Contributions of C.N. Vakil | Economics Optional Notes for UPSC PDF Download

Introduction

The following points highlight the top nine contributions of C.N. Vakil to Economics.
The contributions are: 

1. Planning 
2. Wage-Goods Model 
3. Role of Technological Progress 
4. Consumption Multiplier 
5. Poverty 
6. Deficit Financing and Public Expenditure
7. International Trade
8. Extension Work
9. Inflation

Planning

• Prof. Vakil (along with Prof. P.R. Brahmananda) put forward an alternative approach to Indian planning, which was opposite to that of the Mahalanobis model, at the time of the formulation of the second five year plan for India. Vakil’s plan frame was related to Marxian concept of variable capital (v). This model is based on classical economic philosophy, in particular Ricardo, Marx, Rosenstein Rodan and Ragnar Nurkse.
• All these models are based on the assumption that, there exist a massive reserve army of labour in rural areas of developing economies. In other words, the disguised unemployed formed the savings potential. This is based on the view of that labour could be transferred from agriculture, without decreasing production and deployed for producing real capital goods. In short, for the development of the Indian economy, with large-scale disguised unemployment, the bottleneck good is not the basic and heavy capital goods (as felt by Mahalanobis) but the wage-goods.

Assumptions

The plan frame proposed by Vakil was based on the following assumptions:

• Wages are paid in advance of production. This assumption is similar to that of Marx, Van- Neumann, Leontif, Nurkse, etc.
• Variable capital or wage goods constitute exclusively food.
• Labour could produce capital goods without the assistance of other factors of production.
• The role of the potential surplus might not be procurable and further that there might be a need to provide for slightly higher consumption levels than in agriculture to workers engaged in Non-agriculture (consumption). The model is developed with a multiplier formula which is based/autonomous increase in the stock of wage foods in the hands of planning authorities.
• In rural areas there prevails disguised unemployment to a great extent. Therefore, existence of large industrial reserve army.
• The transfer of disguised unemployed workers from rural sector does not lead to the decrease in the output in the farm sector.
• There exists a gap in accumulation of wage goods. To the extent of that/gap, forced savings have to be effected by reducing present consumption (by imposing taxes) or by importing wage goods.
• The wages paid to the newly employed workers will be higher than the consumption of disguised unemployed.

Wage-Goods Model

• According to Vakil, the rate of growth of the economy is influenced by several economic and non- economic factors. Among economic factors, accumulation of capital is the most important, which in turns depends upon technical progress.
• So as non-economic factors are concerned, institutional changes are important. The living conditions of people are very poor. Higher level of investment will break this vicious circle. Demand for investment depends upon the demand for consumption goods.
• The demand for consumption depends upon the size of the market. But due to low level of income in developing economies, the size of the market is limited. The lower productivity of labour leads to lower level of income and hence the size of the market end level of investment is low, that is, small investments have to be made in several avenues.
• In the context of the large-scale employment that was prevailing at the time of the finalization of the second five year plan frame, vakil suggested a wage-goods strategy as the best alternative to the Mahalanobis model.
• The model suggested that disguised unemployed be regarded as potential saving. To transfer these workers from agriculture to industry by itself, did not lead to the existence of a wage-goods gap. By filling the wage-goods gap only could one increase employment in developing economies.
• Since economic system does not supply wage-goods in the short-run, employment and investment will decrease. The rate of transfer of unemployed workers from the farm sector to the non-farm sector (capital goods sector) depends upon the rate of increase in the supply of wage-goods.
• Until this wage-goods gap is removed, it will not be possible to remove workers from the farm sector to the non-farm sector. Thus the provision of wage goods constitutes the most important element of Vakil’s planned model. In India, the population is high, but the avenues to provide employment to them are limited. Capital unemployment is less harmful than labour unemployment.
• Therefore, the problem of unemployment has to be tackled without sacrificing technical progress and rapid accumulation of capital, Vakil felt that, the Mahalanobis model does not solve the problem of unemployment and economic growth in India, because the model has a contradiction between theory and statistical frame.
• Therefore, provision of unemployment to the tune of 11 million people (of which 8 million people in non-agricultural sector was the target) would not be achieved in the second five year plan period because the employment target was not fixed on the basis of demand and supply of additional wage-goods. Vakil says that, in a country like India it is not only the availability of fixed capital which leads to provision of employment, but also the level of wage goods. Scarcity of both types of capital is the cause of unemployment.
• In the Vakil Plan frame, there is a complementarity between consumption and investment whereas, in the Mahalanobis model there is a conflict between consumption and investment. This is because, an increase in consumption goods output leads to decrease in investment, which in turn leads to decrease in the growth of the economy.
• When more resources are allocated to the capital goods sector, allocation of resources to consumption goods sector has to be reduced. But this conflict is not present in Vakil’s model, as the consumption goods sector and capital goods sector are complementary to each other. By increasing wage goods production, at a rapid rate, the resources needed for investment in capital goods sector can be mobilized without decrease in the output of wage-goods sector as labour can be reduced in the latter.

