Introduction || Planning Commission
Chapter-1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || Conclusion || Appendix A || Appendix B || Appendix C || Glossary

Chapter 7:
PRICE POLICY FOR THE THIRD PLAN

Price policy in a developing economy has to concentrate on two main objectives : (a) it must ensure that the movements of relative prices accord with the priorities and targets that have been set in the Plan; and (b) it must prevent any considerable rise in prices of essential goods that enter into the consumption of low income groups. Both these aspects were stressed in the First and the Second Plans, and various measures were taken in the course of these Plans to correct or moderate undesirable trends. Prices, however, fluctuated widely in the First Plan period and they have shown a rising trend through the Second Plan period. At the commencement of the Third Plan, the levels of wholesale prices and cost-of-living are already high and it is essential to ensure that there is no accentuation of inflationary pressures in the course of the Third Plan and that the levels of living of the more vulnerable classes in society are safeguarded.

Prices In The First Plan

2. Table 1 on the following page indicates the price trends over the First Plan period. The index of wholesale prices at the end of the Plan was about 22 per cent lower than in March 1951. It must be borne in mind, however, that this is a somewhat misleading comparison as inflationary pressures were at their height in 1951 because of the Korean boom. As compared to 1950, the fall in the general index of prices was lower—about 8 per cent; prices of food articles fell by about 14 per cent; some of the other groups such as fuel, power, light and lubricants and manufactures showed a rise. With the end of the Korean war and following the dis-inflationary fiscal and monetary measures taken by Government in the course of 1951, prices recorded a marked fall, the index coming down from 125.2 in March 1951 to 99.9 in March 1952. The index was more or less steady around this level for the next two years. The bumper crop of 1953-54 resulted in a sharp fall in prices, especially in the prices of foodgrains;the index for food articles came down from 102.2 in March 1953 to 98.6 a year later and further to 82.9 in March 1955. It was in this situation that the ceiling for Plan outlays was raised and some purchases of foodgrains were made on Government account. By July 1955, a distinctly upward trend in prices emereed. This trend continued for the rest of the Plan period. The index of wholesale prices in March 1956 was 98.1, i.e., only slightly below the 1952-53 level.

Table: Index number of wholesale prices : 1950—1956 (base : 1952-53)
100 (March : average of weeks)

3. The all-India working class cost-of-livin" index (1949=100) was 103 m March 1951. It varied considerably from year to year declining to a level of 94 in March, 1955, but rising again to 100 by the end of the Plan period. Over the five years, the index showed a fall of about 3 per cent, but an upward trend had already started before the First Plan ended, the rise in the index in the twelve months ending March, 1951, being more than 6 per cent.

4. While it is true that the level of prices at the commencement of the First Plan was unduly high and a corrective fall was necessary, there is little doubt that the decline in foodgrains prices that occurred about the middle of the Plan period was excessive and harmful. This downward trend could not be arrested in time because there was considerable doubt for some time as to the appropriate level at which Government ought to buy.

Prices In The Second Plan

5. The Second Plan has been characterised by a persistent upward trend in prices though, of course, part of the rise in prices was a corrective to the earlier decline. Over the five-year period, the rise in the general index of wholesale prices has been about 30 per cent; food articles as a group have gone up by some 27 per cent; industrial raw materials by 45 percent; manufacturers by over 25 per cent. Table 2 on the following page indicates these trends.

6. It will be observed that the index for cereals which was below 100 in March, 1956 •rose sharply over the next three years; pulses also showed a similar trend. The index for cereals was back to 100 in March, 1961, that for pulses was 93. It is the rise in the other constituents of 'food articles' that accounts for the continued uptrend in the index for th?t group. Relative shortage of foodgrains was the major factor accounting for price rises in the early stages of the Second Plan. In the later parts of the Plan period, the leading factor in the upward trend of prices has been shortage of agricultural raw materials. Of the rise of 14 per cent in the index of wholesale prices since March 1959, some two-fifths is attributable to the rise in raw material prices, and another two-fifths was accounted for by the rise in the prices of manufactured goods—partly in consequence of the rise in raw material prices.

