RESTRICTED ReportN O.AS-80a FILE LOPY This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INDIA'S THIRD FIVE-YEAR PLAN REPORT OF BANK MISSION TO INDIA THE MAIN REPORT August 10, 1960 Department of Operations South Asia and Middle East CURRENCY EQUIVALENTS 1 Indian Rupee = U. S. $0. 21 1 U.S. Dollar = Rs. 4. 762 Rs. 1 billion = $210 million 100 Naye Paise = One Rupee WEIGHTS AND MEASURES All tonnages in long tons unless otherwise stated. CONTENTS Page No. BASIC STATISTICS (i) INDIAtS SECOND AND THIRD PLANS (iii) MAP OF INDIA (iv) PREFACE (v) SUMMARY OF THE MISSION'S FINDINGS (vi) CHAPTER 1. PROGRESS OF THE SECOND PLAN Growth of Output and Income 1 Agricultural Development 2 Changes in Industry 3 Transport 6 Investment Programs and Performance 6 Financing of the Second Plan 7 Foreign Trade and Payments 8 Conclusion 9 CHAPTER 2. THE THIRD PLAN IN OUTLINE Principal Aims 10 Financial Resources for the Plan 14 The Plan in Perspective 14 Conditions of Success 18 CHAPTER 3. AGRICULTURAL FRODUCTION AND PROSPECTS Production Targets 20 Means of Achievement - Irrigation 22 Fertilizers 23 Price Incentives 24 Agricultural Credit 25 Cooperative Farming 25 Land Reform 26 Rural Works Programs 26 Prospects for the Third Plan 26 Page No. CHAPTER 4. BASIC INDUSTRIES AND SERVICES Coal Production 28 Electric Power 29 Oil Supplies 31 Transport 33 The Steel Industry 36 CHAPTER 5. GENERAL INDUSTRIAL PROBLEMS Management and Technical Skills 40 Costs and Productivity 41 Profitability of Industry 42 Government Controls 43 Labor Relations U Employment Prospects 45 Conclusions 46 CHAPTER 6. SOCIAL SERVICES A Modest Program 47 The Problem of Calcutta 47 Education and Technical Training 49 Family Planning 50 CHAPTER 7. FINANCE FOR THE PLAN - (A) FOREIGN EXCHANGE Foreign Exchange Requirements 51 Export Earnings Sh The Balance of Trade and Payments 57 Private Foreign Investment and Official 58 Assistance CHAPTER 8. FINANCE FOR THE PLAN - (B) INTERNAL RESOURCES Nature of the Problem 61 Problems of Definition 62 Resources for the Public Sector 62 Resources for the Private Sector 66 Interest Rates 67 General Conclusions 68 CHAPTER 9. FEASIBILITY OF THE THIRD PLAN External Conditions 70 Internal Conditions 73 Chances of Reaching the Production Targets 75 CHAPTER 10. LONG-RANGE ECONOMIC PROSPECTS 77 TABLES IN TEXT Page No. 1. Per Capita Consumption Availabilities 2 2. Outlays in the Third Plan 11 3. Public Outlays in the Second and Third Plans 12 4. Crop Production Targets 21 5. India's Balance of Payments 52 6. Inflow of Private Foreign Capital 59 7. Financing of Public Expenditures under the Plan 63 CHARTS Following Page No. Growth of Industrial Production 4 Wholesale Prices 8 Net Mational Output, Money Supply and Wholesale Prices 8 Foodgrain Production and Its Percentage Growth Rates 21 MAPS India (iv) India - Deposits of Coal and Iron Ore 28 India - Petroleum Development 31 TABLES IN TEXT Page No. 1. Per Capita Consumption Availabilities 2 2. Outlays in the Third Plan 11 3. Public Outlays in the Second and Third Plans 12 4. Crop Production Targets 21 5. Indiafs Balance of Payments 52 6. Inflow of Private Foreign Capital 59 7. Financing of Public Expenditures under the Plan 63 CHARTS Following Page No. Growth of Industrial Production 4 Wholesale Prices 8 Net National Output, Money Supply and Wholesale Prices 8 Foodgrain Production and Its Percentage Growth Rates 21 MAPS India (iv) India - Deposits of Coal and Iron Ore 28 India - Petroleum Development 31 (i) BASIC STATISTICS Area Total area 811 million acres or 1,270,000 sq. miles of which: Cultivated 4O% (325 mn, acres) of which: Irrigated 21% ( 67 mn. acres) Population (1960) Total population (revised estimate) 423 million Overall population density 300 per sq. mile Assumed rate of population growth (1956-1966) 2% per annum National Output (1958/59) Net national output at factor cost Rs. 125 billion of which: Agriculture, forestry and fisheries 50% Mining 1% Factory establishments 8% Small enterprises 8% Commerce and transport 17% Government administration 6% Other services 10% Output per head Rs. 306 Net national expenditure at factor cost Rs. 128 billion of which (very approx): Current government expenditure 10% Net investment 10% Private consumption 80% Government Finance (1959/60: Centre and States combined) Total revenue receipts Rs. 15.25 billion of which: Taxes on income and expenditure 16% Taxes on property and capital 10% transactions Taxes on commodities and services 51% Non-tax revenue 23% (ii) Total expenditure on revenue account Rs. 16.58 billion of which: Defense expenditure 17% Debt service 9% Social services, civil administra- 74% tion, etc. & Figures not strictly comparable because of discrepancies in accounting of Central grants-in-aid to the States. Foreign Trade and Payments (1959/60) Payments for imports, c.i.f. Rs. 9.23 billion of which (approx): Foodgrains 17% Petroleum 9% Iron and steel 13% Capital equipment 25% Other imports 36% Receipts from exports and re-exports, f.o.b. Rs. 6.23 billion of which (approx): Tea 20% Jute goods 17% Cotton goods 11% Hides and leather 7% Mineral ores 5% Nuts and spices 5% Vegetable oils 3% Raw cotton 2% Tobacco 2% Other exports 28% Net invisible receipts (exc. foreign aid) Rs. 0.65 billion Foreign grants and loans Rs. 2.95 billion Foreign Assets (July 1, 1960) Gold with Reserve Bank Rs. 1.18 billion Foreign exchange with Reserve Bank Rs. 1.56 billion Public Debt of Central Government (March 31, 1960) Internal debt Rs.51.18 billion External debt Rs. 6.10 billion (iii) INDIAIS SECOND AND THIRD PLANS (All figures in Rs. billion, with $ billion equivalent) SECOND PLAN THIRD PLAN Original Latest Estimates 1. Public Expenditures in 48.0 ($10.1) 46.0 ($ 9.7) 72.5 ($15.2) the Plan of which: (a) Current outlays 10.0 ($ 2.1) 9.5 ($ 2.0) 10.5 ($ 2.1) (b) Investment a/ 38.0 ($ 8.0 36.5 ($ 7.7) 62.0 (513.1) 2. Financing of Public 48.0 ($10.1) 46.0 ($ 9.7) 72.5 ($15.2) Expenditures of which: (a) Foreign resources 8.0 ($ 1.7) 13.1* ($ 2.7) 22.0 ($ 4.6) (b) External reserves 2.0 (N 0.4) 5.6* ($ 1.2) - - (c) Domestic sources 38.0 ($ 8.0) 27.3 (0 5.7) 50.5 ($10.6) 3. Net Investment 62.0 ($13.0) 67.5 (14.2) 102.0 ($21.4) of which: (a) Public 38.0 ($ 8.0) 34.5 ($ 7.2) 60.0 ($12.6) (b) Private 24.o ($ 5.0) 33.0 ($ 6.9) 42.0 ($ 8.8) 4. Imoort Requirements 43.4 ($ 9.1) S.0* ($11.3) 62.7 ($13.2) of which: (a) P.L. 480 . . . . hs*($ 0.9) 6.0 ($ 1.3) (b) Project imports . . . . 206* ($ 4.3) 19.0 ($ 4.0) (c) Other imports c/ . . . . 28.9* ($ 6.1) 37.7 ($ 7.9) 5. Foreign Exchange Gap 11.0 ($ 2.3) 20.6* ($ 4.3) 32.0 ($ 6.7) of which covered by: (a) P.L. 480 - - 4.5* ($ 0.9) 6.0 ($ 1.3) (b) Other foreign aid d/ 9.0 ($ 1.9) 10.5* ($ 2.2) 26.0 (W 5.5) (c) Use of reserves 2.0 ($ 0.4) 5.6* ($ 1.2) - - Figures based on official estimates, but including an element of guesswork on the part of the mission (e.g. for disbursements of aid not yet negotiated). a/ Includes Rs. 2 billion in second and third columns for private investment financed out of public funds. This is treated as private investment under Item 3. b/ Includes net drawings on the International Monetary Fund. Includos Rs. 2 billion for imports of components and materials required for the manufacture of capital goods in India. The total may not be strictly comparable with the estimate for the Second Plan, d Private foreign investment is included with aid in the original projections for the Second and Third Plans, but not in the latest estimates of aid received during the Second Plan. The latter includes net drawings on the I.M.F. SINKIANG C H l N A AFGHANISTAN f T l B E T p -miMACHAL IP DESH STA $CHANDIGARH(: k'SIKKI DE Hi N EP A L R A J A S T A N LcKNO 5 B JAtPUR CSHILLONG r r PATNA PAK STANMAPU .3 f- \ B l H A R G U i R A T CM A D H Y A 1, CA UTTA 8 U R M A AHMEDABADO B"PA NaopPl,DE DAMAN r BOMBAYP A AN DH RA OHYDERABAD .NLDAMANI MY ORE:, lSL IAAND BANGA QRE, ADA 31ELOW 1.,O O1OF,T e e NOO - ,01. I T L ACCADIVE 7 4,000 - 10, . I T ISLANDS NICOBAR ABOVE 10,00 FT SLANDS G TRIVANDRUM AUGUST 1960 leID 720U9 (v) PREFACE The mission was asked to review the progress of India's economic development during the First and Second Five-Year Plans and to explore the prospects for the Third Five-Year Plan which will run from April 1961 to March 1966. This report is based on a two months' visit to India in April and hay of 1960, during which the mission travelled extensively around the country, visited--projects in ten out of the fifteen states and talked with many ministers, officials and private individuals, including prominent re- presentatives of the business community. About half our time was spent in Few Delhi. Information was freely placed at our disposal by the Central and State Governments, and ministers and officials gave most generously of their time in explaining their policies and answering our questions. The main report contains our general findings, impressions and con- clusions. It is suolemented by a series of annexes providing a more detailed analysis, sector by sector, of some of the most important economic and financial problems of development. There is also a Statistical Appendix in which official data for past years are grouped together under the broad headings of production, money and prices, public finance and external trade and payments. The uncertainties surrounding many of the statistics should be stressed at the outset. Statistics of public finance and tne balance of payments are generally good, except that the statistics of merchandise im- ports are incompLete and difficult to interpret. But the size and variety of the country and the existence of a large non-monetized rural sector make it particularly difficult to obtain reliable information about roduction, investment, consumption, employment and prices. Impressions ay sometimes be miara trustworthy than figures. Finally, we would like to underline the point that the ant roach adooted in an economic report of this kind is necessarily limited in that it largely ignores the political and sociological factors which in India, as in any other country, govern the pace of development. India is struggling against heavy odds to achieve a revolutionary change in economic conditions by non- revolutionary means. There are few societies in which tradition and status count for more, and in which conservative habits of thought and action are More deeply ingrained. This nakes for stability, and stability is not always an aid to economic growth. But new forces are emerging, new ideas are taking hold, and a new class of educated people is emerging which is more interested in the present and in the future than in the past. Change is in the air. No one can say for certain how deep its impact is. (vi) SUMMARY OF THE MISSIONIS FINDINGS Prngress of Second Plan 1. India is continuing to make slow, but steady progress in expanding production and consumption. According to official statistics, the increase in national output during the Second Five-Year Plan will probably be a little under 20 per cent, the rate of growth in per capita output a little under 2 per cent a year. These figures almost certainly understate the progress made. 2. In terms of real investment, about 80-85 per cent of the Second Plan is expected to be fulfilled in the five-year period ending March 1961. Organized industry in particular has taken a big jump forward during the Plan, and there has been a marked improvement in the investment climate. 3. About 30 per cent of all investment during the Second Plan will be financed out of foreign aid and use of Indiafs foreign exchange reserves. Domestic savings as a proportion of national income have increased slightly between the First and Second Plans; the proportion is now probably about 7 or 8 per cent. Prices have risen by something like 20 per cent during the first four years of the Plan; in large part, this reflects the recovery of agricultural prices from a sharp decline in previous years. 4. The balance of payments deficits incurred during the Plan have been primarily attributable to the sharp rise in imports of machinery and vehicles, defence equipment, steel and other industrial materials. Imports of foodgrains have been very much larger than anticipated, but these have been mainly obtained from the United States without payment in foreign exchange. Earnings from the principal traditional exports have been stagnant, but new exports are beginning to come along, particularly in engineering and metals. Shape of Third Plan 5. The starting-point of all Indian economic planning is a target rate of increase in real national income. The rate chosen - 5 per cent a year- can hardly be called excessive when the present level of per capita income is only about Rs. 300 (863) a year and the population is believed to be growing by 2 per cent a year. To aim any lower would be to admit failure in advance. 6. The Third Five-Year Plan, beginning April 1961, contemplates stepping up investment by 50 per cent compared with the Second Plan. About 60 per cent of the investment is allocated to the public sector, 40 per cent to the private sector. The Plan aims at increases of at least 272 per cent in national output and 22 per cent in consumption. This would allow for average annual growth rates of 3 per cent in per capita output and 2 per cent in per capita consumption. (vii) 7. First priority is given in the Third Plan to raising agricultural output, which still accounts for about half the national income and is the principal means of livelihood for two thirds of the population. However, the amount of capital that can profitably be absorbed in agriculture in the short run is governed by human and administrative limitations. The pattern of investment is therefore heavily weighted in the direction of industry, minerals, transport and power, which between them account for 60 per cent of the total fixed investment proposed and for 90 per cent of the direct foreign exchange component of the Plan. Particular emphasis is given to the development of the iron and steel, heavy engineering and fertilizer industries, all of which have leading roles to play in reducing the dependence of the economy on imports and ultimately in building up exports. 8. Import-saving is one of the keynotes of Indiats strategy of development. While the mission does not believe that all possibilities of expanding exports have by any means yet been fully exploited, it is persuaded that Indiats exports cannot be developed fast or far enough to keep pace with essential import requirements unless the ratio of imports to national output can be substantially reduced. 9. The Third Plan has to be viewed in the perspective of a process of development stretching not over five years, but over twenty or twenty-five. The high priority attached to heavy industry makes good sense from this point of view, since India's rich deposits of coal and iron ore afford a sound base for industrialization. If it was simply a question of trying to achieve the maximum increase in income and output during the next five years, a different pattern of investment would be appropriate. But the economy would then be less well prepared for further expansion in subsequent periods. 10. The mission considers nevertheless that the scale of investment proposed in iron and steel and heavy engineering may prove somewhat excessive because of the practical difficulties of finding the personnel to organize and operate large projects of this kind. Moreover, these and other big projects have a long gestation period, and their real costs usually turn out to be very much higher than the original estimates assume. Requirements of Foreign Aid 11. The strategy of Indian development is based on the assumption that external aid will be forthcoming on a generous scale for at least the next ten years, and in the mission's view it may well have to be a good deal longer. If this assumption were to be invalidated, a totally different approach would have to be adopted to development involving either a much slower rate of growth or drastically different methods of political and economic organization or, quite possibly, both. 12. External finance is unquestionably the key to the success or failure of the Third Plan. We do not underestimate either the importance or the difficulty of mobilizing the additional domestic financial resources required, but we believe that this will be a manageable problem if the foreign exchange can be found to cover the prospective gap in the balance of payments. (viii) While administrati-re limitations will be a critical factor affecting the growth of production, we do not visualize them acting as a brake on investment, except in agriculture. 13. The investments proposed in the Third Plan depend on foreign aid for their realization, since they involve large imports of capital equipment which India cannot pay for out of her export earnings, and there will be no further room for foreign exchange reserves to be drawn down. The five-year balance of payments deficit to be covered by foreign aid and private foreign investment is estimated at Rs. 26 billion (almost q5.5 billion), excluding aid under PL 480. If PL 480 is included, the stated requirement is Rs. 32 billion ($6.7 billion). Both estimates include about Rs. 5 billion (rather over l billion) for repayment of external debts. 14. The mission has examined the import and export projections underlying these estimates. We believe that exports could be expanded somewhat more than the Plan assumes, but we believe that import requirements have probably also been underestimated, and that the possible margin of error is greater for imports than exports. 15. We find it impossible to accept the view that the Third Plan could at this stage be remodelled in such a way as greatly to reduce its dependence on external support, and yet to retain its identity. Marginal cuts could still be made in certain investment programs without throwing the whole Plan out of balance. The scope for flexibility has, however, been considerably narrowed by the fact that much of the foreign assistance (as well as the private foreign investment) received by India tends to be tied to large industrial projects for which the equipment is supplied by the aid-giving country. 16. Manufacturing industry in India has been attracting a growing volume of private foreign investment in the past two years, and the Government has taken steps to encourage this trend, though more could still be done to help the foreign investor. There is a good prospect that the inflow of business capital will be larger in the Third Plan than the Second, but apart from oil, private foreign investment cannot be expected to make a major contribution to the financing of the Plan - the amounts involved are still much too small. 17. The policy pursued by the Indian Government over the past few years of excluding private capital from further investment in oil exploration and refining has added very considerably to the immediate pressure on India's foreign exchange resources. A change in this policy could free significant amounts of foreign exchange for other uses during the Third Plan by attracting additional foreign capital into the oil industry. 18. Exports have been receiving increasing attention in India, and many of the criticisms directed a few years ago at the Government's export policies no longer apply. The mission feels nevertheless that more could still be done, within limits, to increase export earnings during the Third Plan if this is accepted as a task of the highest priority, taking precedence over increases in home consumption or measures to safeguard domestic employment. (ix) 19. Measures by India to promote her exports call for a more encouraging response from the industrialized countries. Import restrictions and high tariffs in many of these countries are a serious barrier to the entry of Indian goods. Western Europe is the region where alteration of commercial policies could have the quickest and most favorable effect on Indian exports. 20. The amount of external assistance required to carry out the Third Plan in full, excluding aid under PL 480, would be 2 times as great as actual disbursements of aid during the Second Plan, though it would not represent such a large increase as compared with the final year of the Second Plan, when foreign aid receipts will probably be around Rs. 3 billion. Part of the requirement (about Rs. 4 billion out of Rs. 26 billion) will be met by the carry-over of unspent aid from the Second Plan and by additional aid already negotiated for the Third Plan. Internal Financial Conditions 21. An investment program of the dimensions indicated for the Third Plan will call for a major effort to mobilize additional internal resources. The Plan requires that Rs. 75 billion of investment should be financed out of domestic savings, as against Rs. 47 billion in the Second Plan. On the assumtion that national income increases more or less in line with expectations, the implied marginal savings ratio is about 20 per cent. High though this ratio is, the mission does not regard it as impossible of achieve- ment, so long as external resources are available to cover the balance of payments deficit. The Indian tax structure is becoming more responsive to increases in national income, and the extension of the industrial and urban sectors of the economy is making it easier to mobilize additional savings. 22. Nearly one third of the domestic resources for financing public expenditures in the Plan is to come from additional taxation. The Central Government has displayed considerable courage in raising taxes during the Second Plan, though the record of the State Governments in this respect has been less satisfactory. We believe that, with firm political leadership, the target for the Third Plan can be attained. One of the key issues here is the readiness of State Governments to play their full part in making a success of the national Plan. Particular attention should be given to increases in taxation of land, to indirect taxes on semi-luxuries and to higher taxation of the middle income groups, including the better-paid industrial workers. 23. The target for small savings - a 45 per cent increase compared with the Second Plan - is ambitious, but not unattainable. 24. Surpluses of the railways and other public enterprises are relied upon to contribute nearly one sixth of the internal finance for the Plan. We believe that the railways can reach their target, but we are doubtful about the contributions expected from the public steel and fertilizer plants and oil refineries. On the other hand, there is room for a larger contribution from State Electricity Boards than the Plan allows for, and the Centre should press strongly for a general increase in power rates. (x) 25. Barring unforeseen increases in defence expenditures, the modest revenue surplus assumed for financing Plan expenditures should be attainable so long as national income rises in line with expectations. This item has been more cautiously estimated than in the Second Plan. 26. If the other assumptions about external and internal finance are fulfilled, the measure of deficit financing proposed does not appear excessive. However, the danger of inflation always exists when investment ependitures are rising rapidly, and every effort should be made to exceed the targets for taxation and small savings. If this can be done, more can be spent on schemes for putting underemployed labor to work on investment in rural areas. 