The Simple Analytics of Aggregate Supply Demand and Structural Adjustment

The paper attempts to first, build aggregate demand and supply curves for the non- agricultural sector of the Indian economy. Second, use these to briefly analyze demand and supply shocks, including the structural adjustment program (SAP). Third, shed new light on the inflationary process in the Indian economy. We obtain a direct Phillips curve type relationship between inflation and the unemployment rate of capital, that helps to explain stagflation. As the underutilization of capital increases so does the rate of inflation. The nominal standard is the price of food, which is normally rising in such episodes. We bring out inconsistencies in the SAP that arise from ignoring dynamics and multiple equilibria, and suggest efficiency enhancing modifications.