iyer-monetary resources velocity

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Monetary Resources, Agricultural Production and Wholesale Prices, 1953-54 to 1969-70Author(s): S. R. Krishna IyerSource: Economic and Political Weekly, Vol. 5, No. 51 (Dec. 19, 1970), pp. 2053-2054Published by: Economic and Political WeeklyStable URL: http://www.jstor.org/stable/4360850 .Accessed: 14/08/2011 11:51

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Monetary Resources, Agricultural Production

a n d Wholesale P r i c e s , 1 9 5 3 - 5 4 to 1 9 6 9 - 7 0

S R Krishna Iyer

Although official pronouncements had anticipated a fall in prices in 1969-70 wholesale prices infact nmoved up by about 4 per cent - the sharp increase in

agfriculturalproduction notwithstanding.

The sustained uptrend in prices since 1956-57 was thus resumed after a short break in 1968-69.An imvortant assumption of the Fourth Five-Year Plani being stability of prices, the Plan's calcu-

lations would go awry unless this uptrend is checked.This paper seeks to analyse the factors that were responsible for the price situation. What

emerees as evident is that, in analysing a price trentd, one has to look for the trend in income velocityin addition to the trend in monetary resouirces. Very often, a fall in income velocity has moderated theinflationary impact of a rise in monetary resources, and vice versa. Another revealing fact is that, evena marginal fall in agricultural production or in availability of foodgrains results in a noticeable rise inprices. A good crop year has been generally follow2d by a decline in income velocity - probably be-cause the money flows then to the agricultural sector which does not spend it so rapidly as do theother sectors.

DURING 1969-70, wvholesale pricesmoved

uipby about 4 per cent, ac-

cording to the annuial average in(lex.The sustainied uptrend in prices since1956-57 was thus resumed after a shortbreak in 1968-69. All official pronounce-ments had anticipated a further fall inprices during 1969-70. In fact, an im-portant assumption.z f the Fourth Five-Year Plan is stability of prices. A fur-,ther fall in prices, or definitely a sta-bilisation at the previous year's level,was considered certain during 1969-70,in the light of the sharp rise in agri-cultural production during 1967-68.This was more or less maintained inthe following year. The rise in pricesduring 1969-70 is a matter of concern,especially when viewed against the factthat this has occurred on top of sharpincreases right from 1963-64 and espe-cially during 1966-67 and 1967-68. Fur-ther, the very fabric of a successfulFourth Five-Year Plan woven round thestability in prices and in the very firstyear this has been belied. Everythingmjsll go a&vry unless the uptrend ischecked and prices are brought dowvn.It will be of interest to find out whythere has not been an appreciable fallin prices in the last two years despitethe very comfortable crop position, andto analyse the causal factors for theprice trend since 1953-54.

India is predominantly agricultural.About 50 per cent of the national i'a-come is derived from agriculture and70 per cent of the people depend on itfor their livelihood. Nearly 60 per c%cntof total household consumption and 85per cent of the coimmodity consumptionof households comprises agricultural pro-ducts or manufactures based principallyon agricultural rawv iaterials. In thecompilation of the index, food articlesare given a weightage of 41 per cent.

Also, atecordiing o the National SampleSurvev, 18th Round, in consumer

ex-pendittire, food items constituted 70per cent, 60 per ceint an(d 54 per cent,respectively, i.i rural areas, urban areasand cities. This being so, a major fac-tor that has to be kept in mind whileanalysing the price behaviour in Indiais the trend in agricultural production.Of course, the effect of agriculturalproduction either way will have a timelag of about a year - i e, a fall/risein prices Nvill occur in the year fol-lowing an increase/decrease in produc-tion. Apart from the trend in agricultur-al output, the total availability of food-grains including imports will also havcto be considered. The above two fac-tors represent the supply side. On thedemand side, the two important vari-al)les that matter are the monetary re-souirces and the velocity of circulationof monetary resources or the incomevelocity of miionetary esources. Mone-tary resources represent the total ofmoney supply with the public and(IlLasi-moiney r time deposits. Whilemioney supply wvith the public re-presents the most liquid form of moneyhaving a.i immediate impact on theeconomy, quasi-money also is relevantNvhile analysing the price behaviour, asthis also represents purchasing poweran(d considerably influences the spend-ing decision of the individual. Thisis particularly so in India, where morethan 60 per cent of the time depositsatire held for periods of less than oneycear a'ildI canl he withdrawn at shortniotice eveni before maturity.

