international bank for reconstruction and … · vii. india's exports during the second plan...
TRANSCRIPT
T . ... fk' . . RESTRICTED
. .g,Report No. AS-97a
This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRESS OF ECONOMIC DEVELOPMENT IN INDIA
REPORT OF BANK MISSION
THE MAIN REPORT
April 16, 1963
Department of OperationsSouth Asia and Middle East
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
I Indian Rupee = U. S. $0. 211 U.S. Dollar = Rs. 4.762Rs. 1 crore = $2. 1 million
WEIGHTS AND MEASURES
Most of the tonnages given in thisreport - and in the Third Plan -are expressed in long toxns. Indiahas now adopted the metric system,and some of the data given to themission were expressed in metrictons. As the difference is small, noattempt has been made to distinguishbetween the two or to convert to auniform basis.
I Maund = 82. 28 lbs.
FINANCIAL YEAR
The Indian financial year beginson April 1.
TABLE OF CONTENTS
Page
MAP OF INDIA
BASIC STATISTICS ii
PREFACE iv
SU1YIARY OF THE MISSIONtS FINDINGS v
CHAPTER I - PROGRESS OF ECONOIIIC DEVEILOPMiET
Production 1Employment 4Consumption 4Investment and Savings 5Internal Finance 6External Finance 8
CCHAPTER II - ECONOM!IC PROBLEMS AN'D POLICIES
Some General Observations 11Population 14Agriculture 16Industrial Expansion 20Location of Industry 22Controls and Prices 23Interest Rates 26The Import Problem 27The Problem of Exports 31Conclusions 36
CHAPTER III - PROSPECTS FOR THE COMING YEAR
The National Emergency 37The Budget 39Internal Balance of the Economy hOThe Balance of Payments 42Foreign Aid Requirements 45Terms of Aid 46
SIN K I ANG
fr / . tC H I N A
CHINAFGHANISTAN JA ML. I BET
, NJ E F>r44 -Xo !c'1'HarH
U T.
I j01
eiI~ Lf~~j~. 1~AAIHA\
OJIPF SHILLONI v F'IIN !/46t tT$G 0
A RJ DI ' MANIP 'UR
PA I TA o 5l D PI N A r7Sk<t '-- I
\~8 U''' .: A \ - ,.. ' (PA STAN
Belo 1,0 ft 0
- A T vi A1 [ !H 1, 0 A 4U0 0 IM A\M YS R.rDE SN I IiA.1r
*A C DV : y', -. ^ 1 4,000 - 10,000 ft.0
HICOAR A
s Z L Ao ve 10 ,00 - 00 ft. 350I ,
TRIV ORU MAD
JUNE 1962 IBRD-720RI
BASIC STATISTICS
Area
To-tal area- 811 million acres or 1,270,000 sq. miles
of which:Cultivated 4to% (325 mn. acres)
of which:Irrigatled 21% ( 67 mnn acres)
Population (1961 Census data)
Total population (revised estimate) 438 millionOverall population denasity 345 per sq. mileRate of growth of population (1951-1961) 2.1% per eamumAssumed rate of population growth (1961-19,6) 2,4% per annum
National Output (1961/62)
Net national output at factor cost Rs. 14,600 croresof which:
Agriculture, forestry and fisheries 47%Mining 1%
Factory establishments 10oSmall enterprises 8%Commerce and transport 17 cGovernment administration 7%Other services 10%
Output per head Rs. 330
Net national expenditure at market prices Rs. 15t.700 croresof which (very approx.):
Government consumption 8%Net investment 10-12%ooPrivate consumption 80%
Government Finance: Centre (B.E, 1963/64) and States (B.E. 1962/63) combined
Total revenue receipts Rs. 2,491 croresof which:
Taxes on income and expenditure 18%Taxes on property and capital
transactions 7%Taxes on commodities and services 54%Non-tax revenue 21%
1/ Excluding Goa and other ex-Portuguese territories recently incorporatedin the Indian Union.
Total expenditure on revenue account Rs. 2,530 croresof which:
Defence expenditure 28%Debt service 8%Social services, civil
administration, etc. 64%
Foreign Trade and Payments (1961/62)
Payments for imports, c.i.f. Rs. l,OOlt croresof which (approx.):
Foodgrains 15%Petroleum 8%Iron and steel 9%Capital equipment 33%Other imporbs 35%
Receipts from exports and re-exports, f.ob. Rs. 667 croresof which (approx.):
Jute goods 22%Tea 18%Cotton goods 7%Mineral ores 6%Nuts and spices 5%Hides and leather 5%Oilcakes 4%Vegetable oils 3%Raw cotton 2%Other exports 28%
Net invisible receipts (exe. foreign aid) -Rs* 12 croresForeign grants and loans (inc. PL 480) Rs. 331 crores
Foreign Assets (end-December 1962)
Gold with Reserve Bank Rs. 118 croresForeign exchange with Reserve Bank Rs. 97 crores
PREFACE
This is the report of an economic missioin fromthe Bank which visited India in February and March1963. A previous memorandum dealt with the currenteconomic situation, with particular reference to theGovernment t s Budget for the coming year ald theproblems involved in mobilising the nation's resourcesfor defence. The present report contains a moregeneral review of the progress of India's economicdevelopment and the problems encountered in carryingout the successive Five-Year Plans. The report con-cludes with an appraisal of the economic prospectsfor the coming year and a discussion of additionalaid commitments required.
-v -
SUMRIARY OF THE MISSIONI S FINDINGS
Progress of Economnic Development
ill India has just come to the end of the second year of her ThirdFive-Year Plan, Over the twelve years from the beginning of the FirstPlan national outpult in real terms has risen by about 50 per cent or at acompound rate of 31 per cent a year4 The population has increased overthe same period by 27 per cent, from about 360 million in 1951 to nearlyLO6 million in 1963, giving an annual rate of increase of 2 per cent a year.The rise in per capita income has thus been around 11 per cent a year.
ii. Production in organised industry has doubled since the beginningof the First Plan in 1951a and the transformation in this sector of theeconomy has been spectacular. Output of steel has been more than trebled,output of cement nearly trebled and output of coal nearly doubled. Overthe same period the increase in agricultural production has been about 40per cent. Here the changes have been more gradual and less obvious. Therehas been no clear sign of any acceleration in the pace of agricultural ex-pansiorn in recent years in spite of the large investments made in irrigationand community development during the first two Plans.
iii. Government expenditures on devel,prnent have steadily increasedfrom an average of $823 million a year during the First Plan to just over$2,300 million in 1961/62. A principal feature of public investment policyhas been the growing concentration on industrial development, particularlyin iron and steel and heavy engineering. Private investment in industryhas meanwhile risen rapidly in response to the stimulus provided by theGovernment1 s development program.
iv. Net investment as a proportion of national income is believed tohave more than doubled since the beginning of the First Plan and is nowestimated at around 11-12 per cent. The greater part of the increase ininvestment has been financed from external resources - in the early yearsof the Second Plan mainly throuT;h the running dowm of India's foreign ex-change reserves and latterly to an increasing ex:tent by foreign aid andprivate foreign investment. Domestic savings may be around 8 per cent ofnational income. There is no conclusive evidence to show that the marginalsavings ratio has increased significantly over the past five years.
V0 Wholesale and retail prices, wiich declined durizn the First Plan,rose more or less continuously during the Second Plan. At no time, however.was the price situation allowed to get out of hand. The index of wholesalp.prices has levelled off in the past two years, while consumer prices havecontinued to move slowly upwards.
- vi -
vi. India1 s extermal balance of payments has been under continuousstrain since the beginning of the Second Plan in 1956 when imports rosesharply. Between March 1956 and September 1958 'about the time of the firstmeeting of the Indian consortium) foreign exchange reserves fell from around$1,900 million to $700 million. The loss of reserves has since beenslowed down by severe restrictions on imports ?nd increased disbursementsof foreign aid, and the reserves are now in the region of $600 million.Against this, however, Indials obligations to the International Monetary Fundamount to $275 million,
vii. India's exports during the Second Plan fluctuated between $1,200million and $1,)400 million a year; There has been some increase in exportsduring the first two years of the Third Plan, and in 1962/63 earnings werejust over $1,h50 million, including exports from Goa.
viii. The balance of invisible transactions has changed sharply for theworse during the past three years. The main reason for this change has beenthe increase in the service due on external debt. The rate of disbursementof foreign aid has risen from just over $400 million in 1960/61 (excludingassistance from the United States under PL 48o) to $510 million in 1961/62and $740 million in 1962/63.
Economic Problems and Policies
ix. Mluch has been achieved in India since Independence in establishinga steadily rising trend of production and building up the foundations of amodern economy. The results have, however, been painfully inadequate to theneed. The sheer size and Doverty of the country are its greatest problems.For example, it has been calculated that, in order to provide the poorest20 per cent of the population with ar average per capita income of about$50 a year by 1975, the economy as a whole must maintain an annual rate ofgrowth of 7 per cent over the next twelve years.
x* Few governments in history have had such daunting problems to tackleor have tackled them with such a high sense of responsibility. Nevertheless,the Indian Government's political and social policies are frequently inconflict with its economic objectives. Examples of such conflict are to befolund in the policies for reducing inequalities of income and i.Tcalth, fortrying to secure balanced regional development and for the protection of in-efficient, labour-intensive techniques in village industries.
XJ,, Recent official projections of Indian population show a dramaticexplosion between 1961 and 1976 when population is assumed to grow at anaverage rate of 2L.4 per cent a year. A net increase of 187 million peopleis forecast by 1976 which would bring the total population to 625 million.The likely increase in the labour force over the fifteen years is equal tothe size of the present total labour force in the United States and 23- timeSthe size of the labour force in Britain. Failure to keep dowM the rate ofpopulation growth would in the long run be disastrous, and a new approach to)the problem of family planning is needed,
- vii -
xii. Agricultural output has not been rising fast enough, and thebalanced growth of the economy will require a radical improvement in agricul-tural productivity. There is no simple way of bringing this about. Betteragricultural administration, larger supplies of fertilisers, an adequate systehof price supports and a more effective rural works program are among theobvious needs.
xiii. In industry, the picture as a whole is more encouraging. Theprogress made in the steel industry during the past few years is in itself aconsiderable achievementL, The expansion and diversification of the engineer-ing and chemical industries are also impressive.
xiv. Many things are still wrong with the organisation and management ofindustry in the public sector, but the faults are being gradually remedied.Industrial costs in India are generally high by cosmparison with more advancedindustrial countries. Jp to a point this is inevitable at the present stageof developmnent, but the problem has been aggravated by steady, upward pressure.on labour costs and by the policy of encouraging the establishment of smalland medium-sized units in the private sector in preference to large ones.Policies with respect to the location of industry need to be more carefullythought out in future.
xv0 If Indian industry is to operate efficiently, some way must be founedof simplifying the Dresent system of controls and de-centralising the processof economic decision. A start should be made by removing or relaxing some cfthe present controls over prices, so that the price mechanism can function mcrefreely as a guide to the allocation of resources. The policy of controllingprices in key industries, while prices in less important industries have beenleft free, is particularly difficult to justify.
xvi. There is growzing recognition in India that the prices Cixed for bas>!commodities and oervices are too low, A strong case can be made for raisingsubstantially the prices of the better qualities of coal, if not for removingconurols over coal prices altogether. Railway freight rates lor coal and oth<'bulk commodities need to be increased,, electric power rates should be raisedsubstantially, and much higher retention prices should be paid to the iron andsteel plants in both public and private sectors. Pricing policies of publicenterprises should be guided by the need to generate surpluses out of which '-ofinance future investment.
xvii. Interest rates in India have been moving gradually upwards, but they,are still low by comparison with most other countries which are equally shortof capital. It is important for purposes of screening investment projects(and also for deciding the pricing policies of public enterprises) that arealistic price should be attached to capital. In India, there is a goodcase for arguing that new investments, whether public or private, should onlybe undertaken if they can earn a return of at least 10 Per cent on all capitalinvested, after covering operating costs and providing conservatively fordepreciation.
xviii. The inadequate and erratic supply of imported materials, componentsand spares is the most obvious and immerdiate restraint on industrial output.The problem of managing import controls has become extremely complex and isone of' the principal causes of the overload of administrative work on bothgovernment and industry. The most effective form of external assistance toIndia in present circumstances would be an increase in general purpose aidnot tied to procurement of particular comnodities or in aid that can be usedto finance imports of materials, components and spare parts for industry andagriculture. Apart from its direct impact on production, assisUance in thisform will help in relaxing the controls over industry. The private sectorwould be the principal beneficiary.
xix. The Indian Government and Indian industry have become increasinglyexport-conscious during the past few years, but the measures so far taken topromote exports have barely scratched the surface of the problem. The dif-ficulties are formidable. One of the most serious criticisms of governmentexport policy is that it has failed to take full advantage of opportunitiesfor developing exports of agricultural and mineral products, particularly ironore.
xx. Internal prices of many of the goods which India exports are out ofline at present exchange rates with world prices. A wide variety of specialpreferences, rebates and subsidies have been introduced as part of the exportpromotion campaign. The most important export incentive is the scheme underwhich manufacturers receive additional import allocations for machinery,materials and components on the basis of their export perfotmance. Withcertain exceptions, articles imported under this scheme may either be usedby the exporter or sold to other manufacturers engaged in exporting the samekind of goods. Exporters are, however, restricted to the import of specifieditems used in their industry, and there is no general scheme for the retentionof export earnings or the free sale of import licences.
xxi. The tourist trade is a neglected area of export promotion. Schemesfor the development of the hotel industry, for the improvement of internaltransport facilities and for the relaxation of restrictions on drinking havenot been pressed forward vigorously enough. These are probably the threemost important conditions for a major expansion of foreign tourist travel inIndia.
Prospects for the Coming Year
xxii. The immediate outlook for the Indian economy is obscured by the man.yruncertainties about how defence production, investment and the balance of pay-ments will be affected by the increases in defence expenditure decided uponafter the Chinese attack last October. The national emergency does not appearas yet to have had any seriously adverse impact on the development program,but some conflict between defence and development is unavoidable, not leastbecause consideration of the new problems created by the emergency is slowingdown the process of decision-making at the top levels of government.
- ix -
xxiii. A primary object of this yearts Budget was to make way for addi-tional defence expenditures by cutting back consumption rather than investment.The Finance Ministerts proposals for additional taxat;ion are an indication ofIndiats readiness to make great sacrifices for defence. Taking taxation andcompulsory savings together, the yield expected from the new measures in1963/64 is $663 million. Just over one third of this will come from directtaxation of individuals and companies, including compulsory savings, and neartlytwo thirds from indirect taxation, mainly increases in customs and exciseduties.
xxiv. A12 the States have now presentued their budgets, and the estimatedyield from the additional taxation alreaay proposed would be about $85 millhory.Another $44 million of additional revenue is expected to accrue to the Statesin 1963/6L4 from increases in inter-State sales tax which is legislated by theCentre.
xxv. The provision in the Budget for a "super profits tax" has beenstrongly criticised by Indian incdustry, which contends that the tax will dis-courage new investment and penalise efficiency and growth. Industry hasindicated that it is ready to bear its share of the defence burden, and theFinance Winister is understood to be considering the possibility of somlechange in his proposal wlich would meet the objections raised, while stillraising the additional revenue expected (estimated in the Budget at just over$50 million this year).
xxvin The Budget provides for defence expenditures to be more than doubled.and for development expenditures to be raised by 10-15 per cenlt above lastyearx's level, Non-development expenditures, apart from defence, are beingheld down, and the only major increase proposed in the current expendituresof the Central Government is on account of debt service.
xxvii. The Budget ends up with an overall deficit of rather over $300million to be met by an expansion of Treasury Bills. This is somewhat higherthan the provision made for deficit financing in previous years, and if theincreases in expenditures on defence and development materialise to the fullextent allowed for, there could be considerable pressure on prices. However.there are adiynuistrative and plamning limitations on the speed at which defenceexpenditures can be increased, and the same is true in lesser degree of deve-lopmenit 0 Since the additional revenues will start to come in from thebeginning of the year, the immediate impact of the Budget on the ecoinomy coulawell be somewhat deflationary.
xxviii. The further steep increases in indirect taxation and the need forthe upward adjustment of prices of many basic goods and services should resultin a fairly general increase in the cost of living. Whatever the risks ofprice increases in the immediate future, the mission believes that it wouldbe a shaort-sighted policy to try to suppress infla:tion by mainte'ining arti-ficialJ.y low prices in such industries as iron and steel, coal, transport ardelectric power.