Table 2 : Index number of wholesale prices : 1956—61 (base : 1952-53-100)

7. The major explanation of the continued uptrend in wholesale prices in the Second Plan period is undoubtedly the rising pressure of demand resulting from the growth of population and of money incomes. Supply factors have also played their part from time to time. In 1957-58, the production of foodgrains was 6 million tons less than in the previous year. In 1959-60, again, foodgrains production was about 4 million tons less than in the previous year. The output of cotton in that year was 18 per cent below that in the previous year; fhat of jute was 12 per cent lower and that of oilseeds was short by about 8 per cent. These shortfalls and fluctuations in agricultural production have reacted adversely on the price level as a whole. The level of foodgrains prices at the end of the Second Plan cannot be considered too high, but it has to be recognised that there have been large fluctuations in these prices in the course of the Second Plan period; in fact, if one compares the average level of cereal prices in 1960-61 with that in 1955-56, the rise was as large as 37 per cent. The relative stability of foodgrains prices latterly has been due largely to P. L. 480 imports.

8. As in the case of wholesale prices, the trend of the working class cost-of-living index was upward all through the Second Plan period. The index (1949=100) rose from 100 at the commencement of the Second Plan to 124 by the close of the Plan. In the earlier part of the Plan, the rise in the index was mainly because of the increase in foodgrains prices. The relative;stability in these prices in the last two years has not, however, kept the cost-of-living from going up. This is because items other than foodgrains in the food group and several other elements in the cost-of-living have recorded an increase.

9. The experience of the Second Plan period reinforces the point that given a substantial investment programme, the degree to which prices can be kept relatively steady depends vitally on how far agricultural production, that is, the production of food as well as raw materials, can be increased. Industry, mining and transport have to develop rapidly if an adequate rate of growth of the economy is to be achieved. But, all this development must rest on the foundation of a more efficient and progressive agriculture. It follows that since agricultural output is subject to the vagaries of the monsoon. a programme of rapid industrialisation can be carried through without creating economic instability only if there are adequate stocks with Government to meet these periodical shortages. Moreover, agricultural prices are subject to large seasonal and regional variations, which are often aggravated by speculative hoarding. These variations have also to be moderated through judicious purchases and sales by Government.

Outlook For The Third Plan

10. The question now is as to the outlook in respect of prices for the Third Plan. Clearly, the pull of demand factors in a growing economy must necessarily be upward. The Plan envisages a step-up in investment from the current level of 11 per cent to about 14 per cent by the end of the five year period. This will generate money incomes against which there must be an additional supply of goods. The increased volume of investment will have to be financed by fiscal measures which will involve selective price rises. The Plan postulates a large increase in savings. External assistance of a substantial order is envisaged, but it will be 'essential to secure an increase in domestic savings from the present level of 8.5 per cent to about 11.5 per cent in the course of the next five years. This' cannot be achieved if all types of consumer demands have to be met: less essential consumption will have to be restrained so as to release resources for the investment programmes in the Plan. Moreover, the situation in respect of foreign exchange reserves is much more difficult than in the Second Plan. A part of the inflationary nrewirf"; generated bv the growth of investment in the Second Plan was neutralised by the drawing down of foreign exchange reserves. This moderating factor is not available for the Third Plan. In fact. the Third Plan calls for the fullest effort to raise exports. This would tend to raise the prices of exportable commodities for the domestic consumer.

