Impact of Rupee Devaluation

8/8/2019 Impact of Rupee Devaluation

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T h e I m p a c t o f R u p e e D e v a l u a t i o n o n P r o d u c t i v i t y *~By

M. R. Kumara SwamyPoona, India , an d Ea s t Lan s ing, Michigan, U. S . A.With 5 Figures

(Received Ja nu ary 9th, 1967)In wha t fo l lows , the d i scuss ion a t t em pts to con t r ibu te our knowledge

on the sub jec t o f the im pac t o f rupee deva lua t ion on p roduc t iv i ty which ,as most of us recognize , has not been d iscussed wi th any s igni f icantco- re l a t ion , i nsp i r e o f i t s t op ica l im por tance no t on ly on consum pt ionf ron t bu t a l so on p roduc t ion f ron t .

Part IW e a l l r ecogn ize the po in t tha t t he r ea l wor ld encom passes an ageof im per fec t hum an behav iour no t on ly on p roduc t m arke t (which dea l s

wi th supp ly and dem and) bu t a l so on cap i t a l m arke t (which conce rnswi th saving s and inves tmen t) . The exis tence of lags be tween savings an di n v e s t m e n t a n d b e t w e e n s u p p l y a n d d e m a n d p r o d u c e s d y n a m i s m i n t oour econom ic sys t em .

Lags on Capital and Product MarketsA careful examinat ion of lags , wi th the a id of the fo l lowing f igures ,

n o t o n l y o n p r o d u c t i o n f r o n t b u t a l s o o n c o n s u m p t i o n f r o n t w o u l d p r o -v ide us wi th a use fu l p re face to an under s t and ing o f the sub jec t o fproduct iv i ty and i t s re levance for economic development .* The author wishes to express his high appreciation to Messrs. K r i s h -

n a m u r t h i of the Mysore Chamber of Commerce, A r y a of the BangaloreInst itu te of Management, and G a n g a d h a r a S e t ty of the Mysore Sta teProductivity Council for their warm and helpful remarks. Of course, theauthor is highly indebted to Micro-Macro Economic Analyst Dr. Giovm-miC a r a v a l e and Agriculture Economist-Vice-Chancellor of Poona UniversityDr. D. R. G a d g i 1 for their helpfu l suggestions. The mon opoly of ideas, containedin this paper , rests with Professor Dr. Kumara Swamy.1 The pap er shall be divided into two parts. In pa rt I, we deal w ith thesubject of productivity. In pa rt II, we discuss upon the relationship betweenproductivity and devaluation.


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M. R. K. Swamy: The Impact of Rupee Devaluation on Productivity 461Let us concentrate on Fig. 1: We represent price on Y-axis and supplyand demand on X-axis. -- The fundamental human relationship which is involvedhere is between suppliers (producers) and demanders (consumers). The rationaleof a consumer is to demand the product at lower prices; whereas, the rationaleof a producer (supplier) is to sell the product at the highest possible price.The interests of the two heterogeneous human groups tend to tally at the pointof equality between supply and demand. Normally, it is hard to arrive atsuch a profound equality between supply and demand. -- The normal charac-teristic feature of day to day business activity lies in discovering the in-

,5'" ~ ' \ p ' /\ \ ^

~uppIj end D mme ndFig. 1

Y

\6" ..,p,/ \/ ~ / / "Z

0 ,Yey/ngs nd-X#Yaat/na~ ~Fig.

Fig. 1. Consumption sector or product marketFig. 2. Investment sector or capital market

equality between supply and demand. Owing to lags, we experience pricedecreases and price increases. - Movements along the demand curve and thesupply curve denote the responsiveness of demand and supply to changes inprice. - Shifts from one demand curve and supply curve to another denotethe responsiveness of demand and supply to changes in income, prices of sub-stitutes, population, tastes, fashions, capital-labour output ratio owing toa change in technological mix, and differences in grades, qualities of labour,willingness to work and all that.In Fig. 2: Along Y-axis, we represent interest rate; along X-axis, we denotesavings and investment. The human relationship involved is between savers andinvestors -- the rationale of a saver is to save more at higher interest rates;whereas, the rationale of an investor is to invest more at lower interest rates.The interests of the two heterogeneous human groups tend to tally at the pointof equality between savings and investment. Movements along the savings andinvestment curves indicate interest rate changes, representing the responsivenessof savings and investment to changes in interest rates - - shifts from one savingscurve/investment curve denote the responsiveness of savings and investment tochanges in factors (other than interest rate change) like the marginal efficiency

of capital; change in capita l-labour output ratio; productivity (human andmaterial capital); output per manhour is determined by quality, grade, eager-ness, sense of responsibility; output per machine is determined by standardi-zation, automation, layout and maintenance.From this brief, though elementary, analytical discussion, we shall

be safe in pointi ng to the conclusion that the shift in the demand curveto the right, oil consumpt ion front, produces dyn ami sm into the economy,which is closely associated with sh ifts in in ves tmen t curve to the right,which certainly brings about high and higher productivity.


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462 M.R.K. SwamF:Flow of Funds and Productivity

Is it correct to say that a shift in demand/investment curve to theright, associated with an increase in the marginal efficiency of capital,is always attributed to higher productivity? In order to find an answerto the above question, let us put our hands on the significant quotationfrom the most brilliant work on economics ,,The Wealth of Nations",written by Adam Smith in the year 1776 which says,"the annual product of the land and labour of any nation can be increased in itsvalue by no other means, but by increasing either the number of its productivelabourers, or the productive powers of those labourers who had before beenemployed. The number of its productive labourers can never be much increased,but in consequence of an increase of capital or the funds destined for maintainingthem. The productive powers of the same number of labourers cannot be in-creased, but in consequence either of some addition and improvement to thosemachines and instruments which facilitate and abridge labour; or of a moreproper division and distribution of employment. In either case, an additional(wage fund) is almost always required."

