Remaining budget deficit is then recouped by additional issue of money which is not backed by the real economy. Table 1-1 shows the ratios of borrowings to the total budget of the 5-year Plan in its early stage and the rates of budget deficits, in which the vulnerability of India's fiscal base can be seen. However, this problem became visibly crucial only in the 1980s.
1-3 Ricardian Growth Trap and Advent of the Agricultural Crisis
Let us review the status of India, having difficulties in procuring development funds, in relation to its agriculture. One of major conditions of progress for an economy such as India holding a vast surplus labor would be that its industrial sector continues receiving benefits from the Lewisian type unlimited supply of labor for the longest time possible. However, despite the existence of surplus labor, real wages may increase and restrict the growth of the industrial sector.
This is because, in a low-income economy with a high ratio of food cost to the total spending, as price of food increases, wages also increase to sustain lives of factory laborers. As a result, the wages become a constraint that push down the profits of the industrial sector, impeding industrialization - the theory known as Ricardian Growth Trap said to apply to the British economy during the period of the Industrial Revolution (Figure 1-3).
Western European countries received cheap food supplies from the New World, and Japan acquired paddy from the colonized Korean Peninsula and Taiwan in the process of their economic development, so to get out of the Growth Trap. Today's developing countries, however, cannot expect such solutions. If they attempted to restore balance between supply and demand by importing food, it would then reduce the foreign exchange reserves sacrificing imports of the capital goods or technologies that are essential for their import-substitution industrialization. Industrialization would go into impasse as a result. Let us call such stagnation of industrialization by foreign currency constraint the "external trap" to distinguish it from the "internal trap" which is caused by the wage constraint.
