5.6.2 As Statement 5.2 shows, the approved Plan outlay for the Centre and the UTs for 1990-91 was Rs.40,400 crores and the outlay for the States' Annual Plan 1990-91 was at Rs. 24,317 crores. Thus, the total outlay of Rs. 64,717 crores (against initially estimated re- sources of Rs. 65,002 crores) for the Annual Plan 1990-91 was nominally higher by 12 percent (14% at the Centre including UTs and 9% in the case of the States) over the outlay of 1989-90 Plan.
5.6.3 According to the details available now, as indicated in Statement 5.2, Plan expenditure for 1990-91 was Rs. 39,066 crores in the case of Centre (including the UTs) and Rs. 22,360 crores in the case of States. The resources for financing the Plan is now placed at Rs. 39,486 crores in the case of Centre (including UTs) and Rs. 21,651 crores in the case of States, indicating overall deterioration of Rs. 3,865 crores compared to the Annual Plan estimates. Deterioration in Balance from Current Revenues compared to the Annual Plan estimates has occurred in the case of Centre due to slower growth in revenue receipts and increase in non-plan revenue expenditure including subsidy and interest payments. Substantial shortfall compared to the Annual Plan estimates also occurred in the internal resources of public enterprises and in the realisation of Miscellaneous (net) Capital Receipts and Provident Funds.
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5.6.4 Net inflow from abroad in the form of grants and loans to the Centre is now estimated at Rs. 3767 crores (against the total of Rs. 6320 crores, including borrowings by public enterprises) compared to the Annual Plan/Budget Estimates of Rs. 4327 crores (against the total of Rs. 5793 crores). The budget deficit/deficit financing in 1990-91 was of the order of Rs. 11,347 crores which is higher by Rs. 4141 crores over the Annual Plan estimates.
5.6.5 The shortfall in the resources of States has been mainly due to deterioration in ARM, increase in NPRE and erosion in the contribution of the State Public Enterprises.
5.6.6 The Central Assistance for the State Plans and special assistance for Area Programmes during 1990-91 as per States' estimates was only lower at Rs. 10,261 crores compared to the budgetary provision of Rs. 10,526 crores. Plan revenue deficit grants and contribution towards Calamity Relief Funds provided to the States by the Centre were to the tune of Rs. 991.53 crores and Rs. 603 crores respectively, both in pursuance of the recommendations of the NFC.
Annual Plan 1991-92 5.6.7 The approved outlay in the Annual Plan 1991-92 for Centre and States together, as Statement 5.3 brings out, was at Rs. 72,317 crores, with a nominal increase of Rs. 7,600 crores i.e. 11.7 percent increase, over the Plan Outlay of Rs. 64,717 crores for 1990-91. Improvement in the BCR of the Centre and the States and a higher draft on private savings through market loans, small savings and provident funds were expected to finance the increase in the Plan outlay for 1991-92.
5.6.8 The financing strategy during 1991-92 focussed on fiscal deficit which is broadly defined as Centre's total revenue receipts, loan recoveries and other capital receipts (excluding borrowings) minus total revenue and capital expenditure (including loans and advances to the States). The budgetary deficit of Rs. 10,722 crores in the revised estimates for 1990-91 was proposed to be brought down to Rs. 7,719 crores in 1991-92. Several measures to prune NPRE including subsidies and expenditure on defence and establishment were initiated. The ARM measures were expected to yield Rs. 2,005 crores of tax revenue (net of States' share). The administered prices of the Central Public Enterprises were raised to help additional resource mobilisation for Plan financing. The Central Public Undertakings were allocated market borrowings through issue of public bonds/debentures for financing a part of their Plan outlays.
5.6.9 Total provision for Central assistance for the State Plans and Special assistance for Area Programmes during 1991-92 amounted to Rs. 11,835 crores. In addition, the States were given Plan revenue deficit grants of about Rs. 1,333 crores as per recommendation of the NFC. The States were expected to reduce NPRE, step-up the efforts for mobilisation of additional resources and improve the performance of their undertakings to meet the financing of approved outlays.
