I. National income and mass well-being

For assessing economic progress, we must define the term. By economic progress, we must first define the term. By economic progress, we shall mean, first, a continued rise in the standard of living of the masses of the people. Since the masses of the Indian people are close to the margin of subsistence, for quite some time, the measure of economic progress will lie in the consumption of food, the average of which is below the nutritional norm, and the consumption of cloth, the average of which is sub-standard.

In democracies, the expectation would be that, while the level of living of the masses rose fast enough, the affluence of no sector should go up significantly faster than the national average. If the incomes of the more prosperous groups galloped ahead whilst the economic condition of the masses remained comparatively stagnant, there will be complaints of social injustice. Therefore, the second test of economic development is in a reduction of income contrasts between the more affluent sectors of the community and the masses.

With these two criteria of economic progress in our mind, it is easy to say what does not constitute economic progress. First, if the standard of living of the people as a whole did not rise or lagged far behind the accelerating opulence of some groups, we do not have economic progress. Such a state of affairs may be described as the economic development of the classes; it is not Indian economic development. Secondly, spectacular progress in nuclear science, the science of rocketry and space science, and the stockpiling of missiles and other nuclear weapons, in the context of shortages of food, clothing, house-room, and the like, is not economic progress either. These developments may add enormously to the striking power of the nation and may be termed military development. Thirdly, heavy engineering and heavy chemicals, mammoth river valley projects, idle production capacities, and indiscriminate industrialization, when the masses of the people are ill-clad and underfed, do not constitute economic development. We may call it show-window economic activity and, at best sectoral development. 

Ordinarily, in free societies, production would get adjusted to meet the changing needs of consumers, this adjustment being effected by the pricing system. Prices of commodities in larger demand would rise, and entrepreneurs would increase the output of such commodities under the inducement of higher returns on the capital invested, which higher prices would bring. Under such conditions, the increase in the national product may provide a dependable measure of the trend in consumption, i.e., the standard of living of the people in general.

Under the policies which we have pursued during the past one and a half decades and which are generally described as planning, there is, on the other hand, a divorce between production and consumer needs. Production is directed or indirectly controlled by the Planning Commission, the instruments of control being import restrictions and exchange controls, controls over the distribution of domestic supplies, capital issues controls, and price controls of essential goods. Being constrained by these controls, entrepreneurs have not been free to orient production to satisfy consumer demands. Production has been governed more by the policy measures laid down by the Planning Commission. During the Third Plan, about 70 percent of the investment resources are drawn into the so-called “infrastructure” undertakings in the Public Sector; and a considerable part of the rest of the resources are used up in industrialization, including import substitution. This has involved comparative neglect of the production of food, agriculture generally, and basic consumer goods industries such as cotton textiles. 

These policies have caused two damaging consequences. First, they have retarded the expansion of the national product. This retardation is the direct outcome of the shift of resources from sectors where the output of the capital invested is high, namely, agriculture and cotton textiles, into sectors where such output is low, namely, “infrastructure” industries and industries brought into existence under policy pressures for substituting import goods. It has been estimated that Rs. 1 crore worth of additional resources invested in agriculture may add to the national product about Rs. 57 to Rs. 69 lakhs of output. The same amount of resources may add to the national product about Rs. 36 lakhs if invested in cotton textiles and about Rs. 19 lakhs if invested in iron and steel. Our policy preferences for “infrastructure” industries and for import substitution, regardless of costs, to the neglect of agriculture and cotton textiles thus have involved producing less in place of producing more for the same quantum of resources. This, in large part, explains the slow pace of growth of the Indian national product during the past 15 years, despite a more than three-fold increase in investment. 

Secondly, these policies have led to a pattern of production diverging from the pattern of consumer needs. In place of more food and cloth, the economy has been producing more of other things–iron and steel, cement, chemicals, machinery, and other industrial output. This divergence has meant that we can no longer depend on the statistics of the national product for a measure of overall economic progress, defining the latter term, as we have done, to mean a rise in the level of living of the masses. For the statistician, whatever is produced–whether rice, butter, guns, chemicals, or machinery–adds to the national product. When there is a heavy armaments program, as in Communist countries, or when economic policies foster programs of expansion of heavy engineering and heavy chemicals and other “basic” industries, as in India, the curve of the national product present a misleading picture of mass well-being. For an assessment of mass well-being, we have then to take a look, not at national income statistics, but at the consumer goods content of the national product.

