prices; whereas, the rationale
of a producer (supplier) is to sell the product at the highest possible price.
The interests of the two heterogeneous human groups tend to tally at the point
of equality between supply and demand. Normally, it is hard to arrive at
such a profound equality between supply and demand. -- The normal charac-
teristic feature of day to day business activity lies in discovering the in-

"~'\p' / ,5'
\6" ..,p,
\
\^ / \
/~// "Z
~uppIj end Dmmend 0 ,Yey/ngsend-X#Yaat/na~"~
Fig. 1 Fig.2
Fig. 1. Consumption sector or product market
Fig. 2. Investment sector or capital market

equality between supply and demand. Owing to lags, we experience price

decreases and price increases. - Movements along the demand curve and the
supply curve denote the responsiveness of demand and supply to changes in
price. - Shifts from one demand curve and supply curve to another denote
the responsiveness of demand and supply to changes in income, prices of sub-
stitutes, population, tastes, fashions, capital-labour output ratio owing to
a change in technological mix, and differences in grades, qualities of labour,
willingness to work and all that.
In Fig. 2: Along Y-axis, we represent interest rate; along X-axis, we denote
savings and investment. The human relationship involved is between savers and
investors -- the rationale of a saver is to save more at higher interest rates;
whereas, the rationale of an investor is to invest more at lower interest rates.
The interests of the two heterogeneous human groups tend to tally at the point
of equality between savings and investment. Movements along the savings and
investment curves indicate interest rate changes, representing the responsiveness
of savings and investment to changes in interest rates -- shifts from one savings
curve/investment curve denote the responsiveness of savings and investment to
changes in factors (other than interest rate change) like the marginal efficiency
of capital; change in capital-labour output ratio; productivity (human and
material capital); output per manhour is determined by quality, grade, eager-
ness, sense of responsibility; output per machine is determined by standardi-
zation, automation, layout and maintenance.
From this brief, though elementary, analytical discussion, we shall
be safe i n p o i n t i n g to the conclusion that the shift i n the demand curve
to the right, oil consumption front, produces d y n a m i s m into the economy,
which is closely associated with shifts in investment curve to the right,
which certainly brings about high a n d higher productivity.
462 M . R . K . SwamF:

Flow of Funds and Productivity

Is it correct to say that a shift in demand/investment curve to the
right, associated with an increase in the marginal efficiency of capital,
is always attributed to higher productivity? In order to find an answer
to the above question, let us put our hands on the significant quotation
from the most brilliant work on economics ,,The Wealth of Nations",
written by Adam S m i t h in the year 1776 which says,
"the annual product of the land and labour of any nation can be increased in its
value by no other means, but by increasing either the number of its productive
labourers, or the productive powers of those labourers who had before been
employed. The number of its productive labourers can never be much increased,
but in consequence of an increase of capital or the funds destined for maintaining
them. The productive powers of the same number of labourers cannot be in-
creased, but in consequence either of some addition and improvement to those
machines and instruments which facilitate and abridge labour; or of a more
proper division and distribution of employment. In either case, an additional
(wage fund) is almost always required."
From this learned quotation, it becomes quite clear that the flow of
funds from rent and profit (management) to wage (labour) determines
the growth of productivity via an increase in division of labour. Let us
show the economic dynamism of Adam S m i t h with the help of follow-
ing flowing chart:

i/.~ Divisionof /a6our

/4/,7]¢ fYAJ 26 ~ OUfflYf

R]) Populst/on
ffojTfe88ivo80ci'et@~ /
Fig. 3

An increase in the flow of funds from (R ~-P) to (W) results in

an increase in wage-fund; an increase in wage-fund results in a shift
in investment schedule from left to right. -- This, in turn, facilitates
better and complex forms of division of labour. The entire process goes
on and on. At this point, it becomes useful to make the point that
a firm, with large capital (investment), can afford to have several divi-
sions like, for example, Union Carbide (Ltd.) having the Personnel
Division, Production Management Division, Sales Management Division,
Chemical Division and so on. It is not sufficient to have merely division
of labour -- it becomes essential to have better and better co-ordination
among the interests of various divisions. Therefore, in order to have
higher productivity, which can be brought by higher investment,
associated with more and more division of labour, combined with least
cost. production, we should have better and higher grade co-ordination
between labour and management.
 The Impact of Rupee Devaluation on Productivity 463

