Volume I i s t h e Summary or Report of the TjIission. It was prepared by Bernard R. Bell, the Mission Chief. Its f i r s t d r a f t was written i n May 1965 and it was completed i n i t s present form i n August 1965. It has not been revised since t h a t date. Consequently some of the specific output and income figures pre- sented, measuring gross performance i n the Third Plan period, have been superseded by events. Specifically, output and income i n 19&/65 t u r n s out t o have been modestly higher than indicated and t h a t i n 1965/66 substantially lower than projected, princi- p a l l y as a r e s u l t of the disastrous drought of 1965/66, i t s d i r e c t impact on agricultural output and i t s wider ramifications. These differences, however, do not a l t e r the e s s e n t i a l substance of what i s said. TABLE O CONTEXTS F Page No. PREFACE i D!IVELOPPIENT IN THE THIRD P A PERIOD LN The Growth i n Aggregate Output The Growth of Imports The Growth of Exports The Growth of Foreign Aid The Use of the Increment i n Output Tne Growth of Population Development Performance Compared with the Third Plan Investment During the Plan Period Imports and &ports in t h e Plan Period 'qlaintenance I:nportsI1 llProj e c t Lnports l1 The Shortage of ?hintenace Imports Agriculture i n the Third Plan Period OSSTACLES TO PROGRESS The Foreign Exchinee Shortage Over-valuation of t h e Rupee Import Cor. t r o l s Defense Expenditure Population Control Agriculture Foreign Investment Publ-ic Sector Enterprise Rural Works Nobilization of I n t e r n a l Resources i T r ~ n s p o r tta o n Developnlent Strategy THE OUTLOOK Action by I n d i a B t h e Aid-Givers y e I n September 1964 you commissioned m t o lead a s t u d y of t h e Indian economy "aimed a t providing a comprehensive assessment of t h e e x i s t i n g development e f f o r t " . The s t u d y was "intended t o i d e n t i f y and develop our understanding of t h e c r i t i c a l o b s t a c l e s t o more rapid economic growth i n Indiat1. A r e p o r t on t h e study was t o be made t o you p e r s o n a l l y which, it was hoped, would provide advice u s e f u l i n t h e decisions yau must make a s President of t h e IBRD and IDA, and l e a d e r of t h e Aid-hdia Cons ortium. This document, Volume I, i s t h e main and o v e r a l l r e p o r t on t h e study. It i s t h e r e s u l t of t h e work of a l l t h e members of t h e study mission. Their names and t h e p a r t i c u l a r s e c t o r s o r aspects of Indian economic l i f e on which t h e y focused t h e i r a t t e n t i o n a r e l i s t e d below. Each member of t h e mission prepared o r contributed t o one of t h e nine r e p o r t s which u n d e r l i e and supplement t h i s o v e r a l l report. The t e n documents (contained i n 14 volumes) t o g e t h e r c o n s t i t u t e t h e t o t a l r e p o r t of t h e mission. This main o r o v e r a l l r e p o r t i s not, however, a systematic o r f a i t h f u l summary of t h e content of t h e underlying reports. Rather it i s m own e f f o r t , drawing upon t h e work of t h e e n t i r e mission, t o respond y t o what I take t o be t h e p r i n c i p a l questions with regard t o I n d i a ' s economic development e f f o r t . I have attempted t o keep i t rea.sonably b r i e f i n order not t o obscure i t s essence. Consequently it contains, f o r t h e most p a r t , i n t e r p r e t a t i o n s , judgments, and recommendations f o r a c t i o n on major p o l i c y i s s u e s . It leaves t o t h e underlying r e p o r t s p r e s e n t a t i o n and d e t a i l e d analyses of t h e fa.cts and extended argumen- tation. Although obviously t h i s o v e r a l l r e p o r t draws h e a v i l y upon t h e work and t h e r e p o r t s of a l l t h e mission members, i t i s m own r e p o r t and y r e s p o n s i b i l i t y f o r t h e s e l e c t i o n and p r e s e n t a t i o n of f a c t s , f o r t h e i n t e r p r e t a t i o n s and judgments, and f o r t h e conclusions and recommendations r e s t s upon me. Other members of t h e mission have not had the opportunity t o r e d e w it and i t does not p r e s e n t e i t h e r a t e x t o r a s e t of conclusions o r recommendations t o which t h e y have agreed o r t o which t h e y would a l l n e c e s s a r i l y f u l l y subscribe. Several months ago, i n M y 1965, I wrote and presented t o yau a a first and summary d r a f t of t h i s statement. A s I i n d i c a t e d a t t h e time, t h a t summary preceded t h e completion of t h e s e c t o r a l analyses and r e p o r t s by t h e mission members. Completion of those r e p o r t s has n o t l e d t o r e v i s i o n of any of t h e e s s e n t i a l findings, conclusions o r recommendations contained i n the o r i g i n a l summary b u t has reinforced them. You w i l l f i n d , therefore, that t h i s statement i s an e l a b o r a t i o n but not an a l t e r a t i o n of t h a t summary. Several caveats need t o be expressed. F i r s t , I have thought it more important t o attempt t o answer t h e c r i t i c a l questions than t o avoid t h e p o s s i b i l i t y of e r r o r . Consequently, t h i s paper contains i n t e r - p r e t a t i o n s and judgments on matters where t h e evidence may be regarded a s n e i t h e r adequate nor incontrovertible. This i s aside from t h e f a c t , which goes v i r t u a l l y without saying, t h a t the reasoning i t s e l f may be faulty. Nevertheless, s i n c e i n many matters a c t i o n based on judgments must be taken, judgments, however e l u s i v e proof may be, must be made. Second, t h e r e i s no attempt i n t h i s paper ( o r i n t h e s e c t o r a l reports) t o present a c a r e f u l l y balanced evaluation of t h e e f f o r t s of t h e Government of India o r t h e aid-givers t o f u r t h e r I n d i a ' s economic progress. o N space has been devoted t o noting and describing t h e successes and t h e achievements. There i s no l a c k of t h e s e and some a r e e s p e c i a l l y notable, but we d i d not conceive our function t o be t h a t of t h e h i s t o r i a n . Our mandate was not t o record successes but t o seek opportunities f o r g r e a t e r success. Less euphemistically, our t a s k was t o f i n d and t o understand t h e f a i l u r e s , t h e deficiencies, and the obstacles t o more rapid progress i n order t h a t t h e y might be overcome, t h a t t h e achievements might be greater, and t h a t progress m i g f i t be accelerated. The statement concentrates on these and, therefore, w i l l probably seem t o be an unremittingly c r i t i c a l catalogue of f a i l u r e . Its purpose, however, must be understood. Third, because t h i s i s w r i t t e n as a r e p o r t s o l e l y t o you, no p a i n s have been taken t o express judgments i n t h e forms which would be l e a s t bruising and most persuasive t o those t~hoseactions it c r i t i c i z e s and whose i d e a s it hopes u l t i m a t e l y w i l l change. Fourth, t h e paper is not exhaustive o r comprehensive. It t r e a t s t h e matters which I judged t o be most c r i t i c a l i n I n d i a ' s economic development and a l s o those t o which t h e mission, i n t h e time and with t h e range of personnel i t had, could give a reasonable amount of competent a t t e n t i o n . This l a s t i s a n important added q u a l i f i c a t i o n . Education and t r a i n i n g , t o mention only one example, a r e matters of vital importance t o t h e Indian development e f f o r t , but we have not touched upon them. F i f t h , t h e mission included only a few people with any p r i o r knowledge of o r experience with t h e Indian development e f f o r t , and f o r most of these t h e e a r l i e r exposure was a l i m i t e d one. Some of t h e mission members had six months i n India i n i t s course, b u t most had much l e s s time and s e v e r a l only a few weeks. It need hardly be s a i d t h a t t h e Indian economy i s t o o l a r g e and complex t o be thoroughly ccanprehended or uner- r i n g l y diagnosed i n t h a t period. We, therefore, claim no i n f a l l i b i l i t y . Sixth, although t h e statement uses and c i t e s Government of I n d i a s t a t i s t i c s , it a l s o makes some broad estimates of i t s own. These, a s well a s the o f f i c i a l and published s t a t i s t i c a l data, a r e only very imperfect n approximations of r e a l i t y . O balance they a r e probably more revealing than misleading, but they should not be ove2cvalued. Finally, there should be no misunderstanding of t h e scope and t h e nature of our effort. have not attempted, and t h i s paper does not present a s p e c i f i c and meticulous accounting of I n d i a ' s achievements and f a i l u r e s i n t h e Third Plan period, o r a systematic attempt a t appraisal of t h e Fourth Plan. The l a t t e r we could not i n any case have done since, during the period of t h e mission study, the Fourth Plan was only i n the process of preliminary formulation and development. Rather we have examined experience i n the Third Plan period and i n i t i a l thinking about the Fourth Plan i n an e f f o r t t o i d e n t i f y and understand the major devel- opment problems and p o l i c y issues which confront both t h e Government of India and the aid-givers a t t h i s time. Iqe have made p o l i c y judgments and a c t i o n recommendations which bear heavily upon t h e Fourth Plan, but they do not c o n s t i t u t e e i t h e r an a p p r a i s a l of o r a systematic outline of a Plan. The scope and nature of our e f f o r t i s perhaps b e s t suggested by a paragraph from a year-old memorandum with which I transmitted t o you an o u t l i n e of t h e proposed study: "As we conceive it, the Study i s motivated not only by the coming necessity f o r an a.ppra.isa1 of the Fourth Five-Year Plan, but a l s o by the f a c t t h a t a l l i s not well with the Indian develop- ment e f f o r t . I n t h e f i r s t t h r e e years of t h e Third Five-Year Plan the r a t e of growth of output and income has barely kept pace with t h e growth of population. Despite a very l a r g e volume of investment a,nd foreign aid, p e r capita income has not increased, a g r i c u l t u r a l production has been stagnant and f u t u r e debt service obligations have been accumulating rapidly. The reasons f o r all t h i s are not e n t i r e l y c l e a r but there i s doubt, sha.red by both Indian and foreign observers, t h a t t h e a l l o c a t i o n of investment resources among sectors i s as wise and effective a s i t ought t o be; t h a t the establishment of new productive f a c i l i t i e s i s e f f i c i e n t l y conducted; and t h a t e i t h e r e x i s t i n g o r newly created f a c i l i t i e s a r e e f f e c t i v e l y operated. Perhaps most disturbing i s t h e absence of any basis f o r conviction t h a t improvement i s i n sight. There i s a l s o doubt t h a t the t o t a l magnitude of t h e e f f o r t i s a t a l l adequate t o the problem and t h a t e i t h e r domestic savings or the inflow of c a p i t a l from abroad can a t t h e i r present l e v e l s , and even with e f f e c t i v e use, make possible investment adequate t o pro- duce s i g n i f i c a n t economic progress. f ' A s t h i s paragraph suggests, t h e p r i n c i p a l questions t o which t h i s report i s addressed, s t a t e d simply, include t h e following: Is India's economic development e f f o r t succeeding i n r a i s i n g national output and income s i g n i f i c a n t l y ? Is i t succeeding i n r a i s i n g p e r capita consumption o r l i v i n g l e v e l s ? Is i t c r e a t i n g t h e conditions under which economic growth can be continuous and self-sustaining? Is there perceptible movement toward ultimate independence of inter-governmental aid? Is e x i s t i n g aid being e f f e c t i v e l y u t i l i z e d along h i t h i n t e r n a l resources? t h a t a r e the o b s t a c l e s t o an a c c e l e r a t e d growth of output and movement toward self-sustained growth? Idhat can be done by I n d i a and by t h e aid- g i v e r s t o remove t h e s e o b s t a c l e s and t o f u r t h e r t h e i r common o b j e c t i v e s ? I n behalf of a l l t h e mission members I must here convey t o you our a p p r e c i a t i o n of t h e e x t e n t of t h e a s s i s t a n c e we received from a very l a r g e number of o f f i c i a l s a t all l e v e l s of the Government of India. Inevitably, even though perhaps mistakenly, t h e r e was occasional h e s i t a t i o n about t h e e x t e n t t o which, a s outsiders, we could s h a r e i n k n a ~ l e d g eof matters not f u l l y p u b l i c . This r ~ a u l dbe t r u e i n t h e case of any Govern- ment. bje a r e v e r y conscious, however, of the tremendous amount of time f r e e l y given t o us by h a r r i e d o f f i c i a l s responsible f o r t h e stupendous ta.sk of managing t h e a f f a i r s of a nation of almost 500 m i l l i o n p e q l e . e W admire t h e i r p a t i e n c e i n d i s c u s s i n g with us t h e complexities of t h e problems t h e y face. For t h e i r extensive cooperation we a r e deeply grateful. Bernard R. B e l l The f o l l a ~ i n g s a l i s t of t h e personnel of the mission t o g e t h e r i with the p a r t s of t h e s t u d y a,nd r e p o r t f o r which t h e y were c h i e f l y respon- s i b l e . Except a s i n d i c a t e d , a l l members of t h e mission were permanent members of t h e s t a f f of t h e Interna.tiona1 Bank f o r Iieconstruction and Development. Bernard R. ~ e & / Chief o f mission Volume I - Main Report Benjamin B. King Planning (and Deputy Volume XN Chief of mission) S i r John Crawfo Agricultural Policy Volumes 11, 111, I V Y W. David Hopper and V e IJolf ~ a djin+/ Louis Gore- Louis ~ a r n i e & / Kenneth A . Bwhr 14anufacturing I n d u s t r y Volume V I Frank Lamsori-Scribner Romano P a n t a n a l i Jochen Kraske Stanley Please Financial Policy Volume IX A t l e Elsaas Volume X Sheldon J. S e g a 6/ L Family Planning Volume X I Conrad Taegber, 7/ SI ~ e e n ~ d .. Wilfred Owen-8/ Transport P o l i c y Volume X I 1 Da,vid G. Holland Export P o l i c y Volume V I I Doreen Crcmpton S t a t i s t i c a l Operations Volume X 1 1 I (Tks. R. Alberto ~ a l v o ) Jean Baneth Adminis t r a , t i v e Controls Volume V I I I Surveys and Research Corporation A u s t r a l i a n National U n i v e r s i t y Ford Foundation Consultant Food and A g r i c u l t u r e Organization The Population Council U.S. Bureau of t h e Census The Brookings I n s t i t u t i o n DEVELORGNT IM THE THIRD PLAN PERIOD The Growth of Aggregate Outnut 1 . I n d i a ' s economic progress i n the f i r s t four years of t h e Third Five-Year Plan period has been disappointing. Natf onal output increased a t only a modest r a t e , no higher than t h a t i n the Second Plan period, despite a s u b s t a n t i a l increase i n imports and i n foreign aid. A l a r g e p a r t of the increase i n output during t h e period was required t o provide f o r the massive increase i n population and a f u r t h e r p a r t went f o r increased defense expenditure. Per capita l i v i n g l e v e l s rose hardly a t all, invest- ment l e s s than adefluately and exports only moderately. Although India's productive base was somewhat enlarged, t h e growth of a c t u a l output did not much exceed the growth of population, t h e improvement i n l i v i n g l e v e l s was negligible and there was l i t t l e d i s c e r n i b l e progress toward sustained self-supporting economic growth. 