Report to the President of the International Bank for Reconstruction and Development and the International Development Association on India's economic development effort (Vol. 14 of 14) : Some observations on planning

 . -. -. ... . .. . +-yip - ;$.: :g.;; - .; <',* : : ' <2~&,~y... . . $23 ' ; : . f ;, . ; f-. - 752- . . . S*#. * , .- *-,; .'<> $ r. . K : . - .. . C . .. . x. f . .. . . - .... C ' -- '. q . REPORT TO - T OF T H E - . .. i , - ... -.. .- -MATTONAL IMu'cic RPbCQWTRfpcTIOl4 MII3 DCVSLOPKENT A m THE .t ' c . . ~ P ~ m m N w Ar ~ ~ ASWCXATION . . ON I N D U I S ECONOMIC a G V E m N B N T EFFOaT .. .. . . - r1 ' * . .-- .. '. 7 .. .. i - ." -.. . .. 'A -. -. ,.-! I - * 7 .&. . \ ... ;- . . - - .:-. . . . . . . - .;:$y ? -;=g*,y ,:.z :v- .-& -,*.- - , --= - - - *-we?- +. .I .~:-:= ,;;<a , .- - ' . *.:l- 'LC? * , - : :** . 5s - . A, :-:. &.- hbeiaa October 1. 1965 1 .- --< I . -- ..-. . . I -.kc - . ~ *S* it for u i t h t b &st M r a and, vhea yo^ mise yctur head, mthisg Lhey ham yea quits Fits." B.H. Porster, A Passage t hlb a ~vol~vsaprepardbyBenja;inB.Khg. i't was ccapleted as a p - draft in Septe&!!r 1965 and baa not been mvised.  . - a General shape of the Plms b, - a & & : c. ' I b s P l a a a aguidstaac"dm: T b l W n i P l a n d. Yoilawiag thtr progmss of the nm Ihe H & t. Appraisal am Ref3 m s ( S s c d PI-) e fheFallinYbFeigp e, Pres_oarlag a Plan: l b e ~ c : i Fburth Plan lleaarandrr U. 12 1& 22 27 APPmxx: TlrRrJrsltO2lL NOTE C PPD ImJslRY N TABIS3 (i) and (ii) - 1. It i s possible t o approach the subject of planning - India 13 h several different ways. But one cannot proceed, so t o speak, along each axis a t once. The order of pmceeding p s e s a difh-.llt, if not m s s i b l e , choice. The choice been mde, it may help the reidsr to know about i t i n advance &ad t o have actae idea a t the b g ? * e%- about what f o l l w s neamr the erd. 2. The introduction is followed by six sections: 1 1 . Tbe Social Context III. Perspective . IV Docmentary Evidence V. Problems a ] Deficiencies x. VI. b A d t u t i o x . Conclusions and F~8~anmrerdations 3 Section X I , which f o l l a i s , aeeds o e this coclarent: p l w of necessity falls within the s o c i a l franework, to which we s h a l l ultimately return in Section VTI. Lidiats Five-Yea? Plans have always been p m p M uith a longer time horizon in mind: t h f s perspective i s the subject of Section ZZI . b . Section IV describes briei?-y the ccn-t of the Five-Year Plans md then reviews some a s p x t s of selected Plan documents in chromlogical o d e r . It brhga out certain deficiencies, - i i c h are discussed further in Section V. 5 Section VT is a b u t some c f the i n s t i t u t i o n s concerned uith plarming and Section V I I contains sone conclusions and recornnendations. 6. Some anticipa'toq rem;.-74s about the contents of Sections V and VI map a s s i s t the readerL plod- ? through vhat i s a t times rather inirg detail. So f a r a s the ~rOblenISand deflcieacies a r e concerned, the raak ones appear t be these: a i) There are Plans, but L i i t e d p- l. 1.Iuch of -&e time mi'. e f f o r t :. p u t - i n t o p r e p u a the Plans 's every f i v e ,years. I n the course of the Plan period, the econaapr i s a t the mercy of events. This is the main problem. It is d i f f i c u l t to say whether the observations which follow are cause o r consequence. ( ~ i )The Plan i s a canproadse, but not in the sense that a bargain is stluck between different p o i n t s of view. In fact, it yields to too I a n y p o i n t s of visv and therefore bmts to be indecisi=, i f not contradictory.  (iii) - The f l w of information to those responsible for i h ,. . p l a ~ a i a &s t a o &?ten s l ~ i s and h a p h a d I t is often in~ccuratzf o i ~reasms unamnected with the n o d d i f f i c u l t i e s of collectiag information, especially statistics, in an underdeveloped countrp. Ey f a r t h e 3 most serious aspect of this deficiency i s the lack and even the suppression of knowledge about foreign exchange. (iv) There i s l i t t l e oost cantmi. Techniques of pmject a p ~ r a i s a land selection are l i t t l e ased. &*eat stc -e is s e t an the m c e p t cf ph,ysical ,lamin;, :.Nth tends t o *om c m t s , particularly the cost of tine. 7- The principal planning authority is the Pl- Coolllission, s e t up i 1950 as an advisory body to the Cabinet, T b responsibility for n W -3 decisions lies, h o m e r , with the Central and S t a t e GovernaenL- Ib a federal state such as India, a coordinatilg body F+ the highest level is p l a i d y necessary.. This is the National Developv:nt Council, canposed of tbe i.Wster, the Chisf i l i i i t e r s of a12 the States and the appointed e r s of the Planning Coedssian. 9. N e x t i n importance in the mechanism is the M s t r y of Finance, which exlercisas great i a l u e n c e over the magnitude of the mpee resources f o r the Plan, sime t k S"l-'ateshave l i t t l e o r nothing t o spare abom t h e i r mmal c a u i t a e n t s . The tiirristq of Pinance is also ahinistrati-~ely respoosible f o r the c o n t m l of f o r e i p e~ccbnge,the scarcest msource. t I . is, as is nomal, respocrsible f o r f i s c a l and m.?etary policy. 9. The msponsibility f o r -ementation of the Plan. i n both public and prim* sectors. lies with the relevalt O e i l t r a l -ithist.des and t.he S t a t e Govenrments accon;iq t the ca-~stltutional o division of authority. 10. ~ Two d a before he died, Jauaharlal Nehru vm+& a s h o r t fore- word to a book called "3ocialisn i n i n a n Planning." In this foreword, he s a i d t b a t "m m s t not l'orget t h a t the s s s e n t i a l objecti-re t o be - aimed a t is the quality of the indivichial and the concept of dharma under- lying it." Planning in - M a is not. merely a means to economic pmgress. - I t i s a s p i r i t u a l revim1 and a s o c i a l revolution a peaceful one, but nevertheless a revolution. "The aim should be t o create i n the rural populaticn a burning &sire f o r a higher standard of living - a w i l l to Live better."l/ - 1 1 . The t r a C tional society has been based on caste, stiil a p o t e n t force i n Irxlia, but rejected a s a matter of public policy. C a s b embodies what i s c w n to most traditicnal s x i e t i e s , the supremacy of customary relatiomhips between groups of people according to t h e i r function in sociew, the r i l e of s t a t u s rather than contract. 12. But, if t'ne caste systea is rejected for its rigidity, i t does not follow t h a t everything about it is rejected. "Th? zy-stem of caste insis* that t h e j a w of s o c i a l l i f e s t ~ ~ u not be cold and c m e l competition, ld but h a m and c o - o ~ a t i o n . " 2 / The pursuit of economic o r p o l i t i c a l power (artha), the preoccupatio;; of b r t i c u l a r ccaamnities i. society, has been r conceived of a s subordinate - or' spirit.ua1 freedm (moksa), - right conduct (dharma) and t h e u l t i a a t e r d 13 In modern W i a the search f o r a r e s t a t . e m ; of values aqd f o r new i n s t i t u t i o n s has W e d + find Its expression mainly in phrases l i k e a "the s o c i a l i s t pattern of society, " rrhich are I-, 'her vague. But a t l e a s t the n e ~ a t i v e r i t e r i o n that c o r i t s acquisition should nct h e the p. ,i- force i s retTected in the Directive -ciples of the Constitution. The f i r s t Plan put it this way: If planriing i s t o avoLd excessive cent,-alisatf-on and bureau- I' c r a t i c cantml an6 is, a t the same ti*, t o ho:d i n check t h e self-centered, acquis4. ti= i stL7ct.s of the indi~iidualproducer n o r trader war- f o r -elf, tne encouragement of cooperative enter^. ? s e mst be ;-iven the highest pri0rity.~'3/ .- - l/ -. - The r"ir;t Five-Year Plan, ;.z-c: -. 22b. 2/ --- . Radhakrlshnan, The H i d u Vim _.--paze 79. of Life - The F'irst Five-Year - Plan, . U a. P1.eservation of the idea of cooperation has heen a constant theDe in the s t r u g g l e + w i n -freedom fmea poverty by ecomxmic progmss a d a to transform a traditional h t a a tyaanic societp. OIK m i a t eveil sap mmscitation rat&r than preservation, since i t i s believed that tbe land set-ts i British L&a withe& tbe old pe.ttern of life: "The intm- n dactiaa of U s type of 2mperty in land uas m t O & a , t ecarvric ~V m ctange, but i t went deep: a d struck at the vhole U a n collception of a ca-operative ~raap social stmctxlre.111/ 1s. l3ffor-t~ prtxmts ' L b cooperative spirit started w i t h the F i r s t to Five-Year Plan. The National Extension Seruice, which c a m t be known as a Corndw DevelopPerrt, k a s pmaoted and o r i g i a a l l y evm adsLnistered by tbe Planzing ColPdssion. In 1958, the D e p Q azairpan described i t as the "1-t sirgle contribution the P h m l n g bas ns& to the c<mdrg."2/ The objective was to Qve "each family i n the oonntrysi& a plan of 5npro- of its oun."J/ T b i s was t be tbe ias-at n of social rernlutian. I t vas launched, synbolically, on Ga;.ldhils birthday. 