During 1953-54, there was a five percenit increase in prices. In the preced-ing year, agricultural productioni hadimproved by about 5 per cent and then.et availability of foodgrains was alsocomfortable in that year. Despite this,

.111 iinerease in price occurred. On the(lemiandcl i(le, the rise in monetary re-souirces was also very moderate, atarioutnil 2 per cent, but the inconmevelocity accelerated by 5 per cent. Itappears, therefore, that the rise inprice was induced mainly by the fas-ter rate at which money changedhands. In the succeeding two years, i ,during 1954-55 and 1955-56, the priceindex came down by 7 per cent and 5per cent respectively. There was a con-siderable spurt in agricultural produc-tion during 1953-54, and a furtherimprovement in the following year. Thenet availability of foodgrains showed amarked rise during 1954-55, which wasmore or less maintained in the suc-ceeding year. There was an increaseof 5 per cent in monetary resources in1954-55 and a sharper rise of 12 percent in 1955-56, but the effect of theseincreases was more than counter-balanced by the steep declines in theincome velocity noticed in both theseyears. The year 1956-57 again witness-ed a 14 per cent increase in prices. Onthe supply side, agricultural productionhad showNn negligible decline in theprevious year and availability of food-grains also declined somewhat in thatyear. As against this, monetary resouir-ces rose substantially and incomevelocity also moved up.

From 1957-58 to 1962-63, the an-niual rate of rise in prices was mode-rate, except during 1960-61. On thesupply side, crops wvere very good inevery alternate year and the availa-l)ility of foodgrains wvas also quite com-fortable. I-lowever, monetary resources\were co(ntinuously OII the, uptrend,while iniconie velocity moved up forthree years and registered declines iiathe remaining three years. It woulda-pear that, but for the fall in income

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December 19, 1970 ECONOMIC AND POLITICAL WEEKLY

TABLE PERCENTAGE CHANGE IN MONETARY RESOURCES, INCOME VFLOCITY,AGRICULTURAL PRODUCilION, NET AVAILABILITY OF FOOLGRAINS

AND WHOLESALE PRICES

Monetary Income Agricultural Net Avail- WholesaleResources Velocity of Production ability of Prices

Monetary Foodgrains* (Average)Resources

1953-54 1.9 4.7 12.1 8.9 4.6

1954-55 5.2 -12.8 2.4 13.0 -6.8

1955-56 11.6 -7.0 -0.2 -0.9 -5. 1

1956-57 8., 4.3 6.4 -1.0 13.8

1957-58 6.3 -5.2 -6.8 5.6 2.9

1958-59 6.8 3.6 15.2 -6.7 4.2

1959-60 9.7 -6.4 -2.4 17.1 3.7

1960-61 8.1 1.1 9.1 -1.9 6.7

1961-62 5.7 1.8 6.5 0.2

1962-63 9.7 -3.5 -3.6 1.2 2.2

1963-64 11.0 3.6 2.5 -2.2 6.2

1964-65 10.8 5.9 11.4 4.5 8.2

1965-66 10.7 -7.4 -17.1 8.4 7.6

1966-67 11.2 3.3 -0.4 -13.4 13.9

1967-68 9.1 8.2 22.3 0.9 11.6

1968-69 10.7 -8.7 -1.4 17.8 -1.1

1969-70 13.0 - 3.5 to4** 7.0** --1.2 3.7

* Relate to calendar year. ** Estimated.

velocity, the increase in prices wouldhave been sharper. This could be seenfrom the experience in 1960-61, when,in the face of a decline in the availa-bility of foodgrains, the monetary re-sources as well as the income velocityrecorded increases.

