India - Progress of economic development

T . ... f k' . . RESTRICTED . . g,Report No. AS-97a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRESS OF ECONOMIC DEVELOPMENT IN INDIA REPORT OF BANK MISSION THE MAIN REPORT April 16, 1963 Department of Operations South Asia and Middle East  CURRENCY EQUIVALENTS I Indian Rupee = U. S. $0. 21 1 U.S. Dollar = Rs. 4.762 Rs. 1 crore = $2. 1 million WEIGHTS AND MEASURES Most of the tonnages given in this report - and in the Third Plan - are expressed in long toxns. India has now adopted the metric system, and some of the data given to the mission were expressed in metric tons. As the difference is small, no attempt has been made to distinguish between the two or to convert to a uniform basis. I Maund = 82. 28 lbs. FINANCIAL YEAR The Indian financial year begins on April 1.  TABLE OF CONTENTS Page MAP OF INDIA BASIC STATISTICS ii PREFACE iv SU1YIARY OF THE MISSIONtS FINDINGS v CHAPTER I - PROGRESS OF ECONOIIIC DEVEILOPMiET Production 1 Employment 4 Consumption 4 Investment and Savings 5 Internal Finance 6 External Finance 8 CCHAPTER II - ECONOM!IC PROBLEMS AN'D POLICIES Some General Observations 11 Population 14 Agriculture 16 Industrial Expansion 20 Location of Industry 22 Controls and Prices 23 Interest Rates 26 The Import Problem 27 The Problem of Exports 31 Conclusions 36 CHAPTER III - PROSPECTS FOR THE COMING YEAR The National Emergency 37 The Budget 39 Internal Balance of the Economy hO The Balance of Payments 42 Foreign Aid Requirements 45 Terms of Aid 46  SIN K I ANG fr / . tC H I N A CHIN AFGHANISTAN JA ML. I BET , NJ E F>r44 -X o !c'1'HarH U T. I j01 eiI~ Lf~~j~. 1~AAIHA\ OJIPF SHILLONI v F'IIN !/46t tT$G 0 A RJ DI ' MANIP 'UR PA I TA o 5l D PI N A r7Sk<t '-- I \~8 U''' .: A \ - ,.. ' ( PA STAN Belo 1,0 ft 0 - A T vi A1 [ !H 1, 0 A 4U0 0 IM A \M YS R.rDE SN I IiA.1r *A C DV : y', -. ^ 1 4,000 - 10,000 ft.0 HICOAR A s Z L Ao ve 10 ,00 - 00 ft. 350I , TRIV ORU MAD JUNE 1962 IBRD-720RI  BASIC STATISTICS Area To-tal area- 811 million acres or 1,270,000 sq. miles of which: Cultivated 4to% (325 mn. acres) of which: Irrigatled 21% ( 67 mnn acres) Population (1961 Census data) Total population (revised estimate) 438 million Overall population denasity 345 per sq. mile Rate of growth of population (1951-1961) 2.1% per eamum Assumed rate of population growth (1961-19,6) 2,4% per annum National Output (1961/62) Net national output at factor cost Rs. 14,600 crores of which: Agriculture, forestry and fisheries 47% Mining 1% Factory establishments 10o Small enterprises 8% Commerce and transport 17 c Government administration 7% Other services 10% Output per head Rs. 330 Net national expenditure at market prices Rs. 15t.700 crores of which (very approx.): Government consumption 8% Net investment 10-12%oo Private consumption 80% Government Finance: Centre (B.E, 1963/64) and States (B.E. 1962/63) combined Total revenue receipts Rs. 2,491 crores of which: Taxes on income and expenditure 18% Taxes on property and capital transactions 7% Taxes on commodities and services 54% Non-tax revenue 21% 1/ Excluding Goa and other ex-Portuguese territories recently incorporated in the Indian Union.  Total expenditure on revenue account Rs. 2,530 crores of which: Defence expenditure 28% Debt service 8% Social services, civil administration, etc. 64% Foreign Trade and Payments (1961/62) Payments for imports, c.i.f. Rs. l,OOlt crores of which (approx.): Foodgrains 15% Petroleum 8% Iron and steel 9% Capital equipment 33% Other imporbs 35% Receipts from exports and re-exports, f.ob. Rs. 667 crores of which (approx.): Jute goods 22% Tea 18% Cotton goods 7% Mineral ores 6% Nuts and spices 5% Hides and leather 5% Oilcakes 4% Vegetable oils 3% Raw cotton 2% Other exports 28% Net invisible receipts (exe. foreign aid) -Rs* 12 crores Foreign grants and loans (inc. PL 480) Rs. 331 crores Foreign Assets (end-December 1962) Gold with Reserve Bank Rs. 118 crores Foreign exchange with Reserve Bank Rs. 97 crores  PREFACE This is the report of an economic missioin from the Bank which visited India in February and March 1963. A previous memorandum dealt with the current economic situation, with particular reference to the Governmentts Budget for the coming year ald the problems involved in mobilising the nation's resources for defence. The present report contains a more general review of the progress of India's economic development and the problems encountered in carrying out the successive Five-Year Plans. The report con- cludes with an appraisal of the economic prospects for the coming year and a discussion of additional aid commitments required.  -v - SUMRIARY OF THE MISSIONI S FINDINGS Progress of Economnic Development ill India has just come to the end of the second year of her Third Five-Year Plan, Over the twelve years from the beginning of the First Plan national outpult in real terms has risen by about 50 per cent or at a compound rate of 31 per cent a year4 The population has increased over the same period by 27 per cent, from about 360 million in 1951 to nearly LO6 million in 1963, giving an annual rate of increase of 2 per cent a year. The rise in per capita income has thus been around 11 per cent a year. ii. Production in organised industry has doubled since the beginning of the First Plan in 1951a and the transformation in this sector of the economy has been spectacular. Output of steel has been more than trebled, output of cement nearly trebled and output of coal nearly doubled. Over the same period the increase