5.6. 10 The latest estimates of finances for the Annual Plan 1991-92 may also be seen in the Statement 5.3. These show that the BCR of the Centre deteriorated compared to the Plan estimate. Contribution of Public Enterprises also showed shortfall. The States' resources fell considerably short of the Plan estimates, with the BCR turning out to be negative at a significant level. Central support was lower only to the extent of national economy measure selectively exercised in Central assistance amounting to around 10 per cent. As a result, revised estimates of outlays of the Centre and the States are at significantly lower levels compared to the approved outlays.
5.6.11 In pursuance of the recommendations of the National Development Council which met in October 1990, it has, inter alia, been decided that:
a) the entire external aid (compared to 70% earlier) meant for externally aided projects implemented by the States would be passed on to them and
b) the grant-loan pattern of assistance to Assam and Jammu & Kashmir States would be 90:10, from 1st April, 1991, as prevalent for other Special Category States.
Besides, a Committee of Experts has been appointed to suggest durable solutions for the financial problems of the Special Category States.
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Annual Plan 1992-93 5.7.1 The Annual Plan 1992-93 has been formulated in the context of the Eighth Plan, 1992-97. The measures initiated by the Government in 1991-92 for fiscal correction and consolidation will be continued in 1992-93. Thus, efforts for mobilising resources and restraining expenditure taken during 1991-92 will be continued during 1992-93. The objective is to reduce the fiscal deficit to 5 percent of GDP during 1992-93.
5.7.2 The Annual Plan 1992-93 recognises the importance of maintaining fiscal discipline at all levels. The basic premise is that Plan expenditure should not depend on ever increasing budgetary support. In future, the ability to finance Plan expenditure will depend critically upon the internal resources generated by the public sector. Thus, the Plan draws attention to the importance of efficiency in the public sector.
5.7.3 The Annual Plan outlay (Centre, UTs and States) for 1992-93, as shown in Statement 5.4, will be of the order of Rs. 80,771 crores: implying an increase of 11.7 percent over the Plan outlay of 1991-92. The proposed Plan outlay for the Centre including UTs at Rs. 49,698 crores (at current prices) will be 61.5 percent of total outlay. The details of financing of public sector outlay in the Annual Plan 1992- 93 are given in Statement 5.4.
5.7.4 Prior to the Fourth Plan, the allocation of Central assistance was based on schematic pattern and there was no formula for allocation. In view of the general demand for an objective basis for allocation of Central assistance for State Plans, a formula known as Gadgil Formula was evolved, which in its original form was adopted for distribution of Central Plan assistance during Fourth and Fifth Plans. According to this formula, allocation for States (other than special category States) was based on population (60%), per capita income (10%), tax effort (10%), on-going irrigation and power projects (10%), special problems (10%). Since the criteria in respect of on going programmes were weighted in favour of rich States, Gadgil formula was modified in the beginning of Sixth Plan, and the weightage for on- going schemes was added with per capita income, making its weight 20%. This modified formula became the basis of allocation of Central Plan assistance to States in Sixth and Seventh Plans and Annual Plan 1990- 91. Keeping in view suggestions made by some of the States for revising the modified Gadgil formula, various alternatives were considered by the NDC in October, 1990 and the formula was revised and it laid down criteria with weightage of population (55 %) per capita income (20% - deviation method; 5% distance method), fiscal management (5%), special development problems (15%). This formula was followed for distribution of Central assistance for 1991-92 only. Most of the State Governments expressed reservation on this formula and keeping in view their concerns, a Committee under the chairmanship of Shri Pranab Mukherjee, Deputy Chairman, Planning Commission was constituted to evolve a suitable formula for distribution of Central assistance. The suggestions made by the Pranab Mukherjee Committee were discussed by the NDC on 2324, December, 1991 wherein a consensus emerged and a revised formula evolved which was equitable and acceptable and was made the basis of allocation of Central Plan assistance to the States for the Eighth Plan. Mukherjee formula containing criteria for allocation of Central assistance for the non-special category States is given below:
Criteria Weight
(i) Population (1971 Census) 60%
(ii) Per capita income -
(a) 'Deviation' method - Covering 20%
States with per capita SDP
below the national average
(b) 'Distance' method - Covering all 5%
States
(iii) Performance -
(a) Tax effort;
(b) Fiscal Management; and 7.5%
(c) Progress in respect of
national objectives
(iv) Special problems 7.5%
Under the criterion of the progress in respect of national objectives, the approved formula covers four objectives viz., (a) population control and maternal and child health; (b) universalisation of primary education and adult education; (c) ontime completion of externally aided projects; and (d) land reforms. Distribution of Central assis-
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tance for the Special Category States' Plans would be as in the modified Gadgil formula, on the basis of the lump sum amount (about 30 per cent taken out of total allocable among the States; aside from the pre-assigned including NEC, additional Central assistance for exter- nally aided projects and REC).
