12. The second five year plan accords high priority to industrialisation, and especially to the development of basic and heavy industries. A large expansion of public enterprise in-the sphere of industrial and mineral development is envisaged. It is, in fact, intended to strengthen further the programmes of development in respect of heavy industries, oil exploration and coal and to make a beginning with the development of atomic energy. The main responsibility for these programmes rests upon the Central Government. The carrying through of these new programmes will entail, besides the financial investment required, a great deal of strengthening of the organisational and administrative personnel available to Government It will also necessitate the adoption of expeditious procedures in the matter of taking decisions and executing them. It cannot be emphasized too strongly that unless steps are taken to augment rapidly the output of the means of production and to build up the fuel and energy resources which are so vital to development the scale and pace of advance in the coming years will be inhibited. The dynamism of the second plan lies to a considerable extent in these new programmes, on the fulfilment of which effort has to be concentrated. The results which the second plan promises are impressive, but correspondingly large is the effort that it calls forth by way of mobilisation and application of real and financial resources.
13. These developments in the public sector have to be viewed together with those envisaged in the private sector. The increase in the output of goods and services to be secured over the plan period is the result of developments in both these sectors. The two sectors have to function in unison and are to be viewed as parts of a single mechanism. The plan as a whole can go through only on the basis of simultaneous and balanced development in the two sectors. The plan incorporates the investment decisions taken by the public authorities, and the corresponding outputs or benefits can easily be estimated. As to the private sector, Government policy can influence private deci- sions through fiscal measures, through licensing and, to the extent necessary, through direct physical allocations so as to promote and to facilitate the realisation of the targets proposed. A large part of the private sector consists of millions of small producers scattered all over the country. Investment estimates and targets in these fields can only be in the nature of broad indications. Even in the field of organised industry and business for which more data are avail-
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APPROACH TO THE SECOND FIVE YEAR PLAN
able and which are more amenable to incentives or curbs offered or introduced by Government, there cannot obviously be the same degree of closeness or integration between resources and performance as in the case of activities directly undertaken by Government. Various investments in the public sector, such as for irrigation, power and transport for instance, increase the production potential of the private sector and the producers or enterprises concerned can be expected to take advantage of these facilities. Given an appropriate structure of relative prices, which Government can and has to control and influence, the desired allocation of resources in the private sector can be induced. In fact, it is appropriate to think more and more in terms of an interpenetration of the public and private sectors rather than of two separate sectors.
14. These are general considerations bearing on the formulation of industrial policy in the context of planning. The Government of India's industrial policy since Independence has been shaped broadly in terms of the Industrial Policy Resolution of 1948. That Resolution emphasised clearly the responsibility of Government in the matter of promoting, assisting and regulating the development of industry in the national interest It envisaged for the public sector an increasingly active role. While it reiterated the inherent right of the State to acquire any industrial undertaking whenever the public interest requires it, it laid down, in view of the circumstances then existing, a certain demarcation of fields for the public and private sectors. Important developments have taken place since the Resolution was adopted in 1948. There is no* a clear appreciation of the goals and direction of development. Planning has proceeded on an organised basis, and it is essential to strengthen and accelerate this effort in the coming years. The 1948 Resolution has been reviewed in the light of these considerations and the experience gained so far, and the new Industrial Policy Resolution was placed before Parliament by the Prime Minister on the 30th April, 1956.
15. The full text of this Resolution is given in the annexure at the end of this chapter. As the Resolution puts it "The adoption of the socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector. Other industries which are essential and require investment on a scale which only the State, in present circumstances, could provide, have also to be in the public sector. The state has, therefore, to assume direct responsibility for the future development of industries over a wider area". The Resolution classifies industries into three categories, having regard to the part which the state would play in each of them. The first category shown in Schedule A, consists of industries the future development of which will be the exclusive responsibility of the State. In the second category, shown in Schedule B, are industries which will be progressively state-owned and in which, therefore, the State will generally take the initiative in establishing new undertakings, but in which private enterprise will also be expected to supplement the effort of the State. The third category comprises all the remaining industries, the further development of which will, in general, be left to the initiative and enterprise of the private sector. These categories are not intended to be rigid or watertight In the industries listed in Schedule A, for instance, the expansion of existing privately owned units is not precluded, and the State is free to secure the cooperation of private enterprise in the establishment of new units when the national interest so requires, subject to the proviso that while securing such cooperation, it will ensure, through majority participation in the capital of the undertaking or otherwise, that it has the requisite powers to guide the policy and control the operations of the undertaking. Schedule B relates to what may be called the mixed sector, a sector in which the State will enter progressively and enlarge its operations, but private enterprise will, at the same time, have the opportunity to develop, either on its own or with state participation. In the rest of the field, development will ordinarily be undertaken through the initiative and enterprise of the private sector, but it will be open to the State to start any industry even in this field. The prime consideration determining State policy over the whole industrial field is promotion of rapid development in keeping with the overall objectives defined. The public sector has to grow--and rapidly-and the private sector has to conform to the requirements of the Plan. There has necessarily to be "a great deal of dovetailing" between the two sectors, and it is recognised that the private sector has to be given the opportunity and facilities to function effectively within the field allotted to it. It is within the framework of this new Industrial Policy Resolution that rapid industrialisation has to be carried through in the coming years.