2. Some numbers may help t o give more s p e c i f i c meaning t o these e general statements. There a r e , as w have already s t a t e d , important gaps i n Indian economic s t a t i s t i c s , and t h e r e a r e deficiencies, c o n f l i c t s and uncertainties. The broad estimates we have made i n the e f f o r t t o fill gaps and t o obtain a general p i c t u r e of develapment i n t h e Third Plan period a r e subject t o even more error. Consequently no precision should be a t t r i b u t e d t o these numbers. Nevertheless they may be taken as approx- imations of t h e rea.lity. Tables 1 t o 7 summarize i n aggregative terms our estimates of t h e performance of the economy i n the Third Plan period. These estimates a r e based on o f f i c i a l published data f o r the f i r s t three years of the P1a.n period a s well a s f o r e a r l i e r periods, o f f i c i a l , but i n p a r t unpublished, estimates f o r 1964-65, and the assumption t h a t t h e ra,te of growth i n GP?P i n 1965-66 w i l l be s l i g h t l y higher than the average i n the four preceding years. This l a s t assumption i s made simply because five-year data make comparison with t h e Plan and with e a r l i e r Plan periods more con- venient. 3. The aggregate growth of GWL/ i n the Third Plan period, w i l l , according t o our estimates, be 22.6 p e r cent or an average of 4.2 p e r cent (compound) p e r year, In t h e f i r s t four years of t h e period GNP, measured i n 1960-61 prices, increased a t t h e average compound r a t e of approximately 4 p e r cent p e r year and we assume p e r cent f o r the current (1965-66) year. Ivational Income o r Ilet Rational Product, which i s more commonly - 1/ I.!ost Government of India documents speak i n terms of National Income ( o r Met ljTa,tional product) which measures output and income a t f a c t o r cost and net of deprecia,tion o r capita.1 consumption. Even though rough estimating must be done, we find i t u s e f u l and meaningful f o r many p u r poses t o use figures f o r Gross National Product ( o r Income o r Expenditure) which measures i n ma.rket p r i c e s and gross of depreciation. G P i s always, N of course, higher i n absolute terms but r a t e s of change i n GhP and National Income a r e not s i g n i f i c a n t l y d i f f e r e n t , used a s a measure i n India, w i l l have grown 21.6 p e r cent i n t h e f i v e years, o r a t t h e s l i g h t l y lower compound r a t e of 4.0 p e r cent p e r year. This i s v i r t u a l l y i d e n t i c a l with the r a t e of growth acniaved i n the Second Plan period, but i s s u b s t a n t i a l l y lower than t h e Third Plan t a r g e t of 31 p e r cent o r 9 9 p e r cent p e r year. 4. The o v e r a l l growth achieved i s t h e product of an increase i n the f i v e years of about 12 p e r cent i n the output of agriculture, t h e l a r g e s t s e c t o r of t h e econmy, of about 45 p e r cent i n the output of t h e much smaller mining and factory sector, and of -mrying increases i n t h e small enterprise, service and other sectors. The grmrtn f o r e c a s t s or t a r g e t s of t h e Plan were, by contrast, about 25 p e r cent f o r a g r i c u l t u r e and almost e 70 p e r cent f o r t h e mining and f a c t o r y sector. W c i t e these cotrrparisons with t h e Plan a t thLs p o i n t mainly t o i n d i c a t e t h e extent t o which Indian expectations a s expressed i n the Plan have been disappointed. tie discuss elsewhere the growth of output t h a t could be expected, given t h e inputs and t h e allocations f o r which it provided. 5- In absolute t e n s , GNP, expressed i n 1960-61 p r i c e s , will have g r a m from Rs. 150 b i l l i o n ($33 b i l l i o n ) i n 1960-61 t o Rs. 195 b i l l i o n ($41 b i l l i o n ) i n 1965-66. Net National Product or National Income, a l s o i n 1960-61 prices, w i l l have grmm from 3s. l4l b i l l i o n t o Rs. 172 b i l l i o n . O f the t o t a l increment i n Net National Product of R s . 31 b i l l i o n , agri- culture w i l l have supplied about 28 p e r cent and the mining and f a c t o r y s e c t o r a-bout 22 p e r cent. The Growth of Inrports 6. The rela,tiveljr low r a t e of growth i n output occurred despite a substa.ntia1 increase i n imports. Government of India foreign t r a d e data a r e not very s a t i s f a c t o r y , but they suggest t h a t imports ?.sill have increased from F. 1 . b i l l i o n ( $2.3 b i l l i o n ) i n 1960-61 t o Rs. 15.1 b i l l i o n ($3.1 & 11 b i l l i o n ) i n 1365-66. This i s an increase of %. 4.0 b i l l i o n ($840 million), 36 p e r cent, i n the f i v e years, o r an average of more than 6 p e r cent p e r year. Imports i n 1765-66 s t i l l were l e s s than 8 p e r cent of G P ( a t the N o f f i c i a l r a t e of exchange), but t h i s v a s t l y understates t h e i r key importance i n t h e economy. The marginal import r a t e (incremental imports a s a. percent- 1 age of the increment i n GFP) was approximately 1 p e r cent p e r year. A l - though the import c l a s s i f i c a t i o n s a r e not very s a t i s f a c t o r y , i t i s c l e a r t h a t nachinery and equipment w i l l account f o r the major p a r t , possibly $500 n i l l i o n , of t h e increase i n imports between 1960-61 and 1965-66. This r e f l e c t s princi?ally the gracing investment i n manufacturing, e l e c t r i c power, mining and transport capacity and i n p a r t the growing replacement require- ments of production f a c i l i t i e s i n these industries. Imports of cereals, including those provided by PL 480 v i l l have increased by perhaps $250 million i n the period, r e f l e c t i n g t n e inadequate growth of a g r i c u l t u r a l output. Imports of a l l other goods, f o r t h e most p a r t materials required f o r current production, w i l l have increased only modestly, by perhaps $100 million o r l e s s . This l a s t f a c t i s of key importance and goes f a r t o explain the emergence of a s u b s t a n t i a l amount of unutilized and u n d e r e u t i l i z e d industria.1 ca,pacity. W w i l l return t o t h i s ma.tter. The Growth of Fkports 7. Exports, according t o our estimates, ~.Jjll have increased l e s s r a p i d l y than imports during t h e Third Plan period and t h e aggregate amount of t h e i n c r e a s e r a l , of course, be s m a l l e r s i n c e imports exceed exports by a wide margin. There a r e c o n f l i c t s and u n c e r t a i n t i e s i n Government of I n d i a export as w e l l a s import data, b u t i t appears t h a t commodity exports a r e l i k e l y t o have increased i n t h e five-year period from Rs. 6.3 b i l l i o n ($1.3 b i l l i o n ) t o Rs. 8.1 b i l l i o n ($1.7 b i l l i o n ) o r by Rs. 1.8 b i l l i o n (approximately $380 m i l l i o n ) . The i n c r e a s e i s approximately 29 p e r cent o r a l i t t l e more than 5 p e r c e n t p e r year. This i n c r e a s e i s sub- j e c t t o some small discount, however, s i n c e p a r t of i t i s accounted f o r by t h e i n c l u s i o n subsequent t o 1960-61 of exports from Goa and by changes i n s t a t i s t i c a l coverage. Exports represented only about 4 p e r c e n t of GlJP i n 1965-66 and were not much more than h a l f imports. The marginal export r a t e (incremental exports a s a percentage of t h e increment i n GNP) appears t o be about 5 p e r cent. The import-export ga,p was Rs. 4.8 b i l l i o n ($1 bil-lion) i n 1960-61 and had widened t o Rs. 7.0 b i l l i o n ($1.5 b i l l i o n ) i n 1965-66. The Growth of Foreign Aid 8. The widening gap between imports and exports was financed p r i n c i p a l l y by increased f o r e i g n a i d . I n 1960-61 a c t u a l u t i l i z a t i o n of foreign a i d , including PL 480 a s s i s t a n c e , was 2s. L.2 b i l l i o n ($880 m i l l i o n ) whereas by 1964-65 it was Rs. 6.9 b i l l i o n ($1.5 b i l l i o n ) and i n 1965-66 i t i s l i k e l y t o be h i g h e r and may reach Rs. 8.8 b i l l i o n ($1.9 b i l l i o n ) . These f i g u r e s a r e gross. Net of p r i n c i p a l and i n t e r e s t payments t h e f i g u r e s a r e approximately $700 m i l l i o n in 1960-61, $1.2 b i l l i o n i n 1964-65, and probably $1.4 b i l l i o n t o $1.5 b i l l i o n i n 1965-66. Excluding PL 480, t h e gross a i d f i g u r e s a r e approximately $500 m i l l i o n i n 1960-61, $1.0 b i l l i o n i n 1964-65 and probably somewhat more, perhaps $1.3 b i l l i o n i n 1965-66. The i n c r e a s e of $700 m i l l i o n o r more i n t h e l e v e l of n e t a i d u t i l i z a t i o n between 1960-61 and 1965-66 approximately matches but s l i g h t l y exceeds t h e i n c r e a s e i n t h e importrexport gap i n the same period. 9. Ue have been t r a c i n g change within t h e Third Plan period, measuring from 1960-61, t h e l a s t year of t h e Second Plan period, t o 1965-66, t h e l a s t y e a r of t h e Third. It i s important t o notice i n comparing f o r e i g n a i d i n t h e two periods as a whole t h a t t h e i n c r e a s e i n t h e l e v e l of a i d i n t h e Third Plan period over t h a t i n t h e Second d i d not go prima.rily t o finance a widening of t h e t r a d e d e f i c i t . Aid u t i l i z a t i o n ( i n c l u d i n g PL 480) i n t h e Second Plan period was approximately $3.0 b i l l i o n and i t i s l i k e l y t o be approximately $6.1 b i l l i o n i n t h e Third, an i n c r e a s e of $3.1 b i l l i o n . The t r a d e d e f i c i t , however, was only some $300 m i l l i o n higher i n t h e l a t e r period then i n t h e e a r l i e r . To t h e e x t e n t of approximately $1.2 b i l l i o n s t h e a d d i t i o n a l a i d i n t h e l a t e r period m e ~ e l y u b s t i t u t e d f o r t h e drawing down of I n d i a ' s f o r e i g n exchange reserves i n t h e Second Plan period. Almost $900 m i l l i o n was used t o meet a.dditiona1 debt s e r v i c e obligations. The balance apparently o f f s e t a sharp reduction i n I n d i a ' s n e t r e c e i p t s from i n v i s i b l e s and on account of c a p i t a l movements. The Use of t h e Increment i n Output 10. e N W have i n d i c a t e d t h a t t h e i n c r e a s e i n G P during t h e Third Plan period i s estimated a t 22.6 p e r c e n t o r .%A 36 b i l l i o n , expressed i n 1960-61 p r i c e s . W regard t h i s a s only a modest i n c r e a s e , inadequate t o I n d i a ' s e need and a s p i r a t i o n t o r a i s e t h e l e v e l of l i v i n g of i t s people and t o move toward u l t i m a t e l y s e l f - s u s t a i n i n g economic growth independent of f o r e i g n a i d . Nevertheless t h i s growth might have made a s i g n i f i c a n t c o n t r i b u t i o n toward t h e achievement of t h e s e objectives i f i t were not f o r two o t h e r f a c t o r s , one t h e r a p i d and a c c e l e r a t i n g growth of population, and t h e other t h e s i z e a b l e i n c r e a s e i n defense expenditure. These two pre-empted a sub- s t a n t i a l p a r t of t h e increment i n t h e resources a v a i l a b l e f o r i n t e r n a l use, namely t h e Rs. 36 b i l l i o n of a d d i t i o n a l output p l u s t h e Rs. 4 b i l l i o n increase i n imports made p o s s i b l e by f o r e i g n aid. Consequently, inadequate amounts were l e f t f o r investment t o expand production capacity, f o r increased export t o reduce t h e t r a d e gap, o r f o r r a i s i n g t h e l e v e l of consumption, e i t h e r p r i v a t e consumption o r expanded and improved Government s e r v i c e s . The Growth of Population 1.1 During t h e Third Plan period I n d i a ' s population w i l l have increased by 56 m i l l i o n (from 439 m i l l i o n t o 495 m i l l i o n ) . This i s an i n c r e a s e of 12.8 p e r c e n t o r 2.4 p e r c e n t (compound) p e r year. It means N t h a t on a p e r c a p i t a b a s i s t h e increase i n G P has been l e s s than 9 p e r c e n t i n t h e f i v e years and only 1.7 p e r c e n t p e r year. It means, also, t h a t more than half t h e t o t a l i n c r e a s e i n output wa.s required simply t o maintain p e r c a p i t a consumption a t i t s 1960-61 l e v e l . Onljj t h e balance was a v a i l a b l e t o permit an i n c r e a s e i n t h e l e v e l of investment o r export, o r some improvement i n p e r c a p i t a consumption l e v e l s . I n f a c t a s we estimate it, although consumption ( p r i v a t e p l u s p u b l i c but excluding defense expenditure) took almost 60 p e r c e n t of t h e increment of Rs. 40 b i l l i o n i n t h e resources ava.ilable, p e r c a p i t a consumption increased only about 4 p e r c e n t i n t h e five-year period o r l e s s than 1 p e r c e n t p e r year. The f u l l s i g n i f i c a n c e of t h i s can be appreciated i f i t i s noted t h a t p e r c a p i t a consumption i n 1960-61 was R s . 3l4 ($66) and t h e annual i n c r e a s e . s was about R 2.5 ( w e l l under $1.00). 12. Defense expenditures more than doubled following t h e Chinese a t t a c k i n 1962. Between 1960-61 and 1965-66 t h e y increased f r o m approx- ima.tely 2 p e r c e n t t o 4% p e r c e n t of GNP. W estimate t h a t they took 14 e p e r cent of t h e R s . 40 b i l l i o n increment i n t h e t o t a l resources a v a i l a b l e t o t h e economy. 