FINANCIAL RESOURCES FOR THE PLAN
THE programmes of development in the public sector included in the Third Plan are estimated to involve an outlay of over Rs. 8000 crores. These programmes are closely interconnected and every effort has to be made to secure their full and orderly implementation. There are, however, uncertainties to be reckoned with. The actual expenditure incurred on several important projects depends upon how far the foreign exchange required is available and when precisely the necessary capital goods and equipment can be imported and installed. Progress in respect of important projects is linked with advance in certain others which are complementary. Any lag in one item of the investment programme may affect the pace of work on other items. The Third Plan postulates that the fullest effort will be made to mobilise internal resources and to carry through the accepted programmes with expedition. Nevertheless, some shortfalls in expenditure may be unavoidable, and part of the outlays corresponding to the physical programmes that have been approved may spill over into the Fourth Plan. As regards external assistance, it has been assumed that the total of actual payments against such assistance during the Plan period will be limited to Rs. 2100 crores (apart from assistance for meeting repayment liabilities) although the requirements on present estimates add up to a higher figure. Bearing these considerations in mind, financial outlays in the Third Plan are being taken at Rs. 7500 crores; Rs. 6300 crores by way of investment expenditure and Rs. 1200 crores by way of current outlays on social services and other developmental but recurring items. The financial provisions envisaged at present could, it is felt, be improved upon if production and savings increase sufficiently; the objective, must be to implement the physical programmes accepted by raising resources beyond the level indicated by the present estimates.
2. Of the investment outlay in the public sector of Rs. 6300 crores, about Rs. 200 crores represents, transfers to assist selected investments in agriculture, industry, housing etc., in the private sector. Private investment over the Third Plan is estimated as Rs. 4300 crores; the resources to be found by the private sector are of the order of Rs. 4100 crores.
3. The total investment programme for the Third Plan thus comes to Rs. 10,400 crores-Rs. 6100 crores in the public sector and Rs. 4300 crores in the private sector. The public sector has to find Rs. 7500 crores in all, including in this total Rs. 200 crores mentioned above and Rs. 1200 crores for current outlays.
4. An investment of the order of Rs. 10,400 crores over the five year period will mean a stepping up of the rate of investment from the current level of about 11 per cent of national income to about 14 per cent. Part of this investment is to be financed through external assistance. The rate of domestic savings will have to be raised from the current level of about 8 5 per cent of national income to about 11.5 per cent by the end of the Third Plan. It is evident that this will require the fullest effort to increase total output as envisaged in the Plan and steady pursuit of economic policies designed to keep consumption within the limits set by requirements of invest- ment. Considering the progress that has been made over the last decade in increasing production as well as in strengthening the poten- tial for further expansion, the investments and savings goals and the targets of the Plan are attainable, given efficient mobilisation and deployment of resources and availability of foreign exchange.
5. Over the last ten years there has been a striking increase in investment in the economy. Public sector investment at the com- mencement of the First Plan was around Rs. 200 crores. By the end of the First Plan, it had risen to about Rs. 450 crores. In 1956-57, the very first year of the Second Plan, it reached a level of Rs.500 crores and in the final year of the Second Plan it rose to about Rs. 800 crores. Thus the increase in public sector investment in finan- cial terms over the last ten years has been about fourfold. The Second Plan has also been characterised by high levels of investment in the private sector. While data on the break-up of this investment are not adequate, it is noteworthy that in large and medium industry and mining, the level of investment averaged Rs. 145 crores over the last five years as compared to Rs. 45 crores in the First Plan period.
6. The First Plan involved a sizeable step-up in investment- from about 5 per cent of national income to over 8 per cent. The substantial increases-both in agricultural and in industrial production-that were recorded during the Plan period made it possible to achieve this step-up in investment without causing any significant strain on the domestic price level or on the balance of payments. In fact. the prices fell sharply about the middle of the First Plan and the index of wholesale prices was 8 per cent lower at the end of that Plan as compared to the pre-Korean level.