27. The mission believes that higher interest rates in the organized sector would help to ensure the more economical use of scarce capital and the better direction of investment, and this consideration should, in our view, outweigh the various objections raised against a change in interest rate policy. The change should be made gradually. As a first step, we suggest that the rate at which the Central Government lends to State Governments, the railways and other public authorities should be raised,and that all departments and enterprises responsible for drawing up investment projects in the public sector should be instructed to use a higher rate of interest in calculating prospective costs and returns. Agricultural Problems and Prospects 28. The Third Plan calls for a 5-6 per cent annual increase in agricultural production. The principal requirements for meeting this target are more water and fertilizers, security against low prices and better agricultural administration. 29. In irrigation the emphasis has rightly been shifted from major to minor works, but the program is doubtfully adequate in relation to the targets set. This is one area in which more might be done to organize labor-intensive construction works if the necessary finance can be found. The need for more water is so urgent that every effort must be made to ensure full utilization of existing irrigation facilities. 30. Growing recognition of the value of chemical fertilizers is one of the most encouraging facets of the Indian agricultural scene, but present supplies are insufficient to meet the demand. Imports are to be stepped up during the Third Plan, and high priority is attached to the construction of fertilizer plants in India. The mission endorses these proposals. In fact, we believe that even larger imports should be brought in during the early years of the Plan so long as there is demand for them. 31. Price supports of some kind, coupled with larger government storage of foodgrain reserves, are essential in the mission's view if the full potential for increased agricultural production is to be realized. (xi) 32. The mission believes that fulfillment of the Third Plan production target is unlikely on the basis of normal weather. The introduction of improved methods on 50 million farms is a slow proes. Nevertheless, there are signs pointing to a break-through on the agricultural front in the not too distant future, and we expect a marked increase in the rate of agricul- tural expansion during the next few years. An average rate of increase of 4 per cent a year in agricultural production during the Third Plan should be attainable given more enthusiastic political leadership and a marked improvement in the quality of agricultural administration. 33. More attention should be given in the agricultural program to production of cash crops, especially oil-yielding crops, with a view to exploiting all possible opportunities of import-saving and export promotion. Industrial Problems and Prospects Key Industries 34. Production of coal, particularly metallurgical coal, is failing to keep pace with the rise in demand. The expansion of the private sector has been restricted as an act of government policy, which has reserved the opening up of new areas to the public sector. The overriding need now is to get more coal quickly, and the mission urges that other considerations should be sub- ordinated to this purpose. The private collieries should be encouraged to raise all the coal they can, restrictions on the issue of new mining leases should be lifted, and prices should be adjusted to provide the industry with larger resources for reinvestment. Special price incentives should be offered for production of metallurgical coal. 35. Electricity ranks with coal as a present limitation on industrial output and a potential bottleneck to the expansion of the economy during the Third Plan. The mission doubts whether the proposed investment program is properly adapted to the needs of particular areas, and the position calls for prompt and careful re-examination. 36. The internal transport system is better able to cope with the traffic offering now than it was at the beginning of the Second Plan, although difficulties have been experienced in providing all the transport needed for coal and steel production. The railways must continue to handle most of the traffic in bulk commodities, as well as long-distance passenger traffic, and further large investments will be needed in the railways during the Third Plan. The mission feels nevertheless that the emphasis in transport invest- ment should now be gradually shifted from rail to road. 37. The first need is to allocate more foreign exchange for the import of motor vehicle components, so that domestic production of commercial vehicles can be more rapidly expanded. This has been allowed for in the Third Plan. The second need in developing road transport is to invest more in the roads. The mission considers that the provisional allocation for road development in the Third Plan is totally inadequate and should be substantially increased. (xii) 38. Port capacity appears to be more or less adequate to cope with present traffic, apart from the problem of access to Calcutta, and the expansion schemes now under way should take care of Third Plan requirements. The mission has reservations about the need for some of the new port invest- ments proposed, particularly in the case of Bombay. We also have doubts about the desirability of developing too many minor ports for the export of iron ore. On the other hand, we believe there may be a case for developing a new major port at Mangalore on the west coast to handle iron ore exports and general cargo, so long as a market for the ore exports can be guaranteed. 39. The most critical port problem is the progressive silting up of the River Hooghly, which threatens to strangle the Port of Calcutta. Proposals are included in the Third Plan for a start to be made on the construction of a new satellite port at Haldia for handling coal, ore and foodgrains and for lightening and topping up vessels entering and leaving Calcutta. The mission considers this scheme so important that it should be speeded up if possible, so that the port can be in partial operation by the end of the Third Plan. ho. Serious difficulties are likely to be encountered in the operation of the new public steel plants. Sorting out these difficulties is a more important task for the Third Plan than the creation of additional capacity in the industry. Particular attention should be given to problems of organi- zation and management. The mission is convinced that foreign personnel will have to be retained in responsible positions for quite a long time if the plants are to be operated efficiently, and if full value is to be obtained from the huge sums invested. h1. Subject to the above qualifications, the mission supports the proposals for the expansion of the three existing public plants during the Third Plan. We consider that the phasing of these expansions should be geared to the availability of suitable teams of managerial and technical personnel to operate and maintain the plants. 42. The Third Plan also includes provision for construction of a fourth steel plant in the public sector. The mission considers that the case for this project is highly debatable and must stand or fall on the arrangements made for running the plant when it is completed. General Problems 43. Scarcity of experienced managers, technicians and supervisors is one of the factors most inhibiting to the growth of Indian industry. The problem is common to both private and public enterprises. If it is more acute in the latter case, it is because many of the largest and most complex industrial units are being established in the public sector and because the salaries offered by government are too low to attract the best talent available. The problem is one that time and experience alone can solve. h. Productivity trends in the newer industries are on the whole encouraging, but the scale of production is still in many cases too small for really efficient operations. (xiii) 45. The industrial boom of the past few years owes much to the stimulus of protection. Protection will have to be continued, but care must be taken to guard against the danger that the general level of industrial costs may be adversely affected by lack of competition. 46. The mission believes it generally desirable that a larger proportion of industrial profits should be retained in future for reinvestment. This is especially important if private industry is to expand sufficiently to utilize the industrial materials and semi-manufactures which are to be produced by the heavy industrial plants in the public sector. Government policies relating to price controls and taxation of profits should be reconsidered in this context. 47. The mission believes that the chances for the success of the Third Plan in industry would be greatly improved if the Government were to institute promptly at the enterprise level an objective and thorough examination of the impact of controls on the efficiency of management. 88. There is evidence of growing pressure on industrial costs arising from wage demands. The most firm and enlightened political leadership will be required to ensure that the benefits of economic growth and improved productiv- ity are not syphoned off by those groups in a position to organize pressure in support of their claims. Ultimately, the ability of India's newer industries to compete in overseas markets will depend to an important extent on the main- tenance of a reasonable degree of wage stability. The full cooperation of organized labor will be essential to the success of the Third Plan. 49. Achievement of the modest employment objectives in the Third Plan will depend on a rapid expansion of industry in the private sector. The new public enterprises will provide only a comparatively small amount of additional employment. Outlook for Production 50. Viewing the industrial scene as a whole, the mission considers it truly remarkable that so much progress has been made in so short a time and it finds the present climate of business highly encouraging. Indian business- men are becoming increasingly investment-minded, and there are signs of a gradual emergence of a new and forward-looking entrepreneurial class. 51. Chances of reaching the industrial output targets in the Third Plan will depend more on the availability of "maintenance imports", fuel and power than on the new capacity created during the next five years. This underlines the need for more flexible foreign aid policies. However, even if foreign exchange difficulties can be surmounted, the mission considers it unduly optimistic to expect all the targets to be fulfilled. There is a risk of shortfalls in respect of coal, steel and heavy engineering. If action is taken promptly to remedy the weaknesses in the basic industries to which refer- ence is made in this report, we would not rule out the possibility that total industrial production will increase during the Third Plan by the 80 per cent assumed. (xiv) 52. The success or failure of democratic planning in India will be judged as much by the appearance of the industrial landscape as by any statistics of production. The mission expects a further rapid broadening of the industrial base during the Third Plan. If this is achieved, it will mark an important step forward on the road to viability. Social and Political Issues 53. Welfare expenditure as such finds a comparatively small place in India's five-year plans. The allocation suggested for the Third Plan is certainly not excessive. 54. In the mission's view, one of the most dangerous weaknesses in the Plan is the continued neglect of the problems of urban development in Calcutta. If this is to be remedied, it is essential, first, that the Central Government should accept a direct and special financial responsibility for the improvement of conditions in the city and, second, that the provincial and municipal author- ities should cooperate in establishing an effective body to carry through an enlarged program of municipal reconstruction and improvement. Granted these conditions, a considerably larger allocation should in our view be made in the Third Plan for slum clearance and rehousing, improved health measures and the construction of thoroughfares in the city. 55. The mission feels that India's educational needs have been well defined, and that there is a clear and consistent view of the necessary next steps. The educational system, however, is under great pressure, and the quality of education is inevitably suffering to some extent from the increase in quantity. 56. The Third Plan stresses the importance of population limitation and includes provision for the extension of family planning facilities. It is not clear that more could be achieved at this stage through larger expenditure. In any case, the mission was informed that no financial limitations would be imposed on the program. We certainly feel that no effort should be spared to bring about a reduction in the rate of population growth, since otherwise it will be extremely difficult to achieve a satisfactory improvement in living standards. 57. Any strengthening of separatist tendencies in the States or any sharpening of regional divisions would react unfavorably on the development of the economy. It is particularly important to guard against the risk that the adoption of regional languages may lower the quality of public administra- tion and weaken the bonds of union. Full cooperation between the States and the Centre must be considered an essential condition of carrying through the Third Plan. 58. One of the declared objectives of the Third Plan is "to bring about a reduction in inequalities in income and wealth and a more even distribution of economic power". There is a risk that the methods adopted to achieve this result may conflict with the requirements of rapid economic development. (xv) India's Creditworthiness 59. The mission's broad conclusion is that the growth in national income as a whole during the Third Plan is more likely to fall short of than exceed the projected rate of over 5 per cent a year. If a figure has to be chosen, we would settle on 4-5 per cent as a reasonable estimate, or 2-3 per cent on a per capita basis. 60. In the short run, India's ability to meet her external debt obliga- tions clearly depends on the receipt of fresh external assistance. Without such assistance the present pattern of growth would be disrupted. In the long run, India's creditworthiness will be closely related to the growth of the economy and to the progress made towards viability. 61. Illustrative projections made by the Indian Planning Commission envisage that by 1970 or thereabouts export earnings will have risen to a level sufficient, together with invisible earnings, normal commercial credits and private foreign investment, to cover necessary import payments and ex- ternal debt service. The mission considers this a distinctly optimistic assumption. 62. We do not in fact believe that any specific date can be set in advance for the Indian economy to reach the proclaimed goal of self-sustained economic growth. By any definition this goal is one that has to be reached in stages, and over a fairly long period. Much will depend on the trend of population and other presently imponderable factors. But we believe that, if the expansion of national output can be maintained during the Third Plan at approximately the rate assumed, India should become progressively less depend- ent on foreign aid in subsequent periods. 63. The inflow of foreign capital assumed in the Third Plan will not be out of proportion to the scale of investment proposed or to the prospective increase in national output. The mission believes that India has demonstrated a capacity to make good use of foreign aid, and that the continuance of aid on a generous scale during the Third Plan can be justified on economic grounds. It is of the greatest importance that most of this aid should be extended in a form that does not add to the already heavy burden of debt repayment. CHkPTER 1. PROGRESS OF THE SECOND PLAN Growth of Output and Income 1. India has been making slow, but steady progress in her struggle against poverty. Nine years have now elapsed since the First Five-Year Plan began, and real income has risen during this period by about 30 per cent or an average of 3 per cent a year. 1eanwhile, the population is believed to have grown from 362 million in 1951 to 423 million in 1960 - an increase of 17 per cent. Thus the rate of growth in per capita income has been less than 1, per cent a year. 2. The Second Five-Year Plan, now in its final year, aimed at a 25 per cent increase in real income over five years. The actual increase is unlikely to exceed 20 per cent and will probably be less. Since the increase during the First Plan was 18 per cent, there has been no perceptible acceleration in the rate of growth. 3. So, at least, the official statistics say. But these statistics almost certainly understate the pace of expansion, particularly in the last few years when the pattern of industrial production has undergone a marked change. The industrial production index gives too much weight to tradition- al industries such as cotton and jute textiles, in which output has risen less than the average, and too little weight to the newer industries such as engineering, vehicles and chemicals, in which growth has been spectacular. Nor is it by any means certain that the national income statistics take full account of the output of manufactured goods and services in the unorganized sectors of the economy. 4. More tangible evidence of India's economic progress is to be found in the improved health and longer expectation of life of the people, in the increasing number of children going to school and the resulting spread of literacy, in the greater range of consumer goods to be found in town and village shops, in the rapid growth in the number of buses, trucks and bi- cycles on the roads, in the new factories which are springing up all over the country and in a variety of other changes in the aspect of town and countryside. Figures showing how supplies of certain types of consumer goods have increased are set out in Table 1. - 2 - Table 1. Per Capita Consumption Availabilities (annual averages except where stated otherwi se 1951-53 1954-56 1957-59 Foodgrains (ozs.per day) 13.3 15.3 15.2 Vegetable oil products (lbs.) 1.13 1.45 1.67 Sugar and gur in terms of gur (lbs.) 31.5 37.2 39.8 Cotton cloth (yds.) 14.21 15.70 15.66 Shoes (prs. per '000 persons) 74 98 105 Cycles (per f000 persons) 1.04 1.61 2.27 Cigarettes (numbers) 54 59 7b Sewing machines (no. per tO00 persons) 0.13 0.26 0.48 Factory soap (lbs. per person) 0.51 0.58 0.66 Radio receivers (per 100,000) 24.7 26.2 51.9 Number of towns and villages electrified- 4,518 6,981 10,712 a Figures relate to 1952, 1955 and 1958 respectively. 5. The impact of development has been very uneven. For many thousands of industrial and transport workers, small traders and business- men, for instance, conditions over the past five or ten years have improved almost beyond recognition. Yet there are large areas of rural India which have scarcely been affected at all, there has been no perceptible change in the under-employment of the rural population, and urban unemployment has probably increased. Average earnings in industry and transport must now be well above Rs. 100 ($21) per month, and many skilled and semi-skilled workers are getting Rs. 150-200 per month or more. Yet the typical wage for construction workers and other unskilled labour is still only one or two rupees a day. Per capita income in the country at large works out at around Rs. 25 a month or Rs. 300 ($63) a year - about Rs. 200 for the agricultural population and Rs. 500 for the non-agricultural population../ Agricultural Development 6. Agriculture is still the main determinant of national income, accounting for nearly half the total. Year to year fluctuations in output caused by the weather make it particularly difficult to assess achievements over so short a period as three or four years - and the final crop estimates for the fourth year of the Second Plan are not yet available. Progress is much less apparent than in industry, though appearances may well be deceptive. 1/ Conversion of per capita income from Indian rupees into U.S. dollars on the basis of the official exchange rate overstates the difference in per capita income between India and more highly developed countries because of international differences in price structure. -3- Production of foodgrains, which was originally planned to rise from 65 mil- lion tons in 1955/56 to 75 million tons in 1960/61, reached 75 million tons in the third year of the Plan, when the weather was exceptionally favorable, but was a good deal lower in 1959/60. Likewise production of sugar, oil- seeds and jute reached, or came near to reaching, the Plan targets in the third year, but droped back in the fourth. The cotton crop advanced sharply in the first year of the Plan, remained roughly stationary over the second and third years and then suffered a setback in the fourth. The rate of increase in agricultural production as a whole in the Second Plan, as in the First, has probably averaged 21-3 per cent a year. 7. Perhaps the most encouraging aspect of the agricultural picture has been the marked increase in demand for fertilizers, only part of which has been satisfied. When the 1956 Bank mission visited India, doubts were widely expressed about the readiness of farmers to use more fertilizers. Now there is acknowledged to be an almost universal shortage in spite of the fact that supplies have increased by about 50 per cent in the meantime. WTater is the other principal resource required for expanding agricultural production. Figures have been published which purport to show that farmers have been slow to take advantage of new irrigation facilities, but these figures, in as much as they are on an acreage basis, tend to exaggerate the amount of water actually made available for irLigation at the right time and place. On the whole, the mission found agriculturists increasingly alive to the advantages of irrigation. Their difficulty was often in getting the water when they wanted it. 8. A major part of the agricultural effort during the Second Plan has been channelled through the Community Development Program, which is being gradually extended to cover the whole country. Initially the main emphasis in the program was on improving rural amenities, and measures to expand production tended to take second place. The emphasis has been deliberately changed during the past two years, but the effectiveness of the program has varied greatly from place to place, depending very much on the quality of local officials and village leaders. It takes time to influence 50 million fanners. Changes in Industry 9. Organized industry in India has taken a big jump forward during the Second Plan. There has been a boom in private industrial investment, notwithstanding the restrictions on imports of capital equipment, and output has gone ahead very fast in many of the newer industries such as motor vehicles, bicycles, tires, sewing machines, sugar and cement-making machinery, textile machinery, machine tools, electrical goods, cement, paper and chemicals (Statistical Appendix, Tables 8 and 9). Import restrictions and power shortages have prevented full utilization of capacity in many of these industries, particularly in the metal-using industries, and this helps to explain why production generally falls short of the targets set in the Second Plan. Output in some industries, however, has been held back by lack of demand. Cotton textiles and soap are two examples. 