Least Cost and Productivity

Let us show the least cost combination, associated with maximum
productivity, with the help of two simple diagrams: From figure 4, we
find that A T C schedule is U-shaped -- in the beginning the firm reaps
economies of large scale, resulting in
lower costs -- the firm maximises pro- $1 /y/.C
ductivity when costs are lowest at point
P. At this point, output per manhour
and output per machine tend to reach
maximum levels.

Productivity (Specialization)
and International Trade
It may be necessary to ask: "Why
should a country like U. S. A., U.K.,
Germany, Sudan, or Nigeria have any
trade -- relationship with neighbouring M.P
countries or among countries having Fig. 4, 5
'Good will' relations?" International
trade emerges as a result of production at lower (least) costs, or, in other
words, the emergence of trade (internal and international) is the result
of comparative advantage possessed by countries in the production of
particular products. It is at this point, it becomes relevant to bring in
the relationship of exchange rates among several currencies of the world,
like the U. S. dollar with rupee, and the rupee with roubel, and the roubel
with german mark, and so on.
The question of devaluation comes to play an important role when
the country concerned wants to bring about a favourable change in the
balance of payments.
Part II
Productivity and Devaluation
In this section we shall discuss the relationship between devaluation
and productivity. It may be pointed out that in order to understand
the relationship between productivity and devaluation, let us understand
the fundamental relationship between the balance of trade and the balance
of payments. The balance of trade concerns with an equality between
physical imports and exports (as, for example, trade is 'said' to be in
balance when say 10 bales of cotton equal 10 bales of jute). The expor-
tation of any item takes place when the country finds it advantageous
to produce by reaping economies of scale combined with lower costs and
higher productivity -- or, when. the country produces over and above
domestic needs or requirements -- or, to keep the price level (domestic)
at a reasonable level. Therefore, a favourable balance of trade is assoc-
iated with productivity combined with specialization in the production
of that particular product. Where does the question of devaluation come
464 M . R . K . Swamy:

into play here? Well, an equality in the balance of payments is said

to take place when the value of exports equals the value of imports. An
equality in the balance of trade does not necessarily mean a balance in
the balance of payments.
India's 1949 and 1966 Devaluation
The country finds it desirable to devalue the currency when the
country concerned faces a serious imbalance in the balance of payments,
viz., when the value of imports tends to outstrip the value of exports.
At this stage, let us bring in the question of the 1949 British pound
devaluation -- India followed suit; Pakistan further went in line. Let
us note that India devalued her currency in the year 1949, as the result
of the British pound devaluation, without knowing the efficacy or pros
and cons of devaluation -- this step was not undertaken under the
initiative of the then Government of India -- we all recognize that up
until 1950, India did not have her own Constitution: India was depend-
ant upon the British Constitution -- she had cultural, political, spiritual
(for instance, the spread of Christian Missionary work here) and econ-
omic ties with pound sterling countries -- Britain imported jute, hand-
loom products, art-works etc. from India. Pakistan devalued her cur-
rency owing to the fact that the advantage which the United India
(before Partition) possessed in regard to jute manufacture and production
fell apart -- therefore when India devalued, Pakistan found it feasible
(advantageous) to devalue her rupee.
After India framed her own Constitution in the year 1950, she
launched her planning era in the year 1951 - the First Plan was oriented
towards agriculture; in the Second Plan, India shifted her emphasis from
agriculture orientation to industry orientation; she got excited and Nature
too went against India, and India was forced to return to her original
emphasis viz., on agriculture. We have (almost) completed the Three
Five Year Plans in India; yet, the economic evils of the day have not been
solved to any extent -- the marginal utility of income has been increasing
not only in the middle income group but also in the lower middle income
group: the internal price structure has gone up by leaps and bounds;
of course, our cost structure has (tremendously) gone up. India, without
knowing pros and cons of the problem, decided to devalue her rupee in
the year 1966. Let us examine the impact of the rupee devaluation not
only from an international stand-point but also from an internal view-
point.
Rupee Devaluation and International Front
It may be interesting to throw light on the impact of the rupee
devaluation on the international front. As is expected of devaluation,
there is a fundamental relationship between the Indian rupee and the
currencies of countries with whom we have negotiations in regard to our
balance of payments. Most of us have read in the daily news-papers and
in financial journals about the establishment of new exchange rates of
the Indian rupee with the currencies of advanced countries, like the
 The Impact of Rupee Devaluation on Productivity 465

