 ASSESSMENT OF RESOURCES

The Five Year Plan outlined in the next chapter relates directly to the public sector but has in view a programme of development for the entire economy. In the public sector are included the development programmes of the Central and State Governments and also of the commercial enterprises owned by them*. The private sector covers the rest of the economy including corporate and cooperative institutions as well as small enterprises throughout the country in agriculture, industry, transport and finance. While the initiative for development in defined fields as well as the responsibility for coordinating the development programmes in the entire economy will the with the State, private initiative and effort have also a significant part to play in the process of development. The development expenditure in the Plan referred to as such in this Report has to be related to the resources available to the public sector, but these have also to be linked up with the needs and resources of the private sector. There is, in other words, a single pool of investible resources on which the private and the public sectors have to draw. The problem is not merely to find resources for the public sector but to enlarge progres- sively the size of the common pool and to see that the total thus available is allocated between the two sectors in terms of agreed priorities.

2. The Five Year Plan as it is now being presented involves an outlay of about Rs. 2069 crores by the Central and State Governments over the period 1951-56. On present calculations the normal revenue and capital receipts of public authorities, including loans and grants received upto now from abroad, are expected to finance about Rs. 1414 crores of this expenditure. Deficit financing in the public sector--of which more will be said later-cannot at this stage be visualised in excess of about Rs 290 crores. There is thus still left a gap of Rs. 365 crores which can be met only from external sources or, in the absence of it, by additional measures of internal taxation and borrowing or by further deficit financing.

3. It is clear that external resources are necessary in the early stages of development and that they could be a significant factor in eliminating bottlenecks and in helping to avoid dislocations which may have far-reaching consequences. In the conditions in which the country is placed today, however, a programme with relatively modest targets cannot be made inflexibly conditional on the availability of external resources. Development is a process in which once certain main lines of work have been commenced, supplementary investments have also to be undertaken. Thus there develops in stages a rate of expansion which cannot be slowed down without serious repercussions.

*Strictly speaking, public sector should cover also municipal corporations and other local authorities been possible, however, to include their development programmes in the present Five Year Plan.

ASSESSMENT OF RESOURCES

4. The outlay on development by the Central and State Governments in 1950-51, the base year for our calculations, was about Rs. 232 crores. The development expenditure in 1951-52 has been tentatively estimated at Rs. 285 crores. The budgeted outlay for the second year of the Plan is Rs. 346 crores. In 1953-54, by when the expenditure on many of the projects in hand will have reached their peak levels, the total will exceed Rs. 400 crores. If external assistance is not forthcoming to the extent necessary there will undoubtedly be scope for marginal adjustments, but a planned outlay of the order of Rs. 2069 crores over the five-year period is necessary for maintaining the rate of growth of development expenditure visual- ised by us. The need for attaining a rate of investment in this period which could form the basis of more rapid advances in the following years and lay the foundation for balanced regional development in the next planning period has been an important consideration in determining the development programme in this Plan.

5. The problem of resources is basic to the whole question of planning. It is, therefore, necessary to be clear not only as to the basis on which the Plan is built, but also about the implications of the different methods and techniques which are visualised for meeting the requirements of development in this period. The various aspects of this problem are discussed in some detail under the following heads :-

I. Taxation and public savings as a source of development finance;

II. Budgetary resources of the Central and State Governments ;

III. Deficit financing ;

IV. External resources and the problem of foreign exchange ; and

V. The problem of mobilising financial and physical resources.

I. TAXATION AND PUBLIC SAVINGS AS A SOURCE OF DEVELOPMENT FINANCE

Magnitute of savings in the economy

6. Though the outlay in the Plan itself relates directly to developmental expenditure by public authorities, the problem of resources for meeting this outlay has to be viewed, as already mentioned, in a wider setting. For the country as a whole, the resources that can be applied to development depend on the level of aggregate output that can be attained and on the consumption requirements of the community. The larger the output and the lower the consumption requirements, the greater would be the productive resources available for building up the human and material resources of the country for the future. The precise division of responsibility for development, between the public and the private sectors is mainly a question of internal arrangement depending on the objectives in view and what seems to the community the most effective and acceptable means of achieving them ; once this is agreed upon for the period of the Plan, appropriate measures could and have to be devised for the necessary division of resources. But an assessment of the total resources available to the country as a whole for development is necessary for analysing the full implications of the arrangements proposed for financing the Plan in the public sector.

THE FIRST FIVE YEAR PLAN

7. The data available in India for an analysis of output and consumption requirements by different sectors are altogether inadequate. There is only scattered information which might be pieced together for forming an idea of the nature of the problem and of the orders of magnitude involved. Some rough estimates have been attempted for this purpose in the Appendix on `National Budgeting and the Plan'. These estimates place India's national income in 1950-51 at around Rs. 9000 crores. Of this, the savings available for net investment were probably not much more than Rs. 450 crores. The Five Year Plan is roughly estimated to raise the national product by about Rs. 1000 crores by the end of the five years. Over one half of this increase will be absorbed by the needs of the increase in the population in the meanwhile. It is clear, therefore, that if capital formation from out of domestic resources is raised by 50 per cent in the course of this period i.e., from about Rs. 450 crores in 1950-51 to Rs. 675 crores by 1955-56, it would in effect be taking away about half of what is left over from the increase in the national product for raising standards of living. But raising capital formation from domestic resources by 50 per cent is not an excessively high target in view of the considerations we have set out in Chapter I. As a proportion of the total increase in national output by 1955-56 the increase in resources devoted to investment would be only about 20 per cent. It should be emphasised that this proportion of reinvestment from the additional output, which is involved in reaching the target, will be necessary to sustain the rate of development we visualise in this five year period.

