FINANCING THE PLAN
Introduction This Chapter after reviewing the financing of the Seventh Five Year Plan (1985-90) and the Annual Plans (1990-92), provides the projected financing of the Annual Plan 1992-93 and the Eighth Plan, 1992-97. The Chapter brings out the changes in the actual financing compared to the projections during the Seventh Plan 1985-90 and Annual Plans 1990-92. It examines the critical issues that have risen in the financing of investment by the Central and State Governments as well as the public undertakings.
5.2 Financing the Plan has three major dimensions: first, estimating major sources of finance; secondly, allocating these resources to user sectors (both public and private) for investment; and thirdly, checking the consistency of the sources and application of resources with the overall growth of income, consumption and savings.
5.3 The sources of financing projected in the Eighth Plan differ from the Seventh Plan in many respects. These projections reflect reduced dependence on borrowings, domestic as well as foreign and on deficit financing, and place greater reliance on resource mobilisation through buoyancy in revenues and economy in non-Plan (revenue) expenditure(NPRE). Thus, the Eighth Plan calls for much greater effort towards raising the resources domestically and deriving more out of the same expenditure, in support of the targetted GDP growth at 5.6 per cent. The projections of Plan financing, imply rationalisation of fiscal, monetary and financial policies.
5.4 Since the Seventh Plan projections were made at 1984-85 prices, the review of performance is also made at these prices using estimated gross domestic product (factor cost) deflators.
5.5 The Seventh Plan financing placed considerable reliance on additional resource mobilisation (ARM) and contribution of public enterprises. The pattern that has emerged after five years shows the shortfalls in contribution of public enterprises and ARM, on the one hand, and substantial increase in non-plan revenue expenditure on the other. It reveals a nearly three-fold deficit in Balance from Current Revenues (BCR), at base rates, and more than two-fold of level of deficit financing compared to the original projections.
5.6 While the average growth of GDP during the Seventh Plan (5.8%) exceeded the-Projected rate (5%), the domestic
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savings rate (estimated at 20.3%) fell short of the projected rate (24.3%). The average savings rate during the Seventh Plan was just about the average rate during the Sixth Plan. The shortfall in domestic savings rate was largely on account of lower rates of public sector and private corporate savings. The household savings rate is estimated to have increased significantly to 17.8 percent by 1989-90, compared to the base year.
5.7 A review of savings and investment during the Seventh Plan, as compared to the projections, reveals three major features: First, household savings financed household investment to the extent of 8 percent of GDP as was projected. But, the overall gross (domestic) savings rate (20.3%) turned out to be substantially below the projections (24.3%). The lower proportion was largely due to a change in the basis of estimating GDP in the new series, which raised GDP from 1980-81 onwards by over 8 percent as compared to the old series. The corresponding ratio (comparable to 24.3%) in terms of New Series of GDP would be around 22 per cent. Secondly, the overall rate of gross investment during the Seventh Plan is estimated to be 22.7 percent compared to the projected 25.3 per cent. Much of this shortfall was in the public sector. Thirdly, despite some shortfall in investments, domestic borrowings and inflows from the rest of the world in the public sector were consistently in excess of projections. The private corporate borrowings, domestic and foreign also exceeded the projections.
5.8 The Seventh Plan review shows significant deterioration in budgetary savings and in the BCR of the Centre and the States. Budgetary dissaving amounted to over 2 percent of GDP and BCR worked out to (-) 0. 65 percent of GDP f or the Centre during the Seventh Plan period. The overall fiscal (gross) deficit of the Centre amounted to 8.2 percent of GDP during the Plan. The budget deficits of the Central Government far exceeded the projections leading to pressure on the balance of payments necessitating foreign borrowings on a much larger scale than projected.
