POLICY FRAMEWORK
The Plan is primarily a set of consistent and feasible investment programmes designed to achieve the targets of output and generation of surpluses for development in different sectors of the economy; but in order to ensure that the programmes move as scheduled and to bring about the requisite direction and effort in the wideranging economic activities of the people, corporate and non-corporate entitles and government machinery itself, it is necessary to indicate the framework of policies affecting these activities its an integral part of the Plan. The success of the Plan depends on many factors among which the choice of the correct policy framework must be rated as crucial
7.2 Such a policy framework has to embrace mobilisation of savings, supply and demand management, measures for improving the performance of the public sector and adoption of specific steps required for the attainment of the objectives of the Plan in different sectors of the economy: accelerated growth in agriculture, pursuit of a well coordinated energy policy aiming at reduced dependence on imported oil, promotion of employment including self-employment, reduction of regional disparities, protection of environment and ecological balance, family planning and welfare and so on. An attempt Is made in this Chapter to indicate the underlying assumptions of the Plan in respect of some of these matters and the kind of policy measures which will need to be adopted from time to time. A more elaborate treatment of the issues involved is given in the relevant Chapters of the Plan.
GROWTH WITH STABILITY 7.3 A major task of economic policy in the Sixth Plan is to create the necessary conditions for the mobilisation of resources for development in a noninflationary manner. The control of inflation and generation of stable price expectations are crucial for a successful implementation of the Plan. However, anti-inflationary policies must be so devised as to facilitate basic structural changes which are essential for a progressive increase in the country's productive potential. This is by no means an easy task even under normal conditions. It is rendered all the more difficult when the international environment is highly inflationary, the outlook for the country's terms of trade and external payments is unfavourable and there are bottle-necks in certain critical domestic sectors (like power, coal, rail transport) which fan inflationary expectations and can be overcome only gradually. In the background of such difficult external and internal conditions, the rate of inflation can be reduced only gradually. A great deal of ingenuity and imagination will be needed to devise effective economic policies to cope with inflationary pressures.
7.4 Sensible demand management policies will continue to be an important element of an effective package of fanti-inflationary polices. Fiscal and monetary policies will have to be so designed as to prevent an excessive growth or money supply. Due attention will have to be paid to the proper phasing of investments so that imllauonary pressures are not accentuated. It demand management policies are not to hurt the country's longer term growth prospects, major emphasis must be laid on curbing the growth of conspicuous consumption, preventing diversion of investable resources into low priority activities and on promoting savings so that investment requirements of acceierated growth can be financed in a non- inflationary manner. Thus fiscal and monetary policies will need to provide positive encouragement to savings, particularly to savings in the form of assets which are under social control.
7.5 In Indian conditions, agricultural prices are the kingpin of the price structure. Thus fluctuations in agricultural output can give rise to a price, spiral which is not easily controlled by demand management policies once it gets started. In the long run, an in- crease in agricultural production and a reduction in the amplitude of fluctuations will no doubt contribute to greater stability of the price level. In the short run, the effects, of fluctuations in weather conditions on the price level can be moderated if adequate buffer stocks of important agricultural products like foodgrains, cotton, and sugar are built up and these are accompanied by an effective system of public distribution of essential commodities.
7.6 Recent experience shows that bottlenecks in certain critical sectors like power and transport can have a significant bullish effect on price expectations. These factors, together with the inevitable adjustments in prices demanded by an era of rising energy costs bring out the growing importance of structural factors in generating inflationary pressures. To this extent, inflation has acquired a structural character. Thus, in any viable anti-inflationary strategy, adequate emphasis on supply management-involving both fuiler utilisation of existing capacities and growth of these capacities over time-must go hand in hand with demand management. Indeed, in a situation in
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which India is faced with a sharp deterioration in her terms of trade a significant increase in productivity, both in agriculture and industry, is essential for maintaining a reasonable degree of price stability. Such an increase in productivity can materialise only in the framework of an expanding economy.
MOBILISATION OF RESOURCES 7.7 The size of the Plan, its scheme of financing, the pattern of allocation of resources, the composition of output and the physical targets for various sectors including infrastructure etc. have been arrived at keeping in view the objective of accelerated growth white Maintaining a reasonable balance between aggregate demand and supply of essential goods and services, important raw materials and other key inputs. The implementation of the Plan according to schedule and the realisation of the targets in different sectors is, therefore, of crucial importance from the point of view of ensuring relative price stability. The policy measures that need to be adopted in different areas are indicated below.
Fiscal Policy 7.8 The scheme of financing the Plan, which is described in detail in Chapter 5, has been so designed as to be essentially non-inflatonary in character. It calls for additional resource mobilisation of Rs. 21,302 crores by the Central and State Governments and their enterprises while deficit financing is proposed to be restricted to Rs. 5,000 crores.