10. Total industrial production in 1959 was 22 per cent greater than in 1955. Excluding cotton textiles, jute, tea and sugar, the increase was 50 per cent. The disparity between the growth rates of the older and newer industries is illustrated by the chart on the following page. 11. The Indian business comnunity is taking an increasing interest in manufacturing industry as a source of profits, in place of the traditional preference for making money out of trade, land and building. Industrialists appear anxious to expand their markets and to branch out into new lines of production and they are seeking out foreign collaborators to provide theM with capital and technical know-how. Foreign investors for their part are coming to recognize the advantages to be gained by getting inside a heavily protected and rapidly expanding market, and European and American govern- ment trade representatives in India testify to the unprecedented number of enquiries received in the past two years from foreign firms interested in entering into arrangements for local manufacture. 12, The growth of private industry has been greatly stimulated by the large public investments undertaken during the Second Plan. It has also been powerfully encouraged by the more or less complete protection afforded by severe restrictions, often amounting to embargoes, on imports of competing products. This kind of protection clearly has its dangers, especially when only a few licences can be granted for domestic manufacture. If the general level of industrial costs were to be conditioned for a long period by the present uncompetitive atmosphere, India's chances of beconing a major exporter of manufactured goods would be greatly reduced. Nevertheless, the industrial boom of the past two years owes much to the stimulus of protection. In any case, there is no real alternative at present in view of India's acute foreign exchange shortage and the difficulties of securing a rapid expansion of exports. 13. The rise in manufacturing production during the first four years of the Second Plan has come almost entirely from the private sector. The public industrial enterprises started during the First Plan have progressed quite well, but they make up only a very small fraction of the output of organized industry (well under 5 per cent). None of the major undertakings started during the Second Plan has yet achieved anywhere near full production, and operations are in all cases behind the original schedule. The three steel plants, in which Rs. 6 billion will have been invested during the Plan, have only recently begun producing steel, and it is unlikely that they will turn out more than 1.3 million ingot tons of steel and 500,000 tons of pig iron for sale in 1960/61 (as against the targets of 2.7 million tons and 450,000 tons respectively). The lignite project at Neyveli, and the related fertilizer plant, is not yet producing anything, nor is the fertilizer plant at Nangal, though the latter is expected to start operations later this year, The first heavy electrical plant is just beginning production on a small scale. The planners in fact greatly underestimated the period of gestation required for these projects, nor was sufficient attention given to the formidable problems of organization and management involved in running undertakings of this size and complexity. 14. The coal industry, which was expected to raise its output from 38 million tons in 1955 to 60 million tons in 1960/61, is unlikely to achieve INDIA GROWTH OF INDUSTRIAL PRODUCTION (INDEX, 1951 = 100) 450 450 YEARLY 400- 400 350 350 300 300 fiACHINERYm.. 250 -250 ALL INDUSTRY EXCEPT COTTON,JUTE, AND TEA 200 .200 CHEMICALS GENERALINDEX 150 150 ...--- TEXTILES 1 0 0------ ------ 1 0 I 00 ' s...-...._....s.--~.~~~~...0 TEA COTTON TEXTILES 50 ' '50 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 7/27/60 1680 IBRD - Economic Staff more than 53 million tons. Output in 1959 was 47 million tons, of which just over 40 million tons were raised by the private collieries and just under 7 million tons by the public sector. The principal shortfall i. in the public sector, which has taken longer than expected to develop new areas for open-cast mining. An acute shortage of good metallurgical coal has arisen during the past year and is hampering steel production. 15. Commercial power production in India is closely geared to the expansion of industry which accounts for two thirds of all electricity sales. Total electricity generated has increased by 70 per cent in the first four years of the Plan, while installed capacity has expanded from 3.4 million kilowatts to 4.7 million kilowatts. Power facilities have failed to keep pace with industrial expansion, and shortages of varying severity are now being experienced in many parts of the country. 16. Industrial production statistics in India relate to enterprises employing 20 or more workers without power or more than 10 workers with power. There is also a large unorganized industrial sector, which is said to produce as much as the organized sector and to employ three or four times as many workers. It includes on the one hand tne traditional village or cottage industries such as handloom weaving, taiaoring, wood working, ceramics, leather and coir manufacture and the processing of vegetable oils, and on the other a variety of small establishments operating on more modern lines and producing or assembling a wide range of light consumer goods and industrial components - bicycles, fountain pens, spec- tacle frames, hand tools, surgical instruments, nuts and bolts, light castings and so forth. 17. Very little is known in total about the production of snall enter- prises. The more modern type of small-scale industry is distinguishable from factory industry only by the size of units engaged, and even this distinction is rather blurred. Some of these establishments have been shepherded under the Government's wing into industrial estates, but they comprise only a fraction of the total. Output must be assumed to be expan- ding fairly fast, but no one knows how fast. As for village industries, it would be surprising if their output was not growing at least in line with the growth of agricultural incomes, if not faster, but this can only be surmisedin the absence of more definite information. Handloom weaving is one of the few handicraft industries for which data are available, and here the rate of growth, fostered by special means of assistance, has averaged about 6 per cent a year between 1955 and 1959. 18. Activity in building and construction has increased very rapidly with the rise in investment during the Second Plan, but as there are no reliable estimates either of output or employment, the extent of the increase must remain a subject for speculation. A 40-50 per cent growth of net output over the five years would seem to lie well within the bounds of possibility. 19. In short, Indian industry is being fast expanded and diversified. But because the initial base was so small in relation to the size of the - 6 - population, it will be a long time before industrial development has a major impact on the condition of the people as a whole or produces any radical change in the structure of the economy. Transport 20. The internal transport situation in India is a good deal easier today than it was at the beginning of the Second Plan. A massive program of railway investment and a substantial increase in domestic production of trucks and buses have helped to expedite the movement of freight and passengers. At the same time congestion in the ports has been relieved as a result of the more even flow of traffic, various capital improvements and a marked increase in labor productivity following the introduction of piece-rate schemes in Bombay and Calcutta. Two major transport problems were brought to the missionts attention. The first was the difficulties experienced by the railways in ensuring a regular flow of materials to and from the steel plants. The second was the further silting up of the bars in the River Hooghly, which is a source of serious concern to shippers and is adding appreciably to the cost of moving goods to and from the port of Calcutta. Investment Programs and Performance 21. Much of the increase in production achieved during the Second Plan results from investments carried out in earlier periods - and much of the investment carried out during the Second Plan has not yet borne fruit. Capital: output ratios related to so short a period as four or five years are thus liable to be extremely misleading. It appears that the Indian planners seriously miscalculated the input of capital required in the different sectors to achieve a given increase in output; the construction costs of the steel plants in particular were greatly underestimated. Nor was sufficient consideration given to the costs involved in waiting for production to materialize. Large slow-yielding projects consequently tended to be given undue preference over small quick-yielding projects, particularly in the case of irrigation and power. 22. The Second Plan, as originally formulated, allocated Rs. 38 billion. for public investment and a further Rs. 10 billion for recurrent development expenditures, making a total of Rs. 48 billion in all. It now looks as if public sector expenditure over the five years will turn out at around Rs. 45-46 billion at prices which on average might be nearly 10 per cent higher than those used in the Plan. Expenditure in real terms therefore may fall short of the target by about 15-20 per cent. Considerably more has been spent on investment in the iron and steel industry than the Plan allowed for because costs have been so much higher than expected. Out- lays in most other sectors have been below expectations. A number of projects in irrigation and power, transport and manufacturing industry have been slowed down or deferred because of foreign exchange restrictions, while investment in agriculture and social services has been held back by organizational and administrative limitations, no doubt reinforced in some cases by budgetary considerations. - 7 - 23. Very little can be said with any assurance about private invest- ment. On the basis of a recent study by the Reserve Bank of India, private investment during the Second Plan is now expected to be almost as large as public investment - Rs. 33 billion private, Rs. 342 billion public* This is a very different picture from that presented four years ago, when private investment was expected to be only Rs. 24 billion, as against Rs. 38 billion for public investment. No useful purpose is served by trying to compare the two estimates of private investment, since the second is based on information which was not available when the first was madeo Nor is it clear that the investment estimates exclude expenditure on replacements, as they are supposed to do. The practice followed in both Plans of estimating investment on a net rather than a gross basis is open to serious practical objections and might well be reconsidered in future. 24. Total net investment, as a proportion of net national income, is officially claimed to have risen from about 8 per cent in 1955/56 to 11 per cent in 1960/61. It is doubtful whether the progression has been as straightforward as these figures imply. Investment may well have been as high in the early years of the Second Plan as in the final year, while national income has gone on rising. In any case, the uncertainties sur- rounding the estimates both of investment and of national income render precise calculations rather futile. All that can be said is that net investment during the Second Plan has probably absorbed around one tenth of the net national income, as against perhaps 6-7 per cent during the First Plan. Financing of the Second Plan 25. About 30 per cent of all investment carried out in India during the Second Plan is likely to be financed out of external resources made available through drawings on foreign exchange reserves and the use of foreign aid, including aid from the United States under PL 80. During the First Plan, by contrast, practically all investment was financed out of domestic savings. Thus the proportion of national income saved increased only slightly between the two plan periods - say from 6-7 per cent during the First Plan to 7-8 per cent during the Second. If attention is centered on Plan outlays in the public sector, including recurrent development expenditures, it looks as if nearly 30 per cent will be financed out of foreign aid, including PL 480, and nearly another 30 per cent by means of deficit financing, if the latter is defined so as to include recourse by the Government to the Reserve Bank in order to pay for imports required by the public sector. The remaining 40-45 per cent of the resources have been found from additional taxation, public borrowing, small savings, surpluses of the railways and other public enterprises and miscellaneous receipts. 26. Extension of bank credit to the Central and State Governments during the Second Plan may total around Rs. 13 billion. Against this, foreign exchange reserves will be drawn down during the Plan to the extent of Rs. 5-6 billion. During the first four years of the Plan bank credit to the private sector has risen by rather over Rs. 4 billion. However, - 8 - the time liabilities of the commercial banks to the public have risen by a similar amount. Money supply with the public during the first four years of the Plan has increased by about Rs. 5 billion (just under 25 per cent). 27, The economy has been able to absorb the addition to money supply without excessively severe monetary strains. The official indices of wholesale prices and working class consumer prices have risen by something like 20-25 per cent over the four years (Statistical Appendix, Tables 10-11), but it should be borne in mind that at the beginning of the Plan agricultural prices were at a rather low level compared with earlier years (see chart on next page). Until a year ago changes in the wholesale price index were main> determined by food prices, while prices of raw materials and manufactures remained fairly steady. More recently, prices of raw materials and manu- factures have both risen fairly sharply, and the situation during the current years has been aggravated by poor cotton and jute crops and by a slight decline in food-grains production after the previous year's exceptionally favorable harvest. The present situation thus needs careful watching, and the monetary authorities are aware of the dangers. The latest PL 480 deal affords valuable reinsurance against a recurrence of food shortage. Foreign Trade and Payments 28. The Second Plan ran straight into balance of payments difficulties, and it was not until mid-way through the five-year period that the fall in foreign exchange reserves was halted as a result of import cuts and in- creased foreign aid. By that time (end of October 1958) the Reserve Bankts holdings of gold and foreign exchange had been reduced from Rs. 8.64 billion ($1,800 million) to Rs. 2.96 billion ($622 million). A small part of this loss was made good in the following fourteen months, but the reserves have been falling again since the end of 1959 and at the beginning of July 1960 they touched a new low of hs. 2.74 billion ($576 million). 29. The main reason for the balance of payments crisis was the sharp rise in imports of machinery and vehicles, defence equipment, iron and steel and other industrial materials during-the first two years of the Plan. Imports of foodgrains have also been much larger than anticipated, but these have been mainly obtained from the United States and Canada without payment in foreign exchange. The total cost of imports during the five years, including imports under PL 480, will probably be in the region of Rs. 54 billion, as against the Rs. 43.4 billion allowed for in the Plan and the Rs. 36.2 billion actually spent on imports during the First Plan. About half the excess of Rs. l4. billion over the forecast for the Second Plan appears to be attributable to foodgrains and the rest mainly to capital equipment, iron and steel and defence stores, though the inadequacy of import statistics renders precise analysis impossible. 30. Export earnings, which were forecast at just under Rs. 30 billion over the five years, should slightly exceed this figure, reaching nearly Rs. 31 billion - as it happens, almost exactly the same as earnings during the First Plan. It is difficult to establish any clear trend over so short a period. The principal traditional exports - tea, jute and cotton textiles INDIA WHOLESALE PRICES 4 (INDEX, 1952- 53 = 00) 140 1-11 1'- ll -i-li-- im I-r imr- -ir- -mm1 ll ll - - 140 QUARTERLY 130 130 INDUSTRIAL RAW MATERIALS 120 .20 11 0 1\10 .. *MANUFACTURES 100 100 ý*ALL COMMODITIES FOOD ARTICLES FIRST 5- YEAR PLAN- SECOND 5- YEAR PLAN 8 0 1 ' ' ' ' ' ' ' i I i i ' '.' ' 8 0 '51/52 '52/53 '53/54 '54/55 '55/56 '56/57 '57/58 '58/59 '59/60 '60/61 NET NATIONAL OUTPUT (AT CONSTANT PRICES), MONEY SUPPLY AND WHOLESALE PRICES (INDEX, 1955-56= 100) 130 | l i l i 130 YEARLY 120 -120 \ ,,d-^WHOLESALE PRICES |00 0 110 110 90.. /N-MVONEY SUPPLY 9 *0 ·· .......... FIRST 5-YEAR PLAN >4 : SECOND 5-YEAR PLAN 3 80 1I I l i 80 '50/51 '51/52 '52/53 '53/54 '54/55 '55/56 '56/57 '57/58 '58/59 '59/60 '60/61 7/18/60 1678 IBRD-Economic Stoff account for slightly under half the total, and the other half is made up mainly of primary products, notably iron and manganese ores, mica, textile fibres, cashew nuts, spices, vegetable oils, hides and skins and tobacco. 31. Although the balance of service transactions has turned out rather more favorably than anticipated, the total foreign exchange deficit in the Second Plan, including PL 480, is likely to be of the order of Rs. 202 billion, instead of the Rs. 11 billion forecast. Rather over one quarter of this deficit will have been covered by drawing on foreign exchange reserves and just under three quarters by foreign aid. Disbursements of foreign aid and net drawings on the International Monetary Fund during the Second Plan will probably amount to around Rs. 101 billion ($2,200 million), with PL 480 accounting for another Rs. h billion ($945 million). This may be compared with the Rs. 9 billion which was stated to be the requirement of foreign aid and private foreign investment when the Plan was published. Conclusion 32. The most striking change in the Indian economy since the beginning of the Second Plan has been the broadening of the industrial base and the increased buoyancy of manufacturing enterprise. The establishment of the three new steel plants alone constitutes a most impressive achievement, even though it will take some time for them to work up to full production. The change in agriculture is less evident, but here too there are signs of progress, and the potential for increasing production may be greater than the statistics of output indicate. Significant progress has been made in reducing Indiats dependence on certain types of imports, but if the momentum of expansion is to be maintained and the economy is to be further diversified, the present volume of imports will have to go up, not down, during the Third Plan. As it is, the current level of imports is inadequate to enable full use to be made of the industrial capacity that has been created. 33. While the economy has been tightly stretched in places, there does not appear to be any gross excess of demand such as might lead to a runaway inflation of internal prices. The balance of payments deficits incurred during the Second Plan have been primarily attributable to the rise in imports of capital goods rather than to any general over-spill of internal demand. 34. For all the progress that has been made during the Second Plan, little improvement has yet been effected in the standard of living of the Indian people, which remains one of the lowest in the world; domestic savings have little more than kept pace with the rise in national income; and the problem of under-employment is as far from solution as ever. These facts are stated not in order to belittle what the Government has done, but in order to emphasize how much still remains to be done if India is to be able eventually to maintain a satisfactory rate of economic growth without outside help. The Third Plan has to be viewed in this context. - 10 - CHAPTER 2. THE THIRD PLAN IN OUTLINE Principal Aims 35. An outline of the Third Plan was published at the beginning of July 1960. It covers the five-year period from April 1961 to March 1966. The Plan will not be finalized until early in 1961. In the meantime discussions will be held with State Governments, the particulars of individual programs will be filled in, and it is to be hoped that some attempt will be made to work out the phasing of major projects, on which little detailed work has yet been done. The broad orders of magnitude are unlikely to change very much, but it is possible that some of the investment targets will be raised a little. At the same time estimates of internal and external financial resources may undergo revision as more up-to-date information becomes available. 36. The aims of the Third Plan are modest enough in relation to the needs. National income is to be raised by a minimum of 2721 per cent over the five years, or by about 3 per cent a year on a per capita basis.-/ An additional 10-11 million full-time jobs are to be created outside agriculture, and fuller employment is to be provided for some of those at present under- employed. Facilities for free and compulsory education are to be extended to 80 per cent of children between the ages of 6 and 11. Basic industries, including particularly the manufacture of capital goods, are to be further developed "so that the requirements of further industrialization can be met within a period of 10 years or so mainly from the country's own resources". Virtual self-sufficiency is to be achieved in food. Exports are to be raised by the last year of the Plan to 18 per cent above the 1959/60 level. 37. To achieve these aims the planners calculate that a little over R.s. 100 billion ($21 billion) will have to be invested over the five years net of replacements, thereby raising net investment from an assumed 11 per cent of the national income in 1960 to 14 per cent in 1965. Roughly 60 per cent of the investment during the Third Plan is allotted to the public sector, 40 per cent to the private sector. In addition to investment expenditures of Rs. 62 billion to be financed.out of public funds, the Plan includes current outlays of Rs. 10.5 billion, bringing total outlays in the public sector to Rs. 72.5 billion. Table 2 shows how the totals are divided under the various heads of development, with the estimated foreign exchange requirement for each. 1/ The Third Plan Outline states that "the national income should increase by over 5 per cent per annum" between 1960/61 and 1965/66. No other figure is mentioned, but it appears that the planners' calculations (e.g. of internal financial resources) assume a growth rate lying between 5 per cent and 6 per cent a year. - 11 - Table 2. Outlays in the Third Plan (Rs. billion) Foreign Public Sector Private Total Exchange Total Current Outlays Investment Investment Investment Components Agriculture.a/ 10.25 3.50 6.75 8.00 14.75 Major and 0.75 medium 6.50 0.10 6.40 - 6.4o irrigation Power 9.25 - 9.25 0.50 9.75 2.70 Village and small indus- tries 2.50 0.90 1.60 2.75 4.35 Organized in- 11.90 dustry and 15.00 - 15,00 10.00 25.00 minerals Transport and communica- 14.50 - 14.50 2.00 16.50 3.00 tions Social services 12.50 6.00 6.50 10.75 17.25 0.80 Inventories 2.00 2.00 6.00 8.00 - Total 72.50 10.50 62.001 40.00 102.00 19.15 a/ Includes minor irrigation and community development. b/ Includes private investment of Rs. 2 billion to be financed out of resources transferred from the public sector. 