Role of Technological Progress

• Vakil emphasized that technological progress is a powerful engine of growth in output as it did not cause unemployment in developed economies (at the full employment level) and also that it led to increase in the standard of living of people. However, in a country like India, if the required capital accumulation does not take place technological progress aggravates unemployment.
• Vakil was of the opinion that labour intensive techniques are not always relevant in labour- abundant economics. After a certain stage, abundance of labour does not increase factor price. To increase capital accumulation, employment has to be increased. This leads to profitability in the agricultural sector which was for long discouraged. By decreasing luxury goods production, avenues for investment will increase in under-developed countries. Abundance of unskilled labour is available but availability of skilled labour for employment is limited.
• In short, Vakil argued that, for the development of the Indian economy, what was needed was an abundant of wage goods, technological progress, reorganization of institutions, changes in the price policy, and mobilisation of resources for investment through taxation and compulsory savings. To mobilize compulsory savings, taxes, adjustment in monopoly prices, and other receipts are needed.
• Though deficit finance also forms a part of compulsory savings, the model envisaged keeping it at a low level. To mobilise investible resources, the model reorganized the role of public and private sectors. The classical economists (particularly Ricardo) stated that scarcity of supply of food grains is a hurdle to economic growth.
• Similarly, in Vakil’s model, the wage-goods equation determines level of employment and growth of the economy. Increase in the supply of wage-goods by one unit will lead to an increase in employment by certain units. This relation is described by Vakil as the consumption multiplier.

Consumption Multiplier

The consumption multiplier developed by Vakil is based on certain specific assumptions, as under:

• The marginal propensity to consume of wage-goods producers is zero.
• The money and real wage rate remain constant.
• Price level remains constant.
• Large-scale disguised unemployment exists in the wage-goods farm sector. The average wage goods consumption of the disguised unemployed worker (d) is less than the real wage (W).
• The supply of credit is perfectly elastic, therefore, rate of interest remains constant.
• Increase in the activities of the public sector does not lead to disincentives in the private sector.
• There are not difficulties in the mobilization and transportation of goods.
• The size of the population remains constant.

Poverty

According to Prof. C.N. Vakil, poverty in a country may be due to defects either in the production of wealth or in its distribution. Both these problems are equally important, but it is obvious that if the production or the national dividend is small, the question of distribution would be of comparatively less importance.
Further, he viewed the causes as two separate entities:

