*Much the greater part of this revenue comes from tobacco and alcohol.
52
THE FIRST FIVE YEAR PLAN
fiscal machinery. Taxation has also its limitations within a given political and economic structure. Turnover taxes on the scale in evidence, for instance, in the Soviet Union involve a degree of organisational control over production and internal trade which again cannot be realised in India in the near future. While, therefore, taxation policy in India must be designed to raise the level of tax revenues to meet the needs of development, it will have to be adjusted also to the economic and social framework within which development has to start.
17. According to present estimates, by the end of the Five Year Plan, the tax revenues of the Central and State Governments are likely to be about Rs. 70-80 crores; higher than in 1950-51 ; if there are unexpected receipts on account of items like export duties the increase may be of the order of Rs. 100 crores. This estimate covers the normal increases that might be expected at the existing rates of taxation as well as the estimated yields from a variety of measures like increases in the taxes on land, higher irrigation rates, death duties, betterment levies, better administration and wider coverage of sales tax, higher taxes on luxuries, etc. Some of these, it will be noticed, are taxes on capital transfers and capital gains and not strictly taxes on current income. But assuming normal conditions, the increased rates of taxation, together with these levies on capital transfers and capital gains, will only enable the level of tax revenues to be maintained at about 7 per cent of the national income even at the end of the Plan. If conditions abroad are favourable for raising larger revenue from export duties than has been assumed in our estimates, and if it is also found possible to raise direct taxation, total tax revenues could be raised by about Rs. 30 crores per annum, but the difference it would make to the above percentage would be small. Apart from this, we should emphasize that unless fiscal policy and the machinery of taxation are re-orientated so as to obtain a significantly wider coverage the tendency will be not only for tax revenues to fall as a proportion of further additions to national income but to make the sharing of the burden of development increasingly iniquitous.
II. BUDGETARY RESOURCES OF THE CENTRAL AND STATE GOVERNMENTS
Classification of sources 18. The financial resources available to a government for development can be broadly distinguished as of two kinds : (a) the savings it can make from current revenues and from the earnings of State enterprises after meeting its non-developmental expenditures, and (b) the private savings it can draw upon through loans, small savings, deposits and funds, and other miscellaneous channels. A grouping of the resources of the Central and State Governments, which follows strictly the distinction between these two categories of savings and also adheres to a definition of `net savings' corresponding to that of net investment referred to earlier, would require considerable reclassification of budgetary accounts. From the operational point of view also, such a rigid analysis has its limitations. For the purposes of our analysis here, a some-what looser grouping has therefore to be attempted.
19. The Five Year Plan treats as development expenditure not only additions to fixed capital equipment and building constructions figuring in the revenue and capital Accounts of the Central and State Governments but also initial recurring expenditures on social services,
53
ASSESSMENT OF RESOURCES
agricultural extension services, etc., which are almost invariably financed from current revenues. On the other hand, capital expenditure on items like defence is non-developmental from the point of view of the Plan. The savings of the public sector, corresponding to this definition of development, are therefore the surpluses of revenue over such consumption expenditures of the government as have been treated as non-developmental in the Plan*. As for estimates of private savings which the Government might draw upon, the net receipts from loans, small savings and other unfunded debt, deposits and funds, etc., would obviously come under this category. But there are a number of transfers within the Government budgets, from the revenue to capital accounts as well as between the capital accounts of the various federal units, some of which may represent additions to public saving and should really be included under that head. These items cannot be traced without detailed scrutiny. They are therefore apt to come under our estimate of private savings channelled into the public sector through `deposits, funds, and other miscellaneous sources'+.
Growth of public savings and capital receipts 20. Classifying in this way the budgetary resources likely to be available to the Central and State Governments over the period 1951- 56, public savings, it is estimated, will finance about Rs. 738 crores of the expenditure visualised in the Five Year Plan. Capital receipts are expected to contribute another Rs. 520 crores. The two sources will together meet about Rs. 1,258 crores of the planned outlay of Rs. 2,069 crores.