11. As to the supply side, the Plan targets for production of the basic essentials of consumption and of raw materials have been fixed on a careful examination of the likely requirements both for domestic consumption and for exports. The output of foodgrains is to be increased by over 30 per cent so as not only to meet the increase in demand because of the growth of population and incomes but also to cover the present deficit which is being met through imports. The increases in the production of rice and wheat have been planned at a higher rate to take into account the tendency for substituting superior for inferior grains as incomes rise. Production of cotton is planned to increase by 37 per cent, that of oilseeds by 38 per cent and that of sugar by 25 per cent. Provision has been made for an increase in per capita consumption of cloth from 15.5 yards in 1960-61 to 17.2 yards in 1965-66. The output of cloth from mills, powerloems and handlooms is scheduled to go up by 25 per cent. The increase in national income that is envisaged during the Plan period leaves scope for moderate increases in per capita consump'ion despite the proposed step-up in investment. The fact that at the beginning of the Third Plan Government have in hand about 2.8 million tons of foodgrains and that about 14.4 million (metric) tons of wheat are expected in the next few years under P. L. 480 gives reasombl assurance that the price of wheat—and to an extent of food grains as a group—will not rise significantly in the next few years if the monsoons do not misbehave seriously.

12. The production potential of the country has been strengthened considerably in the last few years, both in agriculture and in industry. The Third Plan envisages a substantial increase in the availability of fertilisers. The delays in utilisation of irrigation facilities are bsing reduced. Industrial production has risen impressively in recent years and, although difficulties in respect of imported raw materials and components will continue, the outlook for the Plan period is, on the whole, promising. The scheme for mobilising the financial resources required for the Plan proposes deficit financing on a strictly limited scale; every effort will be made to restrict the increase in money supply both on account of Government and of the private sector to the genuine requirements of production. Thus, the Plan has been formulated with due regard to the need for minimising inflationary pressures and for keeping a balance between the growth of essential demands and the availability of supplies to match them.

13. These balances and safeguards notwithstanding. (he possibilities of significant—and even disturbing—price rises cannot be entirely eliminated. Firstly, there is the usual un-cer-taintv in regard to montoons. A five per cent shortfall in agrici^tur?¹! output in a single year can red'ice the marketable surpluses substantially and raise prices more than proportionately. Sscoidlv. the various restraints on consumption implicit in the Plan may not always operate to the full extent, so that a situation of excess demands may well persist over a part of the Plan period. Thirdly, while the Plan envisages a certain balance between the rates of growth in various sectors, some unbalance is almost certain to appear from time to time; investments and outputs in various lines cannot, in actual practice, be phased out with precision; there might well be 'lags' in the system at various stages.

14. There is, then, no doubt that it will be necessary during the Third Plan to keep a close watch on prices, especially on prices of essential commodities, and to be prepared in advance with a strategy for corrective action before difficulties aciually become acute. By and large, what has to be guarded against is an upsurge of inflationary pressures, annough a situation of relative abundance in respect of some commodities with consequential price falls can emerge . from time to time. Measures to counteract both types of trends have to be kept in readiness. bven apart from any persistent price rises or lads, large seasonal fluctuations and regional price disparities will call for corrective action. Stable and reasonable prices for what the farmer produces are likely to provide him a better incentive than high but fluctuating and uncertain prices.

Scope And Limits Of Price Policy

15. It must be stressed that price policy has to be viewed as one aspect of overall economic policy; the question is not merely what can or ought to be done in respect of particular prices. The level and structure of prices are related to a number of basic economic decisions some of which are taken by Government, but others rest with the producers, consumers and investors who are widely scattered and act in terms of the prospects of economic gain to themselves. A plan tries to bring these related decisions into a common focus, but there are limits to which the course of prices can be altered in the short run. Each major policy decision, such as what scale of investment to undertake, what priority to give to short-term quick-maturing investments, the choice between alternative modes of raising the resources required, raising or lowering of export quotas—all these carry with them certain implicit decisions as to the course of prices. Given these decisions, it must be recognised that the scope for altering the structure of prices is by no means unlimited.

16. Certain upward pressures on prices are implicit in development and they have to be accepted. The process of stepping up investment involves creation of money incomes ahead of the availability of goods and services. Investment adds to real national product after a time, and certain types of investment take a longer time to mature than certain others. The larger the investment effort, the greater is the upward pressure on prices. Similarly, the more long-maturing the projects undertaken, the greater is the resultant strain on the system. The substantial transfer of manpower and other resources to new uses involves payment of larger monetary rewards. This also is a significant inflationary factor.