-x -
xxix. Changes in agricultural production during the coming year willdepend mainly on the weather. For industrial production the critical factoris likely to be the availability of maintenance imports, and this in turn wil'depend on how much additional external assistance can be provided in the foritof balance of payments support and commodity aid. Shortages of transport,power and coal, though less severe than they were a year ago, could againemerge as obstacles to expansion. Transport will be one of the sectors of th>economy most directly affected by defence.
xxx. The official balance of payments forecasts for 1963/64 envisageimports rising by 25 per cent, exports by 21 per cent, as compared with thepast year. If things turn out well, the mission feels that the forecast fortotal exports might be reached, but that it is unlikely to be exceeded. MIorethan two thirds of the increase in imports is attributable to machinery andtransport equipment and the remaining one third to iron and steel, non-ferrouHimetals, petroleum products and fertilisers. So far as maintenance importsare concerned, the mission has no reason to believe that requirements havebeen over-stated.
xxxi. The Government is seeking new aid commnitments of $1,250 million in1963/64 - about $550 million of non-project aid and $700 million of projectaid. This would be a higher proportion of non-project aid than was receivedin the first two years of the Third Plan. The mission believes that theratio of non-project aid to total aid must be increased if full advantage isto be taken of the investmerts already made, and if the start of new invest-ments i.n manufacturing industry is not to be pushed beyond what the Indianeconomy can find the foreign exchange to support.
xxxii. The total amount of Indials exteinal public debt on April 1, 1963,was about $3,900 million. Service payments on this debt would reach theirpeak in the years 1965/66 - 1966/67 when projected amortisation and interestcombined would average over $350 million a year. This would be equivalentto around 18-19 per cent of India's gross external receipts on current accour.1at the present time. The indications are that India will require at leastas much external assistance in the Fourth Plan as in the Third if the growthof the economy is to be maintained along the lines at present proposed.Unless most of the assistance extended from now on is in the form of grantsor loans with easy terms of repayment, the burden of debt service will rapidlybecome insupportable.
r.S ;s. *MS.u-¢.*>1pga.>:4asas.t.g '..,-.£Ne:A. 4 r.; s,a .Lx.> rru ... krb. ... SsQ.M.... S ^ .-+.t; a.............-- ?- .............au
CHAPTER I
PROGRESS OF ECONOI"IIC DEVELOPMENT
Production
1. India has just come to the end of the second year of her Third Five-Year Plan. Over the twelve years from the beginning of the First Plannational output in real terms has risen by about 50 per cent or at a compoundrate of 31 per cent a year. The population has increased over the sameperiod by 27 per cent, from about 360 million in 1951 to nearly 460 million in1963, giving an arnual rate of increase of 2 per cent a year. The rise inper capita income has thus been around 11 per cent a year. The rate of growthin output has probably accelerated somewhat in recent years if the effects ofyear-to-year fluctuations in acriculturai production are discounted. Atleast, this seemed to be the position towards the end of the Second Plan.However, during the past two years not only has agricultural production re-mained practically stationary, but the pace of industrial expansion has alsoslowed doam. The rate of population growth has meanwhile been rising andis now believed to be in the region of 21- per cent a year.
20 Production in organised industry has doubled since the beginning oLthe First Plan in 195l, and the transformation in this sector of the economyhas been spectacular. -Output of steel has been more than trebled, output ofcement nearly trebled and output of coal nearly doubled (Table 1). A widerange of new industries has been established in engineering and chemicals, andIndia is now able to supply most of her own requirements for railway equipment(except for electric and diesel locomotives, production of which is only justbeginning), automobiles and ancillaries, bicycles, sugar-making machinery,sulphuric acid and oil refining. Sales of electric power have been risingover the past five or six years at a rate of around 15 per cent a year.Organised industry and mining still accounts for a comparatively small propor-tion of the national income - probably about one tenth. But,absolutely, itssize is impressive. In terms of the value added in this sector, there are fewTcountries outside Europe and North America which out-rank India - Japan, China,Brazil and Australia are probably the only ones. India is the seventh largessproducer of coal in the world and is on the way to becoming one of the twelvetop producers of steel.
A a Slf irj ̂ ,N; a | 2 § L < r it a 6- .. ........... w1j&.Ca ...... 2.,i ... C, ..= ... .,As!.. F:6' ..-=3:. :ti{ .D.9-,tS..-4i 0. i ; olCt '.-3:'S:%fi.tD...-f...........b.:
-2-
Table 1. Production of Selected Industrial Commodities(million tons and calendar years unless otherwJise zindicated)
1a/ Target1951 1956 1960 1961 1962- 1965/66
Coal 35 40 53 56 62 97.0Iron ore 3.7 4.3 10.7 12.1 12.8 30.0Finished steel 1.1 1.4 2.2 2,9 3.7 6.8Cement b/ 3.2 5.0 7.8 8.2 8.6 13.0Nitrogenous fertilisers- 11 81 116 140 159 800Motor vehicles (tOOOs) 22 32 52 54 58 100Cotton cloth c/ b.)077 5,307 5,048 5,142 4,787 5s800Jute goods .89 1.11 1.09 0.97 1.17 1.30
All commodities(index: 1956=loo) 73 100 130 139 150 235
a/ Provisional.b/ Thousand tons of N for fiscal years.c/ IMillion yards, mill sector only.
3. The rise in industrial production has been continuous. Starting froma rather narrow base, it increased by over 35 per cent during the First Planand by 40 per cent during the Second, The most rapid period of expansion wasduring the last two years of the Second Plan when the annual rate of increasewas in the region of 10 per cent. This was the time when industry was reap-ing the benefits of the spurt in private investment which occurred at the endof the First Plan and the beginning of the Second. The smaller percentageincreases in industrial production during the past two years (7 or 8 per centa year) are to be partly explained by the fact that the industrial base isnow much broader. Industrial growth has also been increasingly held back byshortages of imported materials and by internal difficulties over the supplyof coal, power and transport. Year-to-year variations in the growth ofindustrial production are influenced to an imoortant extent by fluctuationsin the output of the textile industries which still account for roughly 40 percent of the weighting of the official index of production.
4. Industrialisation has brouight striking changes to the principal citiesof India and to the new towms which have developed around large industrialplants - for example, Durgapur in West Bengal, Jamshedpur and Ranchi in Bihar,Rourkela in Orissa and Bhilai and Bhopal in Madhya Pradesh. But the economyremains predominantly rural and agricultural, with agricultural productiondirectly contributing nearly half of the national income. Changes here aremore gradual and less obvious. The increase in agricultural production overthe past twelve years has been about 40 per cent - that is, an average ofabout 3 per cent a year (Table 2). Outputs of rice and oilseeds have ex-panded a little slower than the average for all crops. The increases for wheat
INDIAPRODUCTION TRENDS(INDEX, 1950 = 100)
250 Y EI I I250YEARLY
200 200INDUSTRIAL PRODUCTION
NATIONAL OUTPUT
150 150
100 100
PER CAPITA OUTPUT AGRICULTURAL
50I I i I I I I 1 501950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962
BALANCE OF PAYMENTS(CRORES OF RUPEES)
1,500 1 I I I I 1,500FISCAL YEARS I
IMPORTS
EXPORTS
500 500
FOREIGN EXCHANGE RESERVES / *' - *Se..(MID- YEAR)
I I I . _ _ _ I _O
'52/53 '53/54 '54/55 '55/56 '56/57 '57/58 '58/59 '59/60 '60/61 '61/62
SOURCE: India's Balance of Payments, 1948/49 to 1961/62, Reserve Bank of India, Bombay 1963.
-3-
Table 20 Agricultural Production(million tons: agricultural years July-June)
Target1950/51 1955/56 1959/60 1960/61 1961/62 1965/66
Rice 20,2 27,1 31.0 33.7 33.6Wheat 6.4 806 101 10X8 11J6 X aCoarse grains 15.1 19.2 224l 22.7 21.9 . 0
Total cereals 41.7 5)4.9 63.2 67.2 67.1 e a
Pulses 8,3 10.9 11.5 1205 11.5 a .
Total foodgrains 50.0 65.8 74.7 79.7 78.6 100.0
Oilseeds 5.1 5.6 5.9 6.5 6.8 9.8Sugarcane (gur) 5.6 6.0 7.7 10.4 9.7 10.0Cotton .51 .70 .6)4 .94 .79 1.25Jute and mesta .59a/ .95 1.02 .91 1.42 1.36
All crops (index1949/50-l00) 96 117 128 140 140 176
a/ Jube only.
and sugarcane have been much above average, while the relative importance ofmillets and barley has declined. Amongst major crops, the largest expansionof all has been in output of fibres (cotton, jute and mesta); the expansionof cotton production, however, occurred mainly during the First Plan, and ithas not done so well since. Amongst plantation crops, cofLfee and rubber haveboth gained in importance, but they are still growm on a small scale as com-pared with tea which retains its Drimacy as Indiats principal agriculturalexport.
5. There has been no clear sign of any acceleration in the pace of agri-cultural expansion in spite of the large investmaents made during the past tenyears in irrigation and community development. Agricultural conditions varygreatly from one part of the country to another, and in any one year theweather may turn out favourably for some crops and unfavourably for others.Two years of outstandingly good harvests were 1953/54 and 1960/61. Thebumper crops in this latter year made the progress achieved during the SecondPlan appear greater than it really was, and the fact that there has been nofurther significant increase in agricultural output as a whole during the fir3ttwo years of the Third Plan must be assumed to reflect the results of climatirnvariations and not any basic change in the long-term rate of agriculturalexpansion.
-h -
Employment
6. Economic development has not made any significant dent on the problemsof urban unemployment and rural under-employment. The number of new jobsprovided in industry and construction has been much less than the increase inpopulation of working age, and will inevitably remain so. As new jobs havebeen created in and around the towns, more people have left the villages toseek work and to sample the attractions of town life. Overcrowding and un-employment are probably most acute in Calcutta which remains the problem-childof Indian cities. Efforts are being made to plan its future development onhealthier lines, but no significant improvement has yet been effected in theliving conditions of its huge slum population.
Consumption
7. Private consumption in India probably accolnts for 75-80 per cent ofgross national expenditure, and if this is correct, per capita consumption isin the region of Rs. 250-260 a year or about Rs. 5 per week (nominally equiva.-lent to just over $1). Large sections of the commumity receive less thanthis, since there are wide disparities between the different income groups andbetween one area of the country and another. 1/ The statistics are not goodenough to provide any reliable measure of year-to-year changes in consumers'expenditures, but the data presented in Table 3 tend to confirm the generalimpression that, in the towms at any rate, standards of living are rising.There is no doubt at all that in most of the principal industrial centres suchas Bombay, Madras and Bangalore average standards are very much higher thanthey were ten or fifteen years ago.
Table 3. Per Capita ConsLumption AvailabilitiesJ;(annual averages except where stated otherwise)
1951-53 1951-56 1957-59 1960-62
Foodgrains (ozs. per day) 13.6 1591 15.1 15.9Vegetable oil products (lbs.) 1.13 1.43 1q62 1.71Sugar and gur in terms of gur (lbso) 31.5 36.7 38.7 44.3 b,Cotton cloth (yds.) 14.21 15-50 15.24 15.54Shoes (prs. per 1000 persons) 74 97 102 115Cycles (per t000 persons) 1.04 1.59 2.21 2.40Cigarettes (numbers) 54 58 72 90Sewing machines (no. per T000 persons) 13 .26 .47 .65Factory soap (lbs. per person) .51 .57 .64 .73Radio receivers (per tOO,00o) C/ 24.7 25.9 50.5 71.1Number of towns and villages electrified- 4,518 6,981 10,712 23,000
a/ Based on population estimates derived from the 1951 and 1961 Censuses.*/ Relates to the crop year 1960/61. c/ Figures relate to 1952, 1955, 1958
and 1961 respectively.
1/ Data collected by the National Sample Survey suggest that annual per cap.itaexpenditure on consumption by the bottom 20 per cent of the populationaverages as little as Rs. 100 a year, while for the top 20 per cent theaverage is about Rs. 560 a year and for the top 5 per cent over Rs. 930fj ayear.
8. Government current expenditures on goods and services as a percentageof national income are estimated to have risen from a little under 6 per centduring the First Plan to a little over 7 per cent during the Second Plan andabout 8 per cent in 1961/62. The principal constituents of government "con-sumption"t apart from general administration, have been outlays on socialsarvices and defence. Defence expenditures rose by about 85 per cent between1950/51 and 1961/62, but at the time of the Chinese attack last October theystill accounted for only 2-3 per cent of national income, and the ratio ofdefence expenditures to national income was appreciably lower that that ofmost countries in Europe and the Mliddle East. Current expenditures onsocial services have also been comparatively modest, absorbing little over1 per cent of the national income during the First Plan and about 2 per centduring the Second. Important advances have nevertheless been made, particu-larly in education and health - though as the quantity of education hasincreased, its quality has inevitably somewhat deteriorated. School enrolmenthas nearly doubled during the past decade and the number of hospital beds hasincreased by two thirds. Expectation of life at birth is believed to haverisen from about 32 years at the time of Independence to 42 years or more today.
Investrnent and Savings
9. Government expenditures on development have steadily increased from anaverage of Rs. 392 crores a year during the First Plan to just over Rs. 1,100crores in 1961/62 (Table 4). A principal feature of public investment policyhas been the growing concentration on industrial development, particularly iniron and steel and heavy engineering. Private investment in industry hasmeanwhile risen rapidly in response to the stimulus provided by the Government'sdevelopment program.
Table 4. Five-Year Plan Expenditures(Rs. crores)
a/First Plan Second Plan Third Plan-
Ainual Average Annual Average 1961/62 1962/63 1963/64(PBE)
Agriculture and communitydevelopment 58 110 147 188 217
Irrigation and flood control)u 7 ( 86 103 122 117Power ) ( 90 136 191 2h7Village and small industries 8 37 38 h7)Organised industry and ) 410
minerals 11 188 193 298)Railways 52 163 176 238 257Roads and road transport 29 51 72 90 87Other transport and
communications 23 38 42 12 56Social services and
miscellaneous 94 171 205 264 262Total 392 93 4 1,112 1,480 1,653
a/ RE = Revised Estimate. BE Budget Estimate.
-6
10 The progress of investment and production in key sectors of the economyis discussed in more detail in Annex I. The first boom in private industrialinvestment occurred in 1955 and 1956, but the tempo slackened off somewhat inthe middle years of the Second Plan. There was a second boom in 1960 and 1961encouraged by the ambitious programs of expansion in the Third Plan and theindications of large-scale external assistance. During these two years a largenumber of collaboration agreements were concluded with foreign firms, andconditions in the stock market were generally bullish, Renewed concern aboutforeign exchange difficulties, coupled with the uncertainties created by theChinese attack, have resulted in the dampening down of interest in privateinvestment during the past six months. This year's Budget, and particularlythe proposal for a super profits tax, has caused many industrialists to holdback on new schemes for the time being.
ll-. There are no reliable estimates of investment in the household sector,and consequently all estimates of total investment are subject to considerableuncertainties. When the Third Plan was published, it was assumed that netinvestment absorbed about 11 per cent of the national income in 1960/61, andthat this ratio would be raised to lh-15 per cent by 1965/66. The proportionof net investment to national income is believed to have more than doubledsince the beginning of the First Plan. The greater part of the increase ininvestment has, however; been financed from external resources - in the earlyyears of the Second Plan mainly through the running down of Indiats foreignexchange reserves and latterly to an increasing extent by foreign aid andprivate foreign investment. The current account deficit in the balance ofpayments for 1960/61 was of the order of Rs, L00 crores, against net investmertof around Rs. 1,500-1,600 crores and a national income of just over Rs. l4,COOcrores, Domestic savings would thus appear to have been around Rs. 1,100-1,200 crores or about 8 per cent of national income. The corresponding propol-tion in the First Plan, when investment was almost entirely financed fromdomestic resources, was probably around 6 or 7 per cent. There is certainlyno conclusive evidence to show that the marginal savings ratio has iLcreasedsignificantly over the past five years. On the other hand, this ratio hasprobably fluctuated considerably from year to year in response to changes inagricultural income.
Internal Finance
12. The fiscal and monetary authorities in India have in the main pursuedconservative policies, and with the exception of a brief period at the begin--ning of the Second Plan deficit financing has been contained within moderatelimits. "lIoney supply expanded by about 10 per cent during the First Plan andby about 30 per cent during the Second Plan. The ways in which public develop.ment expenditures have been financed are illustrated in Table 5. The limitsto the pace of development in most sectors have been set more by shortage offoreign exchange and by problems of administration than by shortage of rupeefinance as such. But the strict control traditionally exercised by the NinLstryof Finance over all branches of public expenditure has acted as a brake on ex--pansion in sectors where more could have been spent if the funds had been ava:J45-able - for example, health services, school building, scholarships, roadconstruction and rural works.