6 1. Simultaneo.\sQ; the Planning Cclldssioa s e t up an " ~ ~ s-ralw i c n orgalljlzatioa for c w a u n i t y projects and other d e w e l o p t pro- ,rtm.%. .'u Ua?Al I s 1 i t d i d m- elsa but e~aluate Coruni- h u c l o p rent; &s+, Its plnfessiooal s + a f ras nore than half that of the Planning C;O&sim pmper.s/ 17- In m camtry b i t difficult to p o i n t to flagant violrtio~of Um valnes it pmfesses. It i easy t be meal in India, as elsewtare; s o fnnPm m q evem be inclined -re to cpicisn about their o m values than mtai&m-6/ Pew vould that p a r l i e eloctSom h s s given a aeu twist and -a pwerftal thmst to the caste s y s t e t Caqetitior~is tbe rdle as arch as cooperation, a8 it alvays was to same extant, - Bider, page St. - W -.- - Pirst Fivedear Plan, -I - 2. 16 / .. HL ------.--A--. - - Parapjape, Tbe P-. l* Caaafsaion, pagem 163 and 191. -. -.- cf. 1.. 1N - . in i d.e- r n Srhiva8, b t e . .a Knclia, page 71. C-. 18. r , the spirit of a c ~ i t i ~ never a sickly p l m t ir. s , India, has m been so easy to JUPPRSS. I n Ijj8, dehm said that "the t la of life , h d d not bc cmpetitiori o r acquisitineness, but c m p e m t i o n . " ~ Yet tho Third Plan cuaplairs of acquisitivemss 2/ aod so does the .or2 recent.Resolution of the C o n ~ m s s r $ y a t its &ubanesxar session in 196b. h 19. m s does m t mean that oi~e can ismre the professed values. Tht fact that they ar'e professed is itself s&-pLf?Leant, since the action that f o l l o w m s irr sonz &g=e be influenced by them, if only in fom. As a ut coasequence, t h e concept of p l a m b g uhich bas been based and continues to be on the desire for ecowmic progress, is a t the saw time circuascribed by serious Lkibitiorrs about the laeaas, I th-5 d q s , few would d i s a g ~ e n .trith the basic principks of eqwIAty of opportunitp, the contml cf no~lo- p o l i s t i c paver and the gradual m d i ~ t ~ r i b u t i o n incane. But i f the of sconaeic -tion is eeued as the 'llow@stll society, i t i s only a short in s t e p on to the path where economic considerations of ariy kind have no w a n i n g or iqortance. 2.0 It is not a t a l l surprisiag that the idea of physical planning on the -siau model should have had attractions i n India, free as it mas of the tvin taints of colonialism and c a p i t d i m . Hore particularly, pbpical p w was c l ;co eco&c p r o g x ~ ~without the repugnant s jriving force of acquisitiveness. The ecoaoalc Aflmction, o r private en'uerprise, c d d rea&y be a c c m d a t e d vithin ,mch a system, provided t h a t i t uas f u l l y subordiaate. Provided that the tasks were a l l o t t e d co=+Cly and that e v e p - . l e coozerated in fulfilling them, such a systea could he 'h solution. te 21. The provisos are- na~rzver, all-important. In practice, i f there has k e n change i n the ~ a areas, i t can rarely have h e n h e ' the l a ' stintulus of the villa? iev*l war-!;era In i?dustry, a system, which t r i e s to ensure "a de,gme of rezional and other C i v e r s ~ c a t i o n industry and of to pmvent the emexerne of industrial ao~~opolies," alsc t o m o g n i z e has that "neither the economics of scale nor :hat of full u t i l i z a t i o n of scarce t a l e n t can be ignored with iqmnity."3/- 22. These obse.rvations on t h social context of Indian p l a r m i . ~i o not ~ ?mtend t o p e n e t r a t ~so difr'icdt z s u b j c ~ c very f a r . Their o i a purpose is to w e s t t h a t whatever is inexplicable o r eveu contradictory ' the A outsider has same sort of rationale. That rationale m r be undergo- ~ change i t appears to be. The change is n o t i n the values themselves, but in their interpretatio,? i n the context of a mre complex ecoraamlc olqanization than perhaps had o r i z i n a l b heen foreseen. - - - - Third Pive-Tear Plan, page 10. 2/ - 3/ Report of the C - m t t e e on Distribution of Imam? and Levels of Livfng, Connission, 196b, p a r t I, pages Sh and 55. a. Perspective and st.ratx?q 23 "3eing poor, we have m sw@.us + invest and we siuk lower and A lower. "1,The position could hardly have been put roore coimciseb. Lndia started-its F i r s t Five-Year P1.w in 1%1/52 u i t h an income per head of about Rs.270 (1961 prices), 2/ a dorpestic s-z rate of about 5 percent and an appmst ppalation 6xuut.b of lI% ~ r c e n t . -, a. daub- @ h e n i t i a l long-rang? p e r s p e c t i n in the F3.rst Plan was for a i of national incam? % 1971, a p r t h rate of 3.5 percent per annupa, Per capita income ~:culb be doubled in 1977 (Table 1). 25. Gi-ren the very lo:: incame and c a @ t d base from :~hichplanning e started, i+,m s =.ealized that the only uay to a c h i e ~ e ren + a s x & s t omgxess vas to devote a proportion of additional irmcome in each t ?ho imest.rent, thus successively increasing tbe rate of savings and irmestaent uutil they mached a level (generally conceived of a s b e i z about 20 percent) a t wbich they c d d be alAowed to f l a t a x n off (TaSe 2 . ) h o t b r words, firoug&out this period comuntp+Yim ~ : d d have to p w ------ mch slcwer Lhaa national incorae and a fortiori W investment. 6 2. n I index tvnns, the pms-ct was LS follows: Aggregate & Per Capita &??mate ?er czpita 27- In pllactice- many changes ha= had to be made h the assuaptions i t'le F i r s t Fan. '!e shall =turn to these. One thbg, however, has not n chaqetd, the ,mat divergence between the pmjected growth in investment and earnings of foreign exehaqe. 28. A Qldnant fact in c o n c e i a the st.ratsg of aevelopwmt has been the 1- level of export ean+ags and a pessirllistic outlook as to their giwrth. This outlook kaa been b o r n out by the facts, if not also by policy. In tbe First PLan they w e r e l i t t l e mre than 6 percent of - 1/ Jawaharb1 ism, T e Basic Approach, XICC Bcs ordc Review, August 15, 1956. h -I *- - 2/ $5? a t the official rats of oae. exchulge. pmbably under &bO a t a realistic national incare; in the Fourth Plaii despite the proElise of a massive increase over the Third, they m u l d be no *re than b-L/2 merit (Table 4). 29. Altbot@ external aid has been k i - e and in absolute terns in- creasing, in e l a t i v e terns fore- excharye available to W a since the S d PLan is tapering off. Net assistance plus the use of reserves (tao h n p r possible) export ealniags then amounted +n about 8 percent of national incare. pmportibn i the Third Plan, and as envisaged in n il the Fourth Plan, wl pmbably be less. 30- F r a country aiming a t an investment rate of the order of 20 per- b cent, r r i t b certain inescapable import ~ t ~ z t any @ven time; asid a strong d e s b t o escape fxwm dependence on foreign a i d , it is clear that men on ruch mre op-stic assumptions about the g m v t h of exports, mst of the capital goods r e q i m d f o r inves'hent would have to be pmduced inemally. This has been 'the coroerstoae of all Indian planning and first prioriw has a k t always be- g v e n to W iq up tihe "core" on which ci future developsent depends,l - n practice if m in theory. If a q t h i n g / 5 t was to be sacrificed, it w a d be commaption goods except the vexy basic ooes of food and cotton cioth. Thou@ thsre is roam for sxpnumt over timing and pace, the logic this emphasis on builctfng up the capi+al base anti t h e tisterrmination mt deviab fIPa it appar inescapable. Yet they have cone in l o r mch criticism- The c r i t i c a r c might better have been d i r e c b d uot a t the s t r a w , but a t the tac+Lcs, f o r this i s where the w e m s t e s of India7 planning lie. 32 Perspective p1ami.q has bee3 wide'lg and authoritatively intRr- preted as the equivalent of p b p i c a l p l a i . The perspecti- of the has t:, be translated into sectoral tern hture in a a c r o e c d c +~erns no and tben i t specific targets of p m i c a l output of steel, generators, foodgains and so forth, in order to have aqy ~reaniriiand especially i n order to have aqp fome i n l & i for the long-term t%en preparations must be made a t long-ranp. This is probably what i ~ w i c a l planning i s talcen ta rean, although the tern i s ;lot enbireu devoid of anbi,-;uity. 33- The sain w e a l m s of Indian 7 ~ l is that it has gere l i t t l e ~ ~ x w n this p i n t . Alth- d the p o s s i ~ i l i t i t ! ~ ecorPaaic choice e t h i L i of a piven h9nevox-k are virtualljr -fed, +e : l pbOrsical targets heve tended to becam ends in themselves. Out@ and j,?ceshent have tended to b - e self-justifgine, regardless of cost. Timing, which tactically has p e a t importaxe, has l a r p l y been overlooked. - V cf - --- for example Third Plan, page 264. 