21. What these estimates imply can be seen with advantage in the light of the actuals for a past year. If we take 1950-51 as the base, public savings estimated on a comparable basis work out to about Rs. 145 crores. The estimate for public savings for the five-year period thus only about maintains on an average the level reached in the base year. The fact that no significant increases, over this level are visualised in the estimates in spite of the anticipated increase in tax revenues over the period of the Plan is explained mainly by two factors. In the first place, windfall revenues from export duties and from arrears of income tax had helped the Central Government to develop a substantial revenue surplus in 1950-51. In 1951-52 there was an even larger surplus, but the subsequent recession abroad makes the recurrence of such surpluses problematic. The maintenance of the level of public savings on an average at the level reached in 1950-51 therefore itself presumes additional revenues from other sources. Secondly, the outlay on defence has risen substantially since the base year, the budgeted provision for 1952-53 being about Rs. 215 crores as compared to the expenditure of Rs. 168 crores in 1950-51 The growth in defence expenditure is accounted for by the needs of the infant
*While expenditure on defence and administration, whether on revenue or capital account, would thus be deducted from current revenues, development expenditures in the Plan met from revenue would be excluded. In other words public savings would be equal to total current revenues minus expenditure of a non-developmental nature on revenue account also minus any non-developmental expenditures on capital account other than capital transfers which explained below, are deducted appropriately in calculating the net capital receipts of the government from the private sector.
+Net receipts under these heads are calculated after deducting capital transfers from the Government to the private sector on account of refunds of excess profits tax and income-tax deposits, loans by Government of a non-develop- mental nature, etc. Receipts under these heads by way of withdrawals from reserves are also deducted.
54
THE FIRST FIVE YEAR PLAN
services (i.e., the Navy and the Air Force) and by the large scale replacement of equipment throughout the defence services which has been found necessary. Under these heads it is at this stage difficult to visualise any substantial economies in the Plan period. There is also urgent need for establishing defence industries of key importance, though the sums that can be provided for these are at present only a small proportion of the investment needed.
22. The main improvement expected in the resources position of the Central and State Governments from the point of view of development is in respect: of capital receipts. In 1950-51, the net yield from loans, small savings, deposits and funds, and other miscellaneous sources amounted to about Rs. 77 crores; of this Rs. 16 crores was however in the nature of extraordinary receipts under state trading. Over the period of the plan the same sources are estimated to yield Rs. 520 crores, showing an improvement on an average of the order of Rs. 43 crores per annum. In 1950-51 the Central Government had no net receipts from deposits, funds, and other miscellaneous sources mainly because of large refunds of excess profits tax and income tax deposits and certain extraordinary items of payment which fell due. The revised estimates for 1951-52 and the budget estimates for 1952-53 show that the net receipts of the Centre under the same heads would amount to about Rs. 31 crores in these two years. The estimate for the Plan period also takes credit for receipts of the order of Rs. 11 crores from certain capital accretions on account of the Plan*. In addition to the above the subscriptions to government loans are expected to register substantial increases. Investment in Government securities from out of the proceeds of the newly constituted provident fund for industrial workers is estimated to yield Rs. 36 crores. As will be explained later, the absorption of securities by the market was exceptionally low in 1950-51 for much the same reasons that account for the high level of public savings in that year.
23. The financial programme as outlined here does not presume any radical changes in the machinery of taxation or in the techniques of borrowing. There is no doubt that there is considerable scope for improvement in both. Techniques of borrowing, in particular, have to be adapted so as to convey to the people the larger purposes for which the loans are being raised and to facilitate their participation in the development programme on the largest possible scale. Ways and means of checking the growth of non-developmental expenditures have also to be continuously and unremittingly pursued. To these we shall come back at a later stage.
Responsibility for raising resources : division between Centre and
States +.24. The above assessment of resources available for the Plan, in so far as it concerns the Central Government, has been made in the light of the revised estimates for 1951-52 and the budget estimates for 1952-53. In the case of the States we have retained for the present the estimates made over a year ago and have also provisionally assumed that, corresponding to certain increases in net outlay proposed by some of the State Governments, the additional
*These receipts are from land reclamation and from the development of the Andamans.
+In this chapter, Part C states have been included under the Centre, and `States' refer only to Parts A and B States and Kashmir.
55
ASSESSMENT OF RESOURCES
resources necessary would also be found by them from current revenues. Some part of these increases is of an accounting nature since they arise from inclusion of development schemes which were being implemented out of the resources of the States but had not been previously treated as such. It is clear however that a reappraisal of State finances will be necessary in the, near future, particularly in the light of the recommendations of the Finance Commission. The following table, which gives the breakdown of the estimates, for 1950- 51 as well as for the Plan period, shows the division of responsibility between the Centre and the States for raising resources as it is now visualised.