U. S. dollar, British pound, West German mark. The reason for our
intimate connection with advanced economies is warranted by the fact
that India, since the beginning of the planning year of 1951, has engaged
herself in deep economic ties with U. S., West Germany, France, Italy,
and so on (developed countries).
Indian Rupee and U. S. Dollar
In what follows, let us discuss the relationship between the devalued
Indian rupee and the U. S. dollar -- presently, one U. S. dollar is valued
at Rs. 7 - 5 0 paise; this means that when an American purchases the
Indian items on payment of U. S. dollars, the country (India) becomes
a gainer, as India's main purpose at present is to earn foreign exchange;
although, an American may not be a loser, when he spends the U.S.
dollars outside, say in India, yet the U. S., as a nation, becomes a loser,
as she is already facing the serious problem of the dollar outflow which,
in turn, has resulted in a alarming decline in the value of the dollar.
Americans want to enjoy life and, therefore, they like to travel abroad
during holidays. Whenever and whereever they spend, especially out-
side the U. S., they transact business in U. S. dollar's Travellers Checks.
The American tourists are a boon to the Indian economy as they help
India to earn dollars e.
Dollar Devaluation
Let us discuss in some little detail on the prospects of the dollar
devaluation. Most non-citizens (especially the Indian nationals) are fond
of going to the U. S. to take advantage of social output -- wine -- women --
whisky. For one reason or another, the U.S. has been regarded as
a materialistic society -- therefore, money making has become the symbol
of a person's welfare in the United States and it is rightly said in the
U. S. that 'to remain idle is a cardinal sin'. Every hour lost means every
"dollar-earning" lost, and every lost "dollar-earning' results in a mental
disequilibrium; this, perhaps, explains why an American's life seems to
remain incomplete without his or her visiting, a psychologist or a psychia-
trist twice a year at least, in order to share his or her problems on social,
economic, technological and political problems which are the results of
pecuniary complexities.

Non-citlzens and Social Output

It is often easy to find (secure) jobs by non-citizens in the U. S. not
because there are equal opportunities but becuuse there are widespread
opportunities in the U. S. A. It may be pointed out that a non-citizen,
with an average eductional background (like B. S. or M. S. degree level)
cannot get the same entrance rate as a U. S. citizen for the same type
M. R. K. S w a m y : Devaluation of the Indian Rupee. All India Radio
Broadcast, August, 6, 1966.
M. R. K. S w a m y : Devalued Rupee and the Dollar. Southern Economist 5
(1966), pp. 14--15.
466 M . R . K . Swamy:

