Contributions of V.K.R.V. Rao | Economics Optional Notes for UPSC PDF Download

Introduction

The following points highlight the top thirteen contributions of V.K.R.V. Rao to Economics. The contributions are: 

1. Economic Activity
2. Features of Underdeveloped Countries 
3. Industrial Development 
4. National Income Methodology 
5. Institutional Development 
6. Poverty 
7. Deficit Financing 
8. Fiscal Policy 
9. Income Tax 
10. Price Policy 
11. The Human Factor in Economic Growth 
12. Full-Employment and Economic Development
13. On Relevance of Keynesian Multiplier Principle to Under-Developed Countries

Economic Activity

• V.K.R.V. Rao examined the relation of economic activity to the end of all human activity. The methods employed for securing economic goods, or what is called economic activity, can either promote or hinder the development of human personality.
• There are four elements in economic activity which have a bearing on the development of human personality and, therefore, on the ultimate end of human activity. These are:
  (1) The art element in work;
  (2) The dignity and pride element in work;
  (3) The personality-killing element in work; and
  (4) The character-forming element in work.
• The art element gives an opportunity to the individual to develop his personality though his work has no special value for the economist and is rejected by him in favour of a way of production which will yield a larger output per unit cost in terms of money.
• The dignity and pride element in work is also not taken into account by the principle of economy. The third factor, viz., the personality-killing element in work performs, by its presence, the negative function of getting economic activity to thwart the end of human activity.
• The fourth factor, effect on the character and outlook of the worker, can be either positive or negative. It may promote ability and willingness in the worker to develop his personality or it may result in the opposite. That the mechanized industrial system of today based on the principle of economy – tends to do the opposite is an admitted fact.

Features of Underdeveloped Countries

• Dr. Rao identified the following, features of an underdeveloped economy:
  (1) Prevalence of disguised unemployment;
  (2) Dominance of production under household enterprises;
  (3) A significant extent of production for self-consumption;
  (4) Predominance of Agriculture;
  (5) Deficiency of technical knowledge;
  (6) Deficiency of capital equipment;
  (7) A marginal propensity to consume equal to or about unity;
  (8) A high proportion of incremental demand towards food in any incremental income-generation.
• Dr. Rao argued that whereas a primary increase in investment would take place, a subsequent, secondary and tertiary affects through the expansion of output in the consumption goods sector would not take place. Consequently, the multiplier process would not be operation.
• Dr. Rao came to the conclusion even that the money income multiplier would be working but real income multiplier would not be working. He drew attention to the inelasticity in the agricultural output, and more particularly, to the probability of some decline in proportion of such output coming to the market, consequent upon a rise in prices of food and other agricultural commodities.

Industrial Development

Dr. Rao believed that industrialization would provide a solution to the population pressure in agriculture. However, during the years prior to his passing away, Dr.Rao had started voicing strong concern at the hiatus between the raising share of industry and the falling share of agriculture in national output accompanied by a falling share in agriculture of employment.

National Income Methodology

Dr. Rao applied pure scientific exercise in the estimation of National Income. This was his unique achievement at that time and gave credibility to his work over the years he became more and more assertive on the analytical limitations of inter-country comparisons of national and per capita income. He was bothered truly by three issues.

• First, at great deal of what becomes marketed and exchange- value derived output in developed countries gets unrecorded and underestimated in developing countries.
• Secondly, a significant portion of national income in developed countries represents compensation or countervailing costs of final goods. This is so both in the material production and tertiary sectors.
• Thirdly, there is no scientific basis for estimating values of government expenditures not all of which may have a marketable/commercial significance. Dr. Rao’s own theoretical and applied contributions to national income analysis can bear out a full-fledged research dissention of international significance.

Institutional Development

• Dr. Rao founded the three major institutions of post-graduate work, training and research. These are:
  i. Delhi School of Economics, 1948,
  ii. The Institute of Economic Growth in 1957 and
  iii. The Institute of Social and Economic Change in 1972.
• The Delhi School of Economics is among the foremost of University Post-graduate Teaching Institutions in the country in the orientation to mainstream modern economic theory; it has wide international contacts. The Institute of Economic Growth is among the leading research institutions in the country with its staff intimately involved in governmental consultation and delegation.
• It has record of national level research work. The Institute of Social and Economic change is largely devoted to regional research spheres and is closely connected with the State Government. These three institutions reflect Dr. Rao’s perception of balance among international, national and regional angles and facets in economics.
• As a minister of education Dr.Rao initiated in 1965 the Indian Council of Social Science Research which is now founding the number of research institutions in the country. He also innovated Agro-Economic Research Centres and Research Units in demography in different parts of the country.