13 t, Gross i n v e s t m e n1/ d e s p i t e t h e l i m i t a t i o n s imposed by i n c r e a s i n g consumption and defense requirements, increased from approximately Rs. 22 b i l l i o n t o Rs. 3 1 b i l l i o n or by 43 p e r c e n t between 1960-61 and 1965-66. A s a proportion of G P it r o s e from less than 14 p e r c e n t t o almost 16 N p e r cent. Correspondingly t h e average i n t e r n a l savings r a t e r o s e from l e s s than 1 1 p e r c e n t t o more than 12 p e r cent. The marginal savings r a t e i n t h e - 1/ Gross investment i s l a r g e r than Plan Investment s i n c e i t i n c l u d e s c a p i t a l replacement and some new investment n o t included o r provided f o r i n t h e Plan. period appears t o have been about 20 p e r cent, r e f l e c t i n g i n p a r t l a r g e i n c r e a s e s i n t a x revenues. Although t h i s i n c r e a s e i n t h e l e v e l and r a t e of investment i s appreciable, rie doubt t h a t i t i s adequate t o permit t h e r a t e of growth i n output which I n d i a r e q u i r e s i f i t i s t o make s i g n i f i c a n t economic progress. Economic progress i s more than a m a t t e r of t h e a r i t h - metic of investment l e v e l s and r a t e s . Nevertheless we observe t h a t if t h e 2% p e r c e n t of GAT used f o r a d d i t i o n a l defense expenditure could have been used f o r investment, t h e l a t t e r would have been a b o u t 1 8 p e r c e n t higher than a c t u a l l y it was i n 1965-66, and would have approximated 18 p e r c e n t of GMP. llle observe a l s o t h a t if t h e r a t e of population i n c r e a s e had been a t h i r d l e s s (1.6 p e r c e n t r a t h e r than 2.b p e r c e n t p e r p a r ) then, given no g r e a t e r r i s e i n p e r c a p i t a consumption than occurred, investment might on t h a t score have been 20 p e r c e n t higher than a c t u a l l y it in 1965-66. lk. e W a r e not suggesting i n t h e paragraph above t h a t t h e important l i m i t i n g o r c r i t i c a l f a c t o r i n I n d i a ' s e c o n m i c development i s t h e r a t e of i n t e r n a l savings, o r even t h e r a t e of investment. Both a r e important but, a s we s h a l l argue, o t h e r f a c t o r s appear t o u s t o be more fundamental o r more c r i t i c a l and we b e l i e v e t h a t experience i n t h e Third Five-Year Plan period bears o u t t h i s view. The more c r i t i c a l f a c t o r s , a s we i d e n t i f y them, a r e t h e supply and the a l l o c a t i o n of f o r e i g n exchange and t h e e f f e c t - iveness and r a t e of operation of t h e e x i s t i n g and newly c r e a t e d productive resources and capacity. The two f a c t o r s a r e r e l a t e d but d i s t i n c t . W e p r e f e r , p r i o r t o e l a b o r a t i o n of t h i s view, t o compare performance i n t h e Third Plan period with t h e Plan f o r e c a s t s o r t a r g e t s . Development Perfomance Compared with t h e Third Plan 15 The Third Plan rias not a s i n g l e firmly-knit lad! Rather, it consisted first, of a p l a n f o r p h y s i c a l investment expected t o r e s u l t i n c e r t a i n i n c r e a s e s i n t h e c a p a c i t y t o produce, o r t h e a c t u a l output, of a s e r i e s of commodities; second, of a f i n a n c i a l p l a n which admittedly f e l l somewhat s h o r t i n terms of both domestic and f o r e i g n exchange resources of meeting t h e investment and expenditure requirements projected. It is, t h e r e f o r e , sometimes d i f f i c u l t t o compare a c t u a l experience with t h e Plan. Furthermore, one cannot use t h e Plan t o grade performance, s i n c e t h e Plan f o r e c a s t s of the c o s t of investment, of t h e time required f o r the establishment of f a c i l i t i e s , of t h e output which would r e s u l t and of o t h e r phenomena could only be estimates based on t h e b e s t but t h e i n s u f f i c i e n t and sometimes f a u l t y information a v a i l a b l e . Differences between t h e Plan and performance, t h e r e f ore, a r e sometimes a n i n d i c a t o r of poor performance, a t o t h e r times of d e f i c i e n c i e s , some i n e v i t a b l e and some not, i n planning and t h e Plan, and a t s t i l l o t h e r times of t h e occurrence of unforeseeable developments. - - 1/ See Volume XIV, ''Some Observations on Planning." Investment During t h e Plan Period 16. So f a r a s investment i s concerned, i t seems l i k e l y t h a t a c t u a l Plan investment expenditure (which i s l e s s than Gross Investment a s t h e term i s used i n t h e e a r l i e r aggregative discussion) w i l l , i n money t e n s , probalby s l i g h t l y exceed t h e Rs. 104 b i l l i o n planned. I n r e a l terms, a s a r e s u l t of t h e i n c r e a s e i n t h e l e v e l of c o s t s and p r i c e s during t h e Plan period, t h e investment expenditure w i l l probably be s l i g h t l y lower than planned. i n p h y s i c a l terms, hawever, much of t h e planned expansion of production f a c i l i t i e s d i d n o t materialize. The investment expenditure, i n other words, simply bought considerably l e s s than had been a n t i c i p a t e d . 17. This was not simply a matter of c o s t s t u r n i n g out t o be sub- s t a n t i a l l y higher than had been estimated, although t h i s was almost in- v a r i a b l y t h e case. Higher c o s t s were a s much an e f f e c t a s a cause. The more fundamental f a c t o r s were t h a t shortages of f o r e i g n exchange and ad- m i n i s t r a t i v e d e f i c i e n c i e s very g r e a t l y impeded, delayed and prevented t h e execution of t h e p h y s i c a l work. The f o r e i g n exchange impact was n o t p r i m a r i l y t o prevent o r d e l a y t h e import of f i n i s h e d equipment and machinery required f o r s p e c i f i c p r o j e c t s , e s p e c i a l l y l a r g e p u b l i c and a l s o p r i v a t e s e c t o r p r o j e c t s . C r e d i t s were g e n e r a l l y a v a i l a b l e f o r t h e s e and t h e r a t e of t h e i r u t i l i z a t i o n has by no means pressed a g a i n s t t h e i r a v a i l a b i l i t y . The problem was more t h a t f o r e i g n exchange was not availa,ble i n s u f f i c i e n t supply t o provide t h e so-called maintenamce i r p o r t s and balancing equip- ment needed f o r t h e c u r r e n t domestic production of m a t e r i a l s and equip- ment required along with imported m a t e r i a l s and equipment f o r t h e expansion and c r e a t i o n of new production capacity. 18. Such domestically produced supplies importantly complement and supplement imported c a p i t a l goods. I n p a r t t h e Plan investment program was predicated upon t h e s e domestic s u p p l i e s of c a p i t a l g o d s becoming a v a i l a b l e . The f a c t t h a t they d i d n o t become a v a i l a b l e a s planned was i n p a r t responsible f o r t h e f a i l u r e of t h e programmed expansion of c a p a c i t y and output t o be f u l l y r e a l i z e d . W cannot q u a n t i f y t h e e x t e n t of t h i s e r e s p o n s i b i l i t y but examination of t h e h i s t o r y of a number of major pro- j e c t s indsicates t h a t it i s considerable. The basic p o i n t i s t h a t t h e s h o r t f a l l i n t h e domestic output of these c a p i t a l goods was due p r i n c i p a l l y t o an ina,dequate supply of imported m a t e r i a l s t o t h e domestic i n d u s t r i e s producing such goods. This inadequate supply, i n t u r n , r e f l e c t e d a shortage of f o r e i g n exchange a v a i l a b l e f o r this purpose a s w e l l a s t h e less-than- optimal a.llocations and t h e r i g i d i t i e s i n administration which almost i n e v i t a b l y characterized t h e system of a d m i n i s t r a t i v e c o n t r o l s used t o d e a l with t h i s shortage. 19 Not a l l t h e delays and not a l l t h e added c o s t s can be a t t r i b u t e d t o t h i s cause, however. Close examination of t h e h i s t o r y of a number o f major p u b l i c s e c t o r p r o j e c t s and of p r i v a t e ones a s w e l l i n d i c a t e s t h a t t h e r e were o f t e n i n o r d i n a t e delays i n t h e whole process of decision-making. I n p a r t t h e s e can be a t t r i b u t e d t o r e l a t i v e inexperience, t o t h e l i m i t e d number of t e c h n i c a l l y q u a l i f i e d personnel, t o t h e d e s i r e t o a c c m o d a t e c o n f l i c t i n g views, t o t h e n e c e s s i t y f o r caution i n t h e expenditure of l a r g e suns, and t o a h o s t of o t h e r understandable f a c t o r s . I n good p a r t , however, though t h i s i s a judgment always more e a s i l y ma,de from t h e out- s i d e , t h e r e appears t o be a.n excessive tendency i n t h e Indian concept and scheme of a d m i n i s t r a t i o n t o deny a u t h o r i t y t o those who nominally have r e s p o n s i b i l i t y , t o circumscribe freedom of action, t o i n h i b i t i n i t i a t i v e , and t o seek a degree of p e r f e c t i o n i n d e t a i l and procedure which o f t e n endangers l a r g e r o b j e c t i v e s. Imports and Exports i n t h e Plan Period 20. So f a r a s t h e balamce of payments i s concerned, t h e a c t u a l experience i n t h e Third Plan period has not, i n t h e most aggregakive terms, been f a r d i f f e r e n t from t h e Plan estimates. Ekports i n t h e five-year period were p r o j e c t e d a t Rs. 3,700 c r o r e s ($7,770 m i l l i o n ) and w i l l i n f a c t be somewhat higher, about R s . 3,760 c r o r e s ($7,900 m i l l i o n ) . Imports were p r o j e c t e d a,t 2s. 6,350 c r o r e s ($13,335 m i l l i o n ) , i n c l u d i n g Rs. 600 c r o r e s of PL 480 commodities, but import requirements were estimated a c t u a l l y t o be R s . 200 c r o r e s ($590 m i l l i o n ) higher, o r a t o t a l of Rs. 6,630 c r o r e s ($13,925 m i l l i o n ) . T o t a l a c t u a l imports during t h e Plan p e r i o d w i l l be approximately Rs. 6,150 c r o r e s ($12,910 m i l l i o n ) o r only 3 p e r cent, Xs. 200 c r o r e s ($420 m i l l i o n ) , lower than f o r e c a s t and 7 p e r c e n t lower than t h e estimated "needu. The composition of t h e imports is, however, somez.~ha.td i f f e r e n t t h a n had been a n t i c i p a t e d . Imports of PL 480 commodities were some R s . 283 c r o r e s ($595 m i l l i o n ) higher than a n t i c i p a t e d , r e f l e c t i n g t h e l a g i n t h e growth of a , g r i c u l t u r a l output. Imports of a l l o t h e r commodities were Rs. 483 c r o r e s ($1,0& m i l l i o n ) o r 0 p e r c e n t lower than f o r e c a s t and R s . 763 c r o r e s ($1,600 m i l l i o n ) o r 13 p e r c e n t lower than t h e estimated "needtf. "Plaintenance Imports'' 21. Within t h e commercial (non-PL 480) import category, t h e Plan f o r e c a s t i n p o r t s of equipment and m a t e r i a l s f o r Plan p r o j e c t s a t 1,900 c r o r e s ($3,090 m i l l i o n ) and maintenance imports, i n c l u d i n g components of c a p i t a l goods, a t Rs. 3,850 c r o r e s ($8,085 m i l l i o n ) . Unfortunately Indian irrport s t a t i s t i c s d o not permit t h e s e two major c a t e g o r i e s t o be dis- tinguished, s o t h a t it i s not p o s s i b l e t o determine how c l o s e l y experience matched t h e Plan f o r e c a s t . Forsign exchange a l l o c a t i o n d a t a suggest, h o w ever, tha,t t h e ma,tch, i n t h e case of maintenance imports, may have been q u i t e c l o s e . Unfortunately, however, l i t t l e comfort can be taken from t h i s f a c t , s i n c e t h e e x t e n t of t h e production c a p a c i t y u n u t i l i z e d f o r l a c k of maintenance imports and t h e copsequent l o s s of p o t e n t i a l output appear n e v e r t h e l e s s t o be v e r y g r e a t . A p a r a l l e l shortage of f e r t i l i z e r required f o r a g r i c u l t u r a l production has a l s o emerged. Although t h e Third Plan document i t s e l f f o r e c a s t t h a t "some u n d e r u t i l i z a t i o n of c a p a c i t y w i l l have t o be t o l e r a t e d " , i t now seems c l e a r t h a t t h i s was e i t h e r a considerable understatement o r a s e r i o u s underestimate. A c o n t r i b u t i n g f a c t o r of some, though up t o now limited, irnporta-nce, however, has been t h a t t h e import of foodgrains o t h e r than those provided by PL 480 ha.s r e c e n t l y become a some- what l a r g e r p a r t of t h e maintenance import b i l l than a n t i c i p a t e d . j IrPro e c t Znportsrl 22. If our estimate t h a t maintenance imports ha.ve been about a s f o r e c a s t i s correct, then t h e s h o r t f a l l in projected " p r o j e c t imports" has been of some s i z e . These may have been 1sp e r c e n t t o 20 p e r cent below t h e f o r e c a s t which would f u r t h e r e q l a i n why, i n p h y s i c a l terms, t h e expansion of production c a p a c i t y has f a l l e n s h o r t of t h e Plan t a r g e t . A s we indicated e a r l i e r , however, t h e s h o r t f a l l i n lrproject imports" does not on the whole seem t o r e f l e c t a shortage of foreign exchange f o r such imports. Credits a v a i l a b l e f o r a.nd committed t o this s p e c i f i c purpose were not r a p i d l y used and t h e p i p e l i n e has grown s u b s t a n t i a l l y i n t h e period. I n our judgment t h i s p o i n t s t o a number of things. One, t o which we have a l r e a d y r e f e r r e d , i s what appears t o be the excessive l o s s of time i n t h e decision-making and administrative process i n India. Another, of g r e a t importance, and r e l a t e d t o but not i d e n t i c a l with the f i r s t , i s t h e defi- ciency, not unexpected, i n t h e process of planning, design, and a p p r a i s a l of s p e c i f i c p r o j e c t s i n t h e Government of India. S t i l l another i s t h e time required, not always inevitably, f o r t h e aid-giving i n s t i t u t i o n s t o review and appraise s p e c i f i c p r o j e c t s and f o r negotiation of a i d commit- ments t o be concluded. Finally, i t suggests t h a t under t h e circumstances t o o l a r g e a. prcportion of t h e a i d provided has been reserved f o r "project iniportsrr, when i t s use f o r maintenance imports would have permitted g r e a t e r domestic output of materials required f o r investment and might thereby have accelerated t h e expansion of production capacity. Responsibility f o r t h i s r e s t s upon both t h e Government of India and t h e aid-givers, a p o i n t t o vhich we s h a l l r e v e r t . The Shortage of IiIaintenance Imports 23 Although i n the immediately preceding paragraphs we have empha- s i z e d t h e p o i n t t h a t an inadequate supply of so-called Irma.intenance imports" r e s t r i c t e d domestic output of c a p i t a l goods which might have been used t o expand production capacity, this was not i t s only consequence. The short- age of imported production materials, s p a r e p a r t s a,nd minor balancing equipment e l s o i n h i b i t e d output of a considerable volume of manufactured goods which, i f not used f o r investment, might have been exported o r used e t o meet essentia.1 consumption needs. W have no systema+tic o r comprehen- s i v e measure of t h e e x t e n t of u n u t i l i z e d c a p a c i t y i n Indian industry, b u t informed estimates i n d i c a t e t h a t i t i s very considerable and t h a t i t s u t i l i z a t i o n would have s u b s t a n t i a l l y increased i n d u s t r i a l output, p o s s i b l y by a s u f f i c i e n t ma,rgin t o have permitted a much g r e a t e r degree of achieve- ment of t h e o v e r a l l i n d u s t r i a l output t a r g e t s of t h e Third Plan. Fwrther- more, e s p e c i a l l y i n t h e f i n a l years of t h e Plan period, a g r i c u l t u r a l out- p u t a l s o was i n h i b i t e d by an inadequate supply of f e r t i l i z e r , a s w e l l a s of materials, t o o l s , ar,d minor equipment required f o r i r r i g a t i o n amd agri- c u l t u r a l production. More ample supplies would have made a contribution t o g r e a t e r a g r i c u l t u r a l output and t o a g r e a t e r degree of achievement of t h e Third Plan output t a r g e t s . 