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India’s Third Five Year Plan

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1962
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INDIA launched its Third Five Year Plan for economic development in April 1961. This Plan seeks to carry one stage further the development effort initiated ten years ago. The objectives of the Plan, its targets and magnitude, its investment priorities, and the pattern of its financing have to be viewed in the light of the experience of the last decade and of the needs of the economy in the years ahead. A brief assessment of the achievements of the First and Second Five Year Plans will thus serve as a useful backdrop to a consideration of the Third Plan.1

At the commencement of the First Plan in 1951, the Indian economy had not yet recovered from the dislocating effects of war and partition. Against this background, the aims of the First Five Year Plan were relatively modest; they were to rehabilitate the economy and restore prewar consumption levels in the basic spheres of food and clothing. The Plan itself involved, to a considerable extent, the putting together and coordination of a number of individual development schemes that had been initiated, or had been planned, earlier. The significance of the First Plan, however, extended beyond its immediate objectives and results. It lay in the positive direction it gave to the development process. The First Plan, in fact, provided a frame of objectives for planning and attempted a long-term projection of income growth. The emphasis in the First Plan was, as was to be expected in an economy of the Indian type, essentially on infrastructure investment, on agriculture, and on rehabilitation. Only a modest program was attempted in the direction of industrialization.

The First Plan period witnessed a series of good harvests; agricultural production rose by 22 per cent over the five-year period. Since agriculture accounts for nearly one half of the total national income in India, this development assisted greatly in the increase of more than 18 per cent in real national income during the five years. Over the same period prices declined by more than 17 per cent; one cannot, however, read too much significance into this behavior of prices, as the beginning of the Plan coincided with the post-Korean commodity boom in India, and its end with a drop in agricultural prices as a result of the good harvests. On external account, the Plan imposed no strain, the drawing down of sterling balances representing in the main the effect of capital transactions. In retrospect, it seems clear that the investment involved in the First Plan period—Rs 16 billion in the public sector2 and Rs 18 billion in the private sector—did not place undue strain on the economy. On the other hand, doubts have been raised whether the economy did in fact invest as much as it might have done in the Plan period.

The Second Plan (1956–61) marked the beginning of a more positive planning effort and a more consistent attempt at integrating the various sectoral programs. The Plan envisaged substantial progress toward industrialization and placed special emphasis on the building up of basic industries; in particular, attention was devoted to the iron and steel, coal, and transport sectors. The total investment envisaged was Rs 38 billion in the public sector3 and Rs 24 billion in the private sector. The Second Plan ran into considerable difficulties fairly early. The succession of good harvests that had been a feature of the First Plan gave way to setbacks in agricultural production. In 1957–58, food production suffered such a cutback that real national income fell. The favorable experience on external account in the First Plan was followed by a liberalization of imports in 1956–57; the surge of import demand that followed partly represented a backlog built up during restrictionist years but was mainly brought about by an upsurge in private investment earlier than was expected, together with the planned step-up in public investment. The result was a rapid depletion of India’s international reserves. In contrast to the anticipated utilization of Rs 2 billion over the entire Five Year Plan period, the reduction of external assets of the Reserve Bank in the first two and a half years of the Plan was nearly Rs 6 billion. Domestically, the acceleration of investment caused a strain on available resources. In November 1958, it was decided that the public sector outlay should be cut back from Rs 48 billion to Rs 45 billion. India also obtained a much larger volume of external assistance than had been planned for, following meetings in 1958, 1959, and 1960 of the Consortium sponsored by the International Bank for Reconstruction and Development.

It is now estimated that the outlay over the five years of the Second Plan totaled Rs 46 billion in the public sector (of which Rs 36.5 billion represented investment) while private investment accounted for a further Rs 31 billion. The pattern of financing the public sector program as originally planned, and as realized, showed significant differences. The additional tax effort was much larger than had been expected; on the other hand, the surplus expected from tax earnings at current rates failed to materialize. Small savings fell short of the target, and surpluses from public enterprises did not contribute as much as was expected. In conjunction with an increase in costs, the failure of domestic resources to rise sufficiently resulted, in the earlier years of the Plan, in a larger recourse to deficit financing than had been anticipated. Not all of this financing could be considered as having inflationary effects, since a good part of the expenditure was directly incurred abroad on procurement of essential investment goods for the economy; however, the expansionary influence of the primary credit creation can hardly be doubted. On the other hand, the surge in private imports referred to earlier, financed by the heavy withdrawal of reserves, helped to mitigate the effects of the deficit. The expansion in money supply over the five years amounted to 33 per cent, against an expansion of 20 per cent in real income. The degree of variance between the rates of monetary expansion and income growth was, however, less toward the end of the Plan period.

Summing up the experience of the last decade, national income is estimated to have risen over the entire period by 43 per cent, though as a result of the growth in population of 21.5 per cent the increase in per capita income was only 17 per cent. Agricultural production has risen by over 41 per cent, while industrial output has nearly doubled. Per capita consumption of food increased by 17 per cent, and of clothing by 68 per cent. Other indicators of development are in the figures relating to education and health. Between 1950–51 and 1960–61 there was an increase of 85 per cent (to 43.5 million) in the number of children in schools and an increase from 43 per cent to 61 per cent in the proportion of children in the age group 6–11 receiving schooling. The annual intake of students in technical education rose nearly fourfold, to 39,400. The expansion of health services is reflected in a sharp fall in the death rate, from 27.4 per 1,000 in 1941–51 to 21.6 in 1956–61, and in an increase of about ten years in the average expectation of life at birth.

The national income figures show only the increase in production recorded between the first year of the First Plan and the fifth year of the Second Plan; they do not adequately indicate the growth potential built up in the economy, which has enabled it to embark on a vastly expanded investment effort in the years ahead. Nor do they reflect sufficiently the fact that India has witnessed the beginning of an industrial revolution and that the agricultural economy has recorded some permanent improvement, reflected in a reduction, real though slight, in the country’s absolute dependence on the vagaries of weather. Some of the main indicators of growth, which put into perspective the achievements of the period, are listed in Table 1. When the ten-year period is taken as a whole, the degree of balance between the growth of real national income and monetary expansion is remarkable: against the rise in national income of 43 per cent, money supply rose by 47 per cent. When one considers that some expansion in money is necessarily the concomitant of development, as a result of the increasing monetization of the economy and the increase in the cash balances held by the community, the correspondence between these two variables is even more striking. On the other hand, over the ten-year period, certain structural weaknesses were brought to light. The growth in the agricultural sector was discontinuous and did not provide a sufficient base for more rapid industrial growth. The export performance was inadequate, and there were serious cutbacks and delays in power, steel, and fertilizer projects, which somewhat affected the economy’s capacity for further expansion.

Table 1.India: Selected Indicators of Growth, 1950–51 to 1960–61, and Third Plan Targets
Selected Indicators of GrowthThird Plan Targets
ItemUnit1950–511955–561960–61Percentage increase, 1950–51 to 1960–611965–66Percentage increase, 1960–61 to1965–66
1.National income (at 1960–61 prices)Billion Rs102.40121.30145.0043190.0031
2.PopulationMillions3613974382149212
3.Per capita income (at 1960–61 prices)Rs2843063301738517
4.Index of agricultural production(1949–50 = 100)961171354117630
5.Foodgrains productionMillion tons52.2 165.8178.049100.028
6.Nitrogenous fertilizers consumed1,000 tons of nitrogen551052303181,000335
7.Area irrigated (net total)Million acres51.556.270.03690.029
8.Cooperative movement: advances to farmersBillion Rs0.230.502.007705.30165
9.Index of industrial production(1950–51 = 100)1001391949432970
10.Production
Steel ingotsMillion tons1.41.73.51509.2163
AluminumThousand tons3.77.318.540080.0332
Machine tools (graded)Million Rs3.47.8551,518300445
Sulphuric acidThousand tons991643632671,500313
Petroleum productsMillion tons3.65.7….9.974
Cloth
Mill-madeMillion yards3,7205,1025,127385,80013
Khadi, handloom and powerloomMillion yards8971,7732,3491623,50049
TotalMillion yards4,6176,8757,476629,30024
11.Output of minerals
Iron oreMillion tons3.24.310.723430.0180
CoalMillion tons32.338.454.66997.078
12.ExportsBillion Rs6.246.096.4538.5032
13.Power: installed capacityMillion kw2.323.425.714812.7123
14.Railways: freight carriedMillion tons91.5114.0154.068245.059
15.Roads, surfaced, including national highwaysThousand miles97.5122.0144.048169.017
16.Commercial vehicles on roadThousands1161662108136574
17.Shipping tonnageMillion grt0.390.480.901311.0921
18.General education: students in schoolsMillions23.531.343.58563.947
19.Technical education: engineering and technology—degree level—intakeThousands4.15.913.923919.137
20.Health
Hospital bedsThousands1131251866524029
Doctors (practicing)Thousands566570258116
21.Consumption
FoodCalories per capita per day1,8001,9502,100172,30010
ClothYards per capita per annum9.215.515.56817.211
Source: Reserve Bank of India Bulletin, September 1961, p. 1389. The figures for foodgrains production, agricultural production, and national income relating to 1960–61 have been revised upward since publication of the September 1961 Bulletin.

Estimates of production adjusted for changes in statistical coverage and methods of estimation up to 1956–57.

Figures relate to calendar years 1950 and 1955.

Source: Reserve Bank of India Bulletin, September 1961, p. 1389. The figures for foodgrains production, agricultural production, and national income relating to 1960–61 have been revised upward since publication of the September 1961 Bulletin.

Estimates of production adjusted for changes in statistical coverage and methods of estimation up to 1956–57.

Figures relate to calendar years 1950 and 1955.

The Perspective of Planning

Planning in India is formulated with a long-term perspective in view. The First Plan was based on a simple projection of economic growth for a period of 30 years from 1951 to 1981. This model envisaged that by 1970–71 national income could be double the 1950–51 income, and that by 1977–78 per capita income could be double that of 1950–51. The performance of the economy in the First Plan period exceeded expectations. Therefore, in drawing up the Second Plan, the long-term projections were revised; it was suggested that, compared with 1950–51, national income might be doubled by 1967–68 and per capita income by 1973–74. The favorable outturn of the First Plan was responsible in part for this revision; the investment, in real terms, proposed in the Second Plan was smaller than had been envisaged in 1951. But with the increase in population, which has been higher than anticipated, it now appears that it would be difficult to fulfill the Second Plan’s intention of doubling per capita income by 1973–74 even with a sustained growth rate of 6 per cent per annum. It is now estimated, in the Third Plan, that over the next 15 years population is likely to increase at a rate of more than 2 per cent per annum; in the light of this, it is considered that development over the next 15 years should aim at a cumulative rate of growth as close as possible to 6 per cent per annum. In terms of 1960–61 prices, the 15-year perspective now envisages an increase in national income of 100 per cent and an increase in per capita income of 61 per cent between 1960–61 and 1975–76. It seeks over the 15-year period to create employment outside agriculture for two thirds of the expected addition to the labor force of 70 million, so as to reduce the proportion of population dependent on agriculture from the present 70 per cent to about 60 per cent. These long-term considerations form the background against which the objectives of the Third Five Year Plan have been framed.

Objectives of the Third Plan

The principal aims of the Third Plan are (1) an increase of more than 5 per cent per annum in national income, the pattern of investment being designed to sustain this rate of growth in subsequent periods, (2) the achievement of self-sufficiency in foodgrains and an increase of agricultural production to meet the requirements of industry and exports, (3) the expansion of basic industries so that within about 10 years nearly all the requirements of further industrialization can be met from the country’s own resources, (4) the fullest possible utilization of India’s manpower resources and a substantial expansion of employment opportunities, and (5) the progressive establishment of greater equality of opportunity and of incomes and a more even distribution of economic power.

A discussion of these objectives is useful for an understanding of the arithmetic of the Plan, the strategy of development which it embodies, and its investment pattern and priorities.