Poverty

• V.K.R. V. Rao examined various issues and dimensions relating to poverty and under-nutrition in India and also criticized research studies undertaken by eminent economists like Dandekar, Rath, Bardhan and Sukhatme, etc., on the extent and measurement of poverty in rural and urban India.
• According to Rao, a method commonly employed for the measurement of poverty is to take the nutritional norm in terms of daily calorie intake by consumer unit, and the cut-off point by the expenditure class which has an average daily calorie intake per consumer unit nearest to the norm and then treat half the population lying in this expenditure class and the entire population in the lower expenditure classes as the poor.
• This is the method employed by Dandekar and Rath (1971) in their famous book ‘Poverty in India’. And it has been followed by more studies using a more or less similar method.., but the methodology… does not appear to be correct. While the proportion of under-nutritional poverty undoubtedly declines with increasing income, and the paradoxical result was found that the poor as defined also include the non-poor and that the non-poor include the poor (Rao, 1977).
• Rao seemed to believe that Dandekar and Rath got the ‘paradoxical result’ because they based the estimates of poverty on the sole criterion of calorie intake. He says: ‘The balanced diet approach is … preferable to the calorie intake approach.
• And this is what writers like Bardhan (1974). Rudra (1974) and others have done, unlike Dandekar and Rath (1971) who have only used the calorie intake criterion’. Rao preferred the balanced diet approach because he believed that it took into account the nutritional quality of the calorie intake.
• Though he prefers the balanced diet to calorie intake as a criterion for determining the poverty line, Rao was not entirely satisfied with the balanced diet approach either. He said: ‘Poverty has to be identified with deficiency in the total level of living. And total level of living includes not only energy requirements but also balanced diet needed for health, and the other basic needs essential for human existence at a tolerable level.

Deficit Financing

• Dr. Rao has pointed out that in case of deficit financing by the government the danger of initial rise in prices is greater due to expansion of currency, absence of direct return or absence of the supplies of goods and services, absence of saleable securities and greater possibility of wastage and failure to promote greater productivity. There can be forced savings for financing economic development.
• The only question is the extent to which it can be resorted, because it is bound to result in a certain rise in prices due to the following factors:
  (a) Attempt on the part of the Government to make up for the fall in the real value of its deficit- financed outlay;
  (b) Failure on the part of the Government to mop up for the exchequer any part of the increase in profit that follows deficit financing;
  (c) Failure of the Government to prevent the banking system from adopting a liberal credit policy;
  (d) Failure on the part of the Government to undertake an effective system f price control and controlled distribution of essential wage goods;
  (e) Compensatory rise in money wage rate; and
  (f) Use of deficit financing for unproductive expenditure which adds neither to consumption nor to capital formation.
• For reducing this rise in prices, Dr. Rao has suggested that it is better to use bank credit rather than credit money for meeting the deficit expenditure. The size of induced outlay should be reduced as much as possible; and the flow of output should be increased simultaneously. A suitable fiscal policy should be adopted under which the increments in income should be mopped up by means of taxes and loans.
• A rise in the money rates of wages should be prevented. The reserve ratio of banks should be raised and the flow of additional bank credit should be well-regulated under credit policy. In addition, public-understanding and cooperation are needed since taxation, wage, credit and price controls normally create resentment.

Fiscal Policy

• According to V.K.R.V. Rao fiscal policy should aim at maximizing the mopping up of deficit- induced increment in incomes by means of both taxes and loans; and the more these can be built-in with the increase in income, the more automatic and effective will be the flow-back into the exchequer. Wage policy should take the form of preventing to the maximum possible extent a rise in the money rate of wages.
• In order to do this, it would be necessary to control the prices of basic wage goods and also arrange for their controlled distribution wherever expedient. It would also be necessary to get the positive support of labour for the policy of deficit-financed investment by an appropriate choice of projects and by seeking its cooperation and participation not merely in the choice the projects but also in their implementation.
• Rao emphasised the role of public understanding and public cooperation as a positive factor intending to diminish the price effect of deficit financing. Taxation, savings, credit controls, wage controls, price controls, and controlled distribution, all these normally cause resentment.
• It is only when their rationale is fully understood and the purpose for which they are used fully accepted and supported that they get the best chance of successful functioning; hence the imperative need for promoting public understanding and cooperation when undertaking deficit financing for capital formation.
• As a logical result of the argument, policy conclusions emerge for preventing deficit financing from degenerating into inflationary finance and enabling the mobilization of a given measure of forced saving for the successful achievement of capital formation.

Income Tax

In his work “Taxation of Income in India”, which dealt with the history of income tax from 1860 to 1929, he concluded by saying that “the Indian system of income tax reveals an absence of any background of the theory or principle. No attempt has so far been made by the government to examine the fundamental principle underlying its levy or to analyse its incidence. Such improvements as have been made from time to time are of a piecemeal character”.
Hence, for improving the system he suggested the following measures:
(i) Gross and net incomes should be clearly distinguished;
(ii) Hindu undivided families should be statutorily recognized;
(iii) Agricultural incomes should not be exempted;
(iv) The rate of tax should be properly graduated; and
(v) The courts of appeal should be established.

Price Policy

V.K.R.V. Rao emphasized that price is an important economic mechanism that has certain functions to perform; and any policy that is formulated has to be in this functional context, viz., it has to help in the more adequate and more efficient performance of these functions. Primarily this function is to bring about the required equilibrium between demand and supply both of goods and of factors of production.

