FINANCING THE PLAN
4.1 The financing of a plan involves the diversion, through the use of various financial instruments including taxation, of the required volume of real resources for purposes of investment, without inflation and subject to certain other basic considerations such as equity and efficiency. The inter-dependency of physical and financial planning arises from the fact that while the volume of resources that could be diverted for investment would depend on the rate of investment and the growth of income, the feasible volume of investment, in turn, would depend on how much resources could be mobilised without inflation. Thus, the physical plan targets of investment and the financial targets have to be worked out simultaneously, and in the present exercise, the two sets of targets have been made consistent with each other through a process of iteration.
4.2 The total of resources available for investment consists of domestic savings and inflow of capital from abroad. The volume of domestic savings that could be mobilised depends on the pattern of past behaviour and long-term tendencies in the economy such as the propensity to save of the population and the elasticity of the tax system as well as on conscious efforts to raise the rate of savings through taxation, incentives and institutional and policy changes.
4.3 Although it is true that there is scope for increasing the productivity of capital, in its present stage, the Indian economy requires and can sustain a higher rate of savings than realised in recent years. The rate of gross savings, which had reached a peak of 24.6 per cent in 1978-79, has stagnated around 23 per cent during the Sixth Plan. One of the important tasks of policy in the Seventh Plan would be to induce a rise in the rate of domestic savings.
4.4 Financial planning involves not only the mobilisation of resources to match the targetted magnitude of physical investment, but also the allocation of the total available savings among the major investing sectors according to their respective requirements. In what follows, total domestic resource availability is arrived at through projections of sectoral savings, i.e., savings by the household, private corporate, government and public enterprise sectors. Then, given the investment targets of the sectors and allowing for inter- sectoral transfers and the expected inflow of capital from abroad (which includes the desired amount of commercial borrowings), the balance between sources and uses of funds is worked out for each sector. This gives the amount of savings to be transferred from the `surplus' to `deficit' sectors.
4.5 In projecting the savings of the Government sector (current revenue-current expenditure), a view has been taken of the amounts of additional resource mobilisation that could be reasonably undertaken by the Central and State Governments on revenue account through improvement in administration, structural changes and adjustments in rates. Similarly, in regard to public enterprises, in estimating savings (retained profits plus depreciation) effects of action to improve productivity and efficiency as well as adjustments in prices, where considered necessary and reasonable, have been taken into account. Given the projected total tax revenues and transfers from Government to the household sector, the disposable income of the latter is derived. Household sector saving is then arrived at by applying trend values of the savings rate. The savings of the private corporate sector have been estimated separately on the basis of the analysis of the operations and finances for the non-financial com- panies and on the basis of past trends for the financial companies.
4.6 Table 4.1 gives the disposable income, consumption and savings by sectors. Household sector saving is estimated at 20.5 per cent of its disposable income in 1984-85 and is expected to remain at the same level in 1989-90 but public sector saving is expected to rise from 29.1 per cent to 32.4 per cent of its disposable income. The rise in the savings ratio of the public sector arises from its increasing share of disposable income (from 14.6 per cent to 15.7 per cent) and the high marginal savings rate (41 per cent) assumed for the sector. All of the additional resources mobilised by public enterprises would go to augment the resources for investment. The share of the public sector in aggregate domestic saving would rise from 18.5 per cent to 20.9 per cent and that of the household sector would decline from 74.2 per cent to 69.6 per cent. Thus the success of the plan is predicated on a large savings effort by the public sector. The measures to be taken towards this end are indicated later in the Chapter.
4.7 The relative shares of the different sectors in. aggregate domestic saving for the plan period as a whole are indicated in Table 4.2. The shares of the public and
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private sectors are expected to be 19 per cent and 81 per cent respectively. The share of the household sector would continue to be dominant (71 per cent) though less than in the past. Of the total household sector savings, 47 per cent are estimated to be held in the form of financial assets.
