PRICES RISING
DUE TO RECKLESS PRINTING OF MONEY
By S S Bagai--June 2008
Since 1947 India's price level has gone up 51 times and destroyed over 98% of the value of the rupee left by the British rulers. This has happened due to reckless printing of money.
Prices of individual goods can keep rising or falling due to several factors affecting their demand and supply. But price level as a whole is determined primarily by the quantum of goods and services available in the country and the total amount of money chasing them. Increase in the prices of some goods is bound to lead to fall in the prices of some other goods, unless the quantity of money is increased. Price level as a whole goes up only when more money is injected into the system or its velocity of circulation goes up due to changes in habits and practices.
To ensure that the price level does not fall when the total output of goods and services is increasing in an economy, money supply has to be increased. But if increase in money supply is greater than the increase in the quantum of goods and services, then the entire price level is bound to go up. Better managed countries, therefore, ensure that a reasonable relationship is maintained between the two. They do not allow money supply to expand much faster than the amount required to take care of rising GDP.
This is the simple quantity theory of money, which many economists do not accept, but its basic proposition is simply a matter of common sense or a rule of arithmetic.
Massive Expansion Of Money Supply
Since last two/three decades Government continues to expand money supply many times more than increase in GDP, as the data tabulated in this article will show. Considering the entire post - independence period, for every rupee of increase in GDP, currency in circulation has been increased by more than 30 rupees. This has led to the disastrous result of pushing up the price level by 51 times in the course of 61 years from 1947 to 2008.
M3, which includes not only currency in circulation but also, deposits of various types and other large liquid assets, represents a comprehensive measure of supply of money in an economy. Currency and total money supply both have to remain under strict control to ensure a reasonably stable price level.
Table I shows the amount of currency in circulation as well as M3 in a few selected years, along with the Wholesale Price Index.
Table 1
Money Supply and Price Index
| Year | Currency in Circulation Rs. Cr | Total Money Supply (M3).
Rs. Cr. | Wholesale Price Index Base year 1993- 94=100 |
| 1919-20 | 154 | NA | |
| 1929-30 | 159 | NA | |
| 1938-39 | 189 | NA | |
| 1947-48 | 1,304 | NA | 4.5 |
| 1951-52 | 1,292 | 2,196 | 7 |
| 1960-61 | 2,154 | 3,902 | 8 |
| 1970-71 | 4,557 | 10,326 | 14 |
| 1979-80 | 12,382 | 43,792 | 37 |
| 1990-91 | 55,282 | 2,49,493 | 74 |
| 1998-99 | 1,75,846 | 9,01,294 | 142 |
| 2003-04 | 3,27,028 | 18,61,604 | 176 |
| May 2008 | 6,02,706 | 40,77,302 | 231 |
NA= Data Not Available
Between 47- 48 to 60-61, currency did not even double. But with passage of time it has been multiplying rapidly. Between 1947-48 to 2008, it has multiplied 462 times. Explosive expansion from mere Rs.12,382 crores to Rs. 6,02,706 crores took place after 79-80.
In more than 100 years ending in 1980, the total amount of currency in circulation increased gradually to only Rs 12,382 crores. Now that much amount is being added every 45 days. In last one year alone a further amount of Rs 90,355 crores was pushed into circulation, which is currently playing havoc with the price level.
M3 was merely Rs 43,792 crores in 79-80. It has now touched the astronomical figure of Rs 40,77,302 crores. Since 1951-52, it has gone up 1857 times.
Massive expansion of currency and M3 is very much reflected in the rapid increase in the price level. Since 1947-48 price level has gone up from 4.5 to 231 (93-94=100).
After 1947 while GDP has increased only 15 times, currency in circulation has been multiplied 462 times. This constituted an open invitation to large scale inflation.
Government officials and even some economists and journalists keep blaming all sorts of irrelevant factors for inflation in the country. But as apparent from Table I, the real reason is massive expansion in money supply, to please the business community and finance the budget deficits of the government.
How well the currency was managed in the years prior to the Second World War is apparent from the fact that in 19 years from 19-20 to 38-39 currency in circulation went up from Rs 154 crores to merely Rs 189 crores.
COMPARISON WITH OTHER COUNTRIES
For comparison complete data about currency is not available about most of the countries from the internet. But whatever could be gathered is tabulated below.
The following table shows the number of times total money supply (M3) increased during the period of 46 years, between 1960- 2006.
