The State-wise details of this revised estimate have yet to be worked out.
27. With States' resources at Rs. 1462 crores and Central assistance at Rs. 2375 crores, the total of the resources available for financing State Plans comes to Rs. 3837 crores. This is close to the programme limit of Rs. 3847 crores
FINANCIAL RESOURCES FOR THE PLAN 53
which has been suggested for State Plans. On present indications, thus, the gap between the programme limit and financial resources for the States is, if anything, negligible. With strict economies in expenditure, especially on outlays outside the Plan, it might, in fact, be possible for the States to finance out of their own resources some increases in outlays in respect of rural employment schemes.
ADDITIONAL TAXATION 28. The additional taxation target accepted initially in the Second Plan was Rs. 450 crores. It was recognised that this target was inadequate and that the bulk of the gap of Rs. 400 crores shown in the financing scheme for the Second Plan would have to be made good by additional taxation. The total of additional taxation actually put through in the course of the Second Plan was Rs. 1052 crores, which is considerably in excess of the initial target plus the gap just mentioned. Even with this measure of additional taxation the proportion of tax revenues to national income rose from about 7.5 per cent of national income at the beginning of the Second to about 8.9 per cent by the end of that Plan. With the normal increase in tax yields as a result of rising national income and the additional taxation of Rs. 1710 crores that is proposed over the Third Plan period, the proportion of tax revenues to national income will go up to 11.4 per cent by the end of the Third Plan. Considering the requirements of the Third Plan and the rise in incomes expected, this order of additional taxation is essential as well as practicable, and a substantial beginning towards this effort has been made in the Central budget for 1961-62.
29. It was stressed both in the First and in the Second Plans that a progressive enlargement of public savings is an essential element in sound financing of public sector programmes in a developing economy. Undoubtedly, there are limits to taxation and a number of complex economic as well as other considerations are involved in working out the concrete taxation measures to be adopted for realising a given target. To a considerable extent, programmes of investment in the public sector have to be financed by channelling into the public exchequer a part of the aggregate savings arising in the private sector. The programmes of public borrowings and small savings have to be oriented to this encl. Nevertheless, a significant element in the financing of investment in the public sector has to be public savings, that is, the surpluses of revenue receipts over non-investment expenditure together with the surpluses of public enterprises. The need to maximise the surpluses of public undertakings has to be borne in mind in deciding on the price policy in respect of the products of those enterprises. Enlargement and ploughing back of profits of public enterprises have an important contribution to make to the financing of development,
30. The choice between different forms of taxation has to be made on a consideration of the existing levels and the likely incidence and effects of further increases in each direction. There is scope in a developing economy for increasing the receipts both from direct as well as from indirect taxation. Direct taxation seeks to keep down consumption and enlarge the investible surplus by reducing disposable incomes. Indirect taxation works through a reduction in the quantum of goods that can be brought against the incomes that are spent. The relative merits of each form of taxation have to be determined pragmatically. The crucial point is to locate the surpluses as they are being generated in consequence of development so that additional taxation could be directed appropriately. The details of tax measures to be adopted during the Third Plan will have to be decided upon in the light of the economic situation as it emerges from year to year. It must be stressed, however, that if taxation in the aggregate is inadequate, this means not merely a loss of so much of resources for investment but a pressure on domestic prices that may affect the structure of production and aggravate economic inequalities.
31. In the field of income tax, the scope for raising the rates generally is limited, although adjustments in tax rates in particular income brackets may be necessary from time to time. The objective of these adjustments must be to enlarge public resources and to spread the burden equitably as between different groups of income earners. There are at present a number of other taxes on personal incomes and wealth : the wealth tax, the capital gains tax, the expenditure tax and estate duty. The yield from these taxes is relatively small. The object of all these taxes taken together is not only to secure larger receipts for the public exchequer but also to reduce economic inequa- lities. It is essential in this context that the relevant tax laws leave as few loopholes as possible for evasion or avoidance of taxes. In regard to taxation of corporate incomes. a number of tax incentives and concessions are at present being given for investment. These have contributed in no small measure to high levels of private Investment over the last five years. These incentives and concessions will need to be kept under continuous review so as to ensure that their benefit accrues to types of investment that have a high priority in the Plan. It becomes particularly important when these concessions are being given that the expense accounts of companies are carefully scrutinised and suitable provisions made in the tax laws to ensure that wasteful expenditures are kept down, if not eliminated.