From this learned quotation, it becomes quite clear that the flow offunds from rent and profit (management) to wage (labour) determinesthe growth of productivity via an increase in division of labour. Let usshow the economic dynamism of Adam S m i t h with the help of follow-ing flowing chart:

i / . ~ Division f a6our/4/,7] fY AJ 26 ~ OUfflYf

R]) Populst/onffojTfe88ivo80ci'et@ /

Fig. 3An increase in the flow of funds from (R ~-P) to (W) results in

an increase in wage-fund; an increase in wage-fund results in a shiftin investment schedule from left to right. -- This, in turn, facilitatesbetter and complex forms of division of labour. The entire process goeson and on. At this point, it becomes useful to make the point thata firm, with large capital (investment), can afford to have several divi-sions like, for example, Union Carbide (Ltd.) having the PersonnelDivision, Production Management Division, Sales Management Division,Chemical Division and so on. It is not sufficient to have merely divisionof labour -- it becomes essential to have better and better co-ordinationamong the interests of various divisions. Therefore, in order to havehigher productivity, which can be brought by higher investment,associated with more and more division of labour, combined with leastcost. production, we should have better and higher grade co-ordinationbetween labour and management.


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The Imp act of Rupee Devaluation on Pro duc tivity 463Least Cost and Productivity

Let us show the least cost combinat ion, associated with maximumproduc t iv i ty , wi th the he lp of two s imple d iagrams: From f igure 4 , wef ind tha t A T C schedule i s U-shaped - - in the beginning the f i rm reapseconomies of large scale , resul t ing inlower costs - - the f i rm maximises pro-duc t iv i ty when costs a re lowest a t po in tP . At th i s po in t , ou tpu t pe r manhourand output per machine tend to reachmaximum levels.

Produ ctivity (Specialization)and Internation al TradeI t may be necessa ry to a sk : "Whyshould a cou nt ry l ike U. S . A. , U .K . ,Germany, Sudan, or Niger ia have anyt rade - - re la t ionship wi th ne ighbour ingcountr ies or among count r ies having'Good wi l l' re la t ions?" In te rna t iona l

$1 /y/.C

M.PFig. 4, 5

trade emerges as a resul t of production at lower ( least) costs , or , in otherwords, the emergence of t rade ( internal and internat ional) is the resu l tof compara t ive advantage possessed by count r ies in the produc t ion ofpar t icu la r produc ts . I t i s a t th is po in t , i t becomes re levant to br ing inthe re la t ionship of exchange ra tes among several currencies of the world,l ike the U. S. dol lar with rupee, and the rupee with roubel , and the roubelwi th german mark , and so on .The quest ion of deva lua t ion comes to p lay an impor tan t ro le whenthe count ry concerned wants to br ing about a favourable change in theba lance of payments .Part II

Productivity and DevaluationIn this sect ion we shal l discuss the re la t ionship between devaluat ionand produc t iv i ty . I t may be poin ted out tha t in order to unders tandthe re la t ionship be tween produc t iv i ty and deva lua t ion , le t us unders tandthe fundamenta l re la t ionship be tween the ba lance of t rade and the ba lanceof payments . The ba lance of t rade concerns wi th an equa l i ty be tween

physical imports and exports (as, for example, t rade is ' sa id ' to be inbalance when sa y 10 bales of cot ton equal 10 bales of jute). T he expor-ta t ion of any i tem takes p lace when the count ry f inds i t advantageousto produce by reaping economies of sca le combined wi th lower costs andhigher produc t iv i ty - - o r , when. the count ry produces over and abovedomestic needs or requ irem ents -- or , to ke ep the price level (domest ic)at a reasonable level . Therefore , a favourable balance of t rade is assoc-ia ted wi th produc t iv i ty combined wi th spec ia l iza t ion in the produc t ionof tha t par t icu la r produc t . Where does the quest ion of deva lua t ion come


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464 M .R .K . Swam y:in to p la y he re? W el l, a n equa l i ty in the ba lance o f pay m e nt s i s s a idto t ake p lace when the va lue o f expor t s equa l s the va lue o f im por t s . Anequa l i ty in the ba lance o f t r ade does no t necessa r i ly m ean a ba lance int h e b a l a n c e o f p a y m e n t s .

India's 1949 and 1966 DevaluationThe coun t ry f inds i t des i r ab le to deva lue the cu r rency when thec o u n t r y concerned f aces a se r ious im ba lance in the ba lance o f paym ent s ,v iz . , when the va lue of impor ts tends to outs t r ip the va lue of expor ts .At th i s s t age , l e t u s b r ing in the ques t ion o f the 1949 B r i t i sh pounddeva lua t ion - - Ind ia fo l lowed su i t ; Pak i s t an fu r the r wen t in l i ne . Le t

