RESTRICTED

Report No. AS-71a

This report was prepared for use within the Bank. In making itavailabhe to others, theRBank assumes no responsibility tn them forthe accuracy or completeness of the information contained herein. |

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

RECENT ECONOMI C DEVELOPMENTS

ANn Cr.TjRET2 NT PR2OS.PEC.TS

'OF INDIA

February 20, 1959

Department of OperationsSouth Asia and Middle East

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CURRENCY EQUIVALENTS

1 Indian Rupee - U.S. $0.21

1 U.S. Dollar -- Rs. 4.762

Rs. 1 b - t2in .rni1in

F 0 R E I 0 R D

This report is the outcome of a visit to India inJanuary 1959 by two rmembers of the Bank's staff. It givesa brief account of recent developments in the Indian econo-mic situation, concentrating upon topics which will be ofspecial concern to the participants in the I4arch 1959 meetingon India's foreign exchange situation. For a fuller treatmentof particular subjects reference may be made to the Bankseconomic report of July 1958 (AS-68a), or to the report ofthe International Honetary Fund on the 1958 consultations withIndia (February 1959).

The section of the report dealing with the balanceof paynents is based upon detailed estimates and projectionsprepared by the Government of India in January 1959. Thesecorrespond with similar calculations, made some eight monthsearlier, which were the basis of discussion at the firstmeeting on India's foreign exchange situation in August 1958.The two sets of calculations are referred to in the reportas the Mav 1958 and the January 1959 forecasts.

The Tnrl;inn hlii9ozt is p rosrntP(9 at. thp Pndl of Fehrn -ary. Revenue and expenditure figures for 1958-9 quoted inthe report are estima>tes given at the time of the last bud get.Provisional figures for the current fiscal year, eniding Miarch

be available by the time of the March mieeting.

The Second Five-Year Plan covers the Period April 1,1956-4 to i,T&srch 31, 1961.

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CONTENTS

Pge

Foreword

Summary & Recommendations

I. Scope of the Plea 4

II. Internal Finance and Prices 7

III. Progress of Agriculture & Industry 11

IV. Balance of Payments 13

ADpendices

I. India's Export Earnings by PrincipalCommodities 17

II. Estimated Disbursements during theSecond Five-Year Plan of Foreign Aidaql rea,dv committed9 18

TTT_ Thrr9T tq Jyt.F,-nql Tflht.ITIo India n "nCi+inal I Ct

A ) ComMposition 19B)-D) Protected Debt Service by

Main Categories 20-22

SMTPY AND RECOi9V NDATIOMS

1. While there has been no fundamental change in the situation duringthe last few months, the atmosphere of crisis which overhung the Indianeconomy in the summer of 1958 has been largely dissipated. For this, twofactors have been chiefly responsible. One was the excellent rice harvestin the autumn and the prospect of an almost equally good wheat harvest atthe end of the winter. The other was the outcome of the August meetingon India's foreign exchange igtuaWtion, with its promise of fresh aid andthe reasonable hope that the foreign exchange gap during the remainder ofthe Second Plan-period would be bridged.

2. The Indian economy has moved into a phase of consolidation, afterthe sharp burst of investment activity--both public and private--in thefirst two years of the Second Plan. The rate of investment in the publicsector has levelled off, and in the private sector there is evidence of adistinct decline. W1hether this is due to the progressive tightening ofcommercial imports since the beeinning of 1957. or whether a pause wqas tobe expected in any case, is a matter of dispute between the business com-munitv and the authorities. However. anart from cotton textiles whichhave been undergoing a recession, industrial production continued to ex-pand until the autumn of 1958 There mav have hben a falling off sincethen, with the restriction of imports and the depletion of stocks, but thefigures are not yet available.

02 1fflT; + h a or {A 4 mr. ninA A,+; mo- lnt nr_.n 'A, n +c C- ho rAh__ r -v. s.,l 1 1vi n v .4.. v . 4.ln . _t whJ4j q , rh. ±1. V VJ. 4,1 4 vbe authorized in the last 2-2 years of the present Plan. Plan expendituresare now offi,ci a-lly put at Rs. 45blin(.940rllo) gis noil

nal estimate of Rs. 48 billion, but the actual outlay is likely to be some-whatU Less0. The eites of foreig eange eAjJrIdltU.Lii o ln O telan h1a-ve

not changed significantly in total, but with a further delay in many of__4- A 04 C S 1fi ._ 1_ _ -- __ _3 _ 2thle pro esU expenditures have been more e- VUIenly s1pretdU iteaId WU Uof UUbein

bunched in the middle years.

4. Now that the scope of the Second Plan has been more or less fixed,the focus of public interest has shifted to the Third Plan. R iively de-bate has started on its size and content. There is a consensus among thegeneral public and the leading groups in the Government and the CongressParty that it will have to be bigger than the Second Plan, if the growthof the economy is to be sustained and the gains so far achieved are notto be swallowed up by the increase of population. This is now put at al-most 2% a year instead of the much lower rate assumed when the Second Planwas drawn up. However, it is also generally'understood that there is noassurance of a larger amount of foreign resources--including any furtheruse of the sterling balances--being available for the Third Plan than forthe Second, or even as much. Consequently, emphasis is put on the needto mobilize domestic resources more effectively, although there is as yetno agreement as to how tlis can be done. The Government itself has beguna number of studies at the official level, but does not expect to be ableto publish a preliminary statement on the approach to the Third Plan untiltowards the end of 1959.