38. The pattern of public expenditure in the Third Plan is broadly similar to that in the Second, but there are certain changes of emphasis, as shown in Table 3. Agriculture is allocated a slightly larger share of outlays in the public sector and power a considerably larger share, while the share of trans- port and communications is reduced. Industry and mining receive much the same share in both Plans. There are, however, considerable differences in the allocations made within this sector. Iron and steel expansion is still a prominent feature of the industrial program, but whereas in the Second Plan it has accounted for nearly half of all industrial investment, public and private, the proportion in the Third Plan is expected to be only about one sixth. Machine-building and fertilizer production are both accorded a much higher priority in the Third Plan than in the Second. Substantially increased resources are set aside for oil exploration and development in the public sector, and the provision made for public investment in coal-mining is over 21 times what is expected to be spent under this heading in the Second Plan. - 12 - Table 3. Public Outlays in Second and Third Plans (Rs. billion: percentages of totals in brackets) Second Plan Third Plan / Original Latest Estimates Proposals Agriculture 3.1 (7 3.7%) 307%) 6.25 (9%) Community Developmentb/ 2.27 (5%) 2.10 (5%) 4.oo (5%) Irrigation and flood control 4.86 (10%) 4.50 (10%) 6.50 (9%) Total agriculture and irrigation 10.54 (22%) 9.80 (21%) 16.75 (23%) Power 4.27 (9%) 4.10 (9%) 9.25 (13%) Village and small industries 2.00 (4%) 1.80 (h%) 2.50 (3%) Organized industry and minerals 6.90 (14%) 8.80 (19%) 15.00 (21%) of which: Iron and steel 3.50 6.00E/ 5.41 Heavy machinery ) 2.8 Chemicals and ) 2.67 1.90 fertilizers ) Other industries) . . 1.43 Coal ) 0.53 1.38 Petroleum ) 0.73 . . l55 Other minerals ) . . o85 Transport and communications 13.85 (29%) 12.90 (28%) 14.50 (20%) Total power, industry and transport 27.02 (56%) 27.60 (60%) 41.25 (57%) Social services 9.45 (20%) 8.60 (19%) 12.50 (17%) Inventories and miscellaneous 0.99 (2%) - 2.00 (3%) Grand total 48.00 (100%) 46.00 (100%) 72.50 (100%) a/ Includes minor irrigation. b/ Includes cooperation. 2/ Rough estimate given to mission. 39. Some of the principal production targets for agriculture, industry, mining and transport are described in the Annexes. Many of them may well be revised before the Plan is finalized. Production in the base year 1960/61, to which most of the increases are related, has yet to be realized, - 13 - and if it is not realized to the full extent assumed, the targets set for output in 1965/66 may have to be looked at again. Production of foodgrains is to be raised by 33-40 per cent and total agricultural production by 30-33 per cent. Steel capacity is to be expanded from 6 million ingot tons to 10.2 million ingot tons. Electricity generating capacity is to be doubled from 5.8 million kilowatts to 11.8 million kilowatts. Production of coal is to go up from $3 million tons to 97 million tons, of iron ore from 12 million tons to 32 million tons, of cement from just under 9 million tons to 13 million tons and of nitrogenous fertilizers from 210,000 tons to 800,000 tons (in terms of nitrogen). 40. The programs for machine-building cover a varied range of light and heavy products. Large increases are planned in the production of machine tools, cement-making machinery, textile machinery, sugar machinery, cranes, earth-moving equipment, precision instruments, small electric motors and transformers, ball and roller bearings. Except for a proportion of the machine tools, practically all these items are reserved for private industry. In the public sector new capacity is to be created for annual production of 73,000 tons of steel castings, 135,000 tons of grey iron castings and 77,000 tons of steel forgings. A new heavy machinery plant is to be established with an eventual capacity of 160,000 tons a year, of which it is hoped that half will be ready by 1965/66. Other public plants already under construction are to turn out heavy electrical equipment, pressure vessels for chemical and fertilizer plants, high pressure boilers for power plants and coal-mining machinery. 4l. Existing industries making industrial materials and components and consumer goods are assumed to go on expanding during the Third Plan. Specific targets have been set for a large number of individual items, in- cluding jute and cotton textiles, woollen manufactures, vegetable oils, sugar, bicycles, various heavy chemicals, rayon and staple fibre, industrial explosives, wires and cables, drugs, plastics, soap and synthetic deter- gents, raw film, watches, tires, paper and board, newsprint, refractories and glassware. New factories for the manufacture of drugs, ophthalmic glass, precision instruments, watches and raw film are being set up in the public sector. Output of cotton textiles, which amounted to just over 7,000 million yards in 1959 and is rather optimistically estimated at around 8,000 million yards in 1960/61, is projected to rise to 9,300 million yards in 1965/66. The target for the mill sector is 5,800 million yards (an 18 per cent increase compared with 1959) and for the decentralized sector 3,500 million yards (an increase of over 50 per cent). 42. About 17 per cent of total investment (11 per cent of public in- vestment) is earmarked for the development of social services during the Third Plan - a very low proportion by comparison with most underdeveloped countries. At present about three children out of every five in the 6-11 age group are attending school, and it is hoped to raise this to four out of every five by the end of the Plan. In the 11-14 age group the propor- tion attending school is to be raised from 23 per cent to 30 per cent and in the 14-17 age group from 12 per cent to 15 per cent. Altogether nearly 65 million children are expected to be in school by 1965/66, compared with about 40 million now. Particular attention is being given to expanding facilities for higher education and technical training. The number of places in universities and colleges is planned to rise from 900,000 at the - 14 - beginning of the Plan to 1,300,000 at the end and the annual intake of engineering colleges and polytechnics from 37,200 to 53,500. Health programs are directed towards improving environmental hygiene, especially water supplies, to providing more hospitals, dispensaries and trained medical staff, to control of communicable diseases and to the promotion of family planning. The number of hospital beds is to go up from 160,000 to 190,000 (approximately one for every 2,500 people) and of doctors from 70,000 to 81,000 (one for every 6,000). Family planning centers are to be multiplied. The provisional allocation under this head is very small (Rs. 250 million), but it is intended that more money should be provided if it can be spent. Financial Resources for the Plan 43. The Third Plan has been drawn up on the assumption of massive external assistance. Without this assistance the investments proposed would be quite incapable of realization, since they involve large imports of capital equipment which India cannot pay for out of her own export earning, and there will be no further room for foreign exchange reserves to be drawn down. The balance of payments deficit to be covered by foreign aid and private foreign investment is estimated at Rs. 26 billion (almost 65.5 billion), excluding aid under PL 48o. If PL 480 is included, the stated requirement is at least Rs. 32 billion ($6.7 billion). Approximately Rs. 5 billion of this is ear- marked for repayment of external debt, so that the net addition to resources available for domestic use would be Rs. 27 billion. In other words, the Third Plan assumes that rather over one quarter of the proposed invest- ment will be financed out of external resources - a slightly smaller pro- portion than in the Second Plan. This would leave Rs. 75 billion of investment to be financed out of domestic savings, as against Rs. 47 billion in the Second Plan. On the assumption that the full 5-6 per cent per annum increase in national output is achieved, the implied marginal savings ratio is of the order of 20 per cent. On the same assumption, the increase in consumption during the Third Plan is supposed to be limited to 4 per cent a year, or 2 per cent on a per capita basis. The proposals for mobilizing domestic resources are examined in more detail in Chapter 8. The Plan in Perspective 44. The Third Plan has grown out of the past and will grow into the future, being part of a continuous process of economic development which was set in motion shortly after India gained her independence. Each stage in this process is to an important extent determined by what went before and in its turn largely determines what follows after. The First Five-Year Plan was little more than a haphazard assortment of departmental projects belatedly assembled under one cover. The Second Plan marked the first attempt on the part of the Government to work out a strategy of development and to establish long-range economic goals. In the Third Plan this strategy emerges more clearly and is expounded with greater conviction. While the mission has many detailed criticisms to make and doubts to express, it was greatly impressed by the quality of thinking which has gone into the preparation of the Plan and it finds it difficult to quarrel either with - 15 - its broad aims or with the principal assumtions underlying it. These aims and assumptions have to be judged in the perspective of a nrocess of development stretching not over five years, but over twenty or twenty-five. 45. The starting-point of all Indian planning is a target rate of increase in real national income. The rate chosen - 5 per cent a year - can hardly be called excessive when the present level of per capita income is the equivalent of only $63 a year and the population is believed to be growing by 2 per cent every year. To aim any lower would be to admit failure in advance. 46. The assumption made about population growth is, of course, fundamental to any evaluation of the progress already achieved or of prospects for the future. Then the Second Plan was prepared, the popu- lation was believed to be growing at the rate of 1.25 per cent a year. Studies made by independent experts suggested that the estimate was too low, and these studies have since been supported by fresh information obtained from sample surveys in India. The latest Indian estimates, which agree fairly closely with those of the Princeton University Office of Population Research, put the annual rate of growth during the First Plan at 1.58 per cent, during the Second Plan at 1.91 per cent and during the Third Plan at 2.14 per cent. The next population census in India will be taken in 1961, and preliminary results should be available before the end of the first year of the Third Plan. Until then, the official estimates can be accepted as the best available. They put total pcpulation at 391 million in 1956, 431 million in 1961 and 480 million in 1966. From 1966 onwards it is assumed that the rate of population growth will decline, but the basis for this assumption is highly insecure. 47. Agriculture is at present the main source of income and employment. Agricultural production must therefore be expanded, and no one questions that this is in one sense the first priority in economic development (see Chapter 3). However, agricultural expansion cannot be achieved simply by putting in more capital. It also requires effective institutional arrangements to make readily available to 50 or 60 million farmers all the necessary materials, the credit required for their purchase, a reasonably attractive relationship between cash costs and sale prices and, in particular, a steady spread of knowledge as to what to do and how to do it. All this takes time and sets a limit to the amount of capital that can be fruitfully employed in the short run. The mission was greatly impressed nevertheless by signs of the increased receptiveness of the farming community to new ideas. The difficulty is frequently not so much reluctance to adopt improvements as the fact that at the margin of subsistence a person cannot afford to take big risks. He may also hope that by waiting a while the state will subsidize the cost of the improvements. 48. Other sectors of the economy must meanwhile continue to be developed. Ultimately India can only provide employment for her surplus population and thus make full use of her human resources by building up industry. Demand for industrial products will in any case increase as the standard of living rises. Transport, power and other basic services must - 16 - be expanded in support of agriculture and industry. More capital equipment is a prime requisite for development in all these sectors, and India must either make this capital equipment herself or import it. She must also import substantial quantities of fuel, industrial materials and semi- manufactures which cannot be produced at home. The balance of payments thus becomes a focal point of development. 49. One of the basic assumptions underlying the strategy of India's economic development is that few of her existing exports are readily expansible, and that there is no way, now or in the future, of increasing export earnings fast enough to match the rise in demand for the kind of goods which at present have to be imported. Unless, therefore, more of these goods can be made at home, it will be impossible to maintain the momentum of industrial expansion and at the same time to reduce the depen- dence of the economy on foreign aid. In other words, while no opportunity must be neglected of expanding export earnings, the main emphasis in industrial and agricultural development must of necessity be placed on import saving. 50. It is easy to challenge this thesis, but not so easy to overturn it. The mission does not underestimate the importance of taking all possible steps to expand Indiats exports, and it believes that, if these measures are taken, foreign exchange earnings can be substantially in- creased. The prospects for exports during the Third Plan are discussed in more detail in Chapter 7. Government policies in the past have too often had the effect of discouraging exports, and it is no use pretending that India as a country is naturally export-minded any more than, say, the United States. There are, however, welcome signs that official attitudes are changing, and the need to give more attention to exports is fully recognized in the Third Plan. 51. It has to be admitted nevertheless that there are very real difficulties in the way of export promotion. World markets for tea and jute manufactures are neither of them expanding very fast, while international trade in cotton textiles has been slowly contracting for some time. Many of the advanced industrial countries have taken steps to keep down, and in some cases to exclude altogether, imports of cheap manufactured goods from India and other less developed countries in order to protect their own industries (see Annex VI). Longer-term possibilities for agricultural exports other than tea are limited in some cases by the existence of world surpluses (e.g. sugar), in others by the rise in domestic consumption in India (e.g. oilseeds) and in others again by the unsuitable quality of the Indian product (e.g. tobacco and raw cotton). Amongst non-agricultural primary products only iron ore appears at present to offer good prospects for the rapid development of overseas sales. 52. If the Indian Government adopted drastic measures of forced savings to hold down consumption and imposed rigid controls over every aspect of economic life, much larger supplies of agricultural and indus- trial commodities could no doubt be made available for export and sold for - 17 - whatever prices they would fetch. At the same time imports of materials for the manufacture of consumer goods could be further curtailed in order to release foreign exchange to pay for capital goods. Such methods, however, even if feasible, would be incompatible with the maintenance of free politi- cal institutions in India. They would also have a disruptive effect on international trade. 53. The mission is persuaded that India must reduce her dependence on imports (i.e. the import content of a given level of national output) if she is progressively to dispense with foreign aid and eventually achieve a process of self-sustained economic growth. The priority given in the Second and Third Plans to the expansion of iron and steel production and machine- building makes sense from this point of view. If it was simply a question of trying to achieve the maximum increase in income and output during the next five years, a different pattern of investment would be appropriate. But the economy would then be less well prepared for further expansion in subsequent periods. 54. The scale of investment proposed in heavy industry may nevertheless be considered somewhat excessive because of the practical difficulties involvr in organizing and operating large projects like the steel plants and some of the proposed machinery plants. Moreover, these projects tie up large amounts of capital for long periods, and their real costs usually turn out to be very much higher than the original estimates assume. Similar criticisms may be applied to the construction of large multipurpose power and irrigation projects during the Second Plan. It is now recognized that these were over- done, and in future more emphasis is to be given in irrigation to minor works. Even in this field, however, the glamor of the big project is not yet dimmed, as is shown by the proposal for the construction of a 300,000 kw atomic power station in the Third Plan - in the mission's view, an extremely dubious economic proposition (see paragraph 91 below). 55. The degree of concentration on industry in the Third Plan should not be exaggerated. Inevitably this is the part of the Plan which attracts attention because it makes large claims on foreign exchange and includes some of the most spectacular, as well as some of the most controversial, projects. These projects have a key role to play in the long-term strategy of import saving, but their contribution to the increase in national income will be comparatively small. Agricultu2e in fact is expected to contribute almost half the increase in total supplies of goods and services during the Plan. The planned increase in organized industrial production is probably of the order of 80 per cent, though no overall figure is mentioned in the Plan Outline. Even, however, if this increase is achieved, organized industry and mining will still account for less than 15 per cent of the national out- put in 1965/66, as against 45-50 per cent for agriculture. 56. Apart from the question of the balance between agriculture and industry, a number of other criticisms have been made of the Plan. It has been criticized for neglecting to provide adequately for the mobilization of unused manpower for purposes of capital formation in rural areas. It has been criticized for giving too much attention to the production of capital - 18 - goods and too little to the production of consumer goods. It has been criticized for placing too much of the responsibility for industrial develop- ment on the public sector and for imposing unnecessary restrictions on the growth of the private sector. All these criticisms, and particularly the last, appear to the mission in some measure justified, and we shall consider them in more detail in relation to the specific programs. The broad shape of the Plan, however, is in our view well adapted to the requirements of long- term economic growth. It has in any case now been determined, and many of the more controversial projects are already committed in the sense that arrangements have been made with foreign countries for providing the necessary external finance. Our main purpose in the remainder of this report is not to argue the merits and demerits of the pattern of investment proposed, but to examine the deciding factors upon which in our view the success or failure of India's development effort over the next five years is most likely to depend. Conditions of Success 57. These factors may be briefly summarized here. In agriculture, supplies of water and fertilizers, price and marketing policies and the qualit, of government administration stand out amongst the many elements in the situation as those most likely to influence production in the short run. The success of the industrial program hinges onsuch questions as the adequacy of supplies of fuel and power and transport, the availability of raw materials, the quality of higher management and technical personnel, the organization of public enterprises, labor relations and the trend of productivity in relation to earnings. The organization and management of the public steel and heavy machinery plants, the coal production program and the plans for the expansion of electric power are of particular concern in this connection. External finance remains the most critical overall limitation on the pace of develop- ment, and while the mission is in no position to evaluate the prospects for foreign aid, it has attempted to assess the foreign exchange requirements of the Plan as realistically as possible. Larger domestic savings cannot to any significant extent be regarded as a substitute for external finance, but they would permit more labor-intensive investment to be carried out in certain vitally important sectors such as agriculture, road transport and social services. There is ample scope for greater expenditure in these sectors if it can be financed without inflation. 58. Finally, there are the imponderable social and political factors to which an economic report can hardly do justice. We have drawn attention to a few of the most obvious problems - standards of education, the language issue, regional differences, the quality of public administration, measures to limit population growth, the appalling conditions in Calcutta. But there - 19 - are more profound, and ultimately more decisive, questions relating to human attitudes and patterns of behaviour, to personalities and political institu- tions, which are barely touched upon in these pages. The fact that so little is said about them does not mean that we underestimate their importance. - 20 - CHAPTER 3. AGRICULTURAL PRODUCTION AND PROSPECTS 59. The Third Plan, more explicitly than the Second, recognizes the prime importance of agricultural development in acountry in which over two thirds of the population are still directly dependent on the land for their livelihood. The Plan Outline states: "In the scheme of development the first priority necessarily belongs to agriculture. The importance of achieving self- sufficiency in foodgrains and meeting the requirements of industry and exports is one of the major aims of the Third Plan. Agricultural production has to be increased to the highest levels feasible, so that the incomes and levels of living of the rural population may rise and keep pace with incomes in other sectors. The level of agricultural pro- duction is an important determinant of the rate of growth of the economy as a whole. There is also an intimate con- nection between the expansion of the agricultural economy and the mobilization of the manpower and other resources of the rural areas. An attempt has, therefore, been made to allocate sufficient resources for the development of agri- culture and the ruraleconomy. It is further envisaged that, as the Plan proceeds, if larger resources are needed for assuring more rapid advance within the rural economy, specially through the fuller use of manpower, these will be made available." Production Targets 6o. The principal targets for agricultural production for the Third Plan are set out in Table 4. The foodgrain target of 100-105 million tons reflects: the influence of the agricultural team sent out to India in 1958 by the Ford Foundation. The team's report, published in April 1959, recommended a target of 110 million tons, which would have involved more than doubling the rate of increase of recent years. The recommendation can be challenged as unrealis- tic; it can also be challenged as unnecessary. For one thing the figure of 110 million tons includes 10 million tons for the accumulation of a foodgrain reserve. This would be a herculean task. But even if it could be achieved, there would be no need to set aside the whole of the 10 million tons out of a single year's production. As for foodgrain consumption, the Ford Foundation team assumed an increase of nearly 30 per cent over the five years, whereas the Third Plan envisages that total consumers' expenditure on goods and ser- vices will increase by only 20 per cent. It seems most unlikely that the income elasticity of demand for foodgrains would be so high. It would be more natural to expect foodgrains to account for a gradually diminishing proportion of consumers' expenditure in India as incomes rise and urbanisa- tion proceeds. - 21 - Table 4. Crop Production Targets Percentage Expected Target Increase 1950/51 1955/56 1958/59 1960/61 1965/66 Third Plan (Index numbers 1949/50 = 100) Foodgrains 90 115 130 131 175-184 33-4o Other crops 106 120 136 143 170-177 19-24 All crops __97 7 3 135 175-180 30-33 ( Quantities ) Foodgrains (mn. tons) 50.0 65.8 75.0 75.0 100-105 33-40 Oilseeds (mn. tons) 5.1 5.6 6.9 7.2 9.2-9,5 28-32 Sugarcane (mn. tons of gur) 5.6 6.0 7.1 7.2 9.0-9.2 25-28 Cotton (mn. bales of 392 lbs.)2.9 4.0 4.7 5.4 7.2 33 Jute (mn. bales of 400 lbs.) 3.3 4.2 5.2 5.5 6.5 Principal Means of Achievement Irrigated area (mn. acres) 51.5 56.2 . . 