17. There are, on the other hand, factors that tend to moderate these upward pressures. To the extent that there are unused resources that can be drawn upon and in so far as in certain sectors such as agriculture, an increase in production could be secured quickly wiih comparatively small investment, the expansionary pressures just mentioned may be sotiened. inen, again, some of the investment made earlier add to current output, and as the level of technology and organisational efiiciency improve, relatively large increases in output could be secured whhout a proportionate increase in costs. Factors such as these have, in favourable circumstances, made it possible for certain countries to achieve hign rates of growth with a fair degree of price stability. Given the requisite production and saving effort backed by an appropriate price policy, the expansionary pressures generated by development can successfully be controlled.

18. The balance between the expansionary and the moderating factors mentioned above tends, however, to be shifting and uncertain. An underdeveloped economy has to step up investments continually over a period of years and has to convert a growing proportion of unskilled rural labour into skilled workers and technicians. Various bottlenecks arise in this process of adaptation. Since the real resources needed have to be mobilised through monetary incentives, and a fairly high degree of profitability secured for those sectors of the economy which have to be expanded more rapidly, it is essential to be prepared for a moderate rise in the price level, while directing every effort possible towards preventing a rise in the prices of essential commodities.

19. And yet, the dangers of continued or excessive price rises are obvious. If the financial outlays in the Plan are realised only at higher prices, the real content of the Plan gets correspondingly reduced. An inflationary situation is not conducive to the most efficient use of resources. It distorts relative prices and tends to move resources away from the uses that have higher priority from a social point of view. The fixed income earners, among whom are some of the most vulnerable classes in society, cannot be expected to put up too long with an erosion of their real standard of living, and yet, if money incomes are increased over a wide sector, the result can only be to give a further twist to the inflationary spiral. The problem, then, is one of drawing the right line between too much intervention and too little, and Of devising appropriate techniques of controls and regulation at certain vital points in the system.

Constituents Of Price Policy

20. A major constituent of price policy in this situation is fiscal and monetary discipline. Fiscal policy must be directed to mopping up the excess purchasing power which tends to push up demands above the level of available supplies. The quantum of taxation must, in other words, be adequate to keep down consumption to the limits provided for in the Plan. The requirements of the public sector investment programme must be met by the transfer of real resources from the public rather than by creation of fresh purchasing power. In other words, fiscal policy in all its aspects must aim at restraining consumption and mobilising saving more effectively.

21. A word may be said in this context regarding the price policy of public enterprises. These enterprises have an important role in enlarging public savings. They must, therefore, operate at a profit and maintain the high standard of efficiency required for this purpose. Their price policy should be such as would secure an adequate return on the investment made from public funds.

22. Monetary policy has to go hand in hand with fiscal policy. Just as the latter has to avoid the creation of excess purchasing power through government operations, the former has to regulate the pace of credit creation through banks. The credit needs of a developing economy are continually on the increase and have to be provided for. Care must, however, be taken to see that the scale and pace of developments in the private sector do not go out of line with those envisaged in the Plan and thereby exert undue pressure on the limited resources available for investment. Speculative holding of commodities and accumulation of inventories need particularly to be discouraged, The policy of selective credit control followed hitherto by the Reserve Bank has latterly been supplemented by measures designed to restrict aggregate credit creation by the banks. Interest rates have gone up, and although the bank rate has not been raised, a system of penal rates on borrowings by banks beyond defined limits has been instituted by the Reserve Bank. Details of monetary management apart, the fact has to be recognised that capital in India is very scarce relatively to the demands for it, and that in the long run interest of the economy, the price to be paid for it should, save in special cases, reflect real costs, this is important both for assessing the priority to be accorded to various projects in the Plan and for determining the prices of the products or services emanating from these projects.

23. Commercial policy can also be used to an extent for overcoming domestic shortages, but since the need for several years to come is to economise on imports and to increase exports, the pressure will continually be towards an increase in domestic prices. In fact, considering the need to enlarge foreign exchange earnings, surpluses from domestic production will have to be created even at the cost of raising domestic prices. In the foreign exchange situation that the country is facing, if the choice is between an enlargement of foreign exchange earnings and a rise in the prices to. be paid by the domestic consumer, the former must have a decided preference.