3b. ibst inportact, haiever. has been t h e comparati're n q i e c t of the fleeb-ty t h a t foreign excban&e pmi.-i&s. 'lhile exports can never hope & tn provide mre than a f r a c t i o n of the n e c e s s a T c a p i t a l , , tilere i s always the p o s s i b i l i t y that +.hey c o d d p:ovide x s o u r c e s a t the margin a t much l e s s c o s t than i n t e r n a l production. A s m a is X-cing a t the mrgin, economic policy ought + concentrate continuous& on conserving a foreign exchanp and encouragiag the earning of it. m i c a 1 planning, if interpreted too l i t e l a l l y , can have a tendency, as it has i n India, t o vast2 i ' o m i g ~exchaqe and indeed o t h e r msources, i n the name of p l q s i c a l performance and to atmphg by neglect the i n i c a t i v e to earn it. b. Persmct.ire and Perfomance 35 By the tine the Second Plan was pubushe?, it was r e a l i z e d that the rate of savings could not hope "o appimach thc mar-dl rate of 5 per- t 0 cent postulated h the F i r s t Plan (Table 3). i!evertheless, the e c o m q ha5 in f a c t g m at a much f a s t e r rate than p d i c t e d in the X r s t Plan, %s i s due t the f a c t t h a t use of =serves &XI o foreign a i d has made up p a r t of tha shortfall in s a a s ad: even m=, t h a t there was undue pessimism about the capital-output r a t i o . %- Althougn the national income has g m ias't-er *.an expected, so has population (Table 1). &I balance, because of these v:~rious - f a c t o r s on the plus and ninus sides, p c a p i t a 'Jl:ome in l 9 6 S / S w i l l e: not be very d i f f e ~ f~r otm the F i r s t Plan's predictions. 37 The f a c t s about population ?gem not knom un'il I%?, late i n the Second Plan, so t h a t the unexpectedly good result3 of the Erst Plan overhung the predictions Li- t h a t Pla;~. The penduium svung W a r d s undue optimisa about t h e yield on investment,. In f a c t , an increasingly high proportion of investment in pAm>ectswith long gestation and low r e t u r n has b m ~ h tth e j 5 e l d steadily down.L/ - 38 Investment i n the a s r e g a t e i n each Plan has been or is expectxd to be a h t as planned, 2/ but its dist.ribution a s between public and priv3te sectors was quixe d i f f e x n t in the First and Seccnd Plans. In t h e First PLm, ther,? r a s a s-sbstantiai upiard mvision of the public sector plan, .ut the final outcame was an cutiay on investment below t h e origirral plan k fL?ancial 'tellas, l e t alone in r e a l tents. Pr5vat.e 1 s e c t o r investment a k u t made up the difference 3-1r e a l terms to the l e v e l of t h e orQ:inal plan. - l/ I f one divides the investment r a t e in each Plan by the annual incl-ease in inccne during it, which does not a l l o w f o r a time-lq, the iullow7mg ratlos s l e q e : 2.9; 2.7; 3 . 3 . The co:respodhg p r a c t e d :ate 2 o z Gle ihurtil Plan i;ouli be 2 .?. - 2/ That is, within 5 percent, a s f a r as one can say within the limitations of r r i c e indices ( s e e Table 5). Indeed- a l l s t a t i s t i c s i n t h i s paper should bs t m a t e d with the utmost caution. 39. PLaa, the =me tbing h a p p ~ e d fa the S e c ~ n d aalg Po= so- nt PPbllc ssctor i- m y have been LO-15 percent under the planned a -t in renl t a m s and private investaeut as much in m l b e . principal feature of tbe Seccnd Plan w a s , hawever, a catastmphic under- eathate a the import rmpimn4nts. In spite S s t r i n g e n t restrictio119, f iqorts huiag tbe Plan erxceeded the forecast by over 1,000 cram (0- 2 percent). The hreign exchange she-e led b a decision t~ scale 0 c b m the Plsn md concentrak on the corn. b- A l - tbtal inveetaent during the first three plans nas appmximtely as planned, the sanw is not t r u e of natimal incolae. In the F i r s t Plan the increase was 1 3 percent as against a t a r g e t of 12 par- c m t , r u e i the acceeding W c perfon&mce was short of the target, n 22 percent against 25 in the Second and 23 percent (anticipated) against 30 in the Third. To some extent, the c t i f f m c e can tm a t t r i b u t e d t the m differarce in the rate of g l a h h of agricultural output which ammmta f o r about hall national incoae. 'be index of production mse 22 percent i n the FiRt Plan, but tnly 15 p e r c ~ in the Second ard pmbably about that t in the W r d . l . f Tbis cannot in any s-cant d e g ~ e e a t t r i b u t e d to be ttm accidents-of weather in the terminal years. l &. Thus, in spite of inc-ing income and higher rates of inpeat- rent, t&e rate of grarth has not w e d much. T e c ~ c i a problsr i3 h l the yield an hvestarent. The point may be illustrated in -18 arith- m e t i c a l Ma t a g m &-ate amund & perccent, which Fs what hss b e e l so far.2/ With a m a r g i - savings rate of 25 parcent more rant, for krildirq up the c a p i t a l base. Anot&er 2.5 m e n t w i l l be -e d f o r g m t h of p q n h t i o n . This leaves 0.5 percent f o r grarth . i ooasrmpticn (and f o r srrors) It is n o t a d n o e ~ margin. I f the nargin i to be increased, it can only be by more i n v e s h e n t o r b e t t e r s use of it o r both. l.2. To those who opt for a lmer rate of investaemt, f o r build2.ng up tbe capital base cmre slowly, one may well ask what u i l l be accaplished by t h i s &me. Iawering the m a l r a t e of saviDgir ha 25 to 20 per- cant 2 1 o ~ c r m more tbsn 0.2 pefcmt per annun for additianal can- w -tion, not a vary na;lrishing cnmb. a The heart of tbe mattar, therefore, is to g e t more out of t h e investacmt, so that both consumptia~and the ~q>ansiarof the capital can be affcrded. This point is elaborated elsarkm, a s p d a l l y in the W r t on fadustry. FertSliuer plants located m e to a 8tate; - 2/ E n m allwing f o r underestimation in the saall-scale sector . ( cf X l Raj, Indian Ecanoaic Orwwth, 1965, page 2). .. ports and roads which M e only l i g h t traffic; wensitre d v a y lines and i m i ore mines built i n ;ever& differtnt places whea one would c ; b tractors and draglines idle 'or want of spare parts; tmcks standing a t checkpints h pay the octroi fee; industrial capacity licensed and b u i l t to meet dsand which does not materialize, or to use r a w naterials vhich a m not a m e ; the undemae of licenses because of price contml; the fail- meet requests for "balancing"equipment which could increase outplt at a h c t i o a a l cost; the spread of xmey and machines over too many gigantic parer and irrigation projects; s t a t e intervention against the f m e movemtmt of agricultnral p ~ c t s ; inadequate planning of large-scale invest- meats; these are the things Yfiich waste ~esourcesanC -hold up developtint. u. If it is obJected tbat much of t h i s is the fault of the foreign =change shortage, the first r q l y must b e that this is too easy an answer. It aggmvates tbe pmbla; it is not the whole problem. Sote of the problar lies in the way foreign 8xchzmge i s pmcessed, har w e l l the prablen is under- stood and har ultimately foreign exchange is allocated. But begnnd this I s the prpblen of stan- of frugality in the use of resources. a. General s h a m of t h e P h n s b5 The Indian Five-Year Plans, of which there have been thme, began m 1951/52, The Fo\~rt?i, beginning in 1966/67, i s in a c t i v e preparation; a p r d i d m q sketch of t h e Plan i s already avaiiable. A 1 1 four have rou&d~ the s l e sort. o f shape, a- cg l t h e r e are some exceptiorss. I n the follow- description, tedium w i l l be reduced by o g i t t i n g reference t o these exceptions. L6. The plans include both i n o e s t i i n t a , d current expenditure. They exclude all "non-developntal!' expenditure, t h a t i s , expenditure * l a w t o govenrent achinistration, law, order and defe-lse. Y i t h this qualifica- tion, a l l investment i both the ~ r i v a t e n and public sectors is i x l u d e d ?.hich is not of a replacement character. In a l l , plan investment accounts for sarething o f the order of 8/3-35 percent of g m s investment a t t h e pmsent tim .y 47 Xlihoyh all private imestment i s theoretically included i n the Plan, in f a c t , o * a part of it is really plarimd. The main part is invest- uent by the corporate sector, pl'edtm-h??Uy in t?dustrg,uith some iatrans- p o r t ( m a d and s e a ) and per, T, accounted f o r only about kO pement cf all private investment in tie Tmrd Pi=, presuaaablp less i n the Second and laore i the Fourth, Apart frm the corporate s e c t o r , the only fdnds n ~f bmestbent which c a r l d in a C w o n a b l e sense be c o n s i d e d as planned r y vould ke those associated ~ l t specsic h lending o r subsidy programs by financial institutions or states ( c . 