1. Internal and
2. External.

Internal causes

• Not enough work for the vast mass of the agricultural population during the off season: The majority of our people demand upon agriculture directly or indirectly. In spite of the presence of employment opportunities provided by industries and also other secondary occupations in different parts of the country, the majority of the agricultural population did not have enough work during the off season, which extends to about five months in a year.
• Presence of the type of social life where there are few active workers in each family: According to Prof. C.N. Vakil, the number of dependents in an average family in the country is large. Usually, an only earning member supports a large family. This kind of situation exists not only among the agricultural population but also among urban population and the higher classes.
• Presence of a large number of able-bodied beggars miscalled sadhus: Prof. C.N. Vakil rightly pointed out that India the number of persons doing religious service is quite high. They are called as Sadhus. He is of the view that the Sadhus are not doing any kind of religious service in the true sense, either for themselves or to the society. They are actually living off society. Their presence in large number, Prof. Vakil feels, adds to the burden of poverty on the productive members of society.
• Climatic disadvantages: Presence of different climates in different parts of the country stands in the way of continuous and sustained work, either physical or mental. This again increases the number of unemployed, another index poverty.
• Fatalism and consequent want of determination to struggle against odds: The peculiar cause operating in our country against greater production, as stated by Prof. C.N. Vakil was the mental attitude which may be described stated by Prof. C.N. Vakil was the mental attitude which may be described as the lack of economic motivation either due to the philosophic idea of renunciation of all desires, or to the continuous state of helplessness and poverty in which the people have been living, or to the want of education and consciousness about their own potentialities, or a combination of these.
• Faculty educational system: Prof. Vakil also mentioned the faulty or one-sided educational system which creates large numbers of educated but in people, suitable for no fit work other than that of the liberal professions or clerical occupations. The great magnitude of unemployment or under employment among the educated young men of the country was due largely to ills of the educational system.

External causes

• International trade and commerce: Prof. Vakil is of the view that the chief external cause of poverty is the great change in the economic life and organization of the people brought about by international trade and commerce, facilitated by modem means by communication. According to him, the nature of our commercial relations with other countries has not been to our best advantage, and the internal adjustment in the internal economy of the people required by the great change is not yet complete.
• Commercial and industrial relations with other countries: He has brought out well the main features of India’s commercial and industrial relations with other countries. During British rule in India there was a silent and pervasive economic invasion of the country, supported by the highly organised industrial system of England and other countries and patronized by the Indian administration. On the one hand, India produced large quantities of varied manufactured articles, the introduction of which had been systematically encouraged; on the other, a large number of foreign capitalists had been allowed to settle in the country for the purpose of industrial and commercial exploitation. This can definitely affect the internal production, employment, etc. and finally aggravate conditions of poverty.

Remedies

• Prof. C.N. Vakil has suggested several measures to remove poverty. He stated that stress had to be laid on increased production and equitable distribution. He advocated consolidation of holdings, for agricultural improvement, as in the use of better inputs in terms of seeds, implements, and manure, sinking of large number of wells and creation of other irrigation facilities, concerted efforts to promote the co-operative movement and suitable education to assure enough employment opportunity and reward to the agricultural family.
• He further suggested that in order to overcome the problem of indebtedness of farmers, there should be Land Mortgage Banks, to take over the existing debt of the farmers from the sow-cars on easier conditions. In addition, finance should be provided through the co-operatives.
• He advocated the development of cottage industries to provide more employment opportunities for those who were not willing to migrate from rural to other areas and also for the small farmers during the off season.
• Regarding land tax, Prof. Vakil stated that it should be brought in line with the income tax, where an exemption limit below a certain specified income from land could be fixed with reference to agricultural life and conditions. It may be possible at the same time to allow Local Bodies to tax agriculturists to a certain extent, by some cases on the land the proceeds to be utilized for the benefit of the people of the area concerned.
• He is of the view that unless steps are taken to prevent foreigners or non-Indians from enjoying the fruits of the industrial exploitation of the country, the problem of Indian poverty cannot be solved. In order to bring about desired social change, he advocated the prevention of early marriages, lowering of mortality rates and incidence of diseases, provision of sanitation, removal of purdah system and provision of suitable work to them etc. Further, he reminds us that unnecessary ceremonial expenditure should be curtailed since it is not productive.
• Prof. Vakil believed that free and compulsory primary education was desirable. He was also of the view that rural universities should be established to create an interest in the better understanding of and efforts to solve, the problems that affect the life of the rural people in their proximity.