-7-
Table 5. Financing of Five-Year Plan Expendituresa/(Rs. crores)
b/First Plan Second Plan Third Plan -
Annual Average kAnual Average 1961/62 1962/63 1963/6TR- T-F
Balances from currentrevenues c/ 77 2 177 -49 -380
Contribution of railways 23 33 h6 15 15Surpluses of other public
enterprises e/t - 20 28. 69Loans from the public (net)- 41 148 148 202 203Prize bonds and gold bonds - 3 4t 12 7Small savings 49 84 88 85 105Compulsory savings - - - - 65Provident funds 18 35 54 60 63Steel equalisation fund - 8 13 7 6Balance of miscellaneous
capital receipts overnon-Plan disbursements 29 9 73 178 136
Additional taxation:(a) Centre 35 162 83 181 490(b) States 16 49 15 53 171External assistance -/ 38 210 303 457 557Increase in floating debt
plus withdrawals fromreserves e/ 66 191 88 251./ 146
Total 392 934 1,112 1,480 1,653
a/ This table follows the conventions used by the Planning Commission and isof limited value in analysing the impact of fiscal operations on theeconomy. An analysis of deficit financing in recent years is given in theStatistical Appendix, Table 16.
b/ RE = Revised Estimate. BE = Budget Estimate.c/ At the tax rates prevailing at the beginning of each Plan.d/ Includes receipts by way of revision of railway fares and freights for the
First and Second Plans. For the Third Plan increases in fares and freightsare included under additional taxation.
e/ Loans from the public include loans taken up by the banking system.B Budgetary receipts corresponding to external assistance. These are notdirectly comparable with the figures of external assistance shown in thebalance of payments.
g/ The final out-turn for deficit financing in 1962/63 is likely to be aboutRs. 100 crores less than the Revised Estimate given lhere. This is partlybecause the balance from current revenues is expected to be more favourableand partly because total Plan expenditures in 1962/63 are expected to bebelow the Revised Estimate of Rs. 1,480 crores (see paragraph 120).
-.8-
13e Agricultural prices in India were declining throughout most of the FirstPlan - first of all, as a reaction to the Korean boom and later in response tothe exceptionally good harvest in 1953/54h Wholesale and retail prices rosemore or less continuously during the Second Plan, but at no time was the pricesituation allowed to get out of hand,) India has not suffered during the pastten years from the kind of uncontrolled inflation which has caused havoc insome developing countries. The index of wholesale prices has levelled off inthe past two years, while consumer prices have continued to move slowly upwards.Prices of basic industrial conmmodities such as coal, iron and steel and cementare controlled by the Government 0 Prices of consumer goods and services havebeen considerably affected by indirect ta}xation. Successive increases incustoms and excise duties and sales tax, coupled with the restriction of importxs,have enhanced the price of many articles of common consumption including tex-tiles, kerosene, tobacco and a wide range of durable consumer goods.
External Finance
1h4 Indials external balance of paymients has been under continuous strainsince the beginning of the Second Plan in 1956. During tho First Plan, apartfrom 1951/52 which was an exceptional year, there was a consistent surplus oncurrent account, and foreign exchange reserves, including government balancesabroad, rose from Rs. 864 crores ($1814 million) in March 1952 to Rs. 902crores ($1894 million) in March 1956. Thereafter a precipitate decline setin, and by September 1958 - about the time of the first Indian, consortiummeeting - the reserves were down to Rs. 335 crores ($704 million).
15, Disbursements of foreign aid up to this time, except for surplus com-modity aid, had been comparatively small, and the phenomenal increase inIndia's merchandise imports from an average of Rs. 679 crores a year duringthe last four years of the First Plan to Rs. 1,167 crores a year in the firsttwo years of the Second Plan was financed mainly out of India's own resourceseForeign aid disbursements rose as the Second Plan progressed, while the risein imports was checked by the tightening of quantitative restrictions and moresevere controls over investment. The drain on reserves continued, but at amuch slower rate, and at the end of the Second Plan they stood at Rs. 304 crres($638 million).
16. The rise in imports during the Second Plan was the direct consequence ofthe stepping up of investment expenditures in both public and private sector&,,Imports of machinery, electrical equipment, vehicles, iron and steel and non-^ferrous metals rose sharply in the early years of the Plan, and there was als"a big increase in imports of foodgrains needed to satisfy the growth of consviaerdemand associated with the expansion of economic activity (and encouraged bydeficit financing in the early years of the Second Plan). The program ofsurplus commodity aid from the United States under PL 480, which was initiated.during the Second Plan, was invaluable to India at this stage of her develop-ment. Indeed, it is difficult to see how the Plan could have been carriedthrough without it. At the same time, grants and loans from a variety ofcountries and institutions have progressively substituted for drawings onIndia1 s foreign exchange reserves as a source of external finance for develomr-ment. Total disbursements of external assistance during the Second Plan,
INDIAPRICE MOVEMENTS(INDEX, 1952/53 100)
160 1 1 I I l l l 1 I 160FISCAL YEARS EDIBLE OILS (Retail)
150 150
/ 1 CLOTHING AND/ /FOOTWEAR (Retail)
140 / /140
WHOLESALE
130 130
120 120
1 10 1S -I10\0 \CEREALS (Wholesale)
100 100
KEROSENE (Retail)
90 90
80 80
5-YEARFIRST 5-YEAR PLAN - - --- SECOND 5-YEAR PLAN PLAN
70 1~ I I fI I I I I , | 70'51/52 '52/53 '53/54 '54/55 '55/56 '56/57 '57/58 '58/59 '59/60 '60/61 '61/62 '62/63
4/11/632163(R) IBRD - Economic Staff
- 9 -
including aid under PL 480, amounted to the equivalent of $2, 900 million(Statistical Appendix, Table 33). Of this, aid under PL 480 accountbed for 35per cent, other aid from the U.S0 Government for about 20 per cent and IBR.Dloans for 16 per cent. The other principal contributors, ranked according tothe scale on which official aid was disbursed, were the United Kingdom, Canada.the Soviet Union, the Federal Republic of Germany and Japan.
17, India's exports during the Second Plan fluctuated between about Rs. 575crores and Rs. 675 crores a year, but there was no clear trend in either direc-tion, Tea and jute goods were the principal commodities, regularly accountingbetween them for 35-4i0 per cent of total export earnings. Cotton textile ex-ports were relatively rather less important than during the First Plan, butmain-tained their position as the third item on the list, with a 10-15 per centshare of the total,, Traditional agricultural exports like hides and skinssraw cot-ton, spices, cashew nuts and tobacco maintained their position in wor.ldmarkets, and oilcakes emerged as a new export of sizeable propor`iono. Export3of vegetable oils, however, declinied because of rising internal consumption0Among mineral products, manganese used to be much more importalt than iron ore,but towards the end of the Second Plan the position was reversed. Earningsfrom iron ore began moving up, while the demand for manganese ore dwlindled,Some of the new manufacturing industries were beginning by the end of the Planto export in a small way.
18e Miaintenance imports have been kept under tight control during the lasttwo years, and most of the major items of capital equipment ordered for proje3tsin the Third Plan have still to arrive. The build-up of total imports hasconsequently been much slower than at the beginning of the Second Plan whenimport licences for investment goods and industrial materials were being issuedfreely. Indeed, the volume of imports during the past two years has been con-siderably smaller than it was five years before in spite of the fact thatnational output has risen by one fifth in the meantime. This slggests thatthe ratio of imports to gross national product may have been significantlyreduced as a resuilt of the extensive programs of import suibstitution undertakenby Indian industry. It is difficult to be sure of this, however, in the abse-Ceof reliable inlormation about changes in -the commodity commposition of importsand movements in inventories,.
19. Export earnings rose by 6 per ceint in 1961/62 anid are expected to riseby another 4L per cent in 1962/63. IIore than half of the increase in the latteryear is, however, attributable to the inclusion of exports from Goa. Earning,sfrom jute goods have been exceptionally high in both years - in the first yearbecause of a sharp increase in prices caused by the shortage of raw jute andin the second year, when prices were somewhat lower, because the volume of ex-ports rose as foreign buyers replenished depleted stocks, Exports of cottontextiles and manganese ore have continued to decline in the face of keen forel.ancompetition. The performance of iron ore has also beeni disappointing; therehas been some increase in the value of exports, in addition to exports fromGoa, but shipments have been held back by transport difficulties. Significantincreases in earnings have been obtained from exports of -sugar and oilcakes.Exports of sugar were at one time being heavily subsidised, but with the sharprise in world prices of sugar, the subsidy has been reduced.
- 10 -
20. The balance of current invisible transactions has changed sharply forthe worse. India earned a net surplus of almost Rs. 400 crores under this headduring the Second Plan, but year by year the surplus has dwindled, and in 1961/62 it was turned into a deficit of Rs. 12 crores. A deficit is also to be ex-pected in 1962/63 and subsequent years. The largest deterioration has been inrespect of investment income. Payments of interest and dividends in respect offoreign investment in India have been mounting rapidly, while the interestrecoived by India on her sterling balances has fallen as the balances have beendrawm dowm. Indiats payments abroad for technic-.l and professional services,together with royalties, have now become a sizeaole item on the debit side ofthe balance of oaynents. Simultaneously private remittances from Indialsliving abroad have been reduced. On capital account also the position hasworsened considerably since the beginning of the Third Plan as the amountsneeded for the repayment of foreign loans have increased.
21. The rate of disbursement of foreign aid has accelerated during the past.two years. From just under Rs. 200 crores in 1960/61 (excluding PL 48o), ithas risen to Rs. 243 crores in 1961/62 and an estimated Rs. 352 crores in1962/63. Add.i'tional foreign aid has gone a long way to offset the increase inimports and the worsening of the invisible account, but there has still beensome further reduction in foreign exchange reserves, and India has also drawnthe equivalent of $147.5 million net frora the International NMonetary Fund sinccthe beginning of the Third Plan. Indiats total obligations to the Fund nowstand at $275 million.
CHAPTER II
ECONOI4I(, PROBLEIIS AND POOICIES
Some General Observations
22, Very real progress has been made in India since Independence in
establishing a steadily rising trend of production and building up wiithinthe traditional society foundations of a modern econo±n,ry DevelopmXent has
inevitably been uneven, but no part of the country has been wholly unaffectedby it, and to a minorityj it has brought revolutionary changes in ways of life'0Yet there is growing dissatisfaction amongst educated people in India with thefailure to achieve the goals set in the fLve-year plans and much criticism ofthe Government's methods and policies. This criticism, insofar as it isrelated to economic issues, has been particularly severe arnongst the moderngeneration of industrial managers and technicians who constitute one of themost vigorous and progressive elements in the new society and wlhose experienccand standards of' value are very differeilt from those of the more tradition-bound sections of the population. There seems to be jusst as much frustratioii
inside the public service as outside, and it is coming to be reconiLsed that,
radical changes will be required in the machinery of government and in the
a.ttitudes of -those who run it if the rate of growth is to be speeded up.
23. Traditional atltitudes anid beliefs are everyuihere an obstacle to rapideconomic change, The fact that India has such a long and civilised traditionmakes this more of a problcm there than in newier count1ries. Buit attitudesare now chang;ing, particularly in the new inclustrial centres; indeed, thismay well be considered one of the strongest arguments in favour of industrialisation. The Government has taken the lead in stimulating change and increating a new desire for economic advancement, yet has sometimes been slow in
bringing its own attitudes up to date. Icvertheless, modern economics and
technology are gradually encroaching on the preserve of the general adminis-trator, and the importance of expert and specialised lknouledge in the manage-ment of the economy is more widely acknowledged now than it was evern a fewyears ago.
240 Planning in five-year periods has obvious disadvantages, and some of
the problems of uneven growth with wvhich the economy is stru-gling todayresult from the tendency for new investments to be bunched together at the
start of each Plan0 Five-year plans, particularly in a democracy, also
introduce an elemfient of inflexibility into econcomic policy in as much as everychange is liable to be made into a political issue,, and the Government cannotadmit to dropping or deferring a major prcject without exposinr: itself to
criticism from interested parties. IMany more changes have, howJever, been madein the Third Plan than official pronouncements might suggest, and criticismof c:Ccessive rigidity, while no doubt justified -up to a point, should not be
pressed too far.
12 -
25. In the nature of things, no one can hope to present an entirely objectiveassessment of what India has achieved, of her successes and failures, In onesense, it is remarkable that the Government has been able to hold the countrytogether and carry through a program of economic development involving largeincreases in taxation without serious political disturbance or infringement ofessential political liberties. Few governments in history have had suchdaunting problems to tackle or have taclcled them with such a high sense ofresponsibility. Communalism has been held in check, English has been retainc.Oalongside Hindi as an official language, the Goveriment has given the lead ininstituting a campaign for family planning, women have been encouraged toparticipate more fully in the life of the country, efforts have been made tobreak down the caste system, educational opportunities have been widely expan6cedand a begirning has been made with the transformation of the traditional villa-esociety through land reforms and the Community Development Program. From aneconomic point of view, these are all changes in the right direction, and tlou-lit is easy enough to find fault with what has been done and to demonstrate thelLnited effectiveness of government policy, the record as a whole is impressti:v
26, For all this, the results so far achieved are painfully inadequate tothe need. The sheer size and poverty of India are its greatest problems. Ithas been calculated on the basis of quite moderate assumptions about populationincrease and income distribution that, in order to provide the poorest 20 percent of the population with an average per capita income of Rs. 20 per monthby 1975, the economy as a whole must maintain an annual rate of growth of 7 per,cent over the next twelve years. In other words, the present rate of growthwould have to be nearly doubled. This may be considered unrealistic, yet noone could fairly regard the goal as excessive.
27, The present report is concerned mainly with economic questions, and itwould be out of place for the mission to comment at length on matters of polit>Jcal and social policy. But in India, as in any other country, there mustinevitably be some conflict between the Government's political and socialobjectives on the one hand and its economic objectives on the other. Anybalanced assessment of the problems involved in securing a faster rate of grow,il'tmust at least take note of these conflicts, and we may therefore briefly menticnsome of them here,
28. It is the declared policy of th-ie Government of India to reduce inequa2--,ties of income and wealth, and this policy is being applied in ways which mus,tinevitably act to some extent as an impediment to growti. For instance, thesalaries of senior government officials and professional staff, includingexecutives of government enterprises, have been restricted to levels (Rs. 3,(iC;'a month for the top jobs, as against Rs. b,000 a month under the old IndianCivil Service scales) which are out of line with the salaries that can beearned in the private sector in India or in almost any foreign country. Thcreare real satisfactions in wiorking for government in India, and there are manyable and devoted men in the public service. But it must be questioned whether.the Government can expect in the long run to attract and retain the best mernand to provide incentives for exceptional effort and enterprise - unless it isprepared to pay them more. To try to solve this problem by limiting salaries
13 -
payable outside government is in the mission's view mistaken, if only becauseIndia carmot insulate herself from the outside world, 2
29, Another objective of government iwllich is in conflict with the aim ofsecuring more rapid economic growth is expressed in the policy of "balancedregional developmenttt. This is a perfectl;y understandable policy and up toa point may be part of the price thatl has to be paid for maintaining theUnion. But the fact should be recognised that, if the limited resourcesavailable fo investment are to be dispersed widely over the country insteadof being concentrated on the projects and areas where they will yield thehighest economic returns, the growth of the economy as a whole must beimpeded. Iqumerous examples can be quoted of wasteful investments resultinhgat least in part from the desire to advance particularly backward areas andto ensure a "fair" allocation of resources between different States andregions. The location of the first govemrment oil refiniery at Nunmati inAssam is a classical case (see Annex I). Other instalnces are to be foundin the proposals for having a new fertiliser plant and a new public sectorindus-trial project in each State (though these have not been fully implemer:1.¢cd),in plans for the development of certain ports, in the State anid Central pro-grams of highwuay construction and in the extension of the package program forfoodgrains from the original 7 districts to 17.
3o. The aim of maximising employment anld the aim of maximising output comeinto conflict in all countries, In India, for obvious reasons, the conflictis particularly sharp. The creaticn of more jobs for the unemployed andunder-employed was singled out as a principal objective of the Third Plan,It is true that in practice investment in the Plan, particularly in thepublic sector, has been concentrated on industries wlhich are generally capital-intensive and provide comparatively little employment in relation to the valu.eof their output. At the same time, however, considerable effort and expendi-,ture are devoted to maintaining or expanding employment in the small-scalesector. For example, expenditure during the Second Plan on Khadi 2/ andvillage industries is estimated at Rs. 87.5 crores (Rs. 68.6 crores for Khadi3,Rs* 18.9 crores for other industries), and provision for further expenditureof Rs. 92 crores has been made in the Third Plan.
31. The protection of inefficient, labour-intensive techniques in villageindustries (for example, in cotton spinning and the manufacture of matches)acts as a drag on efficiency and output in the organised sector, reduces t>hevolume of savings available for investmenlt elsewhere and slowzs down theoverall pace of development. Similar consequences follow from attempts tofreeze levels of employment in organised ildustry and to discourage theintroduction of modern equipment. Restrictions on the firinO of labour,which almost everywhere lhave the Government's support, have been a powerfulfactor making for rigidity and inefficiency. Incidentally, production and
1/ This consideration seems to have been partly responsible for tlle provisionin this year' s Budget that the deduction for expenditure by a compa-ny onaccount of pay and perquisites should be limited to Rs. 60,000 a year forany one employee. Any remuneration in e,.cess of this figure has infutlure to be paid out of profits.
