July 6, 1967

Here is some expertise on the behaviour of national income, national expenditure, Government expen-diture, and personal consumption from 1954-55 onwards. In the light of this study, the unusual rise in prices and the deficit in external payments in 1956-57, in spite of not less than average order of advance in nationa income, appear to be the result of huge accumulation of inventories (which the economists treat as investment) and increase in personal consumption expenditure.

The forecast for 1957-58 is that the economy will remain on an even keel provided personal consump­tion does not rise by more than 3 per cent, Government expenditure is pegged down to 1956-57 level and a fur­ther drain of Rs 200 crores takes place from our external reserves.

THE fol lowing paragraphs at­tempt an analysis of the move­

ments in national Income and related magnitudes In 1956-57, and a national budget for 1957-58. In the absence of data, heroic assump­tions have been made to derive most of the aggregates, and this analy­sis* Is, therefore, of some relevance only to the extent that it may broad­ly Indicate the l ikely trends In the economy over the coming year.

The national income of India during 1954-55 was Rs 9,620 crores at factor cost and Rs 10.140 crores at market price. (Indirect taxes net of subsidies — Rs 520 crores. Mis­cellaneous 'fees' have been excluded f rom indirect taxes.) Government consumption In 1954-55 was Rs 670 crores, and net capital for­mation on Government account Rs 330 crores. Total private expendi­ture in 1954-55 thus works out at Rs 9,140 crores. Net private in­vestment during the year including Investment in inventories has been estimated at Rs 385 crores. (Natio­nal Income Conference: Preli­minary estimate prepared in the C S O.) Assuming stock changes to be nil—doubtless an in­correct assumption in view of the fa l l in prices during the year— private consumption would be around Rs 8,755 crores in 1954-55. For an estimated population of some 378 mil l ion, this gives a per capita consumption of Rs 231.6 in 1954-55. Further, total personal consumption works out at 86.3 per cent of the national expenditure.

1954-55 If per capita consumption were to

be maintained at the 1954-55 level, tota l consumption in 1955-56— at 1954-55 prices—would need to be Rs 8,870 crores (for a population of 383 mi l l ion). National income in 1956-56 was Rs 9,650 crores. Adding Rs 550 crores for Indirect taxes, net of subsidies, (estimate based on available data) national expenditure

lion works out at Rs 225.3. In per­centage terms, personal consumption works out. at 84.2 per cent of the national expenditure at market price.

Pursuing the same line of analysis, in order to keep per capita consump­tion constant, personal consumption in 1956-57 for an estimated popu­lation of 388 mill ion would need to be some Rs 8,740 crores at 1955-56 prices. We may now estimate the probable actual level of consump­tion during the year.

1956-57 Judging f rom available informa­

tion, agricultural production during 11)56-57 was significantly higher than in 1955-56, while the output of factory establishments was some 8 per cent higher. Output increases in the other sectors may be assum­ed to have been less, but the over­all increase in the national income at constant prices may well have been of the order of 5 per cent ,i e, about Rs 480 crores at 1955-56 pric­es. This may appear to be a some­what optimistic estimate compared to past trends, but judging f rom trends in output this increase may well have been obtained. In fact, as wi l l be seen later, the distinctive feature of 1956-57 was an unusual rise in prices .simultaneously w i th a significant increase in output and a large deficit in external payments. To return to our theme, in 1956-57, national income at 1955-56 prices may be estimated at Rs 10,130 crores. Adding Rs 600 crores (rough estimate) for indirect taxes net of subsidies, national expendi­ture in 1956-57 would be Rs 10.730 crores at 1955-56 prices.

