India - Third five year plan (Vol. 4 of 9) : The Industrial Program

RESTRICTED Annex III to Report No. AS-80a This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INDIA'S THIRD FIVE-YEAR PLAN REPORT OF BANK MISSION TO INDIA Annex III THE INDUSTRIAL PROGRAM August 10, 1960 Department of Operations South Asia and Middle East CURRENCY EQUIVALENTS 1 Indian Rupee = U. S. $0. 21 1 U.S. Dollar = Rs. 4. 762 Rs. 1 billion = $210 million 100 Naye Paise = One Rupee WEIGHTS AND MEASURES All tonnages in long tons unless otherwise stated. TABLE OF CONTENTS Page No. (A) GENERAL INDUSTRIAL PROBLEMS Industrial Policy 1 Priorities in Industrial Development 3 Scale of Investment Proposed Production Trends Investment in Individual Industries 7 Industrial Management and the Cost of Production 9 (B) SCME SPECIAL INDUSTRIAL PROBLEMS Steel Position of the Industry 16 The Staffing Problem 17 Demand for Steel 19 Utilization of Capacity 20 Raw Materials 20 Timing of Expansion 23 Production Costs 23 Conclusions 24 Heavy Machinery and Metal Forming General 26 Heavy Machinery 26 Problems of Making Castings 27 Machine Tools 29 The Automobile Industry Present Position 31 Efficiency and Costs 33 Ancillary Enterprises 36 Third Plan Prospects 39 Cotton Textiles Present Position of the Industry 41 Raw Cotton 43 Employment and Wages 44 Modernization 44 Prospects for Production Small-Scale and Village Industries General Village Industries Small-Scale Enterprises APPENDIX TO ANNEX III LIST OF TABLES Page No. 1. Investment in Large and Medium Industries 5 2. Utilization of Capacity in Selected Industries During 1959 6 3. Output of Selected Industries in 1950/51, 1955/56 and 1958/59, Expected Output in 1960/61 and Target for 1965/66 8 4. Productivity of Workers in Various Industries in India 10 5. Wages and Salaries in Relation to Output 11 6. Real Earnings of Labor in Selected Industries 12 7. Landed Costs and Costs of Doiestic Production 1957/58 l4 8. Estimated Personnel Requirements for the Rourkela Steel Plant 18 9. Demand for Finished Steel and Pig Iron 19 10. Stocks of Coking Coal at IISCO 22 11. Production of Motor Vehicles in India, 1951-1960 32 12. Indigenous Content of Vehicles Produced in India 32 13. Automobile M%anufacturing Industry in India 34 14. Customs and Excise Duties on Motor Vehicles 36 15. Vehicle Production in India Divided Between Main Plants and Ancillaries 37 16. Representative Automobile Parts Produced in India 1953-59 37 17. Third Plan Production Targets for Hotor Vehicles 39 18. Production of Cotton Cloth 41 19. Cotton Cloth Exported h2 20. Outlays in the Public Sector for Small-Scale and Village Industries 46 21. Employment in Manufacturing in 1956 47 22. Public Sector Investment in ietals and Engineering 53 23. Steel Capacity in India in 1956, 1961 and 1965/66 5h 24. Private Sector Investment in Metals and Engineering 57 25. Third Plan Investment in Chemicals 59 26. Third Plan Production Targets in Chemical Industry 60 27. Third Plan Investment for Miscellaneous Minerals and iineral Products 62 28. Consumer Goods Targets in The Third Plan 65 29. Third Plan Investment in Miscellaneous Industries 66 !ND刀A GROWTH OF INDUSTRIAL PRODUCT-ON (INDEX,-951二100) 〕不〕〕 騙951 1952 1953 1954 1955!956 1957-958 1959!960 7/27/60 1680 IBRD一Economic Sfoff ANNEX III. INDUSTRY (A). GENERAL INDUSTRIAL PROB Industrial Policy 1. The industrial aims of the Third Plan have been clearly stated in terms of the continued rapid expansion of basic industries like steel, fuel and power and, in particular., machine-building capacity, The goal is both ambitious and clear - it is to build up as soon as possible sufficient industrial potential to undertake development in various sectors of the economy from machinery and equipment produced iTithin the country. Heavy engineering industries are to be built so as to achieve more or less complete self-sufficiency in respect of transport, power generation and electrical equipment., as well as many kinds of industrial machinery, Substantial increases are projected in the production of coal, iron and steel., heavy machinery and heavy chemicals. The Third Plan outline includes both new and expanded capacity in heavy machine- building, heavy electrical equipment and heavy structurals. Other projects are included which, if carried out., should by the end of the Fourth Plan meet the bulk of requirements for main categories of plant and equipment for manufacturing industries, mining2 power and transport. Indeed, substantial self-sufficiency in machine-building industries has become synonymous in many Indian minds with successful achievement of what is called "self-sustained growth". 2. The reasoning behind this policy is that India can become competitive in the heavy industries in a relatively short time. It can do this by building on its extremely rich resource base., especially its coal and iron ore. The planning authorities are confident that most of the goods to be produced will be needed and fully absorbed by the end of the Third Plan. The fact that much of' the program will be carried out in the public sector in their view reflects not so much socialist doctrine as the inability or unwillingness of the private sector to go ahead with such investments, Great emphasis is placed on the fact that industrial development can be completely disrupted by unforeseen or temporary foreign exchange shortages. For this reason., India should achieve the ability to make its own capital equipment even if the cost of that equipment is somewhat higher than imports at the present exchange rate, - 2 - 3. The mission does not question the validity of India's seeking accelerated industrialization. Its resources are impressive. It has a potentially large internal market aid a huge work force for whom employ- ment opportunities must be provided. There are clearly only limited possibilities of expansion in its traditional industries. India seems destined to develop a continental type economy with a broad industrial base. It cannot hope to achieve economic progress along the lines of Hongkong or Denmark. 4. The missionts questions concern specific projects and the advisability of carrying out, during the Third Five-Year Plan period, several very large expansions in areas where the yield to the economy may be quite low and the chance of failure very great. The development ol certain kinds of machinery and equipment at high cost might result in saddling Indian industry with expensive second-rate machinery for many years to come, reducing its ability to compete with industries of other countries. This obviously does not apply to all industry. However, there are some kinds of heavy machinery which probably cannot be produced in India for years to come. 5. The Bank Mission in 1956 emphasized that some heavy industries are not naturally adapted to India's resources, since they make very heavy demands on capital and teclinical skill and also make a relatively small contribution to employment. That mission considered this to be one of the sectors of the Plan most open to criticism and to the likeli- hood of shortfalls in achievement. It urged, that from a strictly economic point of view, India concentrate instead on lighter and less complex metal products for which export markets could be developed, while relying on imports for such thin:s as heavy electrical equipment which can be produced more cheaply in the advanced industrial countries. The present mission was much impressed with the progress that had been made in recent years not only at the steel mills, but also in the machine-building field. Nonetheless, it still feels that in some areas, such as very heavy machi- nery, projects are being planned which go beyond both the administrative capacity of plant managers and the supply of technically competent personnel. 6. The Government is quick to recognize this problem in its Third Plan outline by noting the stresses and strains which past rapid indus- trialization has imposed on an economy with a "lack of domestic industry" and also a shortage of "technical personnel". However, it is the mission's feeling that such personnel shortages place serious limitations on the possibility for additional expansion in some of the basic industries in the public sector. This has nothing to do with the doctrinaire debate about the public versus the private sector. The mission is satisfied that in this field realism is beginning to replace dogma. For example, in the important field of nitrogenous fertilizers, where the public sector has already assumed a dominant role, the Plan Outline states that, during the Third Plan, "the private sector will also enter this field in - 3 - a bigger way than in the past and supplement the efforts of the public sector. Programs for the manufacture of dyestuffs, plastics and drugs in the private sector will be largely complementary to the program for the manufacture of organic intermediates to be undertaken in the public sector. Similarly, whereas the manufacture of bulk drugs will be organized mainly in the public sector, the further processing of bulk drugs will also be undertaken in the private sector." 7. The scope for individual initiative in the private sector has clearly been growing in India. The mission was frecpently told that questions of ideology are in most cases less important than pragmatic con- siderations of finance, personnel and so forth in determining which sector is to undertake a given task. The situation remains somewhat confused, however. The Industrial Policy Resolution of 1956 approved by the Indian Parliament reserved certain industries for the public sector, such as iron and steel, heavy castings and forgings, heavy machinery, machine tool manufacture, production of heavy electrical and telephone, telegraph and wireless equipment. In most cases, this still seems to be the guiding policy of the Government, but we felt that there is a growing determination to make decisions on projects even in this part of the industrial sector on more pragmatic grounds. On the other hand, we were conscious of a tendency to establish some industries in the public sector merely because foreign financing was available or for other doubtful reasons, such as the defense argument in favor of a public sector watch factory. Another such instance is a new small automobile project which it is reported may be built in the public sector despite the fact that private industry could and would do the job. 8. Generally, private industry faces not so much the problem of exclusion from certain areas or competition with public enterprises in the same lines of production as a competition for scarce resources in the economy and the available foreign exchange. Basically, the major handicap to private industry is that imposed by the enforcement of a great number of detailed regulations and continuing ad hoc interventions in the normal activities of business. Some cessation of these restrictions, especially as they slow the undertaking of new activities, would undoubtedly stimulate a more rapid expansion of private production. Nevertheless, it is the mission's feeling that the private investment has been going ahead strongly; the stock market is obviously buoyant, and private industrial production has been expanding rapidly. Furthermore, a large part of India's productive capacity continues to be privately owned and operated. Priorities in Industrial Development 9. The Plan Outline has indicated in broad terms the Government's basic attitude towards the orders of priority in industry as follows: "(a) Completion of projects envisaged under the Second Five-Year Plan which are under implementation or were deferred during 1957/58 owing to foreign exchange difficulties. (b) Expansion and diversification of capacity of the heavy engineering and machine-building industries, alloy tool and special steel, iron and steel and ferro-alloys; and step-up of output of fertilizers. (c) Increased production of major producer goods like aluminum, mineral oils, basic organic and inorganic chemicals and intermediates. (d) Fuller utilization of existing installed capacity where there are wide gaps between capacity and pro- duction or where by multiple shift operation it is possible to economize investments and achieve better output/investment ratios. (e) Increased production from domestic industries of commodities required to meet essential needs like essential drugs, paper, cloth, sugar, vegetable oils and housing materials." Scale of Investment Proposed 10. The overall outlay tentatively envisaged for organized industry and mining in the public and private sectors during the Third Plan amounts to Rs. 25 billion out of a total investment of Rs. 102 billion or about 24 per cent, as compared to Rs. 2.9 billion out of Rs. 23.8 billion or 12 per cent in the First Plan, and Rs. 14.7 billion out of about Rs. 62 billion or about 24 per cent in the Second Plan. Furthermore, there has been a distinct change in the composition of industrial investment. Ex- pansion in the metallurgical field such as iron and steel represents a relatively much smaller share of the total in the new plan, declining from 52 per cent in the Second Plan to 28 per cent in the Third Plan. The largest increases have been in machinery, machine-building, chemicals and minerals (Table 1). The division of investment between the public and private sectors is somewhat different between the two Plans, with Rs. 8.8 billion public and Rs. 5.8 billion private in the Second Plan and Rs. 15 billion public and Rs. 10 billion private in the Third Plan. Table 1. Investment in Large and Medium Industries Expected Projected Second Plan Third Plan Percent Percent RS. of Rs. of Type of Industry Billion Total Billion Total Metallurgical 7.50 52 7.02 28 Machinery and other engineering 1.5o 10 4.98 20 Chemical industries 1.32 9 6.50 26 Textile industries 0.60 4 1.25 5 Minerals 1.03 7 4.05 16 Miscellaneous 2,60 18 1.20 4 Total 1.-55 100 25.00 100 Production Trends 11. The effects of such sizable investment in industry are difficult to measure statistically, although they are easily visible in the country- side. The Indian economy is so large that a substantial change in the modern industrial sector hardly appears in the overall statistical data which are dominated by agriculture and old-established industries such as cotton and jute textiles. A detailed examination of each industry is the only way to get a clear idea of the magnitude of the changes that have been taking place. 12. The industrial output index has been growing at an average annual rate of 5 per cent since the beginning of the First Plan. This rate, however, understates the growth because it does not include many new in- dustries which have been established since 1951. The index also gives in- sufficient weight to those industries which had been established before 1951, but which have grown rapidly since then. For example, the old-established cotton and jute industries with a weight of about 48 per cent in the general index and sugar and tea with a weight of 10 per cent have grown on the average by 2 per cent per annum since 1951, whereas the rest of the industry has grown at an average rate of nearly 8.5 per cent. The disparity in the growth of these industries and the newer ones is becoming even more acute as the pace of industrialization becomes more rapid. Between the years 1958 and 1959, these four older industries increased their output only by 1.3 per cent, whereas the rest of the industry increased its output by 15 per cent. Iron and steel output went up 35 per cent, non-ferrous metals 27 per cent, machinery 17 per cent, and transport equipment 21 per cent. 13. Even though there has been a substantial increase in the output of such industries as agricultural machinery, automobiles, sulphuric acid, aluminum, superphosphates, soda ash, cement and paper there has been an even - 6 - more significant increase in capacity. There is at present a large amount of unutilized capacity in industry due mainly to the shortage of foreign exchange which limits the import of key raw materials and spare parts. An examination of industries selected at random, which are listed in Table 2, indicates that during the year 1959, nineteen out of thirty-three industries covered operated at 70 per cent of capacity or lower. Eight of the in- dustries operated at 5 per cent or lower. There are obvious statistical limitations in these capacity figures, but this does not detract substantially from the conclusion that output has lagged behind the growth in capacity, and that the potential for future growth in output is substantial even if in- vestment lags. Table 2. Utilization of Capacity in Selected Industries During 1969 Percent of Capacity Type of Industry Utilized Finished steel 77 Agricultural implements 67 Machine screws 65 Typewriters 65 Automobiles 69 Welding electrodes 69 Machine tools 100 Road rollers 43 Power-driven pumps 97 Aluminum and copper cable 57 Refrigerators 31 Electric fans 95 Room air-conditioners 36 Aluminum smelting 94 Ammonium sulphate 91 Sulphuric acid 80 Caustic soda 71 Oxygen 67 Liquid chlorine 61 Soda ash 87 Superphosphates 70 Sulpha drugs 42 Paints 72 Cement 82 Ceramic insulators 44 Enamelware 55 Sheet glass 82 Pencils 1 Refractories 68 Rayon 90 Paper and paperboard 93 Newsprint 66 Organized soap factories 51 14. A growth in industrial output at even higher rates than in the recent past is expected between 1959 and the last year of the Plan (1960/61) according to estimates prepared by the Planning Commission. For a group of the so-called "new industries" Table 3 shows an annual growth rate in output of 20 per cent per annum or higher between 195/16 and 1958/59 for 13 out of 25 industries for which comparable data are available. During the last two years of the Second Plan fifteen of these industries will have growth rates higher than 20 per cent per annum and several of them over 40 per cent. If tentative Third Plan targets are realized, an average annual growth rate of at least 20 per cent would continue for over half of the industries included. Investment in Individual Industries 15. The Third Plan proposes investment amounting to Rs. 29 billion for industry and minerals, including small scale industry. Approximately Rs. 8 billion of this amount is to be invested in the public sector for metallurgical and machinery industries, and an additional Rs. 3 billion in similar industries in the private sector. The steel industry, which will have absorbed some Rs. 7.5 billion during the Second Plan in both the public and private sectors, is expected to require an additional Rs. 6.4 billion during the Third Plan if a new fourth steel plant is included and Rs. 5.4 billion if it is not. An allocation of Rs. 1.2 billion is included for a heavy machinery facility and Rs. 1 billion for plants to make heavy electrical equipment. Both of these facilities will be in the public sector. Nearly Rs. 1 billion more has been added to the Plan for plants to make machinery in the private sector. At least Rs. 2 billion is included for fertilizer plants. Industries in the private sector that produce automobiles, paper, cotton textiles, rayon and sugar are expected to require Rs. 3.3 bil- lion. Details of the program are indicated in the attached appendix. 