2/ Khadi is hand-spun, hand-woven cloth0
114 -
price controls tend to have similar effects. Consequently a disturbinglylarge number of inefficient producers are being kept in existence at consider-able cost to the community when they should be encouraged to go out of business.
32. A different sort of problem arises out of what can only be described asexcessive concern for the rights of private property owners and the protectiongiven to these under the law. Development projects are frequently held upi forlong periods by difficulties over acquisition of l.and and compensation of theexisting owners, This has been one of the main obstacles to schemes for slumclearance and urban renewal in Calcutta; it has also been a cause of delay instarting several of the important industrial projects in the Third Plan. Theway in which property owners in the United States can be dispossessed to makeroom for new highways or other public services stands out in striking and ironi',contrast to the situation in India. The mission is not qualified to comment indetail on the legal aspects of this matter, but we would suggest that it meritsurgent consideration by a judicial commission to see what new legislation wouldbe needed to give the Government more effective powers to take over privateproperty, subject to appropriate compensation. Meanwhile, advantage shoould betaken where possible of the defence regulations to by-pass time-consuming legLIprocesses where these are holding up development.
33. MIany other examples could be given of government policies and socialattitudes which conflict with the objectives of maximisiing production. Ifthe ouitside critic makes too much of these conflicts because they seem to himstrange or even perverse, in India there is eperhaps a tendency to under-estimatetheir consequence as obstacles to growth because they are familiar and widelyaccepted. Nevertheless, the spread of education, the development of industryand the increase in the number of Indians travelling abroad - and in the numberof different countries they visit - are having a healthy effect in producinga new outlook on life and in dispelling doubts about the advanatages of materialprogress. The danger is that expectations will be raised much faster than theyare satisfied. The first essential in any 'Long-term plan for meeting even thQ,minimum requirement of a tolerable livelihood for all must be the limitation Afpopulation and the more rapid expansion of agricultural production.
Population
314. The presurmed rate of increase of Indiafs population - less than 0.2 percent a year between 1891 and 1921 - was 1.2 per cent a year between 1921 and1951 and rose to 2e1 per cent a year during the past decade, The acceleraticnis the combined result of a very sharp decrease in the mortality rate with nochange in the fertility rate9 Despite its substantial drop over the lastthirty years, the mortality rate of the Indian population is still high andshould reasonably be expected to continue falling for some time. Fertilityhas not increased, but is not likely to fall spontaneously until average percapita income has reached a level far beyond the reach of the Indian economyfor the next twio or three decades, or urntil the bulk of the population moveaway from the rural areas, which is equally out of the question in the foresee-able future.
- 15 -
35<. Recent official projections of Indian population show a dramaticexplosion between 1961 and 1976 when population is assumed to grow at anaverage rate of 2.4 per cent a yearn A net increase of 187 million people isforecast by 1976 which would bring the total population to 625 million. Bythat time the population of working age would be about 100 million greaterthan now, and the likely increase in the labour force is in the region of 70million, which is equal to the size of the present total labour force of theUnited States and 2: times the size of the labour force of Britain, Clearly)the task of providing employment for all this additional manpower is well-nighimpossible.
36, As far as the employment problem over the next fifteen years is concer:ed,little can be done now apart from stepping up investment in the economy, sincethe entire addition to the labour force that will be seeking employment by 1976has already been born. But action is still necessary uo prevent the positionfrom deteriorating further after that date. In any case, the prospective growthof population poses many other problems besides employment. The primary objectof economic development is to raise consumption per head. In doing so, thereis no sense in concentrating exclusively on measures to raise production whileignoring measures to check population. The huge existing population of Indiameans that a failure to slow down the rate of population increase would in thelong run be disastrous.
37, The effectiveness of birth control policies in any country is still verymuch an open question. There is little experience anywhere in the world toshow what can be done to reduce fertility rates in under-developed rural areasoNevertheless, the fact that Indian family planning policy has so far beentotally inadequate to the size of the task suggests that a new approach willhave to be tried.
38. It has been estimated that expenditures of up to Rs. 600 per preventedbirth would be a cheaper way to attain a given level of per capita consumptionin India over the next two or three decades than comparable investment inactivities needed to generate the extra income that would otherwise be required,On this basis, an annual average investment of Rs. 200 crores a year on measuresto restrain the growth of population over the next fifteen years could be jusv:L-fied if it resulted in reducing the rate of increase in.population by one thi:rd,
39. Of all countries that have attempted consciouisly to control the increasein population, Japan is the only one that has done it on a scale even faintlycomiparable with what is required in India. Japanese experience and methodsmay be deserving of closer study. Several Indian States are already providingfacilities for sterilisation, and if these prove acceptable, very much largerexpenditures might be justified. A combination of many different methods willalmost certainly be needed if a real impression is to be made, and there isneed for more research on an international basis into cheap -and safe methodsof contraception.
16 -
Agriculture
4o0 The progress of agricultural production has been described in broadterms in Chapter I and is examined in more detail in Annex I. The 3 percent rate of growth achieved during the past decade has been accompanied bya definite improvement in standards of living in rural areas, Nonetheless,the expansion of food supplies is still little rnore than keeping pace withthe growth of population, the supply of agricultural materials to industry isinsufficient and erratic, rural savings are deficient, and the potential contri.bution of agriculture to the earning ard saving of foreign exchange io farfrom being fully realised, Foreign aid has provided a temporary escape fromthe impasse and has enabled India to push ahead with industrialisation at arate which could otherwise only have been achieved through the forced savingsof the rural sector. But in the longer run the balanced growth of theeconomy will demand radical improvements in agricultural productivity.
41G It is easy enough to point out what is wrong with Indian agriculture$less easy to prescribe the remedies, More water, more fertilisers,assurances of stable prices, more and easier credit, improved seeds, bettermarketing arrangements and so forth - qualitatively the problems are similarto those encountered in most otlher developing countries, But the size anddiversity of the rural economy make nonsense of simple solutions and limit tL.h,effectiveniess of Central Government6 action in a field which is anyhow reservedunder the Constitution to the States.
4?. The task of reforming Indian agriculture has baffled successivegenerations of administrators and foreign advisers. It is particularlydifficult becaluse this is the sector of the economy in which -the forces oftradition are strongest. The launching of the Community Development Programd-uring the First Plan was accompanied by a burst of enthusiasm for agri-cultural improvement, but this was short-lived, and the results achieved bythe program are now recognised in India to have fallen far short of the hopesthat were widely entertained by the Governmenit when it was introduced, Itwould be wrong to conclude that the whzole experiment has been a failure.There are increasing signs of social and economic change in the countryside.and one day the problem may be to prevent these from gathering up into aviolent storm.
43. Individual farmers in almost every part of the country have shown thatpresent average crop yields can be vastly improved upon by the more intelli-gent use of present resources, with little or no additional capital - forexample,, by greater application of green manures, scientific crop rotation,better weeding, careful selection of seeds amongst already tested varieties,different methods of planting, use of improved hand tools and better bundingof fields to con-serve soil and water. Wider adoption of improved farmingpractices depends to an important extent on a clear demonstration of theirbenefits and is as much as anything a matter of personal leadership andexanmple. Too few of the government officials in charge of the communitydevelopment and extension services have practical ImowTledge of farming orbring to tlheir work the energy, enthusiasm and understanding that are neededto arouse the farmer. Organised industry, ulhich is so largely dependent onagriculture for its rawJ materials, has not done as much as it should to help
- 17
the farmer along by showing him wihat needs to be done to get more out ofthe land and by providing him with the means to do it. The mission has metindividual businessmen who have gone into farming as a sideline in order todemonstrate the possibilities of scientific agriculture. More firms mightfollow this example. Cooperative farming has not taken on in India, andthere seems little prospect that it will, but there may be scope, even withinpresent land ceilings, for more large-scale capital-intensive farming,especially in the cultivation of commercial crops. A few State. farms havebeen established on reclaimed land. (e.g. in the Terai, along the borders of-the northern plain), but private commercial ventures of this kind have notbeen encouraged. The inherent conflict between efficient production and maxi-mum employment is evident in agriculture as well as industry.
44. Agricultural administration is not generally regarded in India as anattractive career, and it may have suffered from being placed under the super-vision of the general administrator rather than the farming specialist. Buteven the specialist employed in the agricultural services is apt to take arather academic view of his job and to prefer his office or laboratory toworking in the fields. Agricultural research, for example, has been toolittle concerned with such down-to-earth problems as determining the optimu-mwater requirements of this or that crop in this or that district. Insufficientstudy is being given to the type of crops suited to different areas or to thpeconomics of production. Nor has enough attention been given to the properorganisation of marketing and to the processing of agricultural, products - atask for private industry and trade as much as government. The milk productionscheme at Anand in Gujarat, where the milk is collected every morning in thevillages by truck and taken straight to a cooperative factory, is an exampleof the benefits which efficient organisation can bring to the farmer. Bycontrast, the poor organisation of marketing appears to be one of the principalreasons why oilseeds production in India has expanded so slowly. As the tradeis now organised, it is the middleman and not the farmer who gets the benefitof rising consumer prices. Nor has sufficient advantage been taken of thepossibilities of increasing supplies of vegetable oils by extrac-ting oil fromcottonseed, only 15-20 per cent of the seed being crushed for this purposeoThis is only one example of inadequate by-product utilisation resulting fromthe lack of proper integration between agriculture, trade and industry.
45. In addition to the need for better extension services, water andfertilisers are recognised as two of the most important requirements for in-creased agricultural production. The use of chemical fertilisers largelydepends on irrigation, and the emphasis given to irrigation in the Third Planis well justified. There has rightly been some shift from major to minorirrigation, and it may be questioned whether the thinking of government is notstill focused too much on huge dams and barrages which are extremely costlyto construct and take many years to yield benefits. The pressure on buildin'-and civil engineering resources has been accentuated by the increase in defencr_expenditures, and no major new irrigation scheme should be initiated withoutthe most careful scrutiny of its economic justification. Indiats ground watarresources are very far from being fully exploited, and more attention might begiven in future to their development.
- 18 -
46. The importance of ensuring better utilisation of available irrigationfacilities has been increasingly recognised by State Governments. Figuresgiven to the mission by the Ministry of Irrigation and Power suggest thatthere has been a marked speed-up in the exploitation of new irrigation re-sources since the beginning of the Second Plan. In 1955/56 less than 50 percent of the land commanded by irrigation works was actually receiving water;in the last three years the proportion has been over 70 per cent. Theproportion of the cultivated area at present supplied with irrigation variesgreatly from State to State. Against the national average of just over 20 percent, in Madras and Punjab it is around 35-lio per cent, while in Gujarat,Mlallarashtra, IMIysore and MIadhya Pradesh it is 10 per cent or less,
47. The functional separation of the departments responsible for agricultureand irrigation at both Central and State levels has been an obstacle to themost effective use of the irrigation provided. Priorities in undertaking newworks tend to be determined more by engineering considerations than accordingto any careful and realistic analysis of agricultural benefits, Croppingpatterns are apt to be taken for granted without much thought being given toways in which they might be brouglht more closely into harmony with nationalobjectives and in which the return on invest.ment in irrigation might be maxi-mised. The closer integration of the two departments might well be considered.
48. The agricultural program for the Third Plan was based on the assunptionthat there would be a steady and rapid increase in supplies of fertilisersresulting from the expansion of domestic production. Domestic production offertilisers has not, however, come up to expectations, while imports have beenrestricted below the levels assumed in the Plan (Annex I) All availableevidence suggests that there is still a considerable unsatisfied demand forchemical fertilisers in most parts of the country, though no one is in aposition to say exactly what the effective demand is. At present levels offertiliser application in India the marginal returns on investment in fertili-sers are extremely attractive, the extra output achieved frequently amounting(in the case of rice, for example) to three or four times the value of theadditional inputs. The mission therefore recommends that fertilisers shouldbe given high priority in anly programs for non-project assistance that may beconsidered by consortium countries.
49. A system of price supports for acriculture is in thae missionTs viewanother essential element in any effective long-term program for agriculturaldevelopment in India. The objections advanced against price supports in theUnited States, where a surplus of agricultural production has been achieved,hardly apply to India. The only crop in which India has achieved a surplusin recent years is sugarcane, and it is no accident that this is the only croDfor wihich prices have been regularly guaranteed. Last year, following abumper jute crop, a scheme was instituted for building up a buffer stock andsupporting jute prices at around Rs. 30 per maund. Although difficulties hare.been experienced in supporting prices at -this level, there is some evidence i.nshow that the scheme has averted the kind of fall in prices wihich in the pastcaused cultivators to switch land back from jute to paddy. Certainly, anothergood crop has followed, and the jute industry has been able to expand
19 -
production with the assurance that ample supplies of its principal raw materiaJwill be forthcoming, The extension of price supports to other crops is beingconsidered by the Government 0 Support prices for wheat and rice have in factbeen anmounced in advance in each of the past two years, but these have beenwell below the prevailing market prices. The difficulties of organising asatisfactory system of price supports are well recognised,but without such asystem the farmer lacks the assurance he needs to invest in improvements.
50. The Government has long recognised that the development of agriculturemust be considered in the wider framework of the evolution of rural society asa whole. The opening up of larger opportunities for non-farm employmentthrough the creation of local industries and the expansion of the servicesector is essential to preserve the balance of the rural economy and to prevenuthe emasculation of rural society through the migration of its more vigorousand progressive elements to the big cities. There is also need for more exten-sive organisation of rural works directed particularly at raising agriculturalproductivity and improving marketing facilities. Purposive direction, howevexrhas been lacking, and no one in India has yet succeeded in evolving a satis-factory pattern- of regional development. Persuasive, if not wholly convincing,arguments have been advanced by an American economist in favour of the town-centered development of indus-try - as an alternative to the unlimited growthof the big cities on the one hand and to village-centered development on theother. 1/ Whatever the right solution, this is a question which calls for moresystematic thinking than it has yet been given in India, wvhere decisions on thelocation of industry have often been settled in a haphazard way by politicalpressures,
51. The various authorities concerned at the Centre and in the States haveprepared schemes for rural electrification, the establishment of industrialestates, the promotion of small-scale industries using power, the protectionof cottage industries, the construction of village roads and minor irrigationworks and so forth, bult these have not been well thought out or coordinated,and capital has often been frittered away to little purpose - straighteningout a road here, constructing a well there, supplying this or that village withrelectric light. No effective effort has ye-t been made on any scale to mobilisounder-employed labour in rural areas for water and soil conservation works whichwould contribute to the efficiency of agriculture. This seems to be as much aquestion of organisation as of money. It has sometimes been suggested in thepast that the necessary organisation might be provided by the army, and nowthat much larger defence forces have to be recruited and. trained, it may beworth reconsidering the possibilities of integrating rural works schemes withthe defence program. One possibility would be the formation at the distric-tor development block level of a civilian labour corps trained and led by ex-soldiers and working under the direction o±' the agricultural authorities.
52. The national emergency lends a new sense of urgency to the drive forincreased agricultural production, and the strong emotions aroused by theChinese aggression should be channelled so far as possible into productive
1/ Quiet Crisis in India, John P. Lewis, The Brookings Institution.,December 1962 (see particularly Chapter 7).
- 20 -
work for the improvemenit of the rural economy. If this is to be done, thecommunity development organisation will have to be completely revanped andre-vitalised,
Industrial Expansion
53. Industrialisation is doing much to bring about the changes in tradi-tional attitudes and motivations which are everywhere a necessary conditionof accelerated economic growth. It also acts as a powerful unifyin.g forcewhich helps to promote the political and economic integration of India againstthe forces making for dissolution. Not all of the achievement in industry i,3visible on the surface, though what the casual visitor can see in the mainindustrial centres is impressive enough. As with building a factory, muchof the time and effor-t in the initial stages is taken up with laying thefoundations. The foundations of Indiats industrial development lie in theexperience now being gained in managemen-t and technical skills and in thetraining of a rapiclly expanding body of industrial workers.
54. India has deliberately made a choice in favour of building up large-scale, generally capital-intensive industries such as iron and steel, heavyengineering, fertilisers, oil refining and basic chemicals. The wisdom ofthis choice has been widely debated in India and outside. In part theargument is academic. Choice of techniques in modern industry is fairlylimited, and it would be difficult to find a meaningful pattern of developmentthat would satisfy the advocates of more labour-intensive formes of production.A program oriented towards the production of capital goods is better suited toIndia's needs than the expansion of consumer goods industries whose productswould be beyond the reach of the vast majority of the population at presentlevels of income, India's resources of iron ore and coal in any case offerher natural advantages for the production of iron and steel which have madethis the focus of her industrial development.