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5. As regards the improvement of' the foreign exchange situation sinceth Au V this is norj seen to ha ve be,, chi, fl t.h resul of a

drastic cut in import allocations in the spring of 1958, when the reserveswere f~aling a' an a'arm,Ing rate. "'er- declining a' a slo.uwer rate 'orsome weeks after the meeting, the reserves ceased to fall in October, andsince then have rlsen again as disbursement of the new credits has gatheredmomentum. Even so, only about half the total of $350 million of fresh aidwihich was thought to be needed 'by the end oT the present fiscal year is ex-pected to have been disbursed by that time. Undoubtedly some of the im-provements in reserves may be attributed to psychologicai factors stemmingfrom the demonstration of international action to deal with the foreignexchange problem.

b. The indian authorities appear to have kept the internal monetarysituation under control during recent months, despite the fact that therelief afforded in tl'h past by the liouidation of the foreign exchange re-serves has been relatively smrall. There was a sharp increase in the priceof foodgrains following the crop failures of the 1957-8 season, but thishas already been reversed in the case of rice; wheat prices should alsofall after the harvest in the coming spring. Otherwise, there seems tohave been little increase in prices. An iinportant contribution to thisstability has been the substantial sales of P.L. 480 foodgrains to thepublic and accumulation of funds in bank accounts of the U.S. Government.But the recession in textiles and the damping down of investment activityin the private sector, which have helped to restrain private bank credit,and a reduction in deficit financing by the Government, have been the mainfactors in this period. Inflation will continue to be a danger in India,so long as development continues at a rapid pace and expenditures are notmatched by public savings. But the authorities should be able to keep thesituation under control during the next two years so long as they continueto resist the Dressure to increase expenaditures.

7. Before allowing for the new aid following the Augzust meeting.the balance of payments deficit for the last three years of the Plan isnow estimated bv the Indian Government to be approximatelv the same as inthe Ivxay 1958 forecast. The cut in imports during the current fiscal yearis regarded as R nostponemnenR t to he made good in the last twro vyars ofthe Plan if foreign exchange is available. In the past there have beendelays in carrying out the Plan n and if this were to continuepart of the foreign exchange expenditure would fall after M4arch 1961. Butdelays become less likely as the f Plan movess iPnton its final phase Tt. J.also possible that the completion of new enterprises during the comingmonths ,re achieve bigg_r lmport savings tnan _re now allowed for. H-owver,

there is considerable doubt whether in a developing economy imports of con-sumer go ods,^eo..intenAance itmgan - l equipment for the 4 privat scto+r

can be indefinitely held down, even at the somewhat higher level now pro-posedU for tUhle nextL t,wo years.

8. Indian exports in 1958 suffered from the world slump intrade, and have only recently begun to pick up. in view of the con-tinued stagnation of some of India's principal exports--especiallycotton and jute manufactures--it will need all the efforts oI thenewer exporting industries, assisted by Government, if the forecastof earnings in the next two years is to be attained. On a longerviewv, the prospect for increased exports, especially of engineeringproducts, is reasonably encouraging.

9. Thus, while there may well be variations in individualcomponents of the balance of payments, there is no reason at this stageto quarrel with the Indian Goverrment's forecast of the deficit forwhich finance is still required during the next two years. Excludina-transactions with the International iylonetary Fund,which involve certainimportant payments especially in the year 1960/61, this is put at Rs.3.05 billion or $641 million--':305 million in 1959-60 and j336 millionin 1960-61. in view of the depleted level of India's foreign exchangereserves, it would be imprudent to rely upon them for a contributionto the financing of these deficits.

10. India's public external debt, excluding I.il.F. drawings,now anounts to the equivalent of almost $l1,640 million, to which mustbe added over $100 million of foreign credits negotiated by privatefirms in India (see Appendix III). The maturities falling due in 1961and 192 are an-rtieularlv heavv; and a rephasing of the main paymentsin those years would be highly desirable. In the following five orsix years, servrice payments even n n the present debt will still he run-ning at almost $150 million a year, or about 9% of current foreign ex-change earnings. Thereafter servce payrments drop sharply.

11. India's abilit',y to servic -additional foreign debt, dur-ing

the next decade is clearly quite limited. There is hope for a substan-tialIi l-r-Foe-ent ineotearnings in the latter part of theprid+4 .- ~ v 4 ~~- A-u 'I -,,~..F 4-L - I 1 ,-,- I +h ~-+ ,vC61~r~

4

,

but it would be unwise to count on this. Consequently, any new assist-ance 'o InLdia shoulld so far as possible j be on ter1as which would notadd to India's service obligations in foreign excharge, at least duringtie next ten yCears.

I. SCOP±E aF THE PLAN

12. The approved expenditure on the Plan is now Rs. 45.00 billion,after the elimination of Rs. 3.00 billion previously included for projectsof lower priority of resources became available. As the total resourcesin sight, including an amount of deficit financing which it is consideredwise not to exceed, are only a little over Rs. 42.00 billion. actual expend-iture is likely to fall below the approved level. Investment expenditure bythe private sector during the five years 1956-61 ig expected to reach theoriginal estimate of Rs. 24.00 billion, since the greater part of it hasalready been inculrred, Aluthoig the natinal incore acco nts are not yetavailable after the year 1956-57, the authorities believe that privateinvestment - other than on projects included in the core of the Plan = snow running at a much lower level than in the first two years of the Planperiodo Iin the case of both public d private investment, he increa-in costs since the Plan was drawn up will mean a somewhat smaller achieve-ment in phy13sical terms than these L igures wouild suggest.,

13.1The - co" f le Plan, as defined 'or the purposes o0 teAugust meeting, remains unchanged. Outside the core no new projects havebeen au-thorised since then, except for the building Of an oil refinery arndpipeline in Assam, the foreign exchange costs of which are to be fullycovered by foreign credits, and the construction of a fertilizer plant, touse by-products of the Rourkela steel plant, for which credits are beingsought. Both projects are expected to save at least enough foreign exchangeto permit repayment of the credits when they become due, without cost to thereserves. More recently the Indian Government indicated to the Bank its in-tention to start a number of additional power projects in order to meet anexpected shortage of power in the early years of the Third Plan. Theforeign exchange expenditure in the next two years would be small and wouldbe absorbed by adjustments under other heads without increasing the overalldeficit during these years. In the circumstances the Bank agreed that thesenew commitments would be appropriate.