70 9541 Consumption of N ('000 tons) 55 105 . . 360 1,000 Consumption of P205 (000 tons) 0.7 13 0 0 67 400-500 Soil conservation (mn. acres extra) . 0.7 9 & 20 13.0 Land reclamation (mn. acres extra) 122.7 1.2 110 0 a( Becomes 90 after deducting 5 for old facilities abandoned. 610 Because of the large year-to-year variations in foodgrains output on account of weather, it is extremely difficult to judge what the true rate of gain over the past eight or nine years has been. According to the assump- tions chosen, it could range anywhere between 21 per cent and 31 per cent a year (see Annex II). The mission believes that 2.6 per cent is 2probably about the right figure. A continuation of this rate during the Third Plan would result in a"normal weather" production of 831 million tons in 1965/66. To achieve 100 million tons, the rate of growth would have to be stepped up to 4.9 per cent a year (see"chart on next page). While this might not be totally impossible, it would probably involve the provision of much larger supplies of water and fertilizers than are contemplated at present. 62. There remains the question of the demand for foodgrains. Present consumption of foodgrains for all purposes must be assumed to be around 75 million tons a year (75 million tons grown at home, 3 million tons imported). Consistently with the trend of consumers' incomes envisaged in the Third Plan, we see no grounds for expecting demand for foodgrains to rise by more than 20 INDIA: FOODGRAIN PRODUCTION AND ITS PERCENTAGE GROWTH RATES (MILLIONS OF LONG TONS) 100 1 1 1 1 1 I I I I I I O O 0 YEAR ENDING JUNE 30 TARGET / J0 95.0 PERCENTAGE FIGURES TO 1965-66 ARE IMPLIED GROWTH RATES PER co 90 YEAR FOR 8 YEARS FROM 3 YEAR 90 AVERAGE CENTERED AT 1957-58 90 0 83.5 80 oor/ ow b 3 e o. 80 - DOTS SHOW__________________ 3 YEAR MOVING AVERAGE OF ACHIEVED PRODUCTION ACHIEVED PRODUCTION 70 70 4 TO EQUAL POPULATION GROWTH RATE PROJECTED DURING THIRD PLAN ADJUSTED 60- . 60 50 ~50 40 40 30 30 20 20 IRICE 0 0 0 1 1 1 0 1950 '5I '52 '53 '54 '55 '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 1966 FIRST PLAN :w 1* SECOND PLAN -3--THIRD PLAN - I8RD- Economic Staff 1664 - 22 - per cent over the next five years. This would raise demand to 941 million tons in 1965/66. The latest PL 480 agreement provides for imports of 17 mil- lion tons over the next few years, of which 5 million tons are to go into a reserve stock. Once this stock has been built up (if it can be), there will be no need to add to stocks in an average year. We suggest therefore that, for a year of normal weather, foodgrains production of 95 million tons in 1965/66 would be adequate. The rate of growth in production required to reach this level, starting from the latest firm figures, would be 4g per cent a year - a very marked improvement over the performance of past years. 63. The mission believes that too much attention has been given in the Third Plan Outline to expanding production of foodgrains and not enough to cash crops. In particular, the target for oil-yielding crops (oilseeds and coconuts) strikes us as inadequate since home demand for vegetable oils is rising very rapidly, and there would also be possibilities for export if supplies could be made available at lower prices. Groundnuts and groundnut oil used to be India's fourth largest export and now contribute only about 3 per cent of her export earnings. Moreover, we believe that there are import- saving possibilities in agriculture, forestry and fisheries which have not yet been fully exploited. The balance of payments forecasts for the Third Plan include expenditure of more tha Rs. 2.5 billion ($525 million) over the five years on imports of fish and fish preparations, fruits, nuts and vegetables, spices, vegetable oils, copra, rubber, timber, gums and resins. Most of these things are produced in India, and could be produced in larger quantities, particularly in Kerala and Mysore where conditions favor the cultivation of rubber, coconuts, cashew nuts, spices and tropical fruits. It is right to add that the Third Plan does provide for very large increases in the cultivation of some of these commodities - a 100 per cent increase in production of cashew nuts, for example, a 70 per cent increase in rubber and a 30 per cent increase in coconuts. We are suggesting only that still greater attention might be given to production of these and other commodities which are imported at the margin. Means of Achievement - Irrigation 64. India has barely oneacre of crop land per head of her agricultural population. Few profitable opportunities exist of adding significantly to agricultural output by reclaiming new land, althoughwater and fertilizers can make it possible to double-crop more of the land at present under culti- vation. Increased production must therefore come chiefly from higher yields per acre. These have to be achieved principally through increased invest- ment in the supply and use of water, greater production and use of chemical fertilizers and the training of agricultural extension staff to assist farmers in adopting more productive methods. 65. Water and fertilizers are of paramount importance. At present about 67 million acres are believed to be irrigated, or between one quarter and one fifth of the total crop area. The Third Plan calls for irrigation of an additional 28 million acres. Emphasis has rightly been shifted from major to minor irrigation schemes because the latter can be more quickly accomplished and are probably cheaper, and because many of the best sites for - 23 - large dams have already been developed. Too much capital has been locked up in the past in huge multipurpose schemes such as the Bhakra-Nangal and Tungabadhra projects. During the First and Second Plans major schemes were started which were eventually to provide irrigation for 38 million acres; as yet, less than one quarter of this potential is expected tobe realized by the end of the Second Plan. The irrigation potential of major schemes to be started during the Third Plan is only 5 million acres. 66. Minor irrigation includes surface wells, tubewells and small reser- voirs or ponds (tanks). Surface wells and tanks have the advantage that they can be constructed with local labor with little equipment and rely on human and animal power for their operation. Tubewells are more costly to build and require electric power to operate. Water from tubewells is usually more expensive, sometimes very much more expensive, than canal water in areas where the latter is available. The complaint is often made that government tubewell schemes try to cover too much land with the result that many of the farmers cannot get the water when they want it. More private tubewells would be constructed if there were cheaper supplies of electricity. But it is sel- dom cheap to supply electricity to rural areas. 67. The economics of irrigation are difficult to assess, since water is only one of the ingredients in the package needed to step up agricultural productivity. Much of the value of additional water is lost if fertilizers are not available to go with it, or if the farmers cannot be induced to use the water. Conversely, the use of chemical fertilizers is seldom economical without water. The fixing of water charges raises complex issues, and rate policies have to be flexible if full advantage is to be taken of newly created irrigation facilities. Concessional rates may be desirable during the first few years to encourage early use of the water. New irrigation schemes usually cost more than old schemes. If higher rates are charged for the new water, as sometimes happens, the farmer is reluctant to buy it. On the other hand, it may be difficult to raise rates for established users. Methods of fixing irrigation rates vary from State to State. In the mission's view it is generally better to fix a low rate and make it obligatory regard- less of whether water is taken or not than to fix a high rate payable only if water is used. Fertilizers 68. Growing recognition of the value of chemical fertilizers is one of the most encouraging facets of the Indian agricultural scene. However, because of the foreign exchange shortage, the Indian Government has restricted fertilizer imports to well below the level needed to satisfy internal demand. One fertilizer factory was completed at Sindri during the First Plan and its capacity has been expanded during the Second. Three more factories were included in the Second Plan, but none of them has yet gone into production; the first, at Nangal, is due to start production towards the end of this year. The Third Plan provides for a large increase in domestic fertilizer pro- duction. Imports are also to be stepped up. The problems are discussed in more detail in Annex II. Assuming that the fertilizer plants are completed according to schedule, which is a very optimistic assumption, the imports - 24 - at present proposed would permit an increase in total distribution of nitrogenous fertilizers (in terms of N) from an estimated 231,000 tons in 1959 to 420,000 tons in 1961/62 and 1,000,000 tons in 1965/66. Distribution of phosphatic fertilizers (in terms of P205) would rise from an estimated 50,000-60,000 tons during 1959/60 to 450,000-500,000 tons in 1965/66. 69. The mission has no doubt that the proposed investment in fertilizer plants is fully justifiable. Water is certainly a prerequisite for getting good returns from chemical fertilizers. But where water is available the returns from investment in fertilizers are extremely attractive. Tests have shown that, in the case of rice, application of ammonium sulohate produced at Sindri has resulted in extra crop production worth three or four times the factory price of the fertilizers. Tentative calculations indicate that the capital:output ratio at Sindri is of the order of 3 to 1, which means that in favorable circumstances the value of the additional agricultural production in one year may exceed the total capital investment in the factory. 70. Similar arguments, of course, apply to the import of fertilizers. The prices paid for imported nitrogenous fertilizers have been more or less comparable to the cost of the fertilizers produced at Sindri. All the evi- dence points to the existence of a large unsatisfied demand for fertilizers at present, and imports should be increased until domestic production can catch up. The present intention apparently is that imports should be raised from 210,000 tons of nitrogen valued at Rs. 210 million in 1961/62 to 430,000 tons valued at Rs. 430 million in 1963/64 and then reduced to 200,000 tons in 1965/66. The mission believes that there is a strong case for larger imports in the early years of the Plan, at any rate so long as they can be sold. This applies particularly to the new kinds of nitrogenous fertilizers which should be widely introduced to the farmers before the Indian production of these new types is put on the market. We say this not- withstanding the acute shortage of foreign exchange and the difficulty of finding the money to pay for other imports. We would rather see some indus- trial projects postponed than agricultural needs neglected. The present glut in world supplies of nitrogenous fertilizers is an added argument in favor of the course we recommend. Price Incentives 71. Violent price fluctuations are bad for production. On this most people are nowadays agreed. Experience in Europe and the United States has demonstrated that farm output responds favorably to price guarantees. The trouble is that it sometimes responds too favorably, with the result that agricultural surpluses accumulate. In India this is hardly a serious danger at the moment. On the other hand, the Indian farmer will be reluctant to invest money in improvements, including irrigation and fertilizers, if he fears that a bumper crop will be followed by a catastrophic fall in prices as happened in 1953/54. Price supports of some kind, coupled with govern- ment storage of foodgrain reserves, are essential in the mission's view if the potential for increased agricultural production during the next five years is to be realized. - 25 - 72. The practical difficulties of operating an effective price support scheme in India are considerable, but there is no reason to suppose that they are insuperable. The authorities are moving in the right direction, and the Ford Foundation team indicated some of the things that might be done. The main obstacle is the fear that price supports would react adversely on the urban cost of living. But the terms of trade between agricultural products and manufactured goods may have to be tilted more in favor of the former if the farmer is to be encouraged to sell more to the towns and to buy more from them. The townsman, as well as the farmer, will benefit from the increased exchange of goods. Resources exist in both the agricultural and non-agri- cultural sectors for which employment can be provided without any great in- crease in the demand for imports. Some rise in average agricultural prices may have to be accepted as a means of making fuller use of existing productive capacity. But the main objective should be security against low prices immediately following good harvests. Agricultural Credit 73. The better organization of agricultural marketing, and a relaxation of the merchant's hold over the farmer, are in the long run essential con- ditions of a prosperous agriculture, but they can only be brought about very gradually. The Government is rightly doing what it can to speed the process of change. The Third Plan, for example, includes an ambitious program for the provision of institutional credit through cooperative societies. Insti- tutional credit develops slowly, and it would be unrealistic to expect a rapid break-through on this front. After more than 50 years of effort, the proportion of agricultural credit supplied through recognized credit institu- tions has risen to about 10-12 per cent of the total, with money lenders and merchants still supplying the rest. Cooperative Farming 74. Cooperative farming has been a favorite topic of conversation among intellectuals for many years and is again recommended for trial on a greater scale during the Third Plan. It is argued that most of India's farms are too small for efficient operation individually, and that by merging them into cooperative farms of larger size it will be possible to overcome inefficiencies stemming from lack of bullocks, farm implements and land improvements. How- ever, farmers in long-established farming areas have shown little enthusiasm for cooperative farming. Individual ownership of land is the farmer's great- est ambition. Thus far it has been found easiest to start cooperative farms on newly reclaimed state land or in villages resettled by refugees from Pakistan. Even under those circumstances it was sometimes found that yields of crops were lower on cooperative farms than on the surrounding farms individually owned aid operated. Farmers on cooperative farms were not dis- posed. to work as diligently or as carefully for the benefit of a common fund as they would have done if their individual success depended upon their indi- vidual efforts. A sharp distinction has to be drawn between service coopera- tives which sell farm products or buy farm supplies cooperatively and joint farms which entail a pooling of land resources and of labor. The latter seem to have little chance of success. - 26 - Land Reform 75. Land reform measures have contributed to improved production in some ways, but in other respects the reverse is probably true. Land reform is a matter for State legislation, and there are as many different land reform laws as there are States. The Third Plan Outline observes: "Security of tenures and reduction in rents have been largely achieved. In the course of the next two or three years the legislation relating to ceilings on agri- cultural holdings will be implemented. The vast body of cultivators will also become owners of land in their own right." This is almost certainly an over-optimistic assessment of the situation. 76. There are two schools of thought on land ceilings. One emphasizes efficiency of agricultural production, and the other accentuates social justice. The productivity school resists limitations upon the size of farm if they tend to reduce crop yields and productive efficiency. The social justice school urges that the millions of landlessor virtually landless laborers in the rural communities should be enabled to acquire land of their own. In some States laws have been enacted to prevent individual ownership of more than three times the anount of land defined as sufficient to provide a minimum level of subsistence. In other States ceilings of 30 or 40 or 50 acres have been established. In most cases a measure of latitude is pro- vided to allow for large family holdings which are tantamount to several individual farms. Moreover, by the method of gradual approach, ceilings of land holdings have been applied first to limitations against increasing the size of the farm before tackling the question of expropriation of excess land, and landlords have been permitted to retain good-sized farms when they have become the actual cultivators of the land. Rural Works Programs 77. The Plan Outline includesa proposal for special works programs in rural areas which would help to ease under-employment and contribute to in- creasing agricultural productivity. The kind of uorks suggested include the improvement of small irrigation, clearing of land, contour bunding for pre- venting water losses and soil erosion, planting of trees, improving and building of village roads and so forth. The idea is that these works should be organized at a low cost on wages at a subsistence rather than a market level. The figure of one rupee a day is sometimes mentioned in this context. The Planning Commission feels that the main problem is one of orgaiization rather than of finance and it proposes to provide resources in the Third Plan "to offer scope for experimentation on a wide scale". The extent of the allocation proposed, however, is not indicated. In principle, the mission strongly endorses the idea of mobilizing unused manpower for capital forma- tion in the rural sector so long as this can be done without subjecting the economy to added inflationary strains (see Annex I). Prospects for the Third Plan 78. As already indicated, the mission believes that fulfillment of the Third Plan production target is unlikely on the basis of normal weather. For foodgrains in any case we consider production of 95 million tons in 1965/66 - 27 - to be both a more realistic and more reasonable aim. This would involve an average annual rate of increase of 4 per cent over two thirds of the field of agricultural production. If output of other crops could be raised by 5 per cent a year - slightly more than the Plan assumes - the total increase in agricultural production might average about 4i per cent a year. 79. More enthusiastic political leadership from the top, at both the Centre and State levels, and a marked improvement in the quality of agricultural administration will be needed to achieve this result. Agricul- tural departments have not yet attracted enough of the best men in the public service, there is a shortage of young men interested in studying agriculture, and few. of those who do enter the agricultural service display any en- thusiasm for practical farming. Farming is still considered to be a rather unenviable occupation, and those who have capital usually prefer to invest it in land speculation than in agricultural production. Indian businessmen could give a lead in this respect by showing how profitable investment in agriculture can be, even on small holdings, when sufficient c4pital is available. The mission met one who had put money into farming as a sideline and found it lucrative as well as interesting. But he was very much of an exception. 80. The introduction of improved methods on 50 million farms is a slow process. Individual situations call for individual decisions, and there is no real substitute for the practical understanding of their own farming situations on the part of farmers who recognize and want the proffered benefits. Moreover, there are even more decision-makers than farmers, as many an agricultural adviser has discovered the next morning after convincing the husband that certain things should be done. Nevertheless, three signs are visible of a future break-through on the agricultural front. First, there has been a rapid expansion in the use of fertilizers where there has been enough water. Second, the Government has followed the advice of the Ford Foundation in adopting the package approach to the application of inter- dependent technological improvements. Third, the emphasis in the expansion program has been changed from meeting "felt wants" to developing unfelt wants into felt wants. The main deficiency now is a more doordinated and efficient administration to bring about a faster spread of popular understanding of the "why and how" of improved farming methods. - 28 - CHAPTER 4. BASIC INDUSTRIES AND SERVICES Coal Production 81. Abundant deposits of coal are one of India's principal natural assets and the foundation of her program of industrialization. Steel production depends on coal, the railways are run almost entirely on coal and more than half of India's electricity supplies are generated from coal. In other countries the growth of demand for coal has been slowed down by a shift to oil and gas as a source of fuel and power, but so long as India remains a net importer of oil, the scope for substitution will be very limited. 82. It is therefore a matter of grave concern that production of coal, and particularly of metallurgical coal, is failing to keep pace with the rise in demand. Some steel production has already been lost because of the poor quality of the coal supplied, railway efficiency has been adversely affected, fertilizer production at Sindri has had to be curtailed, and valuable opportunities have been lost of earning foreign exchange from coal exports. 