in agricultural production has been about 40 per cent. Here the changes have been more gradual and less obvious. There has been no clear sign of any acceleration in the pace of agricultural ex- pansiorn in recent years in spite of the large investments made in irrigation and community development during the first two Plans. iii. Government expenditures on devel,prnent have steadily increased from an average of $823 million a year during the First Plan to just over $2,300 million in 1961/62. A principal feature of public investment policy has been the growing concentration on industrial development, particularly in iron and steel and heavy engineering. Private investment in industry has meanwhile risen rapidly in response to the stimulus provided by the Government1s development program. iv. Net investment as a proportion of national income is believed to have more than doubled since the beginning of the First Plan and is now estimated at around 11-12 per cent. The greater part of the increase in investment has been financed from external resources - in the early years of the Second Plan mainly throuT;h the running dowm of India's foreign ex- change reserves and latterly to an increasing ex:tent by foreign aid and private foreign investment. Domestic savings may be around 8 per cent of national income. There is no conclusive evidence to show that the marginal savings ratio has increased significantly over the past five years. V0 Wholesale and retail prices, wiich declined durizn the First Plan, rose more or less continuously during the Second Plan. At no time, however. was the price situation allowed to get out of hand. The index of wholesalp. prices has levelled off in the past two years, while consumer prices have continued to move slowly upwards.  - vi - vi. India1s extermal balance of payments has been under continuous strain since the beginning of the Second Plan in 1956 when imports rose sharply. Between March 1956 and September 1958 'about the time of the first meeting of the Indian consortium) foreign exchange reserves fell from around $1,900 million to $700 million. The loss of reserves has since been slowed down by severe restrictions on imports ?nd increased disbursements of foreign aid, and the reserves are now in the region of $600 million. Against this, however, Indials obligations to the International Monetary Fund amount to $275 million, vii. India's exports during the Second Plan fluctuated between $1,200 million and $1,)400 million a year; There has been some increase in exports during the first two years of the Third Plan, and in 1962/63 earnings were just over $1,h50 million, including exports from Goa. viii. The balance of invisible transactions has changed sharply for the worse during the past three years. The main reason for this change has been the increase in the service due on external debt. The rate of disbursement of foreign aid has risen from just over $400 million in 1960/61 (excluding assistance from the United States under PL 48o) to $510 million in 1961/62 and $740 million in 1962/63. Economic Problems and Policies ix. Mluch has been achieved in India since Independence in establishing a steadily rising trend of production and building up the foundations of a modern economy. The results have, however, been painfully inadequate to the need. The sheer size and Doverty of the country are its greatest problems. For example, it has been calculated that, in order to provide the poorest 20 per cent of the population with ar average per capita income of about $50 a year by 1975, the economy as a whole must maintain an annual rate of growth of 7 per cent over the next twelve years. x* Few governments in history have had such daunting problems to tackle or have tackled them with such a high sense of responsibility. Nevertheless, the Indian Government's political and social policies are frequently in conflict with its economic objectives. Examples of such conflict are to be folund in the policies for reducing inequalities of income and i.Tcalth, for trying to secure balanced regional development and for the protection of in- efficient, labour-intensive techniques in village industries. XJ,, Recent official projections of Indian population show a dramatic explosion between 1961 and 1976 when population is assumed to grow at an average rate of 2L.4 per cent a year. A net increase of 187 million people is forecast by 1976 which would bring the total population to 625 million. The likely increase in the labour force over the fifteen years is equal to the size of the present total labour force in the United States and 23- timeS the size of the labour force in Britain. Failure to keep dowM the rate of population growth would in the long run be disastrous, and a new approach to) the problem of family planning is needed,  - vii - xii. Agricultural output has not been rising fast enough, and the balanced growth of the economy will require a radical improvement in agricul- tural productivity. There is no simple way of bringing this about. Better agricultural administration, larger supplies of fertilisers, an adequate systeh of price supports and a more effective rural works program are among the obvious needs. xiii. In industry, the picture as a whole is more encouraging. The progress made in the steel industry during the past few years is in itself a considerable achievementL, The expansion and diversification of the engineer- ing and chemical industries are also impressive. xiv. Many things are still wrong with the