55e It is becoming increasingly clear, however, tlat the process of indus-trialisation will be more difficult, slower and more expensive than assumed-when the Third Plan was prepared. The number of projects undertaken by thepublic sector - in heavy industry, petroleum and coal, for example - is greate-,than the public sector is yet really capable of managing efficiently, and therestrictions on private enterprise starting new ventures in various basicindustries has limited the scope for the participation of private capital,including foreign capital, in the fin-iancing of India's developm-ent. A tendencytowards excessive use of capital has been encouraged by lotw interest rates amdby the natural desire of foreign collaborators to erect impressive plants andto promote sales of their equipment, components and spare parts. The organisa-tion and management of public enterprises is being gradually improved, but toomany civil servants are still being employed in top positions, and the methodsof personnel selection leave much to be desired. Only gradually is it comingto be reco&nised that industrial managermlent is a professional job requirinlgspecial experience and expertise, and that work in an industry like steel,heavy engineering or oil should be generally regarded as a life career. Thenumber of changes in recent years in top management positions in publicindustrial enterprises has been a source of much confusion and inefficiency.
- 21 -
56. The faults are there, but they are gradually being remedied. Theprogress made in the steel industry during the past few years is in itselfa considerable achievement. The two private plants have been expanded tonearly double their previous capacity, while three new million-ton plantshave been established in the public sector. All five plants are now inproduction., with a combined output of around 4 million tons of saleable steela year. The new plants are still some way short of full capacity, and thequality of the finished products is not yet fully up to standard. The poorquality of raw materials constitutes one source of difficulty which will taketime to overcome. But the industry has advanced a long way during the pastthree years and for all its shortcomings should in time well justify the largeinvestments that have been undertaken.
57. The expansion and diversification of the engineering and chemicalindustries are also impressive. Seven years ago, at the beginning of theSecond Plan, many of the factories which had been established in theseindustries - in automobiles and pharmaceuticals, for example were littlemore than assembly plants putting together imported materials and components.Now India is able to malke for herself a diverse range of complex products.In such industries, for example, as automobiles, trucks,bicycles, sewingmachines and rmachine tools, the proportion of imported parts is generallyless than 25 per cent. lIew lines of production nowx being developed includeelectric and diesel locomotives, coal-mining machinery, paper-making machinery,air conditioners, electric switchgear, heavy transformers, intermediates fordyestuffs and numerous other types of chemicals and drugs.
58. India has a well-organised construction industry capable of handlinglarge contracts for the building of dams and bridges, the erection offactories and power plants, tunnelling, marine works and so forth. Indiancontractors, for example, have been responsible in recent years for such majorundertakings as the erection of the Bhilai steel plant and the coistruction ofmile-long road and rail bridges over the Ganges and Brahmaputra rivers. Tlhisis one area of development in whlich local resources so far appear to have beenequal to the demands placed upon them. However, the defence program mustinevitably mean some diversion of building resources from civil works, andthis may prove to be one of the bottlenecks to economic development during thecoming years.
59. The quality of manufacture naturally varies from firm to firm. Thereis a considerable range of goods of largely Indian manufacture where at leastone major producer has established standards which bear comparison with themost advanced countries. Examples are to be found in iron and steel, dieseltrucks, fuel injection equipment, piston rings, bicycles, tyres, sewingmachines, fans, machine tools, telephones and cables. Some of these goodsare being exported. But the quality of manufactured goods in general isinevitably lower in India than in countries with longer experience of manu-facture and more exacting requirements, and this will be one of the mostdifficult problems to be solved in developing new exports.
60. Costs of production in manufacturing industry in India are generallyhigh by comparison with more advanced industrial countries. Some of thereasons for this are temporary, others of a more lasting nature. Lack of
- 22 -
ancillary industries frequently means that a firm has tbo make for itselfcomponents and, tools -which in other countries would,be bought in from outsides.In many industries, of which automobiles is one,, the level of production inany one firm is still too small to permit full advantage to be taken of eco-nomies of scale. The problem has been aggravated, by the deliberate policy ofencouraging the establishment of small and,medium-size units in preferenceto large ones. This policy stems from a d.eep-seated. and historically welljustified suspicion of "big business", allied, with a fear of what is usuallytermed.excessive concentration of economic power. Such a policy is out ofplace in India today and tends to hamper efficiency, while doing very littlein practice to weaken the hold of the big financial groups who still directE.lyor indirectly control a large segment of organised. industry.
61. Capital costs in the newer industries are inevitably high, particularlywhen setti-ng up a new plant means building a new town, as it often does.Equipment imported from abroad. is liable to be all the more expensive whenit is financed out of aid tied to particular sources of procurement,, sincesuppliers take advantage of this situation tuo raise their prices. On theother hand., labour costs in India should. be lower than in more ad'vanced.countries. It is by no means clear, however, that they always are. A steady.lupward.pressure on labour costs is accentuated by the influence of the tradeunions, and when profits are so heavily taxed or when there is no particularince-ntive to make profits as in public sector enaterprises, firms have littleincentive to resist this pressure. Unless labour costs per unit of outputcan be kept well below,, the levels prevailing in other countries, there islittle prospect of the newer industries becoming competitive or of olderindustries, like cotton textiles, holding their positi.on in world, markets.It goes without saying that, unless the established, industrial countries areprepared to allow India the comparative advantage wqhich she ought to derivefrom lower labour costs, India cannot hope to achieTe a reasonable balance ofltrade with these countries.
Location of IndustrV
62. Indian planning has tended to neglect the space dimension in economics.Despite much talk of "balanced,regional developmentlH and the. need.to tacklethe formidable problems of congestion and, overcrowding in the big cities,there has been no comprehensive and. well thought out policy of industriallocation. On the one, hand., there are the factors that favour the cumulativeconcentration of industrial investment in a few strategic places: the need,for example, to economise on transport investment and.transport costs; theadvantages of having a large market for industrial products capable ofsupporting economic units of production and a pool of skilled.and semi-skilled,labour on which new industries can draw; the attractions of the big city foci.the entrepreneur, particularly insofar as contactus and the exchange of id,easare easier in an established business community; and, all the external econo-mnies that concentration provides. On the other hand, account has to be takenlof the role wahich industry can play in opening up the traditional ruralsociety to new ideas and. encouraging social change - a considera'rtion wAhichfavours dispersing industrial investment more widely over smaller towns and,villtages., so that the economic and. other ties bet-ween. the urban and ind-ustrialareas can be as close as is technically feasible.
23 -
63. In India, the cities of Calcutta and Bombay have grown far ahead ofall other urban concentrations, and in Calcutta at any rate congestion andovercrowding have reached the point where the disadvantages of adding furtherto the labour force generally outweigh any advantages that can be derived fromeconomrAies of scale. The whole structure of the Calcutta metropolitan areacalls for drastic remodelling based on the establishment of new satellitetowns, The Calcutta Metropolitan Planning Organisation, with the aid of theFord Foundation, is engaged in working out the investment involved in a com-prehensive scheme of urban re-development; the cost will certlainly be tremen-dous. The problems of Bombay are less acute, and there is still room forexpansion in surrounding areas where many new industries are now being set up0But here too the limits to the desirable concentration of industry may soon bereached.
61. Whaile government should be concerned -to restrain the grow:th of thebiggest cities in India, the case for centering industrial development on smalland medium-sized towns is far from proven. Dispersing factories widely over alarge geographical area results in substantial diseconomies both for theindividual enterprise and for society as a whiole0 }{any examples can be give.nof ineffectual efforts made in econonmically more advanced countries (the UnitedKingdom, for instance) to resist the gravitational pull of large industrialcentres. Apart from the problem of new transpor-t investment, the widespreaddispersal of industry maces for larger expenditure on social overheads andhigher transport costs per unit of output and makes it more difficult to obtainthe benefits of industrial specialisation. At this stage of India's develop-ment, a bettcr solutuion to the problem of location may well be to concentrateon the creation of selected centres of "break-through' t w1here extra savings canbe more easily mobilised to assist with the developmenlt of the less advancedareas at a much later stage. There are quite a number of large towns withpopulations ranging between 21- million and 200,000 which would be suitable forthis purpose, and which have not yet grown to the point where further urbanisaL-tion yields diminishing marginal returns to the economy. Examples are Delhi,Madras, Bangalore, Hyderabad, Poona, Ahmedabad, Nagpur, Kanpur, Allahabad,Lucknow and a number of rising industrial towns in the Punjab.
65. Work on a rational policy of industrial location and ways of implementidnit should be starting now in preparation for the Fourth Plan. Many of thedecisions that have to be taken with regard to future investment iIn basicindustries and services (fuel and power, internal transport, coastal shipping:>telecommunications) depend on where the main centres of industrial developmeritare going to be0 The ta.sk is by no means an easy one because of the varyingrequirements of different industries and the great d:ivorsity of the differentareas of tlle country with regard to such factors of production as agricultura:raw materials, mineral resources, water supplies and labour skills.
Controls and Prices
66. The activities of industry in India are minutely controlled and super-vised by the Government in a manner wlhich is destructive to enterprise andefficiency. Public undertakings are subjected to much the same conztrols as
- 2l -
private enterprise. In some respects, indeed, they are more hedged aroundbecause of their accountabilitly to Parliament for the public funds entrustedto them. An over-worked civil service., which must stick to the rules andavoid mistakes, should not be expected to take what are essentially managemeintdecisions. Yet in the last resort it is the Ministries of the Central Govern-ment and their subordinate agencies which decide in important cases how largea firm should be, whether or not it should be allowed to expand, what price itshould charge for its products, what its wage and salary scales shouild be,where it should obtain its raw materials, what foreign exchange it should spend,whether it should go to the market for a loan, sometimes even who should be itsdirectors. If Indian industry is to operate efficiently, some way must befourri of eliminating at least the majority of these detailed checks and controlsand of decentralising the process of economic decision. The machinery ofgovernment in India is simply not designed to carry out the tasks that are nowbeing imposed upon it, and every year it comes closer to breaking down alto-gether under the straipn
67. Part of the trouble lies in the uneasy choice which India has madebetween a centrally planned economy and a decentralised economry guided essen.-tially by market forces within the broad framework of policies laid down bythe Government. The way in which industry is controlled is of greatersignificance than the way in which it is owned.
68. Some degree of planning is clearly needed, and complete decontrol isout of the question. But at present there appears to be too much centralisa-tion of conbrol in the hands of officials - and committees of officials - whoare neither supplied with accurate and up-to-date information about what ishappening in the economy nor professionally quali.fied to take the decisionsexpected of them. The Planning Commission functions essentially as a co-ordinating body without executive responsibility, and neither the PlanningCommission nor the Ministries responsible for economic affairs have at theirdisposal enough specialists to form teclmical and economic planning groupscapable of working out and supervising the execution of industrial plans. Suchgroups are certainly needed, whatever the type of planning adopted, and astart has been made by establishing two survey groups for electric power andenergy (Annex I). Use is being made of a private consulting firm for planningthe development of the iron and steel industry. Hindusthan Steel and theFertiliser Corporation of India have been gradually building up their planningand design staffs. All this is helping to provide a basis for better plarinnI-ngin future.
69. The strengthening of the planning machinery and the improvement ofeconomic statistics are both necessary if controls are to be operated sensibly,But however good the machinery, there is an overwhelming case for simplifyingthe controls. Controls over prices are the obvious place to start. If theprice mechanism is allowed to function more freely as a guide to the allocatii]of resources, it will reduce the need for elaborate physical controls.
70. Price relationships in India have got more and more out of line withreality as a result of a piecemeal approach to price fixation, the lack ofany clearly thought out and coherent price policy and insufficient appreciation
- 25 -
of the difference betwseen real costs and money prices. Goods for which pricesarL subject to control include iron and steel, coal., fertilisc-Ls., cement,paper, automobiles, tyres, certain basic chemicals and a wide range of otherindustrial commodit-ies. Cotton teaxiles are subject to a system of voluntaryprice control operated by the industry. Goods and services provided by,overnment at- subsidised prices include power, irrigation and certain forms oftransporte
71. In general, one must assume that prices ficed at levels below thosewhich would prevail in a more or less free market economy will tend toencourage consumption at the expense of savings and investment (except t.othe extent that indirect taxes are added to the prices paid to producers).Lowt prices will also tend to discourage production, reduce the incentive toinvest in expansion anid encourage waslteful use of resources. The policy ofcontrolling prices in key industries, wthile prices in less important indus-tries have been left free, is particularly difficult to justify. It has hadthe effectb in India of diverting capital away from the priority sectors wherethe need for expension is greatest. Thus the coal and cermcnt inidustries halreboth experienced difficulty in attracting capital for development- in recentyears. Price controls have probably also had somethiang to do with thereluctance of private capital to exploit the opportunities for investment infertiliser production3 notwithstanding the fact that promoters have beenassured by the Government that prices will be fixed on what is essentially acost-plus basis. In the case of coal, it is difficulties over local financewhich have beeni primarily responsible for the long delays in utilisation ofthe $35 million IBRD loan signed in 1961 for the expansion of tihe privatesector (Annex I). Given the choice, the Indian investor tends to steerclear of the basic industries which are under close government conitrol andprefers to put his money into new ventures in chemicals oand eng-ineeringwhere prospects of making profits are very much brighter.
72. Price colntrols lhave tended to introduce an undesirable rigidity intothe economic system just at a time when patterns of costs, procluction anddemand are changing rapidly, and continuous adaptation is required. Pricesonce fixed are very difficult to alter silnce vested interests become entrenchedbehind theni. Nor can anyone conceivably have the knowledge and foresightneeded to establish the right prices, or to change them promptly in responseto new conditions. The cost-plus formula wlhich is the normal basis for pricefixation is sLigularly unconducive to efficiency.
73. There is growing recognition in India that the prices fixed for basiccommodities such as coal, iron and steel and cement are too low. Severalupward revisions in coal and steel prices have been made durina the past twoyears, but these have been too small to have much eff'ect. Further priceincreases are nowj under consideration. There appears to be a very strongcase for raising substantially the prices of the better qualities of coal,if not for removing controls over coal prices altogether. Railway freightrates on coal and other bulk coimmodities also need to be increased, electricpow,er rates should 'De raised substantially, and much hLigher retention pricesshould be paid to the iron and steel plants in both public and privatesectors (Annex I).
26 -
74. The Goverrmernt is naturally concerned that price increases should bekept within reasonable bounds, particularly in view of the potentially in-flationary impact of increased defence expenditures. Some use of price con-trols may be justified in dealing with short-term disequilibria such as arecaused by a sudden increase in demand for a particular commnodity. But thefixation of prices of basic commoditijs at levels which take no account oflong-run changes in costs may well have the opposite effect to that intendedQBy discouraging the expansion of supplies, price controls tend to perpetuatea condition of shorbage and to push up industrial costs instead of helping tokeep them down.
75, Pricing policies of public enterprises should be guided by the need togenerate surpluses out of which to finance future investment. This means that*,within reasonable limits, enterprises should charge what the traffic will bearunless there are strong arguments to the contrary. As the Chairman of oneState Electricity Board expressed it to the mission in connection with powerrates, "industry is ready to be soaked'? 0 State electricity undertakings cou.ldwell take advantage of this happy situation instead of vying with each otherto offer low prices to attract new industries. Most industries are moreinterested in the availability o6f power than in its price.
76. The anti-social behaviour of many Indian businessmen in the past and along record of financial speculation and profiteering has made Parliamentsuspicious of private profits, and government policy has been consistentlydirected at keeping profits down. This approach has tended to penalise andhold back the honest businessman who is interested in expansion, while theprofiteers have gone on profiteering. Present programs of economic developmentare founded on the conception of a mixed economy in which both public andprivate enterprise have scope for explwsion. It is difficult to see any other-type of economy which can be made to work .in India without abandoning essentialpolitical freedo.ris. But this type of economy will only work effectively ifenterprises,, public and private, have standards by which to test their achievo-ments and measure their efficiency - and if they have the incentive and themeans to go on expanding0 Profits are important from both points of view,and artificial restrictions on profits tend not only to discourage efficiencyand divert attention from costs, but also to hold back expansion.
In-terest Rates
77. Interest rates in India have been moving gradual2y upwards, and thechange in the official re-discount rate of the Reserve Bank from 4 to 4h percent in January 1963 marked a further stage in this process. However, interestrates in India are still low by comparison with most other countries which areequally short of capital. Public undertakings actually pay less for theircapital in India than in such countries as Italy and Japan, and this makescapital appear cheaper than it really is. As a consequence, the planiingauthorities continue as a rule to assess the costs and benefits of projects onthe basis of conventional rates of interest charged by the Govelnment on loansto public undertakings or the "dividends" payable by these undertakings oncapital subscribed by the Governmenb (usually between 4 and 6 per cent).