TABLE 4.2
Gross Domestic Saving by Sector of Origin (1985-90)
(At 1984-85 prices)
Sl. Sector Amount Percen-
No. (Rs. page of
crores) total
1. Public saving 57422 19.0
(i) Government and public enterprises
(non-financial)4915616.3
(ii) Public enterprises (financial) 8266 2.7
2. Private saving 244944 81.0
(i) Household sector 216165 71.5
(a) Financial saving 102253 33.8
(b) Physical assets 113912 37.7
(ii) Private corporate including
cooperative sector 28779 9.5
3. Total domestic saving 302366 100.0
4.8 In estimating the total resources availability for plan investment, while conscious effort to raise the volume of savings through additional resource mobilisation effort on the part of the public sector is postulated, private sector savings have been estimated on the basis of past data. It would not be realistic to assume a significant rise in the savings rate in the short run. However, given that the value of the estimated marginal savings rate is only of the order of 28.4 per cent, there is scope for raising it through appropriate policy and institutional changes.
4.9. Aggregate gross domestic savings during the Seventh Plan would amount to Rs. 302,366 crores. Inflow of foreign capital to the extent of Rs. 20,000 crores is postulated. The aggregate resources would, therefore, amount to Rs. 322,366 crores, which is equal to the amount of investment contemplated in the plan. The savings of the sectors, inter-sectoral capital transfers (lending/borrowing) and investment by the sectors are given in Table 4.3. The own savings of the public and the private corporate sectors fall short of their investment plans while the household sector has a surplus of saving over its investment. It is envisaged that there would be a transfer of savings from the household sector to the extent of Rs. 102,253 crores to the other two domestic sectors. And, additionally, the inflow of capital from the rest of the world to the public sector would amount to Rs. 18,000 crores and to the private corporate sector Rs. 2,000 crores. The details of financing of the investment by each of the domestic sectors are shown in Table 4.4. These details provide a broad picture of the flow of funds on capital account in the economy during the Seventh Plan period. It is seen that the public sector investment of Rs. 154,218 crores is financed to the extent of 32 per cent by own saving, 56 per cent by draft on private savings and by around 12 per cent by foreign borrowings. The corporate sector's total investment of Rs. 54,236 crores is expected to be financed to the extent of around 53 per
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cent by its own saving, 28 per cent through recourse to the household sector saving via the capital market, 15.3 per cent by the public sector and the remaining 3.7 per cent by foreign borrowing.
4.10 Of the total household sector savings of Rs. 216,165 crores, financial savings are estimated to account for Rs. 102,253 crores, forming 47 per cent. Projections of physical assets in the household sector have been made on the basis of their relationship with personal disposable income in the past years. The details and the forms in which financial savings will be held are given in Table 4.5, while the investments through which the draft on household sector's savings is effected are indicated in Table 4.6. The total financial savings of the household sector amount to Rs. 134,681 crores in gross terms and to Rs. 102,253 crores in net terms (i.e., net of increase in liabilities) over the five-year period. The major forms of financial savings of the household sector are: deposits with scheduled commercial banks and cooperative societies, currency, life funds, provident funds, claims on Government including Unit Trust of India and corporate shares. The methods of estimation of the amounts which would be held in different forms are given in Appendix-I.
TABLE 4.5
Household Sector Financial Savings (1985-90)
(Rs. crores at 1984-85 prices)
1. Currency 8527
2. Deposits with scheduled commercial banks
including cooperatives 57288
3. Non-banking companies deposits 8592
4. Life funds 9845
5. Provident fund 34675
6. Net claims on Government 8750
7. Corporate/cooperative shares and debentures 2911
8. Security of term-lending institutions 23
9. Unit Trust of India 2500
10. Other assets 1570
Total 134681
Liability (-)32428
Net financial assets 102253
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TABLE 4.6
Draft on Household Financial Saving by Instruments (1985-90)
(Rs. crores at 1984-85 prices)
Items Govern- Private Total
ment Corporate
sector
1. Currency 8527 - 8527
2. Deposits with banks 28107 3595 31702
3. Non-Banking deposits' 1857 5600 7457
4. Life Insurance
Corporation 4950 874 5824
5. Provident fund 34675 - 34675
6. Claims on Government 7064 - 7064
7. Corporate shares - 2911 2911
8. Securities including
Unit Trust of India 1882 641 2523
9. Other assets - 1570 1570
Total 87062 15191 102253
Private Corporate Sector Savings 4.11 The private corporate sector is divided into two parts viz., (i) non-financial institutions and (ii) financial institutions. Non- financial institutions include (i) non-Government public and private limited companies and (ii) co-operative non-credit societies. The financial institutions comprise (a) co-operative banks and credit societies (b) non-nationalised commercial banks and (c) private financial and investment companies.
4.12 The projections of the savings of non-Government non- financial public and private limited companies for 1985-90 have been worked out on the basis of detailed studies of sales, fixed capital formation, inventories, borrowings, depreciation, profits, etc. The savings of the private financial institutions and co-operatives have been estimated on the basis of past trends. The gross savings of the private corporate sector have been placed at Rs. 28,779 crores during the Seventh Plan.
Resources for the Public Sector Outlay-Sixth Plan.
4.13 An analysis of the various sources of financing the public sector outlay in the Sixth Five-Year Plan (Table 4.7) shows that the balance from current revenues at constant rates underwent a sharp deterioration both for the Centre and the States. Although the additional resource mobilisation through budgetary measures undertaken by the Centre and the States exceeded the targets originally envis- aged, the surplus from current revenues, including the revenue from additional resources mobilisation efforts, fell short of the original estimate by Rs. 862 crores in the case of the Centre and by Rs. 4,101 crores in the case of States (all in current prices).
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4.14 The surplus from current revenues including the yield of additional resource mobilisation efforts which was envisaged to finance 28 per cent of the Sixth Plan public sector outlay, actually contributed only 20 per cent of the financing. The deterioration in the contribution from current revenues was due mainly to the sharp rise in non-plan expenditure partly resulting from the inflationary pressures developed during the Sixth Plan period. Besides the increase in the cost of maintenance of normal services, additional D.A. instalments had to be accommodated from time to time. In fact, inflation, far from enabling Government to increase the resources at its disposal, eroded them in real terms because revenues did not grow as fast as the cost of the goods and services bought by Government. Also, additional resource mobilisation efforts by the public enterprises were neutralised to a large extent by cost increases. Apart from the impact of inflation, certain large items of current outlay, such as defence, subsidies and interest liabilities, have also been growing at a fast pace at the Centre. While some of the States have been increasing their commitments unrelated to their plans, their commitments arising from plan expenditure seem to have also grown out of pace with the increase in their revenue receipts (reckoned at the base year rates) which have not shown a corresponding buoyancy to fully offset the liabilities arising on account of growing expenditure. The ratio of tax to gross domestic product, which was 15.56 per cent in 1980-81, increased to 16.65 per cent in 1982-83 but came down to 16.25 per cent in 1983-84. Similarly, the ratio of non- tax revenues to gross domestic product, accounting for 18 per cent of total Government revenues, increased from 3.32 per cent in 1980-81 to 3.80 per cent in 1982-83 but decreased to 3.50 per cent in 1983-84. The automatic growth in revenues (i.e. without ARM) was less than proportionate to the growth in national income, and thus the yield of additional measures undertaken during the Sixth Plan was partly neutralised by-the fall in the automatic growth in revenues. While no doubt, it is necessary to take measures both at the Centre and the States to prevent the deterioration in budgetary savings, the reversal of the existing trend cannot be immediately ensured. This serious limitation cannot be lost sight of in evolving any scheme of development financing for the immediate future.
4.15 The contribution of public enterprises of the Centre at 1979-80 rates was higher by Rs. 2,507 crores than the original estimate. However, in the case of State public enterprises, there was a considerable deterioration. Originally they were estimated to incur a loss of Rs. 516 crores at base year rates, but, in fact, the amount of loss turned out to be Rs. 6608 crores. As a result, despite higher additional resource mobilisation by State public enterprises, the overall contribution amounted hardly to Rs. 516 crores as against Rs. 4,362 crores originally envisaged. While the total Sixth Plan expenditure of the Central and State public enterprises taken together was Rs. 56,360 crores, their contribution to plan resources (including the yield of additional measures) was Rs. 18,634 crores.
4.16 One of the major functions of public sector enterprises is to 2generate surpluses for financing further economic development. An analysis of Sixth Plan financing, however, shows that Central public enterprises financed only 28 per cent of their development outlay from their own internal resources. They mainly relied on budgetary support, which accounted for 56 per cent of their plan outlay. In the case of State enterprises like State Electricity Boards and State Road Transport Corporations, hardly 3.5 per cent of their development outlay was financed through their own internal resources. The de- pendence of State enterprises on State budgetary support was far greater than in the case of the Central enterprises. This is evident from the magnitude of commercial losses of Rs. 4,472 crores and Rs. 961 crores that State Electricity Boards and the State Road Transport Corporations, respectively, are estimated to have incurred during the Sixth Plan. Thus, public enterprises becoming a vehicle of resource mobilisation for financing development expenditure in the country remains a distant goal. While there can be no two opinions that surpluses generated by public enterprises would have to be the mainstay of development financing in future, it would not be realistic to assume that all public enterprises, both Central and States, would turn the corner immediately in the Seventh Plan period and discharge their expected role in resource generation for meeting the growing development expenditure in the country.
4.17 Owing to the depletion of budgetary savings and the inability of the public enterprises to adequately contribute to the financing of their plan outlay through their own internal resources, the Government had to rely increasingly on domestic borrowings for financing public sector plan outlays. Total domestic borrowings accounted for 35 per cent of the Sixth Plan public sector outlay. In the earlier plans, excepting the Fourth Plan, domestic market borrowings ranged from 21 per cent to 28 per cent. Greater dependence on borrowings has implications in terms of increasing the burden on the Government budget for meeting interest payments as well as repayments of the principal amount. Further, in the case of a number of States, borrowings which should have been appropriately utilised for financing capital expenditure, have been used partly for meeting revenue expenditure. This trend is quite indicative of the nature of resource erosion.
4.18 In short, the development financing structure which has emerged during the Sixth Plan shows serious limitations in the matter of generation of resources to cope
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with the increasing demand for development expenditure in the country.
4.19 In the face of the resource crunch, mobilisation of financial resources, therefore, presents a real challenge to be faced in the Seventh Plan, both by the Centre and the States. This would obviously require restructuring of the present pattern of development financing so as to rectify emerging imbalances and maintain sound financial planning to achieve the desired goals. Much would depend on how far the different instruments of resource mobilisation respond to the challenge under a dynamic situation and maintain their resilience to adjust themselves to structural and non-structural changes. It is obvious that the process of resource erosion would have to be immediately checked and also reversed, in due course, if development is to be protected. In essence, the Indian fiscal system would have to accomplish the delicate task of raising adequate resources in a non-inflationary manner, besides providing enough incentives for savings and growth in production.
4.20 Within the above broad framework of fiscal objectives, the resources for financing the public sector outlay during the Seventh Plan have been assessed. The assessment has taken into account the past trends, the postulated rate of growth of the economy and the outlook for the future in different sectors of the economy. The estimates based on detailed exercises undertaken by the expert groups have been re-assessed in the light of the recommendations of the Eighth Finance Commission and the Government decision thereon. Concerned Central Ministries, State Governments, Union Territory Administrations, Reserve Bank of India, Life Insurance Corporation, General Insurance Corporation, Industrial Development Bank of India, the Provident Fund Commissioner, the Bureau of Public Enterprises, important public sector enterprises of the Central and State Governments, and various other agencies have been consulted at different stages to firm up the estimates. The Estimates of resources have been worked out at 1984-85 prices, assuming a non-inflationary situation over the Seventh Plan period. The revised projections are in broad alignment with the growth rates of receipts adopted by the Eighth Finance Commission for 1984-89 period.
Financial Resources for the Public Sector Plan Seventh Plan 4.21 The aggregate resources for financing the public sector outlay in the Seventh Plan amount to Rs. 180,000 crores at 1984-85 prices. The details of the estimates are set out in Table 4.8. Separate estimates for the Centre and the States are given in Appendix-II.
4.22 It will be seen that budgetary resources including borrowings and public enterprises would provide Rs. 148,000 crores or 82.2 per cent of the total resources required for financing the Plan. External resources would account for Rs. 18,000 crores or 10 per cent of the assessed resources. The balance of the required plan resources amounting to Rs. 14,000 crores (7.8 per cent of the total) would be met through deficit financing. Brief comments on individual items of financing are given below:
TABLE 4.8
Estimates of Financial Resources for the Public Sector Plan-1985-90
(Rs. crores at 1984-85 prices)
Amount
1. Balance from current revenues at
1984-85 rates of taxes (-)5,249
2. Contribution of public enterprises 35,485
3. Market borrowings (net) 30,562
4. Small savings 17,916
5. State provident funds 7,327
6. Term loans from financial institutions 4,639
7. Miscellaneous capital receipts (net) 12,618
8. Additional resource mobilisation 44,702
9. Net capital inflow from abroad 18,000
10. Deficit financing 14,000
11. Aggregate resources 180,000