The target for growth of income—more than 5 per cent per annum—is part of the long-term projection of an average increase in national income of 6 per cent per annum over the next 15 years. If one were to compare the target of about 5 per cent a year with what has been achieved so far, it would be seen that the Third Plan postulates a somewhat more rapid growth than has thus far been achieved. The average in the First Plan period was about 3½ per cent per annum and in the Second Plan period a little more than this. These averages include significant year-to-year variations brought about by changes in agricultural production; for example, increases of over 6 per cent in real terms have been recorded in at least two of the last three years, namely, 1958–59 and 1960–61, mainly as a result of the rise in agricultural production. These increases are, of course, related to the fact that in both the preceding years the shortfall in agricultural production as a result of adverse weather conditions depressed income levels; the base for comparison was thus low. On the other hand, there is enough evidence that the permanent improvement in the agricultural economy in the last few years is helping to override the effects of fickleness of weather conditions; the bumper harvest of 1960–61 was recorded in a normal weather year, while this level of production was maintained in 1961–62 despite less favorable weather conditions. Further, the increasing contributions of the secondary and tertiary sectors to income totals are also helping to override limited fluctuations in income growth originating in the primary sector.

The targets for growth of income postulate certain expectations regarding the level of investment in relation to income and the ratio of investment to increments in income. It may be mentioned here that planning in India is basically operated through action on the volume and direction of investment; it is regulation of investment rather than of manpower, employment, or output that is used to set the pattern of growth over time and over different sectors. The Third Plan envisages a rise in the rate of net investment from the present 11 per cent of national income to 14–15 per cent of national income by 1966. Against this, the ratio of domestic saving to income is expected to rise from 8.5 per cent to 11.5 per cent. The increase in domestic saving is related to the increase in per capita income and to the possibilities of restraining the increase in consumption out of the additional incomes. The realization of the increase in domestic savings would imply a marginal savings/income ratio of 16–17 per cent; a recent article in the Reserve Bank of India Bulletin suggests that this is the ratio that was probably achieved in the Second Plan and that there would seem to be no reason why this ratio could not be maintained in the Third Plan.4 The forecasts of the growth of incomes depend also on the expected behavior of capital/output ratios. Such ratios were described in the Second Plan as a shorthand description of the average productivity of capital, and the Indian authorities are well aware of the practical limitations which preclude making precise computations. These ratios have been regarded as a resultant of sectoral cost/returns estimates rather than as precise over-all measures of additions to incomes resulting from investment. Experience in the First and Second Plans has only emphasized the degree of variability in such calculations. In the First Plan the expected capital/output ratio was 3:1; ex post it worked out to 2.1:1. This favorable outturn was largely the result of the increase in agricultural output and the fuller utilization of existing industrial capacity. At the time the Second Plan was formulated, the capital/output ratio was expected to be 2.3:1, but in the event the ratio has been less favorable at 3:1; this result was due to the agricultural setbacks in some years, and the greater concentration than in the First Plan on nonagricultural investment and on projects with a long gestation period. The Third Plan projections also postulate a capital/output ratio of 2.3:1. The possibility of this being realized depends largely on agricultural production expanding as planned, and the prospects for this are reasonable. A large amount of the Second Plan industrial investment will now be entering the production stage; the greater availability of such basic goods as steel and coal should help to utilize more fully industrial capacity; this result would also depend upon adequate imports of raw materials, components, and spare parts for maintenance. To some extent, the sectoral distribution of the Third Plan investment (particularly the lower percentage of the total allotted to power and transport than in the Second Plan) may also help in reducing the ratio.

The targets for the growth of income depend to a substantial extent on farm output; the second major objective of the Plan is an increase in agricultural production to achieve self-sufficiency in foodgrains and to meet the needs of industry and exports. Experience in India has demonstrated that food forms one of the strategic elements in the growth process. About 60 per cent of total consumption in India is believed to be of food, and foodgrains account for about two thirds of food consumption. In an economy where the marginal propensity to consume is high, and where a good portion of additional incomes is spent on food, the generation of new incomes, as a result of stepping up investment, places a strain on food supplies over and above the expansionary impact of a rising population. Much of the stability that was a feature of the First Plan was the result of the availability of foodgrains in adequate quantities and at the right time. Similarly, much of the strain to which the economy was subject in the Second Plan was due to the inadequacy of the supply of foodgrains to meet the increase in demand. This led in the Second Plan period to a rise in food prices and in the cost of living. The importance of keeping food prices in check through adequate food supplies is well recognized by the Indian authorities; in fact, it has been felt that the level of investment can be stepped up only in relation to the availability of food. The problem is closely interlinked with the problem (discussed later) of utilizing more fully India’s surplus manpower resources; the transfer of surplus rural labor and its employment on activities not directly connected with current farm operations would entail an additional monetary demand for foodgrains; the failure of domestic production to meet this demand would lead to shortages and price increases.5 In this connection, the valuable assistance that India has obtained from the United States under its commodity aid program (U.S. Public Law 480) can hardly be minimized. It has helped at a crucial time of domestic shortages to permit a rising level of investment in accordance with the Plan. In the period of the Third Plan also, nearly 17 million tons of P.L. 480 grains will be available, which will have the same effect. Although such assistance is essential while the domestic production potential is being built up, it can be no substitute for long-term measures designed to improve domestic supplies of foodgrains so as to achieve self-sufficiency if this vital sector is not to constitute a limiting factor to the pace of economic growth and a growing charge on external resources.

The projections of demand for food are related alike to population projections and to certain assumptions regarding income elasticities of demand. The demand for grains depends on over-all income levels, which in turn would be determined to a large extent by production levels in agriculture. It is believed that, given a population increase of 2 per cent per annum and an increase of income of about 5–6 per cent per annum, the additional demand for foodgrains would be, under Indian conditions, about 5 per cent per annum. The target for food-grains production is determined by these demand assumptions. This is not to suggest that the interdependence of these variables makes them any the less useful as a technique of planning; in an economy where consumption levels are not subject to over-all control, there perhaps is no other manner in which estimation is possible. The growth of the nonagricultural sector’s contribution to over-all income also weakens the interdependence of the variables.

A primary agricultural objective is not merely the provision of adequate food supplies to obtain self-sufficiency; equally important is the provision of adequate supplies from nonfood agricultural production. As India’s industrial growth progresses, its demands for industrial raw materials will correspondingly expand. Since, for some time to come, India will have to depend upon its traditional exports of cotton textiles, jute manufactures, and tea, as well as minor agricultural products, it will be essential for its cotton and jute industries to be adequately supplied with domestic raw materials and for its export markets in tea and other agricultural products to be maintained. In the program for the Third Five Year Plan, therefore, attention has been paid also to increasing the output of nonfood agricultural production.

The problem is one not only of raising agricultural production, but of releasing adequate supplies from the rural sector to the rest of the economy; here it assumes the character of a savings problem. The mobilization of sufficient surpluses from the agricultural sector is indeed basic to the problem of economic development. The expansion of nonfood consumption by farmers as their incomes increase constitutes an underlying factor making for an increase in the marketable surplus. The goods that will induce such a surplus need not be consumption goods only; they may also be producer goods needed to expand farm output further. Taxation of the agricultural sector is the other obvious method that would help to release a larger surplus.

The importance given to agriculture in the scheme of development is thus based on the realization that a rapid expansion of agricultural production provides a firm base for the much greater growth in the rest of the economy which is needed to correct the structural weakness of the Indian economy arising out of its heavy dependence on agriculture. The desire to correct this imbalance is reflected in the pattern of industrial growth. The expansion of basic industries—like steel, chemicals, machine building, fuel, and power—is a principal objective of the Third Plan. The aim is to see that the requirements of further industrialization are largely met from the country’s own resources within a period of about ten years or so. The Third Plan has thus to be viewed as one of a series of Plans. It may be that, if the Third Plan were viewed by itself, a different pattern of industrial growth would be envisaged; but the emphasis here is on laying the groundwork for future industrialization as much as on the local production of capital equipment.

Like the food sector, the foreign exchange sector plays a crucial role in the development process in India. Even if the economy is able to generate adequate savings (in an ex ante sense), those savings may not be in a form in which they could be translated into essential external resources, either through a pro rata reduction in imports or a release of domestic resources for exports. Furthermore, certain types of investment refer to areas, such as transport and power, where importation is physically impossible. These infrastructural investments with a high import content and a long gestation period have accounted for a large proportion of total investments in the last ten years. In fact, the sectoral allocations for the First and Second Plans combined show that transport accounted for 28 per cent of the total public sector outlay, and that power and irrigation accounted for another 21 per cent. Equally, the strain on foreign exchange will continue to be heavy during the process of industrialization as long as there is heavy dependence on imported machinery and basic capital goods. The small size of the capital-goods sector in India at present and the difficulty of achieving an immediate and adequate increase in exports lead to the necessity for building up rapidly, within India, a large and growing capital-goods sector. The slowness of this group to develop so far has placed a continuing strain on India’s external payments position.6 Given its endowment of natural resources, India has special advantages for building up capital-goods industries.

Concentration on heavy and basic capital-goods industries also follows from the need for investment, which makes for a high rate of growth. The emphasis on capital-goods industries may not yield results in output or raise consumption levels in the immediate future, but it will lay the foundations for a more rapid acceleration of growth (and of employment and consumption) at a later point of time. The propulsive character of the investment in basic and heavy industries is not only related to the need for further industrialization but is also designed to assist in the realization of agricultural targets (e.g., fertilizer industry) and those in transport and power (e.g., engineering and heavy electrical industries).

The limits to which the capital-goods sector can be developed without sacrificing balance in the economy is set by the matching output of consumer goods—other consumer goods as well as food.7 The program of development therefore visualizes a large expansion in consumer-goods industries, including those organized on a small scale and handicrafts. This would help not only to disperse industry and the concentration of economic power, but also to utilize more fully the manpower resources of the country.

This brings us to the fourth objective of the Plan, which is to utilize to the fullest possible extent India’s manpower resources and to ensure a substantial expansion of employment opportunities. While the full utilization of the available manpower resources can be expected only after a period of development, the immediate objectives are that the additions to the labor force in any period shall be adequately absorbed. Even these immediate objectives were not realized in the First and Second Plan periods. The “backlog” of unemployment at the beginning of the Third Plan is estimated at about 9 million.8 In addition, the labor force is expected to increase by 17 million during the Third Plan period, whereas the Plan envisages an increase in employment of only 14 million, of which 10.5 million will be in nonagricultural occupations. Thus by the end of the Third Plan, the “backlog” of unemployment is likely to increase by 3 million. It is proposed to meet the shortfall between additions to the labor force and absorption into employment by ensuring that the employment effects of Plan investment are spread out more widely than in the past, by undertaking a large program of rural industrialization, and by organizing a rural works program aimed at providing work for an average of about 100 days in the year for about 2.5 million persons.

In keeping with the employment objectives of the Plan, and the desire to mobilize the savings potential of disguised unemployment, an attempt has been made to explore more fully the possibilities of labor-intensive investment where feasible. In the construction, agricultural, and small industrial fields, labor-intensive investment would seem to meet the requirements of a conservation of capital goods, especially of imported capital goods, to sectors where technical considerations dictate large-scale capital-intensive projects. In those sectors where labor-intensive techniques can be employed, the expansion of employment opportunities would really be set, on the one hand, by the availability of consumption goods, especially of food, and, on the other, by the presence of complementary investment.

The Plan also has certain broader socio-economic objectives, summed up in the phrase “socialist pattern of society.” The Plan states, “It is a basic premise in India’s Five Year Plans that, through democracy and widespread public participation, development along socialist lines will secure rapid economic growth and expansion of employment, reduction of disparities in income and wealth, prevention of concentration of economic power, and creation of the values and attitudes of a free and equal society.”9 It further states that economic activity must be “so organized that the tests of production and growth and those of equitable distribution are equally met. … In an underdeveloped country, a high rate of economic progress and the development of a large public sector and a cooperative sector are among the principal means for effecting the transition towards socialism.”10 The socialist objective follows basically from the desire to secure equality of opportunity and achieve gainful employment for every one seeking work; hence the emphasis on the development of education and other social services, on community development projects in the rural areas, on the cooperative movement, and on the desire to curb concentration of economic power and the emergence of monopolistic tendencies.