us no te tha t Ind ia deva lued he r cu r rency in the yea r 1949 , a s the r e su l to f the B r i t i sh pou nd deva lua tion , wi thou t know ing the e f f i cacy o r p rosand cons o f deva lua t ion - - t h i s s t ep was no t under t aken under thein i t i a t ive o f the then Governm ent o f Ind ia - - we a l l r ecogn ize tha t upun t i l 1950 , In d ia d id no t have he r own C ons t i tu tion : I nd i a was depend-an t upon the B r i t i sh C ons t i tu t ion - - she had cu l tu ra l , po l i t i ca l , sp i r i tua l( fo r ins t ance , t he sp read o f C hr i s t i an M iss iona ry work he re ) and econ-om ic t i e s wi th pound s t e r l ing coun t r i e s - - B r i t a in im por ted ju t e , hand-loom produc t s , a r t -wo rks e t c. f rom Ind ia . Pa k i s t an deva lued he r cu r -rency owing to the fac t tha t the advantage which the Uni ted India(be fo re Pa r t i t i on ) possessed in r ega rd to ju t e m anufac tu re and p roduc t ionfe l l apa r t - - t he re fo re when Ind ia deva lued , Pak i s t an found i t f eas ib le(advantageous) to devalue her rupee .Af te r Ind ia f r am ed he r own C ons t i tu t ion in the yea r 1950 , shelaunched he r p l ann ing e ra in the yea r 1951 - t he F i r s t P lan w as o r i en tedtowards ag r i cu l tu re ; i n the Second P lan , Ind ia sh i f t ed he r em phas i s f romagr icu l tu re o r i en ta t ion to indus t ry o r i en ta t ion ; she go t exc i t ed and Na tu retoo went aga ins t Ind ia , and Ind ia was fo rced to r e tu rn to he r o r ig ina lemphas is v iz . , on agr icul ture . We have (a lmost ) comple ted the ThreeFive Year Plans in India ; ye t , the economic evi l s of the day have not beensolved to any ex tent - - t he m a rg ina l u t i l i t y o f incom e has been inc reas ingnot only in the middle income group but a l so in the lower middle incomeg r o u p : t h e i n t e r n a l p r ic e s t r u c t u r e h a s g o ne u p b y l e ap s a n d b o u n d s ;of course , our cos t s t ruc ture has ( t remendously) gone up. India , wi thoutknowing p ros and cons o f the p rob lem , dec ided to deva lue he r rupee inthe yea r 1966 . Le t us exam ine the im pac t o f the rupee deva lua t ion no ton ly f rom an in t e rna t iona l s t and-po in t bu t a l so f rom an in t e rna l v i ew-point .

Rupee Devaluation and International FrontI t m ay be in t e res t ing to th row l igh t on the im pac t o f the rupeedevaluat ion on the in ternat ional f ront . As i s expected of devaluat ion ,

the re i s a fundam enta l r e l a t ionsh ip be tween the Ind ian rupee and thecur renc ies o f coun t r i e s wi th whom we have nego t i a t ions in r ega rd to ourb a l a n c e o f p a y m e n t s . M o s t o f u s h a v e r e a d i n t h e d a i l y n e w s - p a p e r s a n din f inancia l journals abo ut the es tabl i shm ent of new exchange ra tes ofthe Indian rupee wi th the currencies of advanced count r ies , l ike the


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466 M.R.K. Swamy:and structure of job. One finds a high degree of wage differentials amongcitizens and non-citizens, especially in business and industry. -- Thereis a small degree of wage differentials in the above sense in academicinstitutions.

Let us ask the question: How are non-citizens able to accept jobs onsub-normal salaries? It must be noted that these employees are paidin U. S. dollars, for instance, an Indian national is so fond of equatingone U.S. dollar with Rs. 7--50 paise, and all that. Nodoubt, this isthe official exchange rate fixed by the Interuationa3 Monetary Fund. --This is fine as far as settlement of international payments among coun-tries is concerned. It may be remembered that the purchasing power ofone U. S. dollar has the same value as the purchasing power of oneIndian rupee up to a point when elasticity of demand is less than unity.It may be interesting to learn that a person earning 900 rupees in Indiamaintains (more or less) the sa.rne living standards (social status) as anindividual earning 900 dollars in the United States.

Very often, the entrance rate (in industry and business) for non-citizens is in the income range of 500 and 650 dollars per month. --How about expenses in the U. S. A.? A non-citizen earning in the incomerange of 500 and 650 dollars could well manage with 150--200 dollarsa month: May be, 100 dollars are taxed away! The balance of 250-300dollars goes in the non-citizen's savings account. If he works for fiveyears, he will accumulate 22,000 dollars, which is untaxed. Such earned(and saved) incomes are not taxable under the present United Statesfiscal (income-tax) regulations. It is high time that the U. S. Departmentof Revenue become alert on the issue. Upon completion of the non-citizen's five year stay in the U. S., he will decide to transfer the entirebank balance to the tune of 22,000 U. S. dollars to his country.Let us note that most of our Indian people who have gone, and whowant to go to the U. S. (under private sponsorship) don't want (and hate)

to return home, as they are attracted by the attractive I. M. F. exchangerate of one U. S. dollar and Rs. 7--50 paise3. There are several Indianswho have gone to the United States on government sponsorship too. --They want to enjoy life and make money4. All these points seem to holdfine from the non-citizen's standpoint. How about the United Statesas a country? It must be stressed that the transfer of U. S. dollars toother countries involves a serious depletion of the U.S. gold reserves.3 There are several hundreds of Gujerathis (people of the western region of

India) in the U.S.A. studying for their B. S. and B.A. levels of preparation,inspite of the fact that Government of India's foreign exchange regulationsdo not (generally) permit undergraduate students going abroad to pursue under-graduate studies.4 D. E. Bell (former Administrator of the U. S. A. I.D.), Vice-Presidentin-charge of International Programs for the Ford Foundation, made the pointin October, 1966 that "too many of the students (referring to the Indiannationals) who come to the U.S. for higher studies were reluctant to returnhome which causes a brain drain which their countries resent and call illafford".