Deficit Financing and Public Expenditure

• Prof. Vakil strongly objected to deficit financing as a means to finance the plans. He floated the idea that. It is the Keynesian concept of pumping money into the economy to offset a depression which is one of the evils of capitalism. This is a short-term remedy for developed countries to remove depression or to bring out equilibrium in the economy. It has created a great havoc, inflation and poverty also.
• His significant contribution lay in truncating the public expenditure by appointing a Public Expenditure Commission. One Public Expenditure Commission was set up in 1921 by the Britishers, since then we have no such Commission. It had a salutary effect in bringing things to reasonable proportions.

International Trade

• On the question of protection, he emphasized that, “Protection should only be for a temporary period and once an industry has been properly established, it should be able to face competition. This is the only way to safeguard the interest of the consumer which one usually ignored in such matters.
• Thus he was in favour of slow and partial competition rather than opening of the whole economy at once. He welcomed the New Gold Policy of the Government to sell gold at international price and import gold. He described it as anti-inflationary, employment-oriented and for checking smuggling.
• He was in favour of joint ventures abroad, consultancy in Gulf countries and trade with OECD countries in primary products. Branch offices in foreign countries like Japan were to be activated to keep pace with the world demand by supplying quality goods at competitive prices with timely deliveries. He also proposed setting up an Import-Export Bank for international trading, commerce and financial matters.

Extension Work

• Prof. Vakil laid much emphasis on extension work without which the colossal task of rural development was not possible. He stressed that people with a missionary zeal should be enthused for this task and devoted officers were to be entrusted to implement the plans.
• A class of young volunteers and trainees should be raised to integrate knowledge of agricultural sciences, agricultural economics, rural sociology, village industries, public administration health and family welfare and so on. Agricultural poly-techniques and a centre for rural development were needed to fill the gap between higher education and the needs of the people.
• The proposed research centres might select a few villages and appropriate methods. He lamented the bureaucratic methods, due to which “a large percentage of plan expenditure for rural development, about 60 percent was spent for administration. It was not known whether or not remaining 40 percent reached the farmer. Therefore, the machinery for implementing the same, had to be created as the existing bureaucratic machinery has failed to function effectively so far”.

