DEVELOPMENT PERFORMANCE
India began the process of planned development nearly thirty years ago with the start of the First Five Year Plan in April, 1951. The central purpose of planning was identified as that of initiating "a process of development which will raise living standards and open out to the people new opportunities for a richer and more varied life" (First Five Year Plan). The manner in which this purpose has been translated into specific objectives has varied from Plan to Plan. However, in a broad sense, the basic objectives of planning in India can be grouped under four heads: growth, modernisation, self-reliance and social justice. In one form or another but possibly with varying emphasis these objectives reflect the views of all sections of the population and represent a national consensus on the aims of planning.
GROWTH 1.2 Betwen 1950-51 and 1978-79 the underlying trend rate of growth of national income was 3.5 per cent, of agricultural production 2.7 per cent and of industrial production 6.1 per cent. In per capita terms, income has grown at a trend rate of 1.3 per cent, which, after allow- ing for the rising share of investment in national income, has meant a modest 1.1 per cent per annum rise in per capita consumption.
1.3 The growth of the economy during the planning era has to be judged in the context of the prolonged period of stagnation that preceded Independence. Judging by expert estimates of the national income of undivided India, the trend growth rate between 1900-01 and 1945-46 was 1.2 per cent for national income, about 0.3 per cent for agricultural production and 2.0 per cent for industrial production. One of the most significant achievements of our development policy after. Independence has been the fact that this handicap of stagnation was overcome and the process of growth initiated.
1.4 The growth performance of the economy in different plan periods is presented in Annexure 1.1. These data show that except for the Third Plan where, in the last year of the Plan, the economy was badly hit by a severe drought, the rate of growth of national income has ranged between 3 and 5 per cent which is a significant achievement, However, except in the First and Fifth Plan, the actual growth rates have been less than the higher targets specified in the Plans: -
Table 1.1
Targetted and Actual Growth Rates
(Percentages)
Sl. Plan Target Actuals Growth rate for
No.
(0) (1) (2) (3) (4)
1 First Plan 2.1 3.6 national income
2 Second Plan 4.5 4.0 national income
3 Third Plan 5.6 2.2 national income
4 Fourth Plan 5.7 3.3 net domestic
product.
5 Fifth Plan 4.4 5.2 gross domestic
product.
NOTE:-Targets were generally specified in terms of not national income/product upto the Fifth Plan in which for the first time, targets were specified in terms of gross domestic product.
The shortfall in the growth in national income has of course meant a corresponding shortfall in targetted levels of per capita income.
1.5 The growth of national income depends on a complex interaction of large number of variables, not all of which are amenable to government control. However, it is well known that the quantum of investment and the productivity of this investment, as measured in a simplified model by the capital output ratio, exercise an important influence on the overall growth rate. An approximate and first-order explanation for the gap between target and actual levels of income growth can be found in a comparison of the trends in income and investment. The main conclusion suggested by such a comparison is that shortfalls (or excesses) in income growth are larger than what would follow from the shortfalls (or excesses) in investment. The main reason for this is that realised capital output ratios, particularly during the Third and Fourth Plan periods, have been much higher than anticipated. One further point in the comparison that is worth noting is that total investment targets have, by and large, been met or exceeded in recent plans. However, in the Fifth Plan period the excess was due largely to higher levels of private sector investment and stock accumulation in the public sector. The
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link between investment and income is not a simple one and it operates not merely through the capital output ratio but also in the reverse direction in that shortfalls in income-generation via their impact on domestic savings can lead to a shortfall in investment.
1.6 The deficiency in investment and the higher capital-output ratios are only the immediate arithmetical explanations for the shortfalls in the growth targets. A further analysis is 'necessary to identify the factors which would account for the departures from forecasts and targets for these two key magnitudes. Some part of the difference is attributable to a degree of unrealism in the forecasts; but in the case of investment and capital productivity, the explanation lies to a considerable extent in deficiencies in effective implementation of plans.
1.7 The trends in the rates of gross savings and investment are presented in Annexure 1.2. These data bring out the very substantial rise in the rate of gross investment, a rise which came in two spurts: the first during the first decade of planning and the second between 1972-73 and 1978-79 by which time the rate rose to 23.2 per cent. Between 1960-61 and 1972-73 the rate fluctuated around 17 per cent and it is in this period that shortfalls relative to the rates specified in the various plan perspectives are most substantial. The high rate of capital formation that we have now achieved is financed largely by domestic savings. The most buoyant element in domestic savings has -been the savings of the household sector; public sector and corporate savings have grown much more slowly than anticipated.
1.8 In a mixed economy, the control of the government on the overall level of investment is limited and what the Plans can regulate more effectively is the level of public investment. According to national account, statistics, gross fixed investment 'In the public sector as a percentage of gross domestic product rose from 2.3 per cent in 1950-51 to 8.5 per cent by the end of the Third Plan. Thereafter the rate declined sharply for several years and started rising only in recent years to reach 9.2 per cent in 1978-79. The level of public investment is determined largely by plan expenditure which has generally exceeded plan provision in nominal terms but fallen short in real terms. The main reason for this is the fact that there is no built-in mechanism to protect public sector resources and investment against inflation.