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The Impact of Rupee Devaluation on Productivity 467Flight of U. S. Dollars vs. Produ ctivity

Is the f l ight of U. S . dol lars des i rable? Are the non-c i t izen employeescont r ibut ing to the economic growth of the U. S . economy? In most cases ,the answer i s in the negat ive ; in some cases , the answer i s in the pos i -t ive . Any pe r son whose se rv ices a re p roduc t ive (v iz . , t ha t j ob whicha U. S . c i t izen i s not cap able of doing) co nt r ibutes to the increase in ne tna t iona l p roduc t o f the coun t ry ; any non-c i t i zen whose se rv ices a reunproduct ive (v iz . , tha t job which a U.S. c i t izen i s as wel l capable ofdo ing) does no t con t r ibu te a b i t t o the inc rease in g ross na t iona l p ro -duct of the U. S . economy. Fo r exam ple , the services of Ast rop hy sic i s tC handrasekhar , S ta t i s t i c i ans R oy , B ose , e t c . a r e cons ide red p roduc t ivef rom the U. S. s t andpo in t . - - Th e i r p roduc t ive im por tan ce w as no t andhas no t been r ea l i sed by Ind ia , wh ich i s r easoned to p ro fess iona ljea lous ies ra m pa nt in th is co un t ry 5 and to the low level of technologica lknow-how at top decis ion levels ( senior adminis t ra t ive of f ic ia ls of IndiaGovernm ent ) .A t t h is p o i n t , i t m a y b e w o r t h m e n t i o n i n g a b o u t t h e r e p o r t o n"A ca l l fo r M one ta ry R eform and F i sca l po l i cy by the U. S . and I . M . F . "(d i scussed and subm i t t ed a s a r ecom m enda t ion to the Jo in t Econom icC o m m i tt e e o f t h e U . S . G o v e r n m e n t b y D r . M . R . K t t m a r a S w a m y i nA pri l 1965 e) which sa ys, " i t is high t ime tha t the I . M. F. al lows fo ra comple te revis ion of exchange ra tes , keeping in v iew the levels of econ-omic development of concerned count r ies . Let us not l ive on theore t ica ldogm as ( l ike the Tr i f f in P lan and a l l t ha t ) . Le t us ge t busy and ac t soon .An y s i lence f ro m the I . M. F . s ide would a ggra vate the p rob lem s of thebalan ce of pa ym en ts of the U. S . and, ma y be , a s tage would be reached(soon) when the Uni ted Sta tes has to devalue her dol lar . I s incere ly urgethe U. S . r ep resen ta t ives to the I . M . F . t o p ropo se the above sugges tedme asu re to the I . M. F. Coun cil ."

I t i s a rgued in p ro fess iona l c i r c l e s tha t deva lua t ion o f the Ind iancur ren cy has been the r e su l t o f the W or ld B an k and the U. S . p res su res(po li ti cal ). There i s no r eason to wa r ran t th i s a rg um ent a s the W or ldBa nk a nd the U. S . a re not a t any d i rec t economic advantage . - In fac t ,t he rupee deva lua t ion would cause fu r the r dec l ine in the va lue o f theU. S . dol lar , which , in the long run, m ay be a threa t to wo r ld economics tabi l i ty as the U. S . i s the cent re of economic ac t iv i ty .Change in the Direction of Export Trade

Regarding the theore t ica l s tand tha t , as a resul t of devaluat ion ,im por t s a re d i scouraged and expor t s a re encouraged , i t m ay be wor th5 O wi ng to the p resence of extensive a nd intensive p arochial feelings inIndia, it is regrettable to learn that the services of the 1930 Physics IndianNobel Laureate, Dr. C. V. Raman, have not been utilized by the IndianScience Congress. His continued activity in scientific research, inspite of Govern-ment discouragement, has been due to his own drive an d dy namism .6 A Call fo r M onetary Reform and Fiscal Po licy by the U. S. and I. M. F.(Translated into Italian.) ILussogna Economica 30 (1966), n. 3.


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468 M .R .K . Swam y:m ent ion ing he re tha t Ind ian t ex t i l e and hand loom produc t s , a r t worksand o the r a l l i ed p roduc t s a re in g rea t dem and in the U. S. and e l sewhere- - there are a few items of the U. S . tha t In dia needs to imp or t ; a f te ra l l ,food , t echn ica l and o the r r e l a t ed a s s i s t ance com e to Ind ia by way o fa id , g i f t s and so on. Imp or ts f ro m U. S . A. , inspi te of the rupe e dev alu-a t ion , would remain in tac t .Owing to the 1966 rupee devaluat ion , we expect a change in thed i rec t ion o f expor t t r ade f rom the Am er ican und European sec to r s tothe Af r i can and the M idd le -E as te rn sec to rs in v i ew of the t e r r i fi c inc reasein in ternal cos t s t ruc ture . This aspect of a change in the d i rec t ion ofexpor t t r ade m ay be a t t r ibu ted to the f ac to r o f a l ack o f deve lopm ent o fhum ani t a r i an i sm (m ot iva t ion) to the cos t a spec t s on the pa r t o f som e o fthe soc ia l ly and econom ica l ly undeve loped r eg ions in Af r i ca and theM idd le Eas t . These coun t r i e s don ' t ve ry m uch bo the r abou t the h ighcos t s o f im por t s - - i f a pe r son t a lks n i ce and good to an Af r i can o r anA r a b , t h i n g s w o r k o u t s m o o t h i n g l y . T h e y h a v e h u g e p a y m e n t - c a p a c i t ypote nt ia l bu t the y lack the technica l and economical know-how . In o the rwords , i t i s the ro le of soc ia l re la t ionships (and not economic con-s idera t ions) which p lays a dominant ro le in d i rec t ing t rade re la t ionshipwi th Af r i can and the M idd le -Eas te rn coun t r i e s . Af r i can coun t r i e s axeno t t r ade consc ious ; whereas , European and Am er ican coun t r i e s a re(especia l ly) t rade conscious and, therefore , they resent h igh pr ices andhigher cos ts .