83. During the Second Plan coal production has increased at the rate of 7 per cent a year. During the Third Plan the rate of expansion required to reach the target will be 12-1 per cent a year. The target for the end of the Third Plan (97 million tons) is probably higher than can be justi- fied by the probable increase in demand unless coal exports can be stepped up considerably. For one thing, it assumes that crude steel production will rise to 9, million tons a year by the end of the Plan, and in the mission's view this is quite unrealistic. Nevertheless, at least 90-95 million tons of coala year may well be required by the end of the Plan to support the projected expansion of economic activity generally. The mission sees no prospect of production reaching this level unless there is a radical change in the Government's policy towards the industry. 84. Of the 47 million tons produced in 1959, 40 million tons were raised by private collieries and 7 million tons by government collieries. The Government plans to step up production in the public sector to 35 million tons by 1965/66, while production in the private sector is tentatively projected as rising to 60 million tons. No final decision has yet been taken, however, on the division of the increased production between the two sectors. The National Coal Development Corporation, which manages most of the public collieries, is a comparatively young organization with very limited resources of managerial talent and skilled manpower. Arrangements for technical assistance are being made with a number of fore.gn countries, but even so, the corporation will be hard put to quintuple its output in the short space of six years. It is relying predominantly on open-cast and horizon mining to develop large deposits of medium quality SIN K l A N G AFGHANISTAN .C H I N A JAMMU B KAS H Rl\. H~ PI B E T .--I HA s PRADESH PAKISTAN PUNJAB DELHI SIKKIM R A J A S T H A N BHUTAN.. ........................... .B H A R PAK STAN NMANIPUR 'WM .* ..0° ... BOARO U RNU A U BOKARO G U JE R A T M tADHYA arr PA G NADHYC DAA PANUR NDAPR AD E SÜ N HRA1P R JAUED R M A PTRIPURA BM/LA/ RAMPUR ROURKELA - -- /5/BURU -.. . . . . . .. OC/ > DAMAN Pcrcd,p <PorAt)POOO BOMBAY S/NGAREN/ ~~~ % IvSHAKAPATNAM A ND HRR AORELLALA Redi o auiao ONCPRLA D E S H Belilher, HOPlor..-..DEPOSITS OF COARLEANDAMAN ..f" MADRAS & IRON ORE ISLANDS rVEL/ LI/GN/rE PRINCIPAL COAL FIE LDS 0EOi Cuddalore ýW IMPORTANT i RON ORE DEPOSITS STE EL PL ANTS LACCADIVE ISLANDS -0 PROPOSED SITE FOR NEW STEEL PLANT COCHIN 6 PORTS USED FOR SHIPMENT OF IRON ORE S 0 50 ISO 00 2 300 ICOBAR ISLANDS AUGUST 1960 IBRD 721R - 29 - non-metallurgical coal and has as yet made few preparations for deep-mining operations, which will be needed to produce more metallurgical coal. The task of meeting the growing requirements of the steel industry will devolve mainly on the private collieries, which are at present responsible for practically all the metallurgical coal produced in the Bengal/Bihar fields. 85. The expansion of the private sector has been restricted as an act of government policy, which has reserved the opening up of new areas to the public sector. Price control has also discouraged the private companies from investing more in the industry. It is possible to sympathize with some of the considerations underlying the Governmentts policy, aid yet to feel that the way in which this policy has been applied is contrary to the nation's economic interests. As the mission sees it, the overriding need now is to get more coal quickly, and other considerations should be sub- ordinated to this purpose. The private collieries should therefore be encouraged to raise all the coal they can, restrictions on the issue of new mining leases should be lifted, and prices should be adjusted to pro- vide the industry with larger resources for reinvestment. The differential between prices of coking and non-coking coal should be increased. The Government has ample means of ensuring that price adjustments are not followed by unreasonable increases in dividends. A good case could be made out on economic grounds for the removal of price controls altogether. Electric Power 86. Electricity ranks with coal as a present limitation on industrial output and a potential bottleneck to the expansion of the economy during the Third Plan. Travelling around India, the mission found evidence of power shortages in all the main industrial areas. Fairly successful efforts have been made so far to minimize the impact of these shortages by the staggering of working hours and restrictions on the installation of electric appliances, but such forecasts as are available of demaid in relation to firm capacity suggest that the shortages will be intensified in the future. The outlook in the area served by the Damodar Valley Corporation is particularly disquieting, the gap between anticipated demand and firm cpacity rising from 84,000 kilowatts in 1960/61 to 250,000 kilowatts in 1961/62 and 300,000 kilowatts in 1962/63. From 1963/64 onwards supply begins to catch up a little with demand, but on present plans there will still be a deficit of over 170,000 kilowatts in 1965/66. 87. The supply of power in India is a State responsibility. At the federal level the Ministry of Irrigation and Power is advised by the Central Water and Power Commission, which is a regulatory and advisory body without executive functions. Lack of effective coordination between the Central and State authorities is evident in a number of matters relating to the planning of future developments 88. The progran prepared by the CWPC for the expansion of generating capacity during the Third Plan has been drastically cut by the Planning Commission. The revised program envisages an expansion of installed - 30 - capacity from 5.8 million kilowatts in 1960/61 to 11.8 million kilowatts in 1965/66 - an increase of 14 per cent a year. The mission's doubts about the adequacy of this program are reinforced by the absence of detailed and up-to-date load studies for individual areas. The CVPC's program was based on studies completed in 1958 before the recent upswing in industrial activity, and the Commission has not had enough detailed information about what is happening in the States to make anything more than a broad analysis of the situation. The State Electricity Boards have prepared their own programs for the Third Plan, but these do not yet appear to have been discussed in detail either with the CWPC or the Planning Commission. In the case of West Bengal, moreover, the State Government and the DVC are both planning facilities to serve the same area, with little apparent coordination between the two. 89. On closer examination the power program might after all turn out to be adequate, but the mission feels that there is so much doubt about it that the position should be carefully re-examined before the Third Plan is put into final shape. This must be done quickly because it takes several years to design and build a new power station. The pattern of power supply for the first two years of the Plan is more or less determined already, and if it should be found necessary to provide for more rapid expansion of facilities in the latter part of the Plan than at present allowed for, decisions have to be taken and orders placed with the least posstble delay. Five-year planning, in power as in other sectors, tends to result in a hiatus in the start of new projects towards the end of one plan pending decisions on resources that will be available for the next five-year period. This is particularly so at present because of the uncertainties about foreign exchange. It is to be hoped therefore that the necessary assurances about foreign exchange can be obtained in advance, so that orders for new power plants can be placed in good time. 90. The additional 6 million kilowatts of capacity at present proposed in the Third Plan will comprise 3 million kilowatts of conventional thermal power based mainly on coal, 2.65 million kilowatts of hydro power and 300,000 kilowatts of nuclear energy. A 300,000 kilowatt nuclear station is planned near Bombay at an estimated cost of over Rs. 500 million, and there has been talk of building two more smaller stations, though no provision for this has been made in the Plan. 91. Calculations have been made by the Indian Atomic Energy Commission showring that in areas like Bombay, where coal is very expensive, it is already as cheap, if not cheaper, to generate power from nuclear energy tha from coal. These calculations are open to challenge on a number of points. They assume that the overall thermal efficiency of coal-burning plants will be only 29 per cent, whereas modern plants should be able to achieve 35 per cent. Further, they assume a rate of interest of h per cent. Ifa higher rate of interest were taken as reflectin: the true scarcity of capital in India, the cost comparison would be greatly to the disadvantage of nuclear - 31 - power (see Annex IV). As between conventional thermal power and hydro power, the balance of advantage is probably swinging increasingly in favor of the former as more and more difficult sites have to be developed for hydro stations. This is an added reason for prompt action to overcome the present coal shortage. Oil Supplies 92. Petroleum and petroleum products are one of the most important items in India's balance of payments, accounting in 1959/60 for about one tenth of total merchandise imports. Present production of crude oil in India is under half a million tons a year, against consumption equivalent to 7 million tons. There are four refineries in the country with a combined capacity of 51 million tons of crude a year. 93. A new oilfield was discovered by a private company in Assam eight years ago, and this could now be producing 21 million tons of crude a year. But its development has been delayed by prolonged negotiations between the Goverment and the company, and by the Government's insistence that refining and distribution of the oil should be reserved to the public sector. The cost of this delay in terms of the foreign exchange foregone duringa-particularly difficult period is very large. 94. The Government has meanwhile been carrying out its own explora- tion program through the Oil and Natural Gas Commission. Total expenditure on oil exploration by the ONGC during the Second Plan may amount to about Rs. 200 million. The Commission has made two discoveries of oil in Gujerat, and the mission was informed that both fields contain sufficient oil of good quality to justify commercial exploitation. However, no detailed information has yet been published either about the quantities of the oil that might be produced or of the time that might be required to develop them. The sum of Rs. 1.15 billion has provisionally been allocated for further exploration in the public sector during the Third Plan, including a foreign exchange component of Rs. 0.60 billion. 95. No new exploration concessions were granted to private companies during the Second Plan, but a change in policy was announced toward the end of 1959, and foreign oil companies have been invited to join in the quest for oil in certain specified areas. A dozen or more offers have been received in response to this invitation and are now being considered by the Government. 96. The readiness of foreign dl companies to invest money in exploration in Indiawill inevitably depend to an important extent on the arrangements made for the refining and distribution of any oil that is found. All the existing refineries are in the private sector, and while the Industrial Policy Resolution of 1956 left the way open for the expansion of these refineries, S l N K I A N G AFGHANISTAN ý C H l N A JAMMU :a T l - E T 0. HIMACHAL AWALAMUH'.0I PRADESH PAKISTAN PUNJAB SIKKIM. R A J A S T H A N . B HUT AN . GAUHATCJ r 000. PRADBARAUNI PAK ISTAN MANIPUR B I H A R U J A TMADHYA B BU R M A CAMBA O PRADESHRE - TRIPURA- ANKLES L BOMBAY VISHAKAPATNAM A N DHRA P A IN D IA MYSORE PETROLEUM DEVELOPMENTO aNDAMAN ISLANDS .1t .OR NATURAL GAS DISC.VER.IES 02. L ACCADVE .-EX ISTING OIL REFINE RIES IS LANDS REFINERIES UNDER CONSTRUCTION - PIPELINE UNDER CONSTRUCTION NICOBAR 9 Ö ISLANDS CEYLON AJGUST 1960 IBRD7220 - 32 - it laid down the principle that all new refineries should be owned and operated by the Government. It is in accordance with this policy that the Government is building two refineries to handle the additional production in Assam. WJhen these two refineries are completed, total refinery capacity will be about 8.25 million tons in terms of crude (5.5 million private, 2.75 million public). The Minister of Fuel has announced that a government-owned refinery is to be established near Cambay on the west coast and he has mentioned the possibility of another government refinery in the south of India; the annual capacity suggested for each of the refineries is about 1 million tons. No specific provision has been made for these projects in the Third Plan. If they both go forward, capacity will be increased to 10.25 million tons, as against a possible demand of over 11 million tons in 1965. This would leave very little room for the expansion of the existing private refineries during the next five years. The outlook is further confused by the fact that the Government has recently set up a company to engage in the distribution of petroleum products in India. Nothing is yet known about how this company will operate, but Rs. 50 million has been earmarked for it in the program of public investment for the Third Plan. 97. The mission considers it essential that geological surveys and exploratory drilling for oil in India should continue on an increasing scale, and the Governmentts declaration of its readiness to enlist the cooperation of private capital and technical skill in these ventures is to be warmly wel- comed. Capital costs of oil exploration and development are extremely high, and large sums may be spent without obtaining any commercial return. Given the acute shortage of capital in general and of foreign exchange in particular, there appears to be no sound economic justification for the Indian Govern- ment to enter into further financial commitments in respect of oil development until all reasonable possibilities of securing the participation of private capital have been fully exploited. 98. The Oil and Natural Gas Commission has made a promising start, it is gradually builcing up a competent technical staff, and its activities can be expanded as its technical and financial resources permit. It may be doubted, however, whether the Commission can usefully spend as much as has been allocated to it under the Third Plan. whatever its capabilities, there is also ample scope for getting more private companies to search for oil and to share the risks as well as the possible benefits of exploration. Much further work remains to be done before the full extent of the deposits in Assam and Gujerat can be established, and large sedimentary areas in other parts of India still await investigation. As the mission sees it, it is very much to India's economic advantage that exploration should be carried out as rapidly, and on as broad a front, as possible, and that the heavy costs of exploration and development should be financed to the maximum extent possible out of private capital, thereby releasing government funds for investment in other sectors where - 33 - they are urgently needed. It is to be hoped therefore that, following the invitations issued to private companies, negotiations for new exploration leases will be pushed forward with the greatest expedition. 99. Likewise in the refining and distribution of oil, development should, so far as possible, be left in private hands, except to the extent that government intervention may be needed to ensure an adequate measure of competition. Private oil companies have already invested large sums in refining, storage and distribution in India, and there is no reason to doubt that they will be able, as part of their normal business, to finance the additional facilities required to meet the growth of demand. The mission is aware of the feeling in India that the pricing policies of the international oil companies have tended to be determined without regard to India's interests and it has sympathy with the Governmentts desire to encourage greater competition in the supply and pricing of oil. Substantial cuts in the price of imported oil have recently been announced by the principal supplying companies, and India has every right to take full advantage of the present competitive situation in the oil market* But we believe that she can do this without the Government entering into the costly and complicated business of oil refining and distribution Transport 100. Transport investment in India continues to be heavily concentrated on the railways. Total railway investment during the Third Plan is provisionally put at Rs. 12.20 billion, as against Rs. 11.20 billion in the Second. Net investment proposed for the Third Plan is Rs. 8.90 billion. Against this, the investment in roads during the Second Plan is expected to be about Rs. 2.70 billion, and the Third Plan allocation is Rs. 2.50 billion. 101. With certain specific exceptions that have already been mentioned, the internal transport system is better able to cope with the traffic offering now than it was at the beginning of the Second Plan. However, large additional demands for transport will arise during the Third Plan as the result of further agricultural expansion, the continued growth of iron and steel production, the development of iron ore for export, the growth of oil consumption (together with changes in the pattern of supply and distribution), the large projected increase in fertilizer usage and the growth of industry generally, particularly insofar as it is accompanied by a major expansion in consumption of coal and cement. A large part of the increase in freight traffic will consist of bulk commodities which can only be handled economically by the railways. The railways must also continue to handle most of the long-distance passenger traffic. 102. It seems to us in these circumstances desirable that road transport should be equipped to handle more of the traffic which is usually carried by road in other countries - marketing of agricultural produce, distribu- tion of factory products, local bus services and so forth. A trend has already developed in this direction during the Second Plan, and the mission - 34 - believes that it should be encouraged, not resisted. There may be some loss of revenue to the railways, but this can be made up by raising rates for bulk commodities. It has to be recognized that road transport opera- tions are at present rather more expensive in foreign exchange because they depend on imported fuel. The adverse reactions on the budget and the balance of payments attract attention because they are easily identifiable. On the other hand, the long-term gains that will result to the economy as a whole from exploiting the advantages of road transport are immeasurable and should not be lightly discounted. The fact that road construction and road transport operations and the servicing of transport equipment are all large employers of labor is an added argument in favor of the course we suggest. 103. The mission does not question the need for further large invest- ments in the railways. If the program proposed for the Third Plan is to be reduced, probably the cuts can be only marginal. We believe nevertheless that India's economic development has now reached the stage when the emphasis in new transport investment should be gradually shifted from the railways to the roads. 104. The first need is to allocate more foreign exchange for the import of motor vehicle components, so that domestic production of com- mercial vehicles can be more rapidly expanded. This has been allowed for in the Third Plan, but there is a danger that the motor vehicle program will be one of the first sectors singled out for cuts in the event of foreign exchange resources falling short of requirements. In our view, it should rank high on the list of priorities. 10$. The second need in developing road transport is to invest more in the roads. The mission considers that the provisional Third Plan allocation of Rs. 2.50 billion for road development is totally inadequate, and that it should be raised to at least Rs. 3.50 billion. The additional revenue to be expected from road taxation should be more than sufficient to finance this increase. 106. Highest priority should be given to improving the national highways and the principal state roads. Particular emphasis should be placed on the construction of missing river bridges and the reconstruction of old bridges to carry heavier loads; on the improvement of the highways leading out of the main cities, especially Calcutta; and on the construction of by-passes around towns and villages and of railway bridges to replace level crossings on busy roads. 107. A good case can be made out for reducing the levels of motor vehicle taxation, which are amongst the highest in the world. At the moment, however, the expansion of commercial road transport is held back more by lack of vehicles than by lack of demand, and there is no urgent need for a revision of taxation. It is more important that restrictions - 35 - on the issue of vehicle permits should be relaxed, that procedures for obtaining permits should be simplified and speeded up, and that the traffic and licensing policies of State Governments should be better coordinated. The present restrictive attitude of many State Governments to the licensing of private road carriers bears heavily on the small man and discourages the growth of business talent in a field which is particularly well suited to develop it. 108. Steps taken during the Second Plan to relieve congestion on the railways by diverting a proportion of bulk traffic to coastal shipping have proved singularly unsuccessful. In fact, the value of coastal cargoes is now smaller than it was five years ago because part of the traffic in salt has been diverted from sea to rail. The languishing state of coastal shipping is to be explained by the unenterprising policies of the shipping companies, which are protected against foreign competition, by the high cost of port operations, especially at Calcutta, and by the unbalanced nature of the trade, which moves predominantly from east to west. 109. The mission sees little prospect in these circumstances of a rapid revival of coastal shipping, but it believes that this should be encouraged as a long-term measure. The main need is for smaller vessels of up to 10 foot draft which can ply between minor ports, as they do, for instance, in the Mediterranean. Positive incentives might be offered by the Government to encourage this trade. Better arrangements for dredging of minor ports would be beneficial to Indian development. 110. The other major problem of trensport development during the Third Plan is the ports. Port capacity appears to be more or less adequate to cope with present traffic, except for the problem of access to Calcutta, and the expansion schemes now under way should take care of Third Plan requirements. No major growth is to be expected in the volume of dry cargo imports or in coastal traffic in bulk comiodities, at any rate so long as foodgrain imports are no greater in the Third Plan than in the Second. The need for the expansion of physical capacity arises mainly in connection with iron ore exports and trade in petroleum, and capacity for handling larger ore exports is already being developed at Vishakhapatnam, Madras and various minor ports. 