- 27
78. It is generally desirable for purposes of screening investment projects -
and also for deciding the pricing policies of puiblic enterprises - -that arealistic price should be attached to capital. The use of a "1shadow rate ofinterest" has frequently been advocated in India, and those in favouur of thisdevice generally suggest that a rate of at least 10 per cent should be adopted.There is certainly a good case Lor arguing that new investments, wl.ether publicor private, should not as a rule be undertaken unless they can earn at leastthis rate of return on all capital invested, after covering their operatingcosts and providing conservatively for depreciation. In practice, privateinvestors in India usually expect a much higher rate of return than 10 per cent,as they do in other countries.
79. So far as pricing policies are concerned, the "profits" or "surpluses"of any enterprise selling in the market will usually need to be larger than isrequired merely to cover the pure cost of capital, Account has to be taken oithe risks involved in an investment, including tha risk of inflation, and ofmany other factors which affect the operations of a business, including parti-cularly the requirement for financing expansion. Generally speaking, therefore,public enterprises should adopt pricing policies which provide for a return ofmore than 10 per cent on the value of their net assets. However, there may becases where departures from such a pricing policy can be justified. It willoften be desirable, for example, to subsidise an irrigation project temporar.lyin order to induce farmers to start using the water,
The Import Problem
8o0 The inadequate and erratic supply of imported materials, components andspares is the most obvious and immediate restraint on industrial output. Noreliable assessment exists of the extent to which industrial capacity in Indiais at present under-utilised,c but it is clear that much equipment is lyingidle for lack of spare parts and that a good many firms have at one time oranother in the past two years been compelled to slow down production or beenprevented from expanding because of difficulties in obtaining scme importeditem. Imported materials which are reported to be particularly scarce inc:lud,2special steels, steel sheet, copper, lead and various types of chemicals.Stocks of spare parts and accessories in the automobile industry are totallyinadequate in relation to the number of vehicles now on the roads (or immobi-lised for repair). Because of the uncertainty of supplies, establishedmanufacturers tryr to hold larger stocks of impolted items than would otherwisebe necessary, and this makes it difficult for the newcomer, or for the smallfirm, to obtain a share of whatever is available. It is in fact usually thefairly small private manufacturer who suffers most severely from the shortageof imports.
81. Import restrictions have been progressively tightened, and fresh cutswere imposed after the Chinese attack last October. There is a considerabletime-lag between a change in licensing policy and its impact on the economy,since industry is using licences issued for earlier periods and normally hasinventories to draw on. There are no reliable data on the inventories ofimported materials held by manufacturers, but there is a general impression
-28 -
that they h-ave been run doun during the past tw-elve or ei-ghteen months,~enabling production to be maintained at a hidgher level than would have beenpossible on the basis of current imports. The scope for living offinventories is almost certainly much less now than it was twlo years ago, andthe check to production which has already been experienced in the engineeringand chemical industries could well becom-e much m-ore severe unless the presentrestrictions are relaxed.
82.0 The problem of managinig import controls has become extremely complexand is one of the principal causes of the overload of admCinistrative work onboth government and industry. Various principles have been adopted fordetermining foreign exchiange allocations to industry., including the grant ofadditional import licences related to export performance., but the licensingsystem is necessarily somewhat arbitrary, slow and cumbersome, and theauthorities .have to be guided very largely by past allocat-ions., which arenot always a reliable guide to present needs. *The historical basis ofallocation works to the particular disadvantage of the expanding firm.
83, The production of a wihole plant can be dislocated or an expDansionscheme held up for lack of a minor item,, the need for whibich has been over-looked by the licensing; aurthiorities, Two examTples may be quoted which cam-edirectly to the mission t s attention. One of the th.ree large bicycle producersin India was nearly forced to close down altogether some months ago becauseit was unable to obtain a small quant-ity of potassium cyanide., and the WorksMianager had to pay a speci-al visit to Delhi to get the necessary allocation.A small manufacturer of canned food products in Bomabay, w-ith foreign salesof around $100,000 a year., had. to give up a scheme for doubling his exportsbecause he could not obtain a licence to import a machine costing less than$6, 000.
84~. While there is no chaace of getting rid of import licensing in theforeseeable future., the pressure on the licensing controls can be eased byraising the price of imports through taxation or a change in the exchangerate, A step in this direction was taken in this year's Budget by thelevyjing of a general surcharge of 10 per cent on all import duties and bythe raising of import duties on a numnber of items including mineral oils.,machinery., iron and steel productbs, raw cotton., rubber., palm oil_, cinemafilms., tobacco,, dyes, hardware,, electrical apparatus and motor vehicle parts,For example, the general rate of duty on machinery was inicreased from l5 percent to 20 per cent.
85. The most effective form of ex-ternal assi-stance to India in presentcircumstances would be an increase in general purpose aid not tied to theprocuarement of particular commodities or in aid that can be used to finaniceimports of materials., components and spare parts for industry arnd agriculturef)Apart from its direct impact on production., assistance in this form will helpin relaxing th-e controls over industry and in lightLening the task of govern~-ment administration; some of the t*jas-tG associated with th-e operation of thepresent import licensing system could be eliminated; and it should be possibleto issue licences much more freely for small items. The private sector wiould~,of course, be the principal beneficiary of any such relaxation.
- 29 -
86. The need for larger non-project imports is clear, but it is difficultto document it with any precision. For one thing, there is no clear-cutdivision either between project and non-project imports or between developmentimports and maintenance imports. Imports of steel and non-ferrous metals,for example, are used partly for direct investment in such sectors as railways,electric power and telecommunications. To this extent, they can be regarded asdevelopment imports and may be financed out of project assistance0 For themost part, however, they are required as industrial materials for manufacturein India and therefore rate as maintenance imports. Orders placed abroad forspecific projects and financed out of project assistance cover not only majoritems of equipment and machinery, but also working capital, which is inprac-tice often indistinguishable from maintenance imports, Miscellaneous item'sof machinery, components and spare parts required to expand or to balance theoutput of existing plants are properly regarded as development imports, butthey cannot easily be "projectised" for aid purposes.
87. A rough idea of the present division between maintenance imports anddevelopmenlt imports can be obtained fromi the comnmodity breakdown of importsgiven in the Statistical Appendix, Table 28, and summarised in Table 6 below6It should be noted, however, that this classification itself is unreliablesince there are wide discrepancies in detail between the figures of importpayments collected by the Reserve Bank and the figures of import arrivalsrecorded in the customrrs statistics0 1/ The figures in Table 6 are derivedmainly from Reserve Bank sources.
Table 6. Commodity Composition of India's Imports(Rs. crores)
a/1958/59 1959/60 1960/61 1961/62 1962/63 196316
Total imports c.i.f. 1,029 924 1,088 1,OO4 1,lL48 1 i17of which:
Machinery and transportequipment c/ 373 273 294 331 387 580
Cereals 152 155 214 110 145 157Cotton 28 39 82 63 57 57Other imports 476 457 498 500 59 623
a/ Forecast based on actuals for first nine months.j Rlequirement as estimated by the Government of India in submission to
consortium.c/ Excludes aircraft.
1/ A recent publication by the Reserve Bank,India t s Balance of Payments-1948/49 to 1961/62, contains two tables on imports of selected commodities,one based on exchaige control data and the other onl data published by theDirector General of Commercial Intelligence and Statistics. For many items,the figures shown in the two tables are completely different.
- 30 -
880 The item "machinery and transport equipment", though not identicalwith project imports$ should broadly correspond with the import of capitalgoods for development projects and programs. Similarly, the item "otherimports" should indicate the trend of maintenance imports., apart from cerealsand cotton, which have been shown separately (because they fluctuateconsiderably from year to year according to the agricultural situation andbecause they are largely financed under PL 480)n The increase in "otherimports" between 1960/61 and 1962/63 can be accounted for entirely by therise in demand for iron and steel, non-ferrous metals, fertilisers andpetroleum products. Delays in expanding outp'it of iron and steel, fertilisersand petroleum products, which are discussed i4 , Annex I, have considerablyadded to the pressure on the balance of payments and help to explain wly thedemand for maintenance imports relative to total production is likely to belarger than the Third Plan assumed, Import-saving investments in these andother industries have undoubtedly reduced the i.mport component of a givenlevel of national output, burt they have not yet made possible any reductionin the absolute level of imports. The experience of the chemical industrieshas been similar. Domestic outpuit of chemicals has expanded in manydirections as a result, of the new plants set up during the past five years,but total imports of chemicals during this period have remained at about thesame level.
89. Taking the figures for the past two years, machinery and transportequipment appear to have accounted for about one third of the total importbill, Apart from food, imports of finished cons-umer goods have been negligi-ble, but a substantial proportion of the imports of raw materials and semi-finished products (textile materials, paper, newsprint, rubber, dyes, drugs,etc.) have gone into consumption. It would probably not be far wide of themark to say that hialf of all imports have been going into investment and half(including food) into consumption. This year's Budgct, by sharply increasingimport and excise duties on kcerosene, textiles, tobacco and other items ofcommon consumption, should have some effect in restraining demand for non-development imports, but the added neods of defence production are likely tooutweigdh any savings on the consumption side.
90. The Third Plan assumed that total imports, including imports underPL 480, would average Rs. 1,270 a year, of which project imports wiere toaccount for Rs, 380 crores, components and intermediate products for raisingproduction of capital goods (so-called "special maintenance imports") forRs, 40 crores and maintenance imports for Rs. 850 crores (including Rs. 120crores for imports under PL )480). Maintenance imports and special maintenanceimports iwere expected to be highest in the early years of the Plan, decliningslightly in the later years; a figure of Rs. 826 crores was given for1961/62, excludinig PL 480. Actual maintenance imports appear to have beenkept well below this level so far, but the trend is definitely upwards, andthe Goverrment's forecasts for 1963/64 enivisage substalntially larger require-ments of petroleum, iron and steel, non-ferrous metals, chemicals andfertilisers, without any significant savings for other coiLmmodities (seeChapter III). The mission sees no reason to suppose that these requirementsare over-stated.
- e. .z .S ... . - . { v. f:a.+ .1 -'.:...... -/. 1 f ., u >[-- bt.-.- .A ..N .-.. ; -. .. ,.. .......X ... k
- 31 -
The Problem of Exports
91 The Indian Government and Indian industry have become increasinglyexport-conscious during the past few years, but the measures taken so far t.opromote exports have barely scratched the surface of the problem. The diffi-culties are formidable. World markets for IndiaTs principal traditional ex-ports - tea, jute goods and cotton textiles - are expanding only slowly. Anumber of other traditional exports have either been swallowed up by risinghome consump-tion (vegetable oils) or are faced wi^th special market difficulties(manganese ore and tobacco). The growth of manufacturing industries in Indiashould in time produce new types of exports, but it is quite unrealistic toexpect much in the way of foreign exchange from this source during the ThirdPlan. As a rule, the scale of production is too small, quality is not yetgood enough, costs and prices are too high, market experience and connectionshave still to be developed, and reputations have to be established, Even wherethese limitations do not apply, India faces trade barriers erected against"low-cost" manufactures, particularly in Europe; she has difficulty in offeringcredit terms as attractive as those offered by advanced industrial countriesjand in some cases she is restricted from exporting by the terms of the agree-~ments under which foreign collaborators have invested capital and kmow-how ir.setting up new industries in India.
92. This leaves the main burden of export expansion to fall for the timiebeing on an intermediate group of miscellaneous primary products and semi-processed industrial and agricultural commodities. Some of these are minortraditional exports, others have only recently been developed. The item withthe greatest potential for expansion over the next 5-10 years is iron oreeExports of oilcakes have made remarkable progress and could well grow further.Other items which should be capable of promotion are leather manufactures,coffee (subject to the limits that have been established under the recentinternational coffee agreement), cashew nuts, spices, fish, canned fruit andvegetables, shrimps, iron castings and ferro-manganese. Sugar has alsoemerged as an export of sizeable proportions in the last few years. Costsof producing sugar in India are much higher than in most other exportingcountries, and initially exports had to be heavily subsidised (in some casesto the e-xtent of 100 per cent of the export price). The sharp rise in worldsugar prices during the past year has largely removed the need for a subsidy,but the present conditions of shortage are unlikely to be maintained for long.
93. The commodity pattern of exports is summarised in Table 7 (see alsoS-tatistical Appendix, Table 30), and the performance of the principal exportsis examined in Annex II. Earnings from jute goods have been exceptionallyhigh in the past two years, and this factor, coupled with the inclusion of Goain the Indian Union towards the end of 1961, is sufficient to account for thegreater part of the increase in total export earnings during the first twoyears of the Third Plan. With the prospect of some decline in earnings fromjute goods and with tea prices tending to decline, it may be difficult toimprove on the 1962/63 figures during the coming year. The failure of Indianexports to rise faster is to some extent the result of factors beyond Indiafscontrol, and while measures to promote new exports have not always been aseffective as they might be, there is little possibility of any quick expansionin exports of manufactured goods.
32 -
Table 7. Commodity Composition of India's Exports-/(Rs. crores)
1958/59 1959/60 1960/61 1961/62 1962/63P/1963/64r1
Total exports, f.o*bo 576 627 631 667 692 710of which:
Tea 130 129 123 123 125 128Jute goods 102 109 13 4 144 151 138Cotton textiles 45 63 58 48 48 50Miscellaneous agricultural
products d/ 149 184 166 187 196 208Minerals 48 54 56 52 61 65Other exports a/ 102 88 94 113 111 121
a/ Includes re-exports. b/ Based on actuals for April-December 1962.-/ Forecast made by Govenment of India in submission to consortiumed/ Includes leather manufactures, but excludes certain minor agricultural
items which are included under "other exports".
94. The most serious criticism of government export policy is perhaps thefailure to take full advantage of the opportunities for developing exports ofagricultural and mineral products. Agricultural policy has not been export-oriented, and little thought has been given to ways in which agriculturalexports might be increased, An even more expensive weakness in planning hasbeen the delay in arranging for the mining and transport of additional suppliosof iron ore. Three years ago the Government was assuming that 4 million tonsof iron ore could be exported in 1960/61 and more than this in 1961/62. Infact, the quantities shipped, apart from Goa, have shown very little increaseover the past three years, remaining around the 1959 level of 3 million tonsa year. The recession in the Japanese steel industry has introduced a furtherunfavourable factor into the situation, and India is now facing increasinglysevere competition in supplying the Japanese market (Annex II).
95. Taking exports as a whole, the most rapid expansion in recent years hasbeen to countries with which India has special bilateral trading arrangements -principally the Soviet Union, Yugoslavia, other countries in Eastern Europe andthe United Arab Republic (Statistical Appendix, Table 32). Exports to thislatter group of countries rose from about Rs. 40 crores in 1958 to Rs. 70 croresin 1961 - an increase of 75 per cent, compared with an increase of less than 20per cent in total exports between the same two years. India had a surplus inher trade with the Soviet Bloc during this period.
96. The other main change in the geographical pattern of India's exporttrade has been a marked decline in the share of exports going to Australiaand to countries in South Asia and the Far East, particularly Ceylon andBurma. Import restrictions in the latter countries have been an importantfactor. The United Kingdom has remained much the largest single market fLor
- 33 -
Indian exports taking 25-30 per cent of the total, and the United Statescomes second with 15-17 per cent. Exports to the European- Conmmon IMarkethave risen more or less in linie with total exports. The mainl increase hasbeen in exports to Germany0r Glermany is the only one of these countries whichhas significantly relaxed her quantitative restrictions on imports of Indianjute manufactures, but she is also the country with which India has the mostunfavourable trading balance over all0 Imports of Indian jute goods areseverely restricted in most other Common Market coun,t,ries, as well as in theUnited Kingdom, and quotas for indian cotton -bextiles are extremely smallo
97. Internal prices of many of the goods which India exports are out ofline at present exchange rates with world prices. Such goods fall into twomain categories - agricultural products, where inefficient methods of Indianagricul-ture have resulted in high costs (e.g. groundnut oil and sugar); andthe newer industrial manufactures, where at the present stage of development,the high cost of imported equipment and components and the small scale onwhich production is organised usually more than offset any advantages thatmay be derived from "cheap" labour (and, as prevuiously noted, Indian labouris by no means always cheap). Manufacturers can usually obtain a considerablybetter price at home than abroad for such products as bicycles, sewingmachines, electric fans, metal containers, dry batteries and diesel engines,all of which are being exported0 It is, of course, a comnon practice in othermanufacturing countries for firms to sell abroad at prices which cover onlytheir marginal costs and which are well below the prices charged in the homemarket 0 India is by no means exceptional in this respect. But the trendof industrial costs in India is a maatter for real concern 0
98. Price as such is not a serious limitation on exports of tea, and iwit;hthe abolition in this year's Budget of the export duty Indian tea shouldremain fully cormpetiti-ve so far as price is concerned. Lhe problem for juteis more the instability of prices than aniy general disparity between Indianprices and the prices of Indiats main cormpetitor, Pakistan, The buffer stockscheme for jute should help to s-tabilise raw j-LUe prices in future, Ironore prices on the other hand are now under considerable pressure, and it isby no means clear that Indian prices can remain competitive in this field ifthese prices take account of the real cost of capital invested irn transportand mining. The Indian cotton textile industry is one of the worldt s high-cost producers - a point that is apt to be overlooked by countries whichimpose restrictions on so-called t"low-cost' Indian manufactures.
