Devaluation of The Rupee

1. 2 6 t h N o v e m b e r 1949 E C O N O M I C W E E K L Y
Devaluation of The Rupee
A. K. Das Gupta,
University Professor of Economics, Benares
EVALUATION of t h e rupee
has created a s t i r in the c o u n -
t r y a n d o u r people seem t o h a v e
b e e n b e w i l d e r e d b y the happen-
i n g . A n y b o d y w h o has h a d a n
occasion to address a p u b l i c meet-
i n g on the issue k n o w s to his sur-
prise a n d d e l i g h t w h a t t r e m e n -
dous a m o u n t o f interest a n d
c u r i o s i t y t h e m a t t e r has created
i n o u r people. A n d y e t the per-
p l e x i t y of the people is being
r a t h e r intensified, one fears, by
a l l k i n d s o f c o n f l i c t i n g statements
t h a t h a v e appeared i n the press
since t h e event, most of w h i c h ,
e v e n t h o u g h n o t a l w a y s p o l i t i c a l
a n d hence interested, offer j u s t a
p a r t i a l p i c t u r e . I t i s good, a t this
j u n c t u r e , t h a t t w o o f o u r ablest
economists s h o u l d h a v e come out
w i t h a clear, concese a n d sober
account of the circumstances that
h a v e l e d t o this a d m i t t e d l y u n -
palatable event a n d t h e n a t u r e
a n d i m p l i c a t i o n s o f not o n l y
w h a t has a c t u a l l y happened b u t
also of a l t e r n a t i v e m e t h o d s t h a t
m i g h t h a v e been adopted t o m e e t
the situation. T h e t w o m o n o -
graphs erf D r . S. K. M u r a n j a n a n d
D r . B . N . G a n g u l i p r o v i d e , s o t o
say, an analysis of the pros a n d
cons of d e v a l u a t i o n on a t r u l y
scientific level.*
A l t h o u g h i n the f i n a l appraisal
of the p o l i c y of d e v a l u a t i o n the
t w o w r i t e r s are n o t q u i t e i n
agreement, t h e i r a n a l y t i c a l p r o -
cedure is the same; b o t h consider
t h e m a t t e r , as t h e y should, as
t r u e economists, against the back-
g r o u n d o f i n t e r n a t i o n a l balance
o f accounts. I t i s i m p o r t a n t t o
m e n t i o n this because t h e r e has
e v e n been a tendency in o u r
c o u n t r y — a n d the present case is
no e x c e p t i o n to consider the ex-
change p r o b l e m f r o m the p o i n t o f
v i e w o f p a r t i c u l a r interests,—
emphasis b e i n g g i v e n either t o
e x p o r t or i m p o r t prices or to cost
o f s e r v i c i n g e x t e r n a l debt. I t i s
far too often forgotten t h a t u n d e r
a system of m a n a g e d c u r r e n c y
a n d v a r i a b l e exchange, deprecia-
t i o n or appreciation is just one of
these weapons in the hands of the
c u r r e n c y a u t h o r i t y for securing
e x t e r n a l e q u i l i b r i u m , and its effi-
cacy as also the occasion for it to
b e j u d g e d i n the l i g h t o f the
general s i t u a t i o n a n d not i n t e r m s
o f the p a r t i c u l a r benefit o r i n -
j u r y done t o this o r t h a t g r o u p .
O n e this is recognised, the rest of
the p r o b l e m becomes s i m p l e or
at least amenable to a n a l y t i c a l
solution. N o b o d y w i l l d e n y that
d e v a l u a t i o n raises t h e cost of i m -
p o r t i n t e r m s o f h o m e c u r r e n c y
a n d that it tends to l o w e r the
p r i c e o f exports i n t e r m s o f the
f o r e i g n c u r r e n c y . A l l o f w h i c h
means indeed that the c o u n t r y
d e v a l u i n g its c u r r e n c y has its
'barter t e r m s o f trade' t u r n i n g
against i t . This, no doubt, is an
u n f a v o u r a b l e situation. B u t i f
circumstances w a r r a n t this situa-
t i o n , it is idle n o t to face up to i t .