5.9 During the Seventh Plan period, the role of the capital market as the medium for mobilising additional resources expanded greatly. The aggregate level of new capital issues by the non-Government public and private limited companies reached about Rs.7,910 crores in 1989-90, compared to little over Rs.1,787 crores in 1984-85. These companies raised about Rs.23,200 crores during the Plan period. The composition of resources raised changed in favour of debentures. This period was marked by some large-sized or mega issues each exceeding Rs. 100 crores. Institutional investors have played a major role in this process.
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Financing of Public Sector Outlay in the Seventh Plan 5.10 The actual financing pattern of the public sector Plan compared to the projections for the Centre (including UTs) , Central public sector enterprises (CPEs) and the States and their PSEs are set out in Statement 5.1 based on the latest estimates as included in the Annual Plan reviews.
5.11 At 1984-85 prices, the deficits of the Centre and the States in BCR (i.e., the excess of non-plan revenue expenditure (NPRE), over revenue receipts), excluding ARM worked out to be 2.7 times the projected level and the contribution of public enterprises also fell substantially short. The Centre's BCR, (even after ARM), deteriorated, at current prices, sharply from a positive Rs.62 crores in 1985-86 to a negative Rs.2824 crores in 1989-90. Among States, the BCR (including ARM), of 10 special category States deteriorated from a little over Rs.42 crores in 1985-86 to about minus Rs.558 crores in 1989-90, while in the case of the 15 non special category States the BCR, including ARM, deteriorated from Rs.3,304 crores in 1985-86 to Rs.3,107 crores by 1989-90. The deterioration in the BCR of the Centre and the States including ARM, was the result of increased expenditure on pay and allowances, interest payment liabilities and other NPRE, notably subsidies. In certain States, even net Miscellaneous Capital Receipts (MCR) i.e. recoveries of loans and advances and deposits and advances less of disbursements by way of repayment of loans to the Centre and financial institutions, non-Plan loans and advances; and construction of official buildings, non-Plan capital outlay, etc. were negative at a substantial level, mainly because of higher loan repayment liability. There were increased losses of certain CPEs and States' electricity and transport undertakings.
5.12 This erosion of own resources was met by increased borrowings and RBI support or deficit financing. Market borrowings and MCR far exceeded the projections and deficit financing was more than twice the projected level at base year prices. Public enterprises' borrowings increased rapidly. Though domestic resources contributed the major part of investible funds, plan financing turned out to be inflationary. With the increase in borrowings, the burden of debt servicing has become significant and this would loom large over the finances of the Centre and the States during the Eighth Plan.
5. 13. Dependence on foreign savings taken as a whole continued to be at a lower level compared to most of the developing countries with low per capita income. However, current account deficit as a proportion of GDP turned out to be much higher than what was originally envisaged. Besides, there was increased dependence on non-concessional foreign inflows and substantial drawdown on the country's foreign exchange reserves.
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Centre and Central Public Sector Enterprises 5.14 The approved plan outlay for the Centre (including the, UTs) for the Seventh Plan was Rs.99,302 crores and as per the latest estimates, their expenditure is placed at Rs.135,304 crores. But, expenditure at 1984-85 prices amounted to about Rs.105,939 crores which was 6.7 percent more than planned.
Centre's Balance from Current Revenues (BCR) 5.15 The Centre's BCR, at 1984-85 prices, shows a deterioration of Rs.4047 crores. Excluding ARM i.e. at base rates it shows a deterioration of Rs.1,540 crores over the original estimates due to higher levels of subsidies, defence expenditure and NPRE. The total revenue receipts of the Centre increased by 17 percent per annum, during 1984-85 to 1989-90, whereas the revenue expenditure has been rising by 20 percent per annum.
5.16 The estimated ARM (net of States' share) during 1985-90 by the Central Government including PSEs, amounted to Rs.14,315 crores, at base year prices compared to the Plan projection of Rs.22,490 crores.