Sectoral Analysis of Targets and Investment

As stated above, the Third Plan seeks to raise national income by more than 5 per cent per annum and to increase the net investment ratio from the present 11 per cent to 14–15 per cent by the end of the Plan period. In monetary terms, the former implies an increase in national income from Rs 145 billion (at 1960–61 prices)11 to Rs 190 billion. The amount of increase is obviously the aggregate of the gains expected from the different sectors, and this in turn depends upon the sectoral investment pattern achieved in the two previous Plans and the proposed distribution of investment in the Third Plan, as evaluated by past experience and prospects of the response of output to investment. Table 1 indicates some major targets of the Third Plan in the various sectors; Table 2 compares public sector outlay in the Second and the Third Plan; and Table 3 shows the distribution of investment, under the two Plans, in the public and private sectors. To a detailed consideration of these output targets and investment programs we may now turn.

Table 2.India: Estimates of Public Sector Outlay in the Second and the Third Plans1(In billions of rupees)
Second PlanThird Plan
Agriculture and community development25.3010.68
Major and medium irrigation4.206.50
Power4.4510.12
Village and small industries1.752.64
Organized industry and minerals9.0015.20
Transport and communications13.0014.86
Social services and miscellaneous8.3013.00
Inventories2.00
Total46.0075.00
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 58.

Public sector outlay comprises the total of investment in the public sector (see Table 3) and current outlay.

Includes investment in minor irrigation schemes.

Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 58.

Public sector outlay comprises the total of investment in the public sector (see Table 3) and current outlay.

Includes investment in minor irrigation schemes.

Table 3.India: Estimates of Investment in the Second and Third Plans
Second PlanThird Plan
Public

investment
Private

investment
Total

investment
Percentage

distribution
Public

investment
Private

investment
Total

investment
Percentage

distribution
(billions of rupees)(billions of rupees)
Agriculture and community development12.106.258.35126.608.0014.6014
Major and medium irrigation4.2024.2066.5026.506
Power4.450.404.85710.120.5010.6210
Village and small industries0.901.752.6541.502.754.254
Organized industry and minerals8.706.7515.452315.2010.5025.7025
Transport and communications12.751.3514.102114.862.5017.3617
Social services and miscellaneous3.409.5012.90196.2210.7516.9716
Inventories5.005.0082.006.008.008
Total36.5031.00367.5010063.0041.003104.00100
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 59.

Includes investment in minor irrigation schemes.

Included under agriculture and community development.

Excludes transfers from public to private sector.

Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 59.

Includes investment in minor irrigation schemes.

Included under agriculture and community development.

Excludes transfers from public to private sector.

Agriculture

“In the scheme of development during the Third Plan, the first priority necessarily belongs to agriculture. Experience in the first two Plans, and especially in the Second, has shown that the rate of growth in agricultural production is one of the main limiting factors in the progress of the Indian economy.”12 The Third Plan therefore treats the increase in agricultural production as one of the pivots around which the whole development effort should revolve.

The Plan seeks to raise agricultural output by more than 30 per cent. Foodgrains production is expected to increase by 28 per cent. In physical terms, foodgrains production is expected to rise from 78 million tons in 1960–6113 to 100 million tons in 1965–66: 45 million tons of rice, 15 million tons of wheat, and 40 million tons of other cereals and pulses. Cotton production is expected to rise by 37 per cent, to 7 million bales; jute output by 55 per cent, to 6.2 million bales; tea production by 24 per cent, to 900 million pounds; and rubber by 71 per cent, to 45,000 tons. The production target for foodgrains is, as has been mentioned earlier, basically a demand-oriented target and has been set on the assumption that self-sufficiency in foodgrains has to be obtained by the end of the Plan period; it is also proposed that by then a buffer stock of 5 million tons (4 million tons of wheat and 1 million tons of rice) would be built up (out of P.L. 480 imports). On the basis of foodgrain targets, it is expected that the daily per capita intake would amount to 17.5 ounces, against 16.0 ounces in 1960–61, and that the corresponding increase in caloric intake would be 10 per cent.

Similarly, the production targets for commercial crops are set in relation to the prospective demand for textiles and the need to export commodities dependent on agricultural raw materials. The average per capita consumption of cloth is expected to rise to 17.2 yards per annum by the end of the Third Plan, against the present annual consumption of 15.5 yards.

The target of the Third Plan for the average rate of increase in agricultural production is about 6 per cent per annum, compared with an average of somewhat under 4 per cent per annum over the last ten years. The marked stepping up of the rate of increase follows from the considerable investment in agricultural infrastructure that has already taken place and is matched by an allocation of investment larger than was allocated to the agricultural program in the first two Plans put together. In fact, in formulating agricultural production programs for the Third Plan, the guiding consideration has been that agricultural efforts should not be impeded in any manner for want of finance and other resources. Finance is being provided on what is considered an adequate scale and is expected to be increased, should that become necessary.

The emphasis on the distribution of outlays in the agricultural sector indicates the nature of the agricultural problem. In India, the possibilities of extending the area under cultivation are rather limited, and primary emphasis has to be placed on improving yields, as a result of more intensive cultivation and of increasing the area under double cropping through the provision of adequate water and other supplies.14 Indian yields, on the average, are poor by world standards. From one point of view, this is a source of hope inasmuch as it indicates the extent of unexploited potential and the possibilities of achieving higher output targets as a result of more intensive farm methods. But there are areas and certain crops where Indian yields compare favorably with international standards. The problem, to some extent, is one of demonstrating over a wider area the technical feasibility of higher yields. In this connection, reference may be made to the intensive agricultural district programs (the so-called “package” schemes). The aim is to make available in one district of each State (where weather conditions are favorable and where the cooperative movement is fairly well advanced), at the right time and in the right quantities, financial and technical inputs for the farm economy so as to obtain the maximum benefit as a result of combined programs.

The question of improving yields generally in India, through the provision of financial and technical assistance, is closely related to the problem of rural organization. It is here that the community development organization at the block and village levels is important, to enable the rural community to be mobilized for intensive agricultural development. The Third Plan stresses the importance of utilizing some of the surplus manpower in the rural areas and the task of improving agricultural organization. The expansion of the cooperative credit system has also been accorded priority in the scheme of agricultural development. Land reform policies designed to abolish intermediaries and change the tenancy system have also been given importance, so as to remove impediments to agricultural production deriving from the traditional agrarian organization and to create conditions for achieving high efficiency and productivity in the rural economy. Stabilization of farm prices is another major need, to induce the farmer to put in the required investment effort.

The technical programs for increasing agricultural production around which intensive work is to be organized are (1) irrigation, (2) soil conservation, dry farming, and land reclamation, (3) supply of fertilizers and manure, (4) seed multiplication and distribution, (5) plant protection, and (6) provision of better agricultural implements and adoption of scientific agricultural practices.

The Third Plan seeks to extend the net irrigated area by 20 million acres, to a total of 90 million acres.15 This emphasis on irrigation stems from the fact that the absence of timely and adequate water has been a major factor in the fluctuations of agricultural production, and also has limited the extent to which land can be double cropped. Of the increase in net irrigated area, 11.5 million acres will come from major and medium irrigation works and 8.5 million acres from minor irrigation works.16 The shift in emphasis, compared with the earlier planning period, to minor and medium irrigation works, is due in part to the fact that the more obvious large schemes have already been completed or are under construction; in a more positive sense, it stems from the realization that medium and minor works can be executed quickly, entail small outlays, and have a very short lag before the benefits are utilized. Moreover, the emphasis is on the maximum possible participation by the community and it is felt that these schemes offer the best media for such participation. A considerable degree of complementary investment has to be undertaken by the farmers to secure the full benefits from the execution of irrigation works; these include the construction and maintenance of field channels, bunds, etc. It is proposed that these obligations on the part of local communities be placed on a legal basis, so as to secure full and continuing advantages from such schemes.

One of the problems that has confronted the authorities has been the extent of underutilization of the benefits of irrigation even where they are available. To some extent, the problem is one of overcoming the inertia of the farmer in a dry farming area and inducing him to change over to different methods of cultivation. In some areas, the system of water rates may possibly act as a damper on using the water; in some, the complementary investment needed from the farmer may not have been forthcoming. However, from the beginning of the Second Plan period to the present, the situation has improved somewhat, the actual gross area irrigated having risen from 48 per cent of the potential created to 76 per cent. Concessional water rates, and the community development program, have helped to bring this about, but there is still scope for reducing the spread between the potential created and utilized. The Third Plan assumes a marginal rate of utilization of potential addition of about 78 per cent.

The Third Plan proposes that supplies of fertilizers be increased; the target for consumption of chemical fertilizers is 1.6 million tons. In recent years, the demand for fertilizers (mainly for nitrogenous fertilizer) has grown rapidly in India, and there has been a marked shortage of supply in relation to demand. While the Third Plan seeks to establish domestic capacity for meeting by 1966 most of the country’s fertilizer requirements, fertilizers will have to be imported in the initial stages. The maximum import requirements will arise by the third year of the Plan, when as much as 650,000 tons (in terms of nitrogen) and 350,000 tons of phosphatic and potassic fertilizers are expected to be needed, whereas domestic production by that time would be far short of this. Past experience indicates that the problem of securing the utilization of fertilizers (when available) is not serious; demand has been increasing at a much more rapid pace than the availability of fertilizers. With the wider spread of extension work and credit facilities, the demand is likely to increase at a still faster rate. It cannot be gainsaid that the enthusiasm of the farmer in this regard will depend on the price trends in respect of agricultural inputs and the prospects for farm prices themselves remaining stable.

While extended irrigation and the wider application of chemical fertilizer form the two most important means for bringing about higher yields, the potential contribution from the use of improved seed, the more general use of pesticides, and better agricultural tools is no less significant. The benefit to be realized from these improvements in agricultural practices is essentially a function of the educative effects of the community development works and of rural administrative efficiency.

Industry

One of the principal objectives of the Third Plan, as has been mentioned above, is that the economy should reach as soon as possible the stage of self-sustaining growth, so that the foundations may be laid for rapid industrialization over the next 15 years. From this point, it is considered essential to press forward further with the establishment of basic capital- and producer-goods industries with special emphasis on machine-building programs, so that in the following Plan periods the growth of the economy in power, transport, industry, and mineral production will become self-sustaining and increasingly independent of outside aid, while at the same time the export base will be broadened. Although long-term objectives for national income and employment require concentration on capital-goods industries and increased production of industrial raw materials, the industrial program in the Third Plan period has also to provide, as far as possible, for meeting the demand likely to be generated over the next 5 years for a wide range of other manufactured goods. In the execution of industrial priorities, the extension of existing installed capacity and the expansion of existing plants are preferred to the establishment of new units. The accent will also be on projects which, by contributing to exports or by replacing imports, will conserve foreign exchange.

The achievement of the targets in respect of industrial growth in the Third Plan would mean an increase of nearly 70 per cent in production by the end of the five-year period. The investment in respect of development programs for industries and minerals will amount to Rs 25.7 billion, of which investment in the public sector is Rs 15.2 billion (Table 3). Of the total industrial investment in the public sector, as much as Rs 12.7 billion (over two fifths) will be in metallurgical and engineering industries. In iron and steel alone, total investment is expected to be Rs 6.4 billion. At the end of the Third Plan, production of 6.8 million tons of finished steel is envisaged from a capacity of 7.5 million tons (equivalent to 10.2 million tons of ingot steel). An increase in ingot capacity is to be achieved by the expansion of the capacity of the three existing public sector mills at Rourkela, Bhilai, and Durgapur to 5.9 million tons (against somewhat less than the 3 million tons at present) and by the establishment of a fourth public sector plant at Bokaro with an initial capacity of 1 million tons. This represents an addition to capacity and cannot be considered as resulting in a corresponding increase of the supply of steel in the Third Plan period itself. These targets of expansion to capacity and actual production are based on demand projections for different categories of steel (themselves based partly on production targets in the steel using industries). The experience of the Second Plan, when steel production fell short of targets owing to delays in construction, raw material shortages, and technical manpower problems, points to the need for advance planning in this respect in the Third Plan. Partly as a result of the delays in the Second Plan, shortages will continue to be severe in some categories of steel in the initial years of the Third Plan.