32. The Third Plan will involve a substantial increase in indirect taxation. The number of assesses paying direct taxes in India, is very small. Although collections of direct taxes are expected to improve in the course of the Third
54 THIRD FIVE YEAR PLAN
Plan, the total of resources required cannot be raised without taxing consumption through indirect taxation over a wide range. In some cases, such taxation may be most effective at the point of final consumption; in other cases intermediate products or raw materials may be found more suitable. Indirect taxation along these lines tends to raise the price to be paid by the domestic consumer. This is a sacrifice that has to be accepted as part of the Plan. It should also not be forgotten that if taxation is insufficient, the benefit is likely to accrue to middlemen and traders in the shape of undue profits. Some of these indirect taxes affect the poorer classes but a great many fall on those who have comparatively high incomes. There is, in other words, an element of progression even in indirect taxes. There is, however, no escape from the fact, that in a country like India where the bulk of the people are poor. resources on an adequate scale cannot be raised without calling for a measure of sacrifice from all classes of the people.
33. A word may finally be said in this context regarding the role of the state governments in raising additional resources through taxation. It is inevitable that the larger part of the additional tax effort has to be put through by the Central Government but it is no less important that the State Governments also raise an adequate share for themselves. Taxation of the rural sector falls largely within their field. They have also to mobilise more effectively the elastic sources of revenue such as sales taxes. The collections under this head have improved notice.ably in recent years but discussions with several States indicate that there is considerable scope still for a tightening of administration in this respect. On present estimates, the States have to raise about Rs. 610 crores out of the additional taxation target of Rs. 1710 crores envisaged for the Third Plan. The additional taxation by the States in 1961-62 has been below expectations. It will be essential to make up for this in the coming years. Effort will also be necessary in respect of public undertakings of State Governments to enlarge their surpluses.
PRIVATE INVESTMENT 34. From the point of view of resources to be raised, the investment programmes of the public and private sectors have to be viewed together, as both draw upon the same pool of savings. The question, in other words, is whether if the public investment programme is to be financed along the lines indicated above, the private sector will be able to find adequate resources for carrying through the programmes for which responsibility has been placed on it in the Plan, The question could be put the other way also; given the investment programmes in the private sector, will the public sector be able to raise enough resources to cover its needs? The answer to these questions depends obviously on the estimates that can be made regarding the growth of savings in the aggregate and the adequacy of techniques for channelling them. A great deal depends upon the rate at which total output increases and the adequacy of the various constraints envisaged on consumption. Since data in respect of investment and savings over a considerable part of the economy are inadequate, it is not possible to attempt any very precise estimates regarding the sources and uses of funds for private investment. But, broadly speaking, considering the trends in the Second plan period and on a view of the likely. trends in the course of the Third Plan, it is felt that a total of Rs. 4300 crores by way of private investment can probably be financed, consistently with the public sector claims on savings.
35. The following Table sets out the likely levels of investment in the private sector over the Third Plan period under major heads as compared to the initial estimates of the Second Plan and the estimates of investment as now revised in the light of subsequent studies :
Table 5 : Investment in the private sector*
(Rs. crores)
Second Plan
group Third
original revised Plan
estimates estimates estimate
1 agriculture (including
irrigation) 275 675* 850
2 power 40 40 50
3 transport 85 135 250
4 village and small industries 100 225 325
5 large and medium industries
and minerals 575 725** 1100**
6 housing and other
construction 925 1000 1125
7 inventories 400 500 600
total 2400 3300 4300
It must be emphasized that the estimates given above are exceedingly rough. The improvement in the total of private investment in the Second Plan as compared to the original estimate is in large part due to a change in the basis of estimation in the light of later data. For the Third Plan, a substantial step-up is envisaged in the field of industry, large as well as small scale, and transport, the total under these heads rising from Rs. 1085 crores to Rs. 1675 crores. The increases envisaged in agriculture, and housing and other construction are moderate and should pose no serious problem, especially as investment in these sectors is largely self-financed. The
* These figures represent aggregate investment in the private sector including that financed out of resources transfer from the public sector.
** These figures do not include investment by way of modernisation and replacement.
FINANCIAL RESOURCES FOR THE PLAN 55
financial resources required for the investment programmes for large and medium industries and in the field of minerals are large. Broad estimates regarding the financing of investments in these fields are given in Chapter XXVI. While the total requirements of capital for new investment as well as modernization and replacement in industry and mining come to Rs. 1350---1400 crores, the resources available would appear to be somewhat short relatively to needs. On this basis some of the programmes in this sector may probably spill over into the Fourth Plan. specially since they require foreign exchange.