Public Sector Enterprises 5.17 The total resources of Central Public Enterprises (CPEs), both departmental and non-departmental, (at 1984-85 prices) during the Seventh Plan was originally estimated at Rs.51,694 crores, including ARM, but the latest estimates (Rs.41,124 crores) even after including bonds were less by nearly Rs. 10,570 crores. The estimated ARM by these enterprises was considerable but there was a shortfall of Rs.5668 crores as compared to projections. Altogether, total internal resources (retained profits, depreciation, etc.) fell considerably short of target and dependence on borrowings increased. Extra budgetary resources (EBR) were higher, as also were the inter-corporate transfers. The budgetary support (equity and loans) by the Central Government amounted to Rs.37,126 crores (at current prices) during the Plan period.
5.18 The CPEs'extra budgetary resources (EBR) including external commercial borrowings/suppliers credit, issue of bonds/debentures and deposits (as also inter-corporate transfer of funds) amounted to Rs.27,324 crores. Central enterprises were allowed to float public loans through the issue of bonds/debentures, on a selective basis, to supplement resources for outlays and to tap the private savings. They totalled Rs.10,757 crores during the five years.
5.19 The CPEs in selected sectors were also allowed to issue tax-free bonds from 1987-88. Out of the total issue of bonds during 1987-90, about two- thirds were tax-free bonds, at the
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rate of 9 percent, and the rest were at the rate of 13 per cent. As much as 85 percent of bonds were picked up by the financial institutions, banks and corporate bodies.
Centre's Borrowings and Deficit Financing 5.20 Reliance on domestic borrowings in the form of market borrowings, small savings and provident fund and net capital receipts for financing the Plan was higher than the original estimates. These items of domestic borrowings financed 61.5 percent of the Centre's Plan as against 49.5 percent envisaged in the original Plan estimates. Deficit financing has totalled Rs.35,626 crores (at current prices). At base year prices, this is more than twice the level projected in the original Plan at Rs.14,000 crores.
Central Assistance 5.21 Total Central assistance together with advance (adjusted) plan assistance normal as well as for relief and special plan loans for Punjab added to total Rs.40,262 crores at current prices, which works out to Rs.32,197 crores at 1984-85 prices (Statement 5.1) compared to Rs.29,737 crores in the Plan that is higher by 8.3 Per cent. The total Central assistance for the States' Plans and special assistance for area programmes during the Plan amounted to Rs.36,554 crores as per details given below (Rs. crores):-
Plan Present
Estimates Estimates
(at 1984-85 prices) (at current
prices)
I. State plans 27,278 33,594
1. Normal Central Assistance (net)
including Plan loan to Punjab, etc. 23,478 30,435
i) Special Category States** 7,098 9,384
ii) Non-Special Category States*** 16,380 21,051
2. Additional Assistance for Exter- 3,159 3,800
nally-aided Projects
II Area Programmes 2,459 2,960
1. Hill areas & Western Ghat Areas 870 1,043
2. Tribal Sub-Plan 756 ---
3. North-Eastern Council (NEC) Plan 575 ---
4. Border Area Programmes 200 219
5. Other Special Area Programmes 58 123
III. Total (I & II) 29 36,554
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* Adjusted for Advance Plan Assistance of Rs.149 crores provided during the Sixth Plan.
** Arunachal Pradesh(added from Feb.1987), Assam, Himachal Pradesh, Jammu & Kashmir, Manipur, Meghalaya, Mizoram(added from Feb., 1987), Nagaland, Sikkim and Tripura
*** Andhra Pradesh, Bihar, Goa (added from May,1987) Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamilnadu, Uttar Pradesh and West Bengal.
5.22 Allocations of Central assistance for State Plans of non-Special Category States were made following Gadgil formula as modified at the beginning of the Sixth Plan.