16. The Industrial Policy Resolution of 1948 also indicated Government's approach to the problem of cottage and small-scale industries. The new Resolution reiterates this approach. These industries offer some distinct advantages in relation to some of the problems that need urgent solutions. They provide immediate large- scale employment; they offer a method of ensuring a more equitable distribution of the national income; and, they facilitate an effective mobilisation of resources of capital and skill which might otherwise remain unutilised. The need to promote, modernise and reorganise these industries is paramount The problem is one of devising effective policies as well as of making suitable organisational arrangements. Unregulated or haphazard applica-
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SECOND FIVE YEAR PLAN
tion of modem techniques in all spheres of production is apt to create or aggravate technological unemployment There is need for regulation here. This is not to suggest that a freezing of existing techniques is at all indicated by considerations of economic or social policy. It only means that conditions have to be created in which modern techniques can be adopted and introduced more and more in these lines of production and that the transition should be orderly. In addition, it is important to stress the fact that development along new lines has to be the keynote of policy in this field. As national income increases, demands get diversified, and as power, transport and communication facilities are developed, the scope for small enterprises of various kinds, which either cater for new consumer demands, or function in a way complementary to large-scale industry, increases steadily. From the point of view of enlarging employment opportunities as well as of increasing production these new lines of development have to be fostered energetically.
17. The workers in cottage and small-scale industries suffer from a variety of handicaps. Some of these handicaps such as lack of access to raw materials of the right quality and at the right price and the unsatisfactory state of equipment follow directly from lack of finance. There are other difficulties such as inadequate marketing arrangements and the lack of contact with new techniques of production and with the changing requirements of the market which also limit the capacity of the workers in these industries to utilise their labour power and their skill to the fullest advantage. Sustained effort to overcome these handicaps and difficulties will be necessary. In general, the expansion of rural electrification and the availability of power at prices which the workers can afford will give a substantial fillip to these industries, but further assistance in various ways will also be required. It will be necessary, for instance, to organise in rural areas community workshops where workers in different types of industries can come together and carry on their production activities in a suitable environment. There is similarly need for encouraging small and medium-scale enterprise through a number of industrial estates with facilities for transport, power and the like provided by public authorities. In spheres in which it is possible to increase employment and output through cottage, village and small scale industries and where these industries are capable of using improved techniques progressively, it is necessary to think in terms of integral programmes of production covering factories as well as small units of production. The second five year plan has laid special stress on increasing the supply of consumer goods by using existing skills and equipment and steadily introducing technical improvements in the village and small-scale industries sector. This sector has to be organised more and more on cooperative lines so as to enable the small producer to secure the advantages of buying raw materials and selling his products on a large scale, of getting access to institutional credit and of utilising improved methods and techniques. An integral programme of production may in, some cases work on the basis of differential taxation; in others, buying over of the product at stated prices and a state-sponsored or cooperative marketing arrangement may be needed.
18. The problem is not to be viewed as one of merely safeguarding the interests of workers in existing cottage or handicraft units or of maintaining the demand for existing types of cottage industry products. It is also-and increasingly-one of finding new types of products and trying out new modes or techniques of production which cater more effectively to the new demand created by rising incomes. It is the promotional rather than the protective aspect of policy which has to become more and more important in the adaptation and reorganisation proposed in this sector. If cottage and small industries have not fared well so far, one reason is the stagnancy of the economy and the consequent lack of demand. The increase in investment activity which developmental planning involves will increase existing demands and create new ones. In a country like India with vast distances and a large potential market, the demands can and ought to be met through production in efficient, decentralised units. There are other reasons also which weigh in favour of a wide diffusion of industry. Up to a point the growth of large towns and cities is a necessary accompaniment of industrialisation. The avai- lability of power, transport banking and other facilities in concentrated areas provides certain economies which make for an aggregation of industry in big towns and cities. Beyond a point, however, there are social costs like emergence of slums and increased incidence of ill-health. With the development of transport and communications and extension of power to smaller towns and rural areas, the economic advantage in favour of highly concentrated areas also narrows. From this point of view as also for raising incomes in rural and semi-urban areas, the development of small industries deserves special attention. Only thus is it possible to draw upon the large reservoir of skills and talents available over the vast areas of the country.