Rupee Dev aluation and Internal FrontLet us look a t t he im pac t o f the 1966 rupee deva lua t ion on the in t e r -na l cos t s t ruc tu re - - i t has gone up by l eaps and bounds owing to theuse of capi ta l - in tens ive techniques involving the use of huge impor tedm ate r i a l s ( spa re pa r t s , and so on) ; lack o f p ro per s t and ard iza t ion ; un-

econom ic l ayou t ; t ack o f p roper m a in tenance ; huge underu t i l i za t ion o fcapac i ty a t t r ibu ted to a l ack o f p roper a s sessm ent o f dem and fo r , s ay ,the nex t f ive yea r s .I t i s c lear f rom our f igures (4 and 5) tha t there i s a fundamenta lre la t ionship be tween cos t and pr ice . The achievement of lower cos ts i sthe m a in ob jec t o f the m anufac tu re r ; t he ach ievem ent o f lower p r i ces(which cou ld be m ade poss ib le by inc reas ing the funds go ing to m a in ta inproduc t ive worke r s ) becom es the m a in ob jec t o f consum ers o r buyer s . I ti s s e l f - ev iden t tha t l ower p r i ce and lower cos t s can be b rough t abou tb y i n c r ea s i n g p r o d u c t i v i t y wh ic h, i n t u rn , m a y b e b r o u g h t a b o u t b y a ninc rease in inves tm en t in hum an and m a te r i a l cap i t a l .Unproductive Labour (Dignified and Undignified Clerks) andMisallocation of Productive Resources

W e m us t m ake a c l ea r d i s t inc t ion be tween p roduc t ive and unpro-duct ive workers , as not a l l workers are product ive . I t i s a 'known' secre ttha t s eve ra l o f our we l l t r a ined (p roduc t ive ) Ind ian na t iona l s who wan tto re turn to India cannot ge t chances to re turn owing to the point tha t


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The Im pac t of Rupee Devaluation on Produ ctivity 469th e i r cases a re h an d led b y u n d ig n i f i ed c le rk s , wh o a re b a re mat r i cu -la tes - the le t ter f rom, say , a wel l t ra ined Ind ian in U. S . A. o f fer ingh is serv ices fo r Ind ia ' s economic p rosper i ty i s addressed to the Secre tary ,Council o f Scien t if ic and Ind ust r ia l Research Pool, Now Delh i. - - U n-for tunate ly , the Secre tary (d ign i f ied head c lerk ) , who is paid fo r th isjob, does not care to har~dle the cases involving the use of services ofproduc t ive la bour . Such cases are d ispose d o f by c lerks (und ign i f ied)who have no capab i l i t ies to assess the use o f p roduct ive labour fo rce .The hopeless reg ime of c lerkocracy 7 i s r am p an t in In d ia - i t i s fo rth is reason that the serv ices o f severa l o f our p roduct ive peop le arego ing waste to th is coun try . - - The f rus t ra t ion i s h igh p i tched . Not on lythe serv ices o f d ign i f ied head c lerks , refer r ing to min is ters in power ,sen io r (non- techn ical ) go vernm ent o ff ic ia ls, bu t a lso o f und ign i f ied c lerks(uneducated , incompeten t , and unexposed to the ou tcome of mo dern c iv il i -za t ion) may be considered unproduct ive in every sense o f the term. I ti s regre t tab le to learn that the oppor tun is t tendencies have tended tomake the Ind ian min is ters change thei r por t fo l ios f rom one specia l izedf i e ld to an o th er l ik e mo v in g f ro m Ph y s ics to Ch emis t ry o r to B io lo g y . - -A physic is t i s incapab le o f judg ing the p rofess ion o f a chemis t anda chemis t cannot judge the work o f a b io log is t . Recen t ly , one o f ourmin i s t e r s , wh o h e ld th e p o r t fo l io o f Co mm u n i ty Dev e lo p men t h as n o wtaken charge o f the por t fo l io o f S teel and Mines . I t i s a mat ter o f deepregret that such unp leasan t and i l log ical th ings have been tak ing p lacein th is g reat coun try o f un i ty in d ivers i ty .

Prod uctivity from the Middle Group and Economic Dev elopm entTh e p ro b lems h av e t ak en v ery se r io u s tu rn s in th i s co u n t ry o win gto the decis ions taken by the two unproduct ive g roups o f peop le (d ig -

n i f ied and und ign i f ied c lerks) . - Those unpro duct iv e peop le have beensuppress ing the in te l lec tual and the p roduct ive ab i l i t ies o f the in ter -media te ca tegory , v iz . , the midd le g roup . I t i s the development o f th isg roup which loads to economic dynamism of the coun try . At th is po in ti t become s re levan t to b r i ng in the p osta l mot tos s o f the fo l lowingorgan izat ions :

(1) Calcu t ta Produ ct iv i ty Council : "Pr odu ct iv i ty in the serv ice o fI n d u s t r y . "(2) M y so re S ta te P ro d u c t iv i ty Co u n c il : "P ro sp er i ty th ro u g h P ro -d u c t iv i ty . "(3 ) Un io n Carb id e In d ia L td . : "P ro d u c t iv i ty - - th e o n ly way to Se l f -Rel iance ."Let us analyse , in some deta i l , the 'g rowth s ign ' mot to o f UnionCarb ide Ind ia L td . "Prod uct iv i ty the on ly wa y to Sel f -Rel iance ." Let7 It may be said that there exists in reality neither the Communistic formof govermnent nor the Democratic form of government in India. -- For practicalpurposes , In dia has a Clerkocratie form of government.s A postal motto is expressed as follows: By the side of the stamp markon the envelope, e ach organization has its 'growth sign' m ark.Zeitsehr. f . NationalSkon omie , XXVII. Bd., Heft 4 31


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470 M.R.K. Swamy:us call our conscience to the terms Self and Reliance. Is India a self-reliant country as a result of the First, Second and Third Five Year Plans?Unfortunately, the answer is 'no', and we have became dependant foreverything on westerners (Britons and Americans); we are more thanready to accept any statement from them, and would give due honourto their doings (either right or wrong). Indians have become the twen-tieth century slaves of the westerners.

