Budgetary Policies and Inflation in India
INFLATION arises when aggregate supply of goods-and services lags behind aggregate demand. Excess demand can appear with respect to individual commodities or groups of commodities even when there is an overall balance between supply and demand. Such imbalances can be short-lived or continuing. Left to market forces) sectional imbalances may alter the relative prices of commodities without upsetting stability in the general price level. The undesirable effects of increases in sectional prices could be avoided through suitable devices of physical controls and rationing.
In general, market forces bring about equality between saving and investment on the one hahd and supply and demand of consumer goods on the other. Forcing the rate of investment above the voluntary rate of saving would, therefore, upset price stability when left to market forces. Even when the rate of investment is sought to be raised with the help of external resources, an upward pressure on prices of wage goods will be inevitable on account of time-lags between investment and emergence of output unless import covers both investment goods and the type of wage goods that would be in demand. When unaccompanied by large enough imports, forcing the rate of investment above the voluntary rate of saving would inevitably result in inflation unless a comprehensive system of physical controls and rationed distribution could be enforced.
In the absence of an effective system of controlled allocation of investible resources and rationed distribution of goods and services, efforts to raise the rate of investment could be frustrated while at the same time resulting in a curtailment of consumption of the vulnerable sections of the population either through regressive commodity taxation or through inflation. In other words, governmental actions would cripple the growth rate of the economy and at the same time aggravate inequalities in incpme distribution, in the absence of controlled distribution. In a large measure, the budgetary policies of the government in India reflect these anomalies.
Mosaic of Mixed Economy
The mixed economy in India has left all the lucrative centres of