8. In comparing the total domestic resources that might thus be available-say about Rs. 2700 to 2800 crores over the five year period- with the development expenditure in the public sector proposed in the Plan, it must be borne in mind that net investment is a restricted concept which covers, in the main, only net additions to capital equipment and building construction. The outlay of Rs. 2069 crores by public authorities in the five year period will include not only such additions but also expenditures of a recurring nature on agricultural extension services, health, education, community projects, etc., which may amount to about Rs. 400 crores over the period of the Plan. The net investment in the programme, comparable to the estimate of savings referred to above, will therefore be of the order of Rs. 1600-1700 crores, which means that the Plan would require channelling through the public sector about 60 per cent of the savings of the community in this period.

9. The releases from India's sterling balances together with other external resources that may become available in this period, will reduce the share of savings to be channelled through the public sector to about 50 per cent. Normally, even half of the investible resources of a country being diverted in this way would be considered a high proportion. But this we regard as inevitable in India at this stage considering the urgent need for investment in spheres like irrigation, power and transport which do not normally attract private agencies but which are pre-requisites to the further expansion of the economy. Moreover, the States is not as it were drawing from a given capital fund ; it is in a position, through fiscal and other measures, to regulate consumption standards within limits and thus release for investment resources which might not otherwise have been forthcoming. As mentioned in an earlier chapter, enlargement of public savings through taxation and through the earnings of public enterprises is one of the major means open in the present state of our organisation to raise significantly the level of net savings in the country.

ASSESSMENT OF RESOURCES

Narrow coverage of tax revenues

10. India's total tax revenue in 1950-51 (including the tax revenues of both the Central and the State Governments) amounted to a little over Rs. 625 crores, nearly Rs. 50 crores of which was on account of export duties. As a proportion of national income i.e., about 7 per cent, this level of revenue represents one of the lowest in the world. Taking the revenues of the central governments alone (that is, excluding revenues of local authorities in all cases and of State governments in the case of federations), the proportion of tax revenue to national income is as high as 35 per cent in the United Kingdom, 22 per cent in Australia, 23 per cent in the United States and in Japan, 27 per cent in New Zealand, 19 per cent in Canada, and 20 per cent even in Ceylon. Too much should not be read into this comparison as yields from taxation depend not only on the facilities for collection afforded by particular structural factors (as when corporate incomes are a large proportion of the national income or foreign trade accounts for a considerable part of the transactions) but also on the absolute levels of per capita income. Much also depends on the importance of monetary transactions in the economy ; when a large part of the production is raised by the labour of peasant families and directly consumed by them, the scope for organising taxation would be obviously smaller than if the operations were being conducted through markets and result in monetary transactions. Yet the comparison has its significance, for if the proportion of the national income covered by taxation is as small as it is in India today the public sector cannot, in the immediate future, increase its savings to any significant extent and thus either raise the level of investment in the economy as a whole or provide social services on an adequate scale.

11. A striking feature of the present structure of taxation in India is the relatively narrow range of population affected by it to any appreciable extent. About 28 per cent of the total tax revenue comes from direct taxation* which directly affects only about half of 1 per cent of the working force in the country estimated at 133 million in 1948-49. Another 17 per cent is accounted for by import duties, a considerable part of which is derived from taxation of commodities like motor vehicles, motor spirit and oils, high-quality tobacco, silk and silk manufactures, liquors and wines, etc., which affect but a relatively small section of the population. A large proportion of the excise duties on tobacco and cloth, which yield about 8 per cent of the total tax revenue, is also probably paid by the limited number of consumers who use the better varieties. Given the structure of incomes in the country it is of course inevitable that the coverage of direct taxation should be narrow ; it is also right that an element of progression should be introduced through higher taxes on commodities which, relatively to the general pattern of consumption of the community, may be regarded as luxuries. In fact, ways and means for raising the revenue from these sources must be constantly explored. But if as much as one-third or more of total tax revenue is derived from certain limited strata of society it implies that the burden of taxation spread over the rest of the community is correspondingly lighter and that relatively small increases in the rates of taxation on the latter will help to add significantly to total tax revenue.

*Whether land revenue is a direct or an indirect tax is a somewhat controversial point. For the purpose of the calculation here it has been treated as an indirect tax.