A n a r t i f i c i a l l y h i g h b a r t e r terms
of trade, a l t h o u g h a p p a r e n t l y a
good t h i n g to pursue, cannot be
m a i n t a i n e d b y any c o u n t r y for
any l e n g t h of t i m e if it is to con-
t i n u e to be a m e m b e r of an inter-
n a t i o n a l economy. T h i s is w h a t is
so often i g n o r e d in the c o n t e x t of
the present d e v a l u a t i o n . Y o u
inflate y o u r c u r r e n c y , b r i n g d o w n
its i n t e r n a l v a l u e n o t o n l y i n t e r m s
o f goods b u t also i n t e r m s o f
l a b o u r ; y o u raise, t h a t is to say,
y o u r i n t e r n a l p r i c e a n d cost
s t r u c t u r e , a n d y e t y o u expect
others to b u y y o u r goods at these
h i g h rates i n quantities large
e n o u g h to offset the 'cheap' i m -
p o r t s t h a t y o u w a n t t o have.
W e l l , t h a t w a y lies f r u s t r a t i o n .
A n d t h a t i s w h a t a n a t t e m p t t o
m a i n t a i n a n ' o v e r - v a l u e d ' c u r -
r e n c y leads to. Y o u c o u l d have
* 1 . Devaluation of the Rupee. By B. N. G a n g u l i ( R a n j i t P r i n t e r s
& Publishers, D e l h i , 1949, p p . 46). P r i c e O n e Rupee.
2. From Hyper-inflation to Devaluation. By S. K. M u r a n j a n
( H i n d K i t a b s , B o m b a y , 1949, p p . 100), P r i c e R s . 2-8-0.
i t i n t i m e s o f w a r emergency w h e n
the A l l i e d d e m a n d for y o u r goods
was a b n o r m a l l y h i g h . Y o u h a d
t h e n a n e x p o r t s u r p l u s i n spite o f
r i s i n g prices. B u t i n t h e n o r m a l
course o f t h i n g s i t m u s t b r e a k
d o w n , a s i t has b r o k e n d o w n .
W h a t are the facts of t h e situa-
tion? R e l a t i v e l y t o the p r e - w a r
year, 1939, o u r wholesale p r i c e
i n d e x has gone up by a b o u t 300
per cent a n d the cost of l i v i n g
i n d e x in c e r t a i n centres, e.g.,
K a n p u r , has gone u p b y m o r e
t h a n 400 p e r cent. Wage i n d e x
i s d i f f i c u l t t o estimate i n o u r
c o u n t r y ; w e have h a r d l y a n y -
t h i n g l i k e a wage s t r u c t u r e a n d
the m o v e m e n t s in wages since
the w a r seem to have been e r r a -
tic. Y e t a n o v e r - a l l c a l c u l a t i o n
w o u l d s u r e l y lead to a figure of
n o t less t h a n 260. A l l these are
m u c h too h i g h r e l a t i v e l y t o w h a t
i s o b t a i n i n g i n most o f the c o u n -
tries w i t h w h i c h w e have t r a d e
relations. T h e result, by no
means unexpected, is that, in
spite of i m p o r t controls, we are
h a v i n g an adverse balance of
t r a d e o f a n u n c o m f o r t a b l e m a g n i -
tude a n d o u r s t e r l i n g balances—
the reserve, i.e., to say, u p o n
w h i c h w e c o u l d f a l l back f o r
f i n a n c i n g t h e i m p o r t s u r p l u s —
have d w i n d l e d i n the course o f
the last t w o years or so to a b o u t
o n e - t h i r d the p e a k f i g u r e .
I n the circumstances, n o t o n l y
the so-called p u r c h a s i n g p o w e r
p a r i t y b u t also wage p a r i t y — a n d
i t i s this l a t t e r o n w h i c h the p r e -
sent r e v i e w e r w o u l d place m o r e
reliance in these days of p r i c e
controls e v e r y w h e r e — w o u l d c a l l
f o r a d e v a l u a t i o n of the rupee.
B u t o n t o p o f a l l this, s t e r l i n g
itself has been d e v a l u e d a n d
most o f the countries w i t h i n the
so-called s t e r l i n g area have f o l -
l o w e d suit. A s i t is, therefore, i t
is just a p a r t i a l d e v a l u a t i o n t h a t
o u r rupee has been subjected to.
O b v i o u s l y in the face of s t e r l i n g
d e v a l u a t i o n , the maintenance of
status quo in respect of r u p e e -
d o l l a r r a t i o w o u l d accentuate o u r
e x p o r t difficulties s t i l l f u r t h e r
and w e w o u l d b e saddled w i t h the
task of c o n t r o l l i n g a s t i l l stronger
tendency to an u n f a v o u r a b l e trade
balance.