and structure of job. One finds a high degree of wage differentials among
citizens and non-citizens, especially in business and industry. -- There
is a small degree of wage differentials in the above sense in academic
institutions.
Let us ask the question: How are non-citizens able to accept jobs on
sub-normal salaries? It must be noted that these employees are paid
in U. S. dollars, for instance, an Indian national is so fond of equating
one U.S. dollar with Rs. 7--50 paise, and all that. Nodoubt, this is
the official exchange rate fixed by the Interuationa3 Monetary Fund. --
This is fine as far as settlement of international payments among coun-
tries is concerned. It may be remembered that the purchasing power of
one U. S. dollar has the same value as the purchasing power of one
Indian rupee up to a point when elasticity of demand is less than unity.
It may be interesting to learn that a person earning 900 rupees in India
maintains (more or less) the sa.rne living standards (social status) as an
individual earning 900 dollars in the United States.
Very often, the entrance rate (in industry and business) for non-
citizens is in the income range of 500 and 650 dollars per month. --
How about expenses in the U. S. A.? A non-citizen earning in the income
range of 500 and 650 dollars could well manage with 150--200 dollars
a month: May be, 100 dollars are taxed away! The balance of 2 5 0 - 3 0 0
dollars goes in the non-citizen's savings account. If he works for five
years, he will accumulate 22,000 dollars, which is untaxed. Such earned
(and saved) incomes are not taxable under the present United States
fiscal (income-tax) regulations. It is high time that the U. S. Department
of Revenue become alert on the issue. Upon completion of the non-
citizen's five year stay in the U. S., he will decide to transfer the entire
bank balance to the tune of 22,000 U. S. dollars to his country.
Let us note that most of our Indian people who have gone, and who
want to go to the U. S. (under private sponsorship) don't want (and hate)
to return home, as they are attracted by the attractive I. M. F. exchange
rate of one U. S. dollar and Rs. 7--50 paise 3. There are several Indians
who have gone to the United States on government sponsorship too. --
They want to enjoy life and make money 4. All these points seem to hold
fine from the non-citizen's standpoint. How about the United States
as a country? It must be stressed that the transfer of U. S. dollars to
other countries involves a serious depletion of the U.S. gold reserves.

3 There are several hundreds of Gujerathis (people of the western region of

India) in the U.S.A. studying for their B. S. and B.A. levels of preparation,
inspite of the fact that Government of India's foreign exchange regulations
do not (generally) permit undergraduate students going abroad to pursue under-
graduate studies.
4 D. E. Bell (former Administrator of the U. S. A. I.D.), Vice-President
in-charge of International Programs for the Ford Foundation, made the point
in October, 1966 that "too many of the students (referring to the Indian
nationals) who come to the U.S. for higher studies were reluctant to return
home which causes a brain drain which their countries resent and call ill
afford".
 The Impact of Rupee Devaluation on Productivity 467

Flight of U. S. Dollars vs. Productivity

Is the flight of U. S. dollars desirable? Are the non-citizen employees
contributing to the economic growth of the U. S. economy? In most cases,
the answer is in the negative; in some cases, the answer is in the posi-
tive. Any person whose services are productive (viz., that job which
a U. S. citizen is not capable of doing) contributes to the increase in net
national product of the country; any non-citizen whose services are
unproductive (viz., that job which a U.S. citizen is as well capable of
doing) does not contribute a bit to the increase in gross national pro-
duct of the U. S. economy. For example, the services of Astrophysicist
Chandrasekhar, Statisticians Roy, Bose, etc. are considered productive
from the U. S. standpoint. -- Their productive importance was not and
has not been realised b y India, which is reasoned to professional
jealousies rampant in this country 5 and to the low level of technological
know-how at top decision levels (senior administrative officials of India
Government).
At this point, it may be worth mentioning about the report on
"A call for Monetary Reform and Fiscal policy by the U. S. and I. M. F."
(discussed and submitted as a recommendation to the Joint Economic
Committee of the U.S. Government by Dr. M. R. Kttmara S w a m y in
April 1965 e) which says, "it is high time that the I. M. F. allows for
a complete revision of exchange rates, keeping in view the levels of econ-
omic development of concerned countries. Let us not live on theoretical
dogmas (like the Triffin Plan and all that). Let us get busy and act soon.
Any silence from the I. M. F. side would aggravate the problems of the
balance of payments of the U. S. and, may be, a stage would be reached
(soon) when the United States has to devalue her dollar. I sincerely urge
the U.S. representatives to the I. M. F. to propose the above suggested
measure to the I. M. F. Council."
It is argued in professional circles that devaluation of the Indian
currency has been the result of the World Bank and the U. S. pressures
(political). There is no reason to warrant this argument as the World
Bank and the U. S. are not at any direct economic advantage. - In fact,
the rupee devaluation would cause further decline in the value of the
U. S. dollar, which, in the long run, may be a threat to world economic
stability as the U. S. is the centre of economic activity.