14. Total foreign exchange expenditure on the Second Plan, as nowestimated, remains approximately the same as in the May 1958 forecast.Within the total there has been a considerable change in the phasing ofexpenditures, for reasons which are explained below, and some shift asbetween itemse In particular there has been an increase in the estimatedcost of certain Drojects,. including the Government steel plants,. owing toescalation and the inclusion of some items such as consultantst fees notnreviouslv allowed for. These intreases are approximately offset by areduction in the Railway program. Given the fact that nearly three yearsof the Plan period have passed) and that the fore gn exchange content ofthe Plan is now fixed, the new forecast should trove reasonably accurate.But on the basis of past experience some further delay in expenditresbeyond the end of the Plan period cannot be ruled out.

15. The statement of public resources and expenditures for theSeco,-,d IUan, as approved bUy L1Ithe N-ational DeveLopmer.t Coun±cil in Novemiilber

1958, is shown in the following table. The amount of foreign assistancesho--n for the final two years of the r-an represents disbursements of aidalreedy committed, plus an amount of additional aid sufficient to cover theresidual deficit in the balance of payments.

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Table I - Public Resources and Expenditures of Second Five-Year Plan(J-n Iiillions of Runpe)

Likely (May 1958 Nov.1958 Nov.1958 Planactuals Est. for Est.. for Five-Year Targetfor first final two final two Est.three years) yearsyears

Resources

Contribution from- currentrevenues 4.28 (5.00) 3.22 7.50 1.2.00Rail-ways! eOn.tributon AL26 (1.21) I'. 2J.50 1.50Loans 4.41) (500 2.77 7.18 7.00Smnll Svinrgs 2.11) 510.73 3a84 5.00Other domestic capitalreceipts 1o/ I t-O (0.4)O\ n0 .06 0.7 '

Total domestic resources 11.26 (11.61) 9.02 20.28 28.00Foreign assistance 4.58 (6.00) 6.42 11.00 8.00Deficit financing / 8.82 (2.83) *2f1J0 10.92 12.00

Total resources 24.66 (20.44) 17.54 42.20 48.00

Exjenditures

as now approved 24e66 (20034) 20.34 45.00 48 00

16. The November 1958 estimate of resources appears realisticin the lignt of past developments and current trends. As compared withthe estimate made at the beginning of the Plan, the surplus on revenueaccount and small savings have had to be scaled down, -but this is partlycompensated by an increase in foreign assistance and in the contributionto the revenue by the Indian Railways. Rs. 10.9 billion, or Rs. 1.1billion less than originally planned, is to be covered by receipts from"deficit financing". However, of the Rs. 4.4 billion of public loans sold

Includes a grea t- ru.mber ofL ..tems e.g. r.et cap- al +an.sacions -Ith

municipalities, use of cash balances (other than those held by theReserve Bank) pr-ofits of public enterprises etc.

AS' Issue of treasury biis net of ehange in centrai government cashbalances with Reserve Bank.

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during the first three years of the Plan about half was absorbed by thebanking system and the remainder largely by the Life Insurance Corporation,provident funds and other institutional investors. If the same propor-tions hold good for the balance of Rs. 2.8 billion of public loans to besold during the remaining two years, total Government borrowing from thebanking system during the Second Plan would be of the order of Rs. 14.5billion. Up to the beginning of January 1959 nearly Rs. 11.0 billion ofthis amount had been incurred. (See Table 3, line 1). The balance ofabout Rs. 3.5 billion is based on Plan expenditures of Rs. 42.2 billion;it would probably increase if expenditures exceeded this level.

II. INTERENL FINANCE AND PRICES

17. The consolidated budget of the Center and the States (Table2) shows that at the time of the last budget a substantial reduction ininflationary financing was considered possible during the current fiscalyear, mainly as a result of increased receipts of foreign aid. The ac-counts of the banking system-, for the first nine months of the fiscal yearsuggest that the outcome will be approximately as forecast. The figures inthe table for 1958s59 are budget estimates, except in the case of the figurefor government borrowings from banks, which is an estimate based on bankstatistics covering the first nine months.

Table 2 - Consolidated Budget of the Center and the States(in billions of Rupees)

Years ending March 31 1955-56 1956-57 1957-58 1958-59

Current RevenuesTaxes 7.6 8.7 10.1 10,5Other 2.3.0 3.1Total 9.9 11.1 13.1 13.6

Defense 2.1 2.3 3.1 3.2

Development 5.6 5.8 9.4 9.5

14.0 18,0 4 0 ei

val.ance - 4.1. - 6.9 ~ - 0.4 - 0.0

Financed by Foreign loans 0.0 0.1 0.7 2.8Foreign grants 0.4 0.3 0.3 0,4Other non-inflationaryreceipts on cap. acct 2/ 1.9 3.4 2.5 2.3Borrowed from banks(net of change in cashbalances) 1.8 3.1 4.9 3.3

1/ Including so-called "Development outside Plant1, which consists largelyof welfare expenditure and expenditure on the maintenance of projectsrecently completed.

O/ Includes contribution by the Railways.

±0. Ilere -was a sliLgh decreUase in With Ilnufley sjupp.ly uLr±LIin, lthese

nine months, des-ite continued Government borrowing on a substantialscale and the fact- tt the 'loss of foreign exchangte, 5g UWVt slo do-w-

until October and was later reversed. These factors were offset by arise in time deposits and a decline in 'Dank credit 0o the private sectorwhich was due only in part to seasonal factors (Table 3).

19. The rise in time deposits was the result in considerable meas-ure of the further accumulation of rupee balances in accounts of the U.S.Government from the sale of P.L. 480 foodgrains. These have been drawnupon only to a small extent, and now stand at Rs. 1.75 billion.

20. The decline in bank credit durl.ng 1958 was associated withthe poor harvests-of 1957-8., the tighter import restrictions in mid-yearand the drop in sales of cotton textiles. With the improvement in

Table 3 - _lonev SupDlv Ath the Public(Rs. billions)

Years ending I4arch 31 1955/56 1956/57 1957/58 1958/59(first 9 mths.)