16. The foreign currency part of this program will, according to the Plan, amount to approximately Rs. 12 billion. The metallurgical and machinery industries account for Rs. 5.3 billion of this amount and fertilizer plants an additional Rs. 1.3 billion. (See Table 5, Annex VI) There seems to be the distinct possibility that if the metallurgical in- dustry program is fully carried out, according to the preliminary estimates indicated in the appendix to this annex, foreign currency requirements might be somewhat understated. It should, however, be added that these estimates are all very tentative and will undoubtedly undergo thorough revision before the Plan is finalized. The estimates for private investment have been proposed by the Planning Commission after consultation with representatives of industry. In some instances, the achievement of these levels of in- vestment will depend on an improvement in the incentives to invest as is discussed in Chapter 8 of the main report. Table 3. Output of Selected Induztries in 1950/51, 1955/56 and 1958/59, Expe.,te4 Output in 1960/61 and TarFet for 1965/66 Index Index Index Actua Actual No. for Actual Expected No. for Output No. for Output Output 1955/56 Output Output 1960/61 Target 1965/66 in in (1958/59 in in (1958/59 for (1958/59 industry Unit 1950/51 1955/56 = 100) 1958/59 1960/61 = 100) 1965/66 = 100) Finlahed steel Th. tons 980 1,300 98 1,330 2,600 195 6,900 520 Ferromainganese " " n.a. 5 29 17 100 590 200 1,180 Aluminum " 4 7 70 10 17 170 75 750 Cotton text. mach. Rs. mill. n.a. 40 47 86 90 105 200 223 Cerent Machinery " "--- 3 50 6 8 133 45 750 c.ar 1achiner " " --- 2 12 17 44 259 100 590 aiachine tools " " n.a. 12 32 38 55 145 300 790 Road rollers Numbers --- --- n.a. 88 350 400 700 795 Power-driven pumps Thousands 34 37 47 79 86 109 150 190 Uicycles " 100 513 57 894 1,050 117 2,000 224 Trucks and busses ) 16.5) 9.5 63 15 28 186 60 400 Cars and jeeps ) ) 12.8 112 11.4 25.5 224 40 350 Bearings 80 900 42 2,126 2,400 112 12,000 561 S-wing machines " 33 111 52 213 300 140 450 211 Elec. cable (ACOR) Th. tons 2 9 60 15 18 120 44 292 Electric fans " " 190 290 45 648 900 139 2,500 376 Nitro. fert. (in N) " " 9 79 98 81 210 260 1,000 1,240 Phos. fert. (in P205) i t 9 12 41 29 70 241 400 1,380 Sulphric acid " " 99 164 69 237 400 168 1,250 525 Soda ash " 45 81 90 90 240 266 450 500 Coustic soda " " 11 35 58 60 125 209 340 570 Automobile tires Thousands --- 882 86 1,028 1,500 146 3,000 291 Newsprint Th. tons --- 4 18 22 28 127 120 545 Cement Mill. tons 2.7 4.6 77 6 8.8 146 13 217 Refractories Th. tons --- 288 67 444 600 135 1,600 360 Glass and glassware "1 t 92 125 64 194 240 124 440 226 - 9 - Industrial Management and the Cost of Production 17. The most apparent factor in India inhibiting the growth of a com- petitive industry is the scarcity of experienced top administrators. This is a problem which is common to both the public and private sectors. Private companies are, to a certain extent, able to attract available talent by paying relatively high salaries. Public enterprises are at a disadvantage in this competition, but the absolute supply is so limited that both sectors suffer greatly. The mission found that the managers of government enter- prises often had little specific experience in the type of industry they were running and did not seem to appreciate the difficulties involved in the job they had been called upon to assume. Effective utilization of facilities that are to be established by the end of the Third Plan period may be sub- stantially delayed because of this. 18. There were, of course, notable exceptions, in both private and public sectors where the managements and higher echelon technicians appeared to be extremely competent and on the verge of achieving competitive produc- tion. 19. The mission does not feel that the problem of achieving competi- tive production is peculiar to any one industry; it is more or less the same throughout the country both in the public and the private sectors. The small scale of production determined by the market tends to make cost levels high. Furthermore, the state of underdevelopment in the economy presents the country not only with a shortage of administrative talent but also with organizational problems that would test the abilities of the best adminis- trators in the most advanced industrial parts of the world. Industrial raw materials are not usually of uniform quality; semi-manufactured components are expensive; deliveries of both materials and components are irregular; poor maintenance of equipment is commonplace; replacement parts are almost impossible to obtain. Under such circumstances, costs are intimately related to the ability of management and its supervisory personnel. The training and recruitment of skilled technical personnel and supervisors at the foreman level is also of first importance in raising industrial efficiency. Before such personnel are fully trained often takes many years. Throughout India, the mission found this problem stood out in the minds of many people in both the public and private sectors. The problem is especially acute in the pub- lic sector because the heavy engineering industries, which are emphasized during the Second and Third Plane require many times more engineers per worker employed than do industries like cotton textiles. The problem is only really difficult as it is related to these skilled supervisors and fore- men. For the unskilled and semi-skilled workers, the problem is relatively simple. The Indian worker has proven his ability to learn and to take on capably jobs involving modest skills within a matter of months. He has shown an unusual degree of excellence in jobs where,once a routine has been established, it is only necessary to maintain steady production along set lines. From this point of view, there is a good prospect that rapid in- creases in productivity can be achieved. - 10 v 20. Cost reductions attributable to an improvement in productivity have already been one of the most encouraging signs in the newer industries. The mission often heard it reported that labor is really expensive in India in the older industries such as cotton textiles. On the basis of the missionts very preliminary findings, labor costs in cotton textiles do seem to be only a modest amount lower than such costs in the US textile industry despite the extremely low wage rates paid. Productivity is surely low in this industry, as it is in many industries in India. It is reported, for example, that the jute industry could be run with half of its present labor force. The size of the labor force in the existing private steel plants and in the public sector fertilizer plant is more than twice as large as should be necessary to run such plants. On the other hand, there can be no doubt that there has been substantial improvement in productivity in much of Indian Industry, especially in the newer fields such as engineering. The Chairman of the Reserve Bank cites the case of Hindustan Machine Tools where in September 1955 4.2 Indians turned out as much work as one Swiss, whereas the ratio had gone down to 1.6 by Augus.t 1959. Table 4 indicates substan- tial improvement throughout the industry, even if the effects of faulty statistics are taken into consideration. Table 4. Productivity of Workers in Various Industries in India (Index numbers 1953 - 100) Cotton Iron & General All Year Textiles Steel Paper Cement Engineering Industry 1947 97.5 90.0 61.8 34.9 77.8 86.6 1948 99.8 81.8 69.8 37.3 83.0 86.8 1949 94.2 93.4 70.2 45.3 92.6 89.4 1950 100.0 100.4 66.3 63.8 100.3 96.3 1951 120.2 101.6 96.1 63.5 113.1 107.0 1952 107.3 106.6 95.7 93.0 94.7 100.8 1953 100.0 100.0 100.0 100.0 100.0 100.0 1954 104.5 106.9 100.3 109.3 115.2 107.2 1955 101.6 104.6 104.2 99.6 122.8 113.2 1956 108.5 114.5 106.7 80.1 123.8 120.7 1957 108.8 104.1 10.7 78.0 143.1 129.6 a/ The figures relate to gross output per worker. 21. Cost levels are being reduced in a number of industries. For instance, the cost of producing such diverse items as vehicles, diesel in- jection equipment, machine tools, plastics and automobile springs has been reduced substantially in the recent past. The result has been that the - 11 - protective duties during the past years have been reduced on such items as diesel injection equipment, some non-ferrous metals, automobile springs and machine screws. Controlled sales prices have also been reduced on such items as locally produced vehicles and machine tools. The trend towards achieving a competitive industry has certainly made some headway. 22. Wage costs have undoubtedly in some industries been relatively stable. Wage statistics are not especially good in India and it is diffi- cult to be certain. But there seems to be a reasonable presumption that, while wages have gone up, they have not outstripped productivity. One in- dication brought to the attention of the mission was the fact that the earn- ings of workers as a per cent of the ex-factory value of total output has declined somewhat over the last two plan periods, as indicated in Table 5. Table 5. Wages and Salaries in Relation to Output (percentages of ex-factory values of output) 1947 1950 1952 1955 1957 Cotton textiles 24.8 21.3 20.4 20.2 21.4 Cement 14.6 10.1 7.1 8.2 8.2 Sugar 4.6 6.6 7.7 6.8 7.0 Paper and paperboard 14.8 14.5 11.0 10.1 10.2 Jute textiles 16.0 15.4 15.5 19.4 18.3 Iron and steel 17.4 17.3 18.3 15.0 13.8 General engineering 23.0 20.6 19.7 15.8 13.3 All industry 15.2 13.6 14.1 13,1 12.h 23. Cost reductions have probably reflected rather substantial in- creases in productivity although they have been accompanied over the last decade by some increases in wages. (Compare Tables 4 and 6). There has not been an excessive amount of industrial unrest during this period. It is also contended within various government agencies that, while there has been no deliberate policy of wage restraint, the Government has usually succeeded in resisting wage claims made by unions. Wage Boards have been established to fix wages in a number of industries. . 12 - Table 6. Real Earnings of Labor in Selected Industries-/ (Index numbers 1953 - 100) Industry 1947 1950 1957 Cotton textiles 82.2 87.3 102.2 Iron and steel 66.5 84.3 102.2 Jute textiles 83.0 87.1 105.3 Paper and paperboard 75.2 93.7 110.1 Cement 55.3 78.2 96,0 General engineering 81.1 92.8 106.8 All industries 80,5 86.3 10.9 a The real earnings index has been obtained by dividing an index of money earnings by the corresponding all-India Consumer Price Index. 24. The statistics presented in Table 6 would indicate that the real wage per worker, including all benefits, increased only about 30 per cent between 1947 and 1957. Although there undoubtedly are serious shortcomings in these statistics, they do indicate to a certain extent that wage in- creases have probably neither outstripped productivity nor increased very substantially. The effect of this relative stability in labor costs has certainly not led to any large increases in industrial profits. In fact, although the atmosphere in the business community is relatively optimistic and seems to be quite encouraging, profit levels have tended to be low in recent years. Gross profits, including managing agentst remuneration, all interest charges and provision for tax but excluding depreciation, as a percentage of total net assets employed averaged only about 72 per cent in 1957, as indicated in Table 13 of Annex VII. Since 1957 profits have tended to remain relatively low. Security prices have been rising during the last few years, but have barely regained the levels reached in 1955/56. (For a comment on profit levels and their effect on the incentives to invest, see Annex VII). 25. The most discouraging aspect of the various attempts at cost re- ductions has been the impediments set in its way by the vast maze of controls and regulations set up by the Government. The general problem of controls is noted in Chapter 5 of the main report. One of the most serious problems that affects industry is in the field of price control and tariff protection. The Tariff Commission has become over the years a body which not only participates in setting the proper level of protection, but also reviews costs for the purpose of fixing controlled prices. During 1958/59 the Commission investigated the price of tinplate, zinc and acetate yarn as well as submitting reports on the "fair" price for steel, pig iron, caustic soda, - 13 - chlorine and bleaching powder. Recently price studies have been submitted to the Government on sugar and paper. The mission feels that this aspect of the system of controls should be reconsidered. The Tariff Commission's view on the appropriate return to capital will, in the mission's view, act as a severe inhibiting factor in future industrial growth. For example, in the April 1960 price control resolution on sugar of the Ministry of Food and Agriculture, the Tariff Commission's recommendations are confirmed by the Government and its attitude towards the return to capital stressed. It is noted that a "12 per cent return on employed capital should be allowed so as to provide sufficient funds for each unit to meet its commitments under bonus and gratuity, interest on borrowed capital and debentures, dividend on preference shares, managing agents' commission and income tax and finally leave a residue to a large majority of the units in all regions to declare reasonable dividends." This seems to be the standard approach, the amount of return varying from 8 per cent to 12 per cent as a maximum. There is no satisfactory means permitted for generating resources within an enterpriee for carrying out expansion. 26. On the other hand, tariff protection as such seems to be playing a useful role in establishing some of the conditions under which industrial growth can take place. Table 7 indicates a number of selected commodities in which the Tariff Commission has made a careful study of cost levels during the past few years. In 17 cases out of 23 the local cost of produc- tion was by 1957/58 already within 30 per cent of the cost of importing a comparable product. Tariffs were in a number of instances at that time considerably higher than was necessary to keep out foreign competition. The Commission recognized this and reduced some of the tariffs. Duties on some of the non-ferrous manufactures, such as solder (40/60 tin-lead), and on items like automobile leaf springs, grinding wheels and machine screws were discontinued. Protection for electric motors was continued at a low level. Tariffs on diesel fuel injection equipment was reduced. Tariffs on some cotton textile machinery such as plain looms was discontinued. ve 14 - Table 7. Landed Costs and Costs of Domestic Production - 1957/1958 (Rupees) Local Cost Lowest as a % Duty Landed Local Above as a Cost Ex- Amount Cost of Landed % of cluding of Produc- Cost Landed Product Unit Duty Duty tion in % Cost Aluminum ingot 1. ton 2,416 842 2,726 13 35 Solid caustic soda cwt. 23.50 11,Z0 31.20 33 48 Bleaching powder Owt. 27.90 4.50 25.45 - 16 Light soda ash Owt. 8.86 5,75 16.83 90 65 50-80 mm. calcium carbide Owt. 26.90 13.00 44.75 67 49 Solder 40/60 tin lead cwt. 382 133 297 - 35 Copper sheet 24 Swg. cwt. 243 24 268 10 10 Brass sheet cwt. 206 4 202 - 2 Copper rod cwt. 233 92 262 13 40 Stearic acid lb. 0.75 0.50 0.94 26 67 Oleic acid lb. 0.72 - 0.72 - - 8" smooth steel hand file doz. 13.47 11.00 18.10 36 81 10" smooth steel hand file doz. 17.70 15.00 22.34 27 85 Bakelite moulding powder lb. 0.84 0.29 0.73 - 35 Leyland truck rear spring unit 207 102 164 - 50 Machine screw 3/16" x 1" gross 0.62 0,31 1,05 71 50 Mach. screw I" x 2" " 2.62 1.31 2.30 50 Plain cotton loom unit 2,104 218 2,082 - 11 Automatic " " " 3,711 386 4,653 26 11 Diesel fuel inj. pump " 40.40 24.0 31.43 . 60 Diesel fuel inj. noz. " 19.19 11.40 29.69 55 60 Elec. motor SR 50 HP " 1,596 237 1,884 15 18 it I 20 " " 970 144 1,089 15 12 Sheet glass - 32 oz. 100 sq.ft. 45.00 31.50 44.63 - 70 n n 16 oz. " " 14.50 10.15 24.76 73 70 a/ "Fair Ex-Works Price", as determined by the Tariff Commission. - 15 - 27. In some instances, the lowering or elimination of duties took place only after substantial progress had been made in the particular in- dustry. The Commission pointed to the progress made in the electric motor industry after more than ten years of protection. They noted that the quality of indigenous motors of almost all ratings compared favorably with that of the imported motors. The Commission, in recommending that protec- tion be eliminated on automobile springs, noted that the indigenous industry after four years of progress had reached a stage where it was no longer in need of tariff protection to overcome the competition in price offered by foreign products. The Commission emphasized that the major units in the industry had reduced costs by installing modern machinery and were thus in a position to meet at a competitive price the prospective demand for the next several years. The mission feels that this case is not unusual and for the most part is favorably impressed with this aspect of the Tariff Commission's work. It is difficult to believe that all Indian industry can be competitive immediately or even within the next few years. However, when costs are not more than 25 per cent to 40 per cent above the imported price of comparable products it seems to the mission that with normal improvement there is reasonable hope that the particular product can ultimately be produced competitively within India. - 16 - (B). SONE SPECIAL INDUSTRIAL PROBLES Stee Position of the Industry 28. The rapid expansion of the capacity to produce steel in India called for in the Second Five-Year Plan has progressed more or less on schedule. Six million ingot tons of capacity will be installed by the end of the Plan, as compared to a capacity of 1.8 million tons in 1956. The capacity for the manufacture of finished steel will have increased during the Plan from the 1.3 million tons to slightly over 4.5 million tons. 29. This huge expansion, however, has resulted in a substantial strain on the resources of India. The cost of the program for both the private and public plants was expected to be Ra. 4.7 billion, exclusive of relatively small investments in ancillaries. The total cost includ- ing ancillaries, is now expected to reach nearly Rs. 7.5 billion. The railroads have not been able to cope with the special problems of moving raw materials to the steel plants according to schedules required for optimum production. Supplies of metallurgical and washed coal have in- creased so slowly that there is now a serious shortage of coke which is holding back production in the newly completed plants. Staffing of the new plants with technically qualified personnel undoubtedly will take many years. Full utilization of the plants will probably not take place till near the end of the Third Five-Year Plan period. 