1.9 The impact of public investment on the over all pace of expansion is profound. In principle, the public sector competes for savings with the private sector so that any expansion of public investment will reduce private investment to some extent. In practice, the modalities for funding investments are so different in the two sectors that such a competition for saving is manifest in only a limited way. In fact, a high level of public investment in infrastructure and key industries is a pre-condition for development in the private sector. Moreover many private enterprises depend on the orders which flow from public activity and their growth and profitability depend directly on the expansion in public sector investment.
1.10 The low rate of public investment (as a percentage of GDP) during the Annual Plans (1966-67 to 1968-69) and the Fourth Plan Period (1969-70 to 1973-74) is probably a consequence of the preoccupation of public policies with short term stablisation in the wake of acute inflationary pressures in the mid sixties and early seventies, the uncertain outlook for India's external payments as also the slow growth in public sector savings. Apart from budgetary surpluses a major element affecting public savings; is the generation of surpluses in public enterprises. It would have been reasonable to expect that, with the passage of time, a growing proportion of the funds required for investment in public sector industry, power, railways, telecommunications, etc. would have been found from the internal resources of the investing enterprises. But this expectation has not been fulfilled and the rate of return in a majority of these enterprises is well below target. The deficiency is partly attributable to the pricing policies of the government but also partly to managerial shortcomings.
1.11 The analysis presented above leads to the conclusion that the deficiency in investment which led to a shortfall in growth targets is a consequence of our inability to ensure adequate growth in public investment. The main reason for this failure appears to lie in the inadequate return from past investment by the public sector in industry, power, irrigation and transport and the shortfall in targetted levels of budgetary savings.
1.12 The impact of the shortfall in the quantum of investment on the growth rate has been compounded by the' fact that actual capital- output ratios have turned out to be higher than anticipated, parti- cularly in recent years. The calculation of capital output ratios is fraught with many statistical hazards because of weather induced fluctuations in output, differential rates of inflation for capital goods and output in general, changing lag patterns, etc. However, an approximate indication of trends is provided by the following estimates for different plan periods:-
Table 1.2
Incremental Gross Capital Output Ratios
(at 1970-71 prices.)
Capital/
Sl. Plan Period output
No. Ratios
(0) (1) (2) (3)
1 First Plan 51-52 to 55-56 3.2
2 Second Plan 56-57 to 60-61 4.1
3 Third Plan 61-62 to 65-66 5.4
4 Annual Plans 66-67 to 68-69 4.9
5 Fourth Plan 69-70 to 73-74 5.7
6 Fifth Plan 74-75 to 78-79 3.9
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These estimates suggest a worsening of the capital-output ratios in, later plans though the most recent period shows some improvement over the previous one. A rough sector-wise analysis shows that the deterioration in the ratio in the second half of the planning era is particularly sharp in mining and manufacturing.
1.13 The deterioration in the capital-output ratio and its difference relative to targets can be attributed to a variety of factors. There are some which are a consequence of the very process of development like changes in the composition of investment (e.g. from engineering to chemical industries) and rising real costs in certain sectors like irrigation and mineral development, where the easier opportunities were exploited first. However, there are others which were avoidable of which the most important seems to be the inefficiency in the utilisation of assets. In critical infrastructural sectors like power and railways the gains in efficiency since the mid-sixties have been minimal (except in some years) and there has, in fact, been a decline in efficiency in recent years. In industry also capacity utilisation rates have declined in recent years. One reason for the low levels of capacity utilisation lies in the lack of adequate synchronisation in the implementation of inter-linked projects.
1.14 The growth in national income is determined by trends in agricultural and industrial production which are indicated in the data presented in Annexure 1.1. The growth rates of agriculture achieved during the planning periods are a substantial improvement on historical trends. These growth rates however are averages which conceal substantial year to, year variations caused mostly by droughts. The data on incidence of droughts since 1951 presented in Annexure 1.3 suggest some tendency towards a worsening of weather conditions over the years, though with reference to climate, this is too short a period for arriving at conclusions about long-term trends. The very fact that despite this worsening the tempo of agricultural advance has been maintained is, in itself, a major achievement. The principal problems from the point of view of growth are (a) the uneven rate of agricultural progress in various regions leading to considerable regional disparities in the level and pace of development, (b) the wide amplitude of yearly fluctuations in agricultural production, (c) the stagnation in the production of several important crops like pulses and oilseeds, (d) the need for technologies, services and public policies that can help ecologically disadvantaged regions and also promote greater labour absorption and (e) the inadequacy of the institutional framework for enhancing the productivity of small farmers and for producer oriented marketing.