2 . f o r l . " l s o r tubewells). A s f a r as the -st a x cancezned, tbe ~-vestnents n the ?Ian a r e really no laore i than forecasts. L9. Current expenditure in t h e -wblic sector Plans is "3ene1.a- speaking that associat.ed ~:i',hnet? schecles in the ''developaienttl for exmqle, the s a l a r i e s of -Leathers in new schools. -t the end of 'the man, 'i these outlags f a l l hack as "cocmitted'' expenditurn i n t o the regular budgets and are mt carried f o ~ a r d t the next Plan.^JIn the Thi& and Fourth hc 8 Plans, current expendit=* is of the oxder of l percent o f . the total Plan - 1/ It is, of c o u n e , -be,- than "net" i 3 e o b e n t in Uie usually accepted sense of the won: (i.e. net of depreciation). I n f a c t , plan l n ~ e s t a e n t(which is the term used h e m thmughout) is frequently referred to as net investment, giving rise t,o much ambiguity. The two concepts are sometimes used side by siae F2~"f. e same name ( c f , Notes on Perspective, page 1 for figures 1 - 2/ Par this reason, currcnt outlay in the Plans necessarily dmps a t the bel;inniag of each P'ZPn, which g i m s a rather false impression to q annual aeries. and i s r n &y l f o r agriculture and the s o c i a l eerPices (Table ) 5. [19. Allocations of invesmt in the sectors a m sharn i s Table 6.L/ Sooe of tbe dfferences in the private sector are p b a b l y m m ~ t a ~ t i c than real. We-Jertheless, t e *reas* o al h 40-e of -, i e~pecially n tbe public sector, a d of prwer i s evident. Cormqmdiqly, there has bean a fa2X.q off rost ~ ~ in major l i r g t6 , a pnminent featare of the Fiat Plaa ard to a lesser r F ai ng extent trarrsport and social semdces. 50- The States, each of vhich bas its a m Five-Year Plan, a c m t for half the plblic mctor exnenditure. b h s t r y and transport are t sectors b r m t m ~ e d tba 'center; agriculture, irrigaticm, p a a r , education by and b a t h by the States (Table 9). In the M Plani it :ms cmte@.ated that about 60 p e m t of t msoumes for the S t a t e Plans m u l d be financed b by the Center and &O p e m t by tbe StaWs. A something appn>aching 25 s percent of the State Plam coxmisted of c u m t outl*, the mrgin l e f t ot-er for irmes- fmm S t a t e revenues was mall. Fbthenwore, the resoumet#of the States include bornwings un the open maket, which are subject t o a t leas the informal control o f the .Aeserve Bank. Thus, the mrplua of the States frm. k x a t i c m and other local revenue8 i s k u d l y more than enough t finance non-plan expenditare and current outlay in the Plan. a o. - w i n g a crisis: The F a l l i n Fomign Exchange %serves (Second Plan) 51- The Seccnd Plan had a bad start: it besaa with a fomign exchange crisis. bports did scnarbet better than t e forecast and invisibles mch b oetter. Together with the external aid a c t w v received, they would have allowed h k i a to add obarLv 3s. L30 crores to - e m in t h 5 first toFo yeam (156/58) had Ule i r forecast been c o m c t . h practice, imports vt .re* about k0 percent -er tban tbe fomcast: reserves (including drawings on the li8) f e l l by Rs. 570 cmres. 52- These facts a m of mre tban *re historical interest. Lack of foreign exchange has beea the sevemst impediment to India1s development ever since. Analpis of tbe crisis a t the tinre has som beaxing on what bas happened later. For t h i s purpose, a p q h l e t prblished by the Planning Ccdssion in ?larch 1958 called "RU in Foreign Exchange Reserveanr/ is pertinent. L/ 9 For details of p b U c and y i v a t e sectcor provision, see Tables 7 and 8. 2/ 9 . k r irrigation i s included W r -culture, a mflection of jurls- dictionnl respormibiliQ. 53- The first thiog 'his paptdet did was to try t o conpare the flgues for ths first ,year or' the Plan ( 1 m 5 7 ) W i t h the forecast tn see what bacr go= m g In $0- 3 . t h i s , i t ~ r a sseverely laandicapped. Them was a forecast, p al- veal and a -*orecast, cmmdity gmup by g m q , for the Hbale Plan. !3uL there w s :o breakchm by years and glaups a t the a l sare ti#. 5.4. This made things particularly difficult, since i n the pattern as forecast, i.ports rose to a peak in the third p r and fell back in ths f i f t h year to the level of the f i m t (see Table 10). This was because of heavy bports f o r s-1 and railway &7elopaent in the first half and also, i t m y be p - , because of wart substitation as steel and other plants to came into m & c t , > n i n the secand h a l f . Consequenw, the caerplrison m k in the pazqidet between the first year's actaal b1p0rt.s c a d the forecast for tbe ave e year is not very neanbgful, especiaU,y -? for steel. Steel imports were 5 percent higher than the average f o r tbe Plan ai~Ipart of t h i s was due t ?x5ce incresses. This might ;rt3qr well o have representied no serious excess over the fol-ecast (had there ka a detailed one). It e t r t .at ha- presented a seriaus pmblen .n i t s e l f .' i l- 55 The onlj- a l t e r n a t i v e *:as to caapare imports in 1%6/57 w i t h the p m ~ o u s a r ; tbey r r e x 326 cro:-es Egher. On the basis of + M s carapar- p ison, the paaphlet isolatad five a ~ g m r a - factors: three of tbea were defense and foodgra-Ins (together about XXI c m m s ) and h,lh r fm-ti.; e rates m u s e of Suez an? higher pricvs (say, 5 crores). A fol~rih 0 was consupre? goods, which yere not i n a b o l u 2 t e r n s of mch i n p o ~ t a n c eand b ~ c we* v e l i t t l e bigher than t h e ,.ear befom. They we-re, h e v e r , h ~ substantially more than in l%WSS. Thit coqmrison, wkich \:a:; ZLSO made for several raw materials, might thougnt to have had l i t t l e relevance, be but in f a c t i t had. 56. The m r t s t a t i s t i c s for lr35/56 which tha piqhlet was using uem quite different from those in the Plan. They Ire- m c h higher i n three categories, nanely, raachinery and vehicles, steel and t d b u s h - 1/ Unless the-- was an e : ~ e c t a t i a nthat the complet.ion of the s t e e l plants would be delayed. This i fact happened and presuarably could n have been foreseen to saae e.xixmt. uhtm the pamphlet vas written, but ttre point is m r nade. The shortfall i 1960/61 was 2.2 U o n n to^ of Mnished s1 -: M r h alone would mpresent. aolaeULing of the oFder of 150 croms for Frparts. it&m Rotbers,ll trhich Anclucks thfense (Table U). Part of the truuble Lay in the fact t h a t the bam fraa which tbe man started uas much tno low. This was a point which tbe pamphlet neglected to make. 57 This f a c t m y go s a - wqy towards explaining the Mftb ag3avating factor, immased s t - of mbtemme imports, which the paaphlet agmes warn mrdemstimted, lifer l~atcbirgthe bi@ r levels of indastrial ., e pmductim in 1955 and 1956." The odd thirg about this remark i s that tbe indsI of prodnctim f o r 1 5 5 quoted in tbe Second Flan and tbe w e t i s the sare.l/ Ibmover, the rise in the in&x in 19% was by m aeans abno=rral.2/-1t vas m t t h e higher prodrretion t h a t ras the t m b l e , but the original cormlatim b e t n e a import3 and pmcbctiaa. $a- ~1~ t h i s i d , for vhich it is impossible t o arake aqg allou- ame *re vas s t i l l an emxss over '755156 to be accamtsd for of s w 170 crores or 270 cmres, de2#nding on tbs set of h p r t s t a t i s t i c s used f o r 1955156. Fhe m e t caxludes that the drain was (italics in t& original) - "attribtltable mair&v to the a t t a q t t o carry mt tbs .