111. The mission has reservations about the need for some of the new port investments proposed, particularly in the case of Bombay, where the construction of a new passenger berth at Ballard Pier, heavy expenditures on dredging and the scheme for combining Victoria and Alexandria Docks hardly appear to be of the first order of essentiality. We also have some doubts about the desirability of developing so many different ports for the export of iron ore. On the other hand, there is a prima facie case for developing a new major port at Mangalore on the west coast to handle - 36 - iron ore exports and general cargo, and we believe that this merits further expert study before final decisions are taken on the port investment pro- gram for the Third Plan. 112. The most critical transport problem of all is the progressive silting up of the River Hooghly, which threatens to strangle the Port of Calcutta. Preliminary studies indicate that it would be feasible to develop a satellite port further downstream at Haldia for handling coal, ore and foodgrains and for lightening and topping up vessels entering and leaving Calcutta. The present intention is that work at the new port should be started during the Third Plan, but it would not be completed until well into the Fourth Plan. The mission considers this scheme so important that it should be speeded up if possible, so that the port can be in partial operation by the end of the Third Plan. Whatever solution eventually commends itself, the whole question is one that calls for prompt and energetic action based upon the best technical advice available. The Steel Industry 113. Abundant resources of high-grade iron ore in close proximity to coal deposits offer India great natural advantages for the manufacture of iron gnd steel, and it is regrettable that steps were not taken earlier to develop the industry on a larger scale. The development that has taken place during the Second Plan has been spectacular, but no country can quadruple its steel-making capacity from l million tons of crude steel to 6 million tons in the short space of Pive years without running into difficulties of organization and management. In India's case these difficulties have been aggravated by a failure on the part of the Government to realize fully, and in time, the complexity of the problems involved in operating and maintaining plants of this description. It was assumed in the Second Plan that the three new million-ton government plants would be running smoothly and near to full capacity in 1960/61, which was the year when construction was due to be completed. It now looks as if it will be another two or three years at least before full production can be reached and maintained* 114. This is not particularly surprising. Even a country with a highly developed steel industry would have difficulty in manning simul- taneously three new million-ton plants. Indian workers and junior techni- cians have shown themselves remarkably quick in acquiring fresh knowledge and aptitudes, and extensive programs have been arranged abroad to train personnel for jobs in the plants. But the supply of Indian managers, senior technicians and supervisors with experience of steel operations is in the nature of things extremely limited, since there have previously been only two major steel producers in the country, and even these have depended to an important extent on foreign personnel, although both plants have been in operation for several decades. The government plants have recruited some of their staff from the private plants, but the cream of - 37 - experience has had to be spread extremely thin - a good deal too thin for comfort - and there are still many senior posts for which no qualified Indians are available, Nor can they be expected to be available for another five or ten years at least, for time alone can qualify them. 115. Arrangements are now being made with the countries which have helped in building the plants (Germany, the Soviet Union and the United Kingdom) for experienced steel men to be loaned for varying periods to fill a limited number of key positions on the operating side. The most important needs of the Russian and British plants appear to have been taken care of for the time being; the arrangements for staffing the German plant have still to be worked out. The mission is convinced that foreign personnel will have to be retained in responsible positions for quite a long time if the plants are to be operated efficiently, and if full value is to be obtained from the huge sums invested. We do not question the importance of Indians taking over just as soon as they are qualified and we have no doubts about their capacity to acquire in time all the requisite skills and experience. But it would be a mistake to try to rush this process out of misplaced considerations of national prestige. Fortunately, the Government now recognizes the need for the continued employment of foreign personnel and is concerned only to devise mutually satisfactory terms for their recruitment. This will not be easy in view of the low salaries paid to the Indians employed and the reluctance of the Government to pay much higher salaries to foreigners. 116. The present organization of the publicly owned steel industry is felt to be unsatisfactory by many of those responsible for trying to make it work. It certainly satisfies few of the criteria that have been found elsewhere to be applicable to the efficient operation of public enterprises, and the mission believes that it ought promptly to be re-examined. There is now a three-tier structure, with the Ministry on the top in New Delhi, the Board of the Hindustan Steel Company in between, and awkwardly located at Ranchi, and the plant managements at the bottom, at Durgapur, Rourkela and Bhilai. Lines of responsibility are blurred. Those responsible for the technical aspects of operations feel that their viewpoint is either unheard or misunderstood by those responsible for administrative decisions, e.g., the hiring and emoluments of key personnel. Much time is spent in communication. There seems to be insufficient delegation of authority down the line.. The individual plants have few incentives to efficiency, particularly as they are not responsible for selling their products. Little attention has been given to costs and selling prices. Indeed, the accounting system so far applied is incapable of producing cost data, being simply an adaptation of accounting practices used in government departments, such as the post office, and totally unrelated to the requirements of steel manufacture. The problems involved in moulding thousands of wage and salaried employees into a loyal, orderly and effective work force have hardly been recognized, much less tackled at the professional level. In short, the whole range of problems generally subsumed under the heading of "management" will have to be dealt with very - 38 - much more effectively before the publicly-ovned steel plants can hope to play the role in India's development that the country has been led to expect from so much investment. 117. Sorting out the operational problems of the existing steel plants, public and private, is a more important task for the Third Plan than the creation of additional capacity in the industry. It is essential that attention should not be diverted from it by the schemes for the expansion of the government plants. The plants were, however, designed for larger capacities and some of the foundation work and other facilities for the extensions have already been built. There is, in addition, something to be said for continuous utilization of the construction forces that have already been assembled and broken in. Thus the balance of advantage seems to lie in favor of going ahead with the expansions, though it is essential that their phasing should be geared to the availability of suitable teams of technical and managerial personnel to operate and maintain the new capacity. 118. The expansion of the three government plants would raise steel-making capacity to a little under 6" million tons in terms of finished steel. Doubts have been expressed as to whether the demand for steel will be sufficient to justify expansion of capacity above the level of 412 million tons of finished steel which will be reached on completion of the Second Plan projects. It is difficult to be sure about this because no one knows what the present level of demand for steel is. Even the figure for actual consumption is uncertain. If, as we believe, consumption is running at around 3 million tons of finished steel a year, and assuming that there is an unsatisfied demand for at least a other half million tons and probably more, capacity for the production of 61 million tons of finished steel by the end of the Third Plan would not appear excessive, especially when it is unlikely that full capacity production will be achieved within this period. 119. The case for the construction of a fourth steel plant in the public sector is much more debatable and must rest in the last resort on the arrangements made for running it when it is completed. India will certainly not be able to spare from her own resources the managerial and technical skills required without detriment to the operations of the other steel plants* The shortcomings in the organization of the existing govern- ment plants anyhow suggest that special arrangements might with advantage be made to secure foreign management for the fourth plant. Nor do we feel that the case for having the plant in the public sector can be established until alternative possibilities of obtaining a further expansion of pro- duction in the private sector have been thoroughly explored. This does not yet appear to have been done. - 39 - 120. Concentration on the shortcomings of the steel industry should not be allowed to obscure the magnitude of India's achievement in quadrupling its steel-making capacity during the Second Plan. By any standards, this is something of which the country can be proud, and it marks a decisive step forward in the development of the economy as a whole. All large new industrial undertakings must be expected to undergo teething troubles. Those now being experienced by the steel industry are more conspicuous than most because of the wide publicity given to them, and because the interests of several different foreign countries are involved. They may take longer, and cost more, to overcome than similar difficulties in more developed countries, but the mission has no doubt that the steel expansion program will eventually pay off. - 40 - CHAPTER 5. GE1ERAL INDUSTRIAL PROBLEMS Management and Technical Skills 121. Scarcity of experienced managers, technicians and supervisors is one of the factors most inhibiting to th growth of Indian industry. Full utilization of capacity in the steel industry has been delayed on this account, and we anticipate similar difficulties in the case of other industries which are being newly developed or rapidly expanding. The problem is common to private and public enterprises. If it is more acute in the latter case, it is because many of the largest and most complex industrial units are being established in the public sector and because the Government refuses to pay high enough salaries to attract the best talent available. 122. The issue is not whether Indians are capable of acquiring the necessary skills. Of course they are. In the long-established enterprises such as the Indian Railways the quality of top management is first-rate by any standards, and there are senior engineers and other technicians who can compare with any in the world. One Indian engineer employed at the Chittaranjan locomotive works has recently patented a design for a special type of diesel hydraulic transmission which will be developed in collabora- tion with a large European manufacturer. Likewise, in a number of the factories in the public sector which were completed in the First Plan the mission found that operations were being conducted in a most efficient and businesslike fashion. The mission was also greatly impressed by the managers of many of the private plants visited - some of the automobile factories, for example, cement plants, textile mills and engineering works. 123. On the other hand, as already pointed out, the position in the steel industry is extremely disturbing. The supply of experienced steel men in India is inevitably largely confined to those who have been employed in two or three private plants, and the quadrupling of steel capacity during the Second Plan has resulted in a demand for special skills and experience which cannot be met out of India's own resources for years to come. At present many of the senior posts in the public steel plants are filled by men who do not have the necessary qualifications, and the same is true of some of the other public enterprises. The mission got the impression that the people concerned often failed to appreciate the difficulties of the jobs they were being called upon to assume and were not making proper use of their foreign technical advisers. We were also concerned at the apparent neglect of problens of labor-management relations which are of particular importance in a new enterprise. 124. There is growing recognition in India that the supply of top admini- strators and skilled technicians is one of the most acute bottlenecks in the program of industrialization, and that extensive use will have to be made of foreign technical assistance in carrying the program through. The problem will be accentuated with the construction of new engineering plants, fertilizer factories and oil refineries in the public sector. Tentative estimates suggest that the country as a whole will require an additional 50,000 degree engineers and 90,000 diploma engineers during the Third Plan, The requirements of supervisors at the foreman level and above will clearly be substantial. The new public plants being put up during the Third Plan might require as many as 5,000 such personnel. 125. The supply of skilled workers is much lessof a problem. Most of the new public enterprises have good training schemes, and the general quality of the intake appears to be extremely high. The mission's main doubt in this field is whether there will be enough good maintenance men to keep the plants in running order. Maintenance is the point where the organization of large new industrial undertakings is most likely to slip up, and where the consequences of failure can be most costly. Costs and Productivity 126. Almost all industrial plants in India have more workers than they need, and very many more than a comparable plant operating in countries where there is no problem of surplus labor. As a result labor costs per unit of output are usually much higher than the level of wage rates would suggest. In fact, some old-established industries in India maintain that their labor costs are hi-her than those of their competitors in other countries. This may well be true, for example, in the cotton textile industry where product- ivity is surely low. It may also be true in jute manufacturing where it is claimed that the industry could be run with half its present labor force. Again, the numbers employed in the existing private steel plants and in the Sindri fertilizer plant are more than twice as large as should be necessary to run plants of this kind. 127. A broad distinction can be drawn between the older industries and the newer ones. In the former surplus labor has long been accepted as a fact of life, there is a deep-seated horror of retrenchment, and the whole concept of relating wages to output is alien to the thinking of workers and management alike. Management is usually a family affair, promotion at lower levels goes by seniority rather than merit, and there is strong opposition to the idea of formal management training. Working conditions in these industries are frequently bad, wage rates are low, plant layout is inefficient and much of the equipment is out of date. 128. By contrast, conditions in some of the new plants in both public anr private sectors would be envied by many workers in the United States and Europe. The plants are excellently designed and equipped with the most up-to- date machinery, and they are operated on modern lines. Wage rates are com- paratively high and extensive amenities are provided for the workers, often including subsidized housing. Productivity in this modern sector is generally much higher than in the traditional industries. For example, in a number of factories set up by European firms the mission was told that output per worker engaged in productive operations was at least 75-80 per cent as high, - 42 - job for job, as in the European countries concerned. However, more super- visory staff and indirect labor have to be employed in an Indian factory. 129. One of the problems that Indian industry faces at this early stage of its development is a lack of common servicing facilities and ancillary undertakings which limits the scope for division of labor and necessitates a high degree of vertical organization. Automobile producers, for example, have to make for themselves many of the components and ancillaries that in other countries would be bought in. Setting up a new plant often involves creating a whole new township, and the concern has to carry on its payroll a large staff which is engaged in administrative duties not directly connected with production. 130. All this makes it extremely difficult to compare costs in Indian industry with those in other countries or to establish what the trend of productivity is. The scale of production in many of the newer industries is in any case still too small for really efficient operations. It is our general impression, however, that productivity in industry as a whole has improved substantially over the past five or ten years, and the limited statistical information available tends to support this conclusion (see Annex III). Costs and prices of a number of items have certainly been reduced in the recent past, including vehicles, diesel injection equipment, machine tools, sheet glass, machine screws and cotton textile machinery, and these reductions have in some cases been accompanied by a lowering of protective tariffs. 131. With regard to tariffs, the general view seems to be developing that, when costs are no more than, say, 25-40 per cent above the imported price of comparable products, there is reasonable hope that, as the market grows, the particular product can ultimately be produced competitively within India. There is definitely an attitude that tariffs should be a temporary phenomenon, and in most instances they are set for a specific period of time, after which a review of production costs takes place. There is always the danger, of course, that tariffs will be used to maintain in existence unecono- mic types of production. There are a number of instances such as spark plugs, caustic soda, some types of sheet glass and calcium carbide where domestic costs are far above the landed cost of imports (excluding duty). The mission feels that this is an area where constant vigilance is necessary, but we have been rather favorably impressed by the action so far taken by the Tariff Commission to reduce or eliminate duties when they are too high. Profitability of Industry 132. The incentives to invest in manufacturing in India can best be measured by the various indications of profit expectations. According to a sample survey made by the Reserve Bank, gross profits before taxation, includ- ing interest charges but excluding depreciation, averaged about 72 per cent of total net assets employed in industry in 1957, while the average for the preceding six years was about 9- per cent. These are low figures. On the other hand, dividends do not compare so unfavorably with the levels prevail- ing in other countries. In 1959/60, for example, average yields to the investor, after deduction of tax, averaged about 52 per cent. Admittedly - 43 -- the trend in yields in recent years has been downwards (in 1957/58 the average yield was 7 per cent), but it is difficult to regard the absolute level as abnormally low. The fact is that the industrial investor in India usually looks for a quick return on his money, and it is difficult to interest the public in equity investment unless fairly handsome dividends are paid. The availability of profits for reinvestment is adversely affected in these circumstances by high taxation and by statutory price controls. Studies made by the Reserve Bank indicate that, of the total gross capital formation in the larger public companies, the proportion financed from internal resources, including depreciation, averaged around 60 per cent between 1951 and 1955, fell to 37 per cent in 1956 and 28 per cent in 1957 and then rose again to 46 per cent in 1958. These figures are distinctly low by comparison with other industrial countries. 133. The idea that large profits are immoral has wide currency in political circles in India and has been encouraged by the poor reputation which the Indian businessman has gained for himself in the past and by the concentration of big business in comparatively few hands. Measures to restrict profits through taxation and price controls have accordingly become a prominent feature of the Government's industrial policy. These measures have undoubtedly been necessary up to a point, but they are in danger of being pressed to extremes which in the mission's view would have a cramping effect on the future expansion of industry. 134. The mission was particularly concerned at the extension of the price-fixing activities of the Tariff Commission. Industries which have been referred to the Tariff Commission for price enquiries in recent years include iron and steel, paper, sugar and cement. In various other industries prices have been fixed incidentally to the grant of tariff protection; examples are automobiles, dyestuffs, non-ferrous metals and electric motors. Coal prices are also strictly controlled, though this is not done by the Tariff Commission. 135. The primary purpose of the Tariff Commission's enquiries is legiti- mate enough - namely to prevent industries which are to be granted protection against imports from exploiting their monopoly position at the expense of the consumer. The trouble is that price-fixing has come increasingly to be regarded as a desirable end in itself, and the arbitrary methods employed in deciding what the limits to profits should be are liable to discourage investment. Thus prices are normally fixed on the basis of an allowance for profits ranging from 8 per cent to a maximum of 12 per cent of capital em- ployed. As a result, after dividends have been paid there is very little left for financing expansion. The mission believes it generally desirable that a larger proportion of industrial profits should be retained in future in the business. This is especially important if private industry is to expand sufficiently to utilize the industrial materials and semi-manufactures which are to be produced by the heavy industrial plants in the public sector. Government Controls 136. An inordinate amount of time and energy is spent by the management of enterprises - public as well as private, small as well as large - in negotiating their way through government regulations. Many of the main controls, including those over investment and imports, unquestionably have to be continued for the time being in view of the overall shortage of resources. On the other hand, the mission has the impression that the multi- plication of controls has been carried in recent years to quite unnecessary lengths, and that many of the existing controls do not contribute materially either to the better functioning of the economy or to the fulfillment of the Government's social objectives. The experience of other countries has shown the damage that can be done by excessive controls exercised by remote government officials over the operations of business enterprises, even though each regulation, taken by itself, can be justified in terms of public policy. One of the most harmful effects of controls in India is that they are particularly discouraging to small enterprises. The big industrialist can always, if need be, fly up to New Delhi to present his case for obtaining the license he wants. The small man is liable to become hopelessly enmeshed in the toils of petty bureaucracy. 