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of the kind that prevailed in mid-seventies when shortages of cement, steel, coal and power were severe, and the annual rates of inflation had crossed 20 per cent. Private sector intiative can reduce the need for public sector investment. But some lag between policy changes and actual investment is inevitable. Though, power sector has been opened up for private sector, it will take sometime before adequate response materialises. The size of public sector investment and outlay has been determined after carefully considering these issues.
3.2.12 The distribution of public sector plan outlay of Rs. 434100 crores between the State and the Centre is arrived at on the following considerations:
i) a careful evaluation of the resource position of the Centre and the State and the need to maintain a certain degree of fiscal discipline;
ii) the need to improve the share of States in the public sector plan since important sectors like agriculture particularly irrigation, health, education and other programmes contributing to human development are mainly the responsibility of the States:
iii) The requirement of investment in the Central Plan for the development of basic infrastructure for sustaining long-term growth, such as petroleum, coal, railways and telecommunications etc.
Consistent with the expected resource position, the size of the States' Plans is projected at Rs. 179985 crores and the central Plan at Rs. 254115 crores (including Rs. 6250 crores for the UTs.) These are shown in table 3.6 The share of the States in the Public Sector plan which has been declining through the fifth, Sixth and the Seventh Plan, is sought to be raised from realised level of 39 per cent in the Seventh Plan to 41.5 per cent in the eighth Plan. The states will be required to improve their resources, curb expenditure and improve and realise a positive contribution to the resources from their enterprises particularly in the electricity and transport sectors.
Savings and Flow of Funds 3.3.1 The rate of savings is projected at an average of 21.6 per cent of GDP during the plan period. The realised average rate of savings was 19.7 per cent of GDP during the Sixth Plan and 20.4 per cent during the Seventh Plan. The slow pace of increase in domestic savings during the eightees as compared to the rate of improvement in savings in the earlier decades is accounted for by two factors. While the savings of the household sector has shown a smaller rise than in the previous decades partly influenced by the larger availability consumer goods, both durable and non durable, the savings of the government sector has shown a sharp deterioration. The rates of savings during the Sixth and the Seventh Plans and the projected rates of savings for the Eighth Plan are shown in table 3.7. Further corresponding details are presented in table 3.8.
3.3.2 The savings of the household sector increased from 16 per cent of household disposable income in the Sixth Plan to 18.6 per cent in the Seventh Plan. In view of the increasing opportunities for consumption and urbanisation of the society, the increases in household savings in relation to their disposable income are not expected to be as sharp as in the previous five year plans. With the increase in the proportion of financial savings in the total savings, however, the major contribution of household savings in the Eighth Plan will be towards making larger resources available for financing the investment of the private corporate sector and the ]Public Sector. The financial savings component of the household savings has progressively increased as shown in table 3.9. Sharper increases in financial savings component were observed from mid-sixties to mid- seventies. The network of commercial banks expanded across the country, particularly in the rural areas in early seventies following the nationalisation of Batiks in 1969 and this helped in mobilising financial savings. Thereafter, the financial component of household savings has more or less remained at the same level. In the recent period, the widening of the base of capital market has raised the possibility of a larger proportion of household savings being made in the form of financial assets. Fiscal measures to strengthen this trend will be pursued further in the Eighth Plan.
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Table 3.7 Rates of Savings
(As Percentage of GDPmp)
(At Current Prices) Projected (At 1991-92 Prices)
Sixth Plan Seventh Plan Average of 1991-92 1996-97 Eighth Plan
7 yrs.
(1985-86 to
(1991-92)*
1 2 3 4 5 6 7
1. Public Sector
(1.1 + 1.2) 3.6 92.33 2.0 01.44 2.07 2.00
1.1 Govt Sector 1.10 -1.36 -1.74 -2.37 -1.08 -1.11
1.2 Public Enterprises 2.59 3.69 3.74 3.81 3.15 3.11
2. Private Corporate
Sector 1.63 2.04 2.15 2.39 2.17 2.00
3. Household Sector 14.33 16.00 16.60 17.77 17.36 17.60
4. Gross Domestic
Savings 19.65 20.37 20.75 21.60 21.60 21.60
(1+2+3)
Notes: (*) Based on data from Quick Estimates for 1990-91 and
projections for 1991-92
Abbreviation: GDPmp = Gross Domestic Product at market prices. GDPmp
= Gross Domestic Product at market prices.
3.3.3 The private corporate saving which increased from 1.6 per cent of GDP in Sixth Plan to a little over 2 per cent in the recent years are projected to remain at 2 per cent of GDP during the Eighth Plan.
3.3.4 Public sector savings have two components, i.e., the savings of the Government and savings of the public enterprises. Government's savings have shown a very discouraging performance during the 80's. While Government savings were positive during the Sixth Plan, they turned increasingly negative thereafter as shown in table 3. 10. The expenditure of the Government as a proportion of GDP increased by 5 percentage points between the Sixth and the Seventh Plans, but the receipts increased by
Table 3.9 Share of Financial Savings in Total Household Savings
Period Share (Per cent)
1966-72 25.1
1972-82 37.5
1982-89 50.3
about 2 percentage points only. The items responsible for rapid build up of expenditure were interests on public debt, and subsidies. The gross savings of Government reached minus 3 per cent of GDP in 1990- 91. If this situation continues, the Government will be increasingly handicapped in making adequate provision even for the most essential of its activities in the area of social infrastructure and minimum needs. If the trends of the Seventh Plan were to continue, the saving.; of Government in the Eighth Plan period would be about minus 160,000 crores of rupees. No meaningful human development programme could be pursued in such a scenario of Government resources. The Eighth Plan has to make a determined effort to reverse the trend of declining Government receipts, rising Government expenditure and negative savings. The seriousness of the Central Government on this account has already been expressed in the budgets of 1991 and 1992. Thus, the availability of resources for financing the projected level of public sector outlay depends on reducing Government dis-savings from Rs. 16000 crores in 1990-91 to an average of Rs. 7620 crores per annum during the Eighth Five Year Plan. This would be possible only if the contribution of direct taxes and non tax revenues increases and
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the Government's consumption expenditure is contained. Subsidies need to be carefully examined, rationalised and reduced. The subsidies need to be targetted mainly towards the weaker sections and within them particularly those who are located in the poverty prone districts/blocks. Limits on fiscal deficits will have a favourable impact on interest burden in the future.There is a need for reduction in Government expenditure in nominal terms.
3.3.5 In raising the receipts of Government by about 3 percentage points of GDP during 1992-97, major efforts are needed for extending the coverage of direct taxes and the excise duties. This is all the more necessary since the receipts from custom duties will fall because the level of tariff protection to the domestic industries is to be brought down. A move towards presumtive taxation in the Central Budget 1992-93 has already been announced and generally welcomed. The receipts from government property (Centre and States) arise mainly from the dividends from public enterprises and the interest on loans. The dividends and other returns should be much higher and commensurate with their command of public enterprises over assets whose market value is far more than what is shown in their balance sheets. Enterprises that hold no prospects of giving a return to the budgets of their owner governments (Centre or State) will have to be disinvested from. More often the cause of poor returns is shown as fulfilment of "social obligation" by the enterprises. But quantitative measurements of such costs are generally not available. The public enterprises should assess and display the hidden subsidies which their operations give to the suppliers of their inputs, to their labour and to their customers. The receipts from entrepreneurship and property of governments are projected to increase from 1.2 per cent of GDP in the Seventh Plan to 1.5 per cent of GDP in the Eighth Plan.
3.3.6 The savings of public enterprises have increased steadily from 1.7 per cent of GDP in 1980-81 to about 4 per cent of GDP in 1989-90. This has been possible because of the expansion of their operations which in turn was made possible by large investments made in the industries and infrastructure (power, railways, other transport, communication, petroleum, coal, etc.) during the Fourth to Sixth Plan periods. While the overall trends have been encouraging, it needs to be recognised that the bulk of the contribution through retained profits (as distinct from depreciation) has come from petroleum, communications and railways. A substantial part of the savings here have come from the rise in administered prices of their goods and services rather than reduction in their current expen- ditures. In other areas the savings of public enterprises have not been sufficient for their capital expenditure and therefore were not able to generate a surplus for paying adequate returns to the government. In the ensuing phase of economic reform, higher efficiency in operations of the enterprises will have to replace progressively the gains that were possible from monopoly power, particularly since the public enterprises now will have to face competition in the capital market as well as in the output market, both domestically and abroad. The savings of public enterprises are projected to rise to 3.1 per cent of GDP in the Eighth Plan as comapred to 2.6 per cent in the Sixth Plan and 3.7 per cent in the Seventh Plan.
3.3.7 The scheme of financing the Eighth Plan public sector outlay is given in table 3.11. The financing pattern of public sector plan has two components, one is the budgetary support to the plan and the other is the internal and extrabudgetary resources of public enterprises. In recent years the budgetary support was almost entirely met out of borrowings, since the balance from current revenues (BCR) has been negative. Adequate budgetary support is needed for the social sectors - education, health, family welfare, welfare of weaker sections, etc. Sectors like irrigation, rural development, agricultural research and extension, etc., also depend heavily on budgetary support as they are not commercially viable. The capability to provide adequate budget support to the Plan while reducing the fiscal deficits (i.e., borrowings of government) rests on the budgetary savings made by the governments at the Centre and the States. The BCR during the Seventh Plan was about 2 per cent of the total public sector outlays in real terms. The projected BCR at Rs.35005 crores (Centre and States) would be about 8.0% of the total public sector plan outlay. These estimates of BCR are consistent with the projected government savings and current plan outlay. Con- siderable improvement will be needed over the past performance both at the Centre and the States. Budgetary resources of the Centre dur-
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ing the, Eighth Plan having been assessed at Rs. 188475 crores, an amount of Rs.78,500 crores would be transferred to the States as plan assistance and grants.
3.3.8 The financing pattern of the Eighth Plan public sector outlay stipulates reduced share of market borrowing and increased share of miscellaneous capital receipts (MCR) in total available resources as a result of selective and partial disinvestments in some of the public sector enterprises.
3.3.9 About 7.8 per cent of the total public sector outlay in the Eighth Plan is expected to be financed by net inflows from abroad. A part of the net inflow of capital from abroad will take the form of external commercial borrowings (ECB's) by public enterprise, and therefore will not be available as a resource for budgetary support. Enterprise-wise distribution of the ECB's in public sector will have to he consistent with the objectives Of Public sector plan.
3.3.10 Deficit financing was projected to be 8 per cent of the outlay during the Seventh Plan. As against this, the actual deficit financing amounted to 17 per cent of the plan expenditure. The Eighth Plan would draw less than 5 per cent of its public sector outlay from this source of financing, so as to keep inflation in check.
3.3.11 The public Sector Plan relies heavily on a larger availability of internal resources of the enterprises. Many of the public enterprises, such as the financial enterprises, airlines and the consultancy organisations have large surpluses available from their operations. These will be channelised to other enterprises whose capital expenditure requires extra budgetary resources over and above their own internal resources. This will be done either through the budget or through the capital market or by transfers among enterprises within the administrative control of the same Department.
3.3.12 The contribution of PSEs and their resource moblization through issue of bonds etc., accounted for about 21.2 per cent of the Seventh Plan expenditure. The Eighth Plan stipulates this share to he as high as 34. 10 per cent of the total public sector outlay. Greater reliance would be put on the public sector enterprises in the Central sector anticipating their constribution to be Rs. 1,44,140 crores. In the reoriented approach, public sector enterprises would be streamlined to impart greater viability in their operations in the context of competitive development. The Eighth Plan emphasises that the State Public Sector enterprises would, in reversal of their negative contribution, generate Rs. 4000 crores by means of imparting operational efficiency and by appropriate pricing of the products of utilities like electricity, transport services etc.
3.3.13 The ability of the economy to mobilise resources from abroad on affordable terms was put to severe test in recent years. The current account deficit rose to 2.4 per cent of GDP during the Seventh Plan as against the targetted 1.6 per cent. The economy tended to rely, beyond its means, on external capital. Increase in imports from hard currency areas and diversion of substantial part of our exports to rupee payment areas increased our external debt of hard currency foreign exchange. The decline in soft aid for infrastructure development made us borrow in the exernal commercial market at high costs. While resort to exceptional financing from donors could salvage the situation to an extent, it is imperative that during the Eighth Plan the dependence on inflow of external capital (foreign savings) should be reduced. The current account deficit is projected at Rs. 55000 crores, i.e., 1.6 per cent of GDP. If the growth of the economy is not to be starved of the required raw-materials, capital goods and technology, adequate imports will have to be provided for. Therefore, in containing the current account deficit to a low level, exports will have to assume a dominant role. Exports are, therefore, projected to grow at 13.6 per cent per annum in real terms during the Eighth Plan period.
3.3.14 The Eighth Five Year Plan allocates a higher share of external resources to the private sector as shown in table 3.12.
3.3.15 Under the envisaged scenario, in order to support the public sector investment of the magnitude envisaged, nearly 81 % of the financial savings of the household sector will have to be transferred to the public sector. In the context of the liberlisation of the financial system and, in particular, the interest rate structure, the public sector will have to compete with private sector for the household savings. This implies
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a higher cost and this can be borne only if the public sector earns a higher return. The stipulated pattern of the inter-sectoral flow of funds during the Eighth Plan is shown in table 3.13.
Sectoral Pattern or Growth and Investment 3.4.1 Given the overall growth target of the economy during the Eighth Plan, the sectoral pattern of output and related growth rates are obtained through the consistency model which starts with the final demand and fully takes into account the inter-sectoral linkages via inputs and outputs. The main components of the final demand are private final consumption, the gov-
Table 3.12 Distribution of Inflow of External Funds to Public and
Private Sector
Public Private Total
Sector Sector
1 2 3 4
Seventh Plan 82.4 17.6 100.00
Eighth Plan 61.33 8.7 100.00