Money supply at end of year 21.85 23.14 23.89 23.76Change during the vear + 2.64 + 1.29 + 0.75 - 0.13

of which

1) Government borrowingfrom banks. net ofchange in Governmenthbalncees ith RBT + 1 A/ + 3.09 + 4.91 + 2.82

of which reserve Bank (+ L72) (+ 2.88_ (+4 _17) (+ 0.55)

2) Bank cr9nrt to private.

sector + 1.48 + 1.52 + 0.66 - 0.66

3) Time deposits:

(a) P.L. 480 _ _ 0.05 - 1.16 - 0.52({-h\ fl+1-,- _ n n _ o1 _ 1 nA

1 v, v u -*4 -v ..) -. _ 1. - 0 . vv

,) Other fTranacto 0.40 + 0.05 + 0.05 + 0

'/ Transactions with I.ei4.F. excluded

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agricultural production ana tne relaxat-ion of imporbs, uank creditu ha5

begun to increase again, but this may also be partly seasonal.

21. The Table also shows that during the current fiscal year theGovernment was able to place most of its new borrowing from the bankingsystem with cormnercial banks instead of the Peserve Bank. The formerhad become increasingly liquid as a result of the decline in their lendingto the private sector. Their purchase of government securities activated fundswhich would otherwise have been idle. However, the bulk of their purchaseswas in long-term securities, which the Reserve Bank is not obliged to re-purchase. Consequently, these purchases have reduced the ability of thecommercial banks to expand their lending in the near future.

22. Aipart from agricultural products, there has been little changein prices since 'ast spring, insofar as this can be judged from the avail-able indices.

Table L - Index of wholesale prices(1952/53 = 100)

End of period: Oct.t57 April '58 Oct. '58 Nov. 158 MvIid-Jan. t59(Provisional)

General 109 108 116 112 112Of which food prices 107 106 121 115 llL" " manufactures 109 108 109 108 109

Imported consumer goods have risen in price, but the quantities involvedare small. Foodgrain prices increased sharDly until the autumn, but thiscan be explained largely by physical factors.

23. Foodgrain prices in India are always liable to fluctuate widelyin response to the supply situation. utnerwise the outlook for price sta-bility during the next two years is reasonably promising. hs mentionedin the last section, government borrowing from the banking system mayamount to about Rs. 3.5 billion between the beginning of 1959 and the endof the Plan period. This figure, which is based upon Plan expenditures inthe public sector of Rs. 42.2 billion, is equivalent to 14% of the presentmoney supply, implying an annual increase of about 6%. Whether the moneysupply actually increases at this rate depends upon the net effect of otherfactors. One of these, the reduction of the foreign exchange reserves,has already ceased to operate, and as already mentioned there is likely tobe some expansion of private bank credit. However, one of the main factorswhich in the past has helped to moderate the pressure of deficit financingon the price level is the rising trend of time deposits at commercial banks,and there is no reason to think that this trend will be reversed in thenear future. Deposits held by private persons and corporations should con-tinue to grow with the economy, while the U.S. Governmentts balances atIndian banks may well increase during the coming year from the proceeds offurther sales of P.L. 480 foodgrains. Sooner or later these balances will

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be released, and it should be recognized that wet releases will have aninflationary influence just as the net acc-Lmulation of these balanceshas been counter-inflationary in its results. It would be advisable,and this is understood to be the Indian Government's intention, to usereleases from these balances for purposes which would in any case beincluded in the budget and to reduce correspondingly government borrow-ing from the banking system.

2h. The amount of deficit financing now contemplated for the lasttwo years of the Plan, although less than in the preceding years, isstill substantial. It should not itself result in an increase in themoney supply significantly larger than the likely growth of nationaloutout during this neriod. although the miiestion arises of whether inview of its expanding activities the private sector may not have to seekinc(reased1 redit at least for working capital purposes. On the w.hole;however, there is at the moment a reasonable prospect for internalmrne±.nrv etai+. ith y 1i+.b uhit. nnlyr sin lnno nas crgrovrnmn+ Pvrentnrn;i t.rP. nr kenpunder careful control. Stability itself exposes the authorities toconstant pressur~e to.n i-n expe on-l +ry1 Ammpn+. nrrripts --

mainly in the social services -- which have been cut below the originalP1n-, estimates, as well as on non=den vrelopment items of all kinds Inthe first two years of the Plan, rising defense costs and other non-development expendi+ures mop,-ped up the very i +str.ial inraei taxreceipts achieved by the Central Government. This tendency seems to havebeen ha-l+CA +heL± thlrd4 I Iea.- bu it w .r ire siderabl

tion to maintain the position during the remainder of the Plan periodin_ the Pace ofP the many clam on 4-h- -1,14 ,s

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III. PROGRESS CF AGPICULTURE AND INDUSTRY

25. The results of the 1957-58 agricultural year were evenworse than had been expected, the output of foodgrains and pulses being6.7 million tons (11%) less than the previous year. Cash crops wereless seriously affected by the drought, but production of sugarcane,oilseeds and jute was also lower; cotton production on the other handwas maintained at approximately the same level. Following the poorharvests food prices increased sharply during 1958, reaching a peak justbefore the delivery of the "kharif" (suTmer) crop to market in the earlyautumn. This was the main argument in favor of a proposal adopted atthe November meeting of the National Development Council to nationalizethe wholesale trade in foodgrains. The details have still to be workCedout, but it is doubtful whether state trading in itself will be sufficientto hold down prices at times of shortage.

26. Weather conditions for the 1958-59 crops have been muchmore favorable, and total production of foodgrains is expected to be arecorda The rice crop has been put at 29 million tons against 25million tons last vear- The nriAe of rine has consenuentlv fallen.Wheat prices remain high, but are expected to fall with the delivery ofthe wheat harvest from April o

27. Theo hot+aeav ^f foodnrAnns in 195A was me+. n pat+. br-w_ - - 6-b -_ 6 -- ' - * ' - - v -_ I- --drawing down stocks, and in part by deliveries of wheat under the U.S.PTL.-8O n w heat a6 eemu,o. .- ADO 've o P.T.A Jor od-.-in

amounted to about 2.5 million tons in each of the last two years. Despite4thi-s, 4tota' stock-s of -P 0 odgrains are down to the low. leve of r 70000 tnsU1i.L, ~J Ub.. _L LOu4. VI. .Lv+ u gui~ .L L uW. Ui1u .±UW -W1t1_ U.L I,''.JI J I.Ji.W

and wheat stocks are virtually confined to what is in the pipeline. It ishloped o u±ilu stocks up to 2 mllion tons. WItuh bUfl goou harvests ofthe present agricultural year and the deliveries of P.L.480 foodgrainsstill to come under existing agreements, this level should be attainable.But inadequate storage facilities present a problem.