24. hiportant i s s u e s of p o l i c y a r e involved i n t h e matter of t h e choice and t h e balance between so-called maintenance and p r o j e c t imports. These p o l i c y i s s u e s r e l a t e t o t h e a c t i o n s of both t h e Government of I n d i a and t h e a-id-giving countries and i n s t i t u t i o n s . W w i l l discuss this e f u r t h e r . A t this s t a g e we have attempted t o nake only a few main points. One i s t h a t during t h e Third Plan period t h e supply of f o r e i g n exchange f o r maintenance imports ~ m s not adequate t o p e n i t anything resembling full use of t h e e x i s t i n g production capacity i n i n d u s t r y o r t h e production p o t e n t i a l i n a g r i c u l t u r e . A second i s t h a t , a s a r e s u l t , t h e r e was a very s u b s t a n t i a l l o s s i n output. A t h i r d i s t h a t t h i s l o s s i n output importantly and d i r e c t l y r e s t r i c t e d t h e expansion of production capacity a s w e l l ads t h e grmrth of export and t h e improvement of consumption l e v e l s . 4 f o u r t h i s t h a t t h e im.decr_uate t o t a l supply of f o r e i g n e x c h ~ n g ewas t h e basic reason f o r t h e r e s t r i c t e d supply of imported m a t e r i a l s required f o r c u r r e n t pro- duction. A f i f t h i s t h a t t h i s shortage was exacerbated i n t h e case of maintenance imports by t h e r e s e r v a t i o n f o r p r o j e c t imports of a l a r g e p a r t of t h e t o t a l supply of f o r e i g n exchange. A s i x t h i s t h a t t h i s reservation r e p r e s e n t e d . d e l i b e r a t e choice on t h e p a r t of both t h e Indian a u t h o r i t i e s and t h e a,id-givers. A seventh i s t h a t i n view of t h e r e l a t i v e s l o ~ ~ m e s s of use of these reserved funds, t h e wisdom of t h e choice i s open t o serious question. The l a s t p o i n t i s t h a t even i f more rapid use of t h e resources reserved f o r p r o j e c t imports had been possible, t h e r e would be s e r i o u s question about t h e wisdom of foregoing t h e output which might have been obtained from t h e e x i s t i n g production f a c i l i t i e s and resources. This i s not a simple question and t h e answer obviously depends not only on t h e quantum of output involved but a l s o on i t s composition and i t s p o s s i b l e uses. Our c e n t r a l p o i n t here remains, hovrever, t h a t it i s a f a c t t h a t during t h e Third P1a.n period t h e r e tias a s u b s t a n t i a l l o s s of output a s a r e s u l t of an inadequate supply of f o r e i g n exchange f o r maintenamce imports. Agriculture i n t h e Third Plan p e r i o d ' 25. Although n e i t h e r i n d u s t r i a l output, a g r i c u l t u r a , l output, nor production c a p a c i t y grew adequately o r i n accordance with t h e Plan t a r g e t s , i t was t h e l a g i n a g r i c u l t u r e which was most serious and i s most dangerous t o I n d i a ' s f u t u r e development. A g r i c u l t u r a l and, s p e c i f i c a l l y , food out- p u t b a r e l y kept pace with t h e growth of population. It f a i l e d t o keep pace with t h e increasing demand f o r food. Even though p e r c a p i t a consumer income rose only very s l i g h t l y , l e s s than one p e r cent, t h e combination of t h i s r i s e with the i n c r e a s e i n population, and p a r t i c u l a r l y non-farm population, created an expanding demand f o r foodgrains which outran t h e growth of out- put. Although t h e supply s i t u a t i o n was a l l e v i a t e d b y enlarged g i f t s of PL 480 grains, p r i n c i p a l l y t ~ h e a t , and by modest cash f o r e i g n exchange purchases of r i c e , these a d d i t i o n a l supplies were not adequate t o prevent a sharp r i s e i n p r i c e s i n t h e 18 months from Narch 1963 t o September 1964. Although f o r t u n a t e l y f o r I n d i a PL 480 i s a v a i l a b l e l a r g e l y a s a g i f t , most of t h e r i c e import required f o r e i g n exchange expenditure and s o s u b s t i t u t e d f o r what might have been imports of production m a t e r i a l s o r f i n a l c a p i t a l goods. Furthermore, t h e r i s e i n food p r i c e s i n e v i t a b l y exerted pressure, v i a wage rz-tes, on t h e general l e v e l of c o s t s and p r i c e s i n t h e e c o n q r a.n influence which was probably not y e t f u l l y f e l t e a r l y i n 1965. Further- - more, lagging growth i n t h e output of o%her a g r i c u l t u r a l commodities, many - 1/ 1 1, V See Volumes 1 , 1 1 I and V, "Agricultural Policyl1. of which a r e normally i n p a r t exported, d i r e c t l y reduced export marketing and earnings o r r e s t r i c t e d supplies of materials required by Indian i n d u s t r y i n producing f o r both t h e home and t h e export markets. In these s e v e r a l ways t h e l a g i n a g r i c u l t u r a l production r e s t r i c t e d t h e growth of output i n o t h e r s e c t o r s of t h e economy. 26. The danger i s t h a t a continuing l a g i n t h e growth of a g r i c u l t u r a l output comparable t o t h a t i n t h e Third Plan period would impose an increas- i n g l y severe brake upon t h e development of o t h e r s e c t o r s . Our examination of t h e d a t a with r e s p e c t t o t h e growth of foodgra.in output i n t h e 15-year period 1950-51 t o 1964-65 i n d i c a t e s a compound r a t e of growth of almost e x a c t l y 3 p e r cent p e r year over t h a t period, b u t one which i s d e c e l e r a t i n g and was s l i g h t l y l e s s tham $ p e r c e n t p e r y e a r i n the more recent 1955-56 5 t o 1964-65 period. This i s about t h e ra.te we have estimated f o r t h e graqth of a l l a g r i c u l t u r a l output i n t h e Third Plan period. The d a t a suggest t h a t expansion of t h e a r e a i n craps has slowed d a m and t h a t although t h e r e has been some i n c r e a s e i n y i e l d s p e r a c r e t h i s has not been adequate t o prevent t h e d e c e l e r a t i o n i n t h e r a t e of growth of output. If t h i s should continue, t h e f o r e i g n exchange expenditure required f o r t h e import of focd would grm and would i n c r e a s i n g l y encroach upon t h e resources a v a i l a b l e t o finance imports required both f o r c u r r e n t production and f o r ca.pacity expznsion. PL 480 supplies a r e probably s u s c e p t i b l e t o some but not t o i n d e f i n i t e a enlargement; i r , 1964-65 India w s a l r e a d y r e c e i v i n g one-fifth of United S t a t e s c u r r e n t wheat production. Zkperience s i n c e mid-196b i n d i c a t e s v i v i d l y t h a t i n t h e absence of much more rapid i n c r e a s e i n domestic focd output t h e r e would be import no matter what t h e consequences f o r production i n o t h e r s e c t o r s of t h e economy. There a r e v i r t u a l l y no a l t e r n a t i v e s . Continued sharp food p r i c e r i s e s would have s o c i a l and p o l i t i c a l conse- quences not l i k e l y t o be risked o r endured, q u i t e a s i d e from t h e i r dis- r u p t i v e economic e f f e c t s . The a l t e r n a t i v e of reducing demand by general f i s c a l and monetary r e s t r i c t i o n i s not a f e a s i b l e one, s i n c e measures s u f f i c i e n t l y e f f e c t i v e t o reduce food demand a t a s o severe a s t o bring economic groxth t o a halt., 17 s i g n i f i c a n t l y would be Rationing might con- ceivably p r o r i d e l i m i t e d temporary a l l e v i a t i o n of t h e problem but i t s f e a s i - b i l i t y and e f f e c t i v e n e s s i f attempted on any s i g n i f i c a n t s c a l e i s most doubtful. I n any case r a t i o n i n g cannot s u b s t i t u t e f o r more than a marginal deficiency i n supply. Finally, although t h e r e a r e p o s s i b l e s u b s t i t u t e s f o r many i n d u s t r i a l commodities, t h e r e a r e none f o r food. 2 7. 1;:'e have characterized t h e low r a t e of growth i n a g r i c u l t u r e i n t h e Third Plan period a s more serious and dangerous than t h e s h o r t f a l l s i n o t h e r s e c t o r s . This i s not because, f o r any mystic o r d o c t r i n a i r e reasons, we regard t h e expansion and development of t h e a g r i c u l t u r a l s e c t o r as more I1importantl1o r llfundamentalll than t h e development of t h e i n d u s t r i a l sector. There cannot be t h e s l i g h t e s t doubt t h a t I n d i a must a s r a p i d l y a s p o s s i b l e c r e a t e a l a r g e and d i v e r s i f i e d industry. This development can only occur, hotrever, i f t h e r e i s a simultaneous expansion of a g r i c u l t u r a l output. - 1/ See Volume I X , I1Problems of Public F i n a n c i a l PolicyI1. 28. \{e a r e n o t making t h e assumption t h a t a l l investment i n a - ! & c u l t u r e a u t o m a t i c a l l y y i e l d s h i g h e r r e t u r n s tha.n zampara,ble investment i n i n d u s t r y . Nor a r e we s u g g e s t i n g t h a t m a r g i r x l import of food i s n e c e s s a r i l y l e s s economic than marginal import of o t h e r commodities. Neither a r e tie suggesting t h e converse of t h e s e p r o p o s i t i o n s . we a r e s t a t i n g t h a t , given t h e p r o s p e c t i v e p o p u l a t i o n i n c r e a s e even with a n e f f e c t i v e p o p u l a t i o n c o n t r o l program, and given t h e p h y s i c a l p o t e n t i a l which I h d i a l s l a n d and water resources and i t s c l i m a t e provide, a v e r y high r e t u r n ca.n be obtained i n both t h e s h o r t and t h e l o n g r u n from an e f f e c t i v e l y designed and v i g o r o u s l y conducted e f f o r t t o expand a g r i c u l - tural production. W a r e s u g g e s t i n g t h a t t h e evidence of t h e Third P l a n e p e r i o d i n d i c a t e s t h a t t h e balance of e f f o r t was, i n t h a t p e r i o d a t l e a s t , tipped t o o f a r a g a i n s t a g r i c u l t u r e and t h a t t h i s balance needs t o 'be redressed. 29. A s rere w i l l i n d i c a t e , we do n o t advocate any u a b s o l u t e f f o r "top" p r i o r i t y f o r a g r i c u l t u r e , except i n s e v e r a l s p e c i f i c senses. One i s i n t h e sense of p r i o r i t y p r o v i s i o n of t h e physica.1 i n p u t s r e q u i r e d t o make p o s s i b l e t h e g r a i t h of a g r i c u l t u r a l production a t a r a t e approximately double t h a t of t h e Third Plan period. P-nother i s i n t h e sense of p r i o r i t y of a t t e n t i o n on t h e p a r t of t h e Government's b e s t personnel. P a r t of t h e danger we apprehend i s i n t h e p a s t simultaneous v e r b a l a s c r i p t i o n of "top" o r "absolutefTp r i o r i t y t o a g r i c u l t u r e and f a i l u r e a c t u a l l y t o provide t h e p h y s i c a l i n p u t s and o t h e r c o n d i t i o n s r e q u i r e d f o r a n adequate growth of a g r i c u l t u r a l output. The o r g a n i z a t i o n a l e f f o r t needed t o achieve the groxth i n a g r i c d t u r e i s g r e a t e r than i n i n d u s t r y , and i n t h i s r e s p e c t t h e t a s k i s more d i f f i c u l t and demanding. It i s e x a c t l y f o r t h i s reason t h a t top p r i o r i t y i n t h e e f f o r t and a t t e n t i o n d i r e c t e d t m ~ a r da g r i c u l t u r e i s needed. 30. The absence of t h e necessary degree of p r i o r i t y i n t h e Third Plan p e r i o d i s r e a d i l y i n d i c a t e d . The Plan c a l l e d f o r t h e a d d i t i o n of some l b m i l l i o n a c r e s t o t h e a r e a i r r i g a t e d . It i s now a n t i c i p a t e d t h a t 1 some 10 m i l l i o n t o 1 m i l l i o n a c r e s may be t h e achievement, but both t h e concept and t h e measurement of a r e a i r r i g a t e d i s s o u n c l e a r t h a t l i t t l e confidence can be placed i n t h e s e f i g u r e s . It i s c e r t a i n , however, t h a t achievement was f a r s h o r t of t a r g e t . The p h y s i c a l work p r o j e c t e d was simply n o t done. This 1ra.s a p p a r e n t l y e s p e c i a l l y t r u e i n t h e case of ma.jor i r r i g a t i o n p r o j e c t s , s i n c e t h e d a t a suggest tha,t much of t h e a c t u a l a d d i t i o n t o a r e a i r r i g a t e d was t h e result of works c l a s s e d a s minor i r r i g a t i o n which i n c l u d e s a l l ground w t e r development by tube and o t h e r w e l l s . 31. The Plan a l s o c a l l e d f o r t h e a d d i t i o n of 800,000 t o n s t o t h e supply and consumption of n i t r o g e n f e r t i l i z e r s and 330,000 tons t o t h a t of phosphate f e r t i l i z e r s , i n terms of M and P205 r e s p e c t i v e l y . The now a n t i c i p a t e d achievement i s &O,OCO tons of N and 180,000 t o n s of P 0 The e x t e n t of t h e s h o r t f a l l s i n t h e supply of t h e s e i n d u s t r i a l pr&ugts . r e q u i r e d a s i n p u t s f o r a g r i c u l t u r e i s probably g r e a t e r than i n t h e case of any o t h e r category of i n d u s t r i a l products. There was comparable in- adequacy i n t h e supply of o t h e r p h y s i c a l i n p u t s , such a s p l a n t p r o t e c t i o n ma.terials and improved seed. Furthermore, c r e d i t was not channeled ade- q u a t e l y t o t h e l a r g e number of I n d i a ' s c u l t i v a t o r s who a r e t e n a n t r a t h e r than owner operators. Inadequate s t e p s were taken t o provide t h e s e c u r i t y of tenure, t h e f a i r r e n t a l arrangements, and t h e c o n s o l i d a t i o n of fragmented holdings necessary t o e f f e c t i v e farm operation, e s p e c i a l l y i n t h e case of i r r i g a t e d land. P r i c e s u n t i l 1964 were k e p t below t h e l e v e l s l i k e l y t o provide f i n a n c i a l i n c e n t i v e s t o t h e u s e of f e r t i l i z e r s and o t h e r i n p u t s . Research and i n v e s t i g a t i o n d i r e c t e d toward t h e development of improved seed v a r i e t i e s , of more s u i t a b l e p l a n t p r o t e c t i o n m a t e r i a l s , of more adequate information on underground water s u p p l i e s , of more e f f e c t i v e farm and water management p r a c t i c e s was n o t in a l l s e c t o r s of t h e e f f o r t w e l l organized o r d i r e c t e d . There i s d i s t u r b i n g evidence of t h i s i n t h e f a c t t h a t i n a number of a r e a s t h e y i e l d s obtained b y t h e upper two d e c i l e s of farmers opeya,ting i n d i s t r i c t s a d j a c e n t t o r e s e a r c h s t a t i o n s were c o n s i s t e n t l y e q u a l t o o r b e t t e r than those obtained on the demon- s t r a t i o n p l o t s . The c a l i b e r and t h e organization of extension work was n o t c o n s i s t e n t l y adequate t o t h e communication of r e s e a r c h knowledge t o t h e l a r g e r number of c u l t i v a t o r s who d i d have something t o l e a r n from it. There was inadequate i n t e g r a t i o n of i r r i g a t i o n engineering p l a n s and i r r i g a t i o n system operation with t h e water requirements of c u l t i v a t o r s aiming a.t optimal use of water. There was t o o g r e a t an emphasis on t h e cooperative a s a s o c i a l form and t o o g r e a t and misplaced a r e l i a n c e on t h i s a s an exclusive channel f o r t h e d i s t r i b u t i o n of farm c r e d i t , f e r t i - l i z e r s and o t h e r requirements. There was perhaps a l s o t o o grea.t an emphasis on t h e need f o r change i n t h e mind of t h e ~ltradition-bound" farmer and t o o l i t t l e a p p r e c i a t i o n of t h e power of f i n a n c i a l i n c e n t i v e s and a s s i s t a n c e . Most of t h e s e l a t t e r d e f i c i e n c e s a r e well-known t o and f u l l y appreciated b y t h e responsible Indian a u t h o r i t i e s . E f f o r t s have been i n progress t o d e a l with them, and many a r e n o t e a s i l y d e a l t w i t h i n tlie space of a few years. t h a t seems c l e a r , however, i s t h a t t h e w i l l behind and t h e v i g o r of t h e e f f o r t was not adequate during t h e Third Plan period. OBSTACLES T PTZOGRJ3SS O The Foreign Exchange Shortage 32. ?:Je have summarized t h e growth of aggregate output of a g r i c u l t u r a l and i n d u s t r i a l production, of c z p a c i t y expansion and of import and export i n t h e Third P l a n period. W have a l s o compared performance i n t h e s e e r e s p e c t s with t h e Plan. W ha,ve discussed some of t h e e f f e c t s of t h e e s h o r t f a l l s i n output and have touched upon some of t h e f a c t o r s responsible. 