%cod five-Year Plan." 59- Later on the o a t s t . c a u i t r e n t s of the public sector, which we- "heavy," w e r e discussed. The pamphlet lists the tries p r i n c i m m q c m i b l e f o r spew3h.g f o d g n exchange and t&en states '&at R h l l these I t i n i s t r i e s have deMnite pmgraxms of work &sigaed to proclace certain r s l s egg., so m a q tons of steel o r kilawtts of pumr o r capacitg eut, f o r fTdght mvement, b=. given dates.!' It concludes tbat, although them were sape mimr extFava,my:es, "There i s no evidence t h a t e ~ c e s s i v eo r p m m t u m coadtaents f o r Plan Fhjects were nade by a q Xinistxy on a la- scale. " 60. t h a t c d d t h i s s o r t of c b s e m t i o n m a n ? It could only nean a t the W a s coating more in foreign exchange for Investment tbn bd besa foreseen. But Indivi&al fignreLs to ched~U s a m not available, nor apparent4 were they to the a;?thora.3/ - - I , / That is, 122 ( l % l m 100). See Second Ran, pege 6- page^ 2 a& , the psmphlet, - The rise was 9 pement. No forecast for the imkx i s given in the Secaac! Plan. but the rise in L c e f r o m factor~re a t a b ~ i s t ~ xo ~ p t a t an a n n u l ave- of 10.b pement; for factories and small- s c a b enterprises 8 percent (page 73). r/ The pamphlet refers t a l i s t of o u t a w p b l i c sector c o a a i t r a t s o ...... in September 1957 by daistries Pnd states tbt "a horn d e t a i l 4 ask- up i s m t im&iatRk- available." "No detailed bre~kbwn"of c a ns f o r the prlvats sector tfas available1 oim t mmr, Painteumnce 0 were 4 - evidently also a t a permanently h i g k r 11-: tbe -let addta that i t is d i f f i c u l t -to say in p m i ~ d e t a i l e *re the i ~ . ~ a. In the event, in spite of ttre decision to i q m s e rom stringent b p r t ~ ~ t r i c t i o n s to concentrate on tbe "core-' of t&e Plan, iqorts and mm mre tban 1,000 cmres above the origStldl est3rate. Had tbey not a beaa, M a amld b v e M to its reser~es m t e a d of draw+og on t a i h ' o the extent of 650 c m m s and mqui&.g over ; c m m s rore foreign aid. 62. Che Last c a a e n t might be math about the m e t . It say8 m a r blandly that "It is a matter of m surprise that the a t - to c a q out tbe Plan has cans& an adverse twin in the foreign -e situation. For the P l a n as finalised, bad a l~ fo- exchange gap." me P l a n bad certainly foreseen a gap md had s t a t e d its need for external aid in ths cn o- of that gap. There was no suggestion tbat the liiagnibde of the gap might be anything l i k e its eventual s h e . 63- The pamphlet en% the main s-ry by sayirrg tbat foreign wcbange b p d g e w has be- revived and adds a corfortiDg r s s u m m e : "Otber step have also been tab t iaqmve ths f l a w of d t regarding a aa m u f o m w -e i position. Consequently, w am ~ a w n a positif a to detect and cormct in good time say adverse turn i n t h e balance of payrerrts sit.uatIon." 6b- The b e s t vay of co-ting on the Second Plan i s t . ~ quote the Third : "As the Second Roe Tear Plan progressed frun year to year, it was f e l t that witb ~ r e a t s r anticipation and rore acnuate s t a t i s t i c a l and ecomaic intelligePce scme of the p m b h right have been dealt with d i f f e m t l y . In the first #base of tbe Plan, tbe decLne in fol.eign exctrioge mservea ldght have been spread over a longer period, and the conseqaent &it- in foruign exchange r'locatiom might h m been a 18- c h a t i c in relation to power developlsat aad tba prodaction of f e r t i l i s e r s . The considerable legs vhich o c c o n e d h tbe u t i l i s a t i o n of irrigation f r o r l a w and llbdium -ation projects c a i l d ham 'bean reduced. Ibe 8 ty short.gss .nd labdances m n l mfl..cted in the d i f f l - c u l t i s 8 of conl bumport could have been countered i n adrrncs to a grwltar extent- Pinollp, t h e intsnsity of nmwti- mi tbs rise in pri- tb prst two ,yeam might have bean rodsratnd. Thsse 8- instances of tbe interdbpendgnce between the balance of _ v t a the InteW price l e ~ e l . 9 , of t&t rchrvl of imestra~ts rad the l a - w m l mtplts, ud of cbeloprsata ia the related s e t o m of industry, tnnsport .ad pawbr. Thnp  point t o tb mch 1r- ctirensions of the p r o b l e s of ranap-wrt, p b m i q and iq-tation vhich are inberent in tbe design, structnre and phasing of the Third Five l n" Tear Fa . g c. T b PLra aa a guide to action: The Tbird Plan 6. The T h k l Plan is pmlix; it is N l of &gi-eesions. It gives inadquate infomatian and is l i a b l e to be slipshod in presenting what it does. But above all, it is indecisive, which ~rra; account for a l l the rest. 6. 6 The P h r e a l l y cons$sts or' thee plans: a m i c a 1 plan, a finan- cial plan and a fomign exchange plan. Each i n tnrn i s m m r e s t - i c t i v e o tban the last, 67 - I n the public sector the physical plan is described as 'over 8,000 crorw." In f a c t , it copes to 8;90C! cmres.2/ Far this the financial plan pmvided 7,500 c m m s , 3,837 f o r the States a & 3,663 f o r the Canter.31' S i n c e tbe Center's physical plan cost 4,LSO c m ~ the f i n a x i a l provisiG , w a s 18 p e m e n t sbort, The prirr=ipal shortfall was in the t r a m p o r t and i n d w t r p se'uors and the c e r ~ t r a l l ysuppor'ted social services. - 68. The foreign exchange cost of the m i c a 1 plan was a t l e a s t 2,230 cmres.z/ This uas c a t once i n conformity w i t h the cut in Plan exparti- tare (b7,500 croi-es) to 2,030 crores and lztei- t l,W cro.-cs an the o b a s i s of expected a m a b i l i t y of foreign e x a x q e . Sk.ilarl;., the estinated need f o r .iaintenance i~.~?o--ts 3,aCO c--ores 6/ and t\e a l l o - was catiar 3,632 (.Table 15). Out of import quimments of t , 2 3 0 crores ( e x c l u h g PL 480, but including 20 for coclponents) the shortfall - 1/ Third F i v e Year Tlan, pages 287/8. -1 2 Sse Table U. I f one adds in a fev iteos vbich w e r e "lostx and m v i s d cost estinates of a feu projects (notably s t e e l ) published only a few m t h s l a t e r , i t rrauld be nearer d,SOO. r/ The Center h e m includes Union Territories (See Table K). h/ 0 - See Third five Year Plan, page 75. / See Table lh. Again, one could add a t l e a s t 100 cmres for estibatea receivbd shortly a f t e r . - 6/ Whether tbse me* l a not clear. related to the physical o r the financial plan frorn the W c i a l plan was U s about 260 crores and h-aa t h e physical plan &80 cmrss. @- I t is clear f n w the Plan itself that them was no & b e a t to carry out the full Avsical plan. Tne Plan states that a lawer r a t e of grwth (30 percent) than t h e -mica plan vould imply (3b percent! is l e in v i e t of the resources in sight. Fbwever, the output "'ta-yetsn ik are expwsed in terus of the physical plan. The even lmer implicatims f o r output of t h e foreign exchange plan a.re left to t h e &er, except that, "sme under u t i l i e a t i m of capacity wl have t o be tolerated. il ny 70. e m Plan postulates a t a r g e t or' export receipts of 3,700 crores, which v i l l in fact be realized at cur-rent p r i c e s ? a r t l y because of the contribution of Goa and scme change in st.a+;istical coverage. But, as a canditim f o r aeeting this target and, i f possitle, exceeding it, the Plan l a y s g m t stress on 'the need to keep down internal prices. 'kis in turn depends on meet- the t a r g e t s of the p & p i c a l plan, and also, on nclear acceptance of t&e s a c r i f i c e s involved, i. e. of sacrificing consuutptian. 71. The Plan also rests on the assmption t h a t n?4aintenance iaports.. .. wl decline in t h e latter part of the Plan."?; il - This, too, necessarily depended an grovth in outgut. 72. I t appea5 from the plan that one scilool of thought nay tave held tbat even the p;lgsical plan could be met, i f cmly fiscal poEcy were geared n recaptame of a large part of xarginal increases in income a ~ d the , to encouragement of saving o r earning of forsign exckange. But it does not say so in black and white, m does it suggest that one way of a c c u n p l i s ~ i these things might be to r a i s e t h e p r i c e of foreign exchange. The problem is not resolved. fbr example: "The *inancial pmvisions envisaged a t present could, it is f e l t , be Lapraved upon i f p m d u c t i m ad savings increase n sufficiently; the objective must be t o implement the physical pmg-para;:- accepted by raising resources bepnd t h e lwel indicated by the present e~tinates.~l/ ".............the investments and savings goals and t h e ! Plan are attainable, given e f f i c i e n t mobi'sa- t a r g e t s of te tian and deployment of resources and availabilitgr of foreign =change. - W -/ I. Third Five Year Flan, page 110. - 2/ Ibid., page 1 1 1. - 3 Ibid., page 90. - b/ Ibid, page 91. 73. Earlier, i t offers a cliffexwit explanation of the difference b- e meal aad fiaancial plans: "Past experispce has sbovn tbat if a Plan for a five-year period is p ~ p a r e d only i terrs of the financial reacrarces n i n sight a t t&e t h ? of tbe pmpa-ration of the Plan, the f'ullest rrse c a a ~ o t made of all the opporbdtiea Mk be c presant -w9 in the carvse fl the i@enenta+Aon of the nao.