30.. After visiting the three new public sector plants and talking with their managements, the mission's impression is that only with more experienced and better qualified technical personnel will the plants be able to run effectively. Even the largest steel producing countries would have had a difficult time staffing and starting production in three new million ton plants in one year. For India even with substantial reliance on outside personnel, it inevitably must be a more difficult job. 31. Neither the Planning Commission nor the Ministry of Steel, Mines and Fuel now expect that production can reach the Second Five-Year Plan target of full production of 4.5 million tons of finished steel until the year 1962/63. They expect an output of around 3 million tons of finished steel during 1960/61. The mission is somewhat more pessi- mistic and feels that the 4.5 million ton output level may not be achieved until the latter part of the Third Plan. The difficulty of utilizing new capacity should not be underestimated. Finished steel production which was 1.36 million tons in 1956, and increased to 1.77 million tons by 1959, has only in recent months passed an annual rate of two million tons, despite the fact that substantial new capacity has been installed for much of the last year. - 17 - 32. The Government's decision to embark immediately on an additional 2.5 million ton expansion of the public sector plants at a cost of ap- proximately Rs. 2.9 billion, of which some 45 per cent is in foreign cur- rency, has now apparently been supplemented to include an additional one million ingot ton steel plant at Bokaro, which wcald cost about Rs. 2 billion. The danger is that this expansion program may interfere with the utilization of the newly completed plants. The solution to the trans- port problems existing now will be made more difficult. There is also some doubt that the plant managers will have obtained enough experience and a sufficient number of qualified technical personnel to handle the existing capacity. The Ministry expressed confidence that these fears will prove unfounded. The mission was happy to find the Government taking definite steps to hire foreign personnel to help run the plants. It will be very encouraging if this hiring program is successful. However, as this program is presently conceived, it still will not meet the serious shortage of top administrators with experience in steel operations. 33. The task is most difficult. Material and transports shortages will constantly interfere with efforts to increase the level of output. The quality of raw materials has been deteriorating as the quantities required have expanded. The marketing problems have not even been tackled. The handling of personnel will clearly demand great skill. TISCO alone has some 60,000 workers, of whom nearly 40,00O are employed at Jamshedpur and most of the rest at the company's ore and coal mines. Approximately 28,000 of these are employed in the actual steel plant. To organize and run such a staff is a sizable administrative achievement. The TISCO and IISCO management have had many years of effective expe- rience. The new plants do not have this advantage. The mission feels that this lack of top administrative talent may be the most serious bottleneck to increasing steel production. The StaffinZ Problem 34. It is estimated that each of the new public sector plants will require approximately 8,000 to 9,000 production employees (see Table 8). From 700 to 900 of these will have to be either adequately trained engi- neers or skilled supervisory personnel. Another 4,000 will have to be skilled workers and perhaps 1,500 to 3,000 semi-skilled workers. These skilled and semi-skilled workers can probably be trained in a relatively short time. The experience in India in this field during the past few years has been exceptionally good. On the other hand, the recruitment of the higher level employees will undoubtedly cause difficulty. For the three public sector plants now being completed approximately 2,100 to 2,700 senior engineers, supervisors and foremen will be required. About 1,000 of these are already at work getting experience on the job. Only 200 of this group, however, have had previous experience with the private steel companies. Another 100 have had experience in related industrial fields. To qualify for supervisory posts, 300 additional employees with the necessary educational background are now taking train- ing course. In other words, some 700 to 1,300 highly qualified men - 18 - remain to be found. It will clearly take some time to fill these short- ages. Yet a further 800 qualified men will have to be found when the three plants are expanded. If a new plant is also built, the additional requirement for qualified men may be as high as 1,600. 35. The management of the public steel plants recognize the problem. They have stated their intention of obtaining some 400 foreign experts and keeping them on hand as long as is necessary to train the Indian staff. Their estimate is that these men will be needed for at least two years, and that perhaps some would have to stay for a longer period. The mission feels that there is a tendency within the Government to underestimate the length of the time the foreign personnel will have to remain on the job. It is the experience in other countries that steel foremen and maintenance men require years of job experience before they are considered ready to function effectively. The mission feels that the steel worker in India can learn as quickly as his counterpart in other countries if he is properly supervised. The type and number of supervisors that would be necessary can be illustrated by Table 8, which is a tentative list of personnel required for the Rourkela project. Table 8. Estimated Personnel Requirements for the Rourkela Steel Plant Indian Semi & Super- Foremen Other Non- visory Foreign and Skilled Skilled Plant Unit Personng Personnel Operators Workers Workers Total Works management 5 2 - - Chief eng. & mainten. 16 - 29 149 127 321 Mach. & elec. shop 38 3 29 215 192 477 Transport. & traffic 7 1 58 358 338 762 Melting shop 69 5 52 196 182 504 Qual. & prod. control 60 3 110 43 34 250 Power 45 1 109 293 229 677 Coke ovens 43 4 45 269 564 925 Blast furnace 37 8 30 190 120 385 Steel works 31 16 57 267 196 567 Rolling mills 87 38 70 458 654 1,307 Oxygen plant 7 - 18 26 22 73 Refractories 18 - 37 11 109 275 Gen. mainten. shop 23 - 14 130 40 207 Iron foundry 14 - 8 192 153 367 Fuel 23 - 62 55 21 161 Other 23 - 44 136 74 277 Reserve 18. ..5 82 71 285 I21 601 86 .25- 3_ .240 8.77 - 19 - 36. Quick decisions on the personnel problem are essential because the plants are beginning operations and the expansion programs are also almost ready to start. The financing of the Bhilai expansion has already been arranged. Discussions have been held concerning the financing of the expansion of the other plants. Demand for Steel 37. The urgency of immediate expansion of these plants is clearly related to estimates of the future demand for steel. Steel has been in short supply in India for many years and has been an especially difficult problem recently. Although the domestic production of finished steel increased from 1.36 million tons in 1956 to 1.77 million tons in 1959, total availability decreased from 3.2 million tons to 2.6 million tons as the result of a decline in imports from 1.9 million tons to 820,000 tons. It is unlikely that actual consumption has fallen. Inventories were probably built up in the earlier years of the Second Plan and have been drawn down since. Currently, consumption is very likely running at the rate of about 3 million tons a year. The amount of unsatisfied de- mand is extremely difficult to estimate. The Ministry of Steel, Mines and Fuel has indicated the belief that the total demand for finished steel at the present time is over 4 million tons. The Ministry also forecasts that this level of demand will grow to 7.5 million tons by the end of the Third Five-Year Plan period. Industry representatives have been somewhat less sanguine about future demand but still feel that 6 million tons will be needed by the end of the Third Plan. The larger figure has been accepted as the tentative Third Plan target. Table 9. Demand for Finished Steel and Pig Iron Estimated Production Ministry's Estimated Capability Estimated Demand of Existing Demand Product in 1958/59 Plants for 1965/66 Rails 458 349 400 Structurals, bars, etc. 2,087 1,837 3,300 Sleepers 180 230 200 Tinplate 140 130 300 Plates 361 300 750 Sheets, strips and skelp 859 718 1,600 Blooms and billets 121 200 200 Wheels and axles .. 90 100 Wire and strapping 117 .. 300 Cold rolled sheet .. 170 Other -52 200 Total finished steel 4,323 4,600 7,350 Pig iron for sale 750 1,025 1,200 - 20 - 38. Present capacity, according to current planning, will more or less satisfy demand when full production is achieved. The growth in de- mand between now and 1965/66 would just about be satisfied by the expan- sion program indicated in Table 23, although there is some doubt about the reliability of these estimates of demand. There is no doubt that the market is growing rapidly and should be able to absorb most of the finished steel that can be produced by 1965/66. If imports are to be sub- stantially eliminated, in accordance with the Government's stated policy, some expansion of existing facilities is justified. However, there is a question of the corposition of demand. Almost 50 per cent of the esti- mated demand in 1958/59 was for structurals, which is consistent with the normal demand pattern in a country in the early stages of industrialization Much of this steel was undoubtedly consumed in the building of such pro- jects as the steel mills themselves. It may not be logical to continue with the rapid expansion of such products as structurals which are now in great surplus all over the world. Future demand will undoubtedly in- creasingly tend towards plates, sheets, strip, tinplate, etc. If there is a continued large demand for structurals during the Third Plan it may pay to meet such a temporary increase by imports, only expanding capacity for products which will grow over time. 39. Expansion for flat products also may be relatively easy during the Third Plan. Most of the plants will have substantial excess rolling capacity. For example, the ultimate rolling mill capacity of TISCO is for 2,750,000 tons, Durgapur 1,250,000 tons and Rourkela 1,800,000 tons. It may be possible in the years to come to integrate more closely the operations of all of these plants. Excess capacity in one plant may be used to roll ingots from another plant in order to keep down the cost of expansion. In any case, the cost of future expansion in existing plants probably will not be more than half the cost of building new plants. Utilization of Capacity 40. The two private companies already have capacity to produce 2.3 million tons of finished steel. Two blast furnaces, three open- hearths, two batteries of coke ovens, a blooming mill, and a billet mill are already in operation at Bhilai. One blast furnace, two open-hearth furnaces, one coke oven battery and a blooming mill are in operation at Durgapur. Two blast furnaces, one LD converter, two open-hearth furnaces, two batteries of coke ovens, and a blooming and slabbing mill are in operation at Rourkela. Construction in fact has kept reasonably close to schedule, but the increase in production as the result of the expansion program has been most disappointing. Raw Materials 41. An important part of the delay in increasing production, espe- cially in the private sector, is due to raw material shortages. The TISCO program was designed to increase the annual ingot capacity of the - 21 - existing plant from 1.3 million tons to 2 million tons and finished steel capacity from 930,000 tons to 1.5 million tons at a cost of Rs. 860 mil- lion. The work was to be completed by the second quarter of 1960. The foreign currency component was estimated to be about Rs. 675 million, the greater part of which was covered by an IBRD loan. The project was com- pleted more or less on schedule during the early part of 1960. A new blast furnace with a daily capacity of 1,650 tons has been installed. Two new 200-ton open-hearth furnaces and one 32-ton converter have been added to the existing facilities, which also have been remodelled and modernized. A new 46-inch blooming mill has been erected with an annual capacity of 1.75 million tons, increasing total blooming capacity to about 2.75 mil- lion tons. A new bar and billet mill with an annual capacity of 460,000 tons and a medium and light structural mill of 320,000 tons capacity have been installed. 42. The expansion program envisaged an increase in the amount of iron ore used from 2 million tons to 3.4 million tons, and coal from 2.2 million tons to about 3.3 million tons, including about 2.1 million tons of coking coal. The iron ore was to be readily available from the com- pany's own mine. A substantial part of the coal requirement was to come from the company's own mines with the balance from other mines. Limestone was not considered to be a problem as the company had a 25-year contract for all of its expanded requirements. However, these arrangements, especially as related to coal, have not materialized. A serious raw material shortage has developed. Stocks have dropped to very low levels. Production is lagging. 43. The situation is similar for all the other steel plants in the country. For example, in May 1960, the railways allotted to IISCO only two-thirds of the wagon-loads of coal they required, and the number of wagons delivered varies from day to day, creating very difficult operat- ing problems for the company. Table 10 indicates how coal stocks have declined in 1960 at IISCO compared to 1959. The stock situation is equally bad at all the steel companies. According to information presented to the mission, whereas IISCO had 12 days stocks of coking coal, TISCO had only 11 days, Rourkela 10 days, Bhilai 7 days and Durgapur 4 days. In its visits to the various steel mills, the mission noted the relatively low level of raw material inventories. IISCO has indicated that the coal difficulty is due to lack of wagons and motive power and interference with traffic by the work on electrifying railway lines in the area. Opera- tions are also made more difficult by having to break up trains consisting of both open and closed wagons. The railroads feel this is a temporary situation which will soon be solved. The situation is discussed further in Annex V. The coal situation is also discussed in detail in Annex IV. - 22 - Table 10. Stocks of Coking Coal at IISCO Quantity Estimated Number of in Tons Days Requirements January 1959 149,000 29 days February 1959 166,000 32 " March 1959 164,000 31 " April 1959 171,000 33 " May 1959 155,000 30 " January 1960 98,000 19 days February 1960 126,000 22 " March 1960 124,000 22 " April 1960 86,500 14 " May 1960 80,000 12 44. The situation is only relatively better with regard to lime- stone. Apparently, there is some problem concerning the production of limestone for Durgapur and Rourkela. Bhilai has its own new quarry 18 miles from the plant. Most of the plants are now obtaining their lime- stone needs from the firm which previously supplied only TISCO and IISCO. The firm previously mined on a selective basis, but can now meet the demand only at the expense of lowering the quality. The consequent de- terioration compounds the problems of iron and steel production caused by the deterioration in coal quality. Not only is the yield of the blast furnaces reduced, but there is fear that the linings will wear out quickly. 45. There are similar problems with regard to iron ore, although in most instances, these are not severe and seem likely to be solved shortly. Bhilai will soon have the railroad to its own mine in operation. TISCO has been having only minor problems with regard to iron ore. Rourkela's regular supply will be ready in several months. Durgapur's iron ore supply seems subject to the most doubt. IISCO has been having some difficulties with iron ore. The company has contracts for delivery of 40,000 tons per month. Recently, apparently without advising the company some of this iron ore was switched by the Government to Durgapur, as the result of complaints from Durgapur that they could not make iron with the quality of ore they had been receiving. Similar allocation dif- ficulties have been reported in scrap supply. IISCO used 80,000 tons of scrap last year, a considerable amount of which was purchased. Much of the scrap available has now been earmarked for the Government Ord- nance plants. IISCO is therefore planning to recover scrap from slag and is in the meantime obtaining it only with great difficulty. 46. The solution to all of these problems will take time. Material shortages will probably continue to cause difficulties. Already over- taxed management will be called upon to face problems that would be a burden to the most experienced steel managers in the world. - 23 - Timini of Expansi 47. The expansion programs will apparently take place as soon as the Government can complete arrangements. The phasing of construction will probably not be known in detail until the end of the present year. The expectations as of now are that the bulk of the work will be under way by 1962/63 and reach its peak in 1963/64. The timing of this ex- pansion will thus coincide with the gradual increase to full capacity in operation of the existing plants. Transport facilities will un- doubtedly be strained during the years 1962 to 1964 in the effort to sup- ply the existing facilities with raw materials. The expansion will greatly add to this burden. The difficulties for management in these years in attempting to reach a peak in both production and construction are likely to be extremely great. These are some of the reasons why the mission believes that the production targets are overly sanguine. Production Costs 48. The effect of this under-utilization of facilities will be a serious waste of capital for India. It may also result in higher cost steel in the short term. The location and quality of raw materials plus low wages should make it possible ultimately to produce steel in India at a low cost. The Bank, several years ago, estimated that TISCO's average cost of production for finished steel at that time was equiva- lent to less than $50 per ton, making the company one of the lowest cost producers in the world. Since then costs have gone up. New plant has come into use. Bowever, costs are still relatively low in these private Indian steel plants. 49. Costs at the new public sector plants will ultimately be low. Perhaps for the next few years the cost of production of raw materials will be substantially higher than the private companies have been paying in the past. Mines are being mechanized, in the case of Bhilai, very highly mechanized. Overheads will be very high until the rate of output can be substantially increased. The present controlled prices for raw materials may not indicate their real cost to the economy. 50. Nonetheless, by using the present selling prices for raw materials, it is possible to obtain a rough indication of the cost of producing steel in the public sector plants. Rourkela is now paying Rs. 25 per long ton for iron ore compared to Rs. 18 per ton at Bhilai and Rs. 28 at Durgapur. The ]Ministry expects the cost of ore to go down when mechanized mining comes into operation by about Rs. 7 to Rs. 8 per ton in the case of Rourkela and about Rs. 2 to Rs. 3 in the case of Bhilai and Durgapur. This will undoubtedly depend on output levels, as so much of the cost of producing ore in the future will be the cost of capital. In any case, if costs develop as the Ministry ex- pects, Indian costs for ore may be only about half the levels paid for iron ore in the US and Western Europe, with Japanese cost levels for - 24 - iron ore even higher. The price paid for limestone at Rourkela and Bhilai is now Ra. 17 per ton and at Durgapur Ro. 31. These prices are expected by the Ministry to come down slightly as the scale of operations increases and transportation is better organized. Coal is, of course, more of a problem. Whereas the price of coking coal has been Rs. 39 per ton at Rourkela and Rs. 41 per ton at Bhilai, compared to Rs. 32 per ton at Durgapur, the Ministry has indicated that these prices may have to go up slightly. In any case, the mission believes that the price of coking coal ought to be increased (see Annex IV). However, even if coal prices do go up, they will remain somewhat lower than comparable costs in Europe and Japan, and only modestly higher than in many parts of the United States. 