REDUCTION IN INEQUALITIES 19. Economic development has in the past often been associated with growing inequalities of income and wealth. The gains of development accrue in the early stages to a small class of businessmen and manufacturers, whereas the immediate impact of the application of new techniques in agriculture and in traditional industry has often meant growing unemployment or under-employment among large numbers of people. In course of time this trend gets corrected
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APPROACH TO THE SECOND FIVE YEAR PLAN
partly through the development of countervailing power of trade unions and partly through state action undertaken in response to the growth of democratic ideas. The problem before under-developed countries embarking upon development at this late stage is so to plan the alignment of productive resources and of class relationships as to combine development with reduction in economic and social inequality; the process and pattern of development has, in essence, to be socialised. There are existing inequalities of income and wealth which need to be corrected and care has to be taken to secure that development does not create further inequalities and widen the existing disparities. The process of reducing inequalities is a two- fold one. It must raise incomes at the lowest levels and it must simultaneously reduce incomes at the top. The former is, basically, the more important aspect but early and purposeful action in regard to the second aspect is also called for. Development along these lines has not so far been attempted on any significant scale under democratic conditions. There are no historical parallels or plans of action which could be regarded as providing an answer to this special problem facing under-developed countries. The problem will have to be faced pragmatically, and it will call forth a great deal of flexibility and experimentation in the matter of techniques. It is important to ensure that in reducing inequalities no damage occurs to the productive system as would jeopardise the task of development itself, or imperil the very processes of democratic change which it is the objective of policy to strengthen. On the other hand, regard for democratic and orderly change cannot be allowed to become a sanction for existing or new inequities.
20. It must be stressed that reduction in inequalities in income and wealth can follow only from the totality of measures and institutional changes undertaken as part of the plan. The pattern of investment proposed in the plan, the direction to economic activity given by State action, the impact of fiscal devices used for mobilising the resources needed for the plan, the expansion of social services, and the institutional changes in the sphere of land ownership and management, the functioning of joint stock companies and the managing agency system and the growth of the cooperative sector, under State sponsorship all these determine the points at which new incomes will be generated and the manner of their distribution. It is the essence of a planned approach that all these measures should be harmonised and brought to a focus in a manner that would ensure an enlargement of incomes and opportunities at the lower end and a reduction of wealth and privilege at the upper end.
21. Fiscal measures have an important part to play in reducing inequalities of income and wealth. It has to be recognised, however, that some of the measures which might reduce inequalities are apt to react adversely on incentives. The Indian income tax is highly progressive, and apparently, the scope for enlarging public revenues or reducing inequalities through a stepping up of these rates is not large. The Taxation Enquiry Commission stressed in this context the need for measures to check evasion. It also mentioned "a widening of the taxation of wealth and property" as "a possible means of reducing inequalities". The adaptation of the tax system to the requirements of development in the context of the objectives defined is necessarily a problem for continuous study, and official as well as non-official research organisations will have to apply themselves to an examination and elucidation of the implications of various possible changes that can be made in the tax structure.
22. It is possible that rather far-reaching changes in the tax system will be required, if the more well-to-do classes of society are to be called upon to make a larger contribution to the resources for development without losing in the process the incentive to work harder or to save more. It has recently been suggested that the substitution of expenditure for income as the basis for personal taxation, coupled with measures to tax wealth and capital gains, can bring about this result. The idea of an expenditure tax has been discussed by economists on several occasions in the past. There is a growing body of expert opinion in favour of an expenditure tax. There are, however, administrative problems which have to be resolved before a change of this character can be made. It may be that an experimental approach on a limited scale may have to be adopted initially. Experience in more advanced countries seems to indicate that progressive income taxes on the scales that are now prevalent are in reality not so effective, firstly because the incomes by way of capital gains escape such taxation, and secondly because there is a great deal of evasion in various ways. A tax based on expenditure may encourage saving, and, in theory at any rate, it is a more effective instrument than an income tax for moderating inflationary or deflationary tendencies.
23. The most important single factor responsible for inequalities of income and wealth is the ownership of property. Incomes from work are by no means equal, but in part at any rate, they have some justification in terms of productivity or relative scarcity. Some types of work are, however, remunerated more liberally than others for reasons which are not directly connected with productivity. Differential monetary rewards are often a matter of tradition an existing psychological or social rigidities. It has also to be borne in mind that capacity to work effectively at higher levels depends on a person's education and training, and these are a matter of the accident of birth or circumstances. A. large expansion of general and technical education for all classes of people irrespective of their paying capacity is