The Human Factor in Economic Growth

• V.K.R.V. Rao emphasized that science and technology have succeeded in devising measures for reducing the death rate without the prerequisite of a high standard of life. But they not succeeded in devising measures for bringing about a similar reduction in the birth rate in the context of underdevelopment. What is needed, therefore, is a deliberate effort on the part of science and technology to devise methods that would lead to a sharp fall in the birth rate and are capable of application in the underdeveloped world.
• There is need to include in the role of the human factor in economic growth an important place for deliberate regulation of the growth of numbers and a drastic reduction in the birth rate. The psychological and sociological factors necessary for this purpose have of course to be studied and acted upon by the governments and peoples of the underdeveloped countries; but a conference that deals with the application of science and technology for promoting economic growth, should also give adequate attention to the application of science and technology for reducing the birth rate in the underdeveloped countries to something like half or less of their current rates and that too within a period of not more than one or two decades at the outset.
• There is one more element concerning the role of the human factor in the underdeveloped countries which needs stressing. In all underdeveloped economies, there are large number of people who are not able to take advantage of even the limited facilities that are available for modernization and increase in productivity. These classes are described in India as the weaker sections of the community.
• They are weak and unable to grow partly because of their sub-human economic status and also because of their social organization, their traditional values and ways of living, and other sociological, cultural and psychological characteristics that are inhibitive of their taking advantage of the facilities that planning and economic development places at their disposal.
• Rao depicted that underdeveloped economies have tended to pay far more attention to the role of capital and investment in the promotion of economic growth and in fact have been so obsessed by this factor that, on the one hand, they set their targets low and, on the other, lean unduly on foreign aid.
• The result has been that progress in slow and the gap continues to widen between the developing and the developed economies. Especially countries like India, which are rich in human resources, have to adopt a far more positive and studied approach to the productive use of the human factor than they done so far.

Full-Employment and Economic Development

• After reviewing the ideas of Keynes, William Fellner, Ohlin, Beveridge, Mrs.Robinson, A.P.Lerner, etc., about full -employment and frictional unemployment Dr. Rao feels that in under developed counties there is another category of unemployment – disguised unemployment which is different from the type of involuntary unemployed which is found in developed countries.
• It is the most formidable problem for the solution of which the first committee of UN-experts had suggested economic development; and the second committee pointed out that the task of economic development was to create new employment rapidly. In other words, economic development would create employment opportunities thus raising the level of employment.
• Now emphasis is shifted from reaching a given level of full-employment to creating additional employment. Whereas full-employment is essentially a short period concept, economic development is a long period one involving movement form one level of full employment to a higher level. This process is continuous; and is determined by the rate of development.
• The disguised unemployed, with nil products, begin to produce output under economic development, and add to the average productivity of all the employment works. When such persons get employment, they add to the volume of employment.
• According to Dr. Rao, economic development involves something more. In this connection, he has quoted the UN Sub-commission on Economic Development. “The objective is the promotion of higher standards of living, full employment and condition of economic and social progress and development in the countries concerned, and the manner for achieving it is a sound, efficient and fuller utilization of man-power, natural resources, energy and capital”. Dr. Rao concludes that the Keynesian treatment of full employment is not only unsatisfactory as regards the removal of the types of involuntary unemployment in both developed and undeveloped economics, but is also deficient as regards the productivity of employed labour.

On Relevance of Keynesian Multiplier Principle to Under-Developed Countries

• How far Keynes’ theory is relevant to under-developed countries is a question which Dr.Rao had attempted to answer about four decades ago. According to him, Keynes’ theory of employment and more particularly the multiplier principle has little relevance for policy decisions in under­developed countries.
• He thought that as in under-developed countries, supplies of consumer goods fail to respond to price changes, Keynesian multiplier principle works with reference to money income only. Any attempt to attain significant improvement in real income or employment by increasing investment would fail as the multiplier principle would not work with reference to any of these.
• Thus the investment or income multiplier (K) and the employment multiplier (K’)would normally be smaller than the multiplier linking up increment in money investment to increment in money income. But all these multipliers must have a positive value and should move in the same direction, if the Keynesian multiplier principle is to have any relevance for policy decision in the under-developed counties.
• Dr. Rao has underlined the following conditions which must be satisfied in an economy, if the multiplier principle is to be applied in practice:
  (i) There must not exist unemployment in any form other than Keynesian unemployment.
  (ii) The economy must be primarily industrial and the supply curves of consumer goods must have a positive slope.
  (iii) Excess capacity should exist in the consumer goods industries which would enable them to expand their output in response to increasing demand for their products.
  (iv) There has to be abundance of capital in the country, making the supply of working capital required for increased output fairly elastic.
• Dr. Rao asserts that these conditions are rarely satisfied in under-developed economies and, therefore, Keynesian multiplier principle remains inoperative in these countries.
• India must follow the ideals suggested by V.K.R.V. Rao which urns as follows: Poverty must go. Disparity must diminish. Injustice must end. These are but essential steps towards our ultimate goal – the goal of an India which is united and strong, an India which lives up to its ancient and enduring ideals, yet is modern in thought and achievement, meeting the future with vision and confidence.