In addition to steel, the major line of development will be in machine building and engineering. While the public sector will concentrate on heavy machinery and heavy machine building, the private sector has been assigned the primary responsibility for an extended range of engineering items. Foundry-forge capacity is to be established on a large scale in both the public and private sectors, the former specializing in heavy tonnage ranges; a heavy machinery plant with an ultimate capacity of 80,000 tons a year is to be set up at Ranchi, and this plant is expected to supply a large part of the equipment required for setting up a million tons of steel-making capacity within India every year. A mining machinery project with an annual capacity of 45,000 tons of equipment is to be set up at Durgapur. Three heavy electrical equipment projects are to be established in the public sector so as to ensure the domestic supply of a wide range of electrical equipment sufficient to enable power generation to be raised at an annual rate of two million kilowatts per year from 1971 onward. In the private sector also, it is proposed to set up capacity for the annual manufacture of machinery for 6 or 7 complete cement plants, 8 paper mills, and 14 sugar mills; also for textiles and certain types of chemicals.17 Substantial expansion is provided for in the machine tool industry (from the present annual production valued at Rs 70 million to Rs 300 million by 1965–66), while the target for automobiles is an increase of 50 per cent in passenger cars, to 30,000, and more than 100 per cent in commercial vehicles, to 60,000, and a nearly threefold increase in motorcycles and motor scooters, to 50,000.

The production of inorganic fertilizers is to be stepped up from 110,000 tons to 800,000 in terms of nitrogen; the expansion of fertilizer production is closely related to the agricultural program, the kinds produced being dictated by soil requirements and the availability of raw materials. The target of production for cement has been fixed at 13 million tons, against the present output of over 8 million tons, and the target capacity for refining crude oil has been set at 11 million tons.

Considerable expansion is also envisaged in consumer goods production; this is to be substantially in the private sector. The requirements of cotton textiles at the end of the Third Plan are placed at 9,300 million yards, of which 850 million yards are meant for export. Domestic requirements are calculated on the basis of a 2 per cent increase in population and 2 per cent in per capita consumption, making a 20 per cent increase over the 1960–61 level in estimated demand. Of the 9,300 million yards, 3,500 million yards will be in the decentralized sector, the respective rates of increase in the mill sector and the unorganized sector in the next five years being 13 per cent and 49 per cent, respectively. Sugar production is expected to rise by 16 per cent, to meet the entire increase in domestic demand and to leave a surplus for export.

The greater emphasis on industrial expansion is matched by an intensification of the program of mineral development. The experience with respect to coal in the Second Plan period—when output failed to increase by the amount planned and, consequently, created shortages which delayed and upset industrial programs in other sectors, such as steel and transport—has served to emphasize the importance of concomitant mineral development in a phase of industrialization. Coal output is expected to rise by 37 million tons, to 97 million. The major objective in the coal program is to ensure adequate and timely supplies of coking and blendable coals to the steel plants and of the superior varieties of noncoking coals to the railways and other users. The program of construction of washeries (delays in which affected coal production in the Second Plan) is also to be expedited. Of the additional coal to be mined, 20 million tons (over half) will be in the public sector. Iron ore mined is expected to amount to 32 million tons (an increase of 20 million tons), of which 10 million tons are meant for export. Provision has been made for the exploration and exploitation of new copper deposits and of pyrites, as well as for the extraction and processing of uranium, magnesium, gypsum, and limestone deposits. A high priority has been given to exploration and exploitation of the mineral oil resources of the country. The Assam oil fields, which will commence production shortly, are expected to yield 2.75 million tons of crude oil a year, while the outlook in respect of the Gujarat fields is promising enough to warrant the erection of a refinery with a throughput capacity of 2 million tons of crude oil.

The share of the public sector in the expansion of industrial output will be considerable; in 1960–61, the public sector accounted for 10 per cent of the production in the organized manufacturing sector; by 1965–66 this is expected to rise to 25 per cent. The share of the public sector will be above this average in the metallurgical and capital-goods industries. In steel, the share (in terms of physical quantities) will be nearly two thirds, and in coal about one third, at the end of the Third Plan.

Industrial policy in India continues to be governed by the Industrial Policy Resolution of 1956, which conceives of the roles of the public and private sectors as being supplementary and complementary to one another. A significant development in recent years has been the subsidence of the earlier controversy about the respective roles of the public and private sectors. There has been an increasing appreciation on both sides of the scope for expansion within the broad confines of the Industrial Policy Resolution. The large public sector investment in power and basic industry has itself extended the field for private sector investment in industry by the provision of electricity, transport, and the like, and by stimulating demand.

The rationale of the industrial program and priorities is thus based on the achievement of a sufficiently large industrial base on which further industrialization can be built from domestic resources. It is also based on the interrelationship between industry and agriculture; hence, the importance given to fertilizer production and other chemical output in the industrial program, as well as to the establishment of heavy electrical and machine-building capacity, is related to the programs for agricultural production, irrigation, and power. The competing claims of capital goods and consumer goods, and of productivity criteria on the one hand and employment criteria on the other, have to be met in framing industrial policy. In an attempt to conserve capital, especially where the import content of such capital is high, increasing attention is being paid to the production of goods in the decentralized sector, which will not make the same demand on capital. Cloth is a typical example. A more positive factor accounting for the stress on village and small industries is the provision of larger employment opportunities and the dispersal of economic power in keeping with the socio-economic objectives of the Plan. Considerable progress has been achieved in small-scale industries which combine the advantages of modern technology and use of power with those of increased employment and greater opportunity for small entrepreneurs and cooperatives. This has been made possible by such measures as technical advice, credit facilities, marketing assistance, and the scheme of industrial estates. More expansion along these lines is envisaged in the Third Plan. It is also proposed to secure closer integration between small-scale and large units over a wide range of industries and the development of small-scale units as ancillaries. A wider dispersal of small manufacturing units to small towns and semirural areas, and the growth of cooperative organizations for common facilities, such as raw material procurement and marketing, is envisaged.

Power

High priority has been given to the power program in the Indian Plans. In the last ten years, the installed generating capacity has increased from 2.3 million kilowatts to 5.7 million kilowatts; although in the Second Plan capacity expanded by 67 per cent, this was less than originally planned, owing to delays in construction and the tight foreign exchange position in the early years of the Plan. Consequently, severe power shortages have been experienced which have affected the rate of growth in other sectors, notably industry, as power units have, in general, a longer gestation period than industrial units.

The power program in the Third Plan has been drawn up against the prospect of power development over a longer period. By 1975–76, the aggregate installed generating capacity is expected to be 35 million kilowatts, of which nearly half would be hydroelectric. The basic considerations and criteria adopted in deciding particular methods of power generation suited to different areas have been the capital costs, the foreign exchange costs, the cost per kilowatt generated, the period of construction, and the impact on other developmental activities in the area.

The total investment in power proposed in the Third Plan is Rs 10.6 billion; by the end of the Third Plan, generating capacity in commercial operation is expected to be of the order of 12.7 million kilowatts, an increase of 123 per cent over current levels. On an average this would mean an annual addition to generating capacity of 1.4 million kilowatts during the Plan period. An expansion of this order would be needed if the industrial programs are not to suffer from lack of adequate power. Of the installed generating capacity in operation in 1966, the largest single source will be thermal plants, which will account for 7.4 million kilowatts; 5.1 million kilowatts will be generated from hydroelectric plants and 0.15 million kilowatts from nuclear power stations.

Transport

The development of the economy in the last ten years has placed heavy demands on the transportation system. The railways today handle (in terms of ton-miles) 100 per cent more freight traffic and 17 per cent more passenger traffic than at the beginning of the First Plan. During the same period, the freight traffic of the road transport industry has risen threefold. Although, in the past period of planning, a sizable proportion of total investment resources was allocated to transport, the expansion that has taken place in transport capacity has barely kept pace with increasing demands; in fact, in recent years, severe local shortages of transport capacity have been experienced, with consequent dislocation of some industrial and mining programs.

With the acceleration of the tempo of development, the demands on the transport system will be heavier than hitherto. The proposed increases in agricultural production and the expansion of industry, especially of steel and coal production, alongside the increase in iron ore mining for export will call for a sizable enlargement of freight carrying capacity.

In planning for the next five years, it is assumed that the railways will continue to account for most of the increase in capacity, but that other means of transport will increase at a more rapid rate.18

In the Third Plan, the transport and communications investment in the public sector is placed at Rs 14.86 billion, of which the railways account for Rs 8.90 billion.19 The railway plan has been formulated on the basis of originating traffic reaching a figure of 245 million tons in 1965–66. This represents an increase over the 1961 figure of 91 million tons (59 per cent). Nearly 90 per cent of the increase is in iron and steel, ores, coal, cement, and railway materials. The estimate of traffic in respect of steel corresponds to a production target of 8.3 million tons of finished steel and pig iron (including 1 million tons from Bokaro), while that for coal corresponds to a target of 97 million tons. Of the railway development program, the expenditure on rolling stock accounts for Rs 5.10 billion.

A significant expansion of road transport facilities is provided for in the Plan to alleviate some of the pressure on the railways. The number of commercial vehicles is expected to rise from 210,000 in 1960–61 to 365,000 in 1965–66 (i.e., by 74 per cent); the increase in freight traffic by road is expected to be of the order of 120 per cent, to 23,350 million ton-miles by 1965–66. The extent to which road transport facilities can successfully divert some of the freight traffic now using the railways is contingent on the supply of oil, the output of the automobile industry, and improvement of the road system.

In the last 10 years, there has been a substantial increase in road mileage. Nearly 46,500 miles have been added to surfaced roads and about 100,000 miles to unsurfaced roads.

The road development program for the Third Plan is formulated in terms of the 20-year road development plan, the objective of which is that no village should remain more than 4 miles from a metaled road or more than 1½ miles from any type of road. The expenditure on road development is expected to be about Rs 3.2 billion and to lead to an expansion of 25,000 miles of surfaced roads. Under the road development plan, the total mileage to be reached at the end of 20 years is 252,000 miles of surfaced roads and 405,000 miles of unsurfaced roads, against the present 144,000 miles and 250,000 miles, respectively.

A substantial addition is also to be made to the shipping tonnage under the Indian flag, from 905,000 tons presently to 1.1 million tons by 1965–66; most of the increase will be in respect of overseas shipping. Port capacity has risen in the last 10 years by 85 per cent, to 37 million tons, and projects now in hand or proposed are expected to raise it to 49 million tons by 1965–66.

Social services

The development of the human resources of the country constitutes a major part of the development effort. The Indian Plans have all along recognized the fundamental importance of raising the educational and health levels of the population. Over the last 10 years, the number of students has increased from 23.5 million to 43.5 million. While the long-term (15-year) objective is the provision of universal education up to the age of 14, the immediate Third Plan target is to provide facilities for the free and compulsory education of all children in the age group 6–11; only 61 per cent of such children are now being educated. In view of the various difficulties (such as the slower pace of increase in girls’ education), however, the percentage by 1965–66 is expected to be no more than 76 of the age group 6–11.

Considerable emphasis is placed on technical education and training, since the availability of trained manpower sets the pace of progress. The estimates of personnel requirements are therefore under constant review, and manpower planning has been looked upon as an integral part of the economic plans. The Third Plan estimates suggest that a total of 151,000 engineers will be needed for the Plan period; a total of 200,000 will be needed for the Fourth Plan, and advance planning will be required if technical manpower shortages are to be reduced, let alone avoided. The agricultural program will also require substantial additions to trained personnel. The Third Plan seeks to expand the capacity of graduate engineering colleges from the present annual admission of 13,860 to 19,140 by 1965–66, and to raise the capacity of polytechnic institutions offering diploma courses by nearly 50 per cent, to 37,390 a year. The expenditure on the total educational program amounts to Rs 5.6 billion, of which 25 per cent is for technical education.

In the expansion of health programs, the emphasis in the Third Plan is on preventive public health services, such as the improvement of environmental sanitation, control of communicable diseases, and organization of institutional facilities for health services. With the increase in the rate of population growth, the family planning program has been accorded a more positive role in health programs. The outlay on health schemes is expected to be Rs 3.42 billion, of which those for water supply and sanitation are expected to amount to more than Rs 1 billion.