99. A wide variety of special preferences,, rebates and subsidies have beenintrodulled as part of the export promotion campaign. Certain types of steel,for exampl.e., are supplied to exporters at concessional prices. Rail freightconcessions and refunds of excise duties have been granted on exports ofselected conmmodities 0 As a partial corrective to the high taxation ofindustry in India, income tax ccncessions were given to exporters in the1962/63 Budget when earnings from exports were exempted from the 5 per centincrease in company tax0 A further rebate of income tax and super tax on asum equivalent1 to 2 per ceit of the value of ex-ports has been extended tomanufacturers in this yearrs Budget. The most important export incentiveof all is the scheme under which manufacturers receive special additionial
- 34
import allocations for materials and components on the basis of their exportperLormance 0 This scheme applies to a wide variety of industries, includingtextiles, engineering, chemicals, plastics, fish, p- rocessod foods, carpets.,leather goods and sports equipment. The extent of the import entitlement interms of the value of the products exported varies considerably from one typeof export to another. With certain exceptions, articles imported under thisscheme may either be used by the exporter or sold to other manufacturers en-gaged in exporting the same kind of goods. Exporters are, however, restrictedto the import of specified items used in their industry, and there is nogeneral scheme for the retention of export earnings or the free sale of importlicenceso It is difficult to say how effecti': the scheme is, but the totalextent of the additional import quotas granted under it is not at present morethan about Rs. 25 crores a yearb
lOOo The various devices that have been adopted in India for raising thecost of imports and providing incentives for export have been organised aroundthe, present exchange rate of Rs. 4.762 to the dollar. The Government believe.sthat in present conditions this is a better way of trying to balance the supplyanid demand for foreign exchange than the revaluation of the rupee. It arguesthat, when the physical difficulties of expanding exports are so ,great and whenthe demand for imports is so closely related to development, a change in theexchange rate would do more harm than good. Nevertheless, there must come a.point at which a general change across the board would be preferable bo a hosL.of small and complicated incentives, imposts and restrictionls.
1021. Quite apart from the questioon of prices and incentives, the urgent needto increase India's foreign exchange earnings calls for some re-thinking ofpolicy in a number of fields. Most of the considerable effort now being putby the Government into export promotion is directed towards expanding sales of'the principal traditional exports and new types of manufactured goods, parti-cularly in the engineering field. Not enough attention has been given to theproper organisation of exports of such things as handloom fabrics, raw silk,ivo'y work and other cottage industry products, The problems of ensuringreglarl supplies of these things, maintaining their quality and building ulp an..adequate overseas sales organisation are obvious enough, but they are surelynot insuoerable. Larger exports must be squeezed out of the agriculturalsector - vegetable oils, resin, cashew nuts, coffee, sugar, tobacco, leather,fresh and canned fruits and juices (pineapples, mangoes, bananas). Governmentintevention in the market may be needed to secure pre-emption of supplies fore-xport. The export of sugar and coffee have both been organlised in this way0In the case of sugar, shipments are handled by the Sugar MIills Association,and the Government makes up most of the difference between the export pricesand the domestic prices according to an agreed fornula. Coffee exports aremanaged by the Coffee Board which buys up the whole crop, controls the auctionlsand determines the allocation of supplies as between the home markeu and [email protected] action might be taken in the case of vegetable oils.
102* The tourist trade is a neglected area of export promotion, Schemes forthe development of the hotel industry, for the improvement of internal trans-port facilities and for the relaxation of restrictions on drinking have notbeen pressed forward with sufficient vigour. These are probably the threemost important conditions for a major expansion of foreign tourist travel inIndia.
103. More and better hotel accommodation is the first essential. India hasvery few hotels which come up to international st;andards, and many of thosewhich call themselves first-class are unable to provide the standards of service,comfort and cuisine wThich the international traveller has come to expect.Foreign mnanagement, which is one of the answers to this problem, has not beenencouraged. Government has been reluctant to invest its own money in hotelconstruction unlike countries such as Greece and the United Arab Republic whichhave been much more successful in improving tourist amenities in recent years.Nor have private entrepreneurs been offered the special inducements and officialsupport that are needed if they are to be persuaded to invest their capital inwhat is otherwise liable to be anl unprofitable business - especially when thereis libtle money to be made out of drinks, which elsewhere are usually the mainsource of the hotelier's income. A new first-class hotel in Del.hi, startedas a private venture some years ago, has been left half-completed because offinancial difficulties, while foreign visitors are being regularly turned awayfrom the other hotels in the capital or provided with makeshift accommodation.
1044 Internal transport is partly a problem of acquiring more aircraft forthe Indian Airlines Corporation. But even with the existing equipmentservices could be improved and more directly geared to tourist requirements(for example, by running additional flights from Delhi to Khujurao, for whichthere is invariably a long list of disappointed applicants in the wintermonths). More use could be made of charter flights, and if these cannot beprovided by domestic airlines, foreign operators could be allowed to operatethem in conjunction with the major travel agencies. Car hire and busservices could also be improved and rates lowered. There are few properlyequipped buses for taking 'large parties around the main tourist centres (Delhi-Agra-Jaipur, for example).
105l India has to win tourist business in a highly competitive internationalmarket. The record of Air India International shows how well India cancompete with other countries in this Lield if she tries, but so far l-ittleattempt has been made to cater specially to the needs of the foreign visitor,and opportunities for earning more foreign exchange from those who have cometo the country have been thrown away. This is not so much the fault of thetourist authorities, who are aware of the need, as an indication of lack ofsufficient interest at the top levels of government and in Parliament.
106. The number of tourists visiting India in 1960 is estimated at 123,000and in 1961 at 140,000. The majority were not tourists in the strict senseof the word, but people travelling on business. Just over half the total in1961 came from the high incorrme countries in North America and Europe whichare the mainstay of the international tourist trade. More tourists came fromthe United States than from any otkh- country. Gross receipts from tourismare now estimated at just over Rs. 2u crores a year and have been forecast torise bo Rs. 27 crores by 1965/66. This is a very modest increase. With thesteady growth of international air travel, including round-the-world flights.foreign exchange earnings from tourism could easily be doubled, if not morethan doubled, over the next five years if the Indian Government took thenecessary steps. Few visible exports have potentially better prospects ofgrowth.
- 36 -
Conclusions
107. The task of promoting the more rapid development of' the Indian economyis exceedingly complex, and no outsider has any right to be superior aboutwhat appear to him to be the shortcomings of Indian economic policies. Everyserious student of the subject, Indian or non-Indian, has his own recipe forsuccess and his own idea of' what are the principal obstacles to growth. rewreach any measure of agreement on the subject. But it is important thatdevelopment should be speeded Up - important to other countries as well asIndia, whose people comprise one seventh of the population of the world andare about equal in numbers to the populations of Africa and Latin Americacombined..
108, Whatever the solubions, the problems discussed in this chapter have adirect bearing on the central issue at stake. The growth of population mustbe curbed if India is to have any chance of securing a tolerable minimumistandard of living f'or the mass of her p3ople. The present rate of expansionin agricultural production must be at least doubled - such was indeed theobjective of the Third Plan, but it obviously will not be reached. Wayshave to be found of improving the efficiency of industry and securing a morerational allocation of resources for future industrial inavestment, and it isdifficult to see how this can be done within the limits set by a politicaldemocracy without a radically differ-ent ajlproach on the part of govermnerntto questions of incentives, controls and pricesn, Continued external assis-tance, with greater emphasis in future on non-project assistance, will beneeded to maintain the momentum of industrial expansion. At the same timeIndia has to increase her exports very substantially in the long run if sheis to make a success of her present plans for development.
- 37 -
CHAPTER III
PROSPECTS FOR THE CONING YEAR
The National Emergency
109. The immediate outlook for the Indian economy is obscured by the manyuncertainties about how production, investment and the balance of paymentswill be affected by the increases in defence expenditures decided upon afterthe Chinese attack last October, The national emergency does not appear asyet to have had any seriously adverse impact on the development program.Industrial production has if anything been stimulated by the mood of nationalresolution, and the most urgent defence requirements for supplies and equip-ment are being met out of the military assistance offered by the United Statesand Commonwealth countries after the N,jassau meeting last December. Anyadditional strain that might have been imposed on the balance of payments byimilitary expenditures has meanwhile been more than offset by the seasonalimprovement in exports and accelerated disbursements of American commodityaid. Internal prices have been held stable, thanks in part to the excellent.response to the appeal for voluntary savings and contributions to the NationalDefence Fund, and there has not been any significant upsurge in speculativeactivities.
llOo The Budget introduced at the end of February 1963 provided for defenceexpenditures to be increased to Rs. 867 crores ($1,821 million) during thecoming year, as against the original estimate of Rs. 376 crores for last year(since revised to Rs. 505 crores, though it is doubtful whether actual expen-ditures will turn out to have been so large). The defence estimate concep-tually excludes the provision of end-items from abroad to be financed out ofmilitary assistance. The Government has not yet decided, however, how muchof the equipment needed for defence can be economically manufactuured in Indiaand how rmuch will have to be obtained from abroad. No final decisions cat.be expected for some time, pending discussions with the United States and tleUnited Kingdom which are due to take place shortly.
11L), Most of the advanced types of military equipment, including aircraft,can only be stupplied from abroad, at any rate in the short run. On theother hand, it may be possible with sonie additional investment for Indianindustry to turn out a substantial proportion of the small arms, guns,ammunition and explosives required, together with certain types of electronicequipment, trucks and jeeps, clothing and other textile products. The extentto which production of defence equipment will involve diversion of suppliesfrom civilian use will depend to an important extent on how much additional
- 38
military aid is forthcoming from abroad for financing imports of raw materials,machine tonls and other equipment for the conversion, diversification and ex-pansion oL existing plants, including ordnance factories. One or two newprojects largely designed to meet defence requirements have been included inthe list of projects for which consortium financing is sought in 1963/6b,notably the expansion of the government electronics factbory at Bangalore, alongwith ancillary units, and the addition of a methanol unit to the new fertiliserplant being built in the public sector outside Bombay. For the most part,however, finance for investments in specifically defence production has to beobtained from other sources,
112. The declared objective of the Government is to prevent the defencebuild-up from interfering with the country's economic development, and aprimary object of this year's Budget was to make way for additional defenceexpenditures by cutting back consumption rather than investment. The scaleof the Finance Minister's proposals for taxation and compulsory saving matchup well to the financial requirement, and it is even possible that theimmediate effect on the economy may be deflationary (see paragraph J.22 below)But in terms of physical resources some conflict between defence ancL economicdevelopment is inevitablec For example, civil engineering resources and con-struction materials such as cement and asbestos will be diverted from civili-anto defence use. Among other things, this may result in some cut-back inordinary programs of road construcbion. Road transport will also be badly hitby the diversion of vehicles and spare parts to defence and by the increasedtaxation of vehicles and fuel. The military authorities have already takenover a large part of the output of the country's largest truck manufacturer.The proposal to construct a new broad-gauge line to Assam is likely to begiven priority over other railway works,. Defence requirements for materialssuch as special steels, tinplate and non-ferrous metals will be met to someextent at the expense of investment and exports. Some industrial capacity(e.g. in the machine tool industry) will be wanted for defence productionwhich would otherwise be available to supply capital goods for development.There will be severe competition for certain categories of technical personnelo
113. Perhaps even more serious is t-he way in which the naticnal emergencyhas tended to distract attention from the problems of economic development.The top administrators, who are already overworked, are now faced with a wholenew range of decisions - and have to sit on even more committees than they didbefore. This is inevitably slowing down the process of decision-making in th:economic field.
114. In the last resort, of course, the conflict between defence and develop-ment will show up most sharply in the balance of paymerbs, and foreign militaryassistance will be all-important from the point of view of sustaining themomentum of industrial expansion. Until the amount5 and forms of such assis-tance are known, and until there is a clearer picture of the kind of militaryforces which India will seek to build up, any discussion of the economic impa2tof defence mobilisation must be rather speculative. It seems most- unlikely,however9 that all the money provided for defence expenclituren in this yearT'Bud-et will actually be spent.
39
The Budget
115, The Finance Minister's budget proposals, which have not yet been finallyapproved by Parliament, are an indication of India's readiness to make greatsacrifices for defence. The total tax increases prroposed would yield addi-tional revenue of Rs. 275.5 crores ($579 million) during the coming year, ofwhich just under Rs. 10 crores would accrue t;o the States and the rest to theCentre, A further sum of Rs. 4tO crores ($84 million) is expected to accrue tothe Centre from a scheme of compulsory savings. Taking taxation and compulsorysavings togetlher, the yield expected from the new measures irn 1963/6L4 isRse 31505 crores ($663 million). Just over one third of this will conme fromdirect tax-ation of individuals and companies, including compulsory savings,and nearly two thirds from indirect taxation, mainly increases in customs andexcise duties.
116. All the States have now presented their budgets. Out of the fifteenStates, twelve have provided for additional taxes, and the other three haveindicated their intention to introduce measures for raising additional revenueduring the year. The estimated yield from the measures already proposed bythe States would be abr.out Rs. 40 crores. This is exclusive of -the additionalrevenue of Rs. 21 crores which the States are expected tn get in 1963/6)4 fromthe increase in inter-State sales tax.
117. The unprecedernted tax increases .appear on the whole to have beenaccepted by the country as necessary., though there have naturally been manycomplaints. Two specific pro\visions in the Budget have, however, been widelycriticised from opposite ends of the political spectrum. The first is theproposed sharp increase in duties on kerosene which is widely used, mainly forlighiting and cooking, by the poorer sections of the population. The second isthe bill for the introduct'ion of a t"super profits tax" which will operate whenthe income of a company, after deduction of income. tax and supertax exceeds 6 percent of its paid-up share capital and reserves. The rate of tax will be 50 percent when that figure is above 6 per cent (but nr,t more than 10 per cent) nfthe capital axLd. it will be 60 per cent on -iTcrmes above 10 per cento
118. Industry oontends that this tax is excessive and in-equitable, and thatit wil:L discourage new investment and-penalisLe-efficiency and growth. Thereis much force in this contention. It can indeed be argued that the idea of aprogressive tax on profits is wrong in princiDlen Certainly, the tax as pro-posed in the Budget would eat inito the savLigs of the corporate sector andcomplicate the task of fi.nancing industrial expansion. It would be particularlyliable in prenent circumstances to discourage new private foreign investment0The impact would be most severe on companies such as holding companies, managingagencies and certatn foreign subsidiaries which have a narrow capital base inrelation to their profits. Among companies that would be worst hit are manyof the most progressive and rapidly, growing firms in the country, while comparliesthat are not doing ve-ry well would obvirusly escape the tax altogether. A flatincrease in the tordinary company tax (now levied at the rate of 50 per cent) ora form of profits tax that discriminated against the distribution of dividendswould not be open to the same objectionsO, Industry has indicatcd that it is
- In -
ready ti bear its share of the defence burden, and the Finance Minister isunderstood to be considering the possibility of some change in his proposalwhich would meet the objections raised, while still raising the additionalrevenue expected (estimated in the Budget at Rs. 25 crores this year).
119. The Budget assumes that,, in spite of the sharp increase in taxation andthe scheme of compulsory savings, Central and State Governments will be able toraise Rs. 178 crores from net market borrowings in 1963/64, as against Rs. 185crores last year, and that there will be an increase of Rs. 2Q crores in smallsavings. These assumptions appear to be distinctly optimistic.
120. The Budget Estimate for Plan expenditures during the coming year isRs* lp653 croresp as compared with the Rs. 1,480 crores now estimated for1962/63 and actual expenditures of Rs. 1,112 crores in 1961/62. Judging bypast experience, the Revised Estimate for 1962/63 and the Budget Estimate for1963/64 probably both over-state expenditures, and there must be considerabledoubt whether development expenditures are rising as fast as these figuressuggest. Investment in rail and road transport is running well above the levelsenvisaged in the Plan, but there has been a, lag in the programs for other trarns-Port and commumications (e.g. ports and telecommunications). Expenditures onpower have been stepped up sharply in the past two years in efforts to overcomethe shortage. Industrial investment in the public sector has been subjectedto many delays, notably in the programs for iron and steel, heavy industry andfertilisers, but expenditures will be considerably increased during the comingyear. Plan outlays on agriculture and community development have been more orless in line with the original allocation, but outlays on irrigation and soci.a-Lservices have been smaller than originally planned. The program for the deve-lopme.nt of the social services is being deliberately held down this year inview of the emergency.