1,Te have i n d i c a t e d +&at t h e r e was during t h e Third Plan period, and t h e r e !:fill continue t o be, a c l o s e i n t e r - r e l a t i o n s h i p among t h e various producing s e c t o r s of t h e economy and t h a t , c o n t r a r y t o some views, t h e r a t e of p r o g r e s s of output i n i n d u s t r y i s n o t independent of t h a t i n a g r i c u l t u r e , and t h e reverse i s a l s o n o t t h e case. have i n d i c a t e d t h a t t h e t o t a l supply of f o r e i g n exchange was t h e most c r i t i c a l l i m i t i n g f a c t o r upon t h e r a t e of growth and t h a t t h i s l i m i t a t i o n bore most h e a v i l y upon t h e import of so-called maintenance goods o r m a t e r i a l s f o r c u r r e n t production and t h e r e b y l i m i t e d output i n a l l s e c t o r s and t h e expansion of both productive c a p a c i t y and export a s w e l l a s of consumption. 33. The aggregate shortage of foreign exchange was not, hawever, the only fa.ctor responsible f o r the disappointing performance of t h e Indian econmy i n t h e Thfrd Plan period. There were others, some of which, i n t h e case of a g r i c u l t u r e pa.rticula,rly, we have touched upon o r r e f e r r e d to. These others, which i n our view rank equally with t h e shortage of foreign exchange a s impediments t o Indian economic progress,are c e r t a i n of the p o l i c i e s and p r a c t i c e s of t h e Government of India i n the management of i t s econamic a f f a i r s . The Government p o l i c i e s and p r a c t i c e s t o which we r e f e r include many of those which determine the b a s i c a l l o c a t i o n and use of resources, which govern t h e d i r e c t investment and production a c t i v i t i e s of Government agencies and e n t e r p r i s e s , and which c o n t r o l and influence p r i v a t e investment and production a c t i v i t y . In our opinion c e r t a i n of these p o l i c i e s have been responsible f o r f a i l u r e of the econmy t o make a s much progress a s was p o s s i b i e within t h e limits of t h e a v a i l a b l e foreign exchange and domestic resources. They not only f a i l e d t o promote b u t a r e s i g n i f i c a n t l y obstructing achievement of t h e Government's c e n t r a l economic and s o c i a l objectives. Over-Valuation of the Rupee 34 One of t h e p o l i c i e s of t h e Government of I n d i a with t h e most pervasive negative e f f e c t s on I n d i a ' s economic progress i s , i n our judgment, i t s i n s i s t e n c e on maintaining t h e e x i s t i n g over-valuation of the rupee and t h e associa,ted system of d i r e c t administrative controls over imports. The over-valuation of t h e rupee works d i r e c t l y t o d e f e a t t h e massive import s u b s t i t u t i o n and the export expansion which a r e e s s e n t i a l t o of t h e objectives of the development program. It has r e s u l t e d i n i n c r e a s i n g l o s s e s of f o r e i g n exchange through a l l the f a m i l i a r devices which come i n t o p l a y i n such circumsta.nces. It has a l s o operated a g a i n s t economy i n t h e use of imports and i n the use of c a p i t a l equipment. The associated system of h i p o r t controls has been an i n e f f i c i e n t a l l o c a t o r of scarce supplies of imports, has f a i l e d t o maximize the aggregate output obtained from a given supply of imports, has reduced e n t e r p r i s e efficiency, and has had other negative e f f e c t s . 35 n O t h e import s i d e t h e Government of India has attempted t o counter t h e over-valuation of t h e rupee by i n t e r m i t t e n t increases i n import d u t i e s . A t times these have been highly s e l e c t i v e , a t others, a s i n t h e case of the 10 p e r cent r e g u l a t o r y duty of February 1965, general and v i r t u a l l y uniform. These moves, however, have n o t yet, i n our judg- ment, gone f a r enough t o e s t a b l i s h an apprcrpriate r e l a t i o n s h i p between t h e general l e v e l s of import and i n t e r n a l p r i c e s . Ye have no comprehen- s i v e or systematic data on t h e d i s p a r i t y between import p r i c e s and domestic c o s t s o r p r i c e s , nor do we have any properly weighted average of the margins by which domestic market p r i c e s exceed t h e landed c o s t s p l u s normal markups of imported commodities a t t h e present e f f e c t i v e exchange r a t e s ( o f f i c i a l r a t e p l u s import d u t i e s ) . Fragmentary data i n d i c a t e , however, t h a t these margins range from 50 p e r cent t o 100 p e r cent a,nd a r e sometimes higher. Import l i c e n s e s have been reported t o s e l l a t 75 p e r cent t o 500 p e r cent of t h e i r f a c e value. The demand f o r imports, a t t h e present e f f e c t i v e ex- change r a t e s , considerably exceeds t h e supply of f o r e i g n exchange, g r e a t pressure i s p u t upon t h e c o n t r o l system, and t h e f o r t u n a t e r e c i p i e n t s of import l i c e n s e s a r e i n e f f e c t heavily subsidized. 36. The over-valuation of t h e rupee c r e a t e s powerful f i n a n c i a l i n c e n t i v e s t o import r a t h e r than t o procure i n t h e domestic market. To some extent, of course, t h e c o n t r o l system s u b s t i t u t e s f o r higher import p r i c e s i n f o s t e r i n g import s u b s t i t u t i o n and t h i s end i s assiduously pursued i n t h e operation of t h e system. It does s o only imperfectly and clumsily, however. Firms which a r e not themselves producers of desired goods almost i n v a r i a b l y p r e f e r f o r e i g n t o domestic sources of supply, and a r e f r e q u e n t l y successful i n obtaining l i c e n s e s . The stimulus t o domestic import-substituting production i s consequently uncertain and dilute. 37. The absence of an appropriate import exchange r a t e has a l s o removed an important guide t o investment. Both p u b l i c and p r i v a t e s e c t o r e n t e r p r i s e s hame Seen e s t a b l i s h e d which were not, a t l e a s t a s t h e y were designed, e f f e c t i v e uses of t h e c a p i t a l they employed. They have incor- porated production processes which have over-emphasized t h e use of imports and t h e use of irriported c a p i t a l equipment. These a r e , of course, t h e c l a s s i c e f f e c t s of under-valuation of f o r e i g n exchange, but s p e c i f i c instances a r e not hard t o f i n d i n India. The subsidy involved has no doubt stimulated investment, but it has not properly d i r e c t e d it. 36 On t h e export s i d e t h e Government of I n d i a has employed a v a r i e t y of devices t o counter t h e f i n a n c i a l disa,dvanta.ges of export sa1es.L' For some commodities, notably manufactured goods from t h e newer i n d u s t r i e s , an i n p o r t entitlement system has been devised. This has been a highly s e l e c t i v e device which has i n e f f e c t pro-dded premiums t o exporters which vary among commodities and from time t o time. The premium i s e s s e n t i a l l y merely t h e subsidy which a l l importers receive, but i n increased amount. The i n c r e a s e derives from t h e f a c t t h a t commonly t h e import entitlement i s i n a n amount double t h e estimated import component of t h e goods exported, and i s a d d i t i o n a l t o t h e import l i c e n s e which t h e producer would "normally" g e t . Recently t h e value of the premia has tended t o be increased by. broadening of t h e l i s t s of commodities r.Jhich could be imported under en- t i t l e m e n t s . This means of providing an export premium i s estimated t o apply t o some 1 0 p e r c e n t t o 15 p e r c e n t of c u r r e n t exports. Its value i s estimated t o renge from hO p e r c e n t t o much higher f i g u r e s . Cotton t e x t i l e s , representing c u r r e n t l y about another 10 p e r c e n t of exports, receive premia. under a s i m i l a r system. 39 A number of mineral and a g r i c u l t u r a l commodities a r e exported by Government t r a d i n g corporations and premia on these commodities a r e paid e s s e n t i a l l y out of t h e i r operating p r o f i t s on o t h e r operations o r out of budgetary funds. Tax concessions and r e b a t e s have a l s o been used f o r sane years t o provide premia f o r a. wide range of exports. Recently t h e 1965-66 - 1/ See Volume V I I , llExport Policyft. Budget authorized new premia i n the form of a. t a x c r e d i t ( o r cash if no t a x were payable) of up t o 15 p e r cent of the value of exports, which on the average, would presumably add approximately double t h a t t o t h e after-tax p r o f i t of t h e exporter. A t t h e same time a considerable number of can- modities which a r e n m exported, many of them a g r i c u l t u r a l commodities, earn no premia except f o r the minor t a x concessions which e d s t e d p r i o r t o April 1, 1965. J u t e and t e a , which c u r r e n t l y account f o r 35 p e r cent t o 40 p e r cent of exports, a r e included i n , but a r e not alone i n t h i s group. F i n a l l y products which a r e n o t now exported a t a l l a r e offered no premia except again f o r the minor tax concessions which ante-date the 1965-66 Budget. 40 - The e n t i r e s t r u c t u r e of export premia i s c l e a r l y highly s e l e c t i v e ; the premia r a t e s vary widely and change frequently. The concept according t o iqhich this system i s j u s t i f i e d i s t h a t t h e Government a u t h o r i t i e s can, commodity by commodity, and presumably each year, c a l c u l a t e t h e p r i c e e l a s t i c i t y of f o r e i g n demand and the e l a s t i c i t y of domestic supply, t a i l o r t h e premia t o f i t each i n d i v i d u a l case, and s o maximize the f o r e i g n exchange e returns a.nd a l s o r e g u l a t e t h e p r o f i t s of t h e exporters. W a.re obliged t o express profound skepticism about t h e a c t u a l e f f i c a c y of t h e process and e a l s o about t h e wisdom of the conception. W do not question the f a c t t h a t f o r t e a and jute, where the p r i c e e l a s t i c i t y of f o r e i g n demand i s limited and whei-e t h e r e a r e a l i m i t e d number of competing producing countries, s p e c i a l treatment i s appropriate, but these a r e s p e c i a l cases. IJe believe t h a t the system cannot and does not work e f f e c t i v e l y t o promote t h e develop- ment of export. 41. As it operates t h e present system tends t o be a, means of disposing of a pre-determined volume and s e t of commodities i n foreign marltets. For most exports or p o s s i b l e exports it takes a very short-run view. It assumes t h a t no short-run responses a r e p o s s i b l e on t h e supply s i d e and it tends generally t o underestimate the p r i c e e l a s t i c i t y of foreign demand. It f a i l s t o take account of t h e f a c t t h a t i n e l a s t i c t o t a l f o r e i g n demand does not r u l e out t h e p o s s i b i l i t y t h a t India might increase i t s share of the market a t the expense of competing producers. India. has, i n f a c t , l o s t ground i n the case of a number of commodities. It ignores the idea. tha.t a t l e a s t i n the longer run a f a r more standardized export exchange r a t e a t an appropriate l e v e l w i l l operate t o determine which products India can, i n f a c t , export with t h e g r e a t e s t economic advantage. The system provides no s t a b l e o r permanent basis upon which producers could p l a n investment o r production f c Y export markets. There a r e few instances i n which today producers a r e d e l i b e r a t e l y designing t h e i r operations f o r o r a r e attempting t o promote export markets. W do not minimize the d i f f i c u l t i e s of expanding e t h e export markets f o r I n d i a ' s t r a d i t i o n a l exports o r of developing markets J f o r n e w products. Ve believe, however, t h a t t h e present highly s e l e c t i v e , non-uniform and sometimes inadequate export exchange r a t e s reduce t h e possi- b i l i t y of overconing t h e d i f f i c u l t i e s . A standard, s t a b l e r a t e a t a m appropria.te l e v e l would open opportunities t o which India' s entrepreneurs would, we believe, respond. 42. There i s i n any event l i t t l e o r no disagreement, we believe, with t h e conclusion t h a t , except i n t h e case of t e a and jute, and a few products of l e s s e r importance, no Indian products can today be s o l d i n export markets without l o s s t o t h e e x p o r t e r u n l e s s some premium above t h e o f f i c i a l exchange r a t e i s pa.id. I n p a r t t h i s r e f l e c t s t h e d i f f e r e n c e i n f o r e i g n and i n t e r n a l p r i c e s , i n p a r t it r e f l e c t s t h e l e v e l of i n t e r n a l c o s t s . The prospects t h a t t h e s e d i s p a r i t i e s can b e s h a r p l y reduced I n t h e near f u t u r e a r e n o t b r i g h t . The need f o r stimulus t o export both i n t h e s h o r t and t h e long run i s evident. It i s inconceivable t h a t I n d i a t s import requirements ?rill ever d e c l i n e i n a b s o l u t e terms o r can d e c l i n e s i g n i f i c a n t l y , i f a t a l l , below t h e i r p r e s e n t average r e l a t i o n s h i p t o na.tiona1 output, A s t h e i n d u s t r i a l base expands and widens, t h e r e w i l l be i n c r e a s i n g s u b s t i t u t i o n f o r a whole range of products now imported. A t t h e same time this widening i t s e l f w i l l c r e a t e growing requirements f o r imports of maaterials and equipment. It can be expected tha.t t h e marginal import r a t e which p r e v a i l e d during t h e Third Plan period w i l l be reduced, but t h e gap between t h e mazginal import and t h e marginal export r a t e s i s wide and t h e a b s o l u t e gap between imports and exports i s large. k3. do not question a t a l l t h e s t r a t e g i c assessment t h a t t h e development of domestic output must i n very l a r g e p a r t provide s u b s t i - t u t e s f o r p r e s e n t and p r o s p e c t i v e imports, W do, howevsr, s u s p e c t e t h a t t h e r e has been some underestimate on t h e p a r t of t h e Indian a u t h o r i t i e s of t h e e x t e n t t o which import requirements ?.