Financing of the Plan

The total investment expenditure in the Third Plan amounts, as indicated in Table 3, to Rs 104 billion, of which Rs 63 billion represents public sector expenditure and Rs 41 billion private investment.20 To this has to be added “current outlay” of Rs 12 billion in the public sector, representing Plan expenditure other than investment. The total of resources that have to be raised is thus Rs 116 billion. As the external assistance assumed in the Plan amounts to Rs 21 billion, a sum of Rs 83 billion has to be drawn from the common pool of domestic savings; the success with which this can be done depends on the rate of increase in total output and the adequacy of the savings effort.21

For the public sector, schemes and projects involving an outlay of Rs 80 billion have been approved, although the operative ceiling for actual financial outlays over the 5-year period is Rs 75 billion. The difference between these two figures allows for shortfalls in expenditure and, consequently, a spillover of some schemes into the Fourth Plan period. The Plan recognizes that it would be difficult, in view of the complexity of interrelations between different investment projects, to estimate in a precise manner the extent to which different programs could be fulfilled. There might also be an element of elasticity on the side of resources. As the Plan puts it, “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.”22

The scheme of financing the public sector outlay is indicated in Table 4, together with the corresponding figures for the Second Plan. Of the total of Rs 75 billion, Rs 47.5 billion (63 per cent) represents domestic budgetary resources; Rs 5.5 billion (7 per cent), deficit financing; and the remaining Rs 22 billion (30 per cent), the budgetary counterpart of external assistance. Before going into a detailed examination of the various items of domestic financial resources, it may be mentioned that the Third Plan document focuses attention on the adequacy of the financing scheme as a whole. Although the estimates have been worked out with care, each individual item taken by itself is likely to vary.23

Table 4.India: Estimates of Financial Resources for the Second and Third Plans (Public Sector)(In billions of rupees)
Second Plan
Initially

estimated
Estimated

now
Third

Plan
1.Balance from current revenues (excluding additional taxation)3.50-0.505.50
2.Contribution from railways1.501.5011.00
3.Surpluses of other public enterprises224.50
4.Additional taxation, including measures to increase the surpluses of public enterprises4.50310.5217.10
5.Loans from the public (net)7.007.8048.00
6.Small savings (net)5.004.006.00
7.Provident funds (net)2.501.702.65
8.Steel equalization fund (net)0.381.05
9.Balance of miscellaneous capital receipts over nonplan disbursements0.221.70
10.Budgetary receipts corresponding to external assistance8.0010.90522.00
11.Deficit financing12.009.485.50
Total44.00346.0075.00
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 95.

Inclusive of increased fares and freights.

Included in items 1 and 4 in the table.

In addition, there was a gap of Rs 4 billion to be covered by greater domestic effort.

Includes investment by the State Bank out of P.L. 480 funds.

Includes investment in 1960–61 of P.L. 480 funds, by the Reserve Bank of India, in special securities.

Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 95.

Inclusive of increased fares and freights.

Included in items 1 and 4 in the table.

In addition, there was a gap of Rs 4 billion to be covered by greater domestic effort.

Includes investment by the State Bank out of P.L. 480 funds.

Includes investment in 1960–61 of P.L. 480 funds, by the Reserve Bank of India, in special securities.

The resources of the Center and the States for the Third Plan are indicated in Table 5.

Table 5.India: Estimates of Financial Resources (Center and States) for the Third Plan(In billions of rupees)
CenterStatesTotal
1.Balance from current revenues (excluding additional taxation)4.101.405.50
2.Contribution from railways1.00….1.00
3.Surpluses of other public enterprises3.001.504.50
4.Additional taxation, including measures to increase the surpluses of public enterprises11.006.1017.10
5.Loans from the public (net)4.753.258.00
6.Small savings (net)2.133.876.00
7.Provident funds (net)1.830.822.65
8.Steel equalization fund (net)1.051.05
9.Balance of miscellaneous capital receipts over nonplan disbursements4.28-2.581.70
10.Budgetary receipts corresponding to external assistance22.00….22.00
11.Deficit financing5.240.265.50
Total60.3814.6275.00
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 100.
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 100.

Balance from current revenues

As shown in Table 4, the Third Plan proposes to secure Rs 5.5 billion from the balance from current revenues at existing tax rates and after allowance for all foreseeable nonplan expenditure. Revenue receipts of the Central and State Governments over the period are expected to amount to Rs 92.5 billion (an annual average of Rs 18.5 billion, against receipts of Rs 16 billion in 1960–61 and Rs 17.49 billion in 1961–62). Aggregate expenditures on development and other accounts, including those on the maintenance of schemes completed by the Second Plan period, are expected to amount to Rs 87 billion, an average of Rs 17.5 billion a year.

The estimate of surpluses from revenues is made on certain assumptions regarding the growth of tax yields in response to the increase in economic activity. Obviously, the growth rates in the economy will vary from year to year, and so will the tax response. A tightening of the tax administration to reduce evasion and avoidance would help to raise the amount of revenues. Equally, nonplan expenditures could, in certain circumstances, exceed the initial estimates. The estimates are based on the projection of past trends and make some allowance for expected variations. It may be recalled in this connection that in the Second Plan the outcome from this source of finance was markedly different. In contrast to an initial estimate of Rs 3.5 billion, there was at the end of the Plan period a deficit of Rs 0.5 billion, indicating that not merely was there no balance for current revenues for Plan needs, but that even for current expenditures there was a deficit. The substantial increase in the expected balance from revenues during the Third Plan, compared with the Second Plan, is a reflection partly of the increase in economic activity in the last few years and partly of the imposition of additional taxes in the Second Plan period. At the same time, a careful scrutiny is being made of all expenditures, with a view to effecting economies wherever possible in Plan and nonplan expenditures. Some increase in expenditure would be difficult to avoid, especially on defense and debt services. For other expenditures, all ministries and departments have set up internal economy committees and there is a central economy board to supervise these activities.

On balance, the expected receipts under this head appear to be reasonable if the economy’s growth rate reaches the anticipated level.

Contribution from the railways

The contribution from the railways (at existing freight rates) is arrived at on the assumption that by 1965–66 the freight carried by the railways will rise, as planned, by 59 per cent (to 245 million tons) and that passenger traffic will rise by 15 per cent. On this basis, the railways are expected to contribute Rs 1 billion; this represents the surpluses of expected current earnings of the railways over their working expenses (excluding expenditure treated as investment) but after providing for depreciation outlays and the payment of interest and dividends in accordance with existing arrangements. In the Second Plan, the contribution amounted to Rs 1.5 billion, but this included receipts from increases in fares and freights. The estimated surplus of Rs 1 billion in the Third Plan period is exclusive of any additional resources that the railways might be able to raise by higher fares or freight charges. Apart from this Rs 1 billion, the railways also pay a dividend to general revenues.24

Surpluses of other public enterprises

In the Third Plan period, surpluses of public enterprises—after providing for their working expenses and normal replacements, interest, and dividends—are estimated at Rs 4.5 billion.25 This figure includes net accretions to depreciation reserve funds and other funds of these enterprises, the assumption being that these funds will be utilized for financing their expansion program. It is expected that the Central Government enterprises (iron and steel plants, fertilizer factories, oil enterprises, posts and telegraphs, and other Central Government industrial establishments) will provide Rs 3 billion and that the remaining Rs 1.5 billion will come from the enterprises of State Governments (electricity boards, transport undertakings, etc.). It would seem that the major contribution to the Center will be from the steel plants, while for the States, electricity undertakings will probably be expected to contribute sizable sums. The estimate for the Third Plan is described by the Plan document as “tentative as the data on which it is based are not sufficiently firm.”

A great deal will depend on the industrial units being commissioned without undue delays, on their reaching targeted production levels, and on the efficiency of operations of these public sector enterprises as well as on their pursuit of suitable pricing policies. In this connection there are possibilities of a conflict between the necessity for stepping up the yields from these enterprises as part of the mobilization of resources and the desire to keep prices of goods like fertilizers low, in the interest of the widest possible acceptance of the products of these enterprises for purposes of meeting agricultural and other targets.

Additional taxation

The amount of financial resources to be mobilized by means of additional taxation—either through the levy of new taxes or the stepping up of rates on existing taxes and increasing the surpluses from public enterprises, including the railways—is estimated at Rs 17.1 billion; this is nearly one third of the domestic financing effort. In the Second Plan, the total yields from additional taxation introduced during the period of the Plan are now estimated at more than Rs 10.5 billion, which is 25 per cent higher than the original target (including in the target Rs 4 billion referred to as the “uncovered gap”).

The role of taxation in mobilizing resources for the Plan is considered crucial in India. The intention is to divert an increasing proportion of additional incomes generated during the phase of development to saving. In the view of the Indian authorities, taxation is an instrument not only for mobilizing but for allocating domestic resources in accordance with the given investment program. It is, therefore, not only the amount but also the distribution of the tax-take that is important. The various taxes on personal income, such as capital gains tax, wealth tax, gift tax, are designed to curtail consumption; similarly, the tax incentives and concessions in respect of corporate taxation are designed to contribute to increased private investment in the priority sectors. Taxation in India has another function in keeping with the objectives of the Plan and the constitutional directives to the State, viz., to aim at a redistribution of income with a view to achieving a more equitable distribution of income and wealth.

In view of the concentration of the largest number of people in the lowest income brackets, the limited possibilities for enlarging, to any considerable extent, receipts from direct taxation have led to increasing emphasis on indirect taxation, especially commodity taxation in the form largely of excise duties and sales taxes. The aim is to cover a wide range of consumer goods, with particularly high duties on luxuries and semiluxuries, and thus introduce an element of progression in the indirect tax structure; but it cannot be denied that to be revenue yielding the indirect taxes have to be wide and to fall on the poorer sections of the community.26 The importance of indirect taxation is also related to the relative inelasticity of land revenue. While the rural sector has maintained its dominant position in national economic life, its contribution to the exchequer has been falling as a proportion of the total. Although, according to one estimate,27 this sector accounts for nearly 70 per cent of the national income, only a little over two fifths of the tax revenues originate in this sector. To make the agricultural sector yield larger revenues for purposes of investment, apart from raising directly taxes in that sector, reliance has to be placed on taxes on articles consumed in that sector.

The choice between different forms of taxation obviously depends upon the likely incidence and effects of further increases in each direction. The relative merits of direct and indirect taxation are determined on the basis of individual taxes. The Third Plan states, “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.”28 At the end of the Second Five Year Plan, the proportion of tax revenues to national income was only 8.9 per cent. It is proposed that this be increased, by the end of the Third Plan, to 11.4 per cent, which will still be lower than in neighboring countries, like Ceylon and Burma.

The prospects for raising this additional taxation are good, especially with the increasing consumption (and production in India) of a wide range of semiluxuries. The marginal ratio of tax receipts to national income that the tax target assumes has been calculated at 15 per cent, which is less than was in fact realized in the Second Plan.29

Of the total of Rs 17.1 billion, Rs 11 billion is to come from the Central Government and Rs 6.1 billion from the States. A good start has been made in the first two years with regard to Central taxation; taxation so far levied is expected to yield Rs 8.5 billion over the five years; the States have also stepped up tax rates in the current year, and the prospects for their attaining targeted levels appear reasonable.

