Keynesian Economics and Under-Developed Countries Again A Rejoinder A K Dasgupta BECAUSE of his enormous experience as an economic administrator, whatever L K Jha says about economic policy deserves our closest attention. It is therefore with considerable interest that I read Jha's comments (EPW, November 14) on my piece on 'Keynesian Economics and Under-Developed Countries Again'. It appears that my "persuasive prose" could not persuade Jha! But no, he has taken the last paragraph of my paper in isolation from its earlier part, and has mistaken me to be one of those orthodox economists who would shun deficit financing under any circumstances. I am not that at all. I entirely agree with him as regards the use of deficit financing in the context of planned economic development, at any rate at its initial stages. In fact this was the bone of contention in the Economists' Panel in the mid fifties between the late B R Shenoy and some of us. Shenoy, as one will remember, was an extreme conservative in respect of Plan finance. In the Panel meeting where the matter was discussed I remember having set myself against him. And at the request of the late C D Desh- mukh (who happened to be our Chairman) I allowed myself to write a note on Deficit- Financing. The note was published in "Papers Relating to the Second Five Year Plan" (Planning Commission, Government of India, 1954). Therein I justified a policy of deficit financing in the context of plan-finance, even though I made it clear that the policy was not to be a painless process as it would be in the economy which had been Keynes's frame of reference. I cannot quote from that note, for I do not have it with me at the moment. I may, however, quote from a paper, which I had written earlier and which was published in a revised form in a collection of essays under the'title "Keynesian Economics'' (ed V B Singh, Peoples' Publishing House, Delhi, 1956). This is what I said there: The need for public investment is urgent if the objective in the under-developed economies is to achieve a higher standard of living and increasing volume of employment. And, in the absence of an adequate flow of foreign capital and an adequate volume of public savings, deficit financing is also called for. But whereas, in mature economies, deficit financing is more or less innocuous and can be depended on, with the aid of the multiplier, to achieve the desired level of employment without any substantial rise of prices and with a constant money rate of wages, in under-developed economies where structural resistances are strong, deficit financing leads to inflationary pressures and a tendency to a rise in money wage rate, except insofar as the pattern of investment is such as increases output within the time lag between the earning of additional money income and its spending on consumption goods. In such economies, therefore, deficit financing has to be accompanied in the transition period (i e, till the structure of capital equipment is matched with the extended structure of demand) by a system of controls very much on the lines of war time controls. If money wage rates are to be kept constant, prices of wage-goods must not be allowed to rise. And if resources are to be prevented from shifting to non-essential industries, price control must be accompanied by capital issue control. And so on (pp 162-63). On this therefore we agree. I have not indeed made "the point", as Jha suggests, "that with the shortage of capital addition to aggregate demand through budgetary deficits will not help countries like India". I have, on the other hand, always argued, as I say in the early part of the paper which provokes his comment, that deficit financing can be legitimately used towards capital formation (and hence growth), provided its inflationary impact could be regulated. In fact in a seminar on Inflation organised by the members of parliament on the eve of the Third Plan, which both V K R V Rao (whom Jha quotes in. his favour) and myself addressed, I remember to have found myself rather to the "left" of Rao in my deviation from orthodoxy.