51. The sum total of material costs under any reasonable assumption is probably still low by comparison with that in any of these other coun- tries. For example, material prices at Rourkela now total about Rs. 185 per ton of finished steel, which is approximately 20 per cent lower than the comparable cost of materials to the average US steel mill and 35 per cent lower than to continental European mills. The Ministry estimates that wages and salaries for the Rourkela plant will be about Rs. 35 per ton of finished steel when the plant is operating near full capacity, which is only about one third of the comparable cost for labor in Western Europe. 52. The real determinant of the cost of Indian steel production is likely to be the level of operations attained. The effect of overhead cost will be dominant. For example, the Rourkela plant represents a total investment of about Rs. 3,100 per ton of annual finished steel capacity. If it is assumed, purely for illustrative purposes, that a total capital charge of 15 per cent is reasonable for depreciation plus the cost of capital then overhead cost, at full production, would be Rs. 465 per ton of steel. The total cost would then be about Rs. 685 per ton of finished steel, which is well below what could reasonably be expected as an average c.i.f.'price in India and only slightly above the present ex-factory price. Indian steel would then be "cheap". But if the plant were to operate at only 50 per cent of capacity, the fixed charges would be Rs. 930 per ton and the total cost around Rs. 1,150 per ton of finished steel. At this level of utilization Indian steel would not be "cheap". Canclusions 53. The missions' general conclusion on the issues raised by the operating problems and expansion plans in the steel industry have been expressed in the main report (paragraphs 113 - 121) and need not be repeated here. It may perhaps be worth emphasizing again, however, that the most urgent need of the new public steel industry is for more qualified and experienced personnel in both technical and administrative posts. This probably means more foreign personnel, and very much more - 25 - expensive personnel, for some years to come. The cost of getting the right people to run and maintain the plants is insignificant, however, compared to the cost to the country of having these huge and expensive installa- tions running badly and below capacity. Had the mission not received the firmest assurances from responsible Indian ministers and officials that this point was accepted in principle by them, its view of the steel pro- gram, the industrial program and indeed the whole Third Plan prospect would have been substantially different. - 26 - Heavy Machinery and Metal Formine General 54. We have already discussed the logic of incorporating in the Third Plan a large program for building the heavy machinery and equip- ment that is required for further industrialization. In the public sector alone approximately Rs. 2.50 billion is being allocated to such enter- prises, including a new heavy foundry and forge, three electrical pro- jects, a heavy mining machinery plant, a heavy structural plant and a heavy machine tool factory. In addition, the private sector is expected to invest nearly Rs. 2.45 billion in the machinery field during the same period. These are very substantial investments. In this section of the report, we wish to draw attention to some of the problems of managing, staffing, maintaining and operating plants of this size and of types that are entirely new to India. The mission's doubts relate to the feasibility of coping with so many of these problems in such a short time, not to India's ability to solve them eventually. The most serious problems relate to the production and maintenance of the heaviest ma- chinery and electrical equipment. The mission has no doubts about the ability of the Government and its foreign associates to construct and set up the various plants covered by the Plan. Heavy Machinery 55. The heavy machine-building complex, which is to be established near Ranchi, has had the benefit of the recommendations of a team of Russian experts. The machine-building plant with a capacity for 45,000 tons of finished machinery each year will be financed by a Soviet credit and construction will be supervised by Russian technicians. On the basis of the mission's view of what the Russians are accomplishing at Bhilai, there is no reason to believe that this machinery plant will not be expeditiously completed. The problems are expected to appear at the production stage. 56. The production of heavy machinery is a difficult specialized job. The plant is intended in the first stage to produce 20,000 tons of rolling mill equipment, 6,000 tons of coke-oven equipment, 4,000 tons of blast furnace equipment, 6,500 tons of crushing and grinding equipment as well as such special items as cranes. The demand for each specific item for some time to come will be limited. More diversification than is customary in plants such as this will be required. But such diversi- fication is impossible without an extremely capable engineering staff, especially strong in tasks of technical management and production planning. As is common in all new machinery plants, it will be difficult to start to manufacture a variety of types of machinery until the production of a first machine has been fully established. When technical personnel are in short supply, managers and their planning staff must get production - 27 - on a more or less routine basis before they can afford to divert their attention to new machines. It is the mission's view that this will re- quire a supply of technical management and production planners much be- yond what can probably be found in India. Training such top level person- nel will take many years. There is no doubt that for a long time, manu- facture will have to be based on foreign designs. This will probably be no problem as agreements can be reached to obtain such patterns and designs. However, the enterprise for the most part will have to train its own skilled labor. A sufficient supply of such workers are just not available today in India. 57. Affiliated with the heavy machinery project will be a coal mining machinery plant set up in Durgapur for the manufacture of coal cutters, loaders, conveyors, locomotives, electric winders, etc. This plant will be financed out of a Russian credit and built in collabora- tion with Techno-Export of Moscow. It will be capable of manufacturing 30,000 tons annually of various kinds of coal mining machinery and spare parts. The investment required for this heavy machinery complex, includ- ing the foundry and the two machinery plants is expected to be Rs. 1,190 million. Approximately 18,500 workers will be employed representing a capital investment per worker of some Rs. 65,000. Other investments in the public sector in similar heavy machinery and electrical plants are indicated in Table 22 of this Annex. 58. The largest part of the program described in paragraphs 126 throughl31 is tied to specific credits and to technical cooperation agreements, which leads the mission to believe that there should be little difficulty in achieving the capacity targets more or less on schedule. Problems of Making Castings 59. To further the manufacture of heavy machinery, there is to be constructed and operated by the same company at Ranchi, near the machine plant, a heavy foundry-forge. This foundry is to be financed out of a Czechoslovakian credit and built in technical collaboration with Techno- Export of Czechoslovakia. The iron foundry is expected to go into pro- duction by the middle of 1963, the steel foundry in 1964 and a 12,000-ton press by the end of 1964. The foundry-forge will be designed to produce 14,000 tons of steel castings per annum, some of which will be as large as 50 tons. Grey iron castings of 25,000 tons per annum will be produced with units of up to 30 tons. There are to be about 14,000 tons of forg- ings, with individual pieces weighing up to 17 tons. The difficulties involved in successfully and efficiently making castings may even surpass those of making heavy machinery. At present India has only foundries making relatively small castings. The maximum size of castings now pro- duced is about 8 tons. Facilities to produce larger castings are clearly needed. Relatively heavy ones of 10 to 20 tons are being imp-orted in large numbers. A few heavier ones of 25 to 100 tons have been imported. - 28 - 60. The present installed capacity in the country for all small and medium steel castings is only 38,600 tons per annum. The demand for such castings as estimated by the Planning Commission will reach 150,000 tons by 1965/66. About 15 foundries in the organized sector produce 93 per cent of the country's total output of steel castings amounting to 28,072 tons. The largest five have an annual output ranging between 3,600 tons and about 6,000 tons. The total expansion program under way at the present time is for an increase in capacity of 20,000 tons during the next year. There is, according to the Planning Commission, a sizable gap between cur- rent capacity and estimated future demand. This will have to be made up by a substantial expansion during the Third Plan period, mostly in the private sector, although Hindustan Machine Too] Ltd. will establish a relatively large foundry to produce its own castings. 61. The problems of operating existing medium sized foundries with the shortage of skilled labor that exists in the country have been espe- cially severe in the last several years. Foundry work in many instances requires an extremely strong and precise worker. Years of experience are normally required. Even relatively small foundries have had to send super- visory employees abroad for experience. Most foundries carry out some sort of training program. The mission learned that foundries in India are now actively competing with each other for the limited skilled labor that is available. 62. The problem of achieving independence from foreign assistance will be very difficult for the new foundries. When it is considered that the majority of foundries in the United States do not engage in pattern- making but receive patterns, as well as core boxes, from a specialized shop at the request and expense of a customer, it is clear that a lot more skilled workers will have to be employed than are normally found in a foundry if the Indian foundries are going to produce their own designs and patterns. The scale of output will be relatively small even for the new heavy foundry, thus forcing greater diversification, as in the pro- duction of machinery. Perhaps this new foundry can follow the pattern set in Europe where many of the larger heavy foundries export part of their output. 63. An expert in this field told the mission that in experienced European foundries when really heavy castings are poured, the rejection rate usually is about 1 out of 6. With inexperience, getting this really heavy foundry going in India may become extremely costly. Nevertheless, the mission cannot help but feel that these activities must be started sometime in India and may only be slightly premature. Foundry work is vital to any industrialization program. The mission's doubts refer basically only to very heavy foundries. Foundries for small and medium sized castings are one of the most labor intensive activities in the whole metals field. Small steel castings in India require only about Rs. 13,000 of capital investment per worker compared to the Rs. 65,000 in the heavy foundry. The value of the product in these small foundries is - 29 - about Rs. 20,000 per worker per annum, with a value added of Rs. 9,000 per worker per annum. Productivity is not too good. Output per worker in a small foundry runs about 13.4 tons per annum, as compared to somewhat over 60 tons per employee annually in most small and medium U.S. foundries and over 100 tons in some of the larger ones. 64. The heavy foundry contemplated is large by any standards. A few years ago there were only 6 foundries in the United States that had 1,000 workers and only 16 with more than 500 workers. In fact, these 16 foundries were the only ones in the United States that produced more than 40,000 tons of castings annually. It is not that India is without experience in this field, but rather only in heavy castings. The foundries of two ve- hicle producers visited by the mission were producing cylinder block cast- ings which appeared to be of excellent quality. But in both cases, this was achieved after a long period of trial and error. An example was cited to the mission from the experience of the India Pistons Ltd. with a foundry making iron castings. The output of bad castings for pistons during most of 1953 to 1954 was over 40 per cent, due to the fact that the company had started making iron castings for pistons with little or no experience. Later on, they were able to reduce the percentage of wastage considerably both in the foundry and in the processing plant. Machine Tools 65. Great optimism exists in the country concerning the progress possible in developing domestic machinery production. The example of the Hindustan Machine Tools Ltd. illustrates what can be done with patience and sufficient outside assistance. Small and medium sized machire tools of high quality are now being produced at costs that make them competi- tive with comparable imports. Enough personnel have been trained not only to handle the running of the present plant, with some outside help, but also to staff and largely design the doubling of the capacity of that plant. 66. The manufacture of heavy machine tools, however, poses addi- tional problems. Managerial experience and specialized engineering skills are especially necessary. The demand for such machines, especially in an industrializing country, will hardly allow the planning of large-scale manufacture. Even in more advanced industrial countries the majority of really heavy machine tools have to be tailor-made to customers' re- quirements. It is exceptional if an identical machine is reordered after a short period so that the same design can be utilized. The production personnel thus must be versatile and experienced because they will rarely be occupied on repetitive or routine jobs. In the production of preci- sion machine tools it is also necessary to have a group of experienced workers who can finish a great number of components by hand to a higher degree of accuracy than can be achieved by machines. Because of certain unavoidable inaccuracies, like machining tolerances, wear and tear of tools, measuring limits, etc., the product as it is produced on a machine is, in many cases, not quite accurate enough. Hence, in the assembly of precision machine tools, a great number of skilled men are required who are able to refine the components by scraping and fitting by hand to the required accuracy, so that the assembled machine tools are sufficiently accurate. 67. The mission has often heard in India that skills are quickly acquired by the highly adaptable workers in that country. The mission was impressed by the workers and what they have accomplished. However, the workers required for making heavy machine tools may take a long time to develop. Heavy machine tools require men who have an intimate know- ledge and rounded experience in the detailed machining and assembly processes. Supervisory workers with such qualifications will undoubtedly have to come from abroad in large numbers if the new capacity is to be efficiently utilized within a reasonable time after completion of the plants. - 31 - The Automobile Industry Present Position 68. A large expansion of the automobile industry is envisaged during the Third Five-Year Plan. It is expected by the Planning Commission that an expenditure of the order of Rs. 600 million will have to be made if capacity for the production of 100,000 vehicles per annum, almost entirely from local parts and materials, is to be established in India. If this target is achieved, it will represent a substantial increase in invest- ment in the industry. 69. During the First Plan some Rs. 93 million was invested in the industry. Although the number of vehicles produced did not increase by the end of the Plan period (see Table 11), the indigenous content of ve- hicles had reached nearly 25 per cent. There were about 11,000 workers employed in the industry and the capacity to produce vehicles had been expanded to 30,000 per annum. 70. The Second Plan target was more ambitious. Capacity was to be increased to 57,000 vehicles annually and the indigenous content of the vehicles was to be step ped up to 80 per cent. This capacity was to be fully utilized by 1960/61 with the production of 40,000 commercial ve- hicles and 17,000 cars and jeeps. The investment required to accomplish this target was originally estimated at about Rs. 160 million. Progress in the industry, although not up to the target as far as indigenous con- tent is concerned, has been quite satisfactory. In the first three years of the Second Plan, the gross fixed investment made in the industry amounted to Rs. 175 million, thus exceeding the original estimate for the entire period. It is further expected, according to various surveys prepared by the Government, that an additional Rs. 155 million will be invested before the end of the Second Plan period. The result of this Rs. 330 million investment will eventually, according to the industry, be a substantial increase in the indigenous content of all the vehicles produced as well as an expansion in capacity. The mission has the im- pression that for this Rs. 330 million there was not only an increase in the overall productive capacity of the plants up to the levels stated in the Second Plan targets, but excess capacity has been built in certain parts of the plants which might make it possible to exceed Third Plan targets with the planned level of investment. Production of vehicles has increased from 23,084 during 1955 to 36,468 during 1959 and is ex- pected to reach 45,000 during 1960 (see Table 3). The industry estimates that if sufficient import licenses are granted for key requirements of materials and parts, a production level of 57,000 (the Second Plan target) will be achieved by early 1961. - 32 - Table 11. Production of Motor Vehicles in India, 1951-1960 Total No. of Year Vehicles C%rs and Jeeps Busep and Trucks 1951 22,272 12,384 9,888 1952 15,288 6,948 8,340 1953 13,926 4,932 9,094 1954 14,462 5,436 9,026 1955 23,084 12,768 11,716 1956 32,136 17,124 15,012 1957 33,058 16,810 16,248 1958 26,758 12,201 14,557 1959 36,468 17,369 19,099 1960aJ 45,000 20,000 25,000 a/ Estimated by Planning Comission. 