Change in the Direction of Export Trade

Regarding the theoretical stand that, as a result of devaluation,
imports are discouraged and exports are encouraged, it may be worth
5 Owing to the presence of extensive and intensive parochial feelings in
India, it is regrettable to learn that the services of the 1930 Physics Indian
Nobel Laureate, Dr. C. V. R a m a n , have not been utilized by the Indian
Science Congress. His continued activity in scientific research, inspite of Govern-
ment discouragement, has been due to his own drive and dynamism.
6 A Call for Monetary Reform and Fiscal Policy by the U. S. and I. M. F.
(Translated into Italian.) ILussogna Economica 30 (1966), n. 3.
468 M . R . K . Swamy:

mentioning here that Indian textile and handloom products, art works
and other allied products are in great demand in the U. S. and elsewhere
-- there are a few items of the U. S. that India needs to import; afterall,
food, technical and other related assistance come to India b y way of
aid, gifts and so on. Imports from U. S. A., inspite of the rupee devalu-
ation, would remain intact.
Owing to the 1966 rupee devaluation, we expect a change in the
direction of export trade from the American und European sectors to
the African and the Middle-Eastern sectors in view of the terrific increase
in internal cost structure. This aspect of a change in the direction of
export trade may be attributed to the factor of a lack of development of
humanitarianism (motivation) to the cost aspects on the part of some of
the socially and economically undeveloped regions in Africa and the
Middle East. These countries don't very much bother about the high
costs of imports -- if a person talks nice and good to an African or an
Arab, things work out smoothingly. They have huge payment-capacity
potential but they lack the technical and economical know-how. In other
words, it is the role of social relationships (and not economic con-
siderations) which plays a dominant role in directing trade relationship
with African and the Middle-Eastern countries. African countries axe
not trade conscious; whereas, European and American countries are
(especially) trade conscious and, therefore, they resent high prices and
higher costs.
Rupee Devaluation and Internal Front
Let us look at the impact of the 1966 rupee devaluation on the inter-
nal cost structure -- it has gone up b y leaps and bounds owing to the
use of capital-intensive techniques involving the use of huge imported
materials (spare parts, and so on); lack of proper standardization; un-
economic layout; tack of proper maintenance; huge underutilization of
capacity attributed to a lack of proper assessment of demand for, say,
the next five years.
It is clear from our figures (4 and 5) that there is a fundamental
relationship between cost and price. The achievement of lower costs is
the main object of the manufacturer; the achievement of lower prices
(which could be made possible by increasing the funds going to maintain
productive workers) becomes the main object of consumers or buyers. It
is self-evident that lower price and lower costs can be brought about
b y increasing productivity which, in turn, may be brought about b y an
increase in investment in human and material capital.

Unproductive Labour (Dignified and Undignified Clerks) and

Misallocation of Productive Resources
We must make a clear distinction between productive and unpro-
ductive workers, as not all workers are productive. It is a 'known' secret
that several of our well trained (productive) Indian nationals who want
to return to India cannot get chances to return owing to the point that
 The Impact of Rupee Devaluation on Productivity 469

their cases are handled by undignified clerks, who are bare matricu-
lates - the letter from, say, a well trained Indian in U. S. A. offering
his services for India's economic prosperity is addressed to the Secretary,
Council of Scientific and Industrial Research Pool, Now Delhi. -- Un-
fortunately, the Secretary (dignified head clerk), who is paid for this
job, does not care to har~dle the cases involving the use of services of
productive labour. Such cases are disposed of by clerks (undignified)
who have no capabilities to assess the use of productive labour force.
The hopeless regime of clerkocracy 7 is rampant in India - it is for
this reason that the services of several of our productive people are
going waste to this country. -- The frustration is high pitched. Not only
the services of dignified head clerks, referring to ministers in power,
senior (non-technical) government officials, but also of undignified clerks
(uneducated, incompetent, and unexposed to the outcome of modern civili-
zation) may be considered unproductive in every sense of the term. It
is regrettable to learn that the opportunist tendencies have tended to
make the Indian ministers change their portfolios from one specialized
field to another like moving from Physics to Chemistry or to Biology. --
A physicist is incapable of judging the profession of a chemist and
a chemist cannot judge the work of a biologist. Recently, one of our
ministers, who held the portfolio of Community Development has now
taken charge of the portfolio of Steel and Mines. It is a matter of deep
regret that such unpleasant and illogical things have been taking place
in this great country of unity in diversity.

