Economic Situation and Trends in Ceylon

By B. R. Shenoy

Summary

This 1966 policy report by the classical-liberal economist B. R. Shenoy diagnoses the economy of Ceylon (now Sri Lanka) and prescribes a market-oriented reform programme. Shenoy opens with a clinical metaphor: the ‘body economy, like the human body, is a living organism,’ whose health is read through three ‘economic P’s’ — Production, Prices, and the Balance of Payments. In the rendered pages he works through the first three diagnostic sections. On Production, he shows real income growing under 2% a year (1960-65) against 2.7% population growth, so that per-capita income is actually declining, and he ties the shortage of national savings (down from 13.6% of GNP in 1959 to 10.7% in 1965) to consumption-boosting socialist policies, especially subsidies on food, relief and social services that amounted to 45.7% of revenue collections.

On Prices, Shenoy argues that in an under-developed economy like Ceylon’s, inflation ‘ensues from budget deficits’ rather than from commercial-bank credit, because currency notes dominate monetary circulation. He distinguishes the ‘Net Cash Operating Deficit’ and analyses which parts of deficit financing are genuinely inflationary, concluding that loan-financed and foreign-aid-financed deficits merely shift money between pockets while monetised deficits expand the money supply. On the savings question he contends that freezing or reducing revenue collections would actually lift private savings, since every Rs.100 million of revenue increase ‘eats up’ roughly Rs.30 million of potential private saving.

The rendered pages reach the opening of Section IV, ‘Measures of Policy Reform,’ where Shenoy synthesises the diagnosis: the biggest single problems are a shortage of national savings (driven by subsidised consumption), inflationary budget deficits, and an over-valued Ceylon rupee held at an unchanged exchange rate since 1925. He frames the first link in the chain of reform as eliminating the inflationary part of budget deficits to bring inflation to zero. The fuller reform prescriptions lie beyond the rendered pages.

Key points

• Shenoy diagnoses Ceylon’s economy through three ‘economic P’s’ — Production, Prices, and Balance of Payments — using a body/medicine metaphor.

• Production: real income grew under 2%/year (1960-65) against 2.7% population growth, so per-capita income is declining.

• National savings fell from 13.6% of GNP (1959) to 10.7% (1965), blamed on socialist consumption subsidies (45.7% of revenue collections).

• Prices: in under-developed economies inflation ‘ensues from budget deficits,’ since currency notes dominate monetary circulation and bank credit is limited.

• Shenoy distinguishes inflationary (monetised) from non-inflationary (loan/foreign-aid-financed) parts of the ‘Net Cash Operating Deficit.’

• He argues reducing revenue collections would raise private savings — every Rs.100m of revenue increase ‘eats up’ ~Rs.30m of potential private saving.

• Section IV identifies the three core problems: savings shortage, inflationary budget deficits, and an over-valued rupee fixed at 1s.6d. since 1925.

• First link in the reform chain: eliminate the inflationary part of budget deficits to reduce inflation to zero.

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