71. Impressive progress has been made toward increasing the amount of the vehicle that is made in India. As indicated above, roughly 25 per cent of the value of the vehicle was manufactured locally at the beginning of the Second Plan period. Table 21 shows by the end of 1959 that 70 per cent of the value of some vehicles was already being manu- factured in India and 45 per cent to 65 per cent is the rule. Table 12. Indigenous Content of Vehicles Produced in India (October 1959 - March 1960) Type of Vehicle Indigenous Content (per cent) Hindustan Ambassador 70.5 Fiat 1100 47.0 Dodge diesel (Perkins engine) 68.0 Standard 10 32.5 Tata--Mercedes Benz truck 64.0 Tata-Mercedes Benz bus 71.0 Leyland Comet 38.5 Jeep 65.0 Bedford diesel (Perkins engine) 46.0 - 33 - 72. On the assumption that the large investment planned during the last year of the Second Plan is carried out, there should continue to be improvement towards increasing the indigenous content of the vehicles produced. The average for all vehicles might reach 60 per cent to 65 per cent. Although this is still substantially lower than the Second Plan target of 80 per cent, the mission feels that it is a very encouraging achievement. It should be added that in many instances the mission was informed that there had been a substantial improvement in quality during the last year or two. Efficiency and Costs 73. There is a general feeling within the industry that the various automobile producing plants are on the verge of becoming economically sound units. This, of course, assumes that expansion is to be permitted along the lines indicated in the Third Plan. It is very important that each plant obtain a production volume which permits a reasonably efficient utilization of facilities. 74. The industry as it existed in 1959 consisted mainly of six pro- ducing plants as indicated in Table 13. By the normal standards of the automotive industry, all of the plants are quite modest in size. The largest, TELCO, has a capacity to produce 12,000 trucks annually, while Hindustan Motors has capacity for 10,000 cars and 6,000 trucks. The Premier Automobile Company can, at full capacity, now produce 7,.200 cars and 7,000 trucks. Industry representatives in general feel that an eco- nomic level of production for trucks in the existing plants would be about 20,000. An economic level for cars would be considerably higher, perhaps 40,0O0 cars. The economic level for trucks is certainly not too far beyond the capacities of the existing plants and would soon be reached if the Third Plan expansion program turns out to be as large as is now contemplated. Production of passenger cars at internationally competitive prices is not in sight during the Third Plan period. Table 13, Automobile Manufacturing Industry in India, 1959 Estimateda Net Fixed Assets No. of (1958) Cars and Jeps Trucks and Buses Name of Fir Employees Rs. Mil. Capacity Production Capacity Production Hindustan Motors (Calcutta) 5,077 30.1 10,000 5,000 6,000 4,000 Premier Automobiles (Bombay) 5,809 19.7 7,200 4,000 7,000 4,800 Standard Motor Products (Madras) 623 6.6 3,000 1,500 - - Ashok Leyland (Madras) 1,431 6.7 - - 3,000 1,400 TELCO (Jamshedpur) 3,922 100.0 - - 12,000 8,000 Mahindra and Mahindra (Bombay) 12886 5,500 5,500- 183748 1728 25,70 16,000 28xOD0 18.200 a/ "Net Block Value" of various companies, as shown in mid-1958 balance sheets. - 35 - 75. The Third Plan target for the industry as a whole sets forth an annual capacity of 60,000 commercial vehicles and 40,000 - 50,000 cars and jeeps. There have been reports of a proposal before the Government that small cars be produced in a new public sector plant. If this scheme is carried out the 50,000 figure would be the target. In the meantime, the stated policy is that the existing units in the industry should, for the most part, be expanded in order to obtain cost reductions through larger volume. A Development Council representing both the industry and various government agencies has estimated that an additional Rs. 600 mil- lion, including about Rs. 350 million in foreign exchange, will be re- quired for this expansion program during the Third Plan. There is a pos- sibility that this amount of investment would result in an even higher level of output in view of the substantial surplus capacity in certain parts of the existing plants. The Development Council has also estimated that an additional Rs. 1,850 million will be needed in foreAgn exchange to cover the requirements for parts and components to be used in the pro- duction as well as the maintenance of vehicles. The average indigenous content of vehicles and all of the component parts is assumed to increase to 85 per cent by the end of the Third Plan period. There would be some additional employment created in the industry. In 1959 there were about 19,000 workers engaged in automobile production, up from about 11,000 at the beginning of the Second Plan. It seems reasonable to expect that employment in vehicle production might increase by 15,000 - 20,000 workers during the Third Plan period. 76. The industry generally speaking, has been an excellent training ground for the development of skills in operating machinery. The in- dustry demands relatively large numbers of reasonably skilled workers. Around 40 per cent of the workers in the industry are classified as skilled or supervisory. The cost from the point of view of capital per worker is low compared to the new heavy engineering industries. On the average, about Rs. 20,000 - Rs. 25,000 of fixed capital per worker is required to build a fairly complete and integrated truck producing plant in India. The annual value of the product at the factory is about Rs. 50,000 per worker, with value added accounting for some 55 per cent of this. In other words, the ratio of fixed assets to output is very favorable at around 1 to 1. 77. As is indicated above, there has been a substantial improvement in the quality of components going into Indian-made vehicles. There is still, nonetheless, a long way to go. Numerous complaints are heard about the quality of vehicles produced. According to an "ad hoc committee" set up by the Government to study the automobile industry, many complaints relate to defects which could be easily detected before a vehicle leaves the factory, if there were adequate systems of inspection. The mission, in visiting the various plants, noted disparities between the inspection systems of different producers. In general, although it can be said that quality is considerably below the standards of comparable imported vehicles, the mission was told that the improvement during the last year or two is substantial enough to be encouraging. Furthermore, as required skills are developed, the basis is being laid for a truly modern industry in India. - 36 - 78. The cost to the economy is in reality not great. Vehicles pro- duced in India are clearly somewhat more expensive than they would be if they were produced abroad and imported into the country. However, a competitive production level for trucks is being approached in some in- stances. The ad hoc committee studying the industry noted that, if the incidence of taxes were eliminated in each case, the consumer price of the Hindustan Ambassador would be only 38 per cent higher than the con- sumer price in the United Kingdom of the comparable Morris Oxford. The Tata-Mercedes Benz diesel truck is now being produced to sell in India exclusive of taxes at a price which is only 6 per cent higher than that for which the comparable vehicles are sold in Germany. Local manufac- turing in some cases may not substantially exceed the cost of local as- sembly as far as the cost to the Indian economy is concerned. The real comparison is difficult to make. Not enough information is available concerning the actual cost of producing comparable vehicles abroad. There is no doubt that the producing companies in India have difficulties in many instances in obtaining materials at a reasonable cost within the country. The companies also have to produce components on a small scale at high cost. In 1958/59 a substantial part of the ex-factory price went to pay for the cost of materials and components. Customs duties and excise taxes, of course, add substantially to the prices paid by the consumer as indicated in Table 14. Furthermore, these figures do not include customs duties paid on materials used in the production of components produced outside the particular automobile plant but inside India. Table 14. Customs and Excise Duties on Motor Vehicles (Rupees) Excise Duties Duties on Tires as a % Ex-Factory Customs and Total of Make of Vehicle Price Duties Battery Duties Price Jeep 11,003 1,500 198 1,698 15.4 Dodge diesel 22,869 2,939 750 3,689 16.2 Tata-Mercedes Benz truck 22,278 3,352 761 4,113 18.5 Hindustan Ambassador 9,678 833 128 961 10.0 Fiat 1100 9,061 1,340 112 1,452 16.0 Ancillary Enterprises 79. The role which is played in Indian automobile manufacture by the small ancillary company is already quite substantial. The ad hoc committee estimated that in European vehicle manufacture between 50 per cent and 60 per cent of the cost of manufacture represents items bought - 37 - from outside suppliers. In India it is not quite as high, but is develop- ing in this direction in some instances. On the other hand, in the case of Tata's diesel truck, of the items that are actually produced within the country, a large proportion is produced within the plant itself as is indicated in Table 15. Table 15. Vehicle Production in India Divided between Main Plants and Ancillaries Of which: Estimated Cost of Value of (a) (b) Full Price Imported Items Pro- Items of Materials duced Bought Items aterials and within from iianufactured and Parts Components India Other in Make of Vehicle in Rs.- __.n Fgirg Main Plant Jeep 5,664 2,830 2,834 58.2% 41.8% Dodge diesel 8,849 2,698 6,151 83.8% 16.2% Tata-Mlercedes truck 12,830 6,720 6,110 36.5% 63.5% Hindustan Ambassador 5,716 2,490 3,226 - - Fiat 1100 4,771 3,320 1,451 57.71o 52.3% 80. The automobile parts industry is growing at a rapid rate and is beginning to develop into a substantial supplier to the automotive producers. Many item5, such as starters, dynamos, voltage regulators, distributors and inition coils, are only now gettIng ready to go into quantity producti on. Others which have been produced for many years have grown very rapidly in the last few years, as indicated in Table 16. The mission heard a number of cowmlaiits that many of these components were not of acceptable quality. The ad hoc committee found that very often the price of compcnents purchaced from the automotive parts industry is substantially higher than the landed cost of the imported product. The mission felt that these complaints, although obviously legitimate, were no greater than one would expect from enterprises at this stage of de- velopment. Table 16. Representative Automobile Parts Produced in India, 1953-59 (thousands) Piston rings 1,376 1,576 1,918 2,081 2,162 3,281 4,890 Pistons 65 114 132 160 192 203 263 Cylinder liners 17 34 65 67 76 83 262 Spark plugs 24 113 532 n.a. n.a. 736 857 - 38 - 81. The ad hoc committee indicated that the "ancillary industry should be able to supply components at a price which does not exceed the c.i.f. price of similar components when imported by more than 40 per cent". The mission would agree with this position. If costs were only 40 per cent higher than the cost of imported components, it can be rea- sonably presumed that, when volumes increase and more production ex- perience is available, costs will come down and the margin above imports reduced. 82. The Tariff Commission has been somewhat indiscriminate in giving protection to these ancillary industries. For example, spark plugs and ball bearings receive a tariff protection of over 90 per cent ad valorem. The mission doubts that spark plugs at the volume needed will be produced in India at anywhere near the price of the comparable import for many years, if ever. On the other hand, such components as pistons, receiv- ing protection of about 50 per cent and diesel injection equipment at 25 per cent are examples of things that can probably be produced in India at reasonable cost. 83. Diesel injection equipment received 60 per cent protection for several years up to 1958. The rate was then reduced to 25 per cent. The mission regards this as a case where tariff protection has in a rela- tively short time proved itself as an aid to a growing, efficient pro- ducer. This producer, which is a subsidiary of a European company, is now producing an almost completely indigenous diesel fuel injection as- sembly at a cost of less than 25 per cent above the c.i.f. delivered price of the same equipment as sold by the parent company. Diesel injection equipment is very precise and difficult to produce. It is in effect a small engine put together with watchmaker precision. Very few newly industrializing countries, if any, produce such equipment domes- tically. Yet the tolerances of the Indian product are as good as the parent company's European product and only 16 foreign supervisors are needed to guide the production of well over 1,000 workers. This is indeed an impressive performance. 84. The Third Plan has tentatively set aside only Rs. 15 - Rs. 20 million for the automotive supply industries. This compares with some Rs. 25 million invested in fixed assets in these industries during the first three years of the Second Five-Year Plan. The mission feels that this target should be reconsidered and perhaps expanded. These indus- tries already have an employment of some 15,000. On the basis of infor- mation made available by the Planning Commission, it is apparent that substantial results are being attained. Some Rs. 5.5 million of auto- mobile leaf springs and leaves are being produced and nearly Rs. 8 mil- lion of piston assemblies. There are 1,000 employees working on piston rings alone, with an investment in fixed assets of only Rs. 8,500 per worker. There are 1,380 workers manufacturing motor engine parts with an investment in fixed assets of about Rs. 11,000 per worker, and about 2,500 workers manufacturing brake equipment. This is the kind of private - 39 - industrial development that the mission believes should be stimulated once its prospects for being competitive have been determined. It is an es- sential part of the road transport industry, which, taken as a whole, is one of the most labor intensive of modern industries and thus a good in- dustry for India to develop. 85. A basic problem of automobile producers is estimating the size of the future market for components which they can either make or purchase from suppliers. This becomes extremely important in determining what each should make itself and what it should "farm out". For example, in 1959 TELCO manufactured among other things 1,950 cylinder heads, 1,930 crank- shafts, 1,950 camshafts, 1,700 connecting rods, 2,056 flywheels, 10,000 sets of gears, 1,950 timing gears, 32,000 rear axles and housings and 25,000 front axles. Recently they have been casting their own cylinder blocks. The quality of the work is impressive. Similar work being done by Premier Automobiles is equally encouraging. There is nevertheless a problem of specialization. For example, Premier is importing body panels until large expensive presses can be obtained from abroad. The Hindustan Motors Company has substantial excess pressing capacity. A sound expan- sion program should attempt to make it possible for Premier to utilize this excess capacity before installing new capacity of the same type. Third Plan Prospects 86. The ad hoc committee estimated that to meet the demand for ve- hicles for 1965/66 would require a total of nearly 800,000 vehicles on the road. According to this estimate, 155,000 additional trucks and buses would be needed by 1965/66. It would also be necessary to pro- duce a further 80,000 - 85,000 replacements for existing vehicles, making a total of about 240,000. A production target to meet such a demand level was set tentatively, as indicated in Table 17. Table 17. Third Plan Production Targets for Motor Vehicles Cars Jeeps Trucks and Buses Foreign Foreign Foreign Exchange Exchange Exchange No. (Rs. mil.) No. (Rs. mil.) No. (Rs. mil.) 1961/62 20,000 60 5,500 40 28,000 200 1962/63 20,000 60 5,500 40 28,000 200 1963/64 20,000 60 5,500 40 28,000 200 1964/65 30,000 40 10,000 170 60,000 210 1965/66 30,000 _0 10,000 170 60,000 210 120,000 260 36.500 60 204,000 1.020 - 40 - 87. The amount required under this tentative program is Rs. 1,740 million in foreign exchange to cover the cost of importing materials and components plus the Re. 350 million for capital investment mentioned at the outset of this section. Since these foreign exchange requirements are large, this is probably the maximum program acceptable, even though the mission feels an even greater expansion in the vehicle population would otherwise be justified. The mission believes that the Third Plan target capacity may be exceeded with this estimated level of investment. On the other hand, raising money will not be easy for the companies under the strict controls under which they now operate. Prices and profits are limited. None of the companies has been able to generate substantial funds for expansion from internal resources. Only limited funds can be obtained in the capital market. - 41 - Cotton Textiles The present Position of the Industry 88. The manufacture of cotton goods is much the most important in- dustrial occupation in India, employing nearly 900,000 workers in the mills and several million workers in the "unorganized sector," which consists principally of handloom weaving, ,ut also includes some powerlooms and a certain amount of hand spinning.1V The gross value of the annual output of cotton cloth may be crudely estimated at around Rs. 6 - 7 billion and the value added in the process of manufacture at perhaps one half of this amount. Total cloth production in 1959 was 7,140 million yards, of which 850 million yards were exported. Domestic supplies work out on this basis at 6,290 mil- lion yards, or just over 15 yards per head a year. This is considerably below the level of consumption foreshadowed in the Second Plan, which (using lower figures of population) envisaged a per capita demand for cloth of 181 yards in 1960/61. 