FISCAL POLICIES AND INFLATION 45 term perspective. Nevertheless, secular trends in fiscal performance can be judged only with reference to plan objectives. Stability denotes an overall trend emerging out of certain dynamic instabilities characterizing the various components of the economic system. General price level indicates whether the system is stable or unstable. An upward trend in the general price level over a secular period is regarded as instability marked by inflation. Traditional monetary theories built on the assumption of full employment took for granted a direct relationship between the quantity of money and the level of prices. Various equations were built around the Quantity Theory of Money. John Maynard Keynes introduced drastic modifications of the Quantity Theory in the light of widespread unemployment during the Great Depression. As explained in the General Theory of Keynes, expansion of money supply will not result in rising prices until full employment is reached, unless "bottlenecks" appear in the supply of factors before full employment level.1 Based on this formulation, Keynes and his followers adopted deficit financed public spending and created money as potent remedies for compensating for the deficiencies in the aggregate demand of the economic system. They were also advocating a mild inflation or a fascile boom as the best way of ensuring near full employment. Theoretical Framework Some economists, brought up in Keynesian traditions, sought to apply Keynesian prescriptions which were tested and found effective in overcoming deflationary conditions to deal with problems of capital formation in underdeveloped economies having an inflationary gap. Surplus labour abounding in the underdeveloped economies was looked upon as a vast hidden investment potential. The successes of the Soviet Union in this direction prompted them to think of their application in the market-oriented developing economies based on private property. W A Lewis, Ragner Nurkse and J S Dusenbery argued that conversion of surplus labour into capital is possible by redistributing consumption (from those who are already employed to those whose surplus labour is to be converted into capital) through deficit financing.2 A note of caution was also sounded that deficit financing unaccompanied by commensurate increase of wage goods would result in inflation in all but comprehensively planned and controlled economies. Some, like Arthur Lewis, were suggesting that a faster rate of capital accumulation and development would depend upon the extent to which income could be redistributed from the consuming to the saving classes in the developing countries.8 Consumption was to be curbed by taxing consumption as well as by eroding real earnings of the consuming" classes. At the same time, fiscal policies were meant to augment public savings besides stimulating savings in the private sector. Fiscal and monetary policies in India echo the theoretical formulations outlined above. Even before independence Keynesian influence was reflected in the 'easy money policy9 of the Reserve Bank of India.