Loans from the public and provident funds

The Third Plan sets a target of Rs 8 billion for the total of market borrowings. This target is not directly comparable with the collections in the Second Plan of Rs 7.8 billion under market loans, as these latter included purchases by the Reserve Bank and the investment by the State Bank of India of P.L. 480 counterpart fund deposits in government securities. In the Third Plan, the figure for market borrowings does not include such investments. The estimate of Rs 8 billion envisages a considerable increase in the absorption of government securities by the Life Insurance Corporation (LIC), the various nongovernmental provident funds, and other investors. Credit has also been taken for moderate absorption by commercial banks. Some doubts may be raised about the feasibility of this target in view of the experience in the Second Plan, when, on the same basis, Rs 3 billion was raised. Furthermore, during the Third Plan period repayment on maturing debt is likely to be of the order of Rs 9.8 billion, and the successful realization of the target for market loans would depend on a favorable trend in the capital market at a time when there will be competing demands from the private sector as well. On the broader question of the attractiveness of market loans, given the present interest rate structure, it is difficult to state categorically what the experience will be in the absence of any data regarding the interest elasticity of savings in India.30 In regard to the strengthening of investment demand, a great deal will depend upon the performance in the life insurance sector. Life insurance business has been expanding in a remarkable manner in the last few years. The LIC has set itself a target for new annual business of Rs 10 billion by 1963 (against nearly Rs 5 billion at the beginning of the Plan); and on the basis that about 55 per cent of fresh additions to the life funds (about one tenth of new business) is invested in government securities, it is not unlikely that the LIC will contribute at least Rs 0.5 billion annually to government securities. Provident funds now cover a large number of industries and, with the increases in industrial employment and the normal increase in contributions, should form another important source of demand for government securities. The absorptive capacity of the commercial banks for government securities depends upon the growth in deposits, against which must be set the likely increase in demand for credit. It would appear at this stage that the contribution of the banking system would at best be moderate.

Small savings

Though small savings in the Second Plan showed a substantial improvement over those in the First Plan, and amounted to Rs 4 billion, they fell short of the target of Rs 5 billion; however, in the last year of the Second Plan the figure of net collections was higher than the annual average assumed in that Plan. The target for the Third Plan is Rs 6 billion which, though high in relation to Second Plan performance, is not incapable of realization, given the requisite improvement in organization. The annual average of Rs 1.2 billion that this represents may be compared with Rs 1.05 billion realized in 1960–61. It is clear that the potentialities for small savings in India are large and growing, as a result of the rise in incomes generally and the proportionately larger increase in the lower and middle income brackets. The improvement so far has come mainly from urban and semiurban areas. An extension of the savings drive to rural areas offers fruitful prospects. The various measures taken to increase the attractiveness of small savings and the many organizational improvements effected should help to increase collections.

Steel equalization fund and miscellaneous capital receipts

Steel equalization fund receipts arise from the surcharge on steel. In the Third Plan period, these are expected to yield Rs 1.05 billion; obviously this depends upon the attainment of the target of steel production, and any shortfall in that target would lead to a shortfall in receipts under this head. Miscellaneous capital receipts are expected to bring in Rs 5.4 billion. This includes net additions to provident funds of the order of Rs 2.65 billion, a figure that refers to net increases in provident funds of government employees which accrue directly to the Exchequer. Betterment levies are also included in miscellaneous capital receipts. Experience in the Second Plan with betterment levies has not been particularly encouraging, and it is difficult to appraise the extent to which this target can be realized. Other miscellaneous capital receipts cover recoveries of loans and advances from local bodies and inflows on account of deposits and remittances; expenditures include compensation payments to refugees and zamindars, and loans and advances to cultivators and others for nonplan purposes. The estimates postulate that recoveries in respect of arrears of outstanding loans will be expedited and that nonplan capital disbursements will be kept to a minimum.

Deficit financing

In the Third Plan, deficit financing, which in India refers to the net increase in the Treasury bill holdings of the Reserve Bank (adjusted for variations in the Government’s cash balances), is to be limited to Rs 5.5 billion.31 This is about 7 per cent of the total resources required in the public sector (10 per cent of those of domestic origin); it is in absolute amounts less than half of what was financed in this manner in the Second Plan, though the aggregate expenditures in the Third Plan are much larger. Another way of looking at it is that it represents somewhat over one half of Central Government revenues in 1961–62. The figure of deficit financing is not to be considered only as a residual after estimating all noninflationary sources of financing. It is also related to the monetary needs of the economy. The Third Plan visualizes an expansion in real national income of some 30 per cent. With the increasing monetization of the economy and the observed tendency for the community to hold a larger cash balance, it is felt that income velocity will decline somewhat. In addition to the public sector’s requirement of Rs 5.5 billion, it is expected that the net increase in the private sector’s operations will call for the extension by the Reserve Bank of credit of Rs 2 billion (mainly through agricultural cooperatives). On the basis of observed trends relating expansion in government money (currency and bank reserves) to total money supply in the ratio 1:1.36, it is felt that the total monetary expansion may be about Rs 10 billion (35 per cent). This would seem to be compatible with monetary stability, especially as the monetary needs of the monetized sector are likely to rise faster than those for the economy as a whole, represented by the rise in national income. There is, of course, no precise way of estimating a safe volume of deficit financing, and the Third Plan stresses this fact. The precise amount of deficit financing, it states, is to be decided in the light of the emerging economic situation, largely the experience with regard to growth in real national income, and more especially of farm output.

The limit to deficit financing in the Third Plan is severely set by the absence of a foreign exchange cushion which could serve to absorb the expansion in monetary volume. An interesting point in this connection is that, though there was a rise in the Third Plan investment figure between the time when the Draft Plan was framed and the Plan was presented in its final form, the extent of the reliance on deficit financing in absolute amounts was not changed; the figure of deficit financing is thus now a smaller proportion of the total.

Investment in the private sector

The likely levels of investment in the private sector are shown in Table 6. The data for this sector program are, in the Plan’s words, “exceedingly rough,” especially in regard to agriculture and housing. The estimates are based on the trends observed in the Second Plan. A moderate increase over the Second Plan is envisaged in respect of agriculture and of housing and other construction. As in the Second Plan period, the investment here is expected to be largely self-financed. Investment in inventories is placed at Rs 6 billion to take account of the higher level of agricultural and industrial production. For the organized industrial and mining program, capital requirements will amount to Rs 13.5-14 billion (including net investment allocation of Rs 11 billion). The sources of supply of investible funds for financing gross fixed assets formation are estimated as follows: institutional sources, Rs 1.3 billion; direct loan participation by Central and State Governments, Rs 0.2 billion; new issues, Rs 2 billion; internal resources (net of repayment liabilities), Rs 6 billion; direct foreign credit or equity participation, Rs 3 billion. This total of Rs 12.5 billion falls short of the requirements of the organized industrial sector’s requirements, though in the light of the widening investment demand and the consequent buoyancy in the capital market, the gap might in practice be bridged.

Table 6.India: Estimates of Investment in the Private Sector for the Second and Third Plans1(In billions of rupees)
GroupSecond PlanThird

Plan

Estimates
Original

estimates
Revised

estimates
1.Agriculture (including irrigation)2.756.758.50
2.Power0.400.400.50
3.Village and small industries1.002.253.25
4.Large and medium industries and minerals5.757.25211.002
5.Transport0.851.352.50
6.Housing and other construction9.2510.0011.25
7.Inventories4.005.006.00
Total24.0033.0043.00
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 105.

These figures represent aggregate investment in the private sector including that financed out of resources transferred from the public sector; therefore, they differ from the figures in Table 3.

Excluding modernization and replacement.

Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 105.

These figures represent aggregate investment in the private sector including that financed out of resources transferred from the public sector; therefore, they differ from the figures in Table 3.

Excluding modernization and replacement.

External Finance for the Plan

Of the total investment effort of Rs 104 billion, nearly three fourths is expected to be financed from domestic resources. The remainder represents external assistance needed for the Plan. The role of external finance in Indian development is not so much that is supplements the domestic effort as that it enables the economy (given the pattern of its investment program and the inability in the short run to generate savings in those sectors where they can be translated into external resources) to obtain imports needed to carry out the investment program. This is the more essential as, unlike the position at the beginning of the Second Plan, the Indian economy has no reserves of foreign exchange upon which it can draw to finance the development effort. The current earnings of foreign exchange in the Third Plan would barely cover current import needs and would leave a deficit represented by debt repayment. External assistance would be needed to finance this as well as nearly all the needs of the Plan itself. While much the larger part of the external assistance has to come from governmental and intergovernmental agencies, the role of private foreign investment will continue to be important. The climate for foreign investment in India is good, and recently the Government, in a clarification of policy, outlined the positive role of private foreign investment in fulfilling Plan targets of output and investment.

The Third Plan document provides estimates of the balance of payments for the five-year period on a tentative basis (Table 7). Total receipts from exports are put at Rs 37 billion, compared with actual receipts of Rs 30.5 billion during the Second Plan period. The estimate of Rs 37 billion is the minimum target to be attained. The needs are much larger. No net receipts are envisaged under transactions in invisibles, excluding official donations. Receipts under investment income will counterbalance payments of interest and dividends. For imports of machinery and equipment for Plan projects, Rs 19 billion is provided, and for the import of components, intermediate products, etc., for raising the domestic production of capital goods, Rs 2 billion. The Plan states that the import requirements of machinery and equipment would, in fact, be higher by Rs 1.3 billion (Table 8), but the figure of Rs 19 billion is retained as that represents the amount that can be financed by external assistance. This would imply that any excess of imports on Plan account over the figure of Rs 19 billion will have to be financed by increased export performance—that is, above Rs 37 billion. Maintenance imports are estimated at Rs 36.5 billion. Here again some doubts have been raised regarding the adequacy of this figure. The estimate assumes that, as a result of larger output in industry and agriculture, some import saving will be possible, but this is not likely to reduce the level of imports in the aggregate. The Plan states, in fact, that an estimate of Rs 38 billion “would not be too high.” Here also for purposes of presentation the figure has not been changed and any excess of maintenance imports over Rs 36.5 billion is hoped to be financed by additional exports. It would thus seem that the export target should more correctly be set at not less than Rs 40 billion. Thus, the annual average would be Rs 8 billion, against an annual average achieved in the Second Plan of Rs 6.1 billion and actual receipts of Rs 6.3 billion in 1960–61. During the Third Plan period, net capital transactions are expected to lead to an outgo of Rs 5.5 billion. The foreign exchange gap as postulated in the Plan (i.e., on the basis of exports of Rs 37 billion, maintenance imports of Rs 36.5 billion, Plan imports of Rs 21 billion) amounts to Rs 32 billion.32 All of this has to be met by external assistance. If the P.L. 480 imports (for which firm commitments were made even before the commencement of the Plan) are excluded, the balance remaining to be financed amounts to Rs 26 billion, of which direct Plan project needs are Rs 19 billion. In addition, Rs 2 billion represents imports of components, etc., essential for domestic manufacture of capital goods for the Plan. Further, a sum of Rs 5 billion is needed to cover capital transactions. If India fails to obtain credits equivalent to debt refinancing, and has to repay past debts out of its current foreign exchange earnings, the balance left for essential maintenance imports will correspondingly be reduced. Foreign assistance for the Rs 7 billion is as necessary for the fulfillment of the Plan as imports of machinery, and hence such “nonproject” assistance is as important to India as direct “project” assistance. Against the figure of Rs 32 billion, the budgetary receipts corresponding to external assistance are placed at Rs 22 billion, the difference of Rs 10 billion being the refinancing of debt obligations of Rs 5 billion, the direct credit to the private sector of Rs 3 billion, and that portion of P.L. 480 imports which will go into buffer stocks or otherwise not be available, viz., Rs 2 billion.

Table 7.India: Balances of Payments During the Second and Third Plans(In millions of rupees)
Annual AverageTotal
Second PlanThird PlanSecond PlanThird Plan
1.Exports6,1007,40030,58037,000
2.Invisibles (net) (excluding official donations)8401Nil4,2001Nil
3.Capital transactions (net) (excluding fresh receipts of official loans and private foreign investment)−340−1,100−1,720−5,500
4.Foreign exchange resources available for imports6,6006,30033,01031,500
5.Imports of machinery and equipment for Plan projects9,6503,80048,26019,000
6.Components, intermediate products, etc., for raising production of capital goods4002,000
7.Maintenance imports7,30036,500
8.Total imports29,65011,50048,26057,500
9.Net deficit (4-8)-3,050-5,200-15,250-26,000
10.External assistance2 (including drawings on IMF)1,8505,200 39,27026,000 3
11.Draft on foreign exchange reserves1,200Nil5,980Nil
Source: Reserve Bank of India Bulletin, September 1961, p. 1396.

Includes reimbursements from the United States for freight expenses on P.L. 480 imports initially incurred by India.

P.L. 480 imports are excluded from both sides—about Rs 5,340 million for the Second Plan and Rs 6,000 million for the Third Plan.