THE FIRST FIVE YEAR PLAN

12. In this connection it may be recalled that, in countries which are largely agricultural, and in which transactions involving money are a smaller proportion than in more industrialised systems, land has been traditionally an important basis for taxation. In Japan, when its programme of industrialisation was being initiated in the 1870's, taxation of land yielded as much as 13 per cent of the value of gross agricultural produce ; even thirty years later, when other forms of taxation had developed, land tax accounted for nearly half of the total tax revenue of the government. Thus, in a sense, it was taxation of land which in Japan provided the initial resources required for development. In India also land taxation was high before the last War and, in the depression years, it weighed heavily on the farmer. In the last decade prices have moved in favour of primary commodities and, since in most parts of the country land revenue has not been raised upwards, the burden of this tax has been considerably lightened. It is reflected partly in the fact that land revenue contributes at present only about 8 per cent of the total tax revenue as compared to about 25 per cent in 1939. The rise in agricultural prices has however benefited significantly only producers with sufficiently large marketable surpluses ; it is also true that costs of production have gone up in many cases. The improvement in prices cannot therefore by itself be made the basis for a substantial upward revision of the tax on land. But within the context of a development programme designed as much to raise agricultural prosperity as to promote all-round economic development, a programme towards which all sections of the community have to contribute to the maximum extent possible, there is a case for moderate upward revision of land revenue. At the moment the capacity of the agricultural sector to bear further additions is limited, but this will no doubt improve as the programme of development gets into swing and, with additional irrigation and other facilities, agricultural productivity is stepped up. Betterment levies designed to draw into the public exchequer a proportion of the capital gains that accrue to private parties as a result of development are a recognised device Or strengthening public savings. It is the essence of rapid development that, consistently with the need to raise the standards of living of the poorer sections of the community, as much of the additional incomes generated should be ploughed back into the system by way of investment for still more rapid increases in output.

13. Apart from the question of legal coverage, there is the question of actual coverage which is a function of the administrative arrangements for securing that those liable to tax do in fact pay. In India it would appear that there are considerable leakages on this account. The following table shows estimates of income assessed to income and super taxes as well as the amounts paid by way of these taxes in the various income ranges in 1950-51.

            
                            No. of Assessees    Total income   Yield of income
             Income range  (thousands)       assessed to tax*  and super taxes 
             (rupees)                         (Rs. crores)     (Rs. crores)
        
             0-5,000   .    .    236.8          81.0           2.3
        
             5,000-10,000   .    134.4          93.2           5.1
        
             10,000-40,000  .     86.9          152.9         24.9
        
             40,000-100,000  .    10.1          59.9          23.3
        
             100,000 and over .    4.2          187.7         99.4
        
                                 472.4+         574.7         155.0

*Income assessed to tax is after allowing for depreciation allowances of business enterprises, earned income relief, etc.

+The number of assessees on the register at present is about 850,000. Part of this increase is accounted for by the inclusion of assessees in Part B States, but there has also been considerable improvement in the reporting of assessable incomes in the lower ranges.

ASSESSMENT OF RESOURCES

It will be seen from this that, though there is undoubtedly a strong case on grounds of equity for making the higher income groups bear a larger share of the burden of development, fairly large proportions of the incomes in the higher ranges, in so far as they are covered by the administrative machinery, are absorbed by direct taxation even at existing rates. Over a wide range, there is, however., evasion of taxation. The reports of the Income Tax Investigation Commission show that such evasion takes place in the middle as well as higher income ranges. The fact that the corporate form of organisation is confined to a limited sector of business renders the problem of checking evasion difficult, particularly in regard to trading operations. Even where the corporate form exists, the close inter-locking of managerial and other controlling interests in industry, trade and finance offers to the unscrupulous opportunities for evasion. If such evasions could be stopped, it might make a considerable addition to the receipts under direct taxation.

14. Where the scope for direct taxation is limited, the incomes of the greater part of the population can be reached only through taxation of commodities. As mentioned earlier, an element of progression can be introduced through higher taxes on commodities which, relatively to the general pattern of consumption in the community, may be regarded as luxuries. In the United Kingdom direct taxes on incomes cover a large sector and the need to rely on indirect taxation is correspondingly less ; import and excise duties, however, are still heavy enough to account for a sixth of the total personal consumption expenditure in the country.* In India, apart from these two sources, it is clear that increasing reliance will have to be placed on sales taxes. Through sales taxes can be reached commodities not covered by either import or excise duties ; they have also the advantage that they can be adjusted to particular regional conditions. The problem here is again one of administration ; it has to be ensured that those liable to tax do in fact pay so that progressively the legal coverage of sales taxes could also be extended to cover a larger range of trading activity.

15. The narrow coverage of taxation is responsible to a great extent for the relatively small proportion of the national income absorbed by the government in the form of tax revenues. It also accounts partly for the existing level of taxation appearing to be heavy. Both ways it restricts the extent of public savings. The narrow coverage of exiting taxation has the further indirect effect of increasing the dangers of deficit financing. For the smaller the proportion of the additional incomes mopped up by taxation, the greater would tend to be the pressure of demand on output arising from a given measure of deficit financing.

Scope for higher taxation

16. These are matters which cannot be overlooked in framing a programme of development, especially when it is clear that with net savings of about 5 per cent of the national income the rate of progress that can be attained will be extremely limited. In the initial stages of planning, however, the size of the programme as well as the sources of finance will have to be fixed keeping in view what can be achieved through existing institutions and the available administrative and