28. Agricultural production continues to be held back by thelack of fertilizers, and the failure to make full use of available irrig-ation water, among other things. The Indian cultivator is showing agreater willingness to use and pay for fertilizer, and demand is growingmore rapidly than domestic production. At present more than half theavailable supplies are imported, and even when additional productionfacilities now under construction as part of the Plan are completed, therewill still be a large requirement for imports of fertilizer.

29. The authorities mounted a drive last year to increase theuse of irrigation water by the cultivator, and this met with some success.If this trend continues, and given reasonable luck with the weather, some10 million tons of additional foodgrains may be raised by the end of thePlan, which is the amount of the increase originally included in the Plan,although it is only two-thirds of the revised target adopted later. Thepositicn is therefore precarious, above all because the rate of populationincrease is now considered to be nearlv 2% a vear instead of 1.25% asassumed in the Plan. Demand for foodgrains (especially for the better

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qualities) is rising more rapdlvy than was foreseen when the Plan wasdrawn up, and imports may continue to be needed on a substantial scalefor some years. The need to place much greater emphasis on agriculturaldevelopment is now generallv accented, and a number of far-reachingmeasures have been canvassed. But these have still to be translatedinto actual proornms

30 Tndulstrinl producition as a whole shonwe only a mnodestrise in 1958. In part, however, this was due to a recession in cottontextiles, still the most important manufacturng industry in India. Tnthe export market Indian cotton goods are losing ground to the competi-tion from Ghina, Hongkong and Japn-. At home a variety of factorsincluding lower agricultural incorms following the poor harvest, anda IJ4.t in t.hJe J.tast- from Uh.m co=ser Xv%fl tSlhe. 4finelr Vr of.'t 0

cotton cloth - have led to a temporary drop in sales. Sugar production" so ,- 1 _, - - .4 - - 4_ - 4 |A was alo -loWVeL Uwing to the pooUrX- cropIUF.

31. Apart from these two industries, the growth of outputappears to hiu±ve been maintained, aLhough there may rhave been sor,e fIllngoff in the last months of 1958 owing to the tight import policy and thedepletion of stocks. The index of industrial proauction, excluding cottontextiles and sugar, rose almost 6% during the first eight months of 1958,which is about the same rate of increase as in the corresponding period of1957. This rate could probably be maintained during the next two years,given adequate imports of raw materials, spares and components, in viewof the completion of new iron and steel-making facilities, and the ex-pansion of capacity in the chemicals, cement, paper and engineeringindustries,

32. After the August meeting, with its promise of relieffrom the immediate drain on foreign exchange reserves, import policy wasrelaxed, to the extent of gradually restoring the cut in imports duringthe previous six months. Total imports during the last three years ofthe Plan are now expected to be virtually the same as in the May 1958forecast.

33. Within the increased foreign exchange allocation forDrivate imports for the next two years, high priority has now beengiven to imp c-s required for the maintenance of the economy, at theexpense of private imports of capital equipment and consumer goods. Butstocks are low and there will continue to be shortages of maintenanceitems. esneciallv iron and steel. non-ferrous metals. sDare parts. rawmaterials for paper-making and rayon, and petroleum products. Consequently,even at thA proposed level of imports of these items, full utilization ofthe growing industrial capacity, particularly in the engineering industries,will not be noss ble.

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IV. BAL*NCE OF PAYMENTS

I4 GTold anA fore'g ------ ets of the Reserve nank decli4ned from, Rs. 74billion ($1,650 million) at the beginning of the Plan in the spring of 1956

VS A.~ 1,41 4- (0X:l =:511 -idr :nrC - A_ 4._ T., INn __ |_n|_to Rs. 3lo5 billon 10 illion) by March 1 1958, ato a low pouint Of

Rs. 2n96 billion ($620 million) by October 31, 1958. At the time of theAugust meeting it -was estimated, on the basis of the previous trend, thatthe reserves would fall to about Rs. 2.5 billion ($525 million) by September30, 1958 before any of the additional foreign aid pledged at thna meetingcould be disbursed. `350 million of this aid was thought to be requiredbetween then and March 31, 19459 if the reserves were not to fall further.

35. The Government of india now expects that the reserves will totalRs. 2.9 billion 1/ (.610 mrillion) at the end of the fiscal year, despitethe fact that only about half of the 4'350 million of additional aid wi1lhave been disbursed by that time. The balance of payments deficit for thecurrent fiscal year is thus expected to be about Rs. 1.20 billion ($250million) less than assumed last August.

36. This improvement has materialized despite the fact that exportearnings fell somewhat short of expectations. Tea earnings developedfavorably, but this was more than offset by a drop in earnings from cottongoods, vegetable oils and jute manufactures. Aggregate exports duringthe current year are now estimated at Rs. 5.82 billion as against an origi-nal estimate of Rs. 6.00 billion and a 1957/58 total of Rs. 5.95 billion.At the same time, however, imports (other than P.L. 480 foodgrains) werereduced to a level of Rs. l.ll billion (4,$233 million) below the May 1958forecast of Rs. 12.04 billion. A further reduction in the deficit resultedfrom drawings of about Rs. 0.23 billion upon the British steel credits forDurgapur. This had been planned only for later years, but an earlier drawingwas made because of the decline in London interest rates.