89. Production of cotton cloth appears to have risen very little during the past four years, as indicated in Table 18. Table 18. Production of Cotton Cloth (million yards) Mills Handlooms Powerlooms Total 1950 2,665 805 148 4,618 1955 5,094 1,480 273 6,847 1956 5,306 1,509 278 7,093 1957 5,317 1,643 303 7,263 1958 4,927 1,798 331 7,056 1959 4,925 1,870 350 7.,140 Target for 1960/61 5,350 2,500 400 8,400 a/ Provisional target for 1965/66 5,800 3,500 9,300 a/ Includes 150 unallocated. / Employment in the handloom industry much of it on a part-time basis, is officially estimated at around 7' million, but it is recognized that in this, as in other cottage industries, the nature of the employment makes precise estimation impossible. - 42 - 90. Contrary to expectations, cotton textile production has been limited more by lack of demand than by any problems of supply (though ex- port production has been held back in 1959/60 by a shortage of raw cotton resulting from an exceptionally poor crop.) On the face of it, this is rather surprising in view of the appreciable rise in money incomes and the widespread evidence of improvements in living standards. The explana- tion appears to lie, first, in the increase in foodgrain prices, which has absorbed a large proportion of the additional incomes, and second, in the stiff increases in excise duties on cloth introduced in 1956. As a result of these tax increases, revenue from the excise duty on cloth rose from Rs., 298 million in 1955/56 to Rs. 660 million in 1957/58 - an additional annual levy equivalent to the retail value of perhaps 300 million yards of cloth. Another factor which has tended to limit the quantity of cloth sold has been a shift in consumer's preferences towards the finer qualities. That is to say, that figures of quantity, taken alone, are a rather in- adequate measure of the industry's performance, and there may well have been a greater increase in the real value of output than the statistics suggest. 91. India's exports have fluctuated with changes in the international textile trade. Table 19 illustrates the export performance of the mill and handloom sectors. Table 19. Cotton Cloth Exported Mills Handlooms Total Piecegoods Quantity Value Quantity Value Quantity Value Mn. Yds. Rs.Mn. Mn. Yds. Rs.Mn. Mn. Yds. Rs.Mn. 1951 732 720 4h lo 776 824 1955 692 490 60 84 752 574 1956 684 480 59 87 743 567 1957 839 590 39 56 878 646 1958 581 400 36 52 617 452 1959 815 550 36 66 851 616 Target for 1960/61 - - - - 850 680 Tentative forecast for 1965/66 (800) (580) (50) (88) 850 669 In addition, exports of cotton yarn and thread brought in about Rs. 50 million in 1959. - 43 - 92. The main problems confronting the cotton textile industry are the irregularity of its raw material supplies, its high and rising labor costs and the generally poor conditions of its plant and equipment. All these factors have to be considered in assessing the chances of the industry achieving the Third Plan targets for production (5,800 million yards of mill cloth) and exports (850 million yards, including handlooms). Raw Cotton 93. At the present level of textile production, India uses about 5 million bales of raw cotton a year (bales of 392 lbs. each). Over the three years 1956/57 to 1958/59, the Indian cotton crop (predominantly below 1 inch staple) was fairly steady at about 4.7 million bales a year; rather over 300,000 bales of this were exported, and imports (predominatly 1 inch and above) averaged a little under 500,000 bales a year.2/ The 1959/60 crop, however, was 400,000 bales lower than in the previous years, and an acute shortage of cotton developed, forcing up prices and holding back textile production at a time when there was a sharp upsurge in overseas demand. Quotas were eventually issued for much larger imports, including an allocation of 450,000 bales of US cotton supplied under PL 660, but valuable export business was lost in the meantime. 94. Efforts are being made to develop longer staple cotton in India, but while it is apparently fairly easy to obtain growths up to 7/8 inch and 31/32 inch, production of 1 inch staple and above is proving difficult (see Annex II). The mission was told by the industry that the maximum fore- seeable output of this type of cotton was 300,000 bales a year (mostly from South India). The supply of longer staple cotton is not of great signi- ficance from the export point of view, since India's cloth exports consist predominantly of coarse and medium qualities. On the other hand, the growing preference of consumers in India for the finer qualities will tend to raise the demand for imports unless more of the longer staples can be produced at home. There seems little immediate prospect of reducing imports much below 500,000 bales a year, which at present prices would cost rather over Rs. 300 million c.i.f. - representing a total foreign exchange requirement of Rs. 1.5 billion for the period of the Third Plan. This is approximately what has been allowed for in the balance of payments forecasts discussed in Annex VI. 1/ The figures in this paragraph relate to crop years running from September to August. - 44 - Employment and Wages 95. The mill industry claims that its wage costs per unit of output are amongst the highest in the world, and that India is able to compete in foreign markets only because of the considerable cost advantage it normally enjoys in respect of raw cotton. The mission feels this is somewhat of an exaggeration but there is no doubt that wage costs have been rising. Figures published by the Central Pay Commission indicate that average earnings in the cotton textile industry in 1957 (the equivalent of $286 a year) were the highest for any industry in India with a comparable level of skills. Now a further wage increase has been recommended by the Central Wage Board and approved by the Government, the effect of which will be to raise earnings in Bombay and Ahmedabad by 6 to 8 per cent and earnings in South India by considerably more. Possibilities of securing economies by means of rationalization have hitherto been limited by government rules prohibiting firms in the industry from reducing their labor force and by restrictions imposed on re-equipment with automatic looms. It has, however, been emphasized in connection with the latest wage award that greater attention must in future be paid to efficiency if the industry is to remain solvent, and the employers are seeking the cooperation of the trade unions in introducing a scheme for relating earnings more closely to productivity. Working conditions in the industry are generally poor and management practices make few concessions to modern ideas, which factors doubtless con- tribute substantially to low productivity in the industry. Modernization 96. Modernization of the mill industry, long delayed, has made some headway in recent years. Gross fixed investment in the mills during the First Plan is officially estimated at Rs. 1.13 billion and during the first four years of the Second Plan at Rs. 0.84 billion. Over three quarters of this investment is attributed to replacement and modernization and less than one quarter to expansion; the latter has been largely confined to the spin- ning section of the industry. 97. Even today, however, although a considerable number of firms have completely modernized their mills, the majority are still using old and inefficient equipment. For example, nearly one third of all the spinning machinery in the industry dates back to before 1920, and out of more than 200,000 looms installed fewer than 12,000 are automatic. The industry itself must be held primarily to blame for the failure to introduce more modern equipment earlier. Long protected against competition from outside, it has not been conspicuously investment-minded, and payment of dividends has tended to take precedence over the ploughing back of profits. Government is entitled to some credit for arousing in the industry a greater sense of responsibility towards the public, particularly in respect of exports. 98. However, the GovernmentIs own policies have not always supported the efforts made by the industry to put its house in order. Restrictions have been imposed on the installation of automatic looms and other labor- saving equipment; the industry has been barred from reducing its labor force; a tax has been levied on mill cloth in order to subsidize the handlooms; and the expansion of mill output during the Second Plan has been discouraged by the adoption of "common production" targets, according to which the greater part of the planned increase in textile output was allocated to the handlooms and powerlooms. The effect of these restrictions and of the rise in wage and raw material costs has been to cut back profits and impair the industry's capacity to finance its development. 99. A growing recognition of the importance of maintaining the com- petitive power of the industry in foreign markets has lately led to some easing of the restrictions on installation of automatic looms. The main difficulty now is shortage of foreign exchange, since approximately 40 per cent of the equipment required for modernization has to be imported. No capacity exists at present for the manufacture of automatic looms in India, but two or three agreements have recently been concluded with foreign firms to establish production in the course of the next few years. Steps are also being taken to encourage local manufacture of other items of textile equip- ment, and the aim is to attain 80 per cent indigenous manufacture by the end of the Third Plan. Prospects for Production 100. The production target for the Third Plan assumes that sales of cloth in the home market will rise from 6,290 million yards in 1959 to 8,450 million yards in 1965/66 -- an increase of 34 per cent in six years or about 5 per cent a year. This would allow per capita consumption of cloth to rise by 3 per cent a year, reaching approximately 18 yards by the end of the Plan. The mission considers this estimate to be on the high side, since total per capita consumption is assumed to rise by only 2 per cent a year. On the other hand, it would be a mistake to rely too much on the continued stagnation of demand for textiles. If the Government succeeds in stabilizing foodgrain prices, a substantial part of any increase in consumer incomes might be directed towards cloth purchases. 101. So long as adequate supplies of raw cotton are available, the mills should have no difficulty in expanding their production to 5,800 million yards. About 85 per cent of the industry is at present working two shifts and 35 to 40 per cent three shifts. These figures indicate a fairly inten- sive use of capital, but there would still be room for extension of double and treble shift work, and output per man-hour could certainly be increased in the event of a boom in demand. The ability of the unorganized sector to meet its targets is more questionable, but as the targets themselves appear to be on the high side, there should be no serious shortage in home supplies such as would react adversely on exports. Fiscal and other measures could always be taken, if necessary, to limit any excessive rise in home demand, though frequent changes in excise and other duties have an unsettling effect on the industry and should as far as possible be avoided. A discussion of the prospects for the export of cotton fabrics is included in Annex VI. - 46 - Small Scale and Village Industries General 102. The relative share of funds allotted to the small-scale and village enterprises sector is lower in the Third Plan than in the Second, although the absolute amount has increased a little. The program will continue to be large and to make substantial demands on available resources. Total invest- ment proposed for the Third Plan is Rs. 4.35 billion (see Main Report, Chapter 2). 103. The stated objectives of the small-scale and village enterprises program remain more or less as they were in the Second Plan, that is, to pro- vide employment, to provide an increase in available consumer goods and to provide for decentralized industry. The emphasis within the public sector program will, however, be broadened somewhat and shifted increasingly to the promotion of industry in small towns and in rural areas as indicated in Table 20. Table 20. Outlays in the Public Sector for Small-scale and Village Industries (Rs. million) Percent of Percent of Total Pub- Total Pub- Second Plan lic Sector Third Plan lic Sector Anticipated Outlays in Tentative Outlays in Expenditures Second Plan Allocation Third Plan Handloom, including powerlooms used in Handloom sector 321 0.70 360 0.51 Khadi, Ambar Khadi and village industries 805 1.76 890 1.27 Small-scale enterprises and industrial estates 563 1.24 1,070 1.53 Handicrafts 53 0.16 80 0.11 Sericulture 38 0.08 70 0.10 Coir industry 20 0.04 30 0.04 1,800 3.98 2,500 3.56 10. The Third Plan targets are expected by the Planning Commission to be reached with the help of expanded provision for credit, training faci- lities and technical assistance, marketing aids, and so forth. It is along these lines that the programs have been weakest in the past. The provisional distribution of allotments shown in Table 30 is intended only to facilitate more detailed work on the preparation of schemes. It was pointed out to the mission that in some fields, especially rural industries, a larger allocation - 147 - may be considered when the final report on the Plan is drawn up. The outlay of Rs. 2,500 million by the Central and State Governments will be in addition to such provisions for small enterprises or village industries as may be found within the community development program. Furthermore, in addition to the outlay proposed for the public sector, resources of the order of Rs. 2,750 million are expected to be forthcoming from private sources. 105. If this investment materializes, it may provide part-time or fuller employment for about 5 million persons and whole time employment for about 800,000 persons, according to the Planning Commission. Programs for the handloom industry, village industries and sericulture will, according to these estimates, provide fuller employment for about 32 million persons, while the production of khadi and Ambar khadi will provide part-time employment for about l million persons. Programs for small-scale industries, handicrafts and coir spinning and weaving are expected to create employment for about 800,000 persons. The industrial estates program is tentatively expected to provide additional employment for slightly over 90,000 during the Third Plan. This expansion of employment in manufacturing is set against a work force now of some 15 to 20 million. Table 21 gives a very rough indication of the approximate number of workers already employed in this small-scale sector in recent years. According to estimates made available to the mission, approximately 65 per cent of all these workers in manufacturing live in rural areas; some 75 per cent are in household enterprises and small work- shops with less than 10 persons and an additional 8 per cent in small factories with 10 to 49 persons employed. The balance is accounted for by large and medium factories. Table 21. Employment in Manufacturing in 1956 Number of Total Number of Persons per Number of Persons Employed Establishment Establishments ('000) Under 5 5,000,000 10,200 5- 9 130,000 910 10- 19 43,000 600 20- 49 18,000 560 50- 99 4,660 340 100-249 2,550 380 250-499 840 270 500-999 470 330 1,000 and over 580 1,410 Total 5,200,000 15,000 - 48 - Village Industries 106. The result of the large expenditure in this field during the Second Plan period has been substantial progress in the output of this sec- tor. The production of handloom cloth has increased from 742 million yards in 1950/51 to an anticipated output of 2,125 million yards in 1960/61. During the same period, production of khadi (traditional hand woven cloth from home spun yarn) is expected to go up from 7 million square yards to about 80 million square yards. The total number of looms in the cooperative sector has increased from 680,000 in the middle of 1953/54 to about 1,200,000 at the beginning of 1959/60. The Planning Commission estimates that fuller employment has been provided for about 3 million handloom weavers, and part-time employment for about 1 million spinners, besides whole time employment for carpenters, blacksmiths, etc., engaged in production or repair of equipment. Progress in the installation of powerlooms by cooperatives of weavers has been slow and out of 13,000 powerlooms which were approved and sanctioned for the Second Plan period, only about 3,500 are expected to be installed by the end of 1960/61. 107. Other village industries have shown less progress due to the ex- isting low level of technology, the scarcity of trained and experienced supervisory personnel and the difficulty in building up an efficient or- ganization which can actually reach the villages. In the first two years of the Second Plan, in terms of the actual utilization of funds for village industries, progress was slow and only a small impact could be made by way of extension of more efficient techniques or organized supply of raw mate- rials and marketing. Greater progress has been reported during the last two years. The total outlay for the period 1956 to 1960 has amounted to Rs. 138 million. 108. Available data about handicrafts are limited, but there has been some improvement in exports and internal sales. Approximately Rs. 37 million was spent on handicraft industries between 1956 and 1960. An additional Rs. 29 million was spent on sericulture between 1956 and 1960, out of a Plan provision of Rs. 41 million. Production of raw silk, both mulberry and non- mulberry, increased from 3.05 million pounds in 1956 to 3.34 million pounds in 1958, as against the target of 4 million pounds set by the Central Silk Board. The high cost of production of raw silk continues to be a serious problem. Progress of the coir industry has been generally slow owing mainly to organizational and financial difficulties. Small-scale Enterprises 109. The progress of small-scale enterprises has been substantial, even though the shortage of certain basic raw materials like pig iron, steel and non-ferrous metals has hampered production.1/ The output of sewing machines, 1/ A "small" enterprise is generally defined as one employing 50 or less workers with less than Rs. 500,000 of invested capital, but the definition is very flexible. - 49 - electric fans, bicycles, hardware and hand tools by small enterprises has recorded increases varying from 25 to 50 per cent and in some cases even higher. Machines valued at about Rs. 20 million have been supplied by the National Small Industries Corporation under a hire-purchase scheme which was introduced in 1956. As part of an industrial extension service, Small Industries Service Institutes have been set up in all States, as well as 42 extension centers. The Government has also organized management courses for owners and operators of small enterprises. 110. An indication of progress has been the sales of small enterprises to Government which increased from Rs. 7.5 million 1953/54 to about Rs. 45 million 1958/59. Some 36 industrial estates have been established, with 29 already in operation. About 400 factories are working in these 29 in- dustrial estates employing some 9,200 persons and producing goods worth Rs. 40 million annually. A total of 60 industrial estates are expected to be completed by the end of the Second Plan, with some 700 factories or work- shops in operation and about 12,000 persons at work. The Planning Commis- sion has estimated. that additional full time employment will have been provided during the Second Plan for about 300,000 persons in small enter- prises. It is intended that another 300 industrial estates should be set up during the Third Plan. 111. The basic problem in this field, it seems to the mission, is to raise the level of technical and organizational efficiency so that these small enterprises can become competitive producers. It is the Government's policy progressively to reduce the measure of protection afforded (e.g. by subsidies, rebates on sales and reservation of markets), and efforts are to be directed more intensively towards improving the productivity of the worker through positive forms of assistance. This assistance mainly consists of improving existing skills and tools. The provision of essential needs of artisans, entrepreneurs and cooperatives such as workshop accommodation, utilities, credit, marketing and technical assistance is being attempted through the industrial estate program. 