Productivity from the Middle Group and Economic Development

The problems have taken very serious turns in this country owing
to the decisions taken by the two unproductive groups of people (dig-
nified and undignified clerks). - Those unproductive people have been
suppressing the intellectual and the productive abilities of the inter-
mediate category, viz., the middle group. It is the development of this
group which loads to economic dynamism of the country. At this point
it becomes relevant to bring in the postal mottos s of the following
organizations:
(1) Calcutta Productivity Council: "Productivity in the service of
Industry."
(2) Mysore State Productivity Council: "Prosperity through Pro-
ductivity."
(3) Union Carbide India Ltd.: "Productivity -- the only way to Self-
Reliance."
Let us analyse, in some detail, the 'growth sign' motto of Union
Carbide India Ltd. "Productivity the only way to Self-Reliance." Let
7 It may be said that there exists in reality neither the Communistic form
of govermnent nor the Democratic form of government in India. -- For practical
purposes, India has a Clerkocratie form of government.
s A postal motto is expressed as follows: By the side of the stamp mark
on the envelope, each organization has its 'growth sign' mark.
Zeitsehr. f. NationalSkonomie, XXVII. Bd., Heft 4 31
470 M . R . K . Swamy:

us call our conscience to the terms Self and Reliance. Is India a self-
reliant country as a result of the First, Second and Third Five Year Plans?
Unfortunately, the answer is 'no', and we have became dependant for
everything on westerners (Britons and Americans); we are more than
ready to accept any statement from them, and would give due honour
to their doings (either right or wrong). Indians have become the twen-
tieth century slaves of the westerners.

Government Intrusion and Evils of the Day

We are relying on government . . . government for everything. The
government has taken over huge responsibilities, and is taking more and
more responsibilities 9. - A stage has been reached in India when Govern-
ment has taken away all incentives for 'productivity increase' from
private sector l°. The government, on its own accord, recently decided
to force devaluation of the rupee on this country. -- In forcing this
decision, the private sector was not consulted. -- The serious economic
evils of the day may be attributed to the 1966 rupee devaluation.
The only people who have benefitted as a result of the 1966 rupee
devaluation are the 'so called' members of the public sector as, for
example, the momentary VIP's, like ministers and senior (non-technical)
government officials, whose services are truly unproductive in every sense
of the term. As a selfish step in the direction, soon after devaluation,
people like Messrs K a m a r a j , S u b r a m a n i a m , C h o u d h u r i , Zakir
H u s s a i n and Srimathi Indira G a n d h i , etc., have visited several for-
eign countries on the pretext of getting foreign help and establishing
"good will" -- "good will".
There is no end to these people going and returning. There are no
restrictions when they want to go abroad; whereas, when a member of
the private sector (the most productive member) wants to go to western
countries, there are hundreds of restrictions imposed on his going abroad.
- These 'unnecessary' restrictions have lead the individual to frustration.
Let us note clearly that the rupee devaluation has certainly hindered
the growth of private sector which, in turn, is the cream of the Indian
economy, and hence prosperity (economic).

India's Political Planning and Hoarding of Food Grains

Inspite of India's development planning since 1951 (agriculture based,
industry oriented and mixed cream), yet, the country has been facing

9 Let us pray that there would not be any nationalization of banks in

India. -- Should there be bank nationalization, the country will run into
a more serious economic disaster.
lo Excessive Government control has resulted in a lack of coordination
between the administration of Bokaro and Bhilai steel plants which, in turn,
has resulted in the retrenchment of top class engineers and other technical
staff (well trained) from Bhilai. Let us note with regret that excessive control
by government has led to frustration.
 The Impact of Rupee Devaluation on Productivity 471

problems after problems especially on the front of agriculture: Prof.