I n g e n e r a l these difficulties are
recognised b y b o t h the authors.
11
D

2. ECONOMIC WEEKLY 26th November, 1949
But whereas D r . G a n g u l i accepts
the present devaluation w i t h o u t
reservation and rules' o u t other
alternative courses. D r . M u r a p j a n
does not. I n particular, D r .
M u r a n j a n seems to be sceptical
about the efficacy of devaluation
in mitigating the balance of trade
difficulties in the I n d i a n context
on the g r o u n d of l o w elasticity of
our exports a n d imports. " I t
appears reasonable to conclude,''
he says, "that devaluation, w h e -
ther against the pound or the
dollar, must in the context of pre-
sent circumstances reduce o u r
foreign exchange f r o m o u r ex-
ports. T h e relief to be expected
i n o u r i m p o r t liabilities appears
v e r y d o u b t f u l and m a y t u r n on
to be illusory.'' (p. 73). He is
also afraid that devaluation w i l l
prevent the m u c h needed fall in
the i n t e r n a l price level, and at the
same time, by m a k i n g the i m p o r t
of capital goods costlier, w i l l re-
sult in a ' s l o w i n g d o w n of o u r i n -
d u s t r i a l recovery.' He thus sug-
gests w h a t he calls a ' m i d d l e
way',—15 per cent devaluation of
the rupee in terms of dollar and
a corresponding appreciation in
terms of sterling,—or, better s t i l l ,
a system of ' m u l t i p l e rates of ex-
change' by w a y of a d i s c r i m i n a -
t i o n not as between nations, as the
t e r m t r a d i t i o n a l l y stands for, b u t
as between the commodities ex-
p o r t e d and i m p o r t e d according to
their importance and degrees of
elast city. F u r t h e r , D r . M u r a n -
j a n is more concerned over the
decision of Pakistan and C e y l o n
w i t h w h o m India's trade interests
are v i t a l l y linked. W i t h C e y l o n
on o u r side we could have a
stronger b a r g a n i n g power in res-
pect of the e x p o r t of tea, and co-
operation w i t h P a k i s t a n w o u l d
ease the i m p o r t of r a w materials
essential for our j u t e and cotton
industr'es. A gentle, yet provoca-
tive, suggestion is thus t h r o w n ,
pleading for the f o r m a t i o n of
'rupee bloe' w i t h those and some
other A s i a n countries as members.
D r . G a n g u l i has none of these mis-
givings. He is more sanguine
about the effectiveness of deva-
l u a t i o n in n a r r o w i n g the dollar
gap and the range of o u r dis-
e q u i l i b r i u m . He does not dis-
miss the possibility of an expan-
sionary effect of devaluation, a n d
yet he w o u l d rather have domes-
t i o prices c o n t r o l l e d b y i n t e r n a l ,
independent measures. A b o v e a l l
he w o u l d w a n t to see the I n t e r -
national M o n e t a r y F u n d f u n c t i o n
smoothly and w i t h as l i t t l e h i n d -
rance f r o m g r o u p interests as
possible. Thus, if the r e v i e w e r
reads h i m aright, he w o u l d leave
Pakistan, for example, to her fate
in case she is bent on c o n t i n u i n g
w i t h her o v e r v a l u e d currency.
In the general appraisal of the
policy of devaluation, p a r t i c u l a r l y
in r e g a r d to this last aspect, t h e
present r e v i e w e r finds himself
m o r e on the side of D r . G a n g u i i .
W h i l e he agrees t h a t Pakistan's
non-devaluation policy has creat-
ed certain difficulties, for the
t i m e being at any rate, by r o b b i n g
a part of the benefit t h r o u g h de-
v a l u a t i o n f r o m our j u t e i n d u s t r y ,
he w o u l d consider the present
impasse a passing phase, a n d he
is v e r y m u c h afraid that the for-
m a t i o n of an independent cur-
rency bloc w i t h countries w h i c h
are not yet affiliated to t h e I n t e r -
national M o n e t a r y F u n d w o u l d
be a retrograde step and m i g h t be
fraught w i t h dangerous conse-
qutnees. We are just feeling our
w a y towards a system of inter-
national c u r r e n c y management
and any step b a c k w a r d m u s t be
v i e w e d w i t h the gravest concern.
