CHAPTER

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Polic olicy Price Policy in Dev Economic Development
THE NATURE OF PRICE POLICY
Rise in prices is inherent in the development process. Imbalance between demand and supply of commodities and factors is inevitable under development planning. The demand for goods and services rises as a result of stepping up investments on a large scale and the consequent creation of money income. Ever mounting administrative, non-developmental and defence expenses and population pressures give a further pull to demand. But supply fails to meet the increased demand as investments in underdeveloped countries are made on such projects that take a long time to mature. Backward technology, low skills, market imperfections and various other bottlenecks, restrict the supply of consumer goods. The gap between demand and supply leads to rise in prices.

OBJECTIVES OF PRICE POLICY

Price policy is not merely concerned with holding the price line or keeping prices stable at any given level, but it is equally concerned with the movements of general as well as relative prices of goods and services. 1. To Establish Equilibrium between Demand and Supply of Goods and Services. In considering the theory of price policy in the context of planned economic development,

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Dr. V.K.R.V. Rao1 emphasises that price is an important economic mechanism performing certain functions, and any price policy should be in this functional context. Primarily, this function is to bring about the required equilibrium between demand and supply of goods and factors. When they perform their economic function, price movements should be of a self-liquidating character. It is not necessary that a rise in the comparative price levels of individual commodities should lead to a general price rise. Increase in individual prices liquidate themselves without bringing about a rise in the general price level when the former bring into use additional productive resources or raise the level of productive efficiency of existing resources. It means that in order to avoid a rise in the general levels of prices total output should be raised to meet the increased demand for individual commodities. 2. To Bring Flexibility in Prices. But in an underdevelopd country undergoing the process of economic development aggregate production takes much longer time to increase than in a developed one, as a result a rise in the general level of prices usually accompanies an increase in the prices of individual commodities. However, all price rises should not be regarded as socially undesirable. It is only when an individual or general price rise fails to increase output or to reduce demand that it is considered harmful. Thus price policy should aim at flexibility in prices in order to redirect demand, reallocate productive resources and reorientate output towards the desired direction. 3. To Stabilise Prices of Consumer Goods. It should also aim at stabilizing prices of basic consumption goods so as to avoid inflationary pressures arising from investment projects of long gestation in an underdeveloped country. But a rigid, stable general level of prices may be as much of a dead weight on economic growth as a rapidly rising price level.2 A stable price level may retard growth whereas a rising price level may distort investment and income. The right and appropriate price policy in this context must achieve the objective of increasing the production both of basic consumption and investment goods. 4. Two Aspects of Price Policy. According to Prof. Rao3 a rightly conceived price policy for aiding economic development should, broadly, have both a macro and a micro aspect. In its macro aspect, it essentially takes the form of monetary and fiscal measures which are meant to influence the creation of income and its utilization. The Indian Third Plan Report also recognizes that a major constituent of price policy is monetary and fiscal discipline. 4 Monetary policy should prevent expenditure and consequent income creation going in the wrong direction. Speculative holding of commodities and accumulation are to be discouraged in particular. An appropriate interest rate and selective credit control policy may help in this direction. Fiscal policy must go along with monetary policy. The latter regulates the creation of excess purchasing power through banks and the former through government action. Both policies also help in maximizing savings of the community. But fiscal policy should in particular try to reduce income through appropriate tax measures. It should help in restraining consumption and mobilizing saving more effectively, and transfer real sources from the community for public investment programmes instead of creating fresh purchasing power. In other words, macro policy with regard to prices operates not through a direct impact on individual prices but indirectly through its impact on income creation and income utilisation and, therefore, on the two variables that determine the monetary framework from all changes in prices.5
1. V.K.R.V. Rao, Essays in Economic Development, Ch. 6. 2. Ibid, op. cit., p. 146. 3. Ibid. 4. GOI, Third Five Year Plan, p. 127.