47
48 THIRD YEAR PLAN
7. The scale of investment envisaged in the Second Plan was significantly larger than in the First Plan. The pattern of invest- ment was also markedly different. The investments in industry, trans- port and power by the public sector totalled Rs. 2650 crores as com- pared to Rs. 820 crores in the First Plan. Private investment in industry, transport and power in the Second Plan period was about Rs. 1025 crores as compared to about Rs. 310 crores in the First Plan period. These developmental tasks involved a greater strain on the economy, especially on the balance of payments.
RESOURCES : PHYSICAL AND FINANCIAL 8. Mobilisation of resources for securing an adequate rate of growth is the crux of the problem of planning in an under-developed economy. The problem may be presented in terms of the physical inputs needed and their availability or as one of finding a quantum of finan- cial resources adequate to cover the cost of the various development programmes, public and private, included in the, Plan. The two ap- proaches, if worked out fully, should give the, same result. Re- sources in physical terms are disparate, and the task of working out detailed physical balances that could be relied on in practice is a difficult one, especially in view of the inadequacy of data and the large number of assumptions inevitably involved. The estimation of needs of resources in financial terms has also its limitations. Each project authority is apt to make its estimate of the financial re- sources required on the assumption that it can secure whatever real resources it needs at current prices, irrespective of what the demands from other project authorities or the economy as a whole are likely to be. This is where the financial and physical possibilities have to be assessed together. The question ultimately is whether there are physical resources corresponding to the financial outlays. This aspect has to be taken care of by providing in the Plan adequate increases in outputs in key sectors and by ensuring that certain types of resources are obtained from abroad.
9. A Plan of economic development is not merely a list of programmes or projects to be implemented; it is a blue-print for the allocation of all the resources available to the community as between their different uses. The physical inputs needed for the accepted programmes have to be provided for; the consequential demands or adjustments called for elsewhere in the economy have also to be taken due account of. These complex interrelations cannot always be pre- cisely gauged in advance. The scale of investment and the pattern of resource mobilisation have, in the last analysis, to be considered in terms of an overall judgment as to what the optimum feasible is. This judgement may have to be reviewed from time to time and there has to be a measure of flexibility in the Plan to permit the necessary ad- justments in outlays. Since, however, the objective is to carry through the physical programmes approved, and since any shortfall or slowing down on these affects the pace of further advance, effort has to be concentrated on mobilisation of the resources required. The techniques of resource mobilisation and the scope for using each one of these more effectively have thus to be kept under continuous re- view.
10. Whether one starts with the question as to how much of resources can be raised in various ways or whether one takes the scale of outlays as the starting point is a matter of procedure rather than of principle. The process of arriving at conclusions is one of as- sessment and reassessment of both these with a view to determining the optimum scale of effort and the results to be secured within a given period. Resources are not a fixed fund to be drawn upon; they depend partly on the scale of investment being undertaken and the resulting increases in output during the Plan period. A Plan of development has thus to be accepted on a consideration of whether the proposed scale and pattern of investment gives the results that are felt to be ade- quate in terms of certain economic and social criteria and whether, on a view of the growth of resources in the period of the Plan, the outlays proposed can be financed without causing serious strains and stresses in the system. It is on a balancing of these considerations that the phasing of programmes and limits for financial outlays have to be determined.