One should surely w o n d e r h o w
D r . M u r a n j a n , o f a l l persons, w h o
has the c u r r e n c y experiences of
the inter-war period Still so v i v i d
in his m e m o r y c o u l d nave lent his
a u t h o r i t y , even if c u r s o r i l y , to
any parochial idea such as this.
Pakistan cannot afford long to
bear the strain of an artificial rate
such as she is h a v i n g today, and
if she chooses to m a i n t a i n her cur-
rency independence, she does it
at h e r o w n p e r i l . J u t e prices
have already come d o w n . T h e
proposed subsidy to j u t e g r o w e r s
w o u l d be a d r a i n on her p u b l i c
f i n a n c e . T h e e x p o r t surplus w h i c h
she is h a v i n g today is artificial
and t e m p o r a r y and m u s t have a
reversal once controls are w i t h -
d r a w n , and controls themselves
are a tax on citizens and a loss
to the nation. T h e o n l y alterna-
tive to devaluation, if a p e r m a n e n t
policy of exchange c o n t r o l is
r u l e d out, w o u l d be a tremendous
degree of deflation,—a deflation
w h i c h , in the absence of a strong
foreign exchange reserve, has to
b e effected t h r o u g h i n t e r n a l
m o n e t a r y measures. N o t q u i t e a
comfortable procedure, a n d the
sooner its weakness is realised the
better for her economy.
T h e r e v i e w e r is one of those
w h o have held the v i e w that, i n -
dependently of sterling, there was
a strong case for the devaluation
of the rupee and w h o believe that
even in the face of sterling deva-
l u a t i o n , a s l i g h t l y d o w n w a r d r e v i -
sion of t h e rupee-sterling rate is
s t i l l called for; it is here that he
goes a l i t t l e b e y o n d D r . G a n g u l i
w h o w o u l d perhaps w a i t and see
h o w sterling behaves so far as its
i n t e r n a l value is concerned. T h e
caution is understandable, and
y e t it appears impossible that
the B r i t i s h price-and-wage index
should come up to our level u n d e r
any circumstances. T h e r e is i n -
deed a scope a n d a necessity for
a r e d u c t i o n of price level in I n d i a ,
b u t the wage index must set the
m i n i m u m , and in the face of the
w i d e d i s p a r i t y between the wage
indices i n E n g l a n d and o u r coun-
t r y , it is idle to expect the p a r t i a l
devaluation, such as we have had,
to go far towards r e m o v i n g o u r
foreign trade d i s e q u i l i b r i u m . A s
it is, therefore, i m p o r t controls
w o u l d s t i l l be necessary. N o w ,
devaluation, if it is not accom-
panied by a r e m o v a l of these con-
trols, w o u l d not o n l y be meaning-
less, i t w o u l d b e h a r m f u l f r o m
the point of v i e w of i n t e r n a l dis-
t r i b u t i o n o f income. F u r t h e r — a n d
this is a p o i n t w h i c h has not y e t
received the attention that it de-
serves—a d o w n w a r d revision i n
the rupee-sterling rate w o u l d
reduce o u r r e q u i r e m e n t of sterl-
i n g reserve against note c i r c u l a -
t i o n . T h e rate of Is. 4d. for e x a m -
ple, w o u l d reduce o u r reserve
r e q u i r e m e n t by 12½ per cent, a n d
this is no s m a l l gain w h e n account
is taken of the fact that, in spite
of the enormous expansion of
c u r r e n c y , a considerable p o r t i o n
of w h i c h w i l l continue to r e m a i n
i n c i r c u l a t i o n w i t h a l l the dis-
inflationary measures that o u r
G o v e r n m e n t m i g h t mean to em-
ploy, there has not been any
appreciable g r o w t h o f w e a l t h i n
our c o u n t r y , s o that w e can i l l -
afford to a l l o w the c u r r e n c y re-
serve to go substantially b e y o n d
its p r e - w a r v o l u m e .