Government Intrusion and Evils of the DayWe are relying on government .. . government for everything. Thegovernment has taken over huge responsibilities, and is taking more and

more responsibil ities 9. - A stage has been reached in Ind ia when Govern-ment has taken away all incentives for 'productivity increase' fromprivate sector l. The government, on its own accord, recently decidedto force devaluation of the rupee on this country. -- In forcing thisdecision, the private sector was not consulted. -- The serious economicevils of the day may be attributed to the 1966 rupee devaluation.The only people who have benefitted as a result of the 1966 rupeedevaluation are the 'so called' members of the public sector as, forexample, the momentary VIP's, like ministers and senior (non-technical)government officials, whose services are truly unproductive in every senseof the term. As a selfish step in the direction, soon after devaluation,people like Messrs Ka ma ra j , Su br am an ia m, Ch ou dh ur i , ZakirH u s s a i n and Srimathi Indira Ga n d h i , etc., have visited several for-eign countries on the pretext of getting foreign help and establishing"good will" -- "good will".There is no end to these people going and returning. There are norestrictions when they want to go abroad; whereas, when a member ofthe private sector (the most productive member) wants to go to westerncountries, there are hundreds of restrictions imposed on his going abroad.- These 'unnecessary' restrictions have lead the individual to frustration.Let us note clearly that the rupee devaluation has certainly hinderedthe growth of private sector which, in turn, is the cream of the Indianeconomy, and hence prosperity (economic).

India's Pol i t ical Planning and H oarding of Food GrainsInspite of India's development planning since 1951 (agriculture based,

industry oriented and mixed cream), yet, the country has been facing9 Let us pray that there would not be any nationalization of banks inIndia. -- Should there be bank nationalization, the country will run intoa more serious economic disaster.lo Excessive Government control has resulted in a lack of coordinationbetween the administration of Bokaro and Bhilai steel plants which, in turn,has resulted in the retrenchment of top class engineers and other technicalstaff (well trained) from Bhilai. Let us note with regret that excessive controlby government has led to frustration.


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The Im pa ct of Rupee Devaluation on Pro duc tivity 471prob le m s a f t e r p rob lem s espec ia l ly on the f ron t o f ag r i cu l tu re : P ro f .N . V. S o v a n i v e r y w e ll p o i n t s o u t " o u r p o li ti c s is v e r y r e l ev a n t t oplanning, because p lanning i s a l so a pol i t ica l process . Our pol i t icsi s tha t o f an im m ature dem o cracy w he re i n the dem ocra t ic ins t itu t ionshave a l r eady o u t run the dem ocra t ic ins t inc t s and 'm or es ' o f the m assof voters . O ur p lann ing has be en geared , by acc ident or des ign, to thegenera l e lec t ions , and each Five Year Plan serves for the par ty in poweras a lm os t i t s e l ec t ion m an i fes to . An e l ec t ion m an i fes to m us t , by i t s ve ryna tu re , p rom ise eve ry th ing to eve rybody and tha t t oo wi thou t cos t s .Benef i t s wi thout cos ts and r ights wi thout dut ies are the s tock in t radeof the pol i tic ian l l e verywhere , a nd i t i s no acc ident tha t ou r p lans shouldcon ta in qu i t e a b i t o f th i s . I t has been open ly r em arked tha t t he p lanswould be m uch m ore r a t iona l and r ea l i s t i c i f t he i r fo rm ula t ion and adop-t ion did not coincide with the gene ral elect ions. ''12

Le t us n o te tha t t he G overnm ent has t a ken con t ro l o f eve ry a spec to f econom ic ac t iv i ty in Ind ia tha t t he se r iousness o f the food p rob lemas , for example , i s s t r ic t ly ar t i f ic ia l , has been crea ted by the hoarderso f food g ra ins . - A bad r e su l t o f f rus t r a t io n on the pa r t o f p r iva teen te rp r i se . - - In a s t a t e l i ke M aharash t ra , we f ace a ve ry se r ious foodprob lem which is m an m ade . A few m onths ago , the Ind ia n M in i s te r fo rFood v i s i t ed the S ta t e o f M aharash t r a and was t aken round som e a reas(unf i t fo r cu l t iva t ion) by the Agr icu l tu re M in i s t e r o f the S ta t e . - - I t i shum an weakness to genera l i se abou t som eth ing on the bas i s o f a f ewisola ted cases. - - The Un ion Fo od Min is ter re por te d (of course , base less)in Pa r l iam ent , "The S ta t e o f M aha ras h t r a i s wors t a f f ec ted by f am ine ,d rough t . " I t was a t t h i s s t age tha t t he hoa rde r s ( e spec ia l ly f rom AndhraP r a d e s h) took adv antag e of the sensa t ional s i tua t ion , and i t w as heretha t our s im ple sup p ly an d dem and approach ( f igures 1 and 2 ) p rov idedthe too l fo r answer ing the ' a f t e r - e f f ec t s ' o f l ag s i tua t ions be tween supp lyof and dem and fo r food g ra ins .