FINANCE FOR THE PUBLIC SECTOR 11. The resources position for the Third Plan has been studied in detail over the last two years or so. The estimates presented in the Draft Outline were based on 1960-61 budgets of the Central and State Governments. During August-September 1950, discussions were held with State Governments to arrive at an assessment of their re- sources for the Third Plan period. Some, of these estimates were again reviewed in the course of discussions with the States on their Plan outlays. On the basis of these data and a further examination of the Centre's budget for 1960-61, revised estimates of the financial reSources likely to be available to the Centre and to the States were submitted to the National Development Council in January, 1961. In the light of these estimates, the National Development Council decided that the resources available for the Third Plan should be taken at Rs. 7500 crores, although the cost of the physical programmes being approved was larger. The following Table gives the resources estimates for the Third Plan as approved by the National Development Council and the corresponding estimates of the Draft Outline:
FINANCIAL RESOURCES FOR THE PLAN 49
12. The National Development Council noted that considering the needs of the economy, every effort had to be made to bridge the gap between the figure of Rs. 7500 crores for the financial outlays indi- cated by the estimates of resources. and the requirements adding upto over Rs. 8000 crores for implementing the physical programmes envis- aged. It was evident that the answer to the problem depended upon how far domestic savings could be stepped up to match the larger needs. The Council appointed a Committee to study and explore further possi- bilities in this direction. In the course of the last few months, further studies have been made of the 1961-62 budgets of the Central and State Governments and of the scope for getting more resources under each of the heads shown in the table above. In the light of this examination the Committee felt that there was warrant for taking a more optimistic view of the total resources that could be raised by the Centre and the States. The latest budget estimates show a greater buoyancy in revenue than Was allowed for earlier. It was, however., not possible at this stage to set out precisely the lines along which the gap between the requirements of physical programmes and the finan- cial provisions could be bridged. It was also necessary to bear in mind the limitation in respect of foreign exchange resources. The problem would need continuous review in the light of the advance made each year in mobilising resources. Accordingly, while the financial outlays are at present being retained at Rs. 7500 crores, sustained efforts will be made to improve upon this estimate and to diminish the gap through more effective mobilisation of savings.
13. The scheme of financing the public sector Plan that is now envisaged is as indicated in the Table below. For comparison, the contribution by each major source of finance in the Second Plan period is also shown in the Table:
Table 2 : Financial resources
(Estimates for the Second and Third Plans)
(Rs. crores)
Second Plan
Item as initially as estimated Third Plan
estimated now
1. balance from current
revenuse (excluding
additional taxation) 350 -50 550
2. contribution of
Railways 150 150(a) 100
3. surpluses of other
public enterprises (b) (b) 450
4. loans from the public
(net) 700 780(c) 800
5. small savings (net) 500 400 600
6. provident funds (net) 170 265
7. steel equalisation fund
(net) 38 105
8. balance of miscellaneous
capital receipts over
non-plan disbursements. 250 22 170
9. total of 1 to 8 1950 1510 3040
10.additional taxation
including measures to
increase the surpluses
of public enterprises 450(d) 1052 1710
11.budgetary receipts
corresponding to
external assistance 800 1090(c) 2200
12 deficit financing 1200 948 550
total 4800 4600 7500
(a) Inclusive of increased fares and freights.
(b) Included in items 1 and 8 in the Table.
(c) Includes investment by the State Bank out of P.L. 480 funds.
(d) In addition there was a gap of Rs. 400 crores to be covered by additional domestic effort.
(e) This includes investment of P.L. 480 funds by the Reserve Bank in special securities in 1960-61.
50 THIRD FIVE YEAR PLAN
14. Over the Second Plan period, aggregate financial outlay in the public sector has been below the target initially accepted but a little above the revised target. The inflationary pressures and the balance of payments difficulties that emerged in the early stages of the Plan necessitated a reappraisal of the resources outlook and it was decided (a) to limit the five-year outlays to Rs. 4500 crores or so and (b) to mobilise external assistance on a larger scale and to concentrate effort on the implementation of core projects. The Second Plan target for additional taxation has been substantially exceeded. on the other hand, the balance available from current revenues has shown a net fall of Rs. 400 crores as compared to the estimates that were worked out when the Plan was formulated. On small savings also, the collections over the five-year period have been about Rs. 100 crores less than the level envisaged earlier. Deficit financing in the Second Plan period has been within the limits set in the Plan. Part of this deficit financing was offset by the drawing down of foreign exchange reserve. The rise in prices that has occurred despite this indicates that the scope for further deficit financing in the coming years is limited.