Represents external assistance required.

Source: Reserve Bank of India Bulletin, September 1961, p. 1396.

Includes reimbursements from the United States for freight expenses on P.L. 480 imports initially incurred by India.

P.L. 480 imports are excluded from both sides—about Rs 5,340 million for the Second Plan and Rs 6,000 million for the Third Plan.

Represents external assistance required.

Table 8.India: Investment and Foreign Exchange Requirement of the Third Plan(In billions of rupees)
Total

Investment
Foreign

Exchange
Public Sector
1.Agriculture and community development6.100.30
2.Major and medium irrigation6.500.50
3.Power10.123.20
4.Village and small industries1.000.20
5.Large and medium industries and minerals (including oil)14.706.90
6.Transport and communications14.863.20
7.Social services and miscellaneous5.720.90
8.Inventories2.001
Total (public sector)61.0015.20
Private Sector
1.Large and medium industries, minerals, and transport13.504.95
2.Other 229.500.15
Total (private sector)43.005.10
Grand Total104.0020.30
Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 110.

Foreign exchange component of “inventories” is included under other groups.

Includes investment in village and small industries.

Source: Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 110.

Foreign exchange component of “inventories” is included under other groups.

Includes investment in village and small industries.

One factor which might upset the calculations of the external finance needs of the Plan is the possibility of a rise in import costs. The requirements of foreign exchange are based on careful cost evaluation and on certain price assumptions, and a rise in import costs (such as occurred during the Second Plan) would affect the picture. The pattern of aid may also tend to raise import costs, and the fact that certain credits which India has obtained may be used only in the country of purchase leads to the possibility of prices being higher than anticipated.

A more serious setback to the Plan would be a lag in export performance. India’s exports so far have shown an uneven and slow rate of growth while import needs have been expanding rapidly. The difficulties in raising exports to the required level are obvious. The Plan states, “The trends in exports should be kept under review at the highest level throughout the period of the Plan and all steps taken to ensure that export earnings are maximized. Two points need to be emphasized in this context. Firstly, while increased production will help in enlarging the surpluses available for export, foreign exchange earnings have at the present juncture to be increased even by sacrifice of domestic consumption. Secondly, exports will flow only to the extent that the prices of our products are competitive. It will be essential in the coming years not only to restrain consumption in the interest of exports, but also to increase productivity and to keep down costs.”33 Export performance will depend on increases in real output; on the success with which domestic consumption, especially of exportable commodities, can be held down through fiscal and monetary instruments so as to create surpluses for exports; on the maintenance of monetary stability; and on improvements in productivity and of quality standards. To this end, a major effort to create export consciousness as well as export organization has been initiated.

Although the urgency for exports to increase both in the short run and over the longer period, so as to reduce the dependence of the economy on external aid, is recognized, there are certain structural factors to be contended with. India’s export performance at present depends heavily on three major commodities, viz., jute manufactures, tea, and cotton textiles; an enlargement of the exports of these staples has to be accompanied by a diversification of exports and exploration of new export lines. While the achievement of the agricultural and industrial targets of the Plan forms the basis on which exports can be expanded, more specific action is needed, both in traditional and in the newer export industries. The traditional industries like jute and cotton are to be modernized in an attempt to bring down costs and increase productivity. India has distinct advantages in the sphere of engineering exports, though as yet a major breakthrough has not occurred. Again, Indian exports of iron ore have positive advantages; much work has already been done here and the possibilities for further exploitation are considerable. Development of new export markets is also needed as part of the wider effort to enlarge the country’s foreign trade. India shares, with other less developed countries, the difficulties of breaking into traditional markets; the obstacles imposed by some of the industrially advanced countries on the entry of goods from countries such as India do not help. Meanwhile, apprehensions have been expressed in India about the impact on India’s exports of the possible entry of the United Kingdom into the European Economic Community, No quantitative assessment is as yet possible, but this once again serves to emphasize the need for India to broaden its export pattern and to move away from the traditional dependence on textiles, tea, and jute.

Appraisal

The Third Plan calls for a major domestic effort to be supplemented by substantial external assistance. The Plan itself is large—the total investment proposed is more than was invested in the last decade—but in real terms the Plan is not so much larger than the Second Plan as would be suggested by the figures.34 Even so, the strain on the economy would be considerable. The prospects for the realization of the Plan’s targets would, in terms of aggregative analysis, depend on the realized increases in investment and income. The greater concentration in the Third Plan than in the Second Plan on investment in the heavy and capital goods industries might at first sight make the assumption of lower capital/output ratios appear optimistic. On the other hand, there has been a marked shift in emphasis in agriculture toward quick-yielding schemes, and much of the earlier investment in industry and other sectors is now reaching the stage of output. The expected output (and hence ratios using this as an element) is dependent in the agricultural sphere on reasonably normal weather, and in industry on the avoidance of major bottlenecks arising out of shortages of raw materials (domestic and imported), power, and transport.

Shortages of coal, power, steel, and transport marked the latter half of the Second Plan, and the “commodity balance” that was hoped for was not realized. In the early years of the Third Plan, the shortage of power and transport is likely to continue; the success of the Plan depends as much on the successful realization of the internal consistency between the various sectoral programs of output and investment as on the achievement of aggregate targets. Experience in the first year of the Third Plan brings this out; coal, power, and transport in certain important sectors are still in short supply, and partly in consequence steel and fertilizer production are behind schedule. The need for importing steel in greater quantities than was allowed for at the time when the estimates for maintenance imports were drawn up has meant a further strain on external resources. In view of the facts that the expansion programs of the three public sector plants are still in a preliminary stage and that the construction of the Bokaro steel plant is still to begin, pending the findings of a survey team, it would be difficult on present indications to attain the planned levels of steel production by the end of the Third Plan; similarly, the program for the expansion of fertilizer capacity has also been proceeding somewhat slowly, and it would seem that, if the agricultural program were not to be affected, larger imports of fertilizers than were budgeted would have to be arranged.

The problem on the investment side is the ability of the economy to mobilize the necessary domestic and external resources. It would seem that, given the requisite effort, the economy would be able to raise the needed domestic resources. While delays in the steel program might affect the volume of resources to be raised from public sector enterprises, the experience with regard to resources from additional taxation might, as with the Second Plan, turn out to be better than anticipated. In the first two years of the Third Plan, the Center and the States have levied taxes which would yield more than three fourths of the total expected for the five years. The ability to raise domestic resources in adequate amounts, however, presupposes that the expected rise in output would take place under conditions of monetary and price stability. The Third Plan starts with a price level nearly 30 per cent higher than at the beginning of the Second Plan; any further rise in prices would come in the way of an effective mobilization of resources. In this connection, the Third Plan stresses the importance of an appropriate price policy. It recognizes that a certain upward pressure on prices is implicit in development and that a “moderate rise” in the price level is likely; equally, it lays stress on the necessity of preventing a rise in the prices of essential commodities. The Plan states that, in the regulation of prices, reliance will be on fiscal and monetary discipline. Fiscal policy is to be directed to mopping up the excess purchasing power generated as a result of the investment effort, and thus to restraining consumption; fiscal and monetary discipline will consist of limiting the volume of deficit financing and restraining the secondary expansion of money following the primary expansion of government money. Monetary policy will continue to be operated flexibly, with the objective of restraining excessive credit expansion while at the same time meeting the genuine credit needs of the economy and especially directing credit into sectors accorded priority in the Plan. In particular, bank credit for speculative purposes is to be discouraged.

While fiscal and monetary measures will be the main instruments of regulation, some amount of physical controls in special sectors may be employed. The country’s experience in the recent past has indicated that, even before the pressure of an accelerated investment program on resources in the aggregate is felt, some key sectors are likely to feel its immediate impact. This is due basically to the structural rigidities in the economy and might affect both producer goods (such as steel, power, or transport) and consumer goods, especially food. Particular attention is thus to be paid in the Third Plan to preventing a rise in the price of foodgrains. The emphasis on food production has been discussed above. In the sphere of distribution, the Government does not intend to have either complete control or complete decontrol over the foodgrains trade. What the Government is seeking to do is to build up buffer stocks of grains, and to carry out what the Plan refers to as “open market operations” in a flexible manner and at a large number of places, in order to achieve stable food prices. Success will depend a great deal upon the ability of the agricultural sector, especially the food sector, to reach output targets. Also, the role of P.L. 480 foodgrains should not be minimized; though as a proportion of annual requirements P.L. 480 grains may be no more than 4–5 per cent, the importance of these grains in helping to keep prices steady has been proved in the last three or four years. Open market operations in foodgrains depend as much on the over-all availability of foodgrains (in reserve stocks) as on adequate local availability through transport priorities or a dispersal of reserve stockholding in different areas.

The role of price policy is also conceived in relation to different targets of production, and some relative price movements cannot be avoided; indeed, they may be needed in order that resources can be mobilized for certain priority sectors by the presence of a high degree of profitability in those sectors. Equally, fiscal measures may be relied on to restrain domestic consumption of exportable items and thus some selective price increases may be permitted; in either case, it would be essential that prices of wage goods be kept in check. To be able to be competitive on the basis of price, it would be essential not merely that the prices of essential consumer goods which enter into the cost of living be kept within bounds, but also that the prices of essential industrial raw materials be kept from rising to levels that would affect export prospects.

Even if internal resources were adequately mobilized and conditions of monetary and price stability maintained, the external resources position would still present serious problems; this must be regarded as the focal point of the Plan, in that nearly the entire investment import content of the Plan has to be financed by external assistance over and above the refinancing of external debt repayments. Though India possesses the features of a continental economy, like that of the United States and of the U.S.S.R., the process of economic development is bound to raise the level of imports both in the aggregate and as a proportion of national income; the experience of the last decade—when, despite the increase in “import-saving” output, imports continually expanded—is relevant in this connection and points to the need for advance planning for exports. The Plan suggests that in the next 10 years Indian exports will have to be doubled as an essential condition for reaching the 15-year objective of becoming a self-reliant economy. On the other hand, given the long-term objective of a self-reliant economy, a certain hump in the balance of payments in the short run cannot be avoided. During this period external assistance is vital, since without such complementary resources even domestic resources could not be put to effective use. This, of course, presupposes that external aid is being put to proper use. The assistance that the Consortium members have been giving India supports the general recognition that India has demonstrated a capacity to make effective use of foreign aid.

Of the total balance of payments gap of Rs 32 billion, Rs 6 billion is on account of P.L. 480 imports and has been secured. Of the remainder, Rs 19 billion is in respect of projects included in the Plan and Rs 7 billion represents nonproject assistance needed over the five years. Therefore, a total of Rs 26 billion of assistance is required on a payments basis; but aid commitments would have to be larger than this figure and be made sufficiently early since there would be a lag between commitments and the utilization of aid.35 For the first two years of the Plan, Rs 11.26 billion ($2,365 million) has been committed as a result of the IBRD Consortium meetings held so far; the largest share of this total is that of the United States (Rs 4.66 billion or $980 million).36 In addition, the U.S.S.R. has agreed to provide Rs 2.38 billion, and several other countries a total of Rs 0.67 billion. Thus, in all, a sum of Rs 14.31 billion has been assured. To this has to be added a carry-over of assistance of Rs 3.65 billion from the Second Plan. However, there will, if past experience is an indication, be a carry-over of external assistance into the Fourth Plan. It is not unlikely that, at least, this will be of the same order as at the beginning of the Third Plan. Altogether, a substantial gap still remains to be covered. Since much the larger part of the assistance secured so far has been tied to specific projects, the proportion of untied aid needed is correspondingly greater in the remainder yet to be secured. The element of underestimation in the import component of the Plan and in the volume of maintenance imports would mean a strain on India’s own exchange resources even if the full amount of aid were secured; on top of this, additional requirements of steel and fertilizer to replace the shortfall in domestic production would impose fresh strains, even on the assumption that exports will increase as planned. Under these circumstances, if India fails to secure the full amounts of aid, especially in untied form, even though the projects included in the Plan might be assured external assistance, the Plan as a whole would suffer, as current production (of consumer and investment goods) would be affected, the tempo of investment would be slowed down, and the internal monetary and price stability that has marked the last two years would be subject to pressure. There is a growing awareness that the provision of such untied assistance is at least as important for India as the provision of project assistance if the developmental effort is to be effectively supported.