~ould nevertheless graw, not merely i n t h e near, b u t a l s o i n t h e continuing f u t u r e . This under- e s t i m a t e has been combined with a s e r i o u s doubt on t h e i r p a r t t h a t t h e r e i s , i n f a c t , a t t h i s time any s i g n i f i c a n t degree of e l a s t i c i t y on t h e 1ndia.n supply s i d e . Ye b e l i e v e t h a t t h e existence of a considerable amount of u n u t i l i z e d i n d u s t r i a l production c a p a c i t y ( a s w e l l a s unrealized a g r i c u l t u r a l potentia.1, d e s p i t e t h e e x i s t i n g food production ~ r o b l e m )p u t s t h i s judgment i n question. The r e s u l t has been a h e s i t a t i n g , and belated, approach t o t h e problem of export stimulation, r a t h e r than one which has been anticipa.tory and has recognized t h e dynamics of export development. lire do n o t underestima.te e i t h e r t h e d i f f i c u l t i e s of transformation of I n d i a ' s immediately p o s s i b l e output i n t o exportable products, o r t h e b a r r i e r s and d i f f i c u l t i e s which a r e faced i n export markets, o r t h e e x t e n t of t h e i n c r e a s e i n t h e volume of exports which i s required t o o f f s e t reductions i n u n i t p r i c e s . Ile believe, however, t h a t t h e r e i s a p o s s i b i l i t y of g r e a t e r export earning even today and t h a t i t can only i n c r e a s e and develop a s i t must i f g r e a t e r s p e c i f i c s t e p s a r e taken t o s t i m u l a t e this development on a r a t i o n a l long-term b a s i s . Other measures of export promotion besides a s h i f t t o a more uniform and higher e f f e c t i v e exchange r a t e than t h e p r e s e n t o f f i c i a l one a r e necessary and may y i e l d s i g n i f i c a n t r e t u r n s , but we b e l i e v e t h e s e can be most e f f e c t i v e i n a context which makes export pros- p e c t i v e l y a t t r a c t i v e r a t h e r than t h e reverse. 44 !Je can envisage a r e o i - d e r i n g of e f f e c t i v e export exchange r a t e s which would provide t h e uniformity and s t a b i l i t y necessary t o give major and s u s t a i n e d impetus to t h e development a Indian exports, b u t which f would a l s o take account of t h e specia.1, limited number of instamces where departures from a uniform r a t e higher than t h e present o f f i c i a l r a t e , would be r a t i o n a l and j u s t i f i e d . There could, f o r example, be discrimina.tory treatment of t e a and jute, perhaps through an export tax, on t h e b a s i s e s s e n t i a l l y of t h e demand e l a s t i c i t y argument. Con- ceivably a l s o t h e infancy argument might j u s t i f y departures, o r s p e c i a l assis3ance beyond t h a t uniformlyprovided, t o c e r t a i n products of newer i n d u s t r i e s . This implies, however, an e n t i r e l y d i f f e r e n t approach and technique than t h e highly s e l e c t i v e one of today which p u t s such heavy and excessive emphasis on t h e immediate a v a i l a b i l i t y of supplies for export, and which i n our judgment has thus f a r f a i l e d t o produce an adequate grorsth of exports o r any asswance of continuing and a c c e l e r a t i n g growth. Import Controls 45 Since a t t h e e x i s t i n g e f f e c t i v e exchange r a t e s t h e demand f o r imports g r e a t l y exceeds t h e supply of foreign exchange, t h e Government of has e r c i s e d comprehensive d i r e c t administrative controls over a l l imports . ~ Y h p o r t sof a l l m a t e r i a l s required f o r c u r r e n t production, including components and minor replacement p a r t s , are, by the l i c e n s i n g procedure, administratively determined f o r a l l producers. Imports of c a p i t a l goods intended f o r capacity expansion a r e s e p a r a t e l y licensed i n a procedure which i s associa.ted, i n t h e case of p r i v a t e s e c t o r enterprises, with t h e l i c e n s i n g of c a p a c i t y expansion i t s e l f . The system i s intended t o ensure t h a t scarce f o r e i g n exchange i s not used f o r non-essential purposes and i s a l l o c a t e d i n t h e l a r g e s t p o s s i b l e measure t o p r i o r i t y uses, t n e l a t t e r being those types of output judged t o be most c r i t i c a l l y needed and o i most value i n f u r t h e r i n g domestic output of investment and e s s e n t i a l consumer goods. b6. There i s no doubt t h a t t h e sys tem has e f f e c t i v e l y blocked v i r t u a l l y a l l import of f i n i s h e d consumer goods except c e r t a i n e s s e n t i a l food a,nd pharmaceutical supplies. It has a l s o minimized t h e import of materials used i n the domestic production of l e s s widely demanded and l e s s e s s e n t i a l consumer goods. Beyond t h i s , however, it has not functioned a.s an e f f i c i e n t a l l o c a t o r of scarce supplies of imports. It hc?s not served t o maximize t h e aggregate output which could be obtained from a given supply of imports. It has not served w e l l even t o maximize t h e domestic output of a. l i m i t e d number of key products, since oilly very crude a.nd r e l a t i v e l y undiscriminating judgments could be made i n i d e n t i f y i n g products or measuring t h e r e l a t i v e q u a n t i t a t i v e requirements f o r them. Indeed, t h e r e i s l i t t l e p o s s i b i l i t y t h a t t h e system could serve these purposes well even i f t h e flow of information on which i t r e l i e s and the procedwes i t employs were somewhat improved, a s they could be. A s i t has operated i t has created imbalances i n t h e supplies a v a i l a b l e t o individual producing e n t e r p r i s e s which have r e s t r i c t e d t h e i r output. Insta-nces of l o s t output f o r want of individual items and - 1/ See Volume V I I I , I1Administrative Controls ' I . t h e delays i n obtaining them a r e common. The stimulus t o t h e holding of excessive stocks i s a.lso evident. To some e x t e n t grey and black market t r a n s f e r s of materials perform a necessary r e a l l o c a t i n g function, but t h i s merely i l l u s t r a t e s r a t h e r than f u l l y c o r r e c t s t h e i n e f f i c i e n c i e s of t h e system. Inter-industry imbalance i s a l s o created, and while such imbalances i n e v i t a b l y e x i s t under any circumsta,nces t h e import c o n t r o l system appears t o have accentuated them. w o r t , i n s t e a d of compensating f o r imbalances i n domestic output, has accentuated them. Since con- s i d e r a t i o n s of e q u i t y i n e v i t a b l y apply i n a l l o c a t i o n s among firms i n p a r t i c u l a r i n d u s t r i e s , maximum e f f i c i e n c y and economy i n t h e use of imports i s s a c r i f i c e d . 47. To some e x t e n t t h e c o n t r o l system has s u b s t i t u t e d f o r higher p r i c e s (am a.ppropriate import r a t e ) i n f o s t e r i n g import s u b s t i t u t i o n and this end i s assiduously pursued i n i t s operation. It has done t h i s only imperfectly and clumsily, however. The f i n a n c i a l gains from import r a t h e r than domestic procurement a r e s o marked t h a t firms which a r e not a t a.ny given time themselves producers of desired goods almost i n v a r i a b l y p r e f e r f o r e i g n t o domestic sources of supply, and a r e f r e q u e n t l y success- f u l i n obtaining l i c e n s e s . The stimulus t o import-substituting production which i s provided by t h e import c o n t r o l system i s u n c e r t a i n and d i l u t e . 48. One of t h e most damaging e f f e c t s of t h e system i s t h a t i t i n e f f e c t a l l o c a t e s market shares among indi-ddual producers, eliminates market ccmpetition and guarantees t o a l l b u t t h e most completely in- e f f i c i e n t and high-cost producers a fixed share i n t h e domestic market. It thereby s u b s t a n t i a l l y educes t h e much needed i n c e n t i v e s and pressures toward increased efficiency. Furthermore, i t c r e a t e s i n c e n t i v e s t o expand capacity wastefully siinply a s a means t o l a r g e r a l l o c a t i o n s of materials. It has had o t h e r undesirable consequences, including an almost ine-zitable discriminztion a g a i n s t small e n t e r p r i s e s , t h e imposition of a heavy a.dministrative burden, and t h e t h r e a t of corruption. 49 e W believe t h a t t h e r e would be s u b s t a n t i a l gains i n output i f t h e e x i s t i n g system of d i r e c t administrative c o n t r o l of imports were replaced by a system of i n d i r e c t c o n t r o l s i n which p r i c e was t h e a l l o - c a t i n g mechanism. The term " l i b e r a l i z a t i o n f 1has sometimes been used f o r t h i s b u t i s misleading i f i t i s i n t e r p r e t e d n e c e s s a r i l y t o s i g n i f y l a r g e r imports, e i t h e r l a r g e r t o t a l imports o r l a r g e r imports of so- c a l l e d maintenznce goods. The question of t h e l e v e l of import i s d i s t i n c t from t h e question of e f f e c t i v e a l l o c a t i o n of any given t o t a l of imports. Our p o i n t here i s t h e t a t t h e p r e s e n t l e v e l of imports a system which r e l i e s on p r i c e and t h e market w i l l a l l o c a t e t h e supply of imports more e f f i c i e n t l y tha.n t h e p r e s e n t d i r e c t c o n t r o l system. It w i l l channel imports more e f f e c t i v e l y , more surely, and more r a p i d l y t o t h e uses i n which they y i e l d t h e highest r e t u r n t o t h e economy. A t t h e same time, %re believe t h e r e would be a d d i t i o n a l b e n e f i t from an enlargment of t h e volume of maintenance imports. 50. A t t h e p r e s e n t l e v e l of import p r i c e s ( e f f e c t i v e exchange r a t e s ) t h e demand f o r imports considerably exceeds t h e a v a i l a b l e supply of f o r e i g n exchange. It would be p o s s i b l e , i n t h e absence of d i r e c t c o n t r o l s , t o e q u i l i b r s t e t h e demand and supply by p e r m i t t i n g t h e exchange r a t e t o shift s h a r p l y upward. The same end could be achieved by monetary and f i s c a l measures which d r a s t i c a l l y reduce t h e demand f o r imports, b u t t h e s e would have t h e e f f e c t a l s o and p r i n c i p a l l y of v i r t u a l l y elimi- n a t i n g t h e investment program from which t h e major p a r t of t h e demand e emanates. W a r e n o t suggesting t h a t equilibrium should be achieved p r i n c i p a l l y b y t h e s e means. FJe have a l r e a d y i n d i c a t e d t h a t t h e p r e s e n t supply of f o r e i g n exchange i s n o t adequate both t o permit t h e full u t i l i z a t i o n of e x i s t i n g production c a p a c i t y and a l s o t o provide t h e supply of imported c a p i t a l goods necessary f o r an adequate r a t e and type of expansion of I n d i a ?s productive capacity. W have i n d i c a t e d e t h a t this inadequacy has forced t h e I n d i a n a u t h o r i t i e s t o make a broad choice between "maintenance1I and l $ p l . ~ j e c t ~ ~ imports as c a t e g o r i e s , a choice i n which t h e i r degree of d i s c r e t i o n was t o some degree l i m i t e d by t h e g e n e r a l preference of t h e aid-givers f o r t h e l a t t e r category. 1Je b e l i e v e t h a t , given t h e e x t e n t and t h e c h a r a c t e r of t h e e x i s t i n g under-utilized capa,city, t h e r e would be a s u b s t a n t i a l a c c e l e r a t i o n i n I n d i a ' s output, and i n t h e c o n t r i b u t i o n of t h i s output t o b o t h c a p a c i t y expansion and export i f t h e r e q u i s i t e supply of maintenance imports were increased. A t t h e same t5me, although during t h e p a s t few y e a r s t h e r e has probably been a,n o v e r r e s e r v a t i o n of f o r e i g n exchange f o r ?'project importsI1, t h e r e i s no doubt t h a t I n d i a ' s c a p a c i t y t o u t i l i z e such imports can be a.nd has been growing. There i s a l s o no doubt t h a t an investment program which would permit e q a n s i o n of Indial s productive c a p a c i t y a t an adequa.te r a t e and with a n appropriate camposition r e q u i r e s a volume of imports of c a p i t a l equipment t o complement and supplement domestic resources vhich i s a t Least a.s l a r g e a s i n t h e p a s t s e v e r a l years. 51- e W believe, t h e r e f o r e , t h a t t h e equilibrium should b e achieved by a combina.tion of measures. One i s a r i s e i n t h e e f f e c t i v e exchange r a t e which :?rill o r r e c t t h e p r e s e n t r e l a t i o n s h i p of import t o i n t e r n a l c p r i c e s and c o s t s and rnJhich should thereby somewhat reduce t h e excessive demand f o r imports and d e s i r a b l y a l t e r t h e composition of t h a t demand. Another i s t h e f r e e i n g of maintenance imports from t h e e x i s t i n g d i r e c t c o n t r o l s and t h e p r o v i s i o n f o r maintenance imports of a supply of f o r e i g n exchange adequate t o meet t h e demand a t t h e newly e s t a b l i s h e d e f f e c t i v e exchange r a t e s . The demand, we -believe, should be l i m i t e d by t h e con- tinued banning of imports of m n - e s s e n t i a l f i n i s h e d consumer goods a s w e l l a s of components and semi-ma,nufactures used only i n t h e production of such goods, and by t h e imposition of high e x c i s e d u t i e s on l e s s e s s e n t i a l o r lower p r i o r i t y domestically produced goods which have an import component; t h e t h i r d measure i s t h e continued d i r e c t c o n t r o l of inrports of c a p i t a l gocds through t h e r e l a t e d i n d u s t r i a l l i c e n s i n g and c a p i t a l goods import l i c e n s i n g operations. 