7.9 As a result of progressive increases in tax rates, taxation expresed as a percentage of the country's national income now stands at 20 per cent. There is thus only a limited scope for raising additional resources through taxation. In the field of direct, taxes, the possibilities of raising additional resources through income tax, corporation tax and wealth tax are somewhat limited. There is need to check tax evasion through a strengthening of the administrative machinery for tax collection, plugging the loopholes in the tax laws and also through an imaginative adjustment of tax policy so as to reduce the incentive as well as scope for such evasion.
7.10 Direct taxes on agriculture at present constitute less than 1 per cent of the total agricultural income. Land revenue, which is the principal direct tax on agriculture, is generally a flat rate levy and, consequently, regressive in character. Fixation of minimum support and procurement prices for major agricultural crops and provision of various inputs such as fertilisers, irrigation and electricity a, subsidised or concessional rates have helped raise agricultural in-comes, particularly of large farmers. It is, there- fore, necessary to consider measures for raising additional resources from the agricultural sector and introducing a measures of progressivity in agricultural taxation. Care should, however, be taken to ensure that this does not in any way affect the incentives to increase production and Productivity.
7.11 The resource base of the Indian fiscal system has been considerably eroded, among other things, due to the inability of the public sector enterprises to generate adequate resources for the expansion of public sector investment. In the case of Central Governments industrial and commercial enterprises which accounted for an investment of over Rs. 15,600 crores at the end of March, 1979 the projections made for the Plan period on the basis of 1979-80 pricing policies imply a rate of return on capital employed of about 8 per cent. This should be raised to at least 10 per cent by the end of the Plan period. For this purpose, it would be necessary to improve management increase capacity utilisation, reduce inventories and adopt appropriate pricing policies. The Railways and Posts and Telegraphs are also expected to raise substantial additional resources.
7.12 In the States, the Electricity Boards are incurring huge losses. In the case of irrigation,the gross receipts are not sufficient to cover even the working expenses. Most of the State Road Transport Corporations are also Making losses. It would be necessary for these undertakings to improve their financial performance through a revision of tariffs, water charges and taxes and other suitable measures,
7.13 Another area which offers scope for contribution to the Plan resources is reduction of subsidies by both the Centre and the States. The central Government has already reduced the net burden of fertiliser subsidy by increasing its prices. Further, while increasing the procurement prices of rice and other kharif cereals, the Central Government has also simultaneously decided to increase their issue prices to avoid additional subsidy. It is recognised that it may not be, possible to eliminate altogether the subsidies that exist at present. Nevertheless a significant reduction in subsidies from the level budgeted for 1980-81 is necessary to raise the required order of resources for the Plan.
7.14 It will also be necessary for the Central and State Governments to take measures to improve tax collections, curb tax evasion and observe strict fiscal discipline. Severe restraints will have to be imposed on the growth of non-Plan and unproductive expenditure. In particular, there is no basis for the assumption that every item of non-Plan expenditure should automatically register growth at a certain minimum rate every year.
7.15 The possibilities of mobilising local resources for local use need to be fully explored. Block level committees and village panchayats could be given powers to raise specified resources, including land revenue, for deployment oil local development schemes. The experience of some States demonstrates the usefulness of market cesses, for instance, in mobilising additional resources. In small towns and metropolitan areas also, local authorities have not fully tapped the resources through appropriate means available to them. Rent control and the consequent low valuation of properties, have the effect of eroding the tax base of local authorities they in turn depend for resources for local programmes of development and improvement on the State Governments. The question of municipal finance needs to be reviewed in all its aspects.
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1.16 Finally, it would be necessary to adopt further measures-fiscal, mometary and others-to increase savings. In so far as this contributes to the increase in financial savings in the form of bank deposits, life insurance premia, and contribution to provident funds, there would be an increased flow of resources for the public sector Plan through market borrowings an increase in small savings and provident fund accumulations of Government employees would flow directly to the public sector.
7.17 Studies in the Planning Commission indicate that the Indian fiscal system does not have adequate built-in elasticity to generate additional resources automatically for financing higher project costs in the wake of inflation. If therefore, prices continue to rise, leading thereby to a arise in project costs, the additional resource mobilisation in nominal terms may have to be higher than indicated above if the real size of the Plan is to be protected. Any resort in such a situation to an increase in deficit financing to cover the gap between the desired level of Plan outlay and available resources will have to be scrupulously avoided as this would accentuate inflationary trends and create distortions in the structure of the Plan.
Monetary and Credit Policies 7.18 Money supply increased by over 13 per cent in 1979-80 (after adjustment for the change in the classification of demand and time deposits). This order of increase in money supply in the context of a decline in both agricultural and industrial production was an important factor contributing to the price rise in that year. Its impact was all the more severe as it came over and above the substantial increase in money supply that had taken place in the preceding years. The rate of growth of money supply has, however decelerated in 1980-81 and this has helped materially in restraining the price rise in the last few months.
7.19 Monetary and credit policies, while aiding the process of economic and social development in line with the priorities of the Plan, have to be so designed as to help maintain a balance between the aggregate demand and supply of goods and services. For this purpose, it would be necessary to ensure that the growth of money supply over the Plan period bears a reasonable relationship with the increase in national income.