In r e g a r d to t h e measure for
12

3. 26th November 1949 ECONOMIC WEEKLY
m e e t i n g the u n f a v o u r a b l e balance
of accounts, the r e v i e w e r ' s v e r d i c t
in f a v o u r of d e v a l u a t i o n is based
on the f o l l o w i n g grounds:
(1) T h e foreign trade d i s e q u i l i -
b r i u m t h a t w e are h a v i n g i s n o t
j u s t a t e m p o r a r y p h e n o m e n o n
arising out of o u r i m m e d i a t e need
f o r imports; it is f u n d a m e n t a l and
is i n h e r e n t in the i n t e r n a t i o n a l
cost-and-price disparities,
(2) W h i l e i n t e r n a l prices can
and s h o u l d be b r o u g h t d o w n ,
m o n e y wages s h o u l d n o t be touch-
ed, so that there is a m i n i m u m set
by the l e v e l of wage-costs b e l o w
w h i c h prices m u s t n o t b e a l l o w -
ed to go if a fair degree of em-
p l o y m e n t is to he maintained,
(3) We have left the simple
stage of profit inflation and have
h a d a considerable degree of i n -
come inflation too; the money
wage i n d e x in the c o u n t r y , as it
stands, is too h i g h r e l a t i v e l y to
w h a t obtains i n the U . K . o r
U . S. A .
(4) A rise in the p r o d u c t i v i t y
of l a b o u r so as to cause a f a l l in
'efficiency wages' in o u r c o u n t r y
w o u l d be far too m u c h of a l o n g
t e r m process to be t a k e n seriously
i n t o account in the present con-
' e x t .
(5) In so. far as t h e d i s e q u i l i -
b r i u m is fundamental, it needs a
l o n g r u n solution, a n d direct i m -
p o r t or exchange controls, h o w -
ever effective, cannot be conceiv-
ed as a p e r m a n e n t m e t h o d of deal-
i n g w i t h i t ; t h e y c o u l d at best be
t h o u g h t of as 'transition' mea-
sures
(6) I m p o r t controls, w o r k e d —
as they a r e — t h r o u g h a system of
license, have tended to create a
serious degree of m o n o p o l y a n d
to breed d i s c r i m i n a t i o n a n d cor-
r u p t i o n . This, i n c i d e n t a l l y , is
w h y it is expected t h a t devalua-
t i o n , if it is accompanied by a
sufficient degree of liberalisation
o f imports, w h i l e i t w i l l c u r t a i l the
profits of the h i t h e r t o licensed i m -
porters, w i l l be m o r e or less
n e u t r a l in its effect on prices.
(7) T h e need for the i m p o r t
of capital goods is u r g e n t no
d o u b t . B u t these i m p o r t s have
l a r g e l y to be financed by l o n g
t e r m foreign loans. A n d f o r e i g n
loans w o u l d be incompatible
w i t h any c o n t i n u e d policy o f i m -
p o r t , controls.
(8) F i n a l l y , there is a l i t t l e
g r o u n d for t h i n k i n g t h a t devalua-
t i o n w o u l d f a i l t o achieve its
objective of m i t i g a t i n g balance of
trade d i s e q u i l i b r i u m . Reference
to elasticity of d e m a n d has been a
sort of obsession in our c o u n t r y .
F a r too m u c h is m a d e of the fact
that some of o u r exports have a
l o w elasticity o f d e m a n d i n the
i n t e r n a t i o n a l m a r k e t . T h e p r o -
b l e m i n fact involves not m e r e l y
the f o r e i g n elasticity of d e m a n d
f o r o u r e x p o r t goods b u t also our
f o r e i g n goods. I t m a y w e l l happen,
to t a k e the present case, t h a t a l -
t h o u g h i n v i e w o f the d e v a l u a t i o n
of the rupee in t e r m s of dollar
we shall be in a position to sell
o u r goods profitably in the dollar
area at l o w e r prices, the q u a n t u m
of exports w i l l increase less than
i n p r o p o r t i o n t o the f a l l t o dolls-
prices, so t h a t o u r dollar acquisi-
t i o n w i l l come d o w n . T h i s indeed,
w i l l , be the case i f t h e o v e r - a l l
elasticity o f d e m a n d f o r our e x -
ports in the d o l l a r area is less t h a n
u n i t y . B u t there is the q u e s t i o n
o f imports, too. D e v a l u a t i o n w i l t
b r i n g d o w n the q u a n t u m of im-
ports, since their cost in h o m e
c u r r e n c y i s n o w higher, a n d m o r e
l i k e l y than t h a n not their-, p r i c e s
i n dollar, too. A n d this c e r t a i n t y
w i l l mean a shrinkage i n o u t
dollar demand, its e x t e n t depend-
ing u p o n the relative strength o f
the t w o forces. A n a l y s i s shows
that d e v a l u a t i o n should be a c c o m -
p a n i e d by an excess of the a c q u i -
sition of foreign exchange over its.