Let us now assume that Govern­ment expenditure during 1956-57 was around Rs 1,350 crores (esti­mated from Economic Classifica­tion of the Central Budget, and the revenue expenditure of States)

Rs 600 crores for investment (Including investment in Govern-

at market price would be Rs 10,200 crores. If Government expenditure is placed at around Rs 1,150 cro­res '-Rs 725 crores for consumption and Rs 425 crores for invest­ment - and if private investment at home is estimated at around Rs 400 crores (this is obviously an under-estimate as there was un­doubtedly some upstocking during 1955-56.) Wi th investment abroad ( or the surplus on balance of pay­ments on current account) at Rs 20 crores, private consumption would be Rs 8,630 crores. On the other hand, we saw earlier that to keep per capita consumption at 1954-55 level, private consumption (at 1954-55 prices) would need to be Rs 8,870 crores In 1955-56. In 1955-56, prices generally declined. The wholesale index fel l by some 5 per cent, and the al l-India cost of l iv­ing index by about 6 per cent. If we assume the Tall in general pri­ces to be, say, 5 per cent, private consumption in 1955-56 at current prices would need to be about Rs 8,430 crores to give the same level of real per capita consumption as in 1954-55. That Is to say, real consumption increased by some 2.4 per cent in 1955-56, or by about 1 per cent per capita.

If national expenditure (at market price) is taken at Rs 10,250 crores, and net investment at Rs 845 crores (Rs 425 crores on Government ac­count; Rs 400 crores on private account; Rs 20 crores for invest­ment abroad), the rate of saving in the economy in 1955-56 would be 8.2 percent . A l l these calculations are at market price and not at factor cost. Wi th total personal con­sumption at Rs 8,630 crores, per capita consumption in 1955-56 for an estimated population of 383 mi l -

803

* Estimate made on the basis of Economic Classification of the-Central Budget, and the revenue ex­penditure of the States.

THE ECONOMIC WEEKLY

National Income, Consumption and Saving Prospects for 1957-58

( Contributed )

ment Commercial undertakings) and Rs 750 crores for consumption \which, incidently, includes some expenditure on the Plan) If we estimate ex-ante private fixed investment at Rs 450 crores, i e, Rs 50 crores higher than in 1955-56, the amount of domestic pro­duct that would be left over for consumption and for inventory increases would be Rs 8,930 crores, against the Rs 8,740 crores neces­sary for maintaining private con­sumption at the 1955-50 per capita level. If we assume consumption to rise at the same rate as during 1955-56, the increase in consump­tion would require another Rs 200 crores or so; in other words, the economy would have been in balance if consumption had increased by some 2.4 per cent (as in 1955-56) and if there had been no upstocking; or again, the economy would have been in bal­ance if per capita consumption had been held statie at the past year's level, wi th an inventory increase of up to about Rs 200 crores during the year. Any substantial Increase in personal consumption, simultaneously with Inventory increases, could only result in a pressure on the balance of payments and rise in prices. In actuality, both transpired, the fa l l In Sterling balances (including withdrawal from I M Ft being of the order of Us 280 crores, and the increase in wholesale prices 14 per cent during the year.

Increased Stocks or Consumption ?

It is difficult to state with pre­cision the amount of upstocking that is likely to have occurred in the economy, or the increase in outlay on consumption during 1956-57. Scheduled banks advan­ces increased by Rs 150 crores during 1956, of which industry got Rs 85 crores and trade Rs 55 crores. Imports during 1956 were more than Rs 200 crores higher (payments figures) than in 1955, due in the main to increased im­ports of iron and .steel and non-ferrous metals and manufactures, machinery, vehicles, chemicals, and a large variety of other pro­ducer goods. It may safely be presumed that a very significant part of the increase in Imports has gone Into investment (either Immediately, In fixed investment or to augment inventories), while the balance has gone (as raw ma­terial) to sustain increased domes­

tic production of a wide variety of commodities. From the point of view of the economy, most of it has been 'investment' during the year, though there has been a corresponding disinvestment abroad.

To some extent, the worsening situation both in the matter of prices and in the deteriorating foreign exchange situation -has added to inventory accumulation. The upstocking rush has not been limited to imports. There has been a significant increase in In­ventories of agricultural products also. While l i tt le is known about inventories in general, the availa­ble information on stocks of agri­cultural commodities is even less. But, judging f rom estimates of production, despatches, and the movements of stocks at selected points, the total increase In in­ventories during 1956-57 for al l commodities may well have been around Rs 150-200 crores in value. This figure relates to actual, of ex-post investment, i e,„ the invest­ment on inventories ( (at rul ing prices) that took place, and not the sum of investment intentions at. the beginning of the year.