7.20 This would require coordination of fiscal, monetary and credit policies so that deficit financing by the Government, credit to public agencies or agencies designated by the Government for purchase of foodgrains and other commodities as well as credit to the commercial sector taken together do not lead to an excessive increase in money supply. The anticipated deficit in the balance of payments would provide, some cushion for monetary growth. On the other hand, food credit, which has declined since 1979-80 as a result of the reduction in food stocks, may he expected to go up with the rebuilding of food stocks, Procurement of other commodities under price support operations or for the purpose of public distribution would add to the requirements of credit. Proper planning in regard to the deployment of monetary and credit resources is, therefore, of utmost importance.
7.21 Credit policy is being reoriented to meet increasingly the needs of the poorer and weaker sections of the community in order to increase their productive capacity. It has been decided to increase the proportion of advances to the priority sectors, comprising agriculture, small-scale industry retail trade and small business, professional and selfemployed persons etc., from 33 1/3 per cent of total bank advances in 1979-80 to 40 per cent by 1985. Further out of the total advances to the priority sectors, at least 40 per cent will be extended to the agricultural sector. To ensure a larger flow of funds to the weaker sections, separate targets are to be fixed for them-within the priority sector lending for agriculture and small- scale industries, which account for a predominant share' of the total priority sector lending.
7.22 The monetary and credit trends would need to be monitored closely and may be reviewed periodically with a view to determining whether any corrective measures are needed. The level and pattern of interest rates will also need to be kept under constant review in the light of the evolving economic trends. There is evidence to suggest that savings in the form of deposits With financial institutions and certain other types of financial assets are responsive to changes in the rates of interest. Interest rate policy can thus be effectively employed for augmenting savings, in addition to its use in the regulation of credit expansion by increasing the cost of inventories and speculative hoarding. The interest rates must also reflect the relative scarcity of capital and the need to promote labour intensive techniques of production it will of course, be necessary to ensure that the interest rates are not too high for the poor and weaker sections or for investment in high priority areas. This could be taken care of by differential rates of interest on a selective basis.
Income Policies 7.23 The existence of wide disparities in incomes and living standards inevitably creates an atmosphere in which it is extremely difficult to secure discipline and dedicated effort in major areas of economic activity. On the other hand, given the fact that the vast bulk of the incomes are generated in the agricultural sector and among those who are self-employed, it is not easy to design an incomes policy on the same pattern as that attempted in some of the western countries. The paramount need to promote a sustained increase in agricultural productivity requires maintenance of adequate incentives for the farmers; similarly incentives for private industrial investment are also required consistent with the objective of avoiding concentration of wealth and economic power. None of these considerations, however, come in the way of creating a general climate of austerity and against conspicuous consumption.
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7.24 An incomes policy as such has to derive its rationale from the objective of the Plan. It has to aim at reducing the existing disparities in order to bring about a more rational and equitable pattern of income distribution. Besides, it must help in stabilising the prices. In fact the success of the incomes policy itself is better assured under conditions of price stability.
7.25 In spite of the various measures taken so far, there has been no significant dent yet in the problem of income disparities. While this is attributable partly to the limitations of the measures adopted and shortcomings in their implementation, the development process itself has also tended to benefit more the favourably placed sections of the community. The recurrence of the inflationary phenomenon has further accentuated the distortions in income distribution The problem is extremely complex on account of the skewed distribution of assets on the one hand and the deep-rooted historical socioeconomic factors on the other. The need to provide adequate incentives for increased efficiency and productivity renders the task of income redistribution even more difficult.
7.26 In a country where nearly half of the population lives below the poverty line, the most important task of the incomes policy has to be to increase the income levels of the poorer and weaker sections. One of the major objectives of the Plan is, therefore, to progressively reduce the incidence of poverty and unemployment and improve the quality of life of the people. The household-centred poverty alleviation strategy under the Integrated Rural Development Programme, development of agriculture and ancillary activities, promotion of cottage, village and small industries and creation of additional employment under the National Rural Employment Programmes are among the important measures designed to achieve this objective. In addition, the Minimum Needs Programme would provide certain amenities to the people in the form of drinking water, elementary education, health care, house sites to the handless labour, etc. Further, the purchasing power of the incomes of the poorer and weaker sections of the community would be protected through the supply of essential consumer goods at reasonable prices under the public distribution system.
7.27 At the same time it is essential to exercise some control on high incomes as well as on non-functional incomes. Reliance will have to be placed mainly on fiscal policy and measures such as industrial licensing, regulation of monopolies and restrictive trade practices etc. It is of utmost importance in this context to tighten up tax administration and curb tax avoidance and evasion. Expansion of the public sector will also help indirectly in preventing accrual of lame incomes at the top level. There are ceilings on income in the public sector and certain guidelines have also been adopted for fixing the emoluments of top executives in the corporate sector. However suitable differentials in emoluments in favour of managerial and high skill jobs will have to be permitted in order to attract the best people to these jobs.