15. The experience of the Second Plan highlights the fact that despite all the care that may be taken in estimating the contribution likely to be secured from each of the sources indicated in the tame, the outturn on individual items is in practice, liable to diverge from the estimates. For the five-year period ahead, it is, therefore, essential to focus attention on the adequacy of the financing schemes as a whole rather than on estimates in respect of each item taken by itself. Tile estimates of surpluses from revenues, for example, nave to be made on certain assumption as to the growth of tax yields in response, to the increase in economic activity. The growth rates in the economy may, however, vary from year to year and the response of tax yields depends on where the new incomes flows. Similarly, on the expenditure side the likely trends in non-Plan expenditure, both developmental and non-developmental, can be estimated in terms only of broad orders of magnitude. A small change in the assumptions can make a sizeable difference to the total figure under this head, especially since account has to be taken not only of the Central budget but of the budgets of fifteen States. Then, again, the data available regarding surpluses of public enterprises other than the railways are incomplete. Some of the projects are in the early stages of production; some will commence production in the latter part of the Plan period. The estimates of unit costs for all these projects are not precise the estimates of the surpluses that have been made at this stage can be regarded as only rough indications. The different modes of raising resources are at some point inter-dependent, and it is possible that while in one situation more can be secured by way of taxation, in another situation recourse to market borrowing may yield a better result. Timely availability of external assistance has also an important bearing on the domestic savings and investment effort. In the paragraphs that follow the estimates for the Third plan in respect of each item are explained.
16. Balance from revenue.-Revenue receipts of the Central and State Governments over the Third Plan are estimated to total Rs. 9250 crores as compared to the estimated receipts of about Rs. 1600 crores in 1960-61 (R.E.). The aggregate expenditures, non-developmental and developmental including those on the maintenance of schemes completed by the end of the Second Plan period, are estimated to add up to Rs. 8700 crores. Thus the surplus available for financing elan outlays is at present estimated at Rs. 550 crores over the Plan period. For working out the estimates of receipts, account has been taken of the increases in production in important lines as also of the expected rise in national income as a whole. On the side of expenditure, past trends have been projected, making allowance for expected variations and after providing for committed expenditure in respect of schemes that were part of the Second Plan but will, on the completion of that Plan, become a prior charge on revenues. The substantial increase in the expected balance from revenues during the Third Plan as compared to the Second reflects the increases in tax receipts that have taken place in the last two years partly as a result of increased economic activity and partly because of the additional tax effort that has been put through. Taxation undertaken in 1961-62 is not taken into account under this head; it is part of the additional tax effort of Rs. 1710 crores envisaged for the Third Plan.
17. Contribution of the Railways.-This represents the surpluses of the expected current earnings of the railways over their working expenses (excluding expenditure on 'Open Line Works' which is treated as investment) after providing for depreciation outlays and the pay- ment of interest and dividend in accordance with existing arrangements. In the Second Plan the contribution amounted to Rs. 150 crores; this was inclusive of receipts from increases in fares and freights carried out during the Second Plan period. The estimated surplus of Rs. 100 crores over the Third Plan is, however, exclusive of any additional resources that the railways might be able to raise during the Plan period by way of adjustments in fares and freights.
18. Surpluses of other public enterprises.This item represents the balance of resources available with public enterprises after providing for their working expenses, normal replacements, interest and dividend. In other words, it does not represent merely net profits; it also includes net accretions to depreciation reserve funds and other funds of these enterprises, the assumption being that these funds will be utilised for financing the expansion programmes of these enterprises. The estimate is tentative, as the data
FINANCIAL RESOURCES FOR THE PLAN 51
on which it is based are not sufficiently firm. Of the total of Rs. 450 crores, Rs. 300 crores is in respect of Central Government enterprises, namely, iron and steel, fertilisers, oil companies, refineries, posts and telegraphs etc. and the remaining Rs. 150 crores is to come from the enterprises of State Governments, namely, elec- tricity boards, transport undertakings etc.