112. The mission feels that the emphasis on the development of small- scale enterprises in India is basically sound. Small manufacturing firms are already relatively more important in India than in almost any other country. For example, in India over 60 per cent of manufacturing establish- ments have less than 20 employees compared to 5 per cent in Japan, 35 per cent in the United Kingdom and 32 per cent in the United States. The basic issue of their future is related to what kind of small enterprises should be stimulated. The familiar arguments in favor of small-scale production were summarized in the report of the 1956 Bank Mission. They include the need to arrest the process of urbanization, with its attendant social prob- lems and heavy investment in "social overhead" capital; the desirability of enabling the poorer elements in the agricultural community to supplement their incomes; the necessity to provide more employment; and the need in a poor, densely-populated country to stress industrial activities which are labor-intensive and save on capital. - 50 - 113. The mission questioned some of the arguments in favor of small- scale industry. They pointed out that the relationship between capital employed and output is not so much more favorable for many hand industries, by comparison with factory industries, as is often assumed. This has been confirmed by recent studies of Indian experience and that of other countries. They noted that the subsidy which is generally necessary to support hand industry may be costly for the economy. On the other hand, the relief of unemployment does provide some justification for this program, and the Government cannot afford, for practical political'reasons, to abandon its support of the handloom industry; for example, which provides employment for some 71 million people. 114. In discussing the program in detail, it is essential that a sharp distinction be made between cottage-type hand industries and the small factories using power-driven machinery. The industrialization of India may well stress the latter type of industry. Small-scale plants have much to offer in the special circumstances under which the country is being developed. Small-scale engineering enterprises are in some instances es- pecially impressive. Factories which employ around 25 workers often use very modern techniques, making such things as machine tools, bicycles and parts, radio equipment and plastics. These small modern factories are not the same as village and cottage industries. The traditional cottage industry pro- duces a traditional product such as handloom cloth by traditional techniques. There is also the small factory producing a modern product such as shoes, soap or furniture by traditional hand techniques. These enterprises should be distinguished from the small modern firms which produce a modern product with modern techniques. Modern products such as machinery, chemicals, paper and beverages are not only produced in large factories, but also in some 628,000 small enterprises located mainly in households employing less than 20 workers. In these fields, of course, the large and medium scale factories predominate. 115. Low productivity is the basic economic problem of the household enterprise. The net value added per person in such enterprises averages only about Rs. 200 per annum. It has been calculated that the average re- quirements of capital per unit of additional labor employed in a small modern factory is about Rs. 7,000. With such an investment, the value added per person amounts to about Rs. 3,700, indicating a capital-output ratio of around 2 to 1 at full capacity operations and higher at less than full capacity operations. In other words, there is a ten to fifteenfold in- crease in productivity by setting workers up in such small factories as com- pared to the traditional handicraft shop. 116. Calculations of this kind suggest the fundamental economic objec- tion to extensive investment in the development of traditional household industries that produce goods competitive with those produced in enterprises utilizing modern methods. This is that such investment, and the various measures necessary to make it effective, perpetuate kinds of employment - 51 - that have very low productivity. The mission is aware of the deep emotional and political forces underlying the policy of continuing to promote tradi- tional village industries, but it fears that the conflict between this policy and the fundamental objective of all Indian planning, which has repeatedly been stated to be to raise the level of productivity of the nation as a whole, will become increasingly sharp. 117. So far as the modern type of small enterprises is concerned the latest information available seems to indicate that in general they not only use more labor per unit of output than large-scale industry but also have a higher capital-output ratio. The shortcomings of the statistics make it difficult to prove this point conclusively. The mission does feel, however, that the evidence is sufficiently clear that small enterprises should not be favored per se. They should only be encouraged when they give promise of ultimately becoming competitive with larger enterprises. It is difficult to pick out such enterprises under the circumstances ruling industry in India during recent years. As a result of the shortage of foreign exchange, there has been a severe shortage of all kinds of manufacturing goods, expecially among chemical and engineering products. Small-scale factories are under these conditions making substantial profits selling whatever can be produced with little difficulty. When these shortages no longer exist, it will be important for the Government to give small factories the opportunity to com- pete on equal terms, helping them out, however, with such aids as technical advice and reasonable credit facilities. 118. The Government should not, however, feel obligated to perpetuate subsidies with a view to sustaining all existing small enterprises. Competi- tion inevitably leads to some failures, and these should be accepted as part of a healthy growth process. The mission also believes that the temptation to set aside or reserve markets for the particular products for the small- scale sector, so that there is no competition between small and large sup- pliers, should be sternly resisted. The mission has seen no evidence what- ever that any such artificial stimuli are necessary to encourage the growth of small enterprises in India. Indeed, the rate at which they spring up, given reasonable conditions and a chance to make a profit, is one of the most astonishing features of the Indian scene. 119. There is currently some tendency in India to seize upon the device of industrial estates as a kind of magic carpet to a new era. Experience to date hardly supports this kind of enthusiasm. Indeed, the results have been very different in various parts of the country. The establishment of an industrial estate, like any other effort to create conditions for sub- stantial economic change, requires more than simply passing laws and allocating funds. Some very impressive results have been obtained in a few places, for example, New Delhi and Madras, while in others, for instance Kerala, the investment has been almost completely wasted so far. Over- cmwcbd areas like Calcutta where light industries desperately need space, water, power and decent surroundings have been neglected while efforts have been made to establish industrial estates in locations where no real demand for such facilities exists. The program also suffers from rigid adherence to certain theories quite unrelated to the central objective of promoting rapid and sound industrial growth. Only recently has the problem of pro- viding suitable credit facilities as one of the amenities been tackled effectively. Too often substantial investments have been made in machinery for joint workshops which are under-utilized, and in the construction of various amenities which are nice but not necessary, and often very much under-employed. Finally, it is worth recalling that with all the enthusiasm and discussion generated by the industrial estate program there are still no more than 10,000 persons employed on industrial estates in India. 120. Despite all this, the mission believes that the Government is right to continue to construct industrial estates so long as efforts are simultaneously made to improve their location and to eliminate features which have been proved to be unnecessary or positively undesirable. The idea of providing in one place the combination of space, buildings, utili- ties and transportation outlets is fundamentally sound if the location is near to reasonable sized towns. Indeed, the mission sees no reason why a well conceived industrial estate ought not very quickly to become a paying proposition in many parts of India, if due account is taken of the fiscal effects. - 53 - APPEIDIX TO ANNEX III Targets for Individual Industries 121. The largest capacity increases during the Third Plan period are envisaged for producing steel, heavy machinery and heavy electrical equipment. Out of a total investment in industry in the public sector of Rs. 15 billion, over half is for the group of metallurgical and machi- nery industries indicated in Table22 below. The foreign excharge compo- nent is approximately Rs. 4 billion. The largest schemes are a steel ex- pansion program and a heavy machinery plant with a heavy foundry and forge. Table 22. Public Sector Investment in Metals and Engineering (Rs. million) Source of Total Amount Amount of Financing of Investment Foreign and Required in Exchange Technical Project Third Plan Required Assistance Alloy steel plant 350 200 Unknown New steel plant at Bokaro 2,200 1,100 Unknown Expansion of Bhilai 1,380 560 USSR Credit Expansion of Rourkela 900 500 Unknown Expansion of Durgapur 560 270 Unknown Total Steel 5,390 2,630 Heavy machinery ) (USSR Credit Foundry-forge ) 1,190 815 (Czech. Credit Mining machinery ) (USSR Credit Expansion of Bhopal electricity 350 150 UK Collaboration Two new heavy elect. plants 690 265 USSR & Czech. Cred. Heavy structural shop 40) Unknown Heavy plate and vessel shop 20) 40 Unknown Expansion of Hindustan mach. tool 30 20 Unknown Heavy machine tool plant 80 60 Czech. Credit Precision instrument factory 80 60 USSR Credit 7,870 4,040 122. Iron and Steel. The iron and steel program will not only in- clude expansion in the capacity for mild steel but also the establishment of facilities for the manufacture of allow, tool and special steels. As regards mild steel and pig iron, tentative planning is on the basis of achieving a capacity of about 10.2 million tons of steel ingots and 1.5 million tons of pig iron for sale by the last year of the Third Plan, an increase from the Second Plan target of 6 million ingot tons of capacity and approximately 1 million tons of pig iron. Table 23. Steel Capacity in India in 1956, 1961 and 1965/1966 (million tons) Ingot Capacity Finished Steel Capacity Company or Actual Anticipated Target Actual Anticipated Target Project 1956 1961 1965/66 1956 1961___ 1965/66 TISCO 1.1 2.0 2.0 0.8 1.5 1.5 I3CO 0.7 1.0 1.0 0.5 0.8 0.8 Durgapur - 1.0 1.6 - 0.8 1.3 Bhilai - 1.0 2.5 - 0.8 1.7 Rourkela - 1.0 1.8 - 0.7 1.2 Mysore - 0.1 0.1 - 0.1 0.1 Bokaro - - 1.0 - - 0.8 Miscellaneous - --2 - - 0.1 1.8 7.112 1 4 7.5 123. The total capacity in the public sector is expected to reach 7 million ingot tons by 1965/66, and preliminary estimates are that pro- duction would then be about 6 million tons. There would also be capacity in this sector for about 1 million tons of free pig iron. Included in this projection for the Third Plan is a new public sector steel plant at Bokaro which would have capacity for about 1,000,000 tons of steel ingots equi- valent to about 800,000 tons of finished steel. This new plant would involve an investment of about Rs. 2.2 billion, including some Rs. 300 million for ancillary facilities. The expansion of the three existing public sector plants would require around Rs. 2.9 billion. In other words, there would be an investment during the Third Plan of slightly over Rs. 5 billion in steel facilities in the public sector after including the cost of a small expansion at the Mysore Iron and Steel Works. 124. Compared to the Second Plan, the share of the main private pro- ducers of iron and steel in further expansions would be relatively small. The principal contribution to be made by private enterprise will be the expansion of production of scrap-based steel billets in electric fur- naces and pig iron production in low shaft blast furnaces. The additional output to be obtained in this manner under the Third Plan is estimated at 200,000 tons of steel ingots and an equal quantity of pig iron (see below on p. ). 125. Alloy Steel. The Planning Commission estimates that the annual overall demand for allow, special steels and tool steel will be between 200,000 tons and 275,000 tons by 1965/66. A target of 200,000 tons of alloy steel production capacity has been set for the Third Plan, with 130,000 tons of this to be established in the public sector and up to 70,000 tons in the private sector. Approximately 30,000 tons of the out- put in the public sector is expected to be located at Rourkela, while an additional 50,000 tons will be installed in the Government's Ordnance Factories. The balance of 50,000 tons of the public sector target is to be achieved in a new plant estimated to cost Rs. 350 million with a foreign currency component of Rs. 200 million. The 70,000 tons ex>ansion in the private sector would most likely cost at least Rs. 500 million. Some esti- mates presented to the mission have been considerably higher. 126. Heavy Engineering. In conjunction with a heavy machinery pro- gram in the Third Plan, foundry and forge capacity is proposed on a con- siderable scale in the public sector. It is expected that during the Third Plan capacity to produce 135,000 tons of grey iron castings, 73,000 tons of steel castings and 77,000 tons of steel forgings will be built. Capacity for 45,000 tons of steel castings, 38,000 tons of grey iron cast- ings and about 70,000 tons of steel forgings is to be created, and a very large foundry and forge is to be set up at Ranchi. Other substantial capacity is to be set up in the public sector at foundries attached to the steel plants at Durgapur, Bhilai and Rourkela and at the Durgapur Mining hachinery Plant. 127. Most of the activity in heavy engineering is to be in the public sector. There is a heavy general machinery plant as well as a mining machinery plant to be set up at Ranchi at a cost, together with the found- ry and forge of Rs. 76 million during the last two years of the Second Plan, plus an additional Rs. 1.19 billion during the Third Plan. Upon its completion, the machinery plant will have an output of 80,000 tons of heavy machinery per year and will be capable of supplying the bulk of the equipment required for adding tost'eel-making capacity at the rate of about one million tons annually. The expanded mining machinery project at Durgapur is being designed for an annual output of 45,000 tons of equip- ment. Technical and financial assistance is being arranged with Czech- oslovakia for the foundry and with the USSR for the machinery plants. Three heavy electrical equipment projects are also being undertaken at a cost of Rs. 350 million for the first plant which is already under con- struction, and an additional Rs. 690 million for the comparable second and third plants. These plants are intended to produce from indigenous resources a wide range of electrical equipment sufficient ultimately to enable power generation to be increased at an annual rate of two million kilowatts. Heavy motors, rectifiers and control equipment will be pro- duced. There will also be included capacity for 19,000 tons annually of high pressure boilers. The first plant is being built with the technical collaboration of experts from the United Kingdom and is expected to pro- duce Rs. 500 million worth of electrical equipment upon completion. The second plant is being financed by a Czechoslovakian credit and the third plant with funds from the USSR. It is expected that these plants will commence production by 1965/66 and have an annual output of Rs. 450 - Rs. 500 million. There is also a project for a heavy structural shop to produce the components of heavy structurals for use by other structu- ral fabricators and, ultimately, to produce heavy fabricated structurals such as cranes. The first stage of this project will permit the produc- tions by 1962/63 of 12,000 tons of structurals. Capital investment during the Third Plan period would amount to Rs. 40 million. British colla- - 56 - boration is being secured for this project. A heavy plate and vessel shop is also to be built in the public sector to provide pressure vessels and allied equipment for fertilizers and chemical plants. The first stage of this plant is intended to produce by 1963/64 10,000 - 12,000 tons of pro- duct per annum with a capital investment of Rs. 20 million. British col- laboration is also being sought for this project. Electric locomotives are to be manufactured at the existing Chittaranjan locomotive plant as part of a Third Plan expansion program. 128. Machine Tools. The Planning Commission expects to be confronted with a growth in demand for machine tools from the current level of about Rs. 200 million to about Rs. 500 million by 1965/66. The public sector will account for most of the increase in domestic output to meet this de- mand. The first step will be to double the capacity of the Hindustan Machine Tools to 2,000 machines per annum, at an investment cost of about Rs. 30 million. Secondly, it is intended that a new heavy machine tool factory be established at a cost of Rs. 80 million to produce machines worth Rs. 50 - Rs. 60 million per year. The new plant is to be built and financed with Czechoslovakian assistance. Small expansions have also been scheduled for the Jalahalli and Praga Tool Factories at Hyderabad. The Government estimates that when this expansion program is completed, the annual value of machines produced will be about Rs. 110 million, leaving a substantial gap to be filled by increased output in private machine building factories. 129. Other Industrial Machinery. There is also proposed for the public sector a rather large plant for the manufacture of precision con- trol instruments and equipment. This plant is expected to cost Rs. 80 million and when completed to produce Rs. 150 - Rs. 180 million of instru- ments and equipment. It is to be built with the financial and technical assistance of the USSR and, according to the Government, will begin pro- duction in 1965/66. A high voltage laboratory is also being set up in the public sector for the testing and design of switchgear. There is a substantial program for producing other industrial machinery in India, but most of this is expected to be carried out in the private sector. 