1.15 The five-fold expansion in industrial production over the planning period is very substantial. However, there is a distinct decline in the pace of industrial expansion in the second half of the period. In India, the impetus for industrialisation has had to come from the domestic market. In the first phase of development there were many relatively easy opportunities for import-substitution and industrial production could grow faster than the growth in demand. As the easier opportunities were exploited, the low rate of expansion of domestic demand increasingly imposed a constraint which was mitigated only to a limited extent by export markets even though there is evidence that we did not fully exploit the available export potential. Moreover, the pattern of income distribution and the rate of economic growth was such that domestic markets for manufactured consumer goods could not grow very rapidly. In more recent years the difficulties have been further compounded by critical shortages of power and transport facilities.
1.16 The growth of national income and of agricultural and industrial production has tended to fluctuate greatly from year to year as is indicated in the data in Annexure 1.4. The reasons for this vari- ability lie partly in the impact of droughts on agricultural production, power generation and industrial output and the subsequent consequences in the form of inflation and an erosion of public resources. An unstable growth rate affects the average level of performance not just arithmetically but also through the effects of instability on the distribution of income, price expectations, the motivation to invest, innovate and take risks and on the volume of public savings.
1.17 A summary assessment of the growth performance of the Indian economy over the planning period would be that it improved substantially on past performance but was generally less than what was targetted and more unstable than that what is desirable. Some part of the shortfall and much of the instability can be attributed to the weather. But the gap between performance and promise is also due to our inability to maintain public investment at targetted levels and deficiencies in the management and utilisation of assets.
MODERNISATION 1.18 The term 'modernisation' connotes a variety of structural and institutional changes in the framework of economic activity. A shift in the sectoral composition of production, diversification of activi- ties, an advancement of technology and institutional innovations have all been part of the drive to change a feudal and colonial economy into a modern and independent entity.
1.19 The composition of national income has changed steadily over the planning period. The share of mining, manufacturing, construction and productive infrastructure has increased from 18.8 per cent in 1950-51 to 29.9 per cent in 1978-79. The more detailed data presented in Annexure 1.5 show that the shift towards these sectors was most substantial upto the end of the Third Plan period. In the later period the shift away from agriculture is somewhat smaller and accounted for to a greater extent by a rise in the share of the services sector.
1.20 The main component in the drive for structural diversification has been the effort to promote industrial growth and diversification. This effort commenced effectively with the Second Plan which. along
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with the Industrial Policy Resolution of 1956, articulated-explicitly the objective of rapid industrialisation. Apart from rapid growth this strategy involved certain other key components viz. a shift in the industrial structure towards industries producing basic materials and capital goods and the growth of the public sector in industry.
1.21 At Independence we inherited an industrial structure that was restricted to a few industries like textiles and sugar. The first steel plant had been set up and there was some limited development of engineering in railway workshops and assembly plants. The drive to diversify this structure, a drive linked to the search for self- reliance, has been the keynote of the industrial strategy of our plans. The extent of change brought about by this drive is indicated in Annexure 1.6. As these data show the relative share in industrial production of the traditional manufacturing sectors like food and textiles has declined and that of new sectors like chemicals and engineering has increased very substantially. In terms of sophistication of technology and the range of goods manufactured an extensive degree of industrial diversification has been achieved.
1.22 The organisation of industry has also undergone a major change with the development of the public sector. Between 1960-61 and 1977- 78, the share of the public sector in the value added in mining and organised manufacturing grew from 8.1 per cent to 28.9 per cent. The development of the public sector has been the principal element in our drive for industrial diversification and in industries like steel, non-ferrous metals, petroleum, fertilisers, petrochemicals and heavy engineering, public sector units play a dominant role.
1.23 The industrial policy of the Government accepted the important role of the private sector and an elaborate network of institution has been established to support it and to regulate its activities. A major component of the support system is the network of development banking institutions which have been established to finance private investment in industry. The cumulative disbursements of these institutions amounted to over Rs. 5,000 crores by March, 1979 of which over 80 per cent was disbursed in the last ten years. Apart from these development banks, the government has set up a variety of institutions to assist in the provision of infrastructure, raw material supply, marketing and technology development. Small scale industries and artisans have also been protected through product reservations and fiscal concessions. The regulatory framework for controlling the pattern of private industrial investment was set up in the early years of the planning era with the Industries (Development and Regulation) Act and elaborated later through the Monopolies and Restrictive Trade Practices Act and other measures. The manner In which these regulatory functions have been exercised has been reviewed from time to time and appropriate changes made. The institutional framework for supporting and regulating private industry is by no means perfect. The essential point, however, is that a variety of institutions and agencies have been established and have succeeded in stimulating the development of new industrial activities, new centres of industry and new entrepreneurs. But their success in these matters is less than what we sought and hence there is a need for adapting and elaborating both the support system and the regulatory framework to suit the fast changing needs of a diversified industrial economy.