24. Without adequate fiscal and monetary discipline, other regulatory measures cannot have the desired effect. But, fiscal and monetary policies by themselves may also not suffice to secure the right relationship between various prices or to prevent undue hardship to low and fixed income groups. It may be necessary, then, to have physical allocations and direct controls in certain sectors. It will be agreed, tor instance, that so long as steel is scarce it should be distributed between competing uses on the basis of agreed priorities. It may, of course, be essential to raise the price of any commodity that is scarce, but it may not be desirable from an overall point of view to let the highest bidder get the bulk of the available supplies leaving the rest to their own devices. If, similarly, there is a shortage of an essential drug, control of prices and distribution at a fair price to genuine users would be the appropriate course of action to adopt. The same reasoning applies to essentials of life like food or cloth. The prices of what may be called basic essentials must be held reasonably stable: in regard to commodities that are "less essential" or could be classed as comforts or luxuries, a rise in prices may have to be tolerated. In the case of comforts and luxuries, in fact, an important factor in policy is the need to raise more resources; a rise in their prices does not affect the common man. The techniques of price regulation may vary from commodity to commodity; in some cases an increase in production may be the only way to secure reasonable levels of prices. In other cases, buffer stocks, reorganisation of distribution arrangements and some direct controls may be inescapable.

Coverage of Controls

25. Government have powers to control prices and make allocations in respect of several commodities. Steel, cement, raw cotton, sugar and coal are in this category. Fertiliser prices are regulated through the Central Fertiliser Pool. Stabilisation of raw jute prices through regulated purchases by the manufacturing interests is also envisaged. Both under the Essential Commodities Act and under the Industrial Development and Regulation Act, the prices and distribution of a number of commodities are subject to control. Government can also adjust the rates of excise duty from time to time on all excisable articles so as to alter suitably the relationship between particular prices. At present, these adjustments can be made only when the budget is being presented. It would be desirable to examine whether in the interest of flexibility, Government should take powers to alter excise duties suitably within defined limits in the course of the year.

26. The coverage of controls on items like these and the extent to which prices may have to be adjusted upwards or downwards will have to be determined in the light of the trends in production and demand as they arise from time 10 time. In the case oi sugar, the problem at present is one of dealing with a surplus, Ii may oe possible to export a part of this surplus. But since the domestic cost of production of sugar is higher than the world prices, sales abroad will have to be subsidised. Over a period, the internal demand for sugar will steadily rise, and the aim of policy should be to improve yields rather than to increase the area under cane cultivation at the cost of other crops, in regard to cotton, from the point of view oi the consumer, lower prices of cloth would bs desirable, but it has to be borne in mind that the shortage of raw cotton has to be made good by imports which cost foreign exchange. In a Situation like this, a price incentive for increased production could justifiably be preferred. In the case of oilseeds, the need is to export more at the same time as domestic demand ior oils is rising rapidly. The need here is to regulate prices in the interest primarily of exports. Prices for commercial crops will need to be regulated on a consideration of all these aspects.

27. The question of appropriate price parities links up with the issue whether the grower always gets the benefit of the prices that the consumer pays, or whether his gains are intercepted by middlemen. Whatever the normal spreads between these prices, there is no doubt that the margin between producer's price and the consumer's price tends to go up in periods of shortage. The same holds for imported commodities for which demand is in excess of the available supplies. The State Trading Corporation has sought to reduce these margins by importing some commodities in bulk and selling them to actual users. To the extent possible middlemen's margins either in respect of imported commodities or in respect of domestically produced ones should be reduced by means of trading through governmental or cooperative agencies.