States and State-level Public Enterprises (SLPEs) 5.23 The approved Plan outlay for all States for 1985-90 was Rs.80,698 crores. As per the latest estimates made jointly with the States and the Ministry of Finance, the resources actually available for their plans are placed at Rs.89,964 crores. But adjusting for price changes, the actual resources work out to be lower by 9.1 percent and expenditure lower by 9.3 percent compared to the approved outlay. The latest estimates of resources indicate a deterioration in the States' BCR including ARM. The BCR shows deterioration due to lower turn out of their own tax revenues, as also from non-tax sources; and increase in interest payments and other non-plan non- development expenditure. Market borrowings for State Plans, at 1984-85 prices were realised at a level lower than projected in the Plan. Share of small savings, net accrual of State Provident Funds and negotiated loans were larger than projected. Together, these capital receipts (excluding bonds of CPEs), exceeded the Plan estimates, at comparable prices, by about 25 percent. The review shows that the share of Central assistance in financing of the States' Plan actually turned out to be 44.5 percent compared to the projected share of 36.8 percent. The Central assistance, at comparable prices, worked out to be higher (by 8.3%) at Rs.32,197 crores compared to the projected level of Rs.29,737 crores. Despite increased Central support, the share of the States in total public sector resources turned out to be less than 40 percent compared to 44.8 percent projected.
5.24 Among Special Category States, the BCR as also the opening balance was negative in all cases. In view of this, ARM through tax and non-tax measures as also contribution of Departmental Undertakings, (including their ARM), was left to cover their deficits under BCR and opening balance. Central assistance exceeded their Plan expenditure as it covered their BCR gap until 1988-89.
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ARM through tax and non-tax measures as also contribution of Departmental Undertakings, (including their ARM), was left to cover their deficits under BCR and opening balance. Central assistance exceeded their Plan expenditure as it covered their BCR gap until 1988-89.
5.25 The latest estimates( at 1984-85 prices) of the BCR of the States, including ARM show a surplus of Rs.12,813 crores which is significantly less than the projected surplus of Rs.19,762 crores. This deterioration was mainly due to shortfall in the projected buoyancy of revenue (in real terms) and increasing NPRE, especially non-development expenditure.
5.26 Prior to 1989-90, in the case of Special Category States, the gap in BCR was covered through Central assistance. However, from 1989-90, States were expected not to show any negative BCR as the Ninth Finance Commission (NFC) provided revenue gap grants based on their assessment. In view of this, the gap in BCR, if any, of the Special Category States was left to be covered by these States through ARM and reduction in the NPRE. But, all the Special category States had gaps in their BCR which they maintained was due to the NFC having over-assessed their revenues and underestimated their non-Plan revenue expenditure.
State-Level Public Enterprises 5.27 State Electricity Boards/Undertakings (SEB) and State Road Transport Corporations/Undertakings (RTC) have shown an estimated level of deficit (negative contribution) of Rs.1,981 crores, compared to their estimated contribution at Rs.7,243 crores in the Seventh Plan. By the terminal year of the Plan, only the SEBs of Andhra Pradesh, Kerala, Madhya Pradesh and Maharashtra contributed positively, in terms of commercial surpluses, (i.e. adjusted for depreciation) to Plan resources in revised estimates. Only RTCs of Andhra Pradesh, Tamil Nadu and marginally of Goa contributed positively in the revised estimates. Departmental transport undertakings in the concerned States showed negative contributions, except for Haryana Roadways.
Review of Annual Plans 1990-91 and 1991-92
Annual Plan 1990-91 5.28 The Annual Plan 1990-91 was formulated initially as part of the Eighth Plan envisaged for the period 1990-95. While the tempo of economic development through larger investment and outlay in the public sector was proposed to be maintained, due emphasis was placed on containing deficit financing within limits in view of the inflationary trends. The need for ARM by the Centre and State Governments and their enterprises in financing their Plan was given due weight. The resource requirements of the States for larger State Plans and for more financial autonomy in the
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developmental activities of States was fully recognised and Central Plan assistance to the States was substantially stepped-up.
5.29 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 resources of Rs.65002 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.