Substantial as is the requirement of external assistance, most of the investment effort is to be financed, as it should be, by domestic resources; external assistance constitutes (including P.L. 480 assistance and debt refinancing) Rs 32 billion in a total program of Rs 116 billion, but the character of that assistance and the sectors into which it flows make it crucial for the success of the entire developmental effort. The continued injection of external capital for another ten years or so is therefore essential if India is to maintain and improve on the present momentum of growth, which, given the demographic compulsions of the situation, cannot be considered as other than minimal.

Le troisième plan quinquennal de l’Inde

Résumé

L’Inde est maintenant dans la deuxième année de son troisième Plan quinquennal. Ce Plan cherche à faire progresser d’une étape le programme de développement qui a été lancé en 1951; pendant les dix années suivantes le revenu national réel s’est accru de 43 pour cent et le revenu par habitant, de 17 pour cent.

Le troisième Plan vise à atteindre un taux annuel d’augmentation du revenu national réel de 5 pour cent; l’accroissement prévu de la production agricole est de 30 pour cent et on pense que la réalisation de l’objectif de 100 millions de tonnes de céréales alimentaires contribuera à assurer à l’Inde son indépendance du point de vue alimentaire. La production industrielle doit s’accroître de 70 pour cent, l’expansion des industries des produits de base étant l’objet d’efforts particuliers. Les programmes de développement de la production d’énergie électrique et des moyens de transport sont liés à l’expansion de l’agriculture et de l’industrie.

L’investissement proposé s’élève à Rs 104 milliards, dont Rs 63 milliards sont destinés au secteur public; en outre, les dépenses courantes du secteur public s’élèveront à Rs 12 milliards. Le financement de ce total de Rs 75 milliards est envisagé de la façon suivante: solde des recettes courantes et contribution des Chemins de Fer et autres entreprises publiques, Rs 11 milliards; nouveaux impôts, Rs 17,1 milliards; emprunt sur le marché et petite épargne, Rs 14 milliards; financement du déficit, Rs 5,5 milliards; contrepartie budgétaire des ressources extérieures, Rs 22 milliards; autres sources, Rs 5,4 milliards. La possibilité de dégager les ressources intérieures nécessaires apparaît satisfaisante.

Le déficit net de la balance des paiements—non compris l’aide de Rs 6 milliards fournie par les Etats-Unis au titre de la loi 480—est estimé à Rs 26 milliards. Il devra être couvert intégralement par l’aide extérieure. Les engagements devront être supérieurs à ce chiffre et contractés suffisamment tôt en raison du délai qui s’écoule entre ces engagements et l’utilisation des fonds. Jusqu’à présent l’Inde a obtenu pour Rs 14,3 milliards d’engagements de la part du Consortium d’Aide et d’autres sources. La majeure partie de cette aide étant destinée à l’exécution de projets déterminés, la proportion d’aide à d’autres fins qui doit encore être fournie s’est accrue en conséquence. Si l’Inde ne partient par à obtenir le montant intégral d’aide nécessaire, en particulier sous forme inconditionnelle, le Plan dans son ensemble en souffrira car la production et le rythme de l’investissement seront ralentis. L’aide extérieure est donc nécessaire pour maintenir le taux d’accroissement actuel qui, étant donné les contraintes démographiques, ne représente qu’un minimum.

El tercer plan quinquenal de la India

Resumen

La India se encuentra ahora en el segundo año de su Tercer Plan Quinquenal. Se aspira con este Plan avanzar una etapa más en el proceso de desarrollo iniciado en 1951; durante los diez años subsiguientes el ingreso nacional real aumentó en 43 por ciento y el ingreso per capita en 17 por ciento.

El Tercer Plan Quinquenal pretende llegar a obtener una tasa de incremento anual del 5 por ciento en el ingreso nacional real, un aumento del 30 por ciento en la producción agrícola, y el logro de la meta deseada de 100 millones de toneladas de cereales que ayudará a la India a autoabastecerse de alimentos. Se tiene en mira que la producción industrial aumente en un 70 por ciento, por lo que se está poniendo especial énfasis en la expansión de las industrias básicas. Los programas relativos a la energía eléctrica y al transporte están vinculados con los de la expansión en la agricultura y en la industria.

La inversión total propuesta es de 104.000 millones de rupias, de los cuales 63.000 millones se han asignado al sector público; además, se estima que los gastos ordinarios de dicho sector ascenderán a 12.000 millones. Se espera que este total de 75.000 millones de rupias se cubrirá así: 11.000 millones entre el exceso de los ingresos ordinarios y las contribuciones de los ferrocarriles y otras empresa públicas; 17.100 millones en nuevos impuestos; 14.000 millones de préstamos en el mercado y de pequeños ahorros; 5.500 millones del financiamiento del déficit; 22.000 millones de la contrapartida presupuestaria de recursos externos; y 5.400 millones de otras fuentes. Las perspectivas de reunir los recursos internos necesarios son bastante favorables.

El déficit de la balanza de pagos—excluyendo la ayuda de Rs 6.000 millones bajo la Ley Pública No. 480 de los Estados Unidos—se estima en Rs 26.000 millones, suma que tendría que cubrirse enteramente mediante la ayuda extranjera. Las promesas de fondos tendrían que superar esta cifra y hacerse con anticipación suficiente para compensar el retraso que existe entre dichas promesas y su utilización. La India ha obtenido hasta ahora Rs 14.300 millones de ayuda económica a través del Consorcio de gobiernos y de organismos para ayudar al desarrollo de la India, y de otras fuentes. Puesto que la mayor parte de esa suma ha sido asignada a proyectos específicos, la cantidad de ayuda que aún se necesita obtener para otros propósitos ha sido aumentada en igual proporción. Si la India no pudiera conseguir la suma total de ayuda, especialmente en forma incondicional, el plan en general sufriría porque la producción actual resultaría afectada y se retardaría el ritmo de la inversión. Por lo tanto, es preciso contar con ayuda externa para mantener la tasa actual de desarrollo que, dada la apremiante situación demográfica, no es sino mínima.

*

Mr. Narasimham, Chief of the South Asia Division, is a graduate of Madras and Cambridge Universities. He has been on the staff of the Reserve Bank of India, and has contributed articles to the Reserve Bank of India Bulletin.

1

For a detailed discussion of the planning process in India and of the First and Second Five Year Plans, see N. A. Sarma, “Economic Development in India: The First and Second Five Year Pans,” Staff Papers, Vol. VI (1957–58), pp. 180–238.

2

The total outlay in the public sector was Rs 20 billion, the difference between this figure and the figure of investment representing current outlay under the Plan (Rs 4.76 = US$1).

3

The corresponding total outlay in the public sector was Rs 48 billion.

4

“Third Five Year Plan of India,” Reserve Bank of India Bulletin, September 1961, pp. 1388–1402. The National Council of Applied Economic Research, a private research organization, in a study of savings in the Indian economy, estimated the marginal savings/income ratio at about 20 per cent for the earlier years of the Second Plan.

5

See D. R. Khatkhate, “The Impact of Inflation on India’s Economic Development,” Economic Development and Cultural Change, Vol. VII, No. 3, Part I (1959), pp. 363–76, for a good discussion of this point. Extending this argument further, A. Shonfield, in Economic Growth and Inflation: A Study of Indian Planning (Bombay, 1961), has argued for a larger investment effort in the Third Plan by obtaining increased supplies of P.L. 480 foodgrains. The role of food supplies in development is not peculiar to India. See G. Maynard, “Inflation and Growth: Some Lessons to Be Drawn from Latin-American Experience,” Oxford Economic Papers, Vol. XIII, No. 2 (1961), pp. 184–202.

6

The impact on the balance of payments of a step-up in the rate of investment where export expansion is limited, where imported capital goods form a substantial proportion of the investment, and where the ratio of international trade to national income is as low as it is in India, is well brought out by W. B. Reddaway in The Development of the Indian Economy (London, 1962), pp. 31 and 54–66.

7

It is interesting in this connection to observe that the goods at present in short supply in India are not so much wage goods as investment goods (such as steel and coal) and services (such as transport and power). The availability of P.L. 480 foodgrains is only part of the explanation.

8

It would be well to point out that this concept of “backlog of unemployment” is more notional in character, in that it measures the difference between the additions to the labor force and the increase in employment in the past period. The figures for unemployed and underemployed would, of course, be much larger.

9

Government of India, Planning Commission, Third Five Year Plan (New Delhi, 1961), p. 9.

10

Loc. cit.

11

This is equivalent to Rs 125.3 billion at 1948–49 prices, the base year for comparison used in national income statistics in India.

12

Government of India, Planning Commission, op. cit., p. 49.

13

Subsequent estimates place foodgrains production in 1960–61 at 79.3 million tons; on this basis the expansion in foodgrains production envisaged would be 26 per cent.

14

Some new land, of course, will come under the plow in the areas being opened up in the various multipurpose projects and in the Rajastan Canal area.

15

With allowance for double cropping, the net area of 20 million acres is equivalent to a gross area of 25.6 million acres.

16

The corresponding gross areas are 12.8 million acres each from major and minor works.

17

This is based on the Draft Outline of the Plan; the final version does not spell out the physical content of the targets in this manner, but the value of output is the same as in the Draft Outline for these machine-building industries.

18

Some amount of competition between road and rail transport will be unavoidable; a Committee on Transport Policy is presently examining the possibilities of greater coordination between these two sectors.

19

This excludes Rs 3.5 billion to be met by the railways out of their depreciation fund and Rs 0.35 billion needed by the railways for stores suspense account.

20

In actual fact, Rs 2 billion of the public sector program represents transfer of resources to the private sector; the total of private investment then would be Rs 43 billion and that of public investment Rs 61 billion, against Rs 33 billion and Rs 34.5 billion in the Second Plan.

21

The figure of Rs 21 billion excludes Rs 5 billion for debt servicing and Rs 6 billion for P.L. 480 imports. The figure of Rs 83 billion excludes Rs 12 billion of current outlay.

22

Government of India, Planning Commission, op. cit., p. 93.

23

The Second Plan experience is relevant in this context; although in the final result the Plan involved public sector outlay of Rs 46 billion, against the original target of Rs 48 billion, the individual items of financing showed wide divergences from original expectations.

24

A figure of a little under Rs 4 billion has been mentioned in the Third Plan for the payment to general revenues of dividends at a rate of 4¼ per cent of capital at charge. This is included under “Balance from current revenues” in Table 5.

25

In the Second Plan period, the contributions from the public sector enterprises were shown under “Balance from current revenues” and “Additional taxation.”

26

“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” (Government of India, Planning Commission, op. cit., p. 104).

27

Reserve Bank of India Bulletin, September 1961, p. 1400. The figure here relates to income originating in the entire rural sector and is thus wider than the income from agriculture proper.

28

Government of India, Planning Commission, op. cit., p. 103.

29

Reserve Bank of India Bulletin, September 1961, p. 1400.

30

It may be noted in this connection that the market loan issues in the current fiscal year (1961–62) have been made at higher rates of interest, the increase in the rates ranging up to a little under one half of 1 per cent.

31

This does not include any Reserve Bank subscription to government debt; it is intended that in the Third Plan there will be no such subscriptions (see section, Loans from the Public and Provident Funds, above).

32

This includes Rs 6 billion representing P.L. 480 imports and Rs 5 billion representing debt service transactions.

33

Government of India, Planning Commission, op. cit., p. 113.

34

The public sector outlay of Rs 75 billion (in 1960–61 prices) is, in terms of constant prices, not more than a quarter as great again as the Rs 48 billion originally proposed for the Second Plan.

35

This lag is due, apart from procedural delays, to the fact that much of the equipment needed for the investment program has to be fabricated to individual specifications in the supplying countries.

36

The U.S. (and total) amount might be larger, as the U.S. contribution is conditional on matching contributions and the United States has announced that it would be prepared to increase its contribution by another $65 million (up to a total of its original commitment of $500 million for the second year) in the event that other member countries of the Consortium raise their contributions by an equivalent amount.

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