Table 2
M3
| Country | Increase in No. of times |
| USA | 35 |
| Sweden | 29 |
| Singapore | 38* |
| Australia | 95 |
| India | 677 |
* Between 1974 to 2006
Look at the wide gap in the number of times M3 increased between these countries and India. Obviously India does not exercise any restrain in respect of such a vital matter affecting the welfare of the common man.
The following table shows the number of times the price level increased in different countries during the period of 50 years between 1956-2006.
Table 3
Price level
| Country | Increase In Price Level (Number of times) |
| Singapore | 3* |
| Germany | 4 |
| Switzerland | 4 |
| Japan | 6 |
| France | 7 |
| USA | 7 |
| Canada | 8 |
| India | 27 |
*From 1961 to 2006
The better a country is managed the smaller is the increase in money supply and consequently the price level. Compared to the countries listed in Table 3, by pushing up the price level so fast India is playing havoc with the finances of the lower strata of society and shifting huge amounts of wealth in the most undesirable direction. Of course, India can be proud of its record when it looks to countries like Turkey, where price level went up 600 times (i.e. from 100 to 60000) in only 15 years (between 1991 to 2006). In Zimbabwe the position is much worse. It has introduced 500 million-dollar currency note which can buy only two loaves of bread.
SINGAPORE MOST WELL MANAGED
Singapore has the highest regard for the welfare and basic rights of its common people. Since its independence in 1961, its price level has gone up only 3 times while its real GDP has jumped up 35 times.
Comparison of last 20 years data of India and Singapore will show the vast difference in the way the two countries deal with such a vital matter affecting the lives of their citizens.
TABLE 4
India and Singapore compared
INCREASE BETWEEN 1988 TO 2008
| | INDIA | SINGAPORE |
| | Increase In No. of Times | Increase In No. Of Times |
| GDP | 3.6 | 3.9 |
| Currency | 16.6 | 3.6 |
| M3 | 26.2 | 6.6 |
| Price Level | 4.30 | 1.37 |
During the period of last 20 years, quantum of increase in GDP of the two countries was almost similar. But while Singapore increased its currency in circulation by a slightly smaller amount than the increase in GDP, India increased it by 4.61(16.6/3.6) times of increase in GDP. In other words for increase of every S$ of GDP, Singapore created less than one S$ of additional currency, whereas for every rupee of increase in GDP India created 4.61 rupees of additional currency. Position with reference to M3 is still worse. Against every S$ of increase in GDP, Singapore created only 1.69 (6.6/3.9) S$ of additional M3, whereas for every rupee of additional GDP India increased M3 by 7.28 (26.2/3.6) rupees.
INFLATION--A GOVERNMENT CREATION
Increase in currency to the extent of increase in GDP is certainly legitimate and necessary. But increasing it 4.61 times of increase in GDP means creating inflation. Having itself created inflation, Government goes on blaming events like increase in price of imported oil. Government spokesmen always talk of 'fighting inflation' as if it is a monster let loose by some external force. Increase in price of imported oil simply reduces India's GDP. By itself it cannot increase the price level as a whole. If people have to spend more on oil, they will spend less on other goods and that will lead to fall in prices of other goods. In the long run, the price level as a whole cannot rise merely because price of one commodity has gone up.
During the aforesaid period of 20 years price level went up 4.30 times because currency was increased 16.6 times while GDP had increased only 3.6 times.
BRITISH PERIOD British government never indulged in massive printing of money (except for a few years of the second world war ). During the period before the war, it ensured that the price level did not go up even 3 times in 82 years from 1857 to 1939. ( With 48-49 as base year, price index stood at 10.2 in 1857 and 29.0 in 1939). INDEPENDENT INDIA FOLLOWED A SENSIBLE POLICY FOR A FEW YEARS
For a few years even independent India increased its currency in tune with the increase in GDP and consequently the price level did not go up too high. During the period of 15 years immediately following independence, between 1947- 48 to 1962- 63, the Indian leaders continued to follow the policy of their British predecessors. During this period of 15 years India increased its currency in circulation by only 87 % (from Rs. 1304 crores to Rs. 2439 crores) while GDP increased by 64 %. Because of the sensible policy of not expanding the currency too much the price level went up only by 30 % during this period of 15 years.
MONEY SUPPLY AND GDP
Government and big business groups, being the principal beneficiaries of inflation have succeeded in establishing the widespread myth that large expansion of money supply is necessary for rapid growth of GDP. They always talk of �the trade-off between inflation and growth� implying that a country has to suffer inflation in order to have economic growth. Singapore has established that economic growth does not depend upon huge expansion of money supply. Since its independence in 1961, real GDP has jumped up 35 times while price level has gone up only 3 times, because money supply has been kept under strict control.