Investment 'Hump' The most significant feature of

these Imports of producer goods was that unlike imports of food, or other consumer goods, these imports were not 'deflationary' in their effect; in fact, to the ex­tent that they called for additional complementary investments, their effect, was inflationary. Further, most of these investments were not quick-maturing, and thus no immediate increase in output could be expected to accrue from al l these investments. In other words, 1956-57 became the first year in the history of Indian economic development when a really serious 'hump' of investment was encountered. It would require detailed analysis of the invest­ments that have already taken place and of those that are st i l l to come to state how much of this hump'—implicit in the Second Plan has already been negotiated. The hump came on rather sud­denly, when expectations were rosy and the mood buoyant, and it came on faster than one may have anticipated.

There was, thus, a good deal of investment In the pipe-lines, dur­ing 1956-57. Not all of it could, of course, be designated as Inven­

tory Increase, but some of it un­doubtedly was of that nature. As seen earlier, an increase In inven­tories (or of fixed investment) by something l ike Rs 200 crores, would have lef t no margin for any increase in per capita consump­tion. What did happen was that private fixed investment was not Rs 450 crores—as ear­l ier- but somewhat n i g r a , . total private investment ( I n d u i n g in ­vestment in inventoried) being' around Rs 650 crores. At 'the same time, the demand for con­sumption was not pegged and the prices were forced up.

Shortfall in Savings Wholesale prices increased by

some 14 per cent in 1956-57 and the cost of l iv ing by more than 10 per cent: If we assume the general price level to have risen by, say, 10 per cent, the national income at factor cost in 1956-57 would be around Rs 11,150 crores. Adding Rs 600 crores for net in ­direct taxes, national expenditure at market price would then be around Rs 11,750 crores. W i th Government expenditure at Rs 1,350 crores, private (domestic) investment, including investment In inventories, at Rs 650 crores, and the net disinvestment abroad at Rs 280 crores, private consumption during 1956-57 may be placed at Rs 10,030 crores.

While the large foreign exchange deficit during 1956-57 arose pr in­cipally from the heavy imports* of metals, machinery and equip­ment, vehicles, chemicals and the like required for investment or as raw materials in industry, the ' inflationary gap' wi thin the economy is symptomatic of the insufficiency of savings relatively to investment demand. We have seen earlier that p e r s o n a l consumption was some 84.2 per cent of aggregate national expen­diture in 1955-56; In 1956-57, per­sonal consumption was as high as 85.4 per cent of the total national expenditure. Inspite of a 5 per cent Increase in the real national product in 1956-57, as observed earlier, ex-ante savings were evi­dently far short of the investment plans of "the Government and of private business.

* Government publicity does not obviously l ike to play up the im ­ports of food or of other consu­mer goods.—Ed

804

July 8, 1957 THE ECONOMIC WEEKLY

Peep into the Future We may now take a peep Into

the future, and t r y and assess the trends in the economy, during 1957-58. As is wel l-known, agricul­ture contributes some 50 per cent to the national income of the coun­t r y directly and also affects indus­t r ia l production and trade, indirectly. It is Iikely that the late monsoon this year may adversely affect agr i­culture, but to wha t extent is not known yet. It is also l ikely, how­ever, that there wi l l be slowing down of the rate of increase in the national income during 1957-58. Assurning a 3 per cent increase in the seal national product inspite of a "somewhat inevitable slackening of the increase in Industrial output, the national income in 1957-58, fit 1056-57 prices, may be estimated at Rs, 11,485 crores. Adding Rs 700 crores for indirect taxes net of subsidies, national income ( ex­penditure) at market price may be placed at Rs 12,185 crores (again at 1956-57 prices).