During the past ten years, Indian national income rose at an annual rate of 4.6 percent and the population at an annual rate of about 2.5 percent. This yields a per capita annual rise of about 1.8 percent. The provisional estimate for 1964-65 shows an impressive jump of 7.7 percent in the national income and of 5.3 percent in per capita income. The Economic Survey, 1965-66, fears that during the current year, because of a decline in agricultural output, national income may be less than in 1964-65. At this low pace of growth in per capita income, seeing that economic development in the more affluent countries of Europe and America is much faster, we may be never able to catch up with the order of economic well-being in these countries. The gap between our level of living and theirs may continually widen. It is not a welcome idea that this widening gap may have a chance of being reduced only in the event of catastrophes such as wars in which these other countries may be engaged, and we may keep out. Unsatisfactory as these statistical averages are, the actual well-being of the masses may be less than semi-stagnant. First, as pointed out by Mr. Narottam Shah of The Economic Times, through an old-standing and inexplicably un rectified error, incomes from Commerce, Transport, and other “Services” sectors of the national income are considerably exaggerated in the statistics. Incomes at current prices are converted into incomes at constant prices by deflating the former to allow for the inflationary rise in prices. Though prices have risen by ~38 percent from 1955-56 to 1963-64, incomes at current prices have been deflated only, nominally, by 2.4 percent. If we make full allowance for the inflationary price rise with respect to these sectors, the increase in national income during the past decade may be at the lower annual rate of 3.5 percent and of per capita income at the lower annual rate of 1.2 percent.

Secondly, for a proper assessment of mass well-being, due allowances must be made from the statistics of per capita income for the considerable income shifts from the masses to the upper-income groups. Though this takes us to a subject that does not make welcome discussion in public, its exclusion may detract from the full appraisal of the basic forces now operating in the Indian economy, comprehension of which is essential to a correct diagnosis of the maladies confronting us. These income shifts have resulted from three factors:

(1) from inflation, which has corroded the incomes of the fixed and the sticky money income groups, which comprise the masses, wage earners, and salaried people, and has added correspondingly to the incomes of a fraction of the community, traders, businessmen, and industrialists;

(2) from controls, in particular, import controls, which have transferred incomes as monopoly gains or illicit earnings through corrupt practices, which controls give rise to, from the general body of consumers to the privileged upper-income groups, who include entrepreneurs, intermediaries, and the corrupt functionaries of the State; and

(3) from the phenomenal expansion of the Public Sector, which has added enormously to the illicit gains of the contractors and other participants in this expansion.

In recent years, aggregate income transfers due to inflation, controls, and the expansion of the Public Sector may not be far lower than the annual increases in national income, the bulk of this being due to import licensing and exchange restrictions. If we may assume that the whole of the values with respect to import licenses issued to Public Sector undertakings accrue to the Public Sector, we may regard them as a species of taxation. But the values of the import licenses issued to the Private Sector accrue to private parties, to which they have neither an economic nor moral title. Currently, the premia on these licenses are reported to vary from 500 to 700 percent with respect to 10 percent of the licenses and to be below 200 percent with respect to the rest. Assuming an average premium of 75 percent on all Private Sector licenses–on which my computations elsewhere, too, have been based–the income shifts on account of import licenses on Private Sector imports–which averaged Rs. 625 crores annually during 196-62 to 1964-65–may be of an annual order of Rs. 470 crores.

If so, the benefit of the largest part of the annual expansion of the national income has accrued to a thin upper crust of the privileged sections of the people, leaving the condition of the masses unchanged or worse than before. With the rich becoming richer and the poor remaining poor or becoming poorer, income contrasts between the rich and the poor have become sharper. Though this is an unwelcome phenomenon, much cannot be gained by ignoring it as any prolonged persistence of it may not be conducive to continued social and political stability, which is so essential not only for rapid economic progress but also for the preservation of the higher values which we cherish.

Thirdly, to get a clear picture of the trends in mass well-being, statistics of per capita income have to be adjusted for (a) the unduly large output of non-consumer goods and the creation of excess production capacities; and (b) for the undue build-up of inventories, which attends rising prices. Productive activity, which ends up in idle production capacities and idle stocks, would no doubt drive up the curve of national income in the same way as productive activity, which ends up in effective capital formation and increased consumption. But the former does not add to the well-being of the people, which the latter does. Excess capacities exist both in the capital goods and consumer goods industries and in the public as well as the Private Sector. They are estimated at about one-third of the total capacity in the major and minor irrigation works, somewhat less in the power projects, and at an average of 45 to 50 percent in 40 industries. Additions to inventories are inevitable under inflation, though it is not possible to assess their precise magnitudes.