52 J l Ve have suggested t h a t l i b e r a l i z a t i o n should involve both t h e freeing of mahtenance imports from d i r e c t a d m i n i s t r a t i v e c o n t r o l and a l s o a,n accompanying expansion of t h e volume of imports of most goods i n this category. C l e a r l y t h e e x t e n t t o which t h i s volume i s expanded w i l l be s u b j e c t t o c o n t r o l by t h e exchange r a t e adopted, by t h e s p e c i a l d u t i e s and excises imposed, and by the e x t e n t of t h e items of which import i s prohibited. W r;ould not suggest, halever, e i t h e r t h a t t h e e r a t e s and d u t i e s should be s e t so high a.s t o negate t h e purpose of achieving higher u t i l i z a t i o n of capacity o r t h a t t h e import of c a p i t a l goods should be s o r e s t r i c t e d a s t o c r i p p l e t h e investment program which requires supply from both foreigr, and domestic sources. W a r e e suggesting t h a t the a l t e r a t i o n of the present balance between mainte- nance and p r o j e c t imports, and higher import exchange r a t e s and elinri- n a t i o n of d i r e c t c o n t r o l of imports, would b r i n g important advantages. Ye believe t h a t a la,rger t o t a l supply of f o r e i g n exchange i s e s s e n t i a l f o r these purposes and t h a t i n t h e immediate f u t u r e only a.dditiona1 aid, above t h e l e v e l received during t h e Third Plan period, can provide a s u f f i c i e n t l y augmented supply. I n t h e longer run we would expect exports, stimulated by an appropriate exchange r a t e and other measures, t o provide an i n c r e a s i n g p a r t of t h e growing requirements of "mainte- nancef7imports. 53 emphasize t h a t advocacy of l a r g e r vmaintenance17imports f~Je and abandonment of t h e e x i s t i n g system of d i r e c t import controls i s not an argument f o r a reduction o r a slo~gdownin t h e investment program i n favor of l a r g e r consumption o r e a s i e r achievement of i n t e r n a l p r i c e s t a b i l i t y . It i s 011 the contrary aimed a,t a more rapid growth of output, investment and export. It contemplates f u l l e r u t i l i z a t i o n f o r these purposes of t h e enlarged and a l t e r e d productive c a p a c i t y which has been created i n India i n the p a s t t e n years. i?e d e t e c t on t h e p a r t of both t h e Indian a u t h o r i t i e s and the aid-givers a f e a r t h z t non-project o r non-capital goods a i d i s i n e f f e c t t h e fina.ncing of consumpticn r a t h e r than economic growth. "Balance of Payments support" i s t h e term f r e - quently used. There i s i m p l i c i t i n t h i s view the assumption t h a t only imports of f i n i s h e d c a p i t a l goods and t h e s p e c i f i c production f a c i l i t i e s ( ~ r o j e c t s )f o r which they a r e destined can contribute t o economic growth. There i s a l s o i m p l i c i t , we suggest, a confusion between t h e types of goods imported and the use which i s made of the output t o which they contribute. Tne t e s t , we believe, i s t h e extent t o which the output i s used and i s required f o r a c c e l e r a t i o n of investment and export, and t h e extent t o which incremental resources, whether t h e y o r i g i n a t e i n domestic production o r abroad, a r e used f o r these r a t h e r thsn other purposes. Defense Expenditure 54 I-t i s i n t h e context of t h i s view t h a t we p o i n t t o t h e increase i n defense expenditure a s one of t h e obstacles t o Indian economic progress. e! V have no means of assessing t h e t h r e a t s t o I n d i a ' s s e c u r i t y o r the y l e g i t i m a t e requirements f o r defense which they impose. Le can only note t h a t i n both India and Pakistan defense expenditures represent s i g n i f i c a n t diversion of resources from development. The p e r s i s t e n c e of India- Pakistan tensions a r e a f a c t o r i n t h e s e expenditures and t h e expenditures themselves contribute t o t h e tensions. The development needs of both countries j u s t i f y f u r t h e r e f f o r t s , hcn~everdiscouraging t h e p a s t h i s t o r y ma.y be, t o 2 e d ~ c ethese tensions. F a i l u r e of t h e two t o collaborate more r e a d i l y i n t h e development and ma,mgement of water resources and t r a n s p o r t and communication f a c i l i t i e s has imposed unnecessary c o s t s on both. F a i l u r e t o f o s t e r t r a d e has done likewise. The Indian economy i s l a r g e and i t s resources a r e d i v e r s i f i e d . Nevertheless P a k i s t a n i n a t u r a l gas, Indian coal, P a l d s t a n i r i c e and raw j u t e and Indian manu- f a c t u r i n g c a p a c i t y o f f e r t h e p o s s i b i l i t y of mutually b e n e f i c i a l exchange. Successful s t e p s t o reduce t h e tensions and t h e defense expenditures could make 2. l a r g e c o n t r i b u t i o n t o Indian economic progress. Population Control 55 I n t h e same context of t h e use of resources we i d e n t i f y a s probably t h e s i n g l e most c r i t i c a l deficiency i n Indian p o l i c y and a c t i o n t h e absence of a. vigorous at-tack upon t h e r a t e of population growth. Although population c o n t r o l has been an e x p l i c i t objective i n I n d i a t s development plans s i n c e 1956, t h e l1Family Flanning" program has not been vigorously o r s u c c e s s f u l l y prosecuted. I t s e f f e c t s t o d a t e on population growth a.re not d i s c e r n i b l e o r measurable. The program has not i n t h e p a s t been given p r i o r i t y among t h e various programs of t h e Ministry of Health. I n some S t a t e s both s t a f f and funds a r e reported t o have been diverted from t h e program t o o t h e r p r o j e c t s . The a d m i n i s t r a t i v e s t a f f a t t h e Center has been t o o small. Delays i n a c t i o n have been excessive. A considerable amount of educational work has been done but t h e number of f a m i l i e s a c t u a l l y now u s i n g one o r another method of contra,ception i s estimated t o be a maximum of 2 million, o r two e r cent of t h e number of Indian couples i n t h e reproductive age group., 1P 56 lJe have a l r e a d y r e f e r r e d t o t h e growth of I n d i a ' s population i n t h e Third Plan period and Ilave indicated i n aggregate terms t h e very la-rge s h a r e of incremental output required simply f o r t h e support of t h i s population a t t h e e x i s t i n g p e r c a p i t a consumption l e v e l . The r a t e a t which popula,tion i s growing has been i n c r e a s i n g a s a r e s u l t of d e c l i n e s i n mortality. These r e f l e c t p r i n c i p a l l y t h e success of malaria and o t h e r d i s e a s e c o n t r o l programs. There i s no evidence, however, of a d e c l i n e from t h e high r a t e of f e r t i l i t y . A t t h e p r e s e n t m o r t a l i t y and f e r t i l i t y r a t e s ( b i r t h s p e r 1,000 women of child-bearing age) I n d i a ' s population w i l l be about 560 m i l l i o n i n 1971 a t t h e end of t h e Fourth Plan, almost 650 m i l l i o n f i v e years l a t e r and c l o s e t o 750 m i l l i o n i n 1981. A t b e s t t h i s i n c r e a s e r ~ o u l dslow o r h a l t economic progress amd would proba.bly d e s t r o y any p r o s p e c t of economic independence. The absolute n e c e s s i t y f o r a massive and s u c c e s s f u l a t t a c k on t h e problem i s evident. 57 Several r e c e n t developments provide a b a s i s f o r hope t h a t a successfrd- program can be mounted. The most i n p o r t a n t of t h e s e i s t h a t t h e i n t r a - u t e r i n e contraceptive device (IUCD) has been proved a s an e f f e c t i v e , safe, acceptable and inexpensive method of contra-ception f o r a high percentage of women. It has been approved and accepted f o r use -/ 1 See Volume X I , ttFamily Planning1'. i n t h e h d i a n Family Planning Program and, supplemented by s t e r i l i z a t i o n and condoms, could be t h e b a s i s f o r a, massive and quickly-effective program. The Governrnent of I n d i a has moved promptly t o begin large-scale manufacture of t h e IUCD i n India, which should assure i t s a v a i l a b i l i t y . The decision has been ta.ken t o t r a i n a m a x i m u m number of physicians i n the use of t h e method. 58. The most encouraging development i s t h a t I n d i a ' s n a t i o n a l lea,dership has begun t o s h a r a determination t o grapple with t h e problem. Preliminary thinking about t h e Fourth Plan has a l l o c a t e d Rs. 95 crores ($200 million) t o t h e Family Pla.nning Program i n t h e period. This com- pares with an alloca,tion of Rs. 27 crores i n t h e Third Plan. The Govern- ment has s e t a s i t s t a r g e t a peduction of t h e b i r t h r a t e from 40 t o 25 p e r thousand a s soon a s p o s s i b l e and programs a r e under consideration which aim a,t a.chievement of this objective by 1975. Reaching this t a r g e t would reduce the population g r m t h ra.te t o 1.5 p e r cent p e r annun by 1976. It would mean 10 m i l l i o n f e v e r b i r t h s i n tha,t y e a r than would occur i f t h e present b i r t h r a t e remains unchanged. It would r e q u i r e t h a t a very l a r g e number of I n d i a ' s family be reached and become users of one o r another of t h e contraceptive methods. The numbers can be variously estimated but they a r e many m i l l i o n s each year. The anti-malaria campaign i s evidence, however, t h a t t h e Government can mount a program t h a t reaches n e a r l y every home i n t h e country. The funds t e n t a t i v e l y a l l o c a t e d f o r t h e Fourth Plan period a r e ample f o r t h i s purpose. The numbers of physicians and other t e c h n i c a l personnel who would be required a r e a v a i l a b l e . There appears t o be no r e l i g i o u s o r other organized opposition t o family planning, and t h e r e i s evidence of i n t e r e s t and demand on t h e pa,rt of l a r g e numbers of families. The t a r g e t is, therefore, not judged t o be an impossible one. 59 Attainment of t h e t a r g e t w i l l r e q u i r e t h a t p r i o r i t y comparable t o or grea.ter than tha,t given t o t h e campaign a g a i n s t malaria be given t o t h e Family Planning Program and t h a t t h e w i l l and determination of h d i a l s leadership be expressed i n a r e v i t a l i z e d organization f o r i t s conduct . Agriculture 60. !Je have a l r e a d y indica.ted t h a t i n our judgment a.griculture has n o t received t h e degree of p r i o r t t y it requires. ! need not repeat t h ee e a r l i e r discussion b u t we can re-emphasize some of i t s ma-in points. Accelerated growth of a g r i c u l t u r a l output c a l l s f o r p o l i c i e s s u b s t a n t i a l l y d i f f e r e n t from those which prevailed during most of t h e Mrd Plan period. Strong and s t a b l e p r i c e incentives t o producers must be provided and sus- tained; much l a r g e r and genuinely adequate supplies of t h e major p h y s i c a l i n p u t s must be supplied. These include most importantly f e r t i l i z e r s , i r r i g a t i o n water, improved seed and pla.nt p r o t e c t i o n materials. Indus- t r i a l production and a l l o c a t i o n s of scarce domestically produced and imported m a t e r i a l s must be geared t o provide these even i f this should r e q u i r e a l t e r a t i o n i n t h e p a t t e r n of i n d u s t r i a l investment and f o r e i g n exchange alloca.tion. F a n c r e d i t must be made a v a i l a b l e i n adequate amounts and t o a l l c l a s s e s of c u l t i v a t o r s . !fie emphasize these a s t h e ah major f a x t o r s ~ ~ h i c r e l i k e l y t o a f f e c t output i n t h e immediate future. Proper balance i n p o l i c y must, however, give concurrent a t t e n t i o n t o b e t t e r organized and d i r e c t e d resea-rch, t o reorganization and strengthen- i n g of extension work and of administration, t o b e t t e r gearing of irri- gation planning and operation t o a g r i c u l t u r a l production requirements, t o enforcement of s e c u r i t y of tenure and f a i r r e n t s , and t o t h e speeding of consolidation of fragmented holdings. 61 l The requiremen3s of e f f e c t i v e p o l i c y a r e numerous and complex. They a r e well understood by t h e Government of I n d i a l e a d e r s responsible f o r a g r i c u l t u r a l p o l i c y and operations i n India., The means w i t h which t o implement them must be provided by a j o i n t determination by I n d i a ' s economic leadership t h a t a g r i c u l t u r e w i l l receive t h e higher degree of p r i o r i t y which i t requires. lle believe t h a t given t h i s t h e r e i s room h f o r optimism t h a t a g r i c u l t u r a l g r o ~ l ~ tcan be accelerated t o t h e average l e v e l of approximately 5 p e r c e n t p e r year by t h e end of t h e Fourth Plan period. Not t h e l e a s t important b a s i s f o r t h i s degree of optimism i s t h e b e l i e f t h a t la,rge numbers, and not merely a selected few, of Indian c u l t i v a t o r s m e now considerably nearer t h e p o i n t a t which they w i l l move from cautious and timid experiment t o more sustained and increasing use of modern technologies. I n d i a ' s land and water resources a r e such tha.t with such technologies i t s a g r i c u l t u r a l output can be enormously increased. Foreign Investment 62. Ambivalence, a l a c k of c o n s i s t e n t a.nd determined e f f o r t , and complicated a.nd i n o r d i n a t e l y time- consuming procedures on t h e p a r t of t h e Government of India have l i m i t e d t h e extent t o which India has a t t r a c t e d f o r e i g n p r i v a t e investment. The data a v a i l a b l e a r e not s a t i s f a c t o r y but they suggest t h a t t h e inflows i n t h e Third Plan period have been l e s s than '$50 m i l l i o n p e r year. It i s t r i t e but t r u e t h a t such investment could make an important and much-needed contribution of f i n a n c i a l o r m a t e r i a l resources 2nd of managerial and technical competence t o the Indian develop- ment e f f o r t . Obvious questions could be raised about t h e wisdom of barring p r i v a t e f o r e i g n o r domestic operation i n important sectors, such a s petroleum e q l o r a t i o n and production. JJithout challenging basic Government of I n d i a p o l i c y i n this regard, hazrever, one can question other aspects of Goverk mei~tof India p o l i c y i n respect of p r i v a t e investment, f o r example i t s i n s i s t e n c e tha.t f o r e i g n i n v e s t o r s generally accept a minority e q u i t y p o s i t i o n i n ventures i n which t h e i r p a r t n e r s a r e p r i v a t e Indian i n t e ~ e s t s and alrmys accept such a p o s i t i o n where t h e Government of India. i t s e l f i s t h e partner. I t s reluctance and h e s i t a t i o n i n removing minor impediments, such a s t h e tax treatment of f a r e i g n personnel employed i n India, i s a l s o expressive of a general under-valuation and d i s t r u s t of f o r e i g n p r i v a t e i ~ v e s t m e n t . Our impression i s t h a t a very l a r g e number of f o r e i g n p r i v a t e business finns a r e a.ttra.cted by t h e p o t e n t i a l of India a s a market b u t on t h e balance, i n t h e face of e x i s t i n g d e t e r r e n t s , decide a g a