=y 71 Past experience can only refer to the First and %cord P m l, vben aptlag i the plbYc sector f e l l sbort of the flaa;lcial provision, n at least i n real tams. M, tbe Plan l o o h over i t s shmlder again to purt eqeFiem8 when i t warns tbat "Investrent in tbe private sector of tbe order of Rs.h,300 croma ............. well M exceeded."2/ - 75. The IWnl Plan contains, like its p ~ s o r s a, variety of tt 9ts: (i) Plan expenditure by sectors, subsectors and specific Pmg= ( j ~ ) Grwrth i mtional income. n 76. Even t b q h there is mt as to w h a t the Plan really was, clearig s tio on existed between s o m of tbe targets. Them are, of course, r IS sfatistical lid'atiw uhich are mt. surprising, as the Plan p t hs out (page 75): The e s t h a t e s for agriculture, mining and factorp establishrents am based largely os, tha targets of p d c t i o n imluded in the Plan. But, i n the case of other scctors, only irdiFect estlPation is possible and, i n raqp cases, the basic data are quite inackquate." - n. T e coanec';ian between thes= estimats a net output and tihe &-gets h f o f p;9ductFm, botA of '-hiz;l c o A w c m dto tile h petrcent increase L natiaml I incae, is not, houeva-, eqlaind. Thu, it is n o t possible to d e c e ALe i q . A i c ~ t i a n s t h e c u t in Gie p ~ ~ . s i c a l of Smg- Lqosed b LIe finaucial jr pmrisiaa not of other subsequeut chagea. I might, of c a m e , be argued t tht tbs camectiarr ia a tecbnlcal mattar d t a b l e for incluaian in the P l a n . Thewe ia r#ae force i t h i a m m t , but not much, especially when me can- n U e r a s = ~ the things tht u a m included. of -/' 1 Third Mve-Tear Plan, page 57. - 2/ M d . , page 1 6 0. 78- A technical a p p x k s would have been a u s e N comprcrnise. Its usefulness d g h t b i t i a l l y ha= been limited to a fetr people, bnt b~~ the lbarket f o r an u n d e r s t a i x of tbe working of the eMlnolqy would have been its main object, one uhich should certainly not be under- estimated. 79. These observatiom apply a f o r t i o r i t the i ~ t e r c a m e c t i o n o belxeex~ ws f o r i n t e d a t e and final t COO&. ! o exanple, there are tuo basic Fr tathies of wpts for a z r i c u l m t h e Plan, for pmgrams (page E06) and f o r pmdm+.ion(- 3l7), i~ essence inputs a d o u t p t s . On the b i e r - c r e ' o , the Plan a g i t s that omcdn ". ..... ,, i t i s usenil to estimate additions o x to production like* t t ? a c h i e n d on the assumption that t h e various develop ment p r o g r a m are carried out.': It then goes oa to say that i t has been h p s s i b l e t o &*lop satisfactory yardsticirs. k ,w i t b u t e w u r e 01 t the d t available and the e x p l i c i t assumptions based on them, hterpreta- aa ti03 of the and of subsequent c h a v s i n the data \#corn r i r t w d l y m s i b l e . Indeed the very process of inp-mving 03 the d t is much aa hpeded. So. Asswiated w i t h t'ne F l a a itso,'lf i s the ''hg,ramms of -trial Develc~prent,~ (P.I.D.) uXch contains a =ass or" ;nfonua'ticu on abclut a huwhci industries. ;4cst of the i u ' o n a t i c r i s there f o r a p k s i c a l input-output table o r a sptem of Ifmate;ial bslances," New czpacity rquiremen+s and the investarent costs (inc1udi.q r'oreigr~exchaqe requireaents) 1 . e given in R O S ~ cases. 31. Yet there i s an astor,isbing lacuna. Although much of ';he data required f o r e s t i e i A n g inprts of m materials and capital equipmmt and ra- thmugg iapart substitu?..ion is set forth, the strands are aever sathered tagether. If the implications f o r foreign exchange uem drawn in aqy detail, the Third F eoes not sho,~it. In the c h a p b r on !u L Forelp Trade. o&v tL-e pwa~.-aphs ( p a ~ e s 133 f f ) are devoted to Imports, It ends by saying, "In v i e w of ths difficult S l a n c e of pynents position &ring t h e Third Plan period, the peeseat sysklcz of foreign exchange budgeting and import lice=- H i l l be continued and improved u o further. pn If 32. Them i s a _possible explanation. The P.I.D. xproduces the tables of ? a l& i n d u s t r i a l investaents i n the Plan a s they stand. l/ I n fact, as i t explains i i a foo'tnote and mre exknsively in the ^&t, ~ there had a h a * been changes i n himrtant ifidustries such as heavy cherP;Lcais (organic and inorganic) , f ~ r t i l i z e r ?s cement and cotton 1/ Inthe Planpages h93 ff:. i . i P . I . 3 . pages x v f f . m e s , while sane large @venmeat prcjects had evidently bear g i m U-p y A ncu assessreat w o u l d have meant rewriting and recalculating the Plan. 83. A l l the Plan cbcuments are rull of statenarrts on policy. Indeed, they udse so many that sometines they cancel each other out. But an the main issues, they tend 4 be s i l e n t . For sample, the Tbird Plan chap+->- ' on p r i c e policy, apart frar: a h i ~ t o ~ c section, is mainly dem+& to a al discussion of, first, p r i c e s t a b i l i t y and, secosrdly, incentives b agri- cultural prpducticn, but even that i n a geueral way. 84. Yet price policy is as s a i o u s an issue as any i India. If one n -s d it logically to include the prices of capital and forei@ exchange, - it may be said t be &issue. There is b a d l y a sector of tne eoonomg x h where the price policy is not open to serious question, e.g. steel, all kinds of fuel ana pauer ( coal, el ectricit>- and petrolem products) , trans- port (especially the railways). 85- Prices of industrial products are in many cases s e t by the Tariff Caanission an what is virtualljr a cost-plus basis, even plant by plant. F h i g h t equalization, i.e., a camon delivered price irrespectLve of delivery poiut, i s applied t o s+,eel and cement. Some prices are controlled, while those of substitutes o r alte.mative p-%ducts of the same rad materials a r e free (e.g. p l a s t i c s vs. uetals; sugar vs. gur). Transactions on a l a w e scale are carried on by the Staie T r a d i n g Corpoaticm in camera, so to spezL, vitbout revealing what amomrt to hidden subsidies o r taxes. a6. T h a t prLces have an allocative function is recognized but not wid&;' o r deeply accepted in India. Far economic sat jccts amuse marepopular motion an6 more popular confusion. The oon-mion and some of the emotion extend to o f f i c i a l documents, i n t e r n a l and &anal. But the Plan, srhich should give a leaa, does not even touch this aspect. 87. I t is pe-+aps worth noting what earlier Plans had said. The H m t Plan, much the most forthrieht of the three, states the pmblan (page 36): "For the private sector, the prevailing price relationships are the prime factor in determinine resource allocations. I n the public sector, the direction of investment need not always and necessarily be guided by the profit-and-loss calculus. Nevertheless, the relaticn between costs and returns even in the public sector has to be judged, a t least a s a first approxination, i n terms of market prices. I t fcllows that the r z t e n a n c e of a structure of prices which brings about an allocation o f resources in conformity with the targets defined i 'he Plan must be the consistent n aim of econonic policq-." U For eumple, the secand heavy s t r u c t u r a l and p l a t e and vessel - works (page 9 6 ) . d8. Tvo otaer issues are worth ruec~tioning. The fiftt is wage w, the seocnd is a c U d s t m t i o n . as. i a w e is an - n !{age policy M of price policy. The ' hr Plan cbea rafer (aa page 157) to the problem of capital-intensive I id vs. l a b o r - i n m i v e developaent and tbe amseqnarcea of this choice for e p r m t . But the chapter on hbor Policy @ores the prablsr. % - h.eacbant c r i t i c i m of pmcedure in g - I ot has beem j the n public drmsrin for a long the, notably in tuo reporta by Paul bppleby. Fbr e e : ............. nothing i SO inportant to the success of tne s Seoaad Five Year Plan smd to the possibility of a much more preteatious Third Five Tear Plan tian W s t . - a t i v e refonn - ntm aired at accelerating a c t i o c in every aspect of develqramt and i activities ccnuplenentiag and s q p r t i n g develapsent n ..... a general f d t of the Indian arlministm+ive pmcess d s t s i the practice o f seeking agmanent an n by weryboctp More anythhg j dme. Worse, the practice mqrdm~ s tbat these aglceeaents cover not only general objectives, geaeral allocaticm of funds, g e w - a l pemamel arrangeneats, and the f*irin(: of gsle-dl 'lines of responsibility, but a l s o cover qmciiYc applicatims of 'Aese g e n d determinations in a cxmtinuing and heavy f l ~ u- ~ l / . 