Base year Plan Period
1950-51 1951-56
Centre Parts A Total Centre Parts A Total
(including and B (including and B
Part C States and Part C States and
States) Kashmir States) Kashmir
Public Saving from
(a) Current revenues 71 51 122 160 408* 568
(b) railways . 23 .. 23 170 .. 170
Private savings absorbed
through
(a) loans from the pub-
lic. . . . -11 8 -3 36+ 79 115
(b) small savings and
other unfunded debt 42 .. 42 270 .. 270
(c) deposits, funds and
other miscellaneous
sources (net) . .. 38 38++ 90 45 135
TOTAL . 125 97 222 726 532 1258
25. According to the financial programme drawn up last year in support of the State Plans, the State Governments were in all to rake about Rs. 213 crores of additional revenue over the five years. This would now have to go up to Rs. 232 crores on account of the further addition
+Represents estimated investment in government securities from out of the provident funds of industrial workers; taking this into account provision is made in the Plan for loans and grants for industrial housing of the order of Rs. 38.5 crores.
i++ Of this Rs. 16 crores was on account of state trading through reduction in stocks. Some of the accumulaties in the Sontates is also perhaps due to delays in transfer of amounts due to the Centre.
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THE FIRST FIVE YEAR PLAN
of Rs. 19 crores by some of the States to the outlay in their Plans. Measures to be adopted in respect of about three-fourths of this amount were settled in consultation with the State Governments concerned ; the nature of the measures contemplated will be evident from the following table:
(Rs.crores)
Revenue from taxation on land (covering land revenue and
agricultural income tax) . . . 34.0
Revenue from irrigation (covering irrigation rates and
betterment levies) . . . . 29.5
Revenue from other commercial ventures of the State (i.e.,
forests, electricity and minerals) . . . 4.8
Revenue from capital transfers (i.e., from Estate Duties) . 21.3
Revenue from taxation of general commercial activity (i.e.,
Sales Tax) . . . . . . 25.5
Revenue from other miscellaneous sources (including taxes on
luxuries) . . . . . 37.5
Revenue from economies in non-development expenditure . 12.4
165.0*
26. The estimate of the total additional resources to be raised by State Governments for the implementation of the development programme was based on preliminary estimates made early in 1951 which indicated an overall deficit in the State budgets of the order of over Rs. 30 crores in the Ease year 1950-51. The End accounts Rs the year show that the budgetary deficits of State Governments were in fact much smaller. Compared to the revenues realised in 1950-51, therefore, the States would not have to raise additional resources of the order estimated earlier if expenditure not covered by the Plan under administrative as well as developmental heads like education, health, etc., were not allowed to exceed the original estimates. In practice, as will be mentioned later, the revenues of State Governments have continued to rise even above the 1950-51 level- without the measures contemplated for raising additional resources being taken on any significant scale-but non-Plan expenditures have been rising even faster with the result that the original target in regard to additional resources has to be still more or less maintained.
The borrowing programme 27. The borrowing programme of the Centre and the States involves in all raising an amount of Rs. 385 crores over five years. This includes loans, as well as small savings and other unfunded debt, but excludes possible net receipts from treasury bills and other floating debt. In 1950-51 loans, small savings and other unfunded debt yielded a net sum of only about Rs. 39 crores ; in respect of loans there was in fact a net outflow. Over the period of the Plan, investment in government securities from out of the provident funds of industrial workers is
*The need for raising the remaining Rs. 67 crores has arisen mainly out of the proposals made by some of the State Governments, subsequent to the consultations with the Commission, for raising the size of their State Plants. The upward revision in the targets of expenditure have been accepted provisionally on the condition that the resources corresponding to these would be raised by the governments concerned.
57
ASSESSMENT OF RESOURCES
expected to yield about Rs. 36 crores. The scope for government borrowing has also to be judged in the light of several other factors. During the war, when money was plentiful and the general level of liquidity high, the market was naturally more receptive to long and medium term loans. But to the extent that the holdings of long and medium terms securities at the end of the war were higher than what the community would normally have held, they were (along with the large holdings of money) part of the latent inflationary potential in the country left by the war. Since the end of the nor there has been a marked shift in favour of more liquid assets. The large scale liquidation of securities in the post-war period may therefore be regarded in a sense as part of the adjustments involved in the return to a more normal pattern of asset holdings. It is difficult to say to what extent this process has been completed or in which direction the preferences of the community might move in future, but it would appear that at least the market for short term and medium term loans is more favourable than it has been for some time.
28. In 1950-51 there were exceptional factors, following the outbreak of the Korean War, which encouraged sections of the community to move away from holdings of money to holdings of commodities. The large scale liquidation of government securities by the commercial banking system, which was a major factor in depressing the market for these securities, was a feature resulting from this movement. In that year the Central and State Governments also sold fairly large amounts from their own holdings of securities. The net absorptive capacity of the market in regard to Government loans cannot therefore be assessed with reference to 1950-51, though it is noteworthy that, even in that year, the non-banking sector of the economy did probably absorb a considerable part of the securities thrown on the market.*