36. Of the total investment of over Rs. 4300 crores in the private sector, Rs. 200 crores will be provided by way of transfer of resources from the public sector. The assistance by the Reserve Bank to agriculture, small-scale industries and cooperatives will also be on a larger scale. External assistance to the private sector may be of the order of Rs. 300 crores. Investment in the private sector during the Second Plan has been at high levels and there is evidence of greater readiness on the part of private enterprise to avail itself of the opportunities being created by the development process. Investment in the private sector of the order of Rs. 4300 crores appears by no means difficult of achievement. Some of the estimates given in the table above, such as on housing and other construction and transport may well be exceeded. Investment in agriculture depends partly on savings in the rural sector itself and partly on the assistance available to agriculture from Government and cooperative agencies. Considering the increase in agricultural production envisaged in the Plan it would probably be desirable to let investment in agriculture exceed substantially the figure shown in the Table. Although, as stated earlier, all investment is in a sense financed from a common pool of savings, it has to be recognised that some savings flow in particular directions only. For example, the farmer or the small. artisan is apt to save if he is investing in his own farm or workshop. The decisions to invest and save are thus inter- linked. The same is true to an extent of housing. If investment of this type were to be reduced, there would probably be less savings. However, it has to be recognised that in a planned economy private investment, specially investment that draws on the organized capital market, has to be regulated with due regard to the limitation of aggregate resources for investment and the requirements of the public sector.
EXTERNAL RESOURCES 37. The problem of external resources is a difficult one for a country in its early stages of industrialisation. With the best effort it can make to enlarge its foreign exchange earnings, it cannot for a number of years cope with the increasing import requirements of the economy. A shortfall in internal resources can, to an extent, be met by letting the economy operate under some strain. Foreign exchange is, however, a specific resource which has either to be earned by larger exports or has to be secured through an inflow of external resources. There was little strain on India's balance of payments in the First Plan period, but foreign exchange reserves fell sharply by Rs. 481 crores in the first two years of the Second Plan. There has been a further drawing down of these reserves in the subsequent years, and the Third Plan commences with a level of reserves that cannot bear any significant further decline.
38. The Third Plan has been formulated on the basis that it would be advantageous from the point of view of the recipient country as well as the donor countries to plan for substantial amounts of external assistance for a relatively short period rather than to proceed in terms of varying and uncertain amounts of assistance over an indefinite period. Development effort in India over the Third and Fourth Plans has to concentrate on expansion of capital goods and machine building industries-together with corresponding development of mining, power and transport in a scale that would enable the country to build tip in this period sufficient capacity to produce domestically the bulk of the capital goods and machinery that it will require in subsequent periods for supporting high levels of investment. This is a priority that follows as much from the objective of maximising the rate of growth of the economy as from the need to attain a viable external accounts position within a foreseeable future. It is evident in this context that the foreign exchange requirements--and the requirements of external assistance-in the Third Plan will be substantial.
BALANCE OF PAYMENTS : FIRST AND SECOND PLANS 39. The First Five Year Plan was directed mainly towards increasing agricultural production and strengthening the economic overheads of development, like irrigation, power and transport. In the field of industry, the stress was mainly on utilisation of existing capacity more fully, public sector investment in industry and mining was only a small proportion of the total. The direct foreign exchange component of the First Plan was about Rs. 400 crores. In 1951-52, the first year of the Plan, there was a balance of payments deficit of Rs. 234 crores, but the situation improved substantially in the subsequent years because of the increase in agricultural as well as industrial production. The deficit in the balance of payments over the Plan period as a whole was Rs. 318 crores. Of this, Rs. 196 crores was financed by external assistance and Rs. 122 crores by a draft on foreign exchange reserves.
40. The following table shows the balance of payments position for the Second Plan period (figures for 1960-61 are subject to revision).
56 THIRD FIVE YEAR PLAN
The balance of payments deficit over the five year period is estimated at about Rs. 2100 crores as compared to the Plan estimate of Rs. 1100 crores. The external accounts came under heavy pressure soon after the Plan commenced, and the foreign exchange resources declined by Rs. 481 crores within a period of two years. A re-appraisal of the economic situation in 1958 led to the decision to scale down the Plan somewhat and to concentrate on "core' projects. The total external assistance utilised for the Plan has turned out to be more than 50 per cent over the level that was originally envisaged. The drawing down of foreign exchange resources amounted to Rs. 600 crores, as compared to the Plan estimate of Rs. 200 crores.
41. The adverse foreign exchange situation that developed during the Second Plan was due partly to underestimation of the direct foreign exchange requirements of the Plan and partly to failure to take into account sufficiently the growing import needs of a developing economy. The sharp rise in the tempo of private investment in the early stages of the Plan also contributed to the difficulties, although this probably affected the timings of deficits rather than their total over the Plan period. The difficulties arising, from these shortcomings in planning were aggravated by two bad agricultural seasons luring the Plan period. Food imports provided for in the balance of payments estimates for the Plan were 6 million tons. Actual food imports over the Plan period have been about 20 million tons. Imports of raw cotton have also been on a substantial scale. However, since the emergence of the foreign exchange crisis a stringent import policy has been followed. A rigorous system of exchange allocations on a half-yearly basis has been adopted and no significant fresh commitments have been made unless they were covered by external assistance.