N. V. S o v a n i very well points out "our politics is very relevant to
planning, because planning is also a political process. Our politics
is that of an immature democracy wherein the democratic institutions
have already outrun the democratic instincts and 'mores' of the mass
of voters. Our planning has been geared, by accident or design, to the
general elections, and each Five Year Plan serves for the party in power
as almost its election manifesto. An election manifesto must, by its very
nature, promise everything to everybody and that too without costs.
Benefits without costs and rights without duties are the stock in trade
of the politician ll everywhere, and it is no accident that our plans should
contain quite a bit of this. It has been openly remarked that the plans
would be much more rational and realistic if their formulation and adop-
tion did not coincide with the general elections. ''12
Let us note that the Government has taken control of every aspect
of economic activity in India that the seriousness of the food problem
as, for example, is strictly artificial, has been created by the hoarders
of food grains. - A bad result of frustration on the part of private
enterprise. -- In a state like Maharashtra, we face a very serious food
problem which is man made. A few months ago, the Indian Minister for
Food visited the State of Maharashtra and was taken round some areas
(unfit for cultivation) by the Agriculture Minister of the State. -- It is
human weakness to generalise about something on the basis of a few
isolated cases. -- The Union Food Minister reported (of course, baseless)
in Parliament, "The State of Maharashtra is worst affected by famine,
drought." It was at this stage that the hoarders (especially from Andhra
P r a d e s h) took advantage of the sensational situation, and it was here
that our simple supply and demand approach (figures 1 and 2) provided
the tool for answering the 'after-effects' of lag situations between supply
of and demand for food grains.
The hoarders of rice, sugar (white) began to work on the psychology
of people by taking undue advantage of imperfect market behaviour,
and began to fix prices accordingly. Officially (according to government
rules), there is no mobility of food grains (rice, wheat etc.) from one
state to another beyond 5 kgs; yet, we have large scale movement of
foodgrains from one state to another. Inspire of Government's orders
to compel people to change their food habits, yet people want to remain
free from the bondage of government and, as a result, don't plan to
change their food habits. A South Indian in the State of Maharashtra
does not want to give up eating rice, and a Maharashtrian does not want
to give up eating wheat and Bajra while being in the South or North.
Are people starving to death? No. The hoarders are providing the
people with required grains and cereals only on payment of excessive
prices (say Rs. 2--50 for 1 kg of rice and Rs. 2--00 for 1 kg of sugar).

II Governor G. C. W a l l a c e of the State of Alabama, U . S . A . , defines

a politician as a person who promises too much too soon.
1~ All India Economic Conference (Presidential Address), December, 1965.
Sl*
472 M . R . K . Swamy:

Punishment to Government by Private Enterprise

A fundamental question may be asked before the entire political
planners of this country. -- How many people are capable of paying this
high rate of Rs. 2 - 5 0 per kg of rice? People with a small family and
earning more than 300 to 400 rupees per month can afford to pay such
high prices. - People with moderate means cannot afford to pay such
prices and meet their demands. -- It is interesting to learn that more
children are born in the moderate and lower middle income groups.
Therefore, the sufferers of to-day are middle class and lower middle class
people whose services, as was said earlier, seem to contribute to the
growth of productivity and economic development (in the sense of the
late Professor J. A. S c h u m p e t e r ) . The reason that there is hoarding
by private enterprise, resulting in high prices of food grains whose
demand is inelastic, may be considered as a severe punishment to the
Government for taking dictatorial powers of ruling the country and,
thereby, spoiling the good and productive motives of the private sector.
It is my sincere urge that the Government keeps its eyes open to the
matter of rendering encouragement to the growth of private sector;
otherwise, India wilt continue to become a slave of the aliens which,
certainly, is regrettable. At this point, it seems informative to
make the point on the quality of wheat supplies that we are
receiving from the United States (under PL 480, India AID, Gifts and
so on). -- Based on my personal contacts w i t h leading agriculturists
in the United States and medical doctors and nutrition experts in the
U. S. A., Europe and here, I must report here with profound sorrow that
the wheat supplies that we are getting are so low in quality that are
not fit for human or pig consumption in the U . S . A . ; their nutritive
content is below the prescribed U.S. standards. The common man (The
Government may be aware!) in India does not know about these 'diplo-
matic' aspects, and keeps on purchasing at ration shops. -- This is our
meanness, and this form of economic slavery must be stopped forthwith.
Let us note that the Government cannot come to the rescue of the com-
mon man, and is like a non-swimmer who has 'almost' got drowned in
the middle of a turbulent river (like Kosi river) or an ocean. Therefore,
let us join hands and urge private sector to help India to save from this
very awkard position she is faced with.
As a result of the rupee devaluation, the manufacturers of washing
and bathing soap, whose demand is so inelastic, are facing the serious
problem of high costs. -- The recent rise in prices of soap is attributed
to non-co-operation from the Government. The manufacturers requested
for lieences to import some technical equipment and chemicals which did
not involve the use of foreign exchange of more than 500 rupees a year. --
Their request was not granted. Therefore, the net result is that the
manufacturers are compelled, by circumstances, to increase prices. Simi-
lar cost and price increases are being experienced b y the newspaper indu-
stry {for analytical details, refer to figures 1 and 2).
 The Impact of Rupee Devaluation on Productivity 473