i n s t i t . TJe a r e struck by t h e f a c t t h a t many of t h e d e t e r r i n g and discouraging f a c t o r s serve no s i g n i f i c a n t purpose f o r and p r o t e c t no important i n t e r e s t of t h e Government of India. Energetic and determined a c t i o n t o remove them, how- ever, has t o d a t e been lacking. Public S e c t o r E n t e r p r i s e 63. There i s roam f o r doubt, t a k i n g a l l t h i n g s i n t o account, t h a t it i s e i t h e r necessary o r s o c i a l l y o r economically advantageous t h a t t h e Government pre-empt c e r t a i n a r e a s of i n d u s t r i a l a c t i v i t y o r even e n t e r o t h e r s . A t t h e same time it i s U e l y t h a t p r i v a t e investment would n o t have undertaken t h e establishment of many of t h e required production f a c i l i t i e s a t a l l o r i n p r a p e r time. I n any event s u b s t a n t i a l investments have been made i n p u b l i c s e c t o r e n t e r p r i s e s and c r i t i c i s m must be made of t h e i r a c t u a l record of performance. The c r i t i c i s m i s n o t of t h e invest- ment choices p e r se i n t h e sense, f o r example, t h a t i t was unwise t o under- t a k e t o produce s t e e l o r heavy e l e c t r i c a l equipment i n India, ,Pather, it is i n the i ementation of t h e production o b j e c t i v e s t h a t t h e r e i s f a u l t e t o be found"E) W have a l r e a d y mentioned t h a t t h e process of p r o j e c t planning has been imperfect. Out of t h a t process t h e r e have come d e f e c t i v e f i n a l d e c i s i o n s with r e s p e c t t o the s i z e of some of t h e p r o j e c t s and t h e i r p a r t i c u l a r designs, processes and product mixes. I n some cases undertakings were s o l a r g e t h a t t h e d i f f i c u l t i e s of management exceeded any e c o n d e s of s c a l e . I n some cases obsolete o r high-cost product designs and processes were adopted. I n few cases was t h e r e any weighing of t h e economics of a l t e r n a t i v e s 'but i n s t e a d an inadequately informed d e c i s i o n t o proceed t o t h e establishment of c a p a c i t y and production. The i n o r d i n a t e time taken f o r design, procurement, construction and f u l l use has added appreciably t o c o s t s . The i n e f f e c t i v e management of a c t u a l production operations i n some e n t e r p r i s e s has added t o c o s t s a.nd r e s t r i c t e d output. There appears t o be a. l a c k of adequate a p p r e c i a t i o n t h a t management must have a u t h o r i t y t o c o n t r o l and d i r e c t operations, t h a t experience i s a n a s s e t , t h a t pe* formance r a t h e r than s e n i o r i t y should be t h e c r i t e r i o n f o r judgment of management and o t h e r personnel, t h a t performance-related rewards, f i n a n c i a l and other, a s w e l l a s p e n a l t i e s a r e e s s e n t i a l , and t h a t , i n general, pro- d u c t i o n aperations cannot be economically e f f e c t i v e i f operated w i t h t h e checks and balances which govern t h e ordinary operations of Government departments. There i s a l s o an inadequate degree of u t i l i z a t i o n of c o s t c o n t r o l and o t h e r techniques of management. These f a u l t s a r e responsible f o r t h e f a c t tha,t a considerable number of p u b l i c s e c t o r e n t e r p r i s e s have t o d a t e produced v e r y l i t t l e economic o r f i n a n c i a l r e t u r n on t h e invest- ments made and t h a t a few a r e u n l i k e l y t o do so. 64. !Je have discussed import, c o n t r o l s elsewhere. There a r e o t h e r Government c o n t r o l s of economic l i f e which a t b e s t serve l i t t l e purpose, r e s u l t i n delays a.nd f o s t e r corruption, and a t worst hamper both invest- ment and production and m i s a l l o c a t e resources. The i n d u s t r i a l l i c e n s i n g system, some of t h e p r i c e c o n t r o l s and some of t h e m a t e r i a l a l l o c a t i o n systems f a l l i n t h i s ca-tegory. The i n d u s t r i a l l i c e n s i n g system i s pro- bably t h e most important of these. It appears t o have, i n t h e thinking of t h e Government of India, a number of purposes, one being t o prevent t h e establishment of excess c a p a c i t y i n p a r t i c u l a r l i n e s of production, - 1/ See Volume V I , nPlanufacturing I n d u s t r y with S p e c i a l Reference t o P u b l i c Sector Enterprises". another t o d i r e c t investment i n t o types of production regarded a s high p r i o r i t y , another t o achieve a wider geographic d i s t r i b u t i o n of income. S t i l l o t h e r purposes appear t o be t o prevent o r reduce t h e concentration of economic power and t o r e s t r i c t t h e establishment of f a c i l i t i e s which make l a r g e demands on s c a r c e resources and f a c i l i t i e s such a s f o r e i g n exchange, t r a n s p o r t , and power. It i s probably n o t u n f a i r t o s a y t h a t i n a d d i t i o n t h e r e appear t o be two t a c i t underlying assumptions: first, t h a t economic a c t i v i t y s o s i g n i f i c a n t a s t h e establishment of new o r expanded manufacturing c a p a c i t y should n e c e s s a r i l y be s u b j e c t t o Govern- ment approval, even i n t h e absence of any c l e a r l y conceived purpose; second, t h a t decisions by Government a d m i n i s t r a t o r s w i l l a u t m a t i c a l l y be e i t h e r w i s e r o r s o c i a l l y more b e n e f i c i a l than those b y p r i v a t e entre- preneurs. There i s no p a r t i c u l a r evidence t h a t t h e l i c e n s i n g system h a s i n f a c t served any p o s i t i v e economic purpose. There i s l i t t l e doubt, however, t h a t it has prevented e f f i c i e n t e n t e r p r i s e s from expamding, t h a t it has imposed r e s t r a i n t s upon t h e achievement of economies of s c a l e , and t h a t i t has delayed and hampered investment and production a c t i v i t y . It has, l i k e t h e import c o n t r o l system, p r o t e c t e d and pre- served i n e f f i c i e n c y by, i n e f f e c t , a l l o c a t i n g market shares and re- s t r a i n i n g t h e growth of more e f f i c i e n t e n t e r p r i s e s . 65. Both p r i c e c o n t r o l s and c o n t r o l s over t h e d i s t r i b u t i o n of m a t e r i a l s a r e diminishing i n importance. P r i c e c o n t r o l s a r e n o t r e a d i l y avoidable when competition i s l i m i t e d o r prevented by import c o n t r o l s operated a s t h e y have been, and by a l l o c a t i o n of s c a r c e domestic materials. There i s evidence, hawever, t h a t p r i c e c o n t r o l s have i n a number of in- s t a n c e s operated t o discourage t h e expansion of c a p a c i t y t o produce and of a c t u a l output of m a t e r i a l s i n s h o r t supply. They have a l s o encouraged non-essential uses of those m a t e r i a l s . Control over t h e d i s t r i b u t i o n of s c a r c e m a t e r i a l s such a,s s t e e l , cement and c o a l has n o t assured p r i o r i t y u s e s of t h e s e m a t e r i a l s and has, l i k e t h e o t h e r a d m i n i s t r a t i v e c o n t r o l s , imposed a good d e a l of r i g i d i t y where dynamic development appears t o c a l l f o r m a x i m u m f l e x i b i l i t y a.nd speed of a.d justment. It i s t h i s b a s i c i n h i b i - t i n g q u a l i t y of t h e a d m i n i s t r a t i v e c o n t r o l s over many a s p e c t s of economic a c t i v i t y and t h e i r use t o p r o t e c t and preserve i n e f f i c i e n c y and vested i n t e r e s t which, i n our view, d i s t i n g u i s h e s them a s one of t h e s e r i o u s o b s t a c l e s t o t h e dynamic progress of t h e Indian economy. LExral Works 66. The f a i l u r e of t h e Government of I n d i a t o organize a r u r a l works program represents, i n our view, a s e r i o u s l o s s . There i s s u b s t a n t i a l unused l a b o r time, a t l e a s t s e a s o n a l l j ~ , i n r u r a l I n d i a and t h e r e a r e a l s o considerable o p p o r t u n i t i e s f o r t h e productive use of t h i s l a b o r combined with minimal amounts of equipment and m a t e r i a l s and some t e c h n i c a l a s s i s t - ance. Roads, dikes, small water f a c i l i t i e s and s i m i l a r works would con- t r i b u t e measurably t o t h e expamsion of a g r i c u l t u r a l output and reduction i n t r a n s p o r t and marketing c o s t s and t h e c o s t s of providing s e r v i c e s t o t h e v i l l a g e population. There a r e g r e a t d i f f i c u l t i e s i n organizing such a r u r a l works program on any s c a l e and i n ensuring reasonable maintenance of t h e f a c i l i t i e s and t h e r e w i l l undoubtedly be i n e f f i c i e n c i e s i n such a program. Nevertheless, the returns a r e l i k e l y considerably t o exceed t h e very low r e a l costs. The use of t h i s labor f o r productive purposes should not continue t o waft upon t h e a v a i l a b i l i t y of the l a r g e amounts of c a p i t a l required f o r i t s absorption i n t o the i n d u s t r i a l sector. Mobilization of I n t e r n a l Resources 67. Inadequate mobilization of i n t e r n a l f i n a n c i a l resources has not, i n our judgment, been a major obstacle t o accelerated economic development i n India. Given the low l e v e l s of i n c m e and p r i v a t e savings, t h e l a r g e r o l e which i s assigned t o the public s e c t o r i n t h e investment program, and the need f o r g r e a t l y expanded public services, i n t h e i n t e r e s t s of both economic development and public welfare, the mobilization of i n t e r n a l f i n a n c i a l resources by the Government i s c r i t i c a l l y important. Its e f f o r t i n this area has been l a r g e and generally successful, although t h e r e i s room f o r improvement and improverilent w i l l be necessary if the pa.ce of development i s t o be stepped up. Taxes have been the major in- strument of mobilization. The cash flows generated by Government enter- p r i s e s , including p r o f i t s , depreciation reserves and amortization pay- ments, ha.ve t o date been l e s s important a s has 'borrowing from t h e public. Specifically, t h e t a x revenues of the Center Government have incres.sed a-t t h e average annual r a t e of 10 p e r cent since 1951 and 20 p e r cent i n the f i r s t f o u r years of t h e Third Plan period. Union excise duties and company ta.xation have been t h e most buoya-nt taxes throughout t h e period but i n recent years c u s t m s duties have a l s o been increased and t h e revenue from them has r i s e n very appreciably, pa.rticularly a s compared with i t s behavior i n the 1950's when i t had been v i r t u a l l y stagnant. Persona,l income t a x has been t h e l e a s t buoyant of t h e ma. jor t a x levies. 6:. Center t a x revenue has increased from 5.1 p e r cent of n a t i o n a l income i n 19-51-52 t o 6.2 p e r cent i n 1960-61, and 9.k p e r cent i n 1963-6& and probably almost t h a t same f i g u r e i n 1964-64;. This has implied a marginal r a t e of Union taxation of approximately 17 p e r cent i n the f i r s t f o u r years of the Third Plan. India s t i l l ranks, despite her e f f o r t s and f o r what t h e unqualified comparison i s worth, a s average-to-low i n t h e i n t e r n a t i o n a l comparison of t a x l e v e l i n r e l a t i o n t o national income; i f S t a t e taxation i s included t h e tax revenue/national income r a t i o i s around 1 3 p e r cent. This r e f l e c t s both h e r poverty and t h e low l e v e l of taxation from which she s t a r t e d h e r program of planned development. 69 Changes i n t h e t a x s t r u c t u r e i n recent years have not only increased the general l e v e l of taxation, but a l s o i t s b u i l t - i n r a t e of gror~th. Built-in e l z s t i c i t y has not, holrever, been great i n the case of t h e personal income tax. This r e f l e c t s , i n p a r t , t h e t a x r a t e s t r u c t u r e which imposes very high r a t e s of t a x upon high income receivers b u t low r a t e s f o r those i n t h e Indian middle income brackets. I n p a r t i t r e f l e c t s an increase i n t a x evasion and avoidance. The number of incomes reported a s subject t o t h e high r a t e s of t a x and the t a x contri- bution of these incomes has declined. The greater simplicity introduced i n t o the personal income t a x i n t h e 1965-66 Budget is t o be welcomed, but t h e s i g n i f i c a n t reductions i n r a t e s which i t a l s o e f f e c t e d seem t o u s undesirable. 70 The p r e s e n t v i r t u a l exclusion of a g r i c u l t u r a l income from t a x a t i o n has deprived t h e Government of a source of revenue which w i l l be i n c r e a s i n g l y important a s a g r i c u l t u r a l production and incomes grow. Savings i n t h i s s e c t o r a r e t o some e x t e n t invested i n a g r i c u l t u r e and a r e required f o r t h i s purpose, b u t some means of mobilizing and trans- f e r r i n g a d d i t i o n a l savings f o r investment i n this and o t h e r s e c t o r s i s necessary. There a r e obvious a d m i n i s t r a t i v e d i f f i c u l t i e s in t h e i m - p o s i t i o n of income t a x e s i n t h e a g r i c u l t u r a l s e c t o r . Furthermore, a n a g r i c u l t u r a l income t a x would, t o some e x t e n t , undermine t h e i n c e n t i v e s t o increased output. It i s p o s s i b l e , however, t h a t p e r i o d i c i n t e n s i f i - c a t i o n of t h e la,nd t a x would produce significa.nt revenues, would be e z s i e r t o administer, and t o t h e e x t e n t t h a t changes were made only a t of i n t e r v a . 1 ~ a. number of years, should g i v e i n c e n t i v e r a t h e r than dis- i n c e n t i v e t o increased output. 71 Ide do n o t s h a r e t h e c r i t i c i s m which has been made of t h e weight of t a x a t i o n on companies i n India. The forma,l ra.tes give support t o t h i s c r i t i c i s m b u t s t u d y of a l a r g e sample of company accounts shows t h a t t h e p r o v i s i o n f o r t a x a t i o n (which i s g e n e r a l l y i n excess of t a x payments) averaged 51 p e r c e n t of p r o f i t s i n 1962-63. I.Tha,t i s even more important i s t h e range of t a x experience of companies. Data f o r s e v e r a l r e c e n t years i n d i c a t e t h a t more than 40 p e r cent of a l l t h e companies included i n a l a r g e sample a l l o c a t e d l e s s than 30 p e r c e n t of t h e i r p r o f i t s a g a i n s t t a x pzyments. This range r e f l e c t s t h e many t a x concessions which a r e granted t o expanding e n t e r p r i s e s . 72
Groupe de la Banque mondiale · Working Paper
Report to the President of the International Bank for Reconstruction and Development and the International Development Association on India's economic development effort (Vol. 1 of 14) : Main report
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