130. Private Sector Machinery. The metal-forming and machinery targets in the private sector cover a wide variety of items such as agricultural machinery, construction equipment (diesel engines, loaders, dumpers, and shovels), power equipment (step-down transformers, electric cables and wires, switchgear and house service meters), transport equip- ment, complete plants for the setting up of new units for the sugar, paper, cement and textile industries and certain chemical industries. The production of new items of machinery is contemplated for development in the independent plants especially established for the purpose like the scheme at Durgapur organized jointly by Associated Cement, Vickers and Babcock Wilcox, for the manufacture of cement-making equipment and high pressure boilers. Table 24. Private Sector Investment in Metals and Em ineering (Rs. million) Total Amount of Amount of Foreign Investment Exchange Industry Reauired Reguired Metalluray Finished steel 400 190 Pig iron 100 50 Ferro-manganese 25 20 Aluminum 600 300 Alloy steel _LO6 8a Total metallurgy 1625 840 Mahinery Cement machinery 18 10 Sugar machinery 50 25 Paper machinery 30 10 Chemical machinery 500 100 Industrial boilers 125 60 Machine tools 120 60 Total machinery 9Q 26 Other Engineering Structural fabrication 40 20 Ball and roller bearings 100 70 Electric transformers 45 20 Electric motors 110 45 Electric cables and wire 157 96 Power-driven pumps 3 1 Stationary diesel engines 6 4 Compressors 7 Rs.2,936 Rs.14266 a/ Estimated on basis of cost of public sector plant. All the figures are preliminary estimates of Planning Commission. 131. The total amount allocated for metallurgy and machinery in the private sector is estimated at approximately Rs. 2.9 billion, with a foreign exchange component of Rs. 1.4 billion, as indicated in Table 24. The largest programs are the Rs. 1.6 billion for expanded metallurgical output especially all steel, alloy steel and aluminum. Another large progr2m 5' Rs. 843 million for machinery, covering such products as chemical machin- ery, industrial boilers and machine tools. - 58 - 132. The machinery targets involve a considerable expansion of certain kinds of equipment. For example, by 1965/66, it is expected that some Rs. 45 to Rs. 50 million worth of cement equipment will be produced per annum in India. The indigenous content of this equipment would be around 90 per cent. Capacity for some Ra. 85 million per annum of paper mill machinery, Rs. 110 million worth of sugar mill machinery, and Rs. 220 million of cotton textile machinery will be installed. All of this machin- ery is estimated to be produced with an indigenous content of 70 to 85 per cent. 133. Metals in the Private Sector. The investment estimates indi- cated in Table 24 include Rs. 400 million for the manufacture of 200,000 tons of additional finished steel, a program which has been under dis- cussion and tentatively approved by the Planning Commission. This ex- pansion probably will take place by the production of scrap-based steel billets in electric furnaces and pig iron production in low-shaft blast furnaces. An amount of Rs. 100 million has also been included for the production of an additional 250,000 tons pig iron in low-shaft blast furnaces. 134. Aluminum is given priority in the field of non-ferrous metals. It is expected that 82,500 tons of capacity will be installed by 1965/66. This would include a 10,000-ton expansion of Indian Aluminium's plant at Hirakud; establishment of two new 20,000-ton smelters at Rihand and at Koyna; plus a new 10,000-ton smelter near Salem as well as a 5,000-ton expansion of the plant of Aluminium Corporation of India. The Govern- ment estimates that the private sector would have to invest Rs. 600 mil- lion to achieve this expansion. Zinc production is expected to start during the Third Five-Year Plan period with a 15,000-ton smelter in the private sector based on zinc concentrates from the Zawar mines in Rajasthan. The production of electrolytic copper will also commence in the early years of the Third Plan with the commissioning of a unit by the Indian Copper Corporation at Ghatsila. 135. Chemicals. The amount allocated to the chemical industry during the Second Plan was about Rs. 1.3 billion, as compared to Rs. 6.5 bil- lion in the Third Plan. Of the Ra. 1.9 billion earmarked for public sector projects, Rs. 1.43 billion is required for the expansion of nitrogenous fertilizer production, including foreign exchange amounting to Rs. 790 million. This does not include an amount of some Rs. 260 million which is to be invested for fertilizer production in the Neyveli Lignite Project, or Rs. 500 million for nitrogenous fertilizer production in the private sector. Other large amounts are allocated to the manufacture of drugs and basic chemicals (see Table 25). - 59 - Table 25. Third Plan Investment in Chemicals (Rs. million) Amount of Amount of Total Investment Investment in Foreign Inustry Required Exchange Public Sector Rourkela fertilizer plant 120 60 Trombay fertilizers 220 120 Nahorkatiya fertilizers 120 70 Andhra fertilizers 220 120 Three new fertilizer plants 750/ 420 BCI organic intermediates plant 110 60 Drugs, antibiotics and surgical instruments 305 150 Sulphur plant _0O Total public sector 1,895 1,030 Private Sector Nitrogenous fertilizers 500 250 Phosphatic fertilizers 150 60 Sulphuric acid 75 30 Soda ash 100 40 Caustic soda 115 60 Dyestuffs 70 25 Drugs and pharmaceuticals 100 30 Plastics 200 80 Total private sector 1.3310 5 Total public and private 3,205 1.605 a/ Does not include amount invested in fertilizer plant at Neyveli Lignite Project. Funds for this project have been included under minerals. 136. The capacity to produce chemicals in India would increase sub- stantially as the result of this sizable investment. Total fertilizer capacity will increase fourfold between 1960/61 and 1965/66. Proposed capacity increases for some of the basic heavy chemicals such as sulphuric acid, soda ash, caustic soda and calcium carbide range from 100 to 300 per cent. A summary of some of the main Third Plan targets are indicated in Table 26. - 6o - Table 26. Third Plan Production Targets in Chemical Industry Expected Target Capacity Capacity Industr Unit in 1960/61 for 1965/66 Nitrogenous fertilizer (in N) th. tons 234 1,000 Phosphatic fert. (in P205) " " 82 500 Sulphuric acid " " 521 1,500 Soda ash " " 304 530 Caustic soda " " 150 400 Calcium carbide " " 28 67 Sodium hydrosulphite " " 4 12 Hydrogen peroxide " 3 10 Carbon black " " - 30 Blasting explosives " " 5 20 Rubber chemicals n n 2 3 Dyestuffs million lbs. 19 22 Drugs and pharmaceuticals Penicillin million mega units 45 205 Sulpha drugs tons 393 1,000 Streptomycin - 150 DDT 2,800 2,800 Plastics th. tons 19 85 Soap (Organized Sector) " " 7 12 137. Fegilizers. The Third Plan targets include production of nitrogenous fertilizers amounting to 800,000 tons of nitrogen and of phosphatic fertilizers equivalent to 400,000 - 500,000 tons of P205 by 1965/66. This compares with a current consumption level of less than 60,000 tons of phosphates and about 231,000 tons of nytrogen. It is at present contemplated that capacity in the public sector for nitrogenous fertilizers will be expanded to about 800,OU tons in terms of nitrogen and that the balance of 200,000 tons will be provided by the private sector. The private sector is also expected to provide most of the increase in capacity needed for phosphatic fertilizers. It is expected that the private sector would have to invest Rs. 500 million to achieve the nitrogenous fertilizer target and Rs. 150 million for phosphatic capacity. The public sector will require Rs. 660 million in the Third Plan to complete fertilizer projects started during the Second Plan plus an additional Rs. 750 million for new projects to be started during the Third Plan period. Some Rs. 260 million will also have to be provided to complete the fertilizer plant in the Neyveli Lignite Project. (The fertilizer program is analyzed in Annex II.) - 61 - 138. Basic Chemicals. The recovery of organic hydrocarbons, e.g., benzene, toluene, naphthalene, anthracen and xylene, is expected to be stepped up in the public sector along with the expansion of coking coal output at the public steel plants. A major scheme visualized as a link between these products at one end and the dyestuffs, plastics and drugs manufacturing plants at the other end is the Basic Chemicals and Inter- mediates (BCI) project proposed as a public plant with an annual capa- city of 31,000 tons of chemicals to be located near Panvel, Maharashtra State. It is estimated to cost Rs. 110 million. This project is ex- pected to be the major supplier of intermediate chemicals to a synthetic drugs project, also in the public sector, to be built near Hyderabad. Both of these projects are being undertaken with the technical cooperation of Bayers of West Germany. An effort is also expected to be made to solve the sulphur problem by the establishment of a plant in the public sector with annual capacity of 33,000 tons of sulphur which will require an investment of Rs. 50 million. The mining of the pyrites required for this plant will simultaneously give rise to the production of "fines" which are expected to find an outlet in the manufacture of sulphuric acid. M1ost sulphuric acid production will remain in the private sector. An investment of Rs. 75 million is estimated for the production of about 1.25 to 1.35 million tons, leaving only about 150,000 to 250,000 tons to be produced in the public sector. Caustic soda production is to be ex- panded substantially, as is the production of soda ash, both in the private sector. The output of dense soda ash, which is required by the glass industries is placed at about 160,000 tons. The investment re- quirements for soda ash will be Rs. 100 million and for caustic soda about Rs. 115 million. The capacity to produce industrial explosives is to be increased by the expansion of a private plant which went into pro- duction in 1959. 139. Orianic Chemical Industry. Major developments are contemplated in the organic chemical industry based on supplies of intermediates from the Basic Chemicals and Intermediates Plant in the public sector, e.g., production of rubber chemicals, manufacture of ASC and sulpha drugs from acetanilide and of phenol-formaldehyde from phenol. Production of citric acid and oxalic acid is also envisaged for the first time. Large-scale expansion of acetic acid, acetone, formaldehyde and production of or- ganic esters required as solvents, e.g., butyl acetate and phathalic esters, will further strengthen the organic chemical industry. The tentative planning is for about Rs. 100 million for investment in drugs and pharmaceuticals in the private sector and Rs. 70 million for dye- stuffs. The production of plastic monomers like vinyl chlorides, styrene and of high polymers like synthetic rubber, is also to be increased in the private sector. The private sector is expected to invest appro- ximately Rs. 200 million on the expansion of the capacity to produce plastics. 140. Druas and Surgical Instruments in the Public Sector. The schemes expected to be implemented in the public sector at an investment cost of Rs. 305 million in this important field are: - 62 - (a) Synthetic drugs project in Andhra Pradesh covering the manufacture of sulfa drugs, vitamins, phenacetin, other synthetic drugs (INH, luminal, chioroquin, etc.) and intermediates (including ASC at 1,500 tons per year). (b) Antibiotics plant in Uttar Pradesh covering the manu- facture of penicillin, streptomycin, chloro-tetracycline and other new antibiotics. (c) Phyto-chemicals plant in Kerala, covering the manufacture of caffeine, ephedrine, digitalis glycos ides, lanatazides, ergot alkaloids, atropine, scopolomine, reserpine, papini. Vitamin P. (d) Surgical instrument plant in Madras state, for the mnanu- facture of 25 groups of instruments. Table 27. Third-Plan Investment-for Mi9cellaneous Minerills =d_ Mieral Products (Rs. million) Amount of Total Amount of Investment Investment Required Mineral Required in Foreign Exchange- Public Sector Neyveli lignite project 4+08 349 Kiriburu iron ore 60 35 Bailadilla iron ore 170 85 Sikkim copper development 25 15 Khetri and Daribo copper 125 60 Panna diamonds 10 5 Manganese ore project 5020 Public sector886 Private Sector Cement 500 100 Refractories 220 100 Glass $0 1 Private sector $0021 1,648 785 - 63 - 141. Minerals and Mineral Products. The increase in the production of minerals during the Third Plan is expected to be extremely large. The production of coal, which is discussed in Annex IV, is targeted for 97 million tons. The production of petroleum products is also discussed in detail in Annex IV. The target for cement capacity of 15 million tons by 1965/66 compared to about 10 million tons in 1960/61 and 6.8 million tons in 1959. This involves a 50 per cent increase during the Third Plan. Other mineral projects for which provision has been made in the Third Plan include the exploration and exploitation of the copper deposits for a production of 10,000 tons of copper annually; the development of the diamond deposits in Madhya Pradesh; and the exploitation of pyrites deposits for the manufacture of sulphur/sulphuric acid. Provision has also been made for further expansion of the Geological Survey of India and the Indian Bureau of Mines with a view to intensification of surveys for mineral resources and detailed prospecting of those deposits which are to be developed in the public sector. The investment requirements in the mineral field are expected to increase substantially during the Third Plan. Some Rs. 1.6 billion is planned for minerals other than coal and petroleum, with about half of this amount allocated to the private sector. Included is some Rs. 500 million for the expansion of the cement industry. 142. Automobile Production. The plan for expanded automobile pro- duction envisages the building of new capacity as well as the allocation of substantial foreign exchange for sustaining increased production from existing capacity. The capacity target for passenger cars and jeeps for 1965/66 is 40,000 as compared to about 25,000 today. The Plan calls for the installation of capacity to produce 60,000 commercial vehicles by the end of the period, inclusive of 4,000 units which can be made at the Ordnance establishments, compared to a current capacity of 28,000. Accoreing to the Plan, to reach a target of production of automobiles at this level without excessive and continued strain on foreign exchange resources would necessitate producing at least 85 per cent of the value of vehicles in India by 1965/66, compared with less than 60 per cent at the start of the Third Plan. A high priority has been given to investment designed to increase the indigenous content of automiobile production, as comoared with investment for establishing new units or expanding existing capacity. Preference will also be given to the production of trucks and busses over Dassenger cars. The Planning Commission estimra)tes that the private sector will have to invest .s. 600 million to meet these targets. There has also been considerable discussion about the production of a small car in the public sector, but no decision has apparently been made on this as yet. 143. Shipyards. An amount of Rs. 120 million has been included in the Third Plan for the expansion of the existing shipyard at Visakhapatnam. In addition, it is contemplated that Rs. 100 million will be spent on establishing a new shipyard at Cochin. The mission doubts that this second shipyard is of higher priority. - 64 - 144. Consumer Goods Industries. Paper (including newsprint), cotton textiles, rayon, sugar and vegetable oils are among the major consumer goods for which specific targets have been proposed for the Third Plan. In the case of cotton textiles, the target of 5,800 million yards for the organized mills is related to the production levels anticipated from the village industry and handloom sector of about 3,500 million yards. The overall target for cloth production is derived from the domestic requirements (including additions to stocks) of 8,450 million yards and an export target of 850 million yards. The problems of the textile industry are discussed later in this Annex. The expansion of paper and paperboard capacity by about 128 per cent (from 360,000 tons to 820,000) and newsprint by 300 per cent have been proposed in the Third Plan. J45. On the basis of the foreign exchange commitments so far allowed the rayon and staple fibre industries are expected to achieve an installed capacity of 150 million pounds by 1962/63, with expansion of these in- dustries to 215 million pounds by the end of the Third Plan. Considerable importance has been attached to the phasing of investments in these in- dustries with preference being given to the expansion of rayon from wood pulp over further expansion of output of synthetic filament. 146. The programs for vegetable oils are based on stepping up the output of cotton seed oil from 37,000 tons to 100,000 tons. The success of this program is expected to depend upon a coordinated effort to dbsorb the cotton seed cake as animal feed and cotton linters as industrial raw material. A fourfold expansion of oil production to 160,000 tons by solvent extraction of oil cakes is also envisaged. The potential for further expansion of production of vegetable oils is chiefly linked with the targets for major oilseeds, as discussed in Annex II where it is suggested that some increase in output may be obtainable by devoting attention to the extraction of oil from rice bran. The amount of in- vestment for the expansion in these various industries is substantial but most of it is required in the private sector as indicated in Table 29. Table 28. Consumer Goodo Targeta iz the Third Plap Expected Target Capacity Capacity in in Unit 1960/61 1965/66 Textile Industries Cotton yarn mil. lbs. 2,100 2,250 Mill cloth mil. yds. 5,000 5,800 Jute th. tons 1,200 1,200 Rayon filament mil. lbs. 52 140 Staple fibre mil. lbs. 48 75 Chemical pulp th. tons - 100 Woolen and worsted yarn mil. lbs. 67 67 Woolen cloth mil. yds. 48 48 Wool top mil. lbs. 10 32 Food and Fodder Industrias Salt th. tons 3,900 6,500 Sugar " " 2,280 3,000 Oil cakes " 936 2,000 Cottonseed oil 415 850 Vanaspati t " 434 550 -, 66 - Tablg 29 Third Plan Investment in Miscellaneous Industries (Rs. million) Amount of Total Amount of Investment Investment Required I ndustry Required . in Foreign Exchange Public Sector Security paper mill 40 30 Raw film project 80 50 Watch factory 20 10 Opthalmic glass factory 15 10 Expansion of Hindustan cables 5 - Expansion of Hindustan shipyard 100 20 Hindustan shipyard (drydock) 20 5 New shipyard 100 10 Total public sector 3LO 225 Private Sector Automobiles, trucks, etc. 600 350 Motor cycles, scooters, etc. 25 18 Automobile ancillaries 110 60 Electric fans 20 10 Electric lamps 20 10 Radio receivers 20 10 Sewing machines 30 20 Agricultural tractors 22 15 Earth-moving equipment 5 4 Tires and tubes 80 4O Paper, paperboard, newsprint 950 380 Hardboard 20 10 Cotton textiles 650 175 Rayon, staple, chemical pulp 550 450 Wool tops 40 25 Sugar 600 75 Vanaspati 10 3 Vegetable oils 70 30 Power and industrial alcohol 33 21 Oxygen and acetylene 60 45 Total private sector 3,915 l,751 L92 1.976