91 One might also quote Professor #abalanobis, de facto m a b e r of the P- l Ommiasion, at the begixming of the - n : a nAcbh- iatrative Uficnltiea inharent in the erFsting Gavenment wachinery a m likely to pmve the greatest obstacle to efficient plaming." The TSrd Plan has a ctrapter an Achhbt~aticrn and P c r Iqilaaentatian (pagea 276 f f ) , ln but it cbea not meet the c r i t i c i s a s made in K r . Appleby's -*eports, W h c remain valid bday. 92 Thus, on w major issues the Plan fails. I t do4= not erp1ai.n hc# the ingredients of its various p=Pposals fit together, it does not make up its mind w h a t it is proposing and it Qes not give a lead on m a a f c poEcy. We s W also see that the Plan did not, i addition, n give a reliable m a s u m of L . cost. I t lacked the decision, precision +S and incisian required of the 'set oi marching orders" that a d a v d q a l t p h ahould be. 1/ - Paul a. Appleby, Coagultant in Public Administration, The Ford m e t i & , me ti on of Indials ~ d a h i s t r a t i v esystem with -1 a defermice to AQlriaistration of Goveriiimt's Iracfwtrlal and CoarmaciP1 mterprisee, Oovernnrent of 1 n d i a ' X p a . d. F b w t b e PIP~XSS of the Plan: the ILd-tens Appraisal 93- 'fbe Pmp y-ssReport on the Emt p a r of the Third Plan (1961/'62) uas tbe m t to appear m its plogress. I t w a s published in March 1 6 , i e ayear af'ter r 9 3 ,. zxi oZ the period to which it ref-. AS it is a ratbar pedestrim rlocammt and a s i t w a s follaved eight mths Labr by the &-called ;;id-- Appraisal, it dogs not call for any further ~ r t - 91 Tbe Hid-term ~ p p ~ a i a aas its rune i q d i s , was i l, n- as a rerler of tm Plan i lidstreaa;. It agpamd in Noverber 1953, a year n after tbe Chinese i n e m . It really covers the f i r s t tuc gears v t ih twma tentative data for tbe W. 95- Ibe H l l uas henrlicapped haa the sta-t by not haring wbat yard- s t i c k t rrr.alm p e r i o m c e against. Sc far a agriculture was concerned, a s this was an acadaic cpwticm. In the first years ( 1 3 W 6 3 ) p-ctim bd dmppd 2 m t (am- t the index), instead of rising b3 ll per- a csat as it uas q p a e d t ~ ,a t least a c c o to t&e optinistic target. ~ 96- Natiaml iacae, u s c h had bear q m c t e d to rise bx 11 percent :.CCO* to the p e s s h 3 t i c target) , mse m l y by 5 percent. A agri- s c u l u accumtsd fbr about half national inco~e, the sbortf'all in agricultam muld a t least 5 out of t 6 percent shortfall, i h f aot 0ey m r. 97. z -e m Appmisal compared k it had no altaraative, the i d t r i uxbtrial prahacti~~~~the o p ~ t i target in the Plan. It had uith c ri8aa 15.6 percemt aa k,-ainst the q u i r e d 25.6 percent. i3ad the penahistic hwget beem Lmam, perfbrmance night not have been so bad, t&mgh s U not very good. - l/ Them &re t u o d i f n d t i e s . m t , tht?i?F! ths axmectian btuan is the indst. of a g r i c d k u o l pmchcticm and the esticbate of natiavl incare; %auxUy, the rate of g t a r t h airaasd for agriculture under the leas optiristic target. 98 . ~hese statistical exausioas adl;r bave importace in tbat tbeiy COPALSim iD riot having a f'im fmre of &ereace. IE the illhntl.pte fFrst tuo page18 of its obopb- a the q a m a r i c Backgmurdmthe h M uses n " bh pesdmktic and aptiristic targets. It had virtually no choice. t 99. By tbe time the H q p d there was alrea4J. a for- A ! encbenge m a a r i an magqreciahle gapmb e t u m indnatrial capacity and utilisatian, a q m c t e d . 4 P r this ~eason, a plea is mmie f o r a p r ~ p e r s b distribution of pmject a--project aid. 10Q. tbe HB flmt nmapitulates the n b s s r a p t i a a i the P1mJnI.ecalling n the distinction M o m iqorta of capital -xipent for Plan p j e c t s 03 tbe one bmd and, aa the other, cqxmarts and mdntaunce iqKJrt~-;1/ it goee an to say uhat hagqxmed to the balance of pagrmta. lhare is no camectim dnam between tbe tam. 121. I q w t statistics i India (of w h i c h them a m two seta and n irnrrrsFsble classincatims)~/ comot be arrcaged i a uay vhich beaft ar n this d i s t i n c t i m . The tiTA, &Ale shaving a list of exports under 16 heading:. , give& none a t a l l f o r ioports. - 1/ hid-- Xppraisal, page k. It ~ a j be added that "Progroaee o f r LncbPatrial DaPelopcr~tr states (page xii) t&at industrial productim i tbe Third Plan uould be based on - e intenaim u t i l i s a t i c m of n r plant faciiitiee. ' - 2/ T e conception of the 'forsign axchange plann was based an this h distinctim Plan, page l 4 ) : nEmm i cases where imports n of phmt a d equipwt can be financed f r a ~ ~ a l resource8, m the point to cauidef would be whether t & rela- iaports o f ra~r c r a t e - U s , carpantnts, ques, etc. can be provided for.' - 3/ cf. Tables 23 and 2 . & 132. Thisfail~is,dcaurse,Aklntotbatalres~refer~toin ttre cUamssioa of tbe Second and Third Plan. Given all the a p r a t u s of excbarrge control, import and iruhl.strial UcerrsiPg, it should be possible r to onsnge m t data historicw n i a uay vhich rakes therre distinctiaas. Even rore valuable, by brinsing irrdPstrial capaciw, its f u m - 2 ard the asaadated irport a t - into the spstepl, a serious fo.nzcast of f- o d d be obtaimd.l/ Aa a matter of a c t , them had bsen a forecast of raintnrranr_e **-for the Third h, made k q tbe 8 0 4 2 d l d Anjarla Cordttec. Bpt it fa never F a f e d to in the Plan or t ad-tern Appraisal ond there is no c m p d m n be- k the f~mcastaend the facts. 103. h q event, the KCA a m l d have draam s l e l u s i o n s f m m f S g m s far tbb priod 19W63, ubi& a m sbwn in Table 17. Them i s a 1 - e ~ m c between the f o m a s t ard the a c W ~ m for s1 W 6 2 . fn the forecast tbe very large t- for mn-project aid was - t 9~10Iltmby tbe lleed trO m p y the LFs in practice, M a b o d (net) imtaad of ~ t b s D ( P . Idr. m e caasents on the shortfall in the wm and availability of m ~ - p r o j e c taid. It says m u a t all about tbe shortfall in p-xject a i d . Pmmaab* this also o c a r d in 1962/63, althugh m specific forecast for that year i available. I ' t h r e yrrs plenty of a i d in the wpQdim,n s e; ls- - - The pmblers of utilization of a i d on both sides are w e l l knaar. In thla case, it is irpoasible to sq;r without elaborate Pnd pzobably i tbe erd equivocal =search uhat the reas- n for this shortfall we^ or eren if tbe shortfall was as a d o m cw it W r s . lob. The glin point, harerer, is the s ~ r e before, witboat a reason- as a t Q s y s m t i c malysh of tbe -t i within the frare, it i s quiteirpossible t o h a v e a jPdgrent on the conseqpsnces. I t m u e l l b e tbat tbe shortfa'll in the early p a n had serious consequences f o r the l a t s r oust; bat i t nap mt. Ikither the Plan m r the :lTA shsd a q Ilght. 107- After r\* e* the balame of pymenta f w 1 W 6 3 , the ;nA pmceda with tbe pr~zlpectafor 196966 in t e r ~ s - 8r to those in the h This HBY 1 . is rather - yrd does not prsseat tbr, f m b , a8 se-in tabular fom. hn a t t e q t is rprde to do =a in Table 18, which abceasadQ includes a fa* assumptiom abuut mttsrs m t nacb explicit In tbe text. - L/ Scbabs for pr~ceas- the 6 1 ' ~ available tn XlTD and CCI3 are, houevar, under conrickration, 19. R d snch a table keen p-pared, a i t might have raised s a w obvious questbm about the text. The latter says tbat non-pmject imports "are eqmtgd to i n c m e subatantially during tbe years 1963-6& tro 1965-66," m a 5 . d ~beuuse of failures in iqort substitution projects ( a -tition ;:' of tbb Secmd Plan) a d M e m s e . Y e t ;T.s fcrecast ~-equi~-slt f o r free -e over the who14 Plan to finance nan-pmiect imports, a cull - t of project imports and increased defense needs is tie 8 ? as the orig;lral forecast. a e The f'igz-es, once me assseahles them, z d the text appear incansiateat. 109. Secandly, w i t h t o t a l a i d a t the o r i g i n a l level, them would - 4 to be a .9rall ahoi-tfall ia p~ojecta i d . QI the r e ~ u b e ~ s n t s X U has tbe several sigpificant things to sqy: (i) Foreign emhark.- mqdfemxts for -nzoject hports had risen. (This was kmwn, in part, taro yea= earlier.) (ii) Some rmv smjects hac been incluckd in the Pm. (iii) A nunber of projects vere included in the Plan ~ritbout detailed project reports and would p b a w have to be "mphased," ( T h i s was also kmk- two years earlier.) (iv) Actual f o r projects would be n s l g n i f i c a a q ~ smaller than the sum of 2,030 cmres eentioned in the Planx ( t h i s I-asthe p b p i c a l plan f i g m z , rut t e foreign h exchange plan: that tias 1,900 cmres). 