37. The curtailment of imports (other than foodgrains) was the resultof extremely stringent licensing policies followed during the months pre-ceding the IWTashington meeting. In the past, import restrictions have notbeen very effective owing to the large hang-over of licences from earlierperiods. However, by the spring of 1958 the bulk of these had been usednr had become invalid; and the effect of the cuts made at that time werefelt on the reserves in the early autumn. In view of the size of the out-standing commitments for develonment imnorts. the Government was omnpellednot only to cut imports of consumersi goods further but also to reduce mainte-nance imports, i.e. raw materlals, fuels nsr -rts.* M -reoer_ freshn

2/ In addition to the official holdings of the Reserve Bank, the Govern-rteen$6 a do ri80namils workin.sween $60 and $80 million.

- I''4 -

commitments for imports under the various development programs were postponedto some extenu. The relaxataion of llcCens1- rte S theI rmut U UI- Iieitin

will not be reflected in payments until after the end of the current fiscalyear.

Table B5- Balance of Paymentskin billions of Rupees)

Jan. 1959 forecast for last three years - Maly 1958 forecast in parentheses.Transactions with the I.M.F. have been excluded - see paragraph 38 below.

Years ending March 31: 1955-56 1956-57 1957-58 1958-59 1959-60 1960-61Est. Est. Est.

Current Account

1. Imports, excludingPL 480 (-12.04) (-10.85) (- 9.06)foodgrains, c.i.f. -7.51 -10.53 -10.75 -10.93 -11.02 - 9.99

2. Exports and re-exports, (+ 6.00) (+ 6.26) (+6.52)f.o.b. +6.41 +6.35 +5.95 + 5,82 + 6.26 +6.52

3. Invisibles net, including (+ 1.11) (+ 0.99) (+ 0.93)official grants +1.27 +1.54 +1.29 + 1.25 + 2.06 + o.66

(- 4.93) (- 3.60) (- 1.61)

4. Balance +0.17 -2.64 -3.51 - 3.86 - 3.70 - 2.81

5. Errors and Cmissions -0.03 -0.11 +0.04 + 0O06 - _

Capital Account(+ 1.99) (+ 1.68) (+ 0.55)

6- Net_ excl- PL -80 +0.01 +056 +0.87 + 2.86 + 2.2;. + 1.21(- 2.94) (- 1.92) (- 1.06)

7. Overall Balance 4O,i5 -2.19 -2.60 - 0.94 - 1.45 - 1.60

( 0.29)PL 480 (not included above) - 0.39 1.02 0.95 0.79

38. The balance (line 7) in the above accounts during the year 1955-56,the last year of the First Plan, and in the first three vears of the SecondPlan, is equal to the change in the foreign exchange reserves during thoseyears. Tle balance for the last two years represents the def'iit to he cov-ered at the assumed level of foreign trade, after allowing in lines 3 and 6for external grants and loans which have already been assured (See hppendlix 2)

- 15 -

It has been calculated without allowing for transactions with the I.M.F.ot-her than interest payments on drawings. India has drawn half herpresent quota of qp400 million in the Fund, and is due lo repurchase

7 ,.5) mILL.Ll UII fis 1 a IL yeaL -L9UU-U6. Th1ere ic a p foUUr a )U/O

increase in quotas during the coming year, but in taking up her increasedquota InLdia would formally be required to pay gold to the Fuind in theamount of 25% of the increase, or `$50 million.

39. Despite the shortfall in exports during th- current year theestimates for aggregate earnings during the next two years have been leftunchanged in the January 1959 forecast. The table shows that they areto rise by 12% between 1956-59 and 1960-61 (see also Appendix I).Projected earnings from a number of commodities, such1 as cotton goods,hides and skins, and sugar have been scaled down,but this is offset byan upward correction in the estimates for tea and numerous other smallerexports. The latter appears justified in view of the recent improvementin tea exports and the encouraging growth of new exports, mainly productsof the expanding engineering industries, e.g. sewing machines. There mayalso be a further growth of exports to the Soviet b'loc; these have risenduring the last two years from 2.5% to 5% of total exports. Both Govern-ment and private industry have accepted the urgent need to improve India'sexport earnings, and a number of useful steps have recently been taken inthis direction, including the removal of all export K-uties, except on teafor which the rate has been reduced. In the imriediate future there shouldbe significant exports of pig-iron and cement. HowevDr, it appears un-likely that- the export forecasts for the next two years will be exceededeven if some cormodities should do better than projected.

40. The revised forecasts for imDorts raise the May 1958 allo-cation for the next two years by an amount roughl,r equal to the cut inimnorts durin_ the crrrent year: the aggregate P en diture on imnortsfor the last three years of the Plan is thus maintained at its May 1958level. The chanee in the phasing of imports reflects previous uncertain-ties about the availability of foreign aid and also takes into accountdelays in the execuation of development nroiects- As to invisihles, therevisions made on current and capital account reflect the additionalforeign aid nhtained sinte lsst summer, and the rdecline in receipts ofinterest caused by the reduction in the sterling balances. On balance,the overall deficit durinr- then next two yea is now estimated at R ns.3.05billion ($641 million) as compared with a corresponding estirate in MayI Qr,. ,- mP 9 Qg h-i114^n rnA^ il!4^on I/ T I nrl + o.;nno a I1 _+ 11n

cations are approximately offset by the amount of foreign aid obtainedas the result of the A-g.i-t meetir but no- scheduled For d-;,Vvbursemen,t

only in the next fiscal year. Of the total of Rs. 3.05 billion, Rs. 1.45billion ($305 0,illion) falls in 1959-60 and Rs 1.60 billion ($336 million)in 1960-61. These figures do not allow for the payment of interest in.oreign exchlange on f reshiI alU obUUta-Lned after hUle March r,.aeting nor lor

the possibility that India may not be able to spend at competitive inter-national prices all the aid already -ee-Uv-d.

I/ Excluding transactions with the I.M.F.

- 16 -

I Tn vie,, O-i' 4-1 .3-1-4-eA Ipa - T A4-1--1. Tn vievT ofU tL -l of India's fo I Ueign e> change

reserves, it would scarcely be prudent to rely upon a further liquidationof these reserves to cover part of those deficits. As noted above, thereserves have not fallen as far as had been expected last August. I'one-theless the level forecast for the en(J of M iarch 1959 would amount to onlyabout one-quarter of annual imports at the current rate or somewh)at lessif P .L.480 lrports were also taken into account. M_oreover, at present overhalf of India's export earnings are derived from tea. jute and cotton

_ _ . r ... , . _ . a ~~T . - I I I . I I a-nuf actur es ardU Ira' cotton. Lnternational trade in tmese commodities issubject to rather wide fluctuations, and a higher level of reserves istherefore necessary than would be the case if India's exports were morediversified.