19. Loans from the public.-Market borrowings over the Second Plan period amounted to Rs. 780 crores. The target set for the Third Plan is being taken at Rs. 800 crores, inclusive of the net collections under the prize bonds scheme. In comparing the target for the Third Plan with the total of market borrowings in the Second Plan period, it has to be borne in mind that the latter include substantial investments in Government securities by the State Bank of India out of the deposits of P. L. 480 funds as also sizeable purchases by the Reserve Bank. The net absorption of market loans by the public, including commercial banks, but excluding the Reserve Bank, was less than Rs. 300 crores. In the Third Plan period, P.L. 480 funds to the credit of the U.S. authorities will be held with the Reserve Bank which will buy special securities created for the purpose. Credit on this account has been taken under external assistance. Whatever support the Reserve Bank may have to give to the loan programme has of course to figure under deficit financing. The estimate of RS. 800 crores for the Third Plan period envisages considerable increase in the absorption of Government securities by the Life Insurance Corporation, the various Provident Funds and other investors. Credit has also been taken for moderate absorption by commercial banks. Bor- rowing--other than normal bank advances-by electricity boards or other enterprises of State Governments are included in the respective State targets for market loans. The requirements of the cooperative sector are, however, not included in the above estimate. The Plan envisages a considerable expansion of this sector and in assessing what the capital market can provide by way of subscriptions to Central and State loans, the claims of cooperative agencies have to be borne in mind. Market borrowings of the order envisaged postulate a sizeable growth in the resources of the commercial banks and careful regulation of bank credit to the private sector.
20. Small savings.-The target of small savings in the Second Plan was Rs. 500 crores; the actual collections are now estimated at about Rs. 400 crores. The potentialities of small savings are large and they will grow further as incomes increase. The movement has so far been confined largely to urban and semi-urban areas. In the coming years a considerable proportion of rural savings will go to cooperative agencies and it is as important to ensure that the finance for the cooperative sector is provided for as to enlarge the resources coming into the public sector. Nevertheless, small savings renge sent a promising field in which further effort can bring large results. The question is one of proper organisation and the lines along which the present field agencies can be strengthened deserve careful study.
21. Provident funds, Steel Equalization Fund and Balance of Miscellaneous Capital receipts over non-Plan disbursements.-As compared to net additions to provident funds of the order of Rs. 170 crores in the Second Plan, the estimate for the Third Plan works out at Rs. 265 crores. This is because of the increased pay scales for certain classes of employees both at the Centre and in the States and the introduction of a compulsory provident fund scheme at the Centre. Under Steel Equalization Fund, the net accrual in the Third Plan period is estimated at Rs, 105 crores. In respect of other items of capital receipts, including betterment levies, funds and deposits, the net receipt in the Third Plan period is estimated at Rs. 170 crores as compared to Rs. 22 crores in the Second Plan. This is the net result of a large number of items of receipts and expenditure on capital account. The main sources of receipts are betterment levy, recoveries of loans and advances from local bodies, cultivators and others, transfer from revenues to funds, net receipts under miscellaneous deposits, funds, remittances etc. On the expenditure side, the items to be reckoned, among others, are compensation payments to refugees and zamindars, loans and advances to cultivators, losses on State trading, if any, and other items of nonPlan disbursements, including outlays on civil works outside the Plan. The estimate of Rs. 170 crores for the Third Plan period has been worked out on a study of the past trends and on the assumption that non-Plan capital disbursements are kept down to the minimum. The estimate also postulates that recoveries in respect of arrears of outstanding loans and advances will be expedited.
22. Budgetary receipts corresponding to external assistance-The credit of Rs. 2200 crores taken against this item corresponds to total external assistance of Rs. 3200 crores that is envisaged in the Plan. The entire amount of Rs. 3200 crores does not dome to the public exchequer. Rs. 450-500 crores of the total receipts of external assistance will go towards repayments of loans maturing during the Third Plan. About Rs. 300 crores might go directly to the private sector by way of private capital inflows or loans from agencies like the I.B.R.D., the International Finance Corporation and the U.S. Export-Import Bank. Another Rs. 200 crores may represent agreed retentions of rupee resources by the U.S. authorities and additions to buffer stocks from P.L. 480 imports. Thus, about Rs. 1000 crores in all would not be available for the budget; the net credit that can be taken under this head is about Rs. 2200 crores as against the total external assistance of Rs. 3200 crores.