Devaluation and Workers' discontentment

As a result of the enormous rise in prices for small consumers'
items, workers' frustration has crept in. -- There is a big stir in labour-
management relations. -- soon after devaluation, internal prices have
gone up so high that workers' have no other go but to go in for strikes
and lockouts. -- BEL, Bombay taxi-drivers' Union, Film Employees'
Union and Steel workers' strikes and lockouts are instances in case. In
recent months, there have been demands for higher dearness allowance
and more casual leave not only by State Government Employees but
also by Central Government Employees.

Political and Economic Freedom through Private Enterprise

In order for the country to be free not only politically but also
economically, India must be self-reliant -- 'Self-Reliance' can come about
b y encouraging the growth of private sector which encourages competi-
tion 13 it is the competitive aspect which provides the green signal for
increasing productivity which, ultimately, leads to prosperity.
In order to bring about an increase in productivity, let us understand
the concept of capital-labour output ratio which takes into account the use
of investment in material capital and investment in human capital. -
The gestation period between material capital input and output should
tend to get reduced, which is a sign of the investment activity rendering
a stage of self-perpetuation; similarly, the gestation period between tech-
nical labour input and output (getting of training and using it for practi-
cal applications depending upon management decision) tending to shorten
becomes a sign of prosperity -- technical growth becomes self-sustaining.

Conclusion
The reduction in the capital-labour output ratio 14 gives a good indica-
tion of investment growth and of self-reliance. How quick demands are

13 G. C a r a v a I e has brilliantly remarked, "by introducing the more realistic

assmnptions of product differentiation, it can be shown that an oligopolistic
market structure (private sector) is capable of playing a positive part in the
development process on condition that there is a possibility of entry for new
firms. A situation of this type can give rise to competitive pressures which
stimulate oligopolistic flip,as to make use of their greater capacity of innovation
and so effectively counteract the forces which work towards a concentration
and would, if left to free play (public sector) tend to slow down the rate of
introduction of technical process and hence the rate of development in the
system", in: Oligopolio Diffcrcnziato e Processo di Sviluppo. Eeonomia Inter-
nazionale 18 (1965).
t4 M. R. K. S w a m y : Growth Models -- A Reappraisal. Economia Inter-
nazionale 16 (1963), pp. 61--72).-- M. R. K. S w a m y : The Labor Command
Theory of Wage Differentials. Indian Journal of Labour Economics (1966),
n. 3. -- A detailed investigation of the concept of capital-labour output ratio
in relation to productivity is in progress.
474 M.R.K. Swamy: The Impact of Rupee Devaluation on Productivity

met, and how soon the products are produced depend upon the growth of
productivity. Self-reliance can be brought about by encouraging private
sector which, knows when, where, and how to reward merit where merit
is due. In order to increase net national product of the country, let us join
hands and encourage methods to increase productivity b y co-ordination
of techniques and their use.

Address of author: Prof. Dr. M. R. Kumara Swamy, Ph.D., 766A,

P. Y. C. Road, Poona-4. India.