- 17 -Appendix I_

ndaias Export Earnings by Principaiu l u U-d1u1u±tie

(Rs. billion)

Jan. 59 estimates; May 58 estimates in parenthesis.

Years endingMarch 31: '56/57 157/58 '58/59 ;,59/60 t6o/61

Tea 1.49 1.19 1.37 (1.25) 1.35 (1.23) 1.40 (1.30)Cashew Nuts 0.14 0.16 0.16 (0.16) 0.16 (0>16) 0.16 (0.16)Tobacco o ,P6 0.16 0,16 (0.16) 0.17 (0.17) 0.18 (0.17)Spices 0.10 0.10 0.09 (0.10) 0.11 (0.10) 0.11 (0.11)Gums, Resin& Las 0,11 0.09 0.09 (0.11) 0.11 (0.12) 0.12 (0.12)

Veg. Oils 0.26 0.15 0.14 (0.20) 0.21 (0.21) 0.21 (0.21)Raa Cotton

& Waste 0.2h 0.16 0.21 (0.20) 0.20 (0.20) 0.20 (0.20)Sugar 0.02 0.12 o.o4 (0.05) 0.05 (0.05) 0.05 (0-07)

Jute Manufactures 1.26 1.18 1.10 (0.15) 1.20 (1.20) 1.20 (1.20)Cotton nn 0.80 0.76 0=53 (0.65) 0=60 (0.72) n.62 (0o76)

ManrEnese Ore 0.21 0.29 0.14 (0.15) 0.21 (0.20) 0=23 (0.22)Iron Ore 0.09 0.12 0.12 (0.10) 0.11 (0.11) 0.11 (0.11)Mica 0n09 0.10 0.10 (n011) n.10 (n0.0) O.In (n-10)

Leathergoodis(inc. Footvear) 0.23 0.23 0.22 (0.27) 0.27 (0.27) 0.27 (0,27)

Pr14, 1 9. a SkIinr) n 7 r 0v7 r o0 (r0 0R8 n) 0.7 (n 12) o.oR (0.1 i

Total of above 5.27 4.°8 4.55 (1.74) 4.92 (4.96) 5.04 (5.12)

Other exports &Totealor+s 6.38 5.95 1.82 (6.00) 1.26 (1.30) 6.52 (6.52)

Total 6.35 5.95 .5.82 (6.00) 6.26 (6;626) 6.52 (6.52)

ADpendix II

Estimated Disbursements during the Second Five-Year Plano.L_ X.LtUJeig.L Alui adl.rteauy col,Julh u teu

(Rs. million)

First three Last two years Totalyears ending ending March 31, fiveMarch 31; 1959 1961 years

I. LoansU.S.A.a) Development Loan Fund2/ 277.1 55603 833.4bh) Ex4ba.-r 20.0 694,3 714.3c) Other U.S. Government 499.7 183.6 683.3A~ P,-;-+e. TT .C * lo r2 2 1I '

* .L1VCLU'7 V .*~ LJC.LnV - Ji..,

e'? Total U.S.A. 7-6/, 1,487-5 2,284.3U.S.S.R. 538.6 687.1 1,225.7Wesgt Germa ny 509.2 /r9R938.7United Kingdom / 313.4 420.9 734.3Japan 36.0 275.9 311.9Canada 157.1 157.1

I.B*R.D.~~~~~~~~~~~~~~~- 9i, .3* 207 2,029.1,730.4 .9 )i

rp l.., -IT I f6 AC1 0 'n t7 I:ze, ITo '- Loans 4a01. 3a599.6 7s°.J 1 o

U.S.A.a) U.S. Government 534.7 43U0 57707b) Ford Foundation 35.1 3902 74.3

c) Total U.S.A. 569.8 82,2 652.0Colombo Plara 300.7 234.1 534.8Others 92.7 92.7

Total Grants 96302 316.3 1,279.5

I1I. Total Loans and Grants 5,044.7 3,915.9 8,960.6

IV. U.S. P.L.480 1,793.5 1,356.9 3,150.4

V. TOT1AL FCREIiGN AID 6,838.2 5,272.8 12,111.0= _

(million US $ equivalent) (1,436.0) (1,107.3) (2,543.3)

/ Repayable in rupeess oes nLot in'ue eay-e oexespgLr mr.i t 1 ilJ-0t~~ 110 U 11.LUU(Zj ru wJ±ivilu LU.L Pq -tI~ ullo t.LIUL4JU±IU-Ir UUJ~- .~--J'~

(Rs. 133.3 million).' Largely from Canada.

ArflTMVMrV - 19 -

INDIA'S EXTERNAL DEBT

(A) Composition

Early in January 1959 India's external debt, excluding IMF drawingsand loans repayable in rupees, is estimated to have amounted to rather over$1,750 million made up as follows. The amounts shown for the various loansare net of cancellations and repayments, but include amounts as yetundisb-rsed.

$ mn. equivalent

IBRD loans 478Export-Import Bank loans 150U.S. wheat loan 186British steel credits 74German steel credits 157Soviet steel credit 129Second Soviet eredit 125Dec. 1958 U.K. loan 80.TJnn 1959 GerTnn loan 40Japanese credits (including iron ore project) 55First Canadian l,%alo 26Second Canadian wheat loan 9Air -India credits (New York Baks 11Sterling bonds 10"u<H-lie.r creditis \(Ftitic sector) ---

Total pUblic debt 1,630

Supplier credits (private sector) 125

Grand total 1,763

The figure for suppliers' credits to the private sector representscredits which private firms in India have been authorized by the Governmentto negotiate with foreign suppliers; some of these credits may not actuallybe negotiated.