Inflation

• Vakil was the first Indian economist who drew attention to the price rise spiral. The definition of inflation, as given by Prof. C.N. Vakil is that, when supply of money in a country increases and the supply of goods does not increase to the same extent, the situation is described as one in which more money chases scarce goods.
• Such a tendency is called inflation. If it continues for a long period, it causes a lot of disturbance to the economy which gets distorted. Excess supply of money may be due to either government expenditure exceeding its receipts from revenue and loans from the public, which is known as deficit financing or larger credit given by banks to the commercial sector not supported by the latter’s productive activities.
• The Reserve Bank regulates the latter by imposing restrictions on credit in order to bring about some equilibrium. The former can be controlled by government imposing greater self-discipline and keeping its expenditure within the limits of its resources.
• Prof. Vakil said that, “We inherited inflation on Independence and we have followed an inflationary policy due to incorrect notions or wrong application of western theories to our conditions. This has seriously interfered with our attack on poverty and our efforts at planning”. Vakil had suggested that the immediate object of policy should be to roll back prices to a lower level and to reduce significantly the incidence of ‘black money’.
• This necessitates immobilisation of say 30 per cent of money supply through partial re-monetisation and issuance of 20 years fixed interest-yielding but illiquid savings certificates and black accounts; there should be a national Ceiling of 5 per Cent on the annual growth rate of money supply during the Fifth Plan; Government borrowing from the entire banking system should be completely eschewed during the first two years of the Fifth Plan.
• The step up in government expenditure contemplated in the Fifth Plan should be brought about through rationalization of expenditure and maximum dependence upon non-inflationary sources of receipts. The growth rate of credit to the industrial commercial sector should be pruned with reference to the Macro-ceiling of 5 per cent.
• The proportion of value of inventories financed by bank credit should be reduced to about 33 per cent; rationalisation of government expenditures can be achieved by economizing severely on non-accumulation expenditure.
• All future capital projects must be examined with reference to their fiscal viability before they are sanctioned. Norms of work standards should be laid down for all levels of employees in the government. The services of Defence personnel should be considered for deployment in short gestation projects, and in step-up of emergency production schemes particularly in food articles.
• Suitable arrangements should be made to examine continuously the desirability and feasibility of granting of, or of the continuance of, subsidies of various types from the public exchequer. All subsidies to certain categories of consumers and government and public servants in the form of supply of goods at subsidized rates, loans at concessional interest, quarters, travel concessions, etc., should be subject to periodical review.
• A drastic upward revision is needed in the level of the Bank Rate, the structure of deposit rates and yield rates. The term-structure of rates should be so devised as to favour the medium-term and the long-term savers. The lending rates by banks for prime borrowers should be increased.
• The instrument of taxation should be effectively used to reduce luxury consumption by individuals and firms of siphon off excess demand on scarce commodities to encourage exports, to promote savings in specific financial and other assets and generally to realign the pattern of private production along a product-mix enabling the speedy attainment of self-reliance.
• Discriminatory excise taxes, exemption of increment in savings from income tax, tax credit schemes based on degrees of utilization of capacity, are all in order. Tax loopholes should be closed. The tax revenue from agriculture should be raised to 3 per cent of net output of agriculture.
• Exchange reserves should be built up to stand normally at a level of about six months of annual imports. Through appropriate redesigning of construction, encouragement of indigenous methods of transport, greater use of public transport, promotion of organic manures and in input mix, the direct and indirect repercussions of the oil crisis can be partly overcome.
• At a time when India is facing the problem of containing the spectra of double, digit inflation, one can’t but appreciate the ideas of C.N. Vakil, many of which have currency even today. The quote Alexander Gray, “No point of view, once expressed, ever seems wholly to die; and in periods of transition like the present, our ears are full of the whisperings of dead man”. For both academic and practical reasons, Vakil’s contribution to inflation will be remembered.

Evaluation of Contributions by  C.N. Vakil

Prof. Vakil can be rightly considered as the originator and pro-pounder of certain standpoints and approaches relevant to modern economics in India:

• He was among the earliest of economists anywhere to have empirically applied the full-fledged quantity theory to understand price behavior. He took into account the quantity of money, the velocity of money and the supply of real output. He separated the monetary factors from the real factors.
• Vakil was among the earliest to have pursued the non-autonomy of money supply and its changes in a country which lodges its gold/foreign exchange/foreign security reserves in a foreign country and makes its own money supply determined by the former.
• Prof. Vakil noticed the strong relation between deficit financing in the form of sales of ad hoc treasury bill and currency supply.
• Prof. Vakil emphasized the need for linking money supply changes to aggregate real output changes rather than to volume of trade changes. He thus rejected the link between money supply and the needs of foreign trade. Total trade changes, foreign as well as internal would be a better proxy for real output changes.
• Prof. Vakil widened the concept of the brain to include more items than the ‘English'(Home) charges. The entire financial policy of the British Government had to be scrutinized in order to understand the magnitude of the excess brain-burden imposed on the Indian people.
• Prof. Vakil also was the earliest in India to have related the incidence of the public expenditure and taxation to the per-capita income of the community. The case for a reduction in public expenditure was argued on the score of its adverse effects on the poor people of the country.
• Prof. Vakil voiced concerns at the growth of defence expenditure in India and urged the case for close economic monitoring of defence expenditures.
• Prof. Vakil also recognized the need for large scale regional and urban social surveys to understand the economic conditions of the people. He was also instrumental in recognizing the need for scientific surveys of public opinion in matters like group tensions, effects of war and rising prices on the middle class, etc. his achievement in this connection is parallel to that of Prof. Mahalanobis, who pioneered National Sample Surveys, to understand the economic conditions of the people.
• Prof. Vakil was also among the few public men who thought that the basic causes behind communal tensions and riots was economic insecurity along with economic disparities.