23. Deficit financing.-In view of the rise in prices that has occurred during the Second Plan period and the fact that, unlike in the Second
52 THIRD FIVE YEAR PLAN
Plan, there is no cushion of foreign exchange reserves that can be drawn upon as an offset to deficit financing, it is proposed to limit deficit financing in the Third Plan to the minimum warranted by the genuine monetary needs of the economy. There is, of course, no precise way of estimating the limits of safe deficit financing. Increases in money supply take place not only through the budgetary operations of Government but also through credit creation by the banking system. Both these have to be viewed together and their appropriate limits decided upon in the light of relative requirements as well as what the economy can absorb in the aggregate. On a broad view of all these factors, the limit for deficit financing in the Third Plan period has been placed at Rs. 550 crores, exclusive of the direct extension of credit by the Reserve Bank to co-operative agencies. The amount of deficit financing that can be undertaken has, however, to be judged from year to year in the light of emerging economic trends. What is required for implementing the Plan, whether in the public or in the private sector, are real resources and these depend upon the rate at which production goes up and the extent to which the community is prepared to defer consumption and enlarge savings. Deficit financing within moderate limits has a place in developmental planning but if it adds to purchasing power unduly at a time When the need is to keep it down so as to restrict consumption within the limits provided for the Plan, the consequences to the economy can be highly deleterious.
24. The following Table gives the resources estimates for the Third Plan separately for the Centre and the States :
Table 3 : Resources for the Third Plan
(Rs. crores)
item Centre State total
1 balance from current
revenues (excluding
additional taxation) 410 140 550
2 contribution of
Railways 100 ... 100
3 surpluses of other
public enterprises 300 150 450
4 loans from the
public (net) 475 325 800
5 small savings (net) 213 387 600
6 provident funds (net) 183 82 265
7 steel equalisation
fund (net) 105 ... 105
8 balance of miscellaneous
capital receipts over
non-plan disbursements 428 -258 170
9 total of 1 to 8 2,214 826 3,040
10 additional taxation
including measures to
increase the surpluses
of public enterprises 1,100 610 1,710
11 budgetary receipts
corresponding to
external assistance 2,200 ... 2,200
12 deficit financing 524 26 550
total 6,038 1,462 7,500
RESOURCES OF STATE GOVERNMENTS 25. On the basis of the discussions held with the States in August-November, 1960 the total of their resources came to Rs. 1416 crores. Annexure I at the end of this chapter gives the Statewise details of this estimate. This estimate needed revision in two respects : (i) interest liability on account of fresh loans from the Centre in the Third Plan and (ii) reduction in the earlier estimates of borrowings from the public. At the time of the discussions, precise estimates of interest liability in respect of loans from the Centre could not be made, and the ad-hoc figures taken at the time were found to be on the low side. In respect of borrowings from the public, the estimate as emerging from the discussions had to be corrected so as to make it consistent with the overall estimate for the Centre and the States together. After making these two adjustments the estimate of States' resources came to Rs. 1345 crores.
26. The further review of States' resources undertaken in the light of the 1961-62 budgets indicate that the resources picture for the States is considerably better; the total of States' resources now comes to Rs. 1462 crores. The main factor in the improvement is the larger transfers of resources from the Centre under income-tax and shareable excises. The following Table gives the estimates of States' resources as presented to the National Development Council in January, 1961, and as re-worked recently in the light of the 1961-62 budgets.
Table 4 : States Resources for the Third Plan
(Rs. crores)
estimates estimates
as as
presented worked
items to the out in the
N.D.C. in light of
January, 1961-62
1961 budgets
1 balance for current
revenues at 1960-61
rates of taxation -12 140
2 surpluses of public
enterprises 149 150
3 loans from the
public (net) 350 325
4 small savings (net) 377 387
5 provident funds (net) 79 82
6 balance of
miscellaneous capital
receipts over non-plan
disbursements -233 -258
7 total of I to 6 710 826
8 additional taxation,
including measures to
increase the surpluses
of public enterprises 610 610
9 deficit financing
(i.e. sale of securities) 26 26
total 1.346 1,462