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In its micro aspect, price policy is more direct and essential under development planning. It should aim at increasing the output of consumption goods alongwith investment goods in order to match increased consumption expenditure resulting from increase in investment outlay. Such a policy would encourage the use of resources for the production of investment and basic consumption goods and help avoid inflationary pressures. In other words, price mechanism should act both as a stimulant and a deterrant. Purposive and differential price policies should be followed for the production of specific commodities and their utilization. This necessitates physical allocation and direct controls. In respect of basic consumption goods, like foodgrains, cloth, edible oil, etc., prices should be held reasonably stable through state trading and control at the retail and wholesale stage. 5. Agricultural Price Policy. A suitable agriculture price policy holds the key to development in an underdeveloped economy. Agricultural prices are quickly responsive to demand and supply conditions. Since agricultural output constitutes 50 per cent or more of the national product, the general price level is mostly determined by the behaviour of agricultural prices. The agricultural price policy should aim at reducing price fluctuations of agricultural commodities so as to reduce the loss to the producer from a sharp price fall following the bumper cropland to minimize the difficulties of the consumers from sharp price rises as a result of crop failures or short supplies. For this, price policy should be comprehensive enough to include measures from the production of agricultural products to their distribution. In order to stimulate their production, various land reform measures should be adopted, dependence on nature be minimized, and inputs like fertilisers, improved seeds and implements be supplied at subsidised rates or even at short-term credit. But the important tenet of this price policy is the fixation of minimum and maximum prices for all major agricultural crops. The minimum prices should be so fixed as to provide proper incentives to producers after taking into account regional variations in the costs of production of different crops. It implies slight price variations for the same crop in different regions. The maximum prices reflect only a payment to the producer for the quality variations in the crops.6 A successful price policy also includes the creation of buffer stocks and their operation through continuous purchase and sale over a wide range. Such purchase and sale operations should be undertaken by the state and its agencies. A network of cooperative and governmental agencies close to the farmer, licensing and regulation of wholesale trade, extension of State trading in suitable directions and a considerable sharing by government and cooperatives in distribution arrangements at retail stage are essential for the success of purchase and sale operations for stabilizing prices and correcting seasonal and regional variations. Pursuit of these policies will be necessary if both the economic and psychological factors affecting the prices of essential consumer goods are to be brought under control. 6. Price Policy for Consumer Goods. In the case of non-essential consumer goods, which fall in the category of comforts and luxuries, price determination should be left to market mechanism. If need be, price rise may be allowed but it should be accompanied by high taxes and controlled allocation of resources. Another aspect of micro price policy is to raise the prices of the exportable commodities for the domestic consumer in order to supply them cheaper to the foreign consumer for the purpose of earning more foreign exchange. Fixation of the price of sugar in India is in keeping with this policy. It is not a healthy policy because it is like starving ones family in order to feed others.
5. V.K.R.V. Rao op. cit., p. 151. 6. NCAER, Price Policy of Economic Growth, 1965.

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7. Price Policy for Industrial Raw Materials. Specific measures are also called forth for regulating the prices of industrial raw materials like coal, cement, iron and steel, etc. Just as stabilization of agricultural prices goes a long way in stabilizing the industrial prices, likewise stabilization of the prices of industrial raw materials contributes much towards stabilizing the prices of goods produced from them. Price policy should ensure their proper utilization and distribution so as to avoid inflationary pressures. Price rise should be permitted in their case keeping in view the need to promote exports to control domestic consumption or to provide incentives for further investment and production. Prices should be so fixed as to avoid excessive profit margin, at the same time providing incentives to production. Such a policy also necessitates the use of price and distribution controls in respect of such commodities. 8. Price Policy in Relation to Enterprises. In a mixed type of underdeveloped economy like ours both the public and private enterprises are expected to play an important role in the economic development. Public enterprises should follow such a price policy as that brings in larger profits commensurate with social welfare and thus help augment public savings. The private sector has to play a still more significant role in this context, since it predominantly supplies consumption goods. A rising price level would have a favourable effect on the expectations of the entrepreneurs. To the extent the rising price level is able to transfer income from the passive rentier class to the active entrepreneurial class, it will exercise a beneficial influence on the levels of savings, investment and output. But the price rise should be gradual and slow where there are competitive product and factor markets so as to affect a right allocation of investible resources among them. Price policy should, therefore, aim at bringing about a proper structure of production and distribution. An absolute and relative price behaviour should be established to promote economic development through rising levels of income, saving and investment.7 9. Relation between Price and Wage Policy. A rational price policy should aim at reducing the scope of automatic linkages between price and wage increase in the economy. Wage incomes and prices are interrelated. When prices rise, wage-earners struggle for inceased wages. When wages rise, they tend to push up prices in the absence of a matching supply of essential consumer goods. A wage-freeze policy is no remedy since it adversely affects efficiency and productivity. It is, therefore, better to have a wage policy in the interest of orderly development. A steady and calculated wage increase is better than an abrupt jump with every price change.8 Wages should rise in those sectors where the prevailing average wage is below the minimum consumption level. Wage increase should, however, be related to productivity. But even the productivity-oriented wage policy cannot stabilize wages and hence prices, unless continuous supplies of essential consumer goods are forthcoming at reasonable prices. Thus price policy should ensure the avoidance of a spiralling of costs, prices and wages through their mutual interaction.

7. Ibid. 8. Ibid.