10 1. At least one thine was obvious fmm this. Zlany decisions would have to be taket~and rdght have been taken alrea* because o f f m s h cir- c\lastances, 111, The problems arising on the foreign front had also their counter- part on the darestic front. Cost estimates in the Plan -re i r n w cases ~xmg vexy luge Irargins, r n t just for occasional projec,ts, but for uhole sectam: indastrp, pomr generation, L-rigation, d ~ v and roads. F r g b ' A industq and tmnsportation the m has specific figurea for the revised cost (Table 1 ) althougha cursory exardnation repeal8 that s a w oi thea 9, a m unrevised. I t is inpossible to t e l l , however, eotcapt Fn isolated cases, haw mch of the incrsase i s due to higher c o s u o f the original p m g m s o r to changes in the pmgrems. I t is remarkable &so t h a t if there uere .=titvised estimates i nrpees, there \rere none in r'oreigr n -0. 112. lM a t of tho railway pmgran was alrsa* 15 percent (calculated in the mst consc-tive m y ) abom the original cost, evan a f t e r deductiq the cost of unfomseen strategic 1Lnes. ht although the fill r e v i s e d cost of tho 2rogrtus :Kil have been spent 'oy the end of the Plan, the in- cmase i n f w h t ( i n t m s ) will only be about 75 percsnt of that fore- cast. g3 72 32 e s t h a t e d cost of the public sector industrial program (incl- m i ) had kpne up by over 8 p u ~ c n t . a b t s of actual ejcpenditura t ae a m s d a t in excess of tbe orig+aal pmvlsion but s t i l l m more than 70 percent of the cost as estimated in 1963. . tbe prim- While the ?EA bas quite specific data on the revised cost of central im-est8lent prograas ( i n d u s t i i a d tramport), it has none on the S t a t e pmgrans- even those like i r r i g a t i o n and m r , uhich include relativelv few 1 - projects. It alluc.1Bs to cost increases, but Qes not hazard 3 conjecture about the uagnitude. I n fact, it ie - u n l i k e l y t h a t Were w s nuch basie fcr one.l/ a 115- Benefits frola mjor and ~ e d i u ir-tion :ill1 be aboat balf what was e q e c t e d , although expenditure has m t been f a r short or" pmvision. Farer capacip installed will Call sbort bp 20 to 30 pmt although expenditure has been s a 2 percent higher. fbe evidence suggests t b a t 0 ~ percent would be a reasorable orQr of mqnitude f o r the rise in costs above the estinates: this is f a r in excess of the rise in prices of m g e s and aateleiais. T h i s is not a m u pmblesi. Both the Second and Third Plan c a l l attention t o imdequate investigation. Olle major pmject w a s iucluded i the Third Plan a t a ccst figure, vhizh had already been mviewed by a n Planning Caglissioll t e a m and folwd too lo:r,2/ The m s t receut estimate i s well over 9 percent a x t s the figure 6 the Third Plan. c lu 16 1, In a l l , one can s q that the Third Plan contained (a) a number of unfinished projects fo. which the cost estiwtes wen? not v v realistice and (b) a series of open-ended caaadtmeats f o r which the estimates yere very p r e l i d n u y . 'Po some &ez-lt, this kind of s u s c e g t i b i l i t y to e r r o r is inevitable; it happens eve:.:here, constantJy. But this only semes to unda-line the necessity foi- c l e w i d m W c a t i o n of specific costs, f o r regular mporting, for. clear tabula~ionof changes and f o r decisions in tiie l i g h t of the changes. 117. Cost b x i a s e s an account of power s n e r a t i o n , rvajor and medium irrigation, railways and industry znay w e l l have pushed the cost of the p h p i c a l plan in the public sector f m 8,300 c m m s close t 10,000 cmres, a i f not above it. Since - + only account f o r about half of it, i t i s hard tn resist the conclusion t h a t the eventual plan resources of 8,200 crores u l l l met only a b u t 75-99 percent of tbe cost instead of 90 percent as or.^^ plannecl. - 11 The T h i d Plan lists a lsrge u ' ~ b e r pwcr projects Hith their of capacity but without their cost (page b19). 2/ Report on dagarjunasagar Project, Comnittee on Ran Projects, July - 1960.  - lie. The f a c t t h a t the Iirh baa so Uttle infomaation on po=?r and irrigatht costs -3salr#t c e m due t o poor r e p o w fmm tbe S t a t e s . y This i s also likely to be msponsible for the fact t b a t the predictians of the iUA on irrigatad ama (atilisation) and installed power capacity a t tbe d of the Plan wem both badly orarestbakd, considerirrg that there was only 2-l/2 Jleaft to go. UP. rub sectors i n uhich predictioa vas also poor wem coal a d - A freight, In both tbse cases, rk#nd aaalygif is p a r t i d a r l y l q m r f a u t , mch =re so than for idustries there aatptlt was depedx.t cn ram o r less rmtomroas investrent decisions, Both coal oatpat and fmQM origimt+tlg were gmatly owmstlmatad, * * the deoland for bas , petrolem prPibrcta bad teen greatly u d e ~ s t i m a t x d t the begianiog of a t b Plan, Oae dght suspect tbat, trben precfiction d e w on ram tban pmgress =ports of imhs'rsial projects, t e tools are not there. h 2. 10 h T e very large irrcrease i Plan costs, the defense eqxmdibm?, n tbb - f of agricultural atput, tbe l a g i import substitution, a l l n t h e e t b i q p pointed t o a mdical revision of the Plan de facto if m t de " j , The forecasts an a p t . 1 ~ n the pnblic sector of 1,900 cmres i per amnm in the l a s t b.m years of the Plan coqaned with an average of 1,hOO in the f i r s t three, It then p s on t o say (page 21) t h a t "tba of ability t undertalre a u t l a p ~ this order v i l l depend an a variety of o factors, Fncludbg the prr'onaance of tbe eco~oqpand specially the g~,xth cf agricul%umland industrid. production, r i s e i n daresttic s a w , efactive coomUation and inpltxmntation at a u i a ~ e levels and tbe extent to uhich external assistame becanes available, T'hat constitutes the "htlook for 196W66.'l 121. In practice, growth is o p t h i s t i c a l l y expectad to be of tbe order of 23 percent, as agahst the two targets of 30 and 3h percent, h s p i u of the f a c t t h a t investneat in real terma was n o t iuch lover than tLe forecast, ir a t a l l . The reasans given in tAe FOQ Plm ikx.mtxbn .;h a year later ?rere mser;aus set-backs in agcicultur6l pmduction cmC delays in realisation of output f m some 02 the inve~taenta.~ u e t&ia is S tm as f a r an it goe8, it does n o t g~ far into the analysis of the under- lsing Feasons. e . P m p a d q a Plan: The Fourth Plan 5 i m l o r b 122. Soole r;ork on the Fourth P l m sfxwtetl lees 1 - a yea-- Ute: the Muaa published, but the more genaral prsparrtion m y be s a i d to have a beqm about thre4 p e ~ ~ ~a l m c e , in the spring of 1953 (Table 20). n i d 123. !lo* a t tbe Center mrs entrusted to LS .o !l- G m u p e , sub- divided into over 100 &;mapa, If cove- all sectors of the econcrgr. hro mn4mctora.l tmrkiDg g m u p k m concern \ri+lh Internal and k t a m a l Rexmmss a & InteraatiOJal Trede a d Ikmlolpent. ht. the saare t e tbe i hrapeetive PlaYdrrg D;vision uss w q oa ttre lolyrange perspectLpe for tbs -; it was mpm%wmtedon +Ibe WO- G r o n p s . A parallel ma, r b w relevant, was set up in the S t a t e s . re lb a T b U o m Gmmp Reports are of hterest as to sise ard content of tbe p ~ ~ g r e they p t foluard; the two are intenelated. The Peftpectiw rs Pl- Division w e t e d its ~.eport(Ibtes on rtrspective of Develop m16 in rent, India 196061 to 1 - . ) April I%&, pro- an arahitious grahh rate of over ?-If2 percent for the follaviag deca&.2/ F r t h i s parpow, b I t proposed a plan of 16,W cmms ( 1 W 6 1 prices)-in tbe pablic sector. Pmposab the YorkLng Grorqmr rdtb a - l be coverage carre tn about 21,500 cmm3.Y The bplk of 'cae U f e - lay I n tbe allocatiolls to A,@cultum, Health and E&sticm, which were near* S i c e those in tbt: m m9pI-t. 125- The -?-range perspective of tbe Third Plan had suggested an imestPeat rate of 17,000 c m - (1W/61 prices) for tbe Fcmrth Plan- m s was 63 p e m t higher than the md man. Even r for a 1oue.r increase i t h e private sector n (v, 9 p e ~ c e n t ) , there w c d d CLQ- be mcm for an increase of around 75 percent k the pnbllc aecbr. In- c l u w current outlay, the pobllc sector plau would on thia basis be about l3,a)[) crores. 2. l6 Tbe area for debate ni&t very w d l ha- been a m d this fi@m jefcre tLK Perspective Planniqg Division p-xxb~cedi t s es-te. The Pain b s m c d d have been d indeed bplicitl;* )raa whether iiirestarcnt at t h i s rate m u emugh t 8 h up for the slak p.mgress i the Thixl Plan (had o a n it been properv documented) ard to r e a l i z e the ~oa3.sof a lainirun standard - *J About. jO on food aad agriculture. - 2/