WHAT INCREASED INDIA�S GDP Since 1947, India�s real GDP has gone up 15 times, but it is largely due to three factors. One is the over threefold increase in population. Second is that more and more educated and skilled workers are entering the workforce. And the last is availability of much better technology. Increase in GDP had nothing to do with massive expansion of money supply.
HELPING THE RICH, HARMING THE POOR
Fall in the value of the rupee keeps raising the value of physical assets and reducing the value of monetary assets. The rich and super rich normally borrow money and buy physical assets. People of lower middle class are normally lenders of money through deposits with banks, post offices and others. Consequently the wealth of the rich and super rich has been going up and that of the lower sections of society going down. That is why the inequalities of income and wealth have considerably increased since independence.
Fall in the value of the rupee through inflation does not destroy the real wealth of the country. It merely leads to the transfer of wealth from the poorer to the richer sections of the people. That is why better managed countries like Singapore, Switzerland and Germany have not allowed the value of their currency to fall excessively.
In India, in the course of last 20 years, the price level has gone up 4.3 times with the result that value of money is reduced by 77%. Take the case of a widow who inherited Rs. 10 lakhs in 1988 and has been keeping it in a fixed deposit in a bank. With the interest income left after paying income-tax she has been meeting the household expenses. But in the course of 20 years, 77% of the real value of her deposit has been snatched away by the beneficiaries of inflation. Her deposit of Rs. 10 lakhs is now worth only Rs.2.3 lakhs in terms of the money of 1988
BENEFICIARIES OF INFLATION
The two principal beneficiaries of inflation are the borrowers of money and holders of property. The biggest borrower of money and holder of property in the country is the government itself and the next are the large business groups. Inflation goes on shifting the wealth from persons like this widow to the government and the upper classes of society.
CONSTITUTION FLOUTED
Our constitution guarantees fundamental rights including the right to property. No one is supposed to be deprived of his property without due process of law and after adequate compensation. But through inflation the government quietly goes on transferring property from crores of people belonging to the lower classes to itself and the richer classes of citizens.
OTHER VICTIMS OF INFLATION
By printing money and promoting inflation Government also causes immense damage to the poorest of the poor and the labor classes, because wages are sticky and do not keep pace with fall in the value of money, particularly in the short run.
Large scale printing of money provides the most subtle way of taxing the poor and the lower middle class people. They are forced to part with a major part of their hard earned income.
INCREASE IN INCOME TAX REVENUE ALSO DUE TO INFLATION Revenue authorities keep feeling very proud of the fact that income tax and other revenues have been increasing during the last few years and attribute it to increase in the efficiency of administration. Actually increase in revenue is due to inefficiency in the management of the monetary system, which is multiplying money recklessly, giving rise to huge corporate and non-corporate profits. Income tax revenue had increased substantially even during the years of the second World War, when the British Govt. started printing currency excessively to finance the war and business profits shot up.
Business houses also keep claiming that their profits are increasing due to better management, whereas they are actually going up due to the rapidly rising prices.
OTHER DAMAGING CONSEQUENCES
Since the time of abandoning the barter system, most of the human activity takes place in terms of costing and pricing, which is done in monetary amounts. If the value of money goes on changing rapidly all amounts of costs and prices need to be revised. And a lot of time is wasted in renegotiating the transactions again and again, which reduces national output.
Fast rising prices and fall in the value of money adversely affect the household budget of everybody. Fixed income earners are the worst hit. Employees of public and private sectors all have to keep fighting continuously for increase in salary and wages rather than concentrate on productive work.
Imagine the consequences if the Govt. goes on changing the length of a foot or the weight of a kilo. Continuously changing the value of the common measure of all financial transactions is still worse.
MOST IDEAL COURSE
In the interest of justice, fairness and welfare of the common man, stability of the price level is very essential. The most ideal course would be to increase money supply only to the extent of increase in GDP so that the price level does not go up at all. But in order to facilitate rapid growth of the economy, some excess of money supply may be unavoidable. Moreover, it is not possible to match the two exactly. This excess should, however, be so small that the price level does not go up by more than around one percent per year as is happening in countries like Singapore or as happened during the period of British rule in India.
ABOUT THE AUTHOR
S S Bagai MA(Economics), LLB served in the Indian Revenue Service for 12 years and is practicing as a financial and tax consultant since last 42 years. Tel 098115-60480
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