organisation and management of industry in the public sector, but the faults are being gradually remedied. Industrial costs in India are generally high by cosmparison with more advanced industrial countries. Jp to a point this is inevitable at the present stage of developmnent, but the problem has been aggravated by steady, upward pressure. on labour costs and by the policy of encouraging the establishment of small and medium-sized units in the private sector in preference to large ones. Policies with respect to the location of industry need to be more carefully thought out in future. xv0 If Indian industry is to operate efficiently, some way must be founed of simplifying the Dresent system of controls and de-centralising the process of economic decision. A start should be made by removing or relaxing some cf the present controls over prices, so that the price mechanism can function mcre freely as a guide to the allocation of resources. The policy of controlling prices in key industries, while prices in less important industries have been left free, is particularly difficult to justify. xvi. There is growzing recognition in India that the prices Cixed for bas>! commodities and oervices are too low, A strong case can be made for raising substantially the prices of the better qualities of coal, if not for removing conurols over coal prices altogether. Railway freight rates lor coal and oth<' bulk commodities need to be increased,, electric power rates should be raised substantially, and much higher retention prices should be paid to the iron and steel plants in both public and private sectors. Pricing policies of public enterprises should be guided by the need to generate surpluses out of which '-o finance future investment. xvii. Interest rates in India have been moving gradually upwards, but they, are still low by comparison with most other countries which are equally short of capital. It is important for purposes of screening investment projects (and also for deciding the pricing policies of public enterprises) that a realistic price should be attached to capital. In India, there is a good case for arguing that new investments, whether public or private, should only be undertaken if they can earn a return of at least 10 Per cent on all capital invested, after covering operating costs and providing conservatively for depreciation.  xviii. The inadequate and erratic supply of imported materials, components and spares is the most obvious and immerdiate restraint on industrial output. The problem of managing import controls has become extremely complex and is one of' the principal causes of the overload of administrative work on both government and industry. The most effective form of external assistance to India in present circumstances would be an increase in general purpose aid not tied to procurement of particular comnodities or in aid that can be used to finance imports of materials, components and spare parts for industry and agriculture. Apart from its direct impact on production, assisUance in this form will help in relaxing the controls over industry. The private sector would be the principal beneficiary. xix. The Indian Government and Indian industry have become increasingly export-conscious during the past few years, but the measures so far taken to promote exports have barely scratched the surface of the problem. The dif- ficulties are formidable. One of the most serious criticisms of government export policy is that it has failed to take full advantage of opportunities for developing exports of agricultural and mineral products, particularly iron ore. xx. Internal prices of many of the goods which India exports are out of line at present exchange rates with world prices. A wide variety of special preferences, rebates and subsidies have been introduced as part of the export promotion campaign. The most important export incentive is the scheme under which manufacturers receive additional import allocations for machinery, materials and components on the basis of their export perfotmance. With certain exceptions, articles imported under this scheme may either be used by the exporter or sold to other manufacturers engaged in exporting the same kind of goods. Exporters are, however, restricted to the import of specified items used in their industry, and there is no general scheme for the retention of export earnings or the free sale of import licences. xxi. The tourist trade is a neglected area of export promotion. Schemes for the development of the hotel industry, for the improvement of internal transport facilities and for the relaxation of restrictions on drinking have not been pressed forward vigorously enough. These are probably the three most important conditions for a major expansion of foreign tourist travel in India. Prospects for the Coming Year xxii. The immediate outlook for the Indian economy is obscured by the man.yr uncertainties about how defence production, investment and the balance of pay- ments will be affected by the increases in defence expenditure decided upon after the Chinese attack last October. The national emergency does not appear as yet to have had any seriously adverse impact on the development program, but some conflict between defence and development is unavoidable, not least because consideration of the new problems created by the emergency is slowing down the process of decision-making at the top levels of government.  - ix - xxiii. A primary object of this yearts Budget was to make way for addi- tional defence expenditures by cutting back consumption rather than investment. The Finance Ministerts proposals for additional taxat;ion are an indication of Indiats readiness to make great sacrifices for defence. Taking taxation and compulsory savings together, the yield expected from the new measures in 1963/64 is $663 million. Just over one third of this will come from direct taxation of individuals and companies, including compulsory savings, and neartly two thirds from indirect taxation, mainly increases in customs and excise duties. xxiv. A12 the States have now presentued their budgets, and the estimated yield from the additional taxation alreaay proposed would be about $85 millhory. Another $44 million of additional revenue is expected to accrue to the States in 1963/6L4 from increases in inter-State sales tax which is legislated by the Centre. xxv. The provision in the Budget for a "super profits tax" has been strongly criticised by Indian incdustry, which contends that the tax will dis- courage new investment and penalise efficiency and growth. Industry has indicated that it is ready to bear its share of the defence burden, and the Finance Winister is understood to be considering the possibility of somle change in his proposal wlich would meet the objections raised, while still raising the additional revenue expected (estimated in the Budget at just over $50 million this year). xxvin The Budget provides for defence expenditures to be more than doubled. and for development expenditures to be raised by 10-15 per cenlt above last yearx's level, Non-development expenditures, apart from defence, are being held down, and the only major increase proposed in the current expenditures of the Central Government is on account of debt service. xxvii. The Budget ends up with an overall deficit of rather over $300 million to be met by an expansion of Treasury Bills. This is somewhat higher than the provision made for deficit financing in previous years, and if the increases in expenditures on defence and development materialise to the full extent allowed for, there could be considerable pressure on prices. However. there are adiynuistrative and plamning limitations on the speed at which defence expenditures can be increased, and the same is true in lesser degree of deve- lopmenit0 Since the additional revenues will start to come in from the beginning of the year, the immediate impact of the Budget on the ecoinomy coula well be somewhat deflationary. xxviii. The further steep increases in indirect taxation and the need for the upward adjustment of prices of many basic goods and services should result in a fairly general increase in the cost of living. Whatever the risks of price increases in the immediate future, the mission believes that it would be a shaort-sighted policy to try to suppress infla:tion by mainte'ining arti- ficialJ.y low prices in such industries as iron and steel, coal, transport ard electric power.  -x - xxix. Changes in agricultural production during the coming year will depend mainly on the weather. For industrial production the critical factor is likely to be the availability of maintenance imports, and this in turn wil' depend on how much additional external assistance can be provided in the forit of balance of payments support and commodity aid. Shortages of transport, power and coal, though less severe than they were a year ago, could again emerge as obstacles to expansion. Transport will be one of the sectors of th> economy most directly affected by defence. xxx. The official balance of payments forecasts for 1963/64 envisage imports rising by 25 per cent, exports by 21 per cent, as compared with the past year. If things turn out well, the mission feels that the forecast for total exports might be reached, but that it is unlikely to be exceeded. MIore than two thirds of the increase in imports is attributable to machinery and transport equipment and the remaining one third to iron and steel, non-ferrouHi metals, petroleum products and fertilisers. So far as maintenance imports are concerned, the mission has no reason to believe that requirements have been over-stated. xxxi. The Government is seeking new aid commnitments of $1,250 million in 1963/64 - about $550 million of non-project aid and $700 million of project aid. This would be a higher proportion of non-project aid than was received in the first two years of the Third Plan. The mission believes that the ratio of non-project aid to total aid must be increased if full advantage is to be taken of the investmerts already made, and if the start of new invest- ments i.n manufacturing industry is not to be pushed beyond what the Indian economy can find the foreign exchange to support. xxxii. The total amount of Indials exteinal public debt on April 1, 1963, was about $3,900 million. Service payments on this debt would reach their peak in the years 1965/66 - 1966/67 when projected amortisation and interest combined would average over $350 million a year. This would be equivalent to around 18-19 per cent of India's gross external receipts on current accour.1 at the present time. The indications are that India will require at least as much external assistance in the Fourth Plan as in the Third if the growth of the economy is to be maintained along the lines at present proposed. Unless most of the assistance extended from now on is in the form of grants or loans with easy terms of repayment, the burden of debt service will rapidly become insupportable. r.S ;s. *MS.u-