According to the Economic Classi­fication of the Central Budget for 1957-58, consumption expenditure of the Centre is budgeted at about Rs 400 crores; net investment at another Rs 400 crores; and invest­ments through non-departmental undertakings ( l ike Hindusthan Steel), together w i t h loans and grants for capital formation to State Governments and local autho­rit ies, at another Rs 350 crores. If we assume total capital formation by the State Governments to be more or less equal to the capital loans and grants received by the States f rom the Centre most States have a revenue deficit the l ikely consumption expenditure of States (to the tune of another Rs 400 crores) wi l l have to be added to derive total Government expendi­ture. Not al l of these amounts are l ikely to be spent, however, espe­cial ly in view of recent develop­ments; further, in the past there has been a fa i r ly wide gap between budgeted and actual outlays. We may, therefore, assume that total Government expenditure during 1957-58 wi l l not exceed Rs 1,,400 cro­res or Rs 50 crores above the 1956-57 level. Private investment may well slacken in 1957-58 especially if inventory accumulations are kept in check, and may for the time being be taken at the same rate as for 1956-57, i e, at Rs 650 crores. Assuming that there wi l l be a fur-

ther drain on pur foreign exchange Reserves—to be met, say, through loans or grants etc—by Rs 200 crores during the year, the amount available fo r personal consumption would be around Rs 10,335 crores. This represents a 3 per cent increase on the 1956-57 level and a definite improvement even in per capita consumption. That is to say, as­suming that the national income Increases by 3 per cent, that we rely on Rs 200 crores worth of im­port surplus during the year, and that the rate of investment is peg­ged at the previous year's level. we may expect per capita consump­tion to increase by more than 1 1/2 per cent. If any of the above hy­potheses falls through, and more particularly, if private consumption shows the same increasing trend as in 1956-57, or if Government outlay exceeds the level attained in 1956-57, the result wi l l be a further spell of price increase, and further pressure on the balance of payments. If no further import surplus emerges, the gap between savings and invest­ment wi l l have to be met by a cur­tailment of consumption.

A Sudden Breakaway? At this stage, a few lessons from

the experience of the years since independence may briefly be recoun­ted. Between 1948-49 and 1954-55, the national income of India in­creased from Rs 8,650 crores to Rs 9,620 crores; and national expendi­ture at market price from Rs 8,970 crores to Rs 10,130 ' crores. Total investment in the economy increa­sed from Rs 440 crores to Rs 750 crores over the same period; and Government consumption from Rs 640 crores to Rs 670 crores. Bor­rowing f rom abroad was Rs 240 crores in 1948-49; in 1954-55, there

1. National income at 1955-56 prices

2. National Income at current prices

3. Indirect taxes Mess subsidies) 4. National expenditure at market

prices 5. Government consumption 6. Government Investment 7. Total Government expenditure 8. Private Investment at home 9. „ ,, , a b r o a d

10. P r i v a t e consumpt ion

was a nominal lending abroad of Rs 10 crores. Personal consump­tion thus increased f rom Rs 8,130 crores in 1948-49, to Rs 8,700 crores in 1954-55. However, over this period, national income estimates indicate a fa l l in the general level of prices by some 8 per cent. This would give an increase of only some 15 per cent in total consumption or a 71/2 per tent increase in per capita consumption in six years. Perso­nal consumption as a percentage of the national expenditure (at market prices) declined from 94 per cent in 1948-49 to 86 per cent in 1954-55.

As against these past trends, the available evidence in respect of 1956-57 indicates a sudden breakaway as it were In both personal consumption and investment expenditure. The basic' malady in the economy has been insufficiency of domestic sav­ings in relation to domestic invest­ment plans. The conclusions which emerge from this survey are briefly recounted below:

(i) The marginal rate of sav­ings In 1956-57 was too low to sustain the spurt in in­vestment activity. One of the reasons for this may lie in the improved terms of trade for agriculture, and the consequent Impro­vement in rural consump­tion.

(ii) Private investment in 1956-57 was rather high, es­pecially in relation to past trends. This may part ly have been due to a scram­ble for investment, in ful­filment of Plan targets; to large investments In construction; and to some amount of speculative stock holding.

1955-56 1956-57

9,650 10,130

0,650 11,150 550 600

10,200 11,750 725 750 425 600

1,150 1,350 400 650 20 280

8.630 8.630

805

THE ECONOMIC WEEKLY July 6,1967

National Income and Related Aggregates

(Rs crores)