The projections of debt service in the following tables areestimates made by the staff of the Bank based on informntion submitted bythe Government of India.

- 20-

gEnD j IN5 (cont.) (B) PrcUed _De!bt SMMUtc

Zzmar3r of Pjro:lected XeeLand ALkmortlaLon PDapmentp DLieon "i ernnl Deb 12 4 ea/

($ million equivalent)

(1) (2) c (3)Tota'L PttbilLc_Detbt _ _ m_ vilerO Credits lo Prlvate_Se2to _ _ Total Dbt

Debt Out- Pazment Ldurin Y'ear Debt Out- ___aZMntj during_'eer _ _ De'bt Out- i durn.iX earstanding Amorti Interest Total standing JAmorti- Interest Total standing Amorti- Interest TotalJanuary 1 scation Janiary 1 ssation January 1 zation

19'59 1638 29 32 6:L :125 22 - 22 1,763 51 32 1331960 1609 78 49 12'7 103 30 - 30 1,712 108 49 1571961 1531 153 65 2113 73 31 - 31 1,604 184 65 2491962 1:378 141 60 20:L 42 26 - 216 1,420 167 60 2:2719653 1237 103 51 154 16 10 - 10 1,253 113 51 16419614 1134 100 44 144 6 4 - 4 1,140 104 44 1 481965 1034 111 40 15:L 2 1 - L 1,036 112 40 1 521966 923 107 35 14;2 1 1 - I 924 108 35 1431967 1316 110 31 14L - - 816 110 31 14119i8 706 103 28 13:1 - - 706 103 28 1:311969 603 92 24 116i - - _ _ 603 92 '24 116197'0 1511 83 21 1 -- _ 511 83 21 104197'1 428 70 16 Is - - - ._ 428 70 16 836197'2 :358 60 14 74 - - - ._ 358 60 14 '741973 298 51 9 60 - - - 298 51 9 I50197'4 :247 26 8 34 - - - 247 26 8 .34

^/ Relates to estimated dlebt outstanding early :Ln January 1959. ae summarized on the preceding page.

b/ IncLudirg uuppliers' credits to public eiectoor.

L/ All service of suppliers' credits treated as amortisation

APPbENDIIII (cont.)-21 -

(C) PjrojetedDebt ServLce by, j.n Cateories

($ mnillion equivalert)

_ ~~~I:BRD Loans _ _U.S. Whjeat Loain _-Z _ -Import Bank Loan _

Debt Ouit- PasmzMu; e L_uZin Y Debt Out- _Panaents dur.nZ Yjar _ Debt OuLt- Payments during_Yearstandiing Amort- Interest Total standing Amorti- Interest Total standing Amorti- Interest TotRl

Januanr 1 zation Janutary 1 z2ation Januery 1 zation

1959 478 9 18 27 186 - - - 150 - 2 21960 469 18 22 40 186 - - - 150 - 4

1961 451 25 23 48 186 - - - 150 - 8 81962 426 30 22 52 186 - - - 150 - 8 8

19613 396 32 21 53 1",6 - - - 150 - 8 8

1964 364 33 19 52 186 - - - 150 15 7 .22

19615 331 34 18 52 1'36 . - - 135 15 6 211966 297 37 16 53 136 - - - 120 15 6 21

19607 260 36 13 49 186 3 2 5 105 15 5 :20

19618 224 30 12 42 183 6 4 10 90 15 4 19

1969 194 32 10 42 177 6 4 10 75 15 3 18197'0 162 31 9 40 l'71 6 4 10 60 15 3 18

1971 131 27 7 34 16$5 7 3 10 45 15 2 17

197'2 104 22 6 28 15,8 7 3 10 30 15 1 16

1973 82 13 4 17 151 7 3 10 15 15 15197'4 69 14 3 17 114 7 3 10 - - _

La Less ths.n $500,000

APPENDIX III (collt.) -22-

(D) Projected Debt Service by Main Categories (Continued)

($ million equivalernt)

Oer¶man Steel Credit U.S.S.R. Credits BriLtish Steel Credits Other Public Debt5e'6r _ Tu7 aWeGa,ym nbr rPti6m ents durineg Year B Ujm 0 F; daymurinig eYearstanding, Am~ii: Interest TotiL stanlding AnolITntere standing Amorti- Inrterest Tot;I standing Amorti-- Interest TotaJanuary 1 zation January 1 sation January 1 sation January 1 sation

1959 157 - - - 2514 8 2 10 74 - 2 2 339 12 8 201960 157 29 5 34 2146 13. 3 14 74 - 4 4 327 20 li 311961 128 81 15 96 235 11. 3 14 74 - 4 4 307 36 :12 481962 47 38 7 45 224 2]. 6 27 74 10 4 14 271 42 1L3 551963 9 9 2 UL 203 2.2 5 27 64 15 3 1.8 229 25 :12 371964 - - - - 181 21. 5 26 49 7 2 9 204 24 iL 351965 - - 1iS0 2]. 4 26 42 11 2 13 180 29 l0 391966 - - - - 1:38 22 3 24 31 10 2 12 151 24 8 321967 - - - - 317 23. 3 24 21 1L 1 12 127 24 7 311968 - - - - 9?6 2). 2 24 10 10 1 1.1 103 20 5 251969 - - - - '14 22 2 23 - - - - 83 18 5 231970 - - - - 153 159 1 20 - - - - 65 12 4 161971 - - - - 34 13 1 14 - - - - 53 8 3 UL1972 - - - - 421 1. 1 12 - - - - 45 5 3 81973 - - - - I0 1( c 10 - - - - 40 6 2 81974 - - - - - - - - - - - - 34 5 2 7

a/ Includes the steel credit and the further credit for various industrial projects (heavy machine building plant, coal-mining machinery plant, optical glass factoryand the development of Korba, coalfield).

bJ Includes the JapaLnese, Canadian, Iumanian, 1958 United Kingdom and 1958 Wlest German government loans,, U.S. privatte banks' credits for Air-India Internationa:L,suppliers' credits to the public sector, and sterling bonds.

C/ Less than S500,000.