137. The mission suggests that the chances for the success of the Third Plan in industry would be greatly improved if the Government were to insti- tute promptly at the enterprise level an objective and thorough examination of the impact of controls on the efficiency of management. There should be two objectives for such a review. The first should be to relieve management of the burden of complying with unnecessary, obsolete and trivial controls and formalities. The second should be to re-examine the case for price con- trols and the base on which prices are fixed in different industries to ascertain whether, on balance, the industry's development, and the growth of the economy generally, is being helped or hindered by the present arrange- ments. The mere announcement of the Government's determination to institute such a review should have valuable psychological effects on the progressive forces in the Indian business community. Labor Relations 138. There are those in India who are deeply concerned at the growing pressure on industrial costs arising from what they consider to be excessive wage increases. Against this, the Ministry of Labor contends that wage in- creases over the past ten or fifteen years have been outstripped by productivity, and that industrial workers have been denied their fair share of the increase in national income. Statistics prepared by the Ministry show that the average real wage per worker, including all benefits, increased by 30 per cent between 1947 and 1957, while production per man employed in in- dustry increased by 50 per cent. However, the data are not sufficiently detailed or comprehensive to enable reliable conclusions to be drawn. In some industries, such as cotton textiles, wage increases have been substan- tial. In others, such as cement, they have been comparatively modest. It is in the newer industries, where there is no basis for comparisons with the past, that the absolute levels of earnings are highest. 139. Economic development has resulted in the emergence of a new elite class consisting of employees in the newer industries and occupations where labor is by any measure enormously more productive than in the traditional occupations, especially agriculture. Already the average annual earnings of workers in the organized sector of manufacturing industry are four or five times the average per capita income of the country, a much higher ratio than that prevailing in advanced industrial countries. They are also two or three times what the unskilled agricultura. worker or construction worker would receive if he were reasonably fully employed, which generally he is not. These are very big gaps. They are bound to give rise to dis- satisfaction and unrest. 14o. The danger is that the process of collective bargaining under political democracy may have effects in India which are very different from those experienced in the countries where collective bargaining first developed as a means of fixing rates of remuneration for large numbers of workers. The organized labor movement in India is gathering strength, and its leaders, who are usually educated outsiders without any real community of interest with their members, are under strong temptation to exploit the situation to their advantage. The fact that one of the two principal organizations is affiliated to the Congress Party, while the other is under Communist control, increases the risk of social disturbance. It will take the most firm and enlightened political leadership to ensure that the benefits: of economic growth and improved productivity are not simply syphoned off by those groups in a position to organize pressure in support of their demands. Ultimately, the ability of India's newer industries to compete in overseas markets will depend to an important extent on the maintenance of a reason- able degree of wage stability. 141. The record to date has been mixed. The Government has succeeded in exercising a good deal of restraint over the wage claims made by the unions, and the system under which wage boards have been established to fix wages in a number of industries appears to have helped in holding off the more extreme demands, On the other hand, a disturbing amount of time has been lost in industrial disputes which the country can ill afford. Employment Prospects 142. Throughout Indiats planning runs the theme that employment creation ought to be one of the principal objects of investment in all sectors. At the same time there is a reluctant recognition that many of the investments recommended create a rather small amount of employment for the Cmount of capital involved. There have been various estimates of the number of employed and unemployed persons in India. Some experts with considerable experience in these matters believe that even the terms "unemployment" and "underemployment" are impossible of definition in Indian conditions. Clearly, all the people who are employed only fitfully throughout the year or working in ways that make their net productivity very close to zero cannot be moved into jobs or occupations that would be regarded as reasonably productive and remunerative by modern Indian standards. In short, the mission believes that the Planning Commission is wise to avoid holding out the prospect that Indian employment problems can - 46 - be significantly eased with the present rate of population increase and the amount of investment contemplated for the period of the Third Plan. 143. The Planning Commission hopes that additional employment for about 32 million persons in agriculture and about 102 million outside agriculture will be provided during the Third Plan as a result of invest- ments contemplated in the Plan. It hopes that an additional 1 million extra employment opportunities will be created elsewhere, that is, in village industries, on local public works for which no or little outside finance is required, and so forth. 144. The mission feels that the Plan Outline does not, however, make sufficiently clear the extent to which even these modest employment ob- jectives depend on a rapid expansion of industry in the private sector. The heavy industrial projects to be built in the public sector will provide relatively small amounts of employment. The total employment of all central government enterprises, of which there are 26 in operation, with capital investment of about Rs. 7- billion, is probably not much more than 100,000-150,000 workers. The heavy industrial program is consistent with the Plan's employment objectives only if it makes possible a very much larger amount of employment in the private sector. Conclusions 145. This brief review of industrial problems has concentrated on the points of weakness in Indian industry, not on its strength. Viewing the industrial scene as a whole, the mission considers it truly remarkable that so much progress has been made in so short a time and it finds the present climate of business highly encouraging. Moze has been done to develop new industries in the past ten years than in the previous fifty. Indian businessmen are becoming increasingly investment-minded, and there are signs of the gradual emergence of a new entrepreneurial class whose outlook is very different from that which has dominated Indian business in the past. - 47 - CHAPTER 6. SOCIAL SERVICES A Modest Program 146. Welfare expenditure as such finds a comparatively minor place in India's Five-Year Plans. Proposed public investment in social services during the Third Plan works out at an average of Rs. 1.30 billion a year or 0.9 per cent of anticipated net national output. This is a much lower proportion than in most other countries. 147. The Third Plan allocation covers education, health, housing, water supplies, family planning, the rehabilitation of displaced persons, social welfare schemes and special programs for the benefit of tribal communities, scheduled castes and other backward classes. Over and above this, some pro- vision is made for investment in social services in other programs. A number of industrial projects, for example, include the construction of new townships and special facilities for education and training. The hope is that social investment can be increased by mobilizing larger local contributions in money and kind for such tasks as the construction of village schools and community centers and improvements in rural sanitation and water supplies. But even if these contributions materialize, investment in social services will still be on a very modest scale in relation to the needs. 148. The mission does not in general advocate any increase in the financial provision for welfare programs and it believes that the only satis- factory answer to the problem in rural areas lies in greater local efforts arising out of a felt need for improvement. Government should be ready to help those who help themselves through matching grants and in other ways, but in present circumstances, when there are so many other pressing claims on re- sources, the initiative for larger expenditure has to come from below, not from above. The Problem of Calcutta 149. Urban development is a different matter, if only because it is usually impracticable to organize works in the towns on a self-help basis. Housing and sanitary conditions in many of the larger towns are appalling, water supplies are frequently inadequate, and the streets are hopelessly con- gested. The mission was particularly impressed by the extent to which the failure to solve the problems of the city of Calcutta is putting impediments in the way of economic growth in India's most rapidly expanding industrial region. 15o. Themopulation of Greater Calcutta is now believed to be at least 6 million, possibly more, as against 3i million in 1948. This includes an estimated 800,000 refugees from East Bengal. Labor is attracted to the city - 48 - from many parts of India in search of work, and a high proportion of the jobs in industry and transport are filled by workers from outside West Bengal. In the port, for example, Bengalis account for only about one sixth of the dock labor force. Calcutta has the largest student population of any city in India, and one of the most unruly. It must also far exceed all other cities in the numbers of its educated unemployed. 151. There is hardly any aspect of community development that is keeping pace with the growth of Calcutta's population or with the requirements of its hinterland. Overcrowding, degradation of housing, health hazards, primitive water supplies, lack of space for new industries, traffic bottlenecks, power shortage, a still unsolved refugee problem - all are increasing the cost of moving goods and of providing the many services that a growing industrial region demands of its metropolis. These conditions likewise nurture feelings of unrest and malaise in the population which are likely to boil over from time to time in ways that are both destructive and inimical to orderly economic development. Nor is there any alternative to Calcutta as a port, financial and administrative center and major market for the heavy and light industries that should develop, and are in fact developing, on the basis of the coal/ steel complex in West Bengal, Bihar, and adjoining areas of Madhya Pradesh and Orissa. Calcutta is also, of course, the hub of India's two principal export industries. 152. The mission got the impression that the Corporation of Calcutta has neither the power nor the financial resources to cope with the staggering problems faced in the city. The annual municipalrevenue is restricted to the paltry sum of about Rs. 85 million - a good deal less thanBontbay, which is a smaller city. The Government of India tends to regard these problems as wholly the concern of the Government of West Bengal which, in turn, is strug- gling with many other difficulties and must respond to a legislature that in- adequately represents the interests of the urban areas. The very magnitude of the challenge that Calcutta presents to the conscience and political commonsense of those in authority no doubt in part explains the inadequacy of the response. Everybody admits that more ought to be done about it. No- body is ready to do it. 153. In the missionts view, the continued neglect of Calcutta's problems is one of the most dangerous weaknesses of the Third Plan. If it is to be remedied, it is essential, first, that the Central Government should accept a direct and special financial responsibility for the improvement of con- ditions in the city and, second, that the provincial and municipal authorities should cooperate in establishing an effective body to carry through an en- larged program of municipal reconstruction and development. Sweeping powers would have to be taken by the Government to overrule vested interests and to expedite legal processes. Work on slum clearance and rehousing could proceed straight away. A scheme has in fact already been prepared for reclaiming 3 square miles of salt marshes near the city for the rehousing of 50,000 to 100,000 families. The construction of a motor expressway from Howrah to Durgapur, on which a halting start has been made, should be given high priority in the national program of road development. - 49 - 154. It is difficult to estimate how much will have to be spent to carry out a minimum program of reconstruction. The mission was given a figure of Rs. 2 billion, and we have no reason to suppose that this is an exaggeration. We might add that it is no more than the cost of one of the new steel plants. The foreign exchange component of the works would be comparatively small, the labor component high. Technical and financial assistance from abroad would nevertheless be of real value, especially in such matters as land reclamation and town planning. Education and Technical Training 155. India has entered a phase of development in which a rapid expansion in the number of her citizens who are literate and possessed of basic education becomes an essential condition of economic growth. She must also rapidly build up a corps of technically trained persons capable of manning the many professional posts in agriculture, industry and the modern service sectors. All experience of recently industrialized countries suggests that an educational system able to meet these needs is as necessary to economic growth as any other resource, perhaps more so than any other definable resource. 156. These general principles are fully accepted by those responsible for education policy in the Government of India. While there is some division of responsibility between the Ministry of Education and the Ministry of Scientific Research and Cultural Affairs, the mission feels that Indiats educational needs have been well defined and that there is a clear and con- sistent view of the necessary next steps. The State and Central Governments have been increasing facilities for education at all levels. From Rs. 1.5 billion during the First Plan the total outlay on education will have risen to approximately Rs. 2.19 billion in the Second Plan. The provisional alloca.- tion for the Third Plan is Rs. 5 billion, of which Rs. 3.70 billion will be for general education and Rs. 1.30 billion for technical education. 157. So far as numbers are concerned, the general opinion of those responsible for finding the technical staff for industry is that the educa- tional program is adequate and can be fulfilled. The only part of the program that we feel may prove seriously inadequate is the supply of agricultural graduates. The problan here is as much one of finding the students as of providing facilities for training them. There is no tendency to skimp on expenditure for technical education. India's problems in education cannot, however, be dealt with in purely quantitative terms. We heard a great deal of concern expressed in responsible quarters about the deterioration in the quality of both general and technical education. This is a matter of public debate in India, particularly with reference to university standards for liberal arts degrees. There is abundant evidence that overcrowding in the universities and the desperate strugrle of thousands of young people to ac- quire degrees of any sort that will qualify them for non-manual work have led to serious problems of discipline in the principal institutions and to a lowering of teaching standards. What would in any circumstances be a formidable task is complicated by the language issue (see Annex I). - 5o - 158. The stresses to which India's educational system is at present sub- jected must be accepted as largely unavoidable. The Government certainly recognizes them and is doing what it can to work out a solution. Time alone will show what the outcome will be. One of the most important issues is how to prevent the adoption of regional languages from lowering the quality of public administration and weakening the bonds of union. The outsider may be overly impressed with the difficulties and the dangers. On the other hand, the Indian authorities may be inclined to take too little account of tham in making plans for economic development. Family Planning 159. The Third Plan Outline is quite explicit on the subject of population limitation. Having drawn attention to the assumed decline in the birth rate in the years after 1966, it admits that this implies "widespread changes in attitudes and a high degree of success in the spread of family planning practices. There is no question that the family planning program has to be carried out as one of the key programs of the Third and Fourth Plans...... The objective of stabilizing the population must, therefore, be regarded as an essential element in the success of each of the five-year plans". In view of this statement, it may seem rather surprising that only Rs. 250 million is allocated in the Third Plan for the family planning program. The real question is whether more could be achieved at this stage through larger ex- penditure. Some believe that it could, but the Government has apparently come to the conclusion that money is not the limiting factor, and it may well be right. No one really knows. The allocation made is for the extension of the existing educational program and forthe multiplication of centers where advice can be obtained and where there are facilities for sttilization and the distribution of contraceptives. The possibility of increasing the al- location is left open for further consideration, and the mission was assured that in practice no financia4 limitations would be imposed on the program. - 51 - CHAPTER 7. FINANCE FOR THE PLAN - (A) FOREIGN EXCHANGE 160. In the preceding pages we have discussed some of the difficulties that may arise in the execution of the Third Plan on the assumption that the financial resources can be found to carry out an investment program of the character proposed. The doubts we have expressed so far have been mainly concerned, not with the proposals for investment as such, but with the pro- blems involved in making the best use of these investments in raising national output. By and large, we believe that Indiats achievements during the past five years demonstrate that she has the administrative capacity to organize and carry through an investment program of the kind set out in the Third Plan, granted the availability of, and willingness to use, substantial technical help from abroad. We turn now to the question of finance for the Plan. Foreign Exchange Requirements 161. Table 5 sets out the Government of India's forecasts of the balance of payments during the Third Plan and shows how the forecasts lead to the con- clusion that the foreign assistance required to carry out the Plan, including private foreign investment, will be of the order of Rs. 26 billion ($5.5 billion) excluding aid under PL 480, or Rs. 32 billion ($6.7 billion) includ- ing aid under PL 480. 162. Import requirements during the Third Plan, including surplus com- modity aid, are assessed at Rs. 62.7 billion, as against estimated imports of Rs. 5h billion during the Second Plan. The 16 per cent increase is wholly attributable to what the Indians call "maintenance imports" - that is to say, imports of industrial materials and components, semi-manufactures, petroleum, fertilizers, foodstuffs and small quantities of manufactured consumer goods. Imports of machinery and equipment, vehicles and steel for specific invest- ment projects in the public and private sectors are expected to be rather smaller in the Third Plan than in the Second in spite of the fact that total investment is assumed to rise from Rs. 67.5 billion to Rs. 102 billion between the two five-year periods. In other words, there is a sharp fall in the direct foreign exchange component of investment from about 30 per cent in the Second Plan to 20 per cent in the Third. The implication is that the value - 52 - of domestic production of capital equipment, including steel, will be at least doubled and possibly nearly trebled between the two Plans. 1/ Table 5. India's Balance of Payments (Rs. billion) SECOND PLAN THIRD PLAN First 4 Years Last Year Total Actual Forecast Forecast Forecast Imports, c.i.f.: Project imports 39.52 9.97 ( 20.60 19.00 Other commercial imports) ( 28.89 37.70 a/ PL 480 3.35 1.12 4.47 6.00 Total imports 27 11.09 3.96 62.70 Exports and re-exports, f.o.b. 24.28 6.46 30.74 34.50 Visible trade balance -18.59 -.7 -23.22 -28.20 Invisibles (exc. official aid) +3.59 +o.5h +4.13 +1.26 Current account balance -15.0 -4.0 -19.09 -26.91 Capital transactions (ine. -1.28 -0.20 -1.48 -5.06 errors and omissions) Deficit to be covered by aid -16.28 -4.29 -20.57 -32.00 or use of foreign exchange reserves Financed by: P.L. 480 3.35 1.12 4.47 6.oo Other foreign assistance 6.79 3.13 b/ 9.92 b/ 26.00 Net IMF drawings 0.65 -0.11 0.54 - Use of reserves 5.49 0.15 b/ 5.64 p/ - q/ Includes, in addition to normal "maintenance imports", Rs. 2 billion for imports of components and materials required for the expansion of capital goods production in India. The total may not be strictly comparable with the estimate for the Second Plan. b/ Allowing for additional aid which the mission has assumed will be negotiated during 1960/61 (see Annex VI). 163. A significant reduction in the foreign exchange component of investment is certainly to be expected as a result of the growth of import- saving production in iron and steel, transport equipment and machinery manu- 1/ This calculation depends on the assumptions made about the proportion of total investment in India accounted for by the cost of machinery and equipment, as distinguished from building and construction. If the proportion should be about 40 per cent, domestic output of machinery and equipment would have to be approximately trebled from around Rs. 7 billion in the Second Plan to Rs. 20 billion in the Third. - 53 - facture. Whether the reduction will be as large as the planners assume is a more open question. Foreign exchange costs of certain projects in the Second Plan were greatly underestimated, and while it is unlikely that the same kind of miscalculation has been made