121 Non-development expenditures, apart from defence, are also to be helddown during the coming year. The only major increase in the current expendi-tures of the Central Government is on account of the servicing of debt. Theadditional provision of Rs. 3b crores under this head, as compared with therevised estimate for last year, is attributable in about equal proportions todebt raised in India and debt raised outside.
Internal Balance of the Economy
122. The Budget ends up with an overall deficit of about Rs. 150 crores to bemet by an expansion of Treasury Bills. This is somewhat higher than the provi-sion made for deficit financing in previous years, and if the increases inexpenditures on defence and development materialise to the Lull extent allowedfor, there could be considerable pressure on prices. However, there are admini.-strative and planning limitations on the speed at which defence expenditurescan be increased, and the same is true in lesser degree of development. Sincethe additional revenues will start to come in from the beginning of the year,the immediate impact of the Budget on the economy might well be somewhat de-flationary. Any judgement on this matter must, however, be qualified byreference to the fact that India is very far from being a well-knit and fully
41 -
integrated economic unite Experience can vary greatl<y from region to region aswell as from sector to sector. The pressure of demand will be heavily concen-trated on particular industries and services su'lh as iron and steel, engineer-ing, road and rail transport, electric power, petroleum and possibly coal - andin a general sense also, of course, on imports0 With government foodgrainstocks of nearly 23- million tons and additional imports available under PL 480,food supplies generally should be sufficient to meet re.luirements without anyrisk of price inLlation, but local shortages can always occur.
123g The further steep increases in indirect taxation and the need for theupward adjustment of prices of many basic goods and services should result ina fairly general increase in the cost of living. There is always the dangerthat this may lead to another twist in the wage-price spiral, particularly whenthe pay of public employees and most industrial workers is directly linked withthe cost of living inldex. The disadvantages of such linking arrangements in asituat-on like the present are obvious enough, and the Government will have toexert all its powers of persuasion to avert a cost-push type of inflation inthe modern sector of the economy. Its chances of success will depend on thequality of its own leadership and on the readiness of the industrial communityto accept sacrifices for defence. But whatever the risks of price increasesin the immediate future, we believe that it would be a shortsighted policy totry to suppress inflation by maintaining artificially low0 prices in suchindustries as iron and steel, coal, rail transport and electric power. Theparamount needs in these industries are to expand production and to mobilisesavings for future development. Price controls may disguise, but they do notreduce, real costs; indeed, they tend to have the opposite effect.
124h Agricultural production will in the short run be influenced by theweather more than by alything else, and the mission does not consider itselfcompetent to predict what the rain-gods hold in store for the next season,Industrial production during the coming year will depend above all on theavailabilities of maintenance imports, and this in turn will depend on howmuch additional external assistance can be provided in the form of balance ofpayments support and commodity aid. So far as internal factors are concerned,it could well be that transport will emerge once again as a serious bottlenecksince this is one of the sectors of the economy most directly affected bydefence. The outlook for power looks better than it did a year ago. Butpower shortages will remain a potential obstacle to industrial expansion incertain parts of the country, particularly in West Bengal and Bihar and inAndhra, and the disturbing recurrence of plant failures in recent years - forexample, in the DVC system, at Calcutta, Bhakra-Nangal, Trombay and Delhi -serves as a warning against over-optimism. The continued delays in gettingthe expansion schemes of the private coal industry under way and doubts aboutthe ability of the National Coal Development Corporation to step up output inline with its targets suggest that t.he recent easinig of the coal shortage mayalso be temporary. In any case, industry will continue to suffer from the poorquality of much of the coal produced and the slow progress of the coal washeryprogram.
- 42 -
The Balance of Payments
125, Forecasts prepared by the Government of India for thle consortiummeetijng in April show an overall balance of payments deficit of Rs. 151 crores($317 million) in 1963/64, after taking credit for expected disbursement of aidalready pledged and after making provision for the repayment of $50 million dueto the International 1Ionetary Fund. The figures are reproduced in Table 8.
Table 8. Indiat s Balance of Payments, 1960/61 - 1963/64(Rs. crores)
Estimated Forecast1960/6i. 1961/62 1962/63 1963/64
Imports, c.i.f.Commercial 915 916 1,010 1,259PL 480 a/ 185 88 138 158
Total 1,100 1,004 1,148 1,417Exports and re-exports, f.o.b. 631 667 692 710
Trade balance -46 -337 -456 -707Invisibles net(excluding official grants) 31 -12 -14 -25
Current balance (excluding officialgrants) -)438 -3 9 -470 -732
Capital transactions net (including errorsand omissions) -3 -48 -45 43
Total su-plus or deficit of above -b41 -397 -515 -775
Financed by:PL 48o b/ 185 88 138 158Disbursement of other foreign assistance- 215 243 352 )490Transactions with I1IF (drawings +) -11 58 12 -24Use of foreign exchange reserves
(decrease +) c/ 52 8 13 -Gap to be covered by disbursements of
additional aid - - - 151
/ Includes that portion of the PL 480 freight charges (50%) which isfinanced out of Indials oim resources.
b/ Includes all aid committed up to February 28, 1963, as well as balance ofpledges indicated at Hay 1961 and July 1962 consortium meetings for whichagreements were not concluded up to February 28, 1963. $50 million of the$67.5 million IDA railway credit signed in March 1963 has been treated asan advance commitment for the third year of the Plan and has therefore beenexcluded here.
0/ Reserve Bank of India's gold and foreigrn assets only; excludes changes ingovernment balances abroad which are incladed under "Capital transactionsnetI (including errors and omissions)".
- .3
126. The export forecast assumes that earnings in 1963/64 will be 21 per centhigher than the latest estimate for 1962/63. A reduction is expected in earn-ings from jute exports (down from Rs. 151 crores in 1962/63 to Rs. 138 croresin 1963/64), but this is more than offset by small increases for a variety ofother items (including tea, coffee, oilcakes, iron and manganese ores andcotton textiles) and a large proportionate increase in sugar exports (up fromRs. 15 crores in 1962/63 to Rs. 21 crores in 1963/6h). The reduction in juteexports might well be larger than forecast, and the increases in iron andmanganese ores must be regarded as highly uncertain given the pressules makingfor a reduction in iron ore prices. The weakness in tea prices also makes theincrease of Rs. 3 crores assumed from this item appear rather optimistic. Ifthings turn out well, the mission feels that the forecast for total exportsmight be reached., but it is not likely to be exceeded.
127. On invisible account, some further increase is expected in 1963/64 inpayments of interest and principal on foreign loans. Debt service paymentsduring the past year are estimated at around Rs. 73 crores ($153 million), ex-clusive of payments in respect of suppliers' credits. The forecast for 1963/64is Rs. 94 crores ($197 million). The increase in interest payments is themain explanation of the worsening of the balance shown in Table 8 for invisibletransactions. Measures taken to reduce the attractions of gold anad to regu-late internal dealings in this cominodity were described in the earliermemorandum on the economic situation. These may have some effect in reducinggold smuggling, which is believed to have been costing India as much as Rs. 25-35 crores a year, and an allowance has been made for this in the forecasts.
128. One of the most questionable decisions that the Government has taken inan effort to economise in foreign exchange is to tighten the restrictions ontravel abroad by Indian nationals. Foreign travel by businessmen and studentsis potentially one of the most invigorating influences to which the economy canbe exposed0 The savings likely to be achieved by the latest restrictions arecomparatively unimportant. The mission would strongly urge that the Govern-ment's policy in this matter be reconsidered0
122. On the import side, apart from imports under PL 480, paymenits are shownas going up from an estimated Rs. 1,010 crores in 1962/63 to Rs. 1,259 croresin 1963/64 - an increase of 25 per cent, More than two thirds of the increaseis attributable to imports of maclinery and transport equipment and the remaini-ing one third to iron and steel, non-ferrous metals, petroleum products andfertilisers. No change is foreseen in imports of cotton, and there is expectedto be some reduction in commercial imports of cereals. The forecasts forimports of machinery and equipment include some items required for the conver-sion of industries to defence production, but most of the foreign exchangerequired for this purpose has been excluded on the assumption that it will befinanced out of military assistance and will in any case not be delivered forsome time. Similarly, with industrial materials, there is no allowance in thebalance of payments forecasts for the extra imports that will be needed byordnanace factories and other defence installations.
- 44 -
130. So far as imports of industrial materials and fertilisers are concerned,the mission considers that the GovernmentTs estimate of requirements in 1963/64is if anything on the conservative side. In the absence of a detailed industry-by-industry study, it is quite impossible for anyone to say exactly whatincreases in these imports will be needed to ensure full utilisation of existingindustrial capacity, but it is clear that the expansion of industrial productionis already seriously hampered by import restrictions, and the likely rise indemand for iron and steel, non-ferrous metals, petroleum and fertilisers duringthe coming year exceeds any foreseeable increase in domestic production.
131. Production of saleable steel, for example, cannot go up by more thanabout half a million tons above last year's level of 4 million tons until thenew expansion programs begin to take effect, which will not be until late 1964or early 1965, and then only in the case of the plant at Bhilai (Annex I).Against this, apparent consumption of steel has risen by 500,000 tons in 1961and 700,000 tons in 1962. If there had been no restrictions on use, theincreases would have been considerably larger. The forecasts of petrolemn con-sumption made by the Government's Oil Advisory Committee last September, beforethe emergency, envisaged that demand would rise by over a million tons between1962 and 1963 and by nearly 1 million tons between 1963 and 1964. Increasesin refinery throughput and indigenous output of crude oil in the near futuredepend mainly on how quickly the new refinery at Barauni can be brought onstream, on what can be done to overcome the troubles experienced at the govern-ment refinery at Nunmati in Assam and on the supply of crude oil from Gujaratto the Bombay refineries (Annex I). It would be optimistic to expect that thevalue added in the petroleum industry as a wqhole during the coming year willmatch the rise in demand, especially as the latter is heavily concentrated onkerosene and diesel oil. India's production of aluminium has risen from L22,000tons in 1960 to 72,000 tons in 1962 as a result of several new projects andexpansion schemes, and this has helped in moderating the demand for imports ofsteel and non-ferrous metals. But almost all the countryts requirements ofcopper, tin, lead and zinc have to be imported, and a continued rise in con-sumption is inevitable if the growth of the engineering industries is to bemaintained and the programs for the development of power and transport carriedforward.
132, The imports of machinery and equipment for which provision is made inthe balance of payments forecast for 1963/64 have for the most part already beenordered and will be largely financed under existing aid commitments. There isa fairly close connection between this item and the increase in disbursements offoreign assistance shown in Table 8. Projects and programs for which substan-tially increased deliveries of equipment are expected during -the coming yearinclude a wide range of power schemes (mainly financed out of aid from theUnited States, IBRD/IDA and Eastern European countries), coal development inboth public and private sectors (mainly financed by the IBRD, United States andEastern European countries), the expansion of the Russian steel plant at Bhilaiand various projects financed by the Eastern European countries for the develop-mont of heavy engineering capacity. Thlere will also be larger disbursements ofproject assistance from the United Kingdom, Germany and other conasortiumcountries, but most of the equipment to be supplied by Germany and the UnitedKingdom for the expansion of the Rourkela and Durgapur steel plants will notarrive until later in the Plan.
Foreign Aid Requirements
133. India's foreign aid requirements during the coming year have to be con-sidered under three main heads. First, there is the need to cover the expectedbalance of paynents deficit in 1963/64, estimated at just over $300 millionafter allowing for disbursements of aid previously pledged., 1/ For the reasonsthat have been mentioned, we consider this to be a minimum requirement fordisbursements of new aid during the year. Indiats foreign exchange earningsare more likely to fall short of the forecast than to exceed it, and it isdifficult to find any room for major savings in the import estimates. Theuse of India's foreign exchange reserves for financing development has alreadybeen carried well beyond the limits that would nirynally be considered prudent,and during the next three years the Government has to find the means of repay-ing its outstanding obligations to the International Monetary Fund, which amountto $275 million.
1340 Second, advance commitments of commodity aid are needed so that licencescan be issued in time to ensure a continuing flow of maintenance imports in1964/65. The practical problems involved in securing prompt utilisation ofcommodity aid from the United States in accordance with the requirements ofUnited States legislation hlave recently been examined by -the two Governments,and as a result of this examination the time taken to translate commitmentsinto deliveries has been substantially recduced. But there is still some time--lag between commitment and utilisation, and commitments usually have to bemade at least 6-9 months before the goods are needed in India. Similarproblems arise over aid committed by certain other members of the consortiumfor financing non-project imports.
135. Third, commitments are needed for orders to be placed abroad in 1963/614for machinery and equipment for programs of development. Total requirementsunder this head are estimated by the Government of India at the equivalent ofover $900 million, but only about $7CO million out of this can be identifiedwith specific programs and projects in a way suitable for financing out of"project aid". The rest consists of miscellaneous small items needed for awide variety of purposes - earth-moving equipment, textile machinery, electri-cal apparatus, drilling equipment, machine tools, structural fabrications andso forth.
136. Including this last category of items, the total extent of the cormmit-menits for non-project assistance sought from the consortium in 1963/64 is about$550 million, of wihich it is assumed that $230 million or so might be disbursedduring the year. These disbursements, together with the use of the advance IDAcommitment for the railways and some other disbursements of new project assis-tance, should be sufficient to cover the prospective balance of payments deficitin 1963/64.
1/ Some $50 million of this deficit should be covered out of an advance commit-ment already made by the International Development Association for thefinancing of the railway program in 1963/64.
- 46
137. Commitments of project assistance sought by the Government of Indiafrom the consortium in 1963/64 total just over $700 million. About 30 per centof this amount is required for the iron and steel industry - notably for theestablishment of alloy and tool steel capacity in the public sector at a newplant at Durgapur and the existing plant in Mysore, schemes for expanding theproduction of the two private steel plants and providing them with bettersupplies of coal and other materials and advance preparation for the fourthsteel plant at Bokaro (particularly the acquisition of earth-moving equipmentfor site clearance and mining equipment for iron ore). Alother 30 per cent isfor programs for development of electric power, coal and transport. The re-maining 40 Per cent is distributed over a variety of schemes in both public andprivate sectors for expanding the manufacture of fertilisers, automobiles,machinery, chemicals, rayon, paper, pulp and other items - with a small amountalso for the atomic energy program'
138. The mission has not studied these projects in detail. The program forexpanding iron and steel production, including production of special steels,is certainly one that needs to be pushed ahead vigorously if the demand forimports of steel is to be kept within manageable limits. Likewise programsfor electric power, coal, rail and road transport must be rated high in anylist of priorities, though it obviously does not follow that each individualproject in these programs is equally deserving of support. In manufacturingindustry, the mission feels that the programs for expanding output of machinetools and trucks deserve special attention because these are both lines inwhich India has demnonstrated a capacity for efficient production and becausethe prospects for increasing demand are well assured. The manufacture offertilisers is another sector of industry where the need for rapid expansionis clearly established.
139. Given a choice between getting aid to finance a margi_Al project andgetting no aid at all, the Government naturally inclines to :.Ie first alterna-tiveo, The limitations of the project approach to aid were stressed in thereport of the 1960 Bank economic mission, Varying proportions of the aid ex-tended to India by Austria, Canada, Germany, the Netherlands, the UnitedKingdom and the United States in the first two years of the Third Plan have beer!on a non-project basis, and IDA credits have been used mainly to finance localcurrency costs, thereby providing the Government with free foreign exchange t,opay for maintenance imports. But the proportion of project aid to total aid iSstill too high to allow the Government the freedom for manoeuvre that isrequired to ensure the most efficient allocation of resources. We believe thatthe ratio of non-project assistance to total assistance must be increased in1963/64 if full advantage is to be taken of the investments already made, andif the start of new investments in manufacturing industry is not to be pushedbeyond what the Indian economy can find the foreign exchange to support.
Terms of Aid
1h0. The composition of India's exterrnal public debt on April 1, 1963 (on thebasis of debt incurred up to February 28) is shown in the Statistical Appendix,Table 34. The total amount of such debt outstanding on that date was about
- 47 -
$3.,900 million. Service payments on this debt, which are shown in Table 35,woul.d reach their peak in the years 1965/66 - 1966/67 when projected amortisa-tion and intWerest combined would average over $350 mill,ion a year; paymentswould remain at over $300 million a year in the following two years and wouldthen gradually decline to just under $200 million a year around 1975. India'gross external receipts on current account, excluding official aid, are atpresent in the region of $1,900 million a year, so that the ratio of debtservice to current account receipts in two or three years time, on the basis ofexisting debt, will probably be around 18-19 per cent.
141 These figures bring out very clearly the need for a change in the typeof aid extended to India. Present indications are that India will require atleast as much external assistance in the Fourth Plan as in the Third if thegrowth of the economy is -to be mainLtained along the lines at present proposed.Unless most of the assistance extended from now on is in the form of grants orloans with easy terms of repayment, the burden of debt service will rapidlybecome insupportable.