The hoarders of r ice , sugar (whi te) began to work on the psychologyof peop le by t ak ing undue advan tage o f im per fec t m arke t behav iour ,and beg an to f ix pr ices accordingly . Off ic ia l ly (according to gov ernm entrules) , there i s no mobi l i ty of food gra ins ( r ice , wheat e tc . ) f rom ones ta t e to a no the r bey ond 5 kgs ; ye t , we have l a rge sca le m ovem e nt o ffoodgra ins f rom one s t a t e to ano the r . Insp i r e o f Governm ent ' s o rde r sto com pe l peop le to change the i r food hab i t s , ye t peop le wan t to r em ainf ree f rom the bondage o f governm ent and , a s a r e su l t , don ' t p l an tochange the i r food hab i t s . A Sou th Ind ian in the S ta t e o f M aharash t r adoes not want to g ive up ea t ing r ice , and a Ma ha ras ht r ian does not wantto g ive up ea t ing whea t and B a j ra whi l e be ing in the Sou th o r Nor th .

Are peop le s t a rv ing to dea th? No . The hoarde r s a re p rov id ing thepeop le wi th r equ i red g ra ins a nd ce rea ls only on paym ent o f excess ivepr i ces ( say R s . 2 - -50 fo r 1 kg o f r ice and R s . 2 - -00 fo r 1 kg o f sugar ) .II G o v e r n o r G . C . W a l l a c e o f t h e S t a t e o f A l a b a m a , U . S . A . , d e f i n esa p o l i ti c i an a s a p e r s o n wh o p ro m i s e s t o o m u ch t oo s o o n.1~ A l l In d i a Eco n o m i c C o n fe ren ce (P re s i d en t i a l Ad d r e s s ) , Decem b er , 1 9 6 5 .

Sl*


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472 M .R .K . Swam y:Punishm ent to Government by Pr ivate Enterprise

A fundam enta l ques t ion m ay be a sked be fo re the en t i r e po l i t i ca lp l a n n e r s o f t h i s c o u n t r y . - - H o w m a n y p e o p l e a r e c a p a b l e o f p a y i n g t h i sh igh r a t e o f R s . 2 - 5 0 pe r kg o f r ice? Peop le wi th a sm a l l f am i ly andea rn ing m ore than 300 to 400 rupees pe r m onth can a f fo rd to pay suchh igh p r i ces . - Peop le wi th m odera te m eans canno t a f fo rd to pa y suchpr i ces and m ee t the i r dem ands . - - I t i s i n t e res t ing to l ea rn tha t m orech i ld ren a re born in the m odera te and lower m idd le incom e g roups .There fo re , t he su f fe re r s o f to -day a re m idd le c l a s s and lower m idd le c l a s speople whose services , as was sa id ear l ie r , seem to cont r ibute to thegrowth o f p roduc t iv i ty and econom ic deve lopm ent ( in the sense o f thel at e P r o f e s so r J . A . S c h u m p e t e r ) . T h e r e as o n t h a t t he r e i s h o a r d i n gby p r iva te en te rp r i se , r e su l t ing in h igh p r i ces o f food g ra ins whosedem and is ine las t ic, m ay be cons idered as a severe pu nish me nt to theGovernm ent fo r t ak ing d ic t a to r i a l powers o f ru l ing the coun t ry and ,the reby , spo i l ing the good and p roduc t ive m ot ives o f the p r iva te sec to r .I t i s m y s ince re u rge tha t t he Governm ent keeps i t s eyes open to them at t e r o f r ender ing encouragem ent to the g rowth o f p r iva te sec to r ;o therwise , India wi l t cont inue to become a s lave of the a l iens which,cer ta in ly , i s regre t table . At th is point , i t seems informat ive tom ake the po in t on the qua l i ty o f whea t supp l i e s tha t we a rereceiv ing f rom the Uni t ed S ta te s (under PL 480 , In d ia A ID, Gi f t s andso on). - - B ased on m y p e r sona l con tac ts w i t h l ead ing agr i cu l tu r i s t sin the Uni ted Sta tes and medica l doctors and nut r i t ion exper ts in theU. S . A ., Eu rope and he re , I m us t r e por t he re wi th p ro foun d so r row tha tthe whea t supp l i e s tha t we a re ge t t ing a re so low in qua l i ty tha t a ren o t f i t f o r h u m a n o r p i g c o n s u m p t i o n i n t h e U . S . A . ; t h e i r n u t r i t i v econ ten t i s be low the p resc r ibed U.S . s t andards . The com m on m a n (TheGovernm ent m ay be aware ! ) in Ind i a does no t know abo u t these ' d ip lo -m at i c ' a spec t s , and keeps on purchas ing a t r a t ion shops . - - Th i s i s ou rm eanness , and th i s fo rm of econom ic s l ave ry m us t be s topped fo r thwi th .Let us note tha t the Government cannot come to the rescue of the com-m on m an , and i s l ike a non-sw im m er who has ' a lm os t ' go t d rowned inthe middle of a turbulent r iver ( l ike Kosi r iver ) or an ocean. Therefore ,l e t u s jo in hands and u rge p r iva te sec to r to he lp Ind ia to save f rom th i sve ry awkard pos i t ion she i s f aced wi th .

As a r e su l t o f the rupee deva lua tion , t he m a nufa c tu re r s o f wash ingand bath ing soap, whose demand i s so ine las t ic , a re fac ing the ser iousprob lem of h igh cos t s . - - The r ecen t r i s e in p r i ces o f soap i s a t t r ibu tedto non-co-opera t ion f rom the Governm ent . The m anufac tu re r s r eques tedfor l ieences to impor t some technica l equipment and chemicals which d idnot involve the use of fore ign exchange of more than 500 rupees a year . - -The i r r eques t was no t g ran ted . There fo re , t he ne t r e su l t i s t ha t t hem anufac tu re r s a re com pe l l ed , by circumstances, to increase pr ices . S imi-l a r cos t and p r i ce inc reases a re be ing exper i enced by the newspaper indu-s t ry { for analy t ica l de ta i l s , re fer to f igures 1 and 2) .