From 1963-64, the price rise assum-ed larger proportions and persisted upto 1967-68. During these years, thesupply side was not quite comfortable,especially in the two years followingdrought, 1966-67 and 1967-68. On topof this, the growth in monetary resour-ces was at a higher rate and, exceptin 1965-66, the income velocity mov-ed up. It is surprising that there wasa sharp rise in prices during 1965-66,in which year, the availability of food-grains wyas very imutich mproved followv-ing a year of good harvest; further, theincome velocity had also fallen sharplyin that year. The onily explanationseems to be that the rise wvas nducedby a psychology of scarcity in thewake of a severe carought, riottwitness-ed for so many years. The harvest

durinig 1967-68 proved to be a bum-per one, and the supply position ka1968-69 was consequently very muchimproved. Monetary resources rose sub-stantially, but the income velocity de-clined markedly. The effect was thatprices declined by about 1 per cent.One should have expected a muchsharper fall in prices iu the context orthe bumper crop, but it would appearthat the flow of commodities to themarket has come down as the holdingpowNer of the agriculturist has consi-derably improved over the years. Theresumption of the uptrend during1969-70 may have to be attributedprimarily to the sharp growth in mo-netary resources, which was the highestin that year. The inflationary impactof the growth inl monetary resourceswas only partially offset by the smalldecline in inicome, velocity.

Agriculttural productio-a imiiprovedsizeablV dcuriig 1969-70. According toPtess reports the rise Jvas of 7 per cent.The rise ini monetary resources cannot'be what it was in the previous year

since a lower level of deficit financfngwas contemplated; foreigni exchangesurplus, which worked largely for theincrease in monetary resources duri.ag1969-70, is likely to be lower during1970-71 as import requirements arelikely to be higher with the recessionhaving almost petered off. The trendin the previous years shows that fol-lowinig a year of good harvest, the in-colne velocity has been showing a de-cline. One can, therefore, expect afurther fall in income velocity durikg1970-71.

Some of the important facts reveal-ed by the above analysis are that, inanalysing the price situation, one hasto look for the trend in. income velo-city in addition to the trend in mone-.tary resources. Very often, the fall i:inicome velocity has moderated the in-flationary impact of a rise in monetaryresources and vice versa. Another re-vealing fact is that even a marginalfall in agricultural production or in theavailability of foodgrains results in anoticeable rise in prices. It was pointedout earlier that, a good crop year hasbeen generally followed by a declinein income velocity. This is so pre-sumably because the money flows insuch a year to the agricultural sector,where it is not spent as rapidly as inthe other sectors.

Nuclear Power in DevelopingCountries

PROSPECTS for using small and inter-mediate nuclear power reactors in de-veloping countries were examined at asymposium organised by the Interna-tional Atomic Energy Agency (IAEA).This was part of the effort being de.voted by IAEA to help less advancedcountries to take a larger share of theadvantages of the peaceful uces ot atQ-mic energy, particularly in the genera-tion of electricity. Most of the nuclearpower now being used, or projectedfor the coming decade, is in advancedcountries xvhere advantage can be takenof the economic benefits of large instal-lations.

The immediate task is to make athorough assessmnent f the possibilitiesfor making nuclear power stations withcapacities of upto about 500 megawattsecoaoinically, attractive - both through

reduction in costs and by leading toother indultstrial development. A numberof counitries have by now acquired ope-rating experience in nuclear power anrdhiave knowledge. N ith regard to receiitprogress Ol thie ~feasibility of smallerpower reac tOrs.

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iyer-monetary resources velocity

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