Open Market Operations In Foodgrains

28. In an economy like ours where a substantial proportion of the expenditure incurred by families in the low income ranges is on food-grains, reasonable stability of foodgrains prices is of vital importance. The experience in this field over the last decade and more has shown clearly that this is a field in which neither complete control nor complete decontrol are feasible. Government must always be in a position to regulate effectively the course of foodgrains prices. In regard to wheat, the supplies in hand and the imports expected over the next three years offer reasonable assurance of price stability except perhaps in the event of serious crop failure. The situation in regard to rice is more difficult as it will not be possible, in the event of shortage, to import adequate quantities of rice within the available foreign exchange resources. The position in regard to other cereals and pulses has always been highly variable.

29. The producer of foodgrains must get a reasonable return. The farmer, in other words, s-hould be assured that the prices of foodgrains and the other commodities that he produces will not be allowed to fall be'.ow a reasonable minimum. The Third Five Year Plan postulates extended use of fertilisers and adoption of improved practices by the farmer. The farmer should have the necessary incentive to make these investments and to put in a larger effort. A policy designed to prevent sharp fluctuations in prices and to guarantee a certain minimum level is essential in the interest of increased production. It is important also that the appropriate measures or policies should be enunciated and announced well in time to ensure that the benefit accrues to the farmer. The other objective, no less essential, is to safeguard the interest of the consumer, and, as has been stated in earlier paragraphs, it is particularly necessary to ensure that the prices of essential commodities such as foodgrains do not rise excessively. These considerations indicate only the broad lines of policy. The key to stabilisation is the building up of buffer stocks and operating on them through continuous purchase and sales over a wide front. Since prices vary between different parts of the country, there may be purchasing operations in some parts and selling operations hi others. A major difficulty in the past has been inadequate storage facilities with Government. It is essential as part of long-range food policy that the storage and warehousing facilities, under Government's control, should be rapidly expanded. It should be known that throughout the Plan period Government would buy if prices of foodgrains tended to sag and would sell if they tended to rise. While imports have assisted and will assist for some time more in adding to the stocks with Government, it will be essential more and more to add to these stocks by domestic purchases, as production increases. Similarly, whenever or wherever in the country prices of foodgrains tend to rise, Government should be prepared to sell adequate quantities from its stocks. These open market operations need to be undertaken flexibly and at a large number of places, so that their impact is felt directly at the points where it is needed.

30. Where and to what extent zoning arrangements will be necessary will have to be determined in the light of practical considerations. Similarly, whether the purchase and sale operations should be undertaken directly by the Central Government or through the State Governments is a question on which decisions will need to be taken on pragmatic grounds. What must be assured is that Government's ability to influence the course of prices is steadily increased and this requires continuous operations over a wide front by way of purchase and sale. The level of stocks with Government from this point of view might well have to be about five million tons, A network of cooperative and governmental agencies close to the farmer, licensing and regulation of wholesale trade, extension of State trading in suitable directions and a considerable sharing by Government and cooperatives in distribution arrangements at retail stage are essential for the success of purchase and sale operations for stabilising prices and correcting seasonal and regional variations. Regulation and control of prices are in this view an aspect of the problem of institutional changes—that is, a strengthening of public and cooperative as against private agencies—that must necessarily accompany developmental planning.

31. To conclude : the Plan provides for adequate increases in the output of essential commodities to psrmit reasonable increase in essential consumption. The primary task is to achieve these targets. Deficiencies in this respect can be overcome only with difficulty. Fiscal and monetary policies have continually to be orientated towards restraint in consumption and maximisation of savings. The role of direct regulation and controls is essentially to correct imbalance in selected sectors and, for this purpose, buffer stocks and market operations are vital. These operations have to be directed towards keeping price fluctuations in respect of foodgrains and other basic essentials within denned maximum and minimum limits. Price rigidity is incompatible with development and some prices cannot but rise. The object must be to regulate within denned limits the prices of basic essentials. Price regulation involves action at various points. The necessary incentives to larger production have to be preserved. It is, therefore, envisaged that Government would set up and promote the necessary cooperative and State agencies for purchase and sale of foodgrains" at appropriate stages so as to strengthen its power to influence the course of prices and to prevent anti-social activities like hoarding and profiteering from getting the upper hand.