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The Imp act of Rupee Devaluation on Productivity 473Devaluation and Workers' discontentment

As a r e su l t o f t h e e n o rm o u s r i se i n p r i c es fo r sma l l c o n su m e rs 'i t e ms , wo rk e r s ' f r u s t r a t io n h a s c r e p t i n . - - T h e re i s a b ig s t i r i n l a b o u r -ma n a g e me n t r e l a t io n s . - - so o n a f t e r d e v a lu a t io n , i n t e rn a l p r i c e s h a v eg o n e u p s o h i g h t h a t w o r k e r s ' h a v e n o o t h e r g o b u t t o g o i n f o r s t r i k e sa n d l o c k o u t s . - - B E L , B o m b a y t a x i - d r i v e r s ' U n i o n , F i l m E m p l o y e e s 'Un io n a n d S te e l wo rk e r s ' s t r i k e s a n d lo c k o u t s a r e i n s t a n c e s in c a se . I nr e c e n t mo n th s , t h e re h a v e b e e n d e m a n d s fo r h ig h e r d e a rn e s s a l lo wa n c ea n d m o r e c a s u a l l e a v e n o t o n l y b y S t a t e G o v e r n m e n t E m p l o y e e s b u ta l s o b y C e n t r a l G o v e r n m e n t E m p l o y e e s .

Polit ical and Economic Freedom through Private EnterpriseIn o rd e r fo r t h e c o u n t ry to b e f r e e n o t o n ly p o l i t i c a l ly b u t a l so

e c o n o mic a l ly , I n d ia mu s t b e s e l f - r e l i a n t - - ' S e l f -R e l i a n c e ' c a n c o me a b o u tb y e n c o u ra g in g th e g ro wth o f p r iv a t e s e c to r wh ic h e n c o u ra g e s c o mp e t i -t ion 13 i t i s the comp et i t ive aspec t which p ro v ide s the g ree n s igna l fo rin c re a s in g p ro d u c t iv i t y wh ich , u l t ima te ly , l e a d s to p ro sp e r i ty .

I n o r d e r t o b r i n g a b o u t a n i n c r e a s e i n p r o d u c t i v i t y , l e t u s u n d e r s t a n dth e c o n c e p t o f c a p i t a l - l a b o u r o u tp u t r a t io w h ich t a k e s in to a c c o u n t t h e u seo f i n v e s tme n t i n ma te r i a l c a p i t a l a n d in v e s tme n t i n h u m a n c a p i t a l . -T h e g e s t a t io n p e r io d b e twe e n ma te r i a l c a p i t a l i n p u t a n d o u tp u t sh o u ldte n d to g e t r e d u c e d , wh ic h is a s ig n o f t h e in v e s tme n t a c t iv i ty r e n d e r in ga s t a g e o f s e l f -p e rp e tu a t io n ; s imi l a r ly , t h e g e s t a t io n p e r io d b e twe e n t e c h -n i c a l la b o u r i n p u t a n d o u t p u t ( g e tt in g o f t r a i n i n g a n d u s i n g i t f o r p r a c t i -c a l a p p l i ca t i o n s d e p e n d i n g u p o n m a n a g e m e n t d e ci si on ) t e n d i n g t o s h o r t e nb e c o me s a s ig n o f p ro sp e r i ty - - t e ch n ica l g ro wth b e c o me s s e l f - su s t a in in g .

ConclusionT h e r e d u c t io n in th e c a p i t a l - l a b o u r o u tp u t r a t io 14 g iv es a g o o d in d ic a -

t io n o f i n v e s tm e n t g ro w th a n d o f s el f -r e l ia n c e . H o w q u ic k d e ma n d s a r e13 G. C a r a v a I e has brillian tly remarked, "b y introdu cing the more realisticassm nptions o f pro duc t differentiation, it can be shown that an oligopolisticma rket st ructu re (private sector) is capable of play ing a positive pa rt in thedevelopment process on condition that there is a possibility of entry for newfirms. A situation of this type can give rise to competitive pressures whichstimulate oligopolistic flip,as to make use of their greater capacity of innovation

and so effectively counteract the forces which work towards a concentrationand would, if left to free pla y (public sector) tend to slow down the rate ofintroduction of technical process and hence the rate of development in thesystem", in: Oligopolio Diffcrcnziato e Processo di Sviluppo. Eeonomia Inter-nazionale 18 (1965).t4 M. R. K. Sw a m y : Growth Models -- A Reappraisal. Economia Inter-nazionale 16 (1963) , pp. 61--72) . -- M. R. K. Sw a m y : The Labor CommandTheory of Wage Differentials. Indian Journal of Labour Economics (1966),n. 3. -- A detailed investigation o f the concept of capital-labo ur outp ut ratioin relation to productivity is in progress.


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474 M .R . K . Swamy: The Imp act of Rupee Devaluation on Productivitymet , and how soon the p roducts are p roduced depend upon the g rowth o fp ro d u c t iv i ty . Se l f - r e l i an ce can b e b ro u g h t ab o u t b y en co u rag in g p r iv a tesecto r which , knows when , where , an d how to rew ard mer i t whe re mer i ti s due. In o rder to increase net nat ional p roduct o f the coun try , le t us jo inh an d s an d en co u rag e meth o d s to in c rease p ro d u c t iv i ty b y co -o rd in a t io nof techniques and their use.

Address of author: Prof. Dr. M. R. Kumara Swamy, Ph.D., 766A,P. Y. C. Road, Poona-4. India.

Impact of Rupee Devaluation

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