demand if j u s t the sum of these
t w o elasticities is greater t h a n
13

4. ECONOMIC WEEKLY 2 6 t h N o v e m b e r 1949
c a t t y . A n d t h i s n o t a b i g suppo-
s i t i o n t o m a k e . N o d o u b t o v e r a
s h o r t p e r i o d , the s u m ' of t h e elas-
ticities, a l t h o u g h greater t h a n
u n i t y , m a y assume such a l o w
f i g u r e that the g a i n i n trade
balance turns o u t to be too s m a l l
r e l a t i v e l y to a g i v e n degree of
d e v a l u a t i o n . B u t d e v a l u a t i o n , as
already noted, is a l o n g t e r m mea-
sure a n d i n that context, w h e n
the possibilities of s u b s t i t u t i o n
b e t w e e n domestic and f o r e i g n p r o -
ducts are take i n t o account, the
elasticity of i n t e r n a t i o n a l d e m a n d
are sure to assume a v a l u e h i g h
e n o u g h for it to secure a c o m -
mensurable i m p r o v e m e n t i n the
trade balance. M o r e o v e r , if, o v e r
a short period, some e x p o r t s are
f o u n d to be too inelastic a n d some
i m p o r t s too u r g e n t , these cases
can perhaps be l o o k e d alter by
taxes a n d subsidies. Il is cer-
t a i n l y arguable, against the back-
g r o u n d of the present; d e v a l u a t i o n ,
t h a t duties s h o u l d be enhanced on
certain exports w h i c h are rela-
t i v e l y s t r o n g i n the i n t e r n a t i o n a l
m a r k e t a n d the proceeds spent o n
subsidising essential i m p o r t s , say,
food. H o w e v e r this apparent c o n -
cession to anti-devaluationists
m u s t n o t be i n t e r p r e t e d as
a m o u n t i n g t o the i n t r o d u c t i o n o f
the so-called ' m u l t i p l e rates of
exchange' b y t h e b a c k door. Y o u
cannot p l a y w i t h t h e " exchange
rate too f r e q u e n t l y , whereas
tariffs a n d subsidies, as suggested
here, are m e a n t to be just a short
t e r m measure w h i c h y o u can
w i t h d r a w as soon as the occasion
for t h e m ceases.
D e v a l u a t i o n is a step t o w a r d s
i n t e r n a t i o n a l economic stabilisa-
t i o n , a n d each c o u n t r y has n o w
the responsibility of m a i n t a i n i n g
its i n t e r n a l s t a b i l i t y lest its effect
s h o u l d be n u l l i f i e d . N o t h i n g is
therefore m o r e u r g e n t t h a n that
I n d i a s h o u l d p u t h e r house i n
order, stabilise her i n t e r n a l prices
b y d i r e c t m o n e t a r y and f i n a n c i a l
measures and m a k e it possible
for the economy t o f u n c t i o n p r o -
p e r l y . T h i s is a w a r n i n g w h i c h
can h a r d l y be repeated too often.
The Drive For Compulsory
Savings
Prayag Das Hajela, M.A.,
Lecturer in Economics, Allahabad University.
D E C I S I O N to save is a deci-
sion n o t to spend on con-
s u m p t i o n , no m a t t e r w h e t h e r this
decision is v o l u n t a r y or forced.
B u t w h e t h e r such a decision
necessarily means a decision
to invest also, n o b o d y c a n say.
O r d i n a r i l y , o f course, w h e n
savings are v o l u n t a r i l y effected,
t h e y are l i k e l y to be invested;
w h e n the are c o m p u l s o r y , t h e y
are l i k e l y to be sterilized. F o r c e d
savings cannot arise f r o m the
i n t e n t i o n to invest or else t h e y
w o u l d cease to be forced. T h e
fact that c o m p u l s o r y or forced
s a v i n s d r i v e has been a n n o u n c e d
i n the w a k e o f the G o v e r n m e n t
decision to cut d o w n capital ex-
p e n d i t u r e s h o u l d r a t h e r be re-
garded as a sign that savings are
t o b e sterilized r a t h e r t h a n i n -
vested.
A s s u m i n g f i r s t that sterilisation
o f - s a v i n g s r a t h e r t h a n m a k i n g
use of t h e m is the i n t e n t i o n of the
g o v e r n m e n t , w h a t are the i m p l i -
cations of such a sterilisation and
is it desirable at this t i m e ?
T h e fact that i m m e d i a t e l y
emerges o u t of such an i n t e n t i o n
i s t h a t o u r t o t a l e x p e n d i t u r e o n
consumption- a n d i n v e s t m e n t
w o u l d stand d i m i n i s h e d w h e n
c o m p a r e d to an earlier situation,
unless something i n the m e a n -
w h i l e has happened to cancel this
d i m i n u t i o n , e.g., d i s h o a r d i n g by
the p u b l i c or an increased flow
of funds f r o m the banks for p u r -
poses of i n v e s t m e n t or c o n s u m p -
t i o n . T h e latter possibility rests
chiefly on w h e t h e r banks have
decided u p o n a cheaper m o n e y
p o l i c y t h a n before, the f o r m e r
u p o n t h e v o l u m e o f the h o a r d e d
m o n e y a n d the readiness of the
p u b l i c t o e m p l o y i t .
A s for the banks, i t m a y b e
stated w i t h some confidence t h a t
t h e y w o u l d n o t agree to a cheaper
m o n e y p o l i c y because t h a t c o n t r a -
diets the i n t e n t i o n of c o m p u l s o r y
savings. So t h a t one factor
c o u n t e r a c t i n g d i m i n u t i o n i n t o t a l
e x p e n d i t u r e w o u l d have gone
o u t of the p i c t u r e or be consider-
a b l y w e a k e n e d .
A s for dishoarding, the r i c h
w i l l dishoard o n l y i f they are t o
invest, a n d w h e t h e r t h e y w i l l i n -
vest cannot easily be p r e d i c t e d
unless t h e r e is reason to expect
that a fair m a r g i n of p r o f i t w o u l d
b e left for t h e m , despite the u n -
favourable i m p a c t of d i m i n i s h e d
m o n e y e x p e n d i t u r e . T h e r e f o r e ,
even i f t h e y invest, t h e y w i l l d o
so after the i m p a c t of the d i m i -
nished m o n e y e x p e n d i t u r e has
been realised, a n d n o t d u r i n g the
t i m e the i m p a c t is w o r k i n g itself
out. W e , i n this p a r t i c u l a r con-
text, are o n l y concerned w i t h the
p e r i o d d u r i n g w h i c h the i m p a c t
is w o r k i n g . A n d inside such a
p e r i o d , there is no reason to ex-
pect any significant d i s h o a r d i n g
f r o m the side of the r i c h or the
w e a l t h y class. As for the m i d d l e
class, d i s h o a r d i n g is n o t e v e n
possible; for there are no hoards.
T h e m i d d l e class has h a d to b o r -
r o w t o m a i n t a i n itself. T h e poor,
of course, can d i s h o a r d to some
extent i f t h e y l i k e . B u t a s things
stand, t h e y w o u l d generally not.
F o r , t h e y w o u l d prefer t h a t the
g o l d a n d s i l v e r o r n a m e n t s , w h i c h
in most cases are the shape t h e i r
hoards h a v e t a k e n , s h o u l d c o n t i -
n u e t o a d o r n t h e i r w o m e n f o l k
r a t h e r t h a n b e f r i t t e r e d a w a y i n
c o n s u m p t i o n . I n q u i t e a n u m -
ber of cases also, the hoards are
non-existent not because t h e y
have been used to raise the stand-
a r d of life, b u t because they have
been spent on pleasures n o w en-
j o y e d m o r e freely. T h u s , dis-
h o a r d i n g f r o m the side of the
poor, too, is n o t l i k e l y to a m o u n t
t o m u c h . T h e net result, there-
fore, t a k i n g a l l the above factors
into account, w i l l be a d i m i n u t i o n
o f t o t a l m o n e y e x p e n d i t u r e . A n d
prices i n the f i r s t instance w i l l
become l o w e r t h a n before. T h a t
completes the first stage.
T h e investor w h o c o u l d h a v e
got a h i g h e r p r i c e otherwise, is a
loser of some income. T h e con-
s u m e r w o u l d be a loser if the f a l l
in p r i c e is less t h a n is necessary
to counteract his sacrifice in p a r t -
14
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