5.7.5. In case of Special Category States, out of the total Central Assistance after providing funds for externally aided schemes and Special Area Programmes, a part (nearly 30%) was earmarked separately for these States right from the days when the Gadgil Formula was adopted for the distribution of Central Plan assistance. This formula was slightly modified in October, 1990 when the share allocated to these States also included the allocation for North Eastern Council (NEC). This, however, was modified under the Mukherjee formula (1991) by which the share allocated to Special Category States excluded the allocation of NEC and thus restoring the position as it existed before 1990.
Plan Financing During the Eighth Plan, 1992-97
Approach to overall financing 5.8.1 Financing investment of Rs.798,000 crores during the Eighth Plan would call for massive domestic effort particularly when net inflow from abroad is to be kept at moderate level amounting to 1.6 percent of GDP. Intersectoral flow of funds in respect of the projected level of investment shows that financing of public sector investments at the rate of 10 percent of GDP constituting 45.2 percent of total, is projected to come from borrowings out of savings of households to the extent of 71.6 percent, from the rest of the world to the extent of 9.34 percent, and the balance from its own savings. The projected investments would still call for significant mobilisation effort in the Government sector, where the budgetary savings need to improve significantly which will depend on higher revenue (net) realisation and economy in NPRE.
5.8.2 The resource constraint is expected to continue at both the Centre and the States, particularly due to the drain by loss-making Central public enterprises and the States' electricity and transport undertakings and the moderate increases in surpluses of profit-making enterprises. But, RBI support (deficit financing) is projected at a lower level so as to move in the direction of non-inflationary financing. Substantial economies in NPRE and increasing ARM would, therefore, be needed to finance the projected outlays of the Centre and the States almost fully from domestic sources. As the Sarkaria Commission has observed, the agriculture sector has lagged in contributing to resource generation compared to its contribution to GDP. The per cent share of direct tax revenue from agriculture has gone down to about 0.7 percent of GDP (1989-90) compared to about 1.2 per cent in 1950-51, while the share of all direct tax revenues in aggregate GDP has gone up to 2.8 per cent compared to 2.6 per cent in 1950-51. Even if 1.2 per cent share observed in 1950-51 is again achieved there would be additional revenue from agriculture sector to the tune of Rs.600 to 700 crores, over the present level of Rs.750 crores. This can be achieved through widening the base of the taxation in agriculture requiring certain legislative changes by the States for which consensus needs to be developed in the National Development Council. All in all, there is need to raise the ratio of direct tax revenues to GDP. Attention in this regard needs to be paid to eliminating or reducing the numerous concessions and exemptions. The level of tax arrears in the case of the Centre as well as the States is considerably large. The level of arrears in regard to Central direct taxes is quite high. Total arrears are estimated to be over Rs. 5,000 crores of which a large amount may be recoverable. Among States, the level of tax arrears, for example, was over Rs. 1,250 crores in Uttar Pradesh at the end of March 1990. Other States having significant tax arrears include Andhra Pradesh (Rs. 461 crores); Orissa (Rs. 385 crores); Karnataka (Rs. 272 crores); Tamilnadu (Rs. 253 crores); Gujarat (Rs. 233 crores); Madhya Pradesh (Rs. 147 crores); Rajasthan (Rs. 108 crores); Punjab (Rs. 106 crores); Kerala (Rs. 105 crores) and Haryana (Rs.90 crores). The tax arrears are also significant in case of Kerala but largely due to electricity duty to be also recovered from State departments/undertakings. States must strive to get about three-fourth of the recoverable arrears in the exchequers even if legal cases are pending. In case of loans and advances also there are substantial arrears. Their recovery is within the States' efforts. There is also large amount of revenue foregone through exemptions in regard
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to taxes, notably excise. Definite measures would be needed to stop the leakages in the revenue system.
5.8.3 The performance of Central public enterprises has improved in recent years but it is still much below the expectations and will have to be considerably improved during the Eighth Plan. Internal resource generation has to be the main source of financing their outlays, particularly as the budgetary resources from Government and external commercial borrowings will have to be contained. There is ample room for improving the capacity utilisation, rationalising tariffs, increasing efficiency and exercising economy in staff expenditure. This would help the CPEs to mobilise resources from the capital market.
5.8.4 Realisation of the projected financing pattern of the Eighth Plan would call for rise in revenues faster than growth in GDP and restriction on NPRE to keep it much below the growth of GDP. In the Eighth Plan, special attention needs to be given to the containment of growth in staff and expenditure on them and further reduction on other non- development expenditure such as subsidies. The scale, the content and the rationale of subsidies will have to be critically reviewed. Through peoples' participation in development programmes, not only the outlay requirements corresponding to the growth targets and programmes can be reduced, but their effectiveness can also be in- creased. Furthermore, the assets created during the previous Plans can be maintained better and the maintenance expenditure can be reduced which would help contain the revenue deficit of the Government at the Centre and the States. Experience of certain States suggests that the efficiency and economy in expenditure on social services can indeed be brought in through people's involvement. Hard decisions will also be needed to make economic and social services yield their due. National consensus on measures is emerging for making higher education self-financing to some extent; making the direct taxes yield their due and indirect taxes responsive to their base and prevailing prices; and in the case of the States, reducing the differentials in the rate of sales tax among States within a narrow range, raising the irrigation tariff to cover at least operating expenses and charging a minimum power tariff.
Financing the Private Sector Investment 5.9.1 To finance the projected investment of Rs. 149,000 crores during the Plan period, the private corporate sector is expected to mobilise resources of the order of Rs. 68,930 crores out of its own savings and Rs. 58,770 crores as transfers from the household sector. The rest, Rs. 21,300 crores, may be net inflow from rest of the world. The household sector's investment of Rs. 2,88,000 crore would be met out of its savings of Rs. 605,170 crores. The balance of savings over investment is to be transferred to the public and the private corporate sector. Until the eighties, the net increase in household savings consisted mainly of bank deposits and loans to Government. In recent years, investment in corporate stocks has been increasing due to their higher returns compared to even tax-rebate-adjusted deposits and loans to Government. This effect is likely to be stronger in future as access to capital market increases and new instruments are brought in. The chunk of small investors is indeed growing fast. The capital market has been able to offer a good hedge for inflation, particularly if investment is made in equities. The share prices have appreciated much faster than that of the conventional hedges like gold and even real estate. The institutions responsible for capital market would need strengthening to promote a competitive atmosphere and improved efficiency in the use and deployment of funds. The level of resources mobilised by Non-Government Public and Private Limited Companies through capital market during the Seventh Plan period can at least be doubled during the Eighth Plan period and increased further with certain institutional developments which may help to tap the rural sector.
5.9.2 According to macro balances, the private corporate sector has been allocated Rs. 21,300 crores as inflow (net) from abroad. While a major part will come in the form of suppliers' credit and market borrowings, recent policy changes should result in increased investment by Non-resident Indians and foreign companies and portfolio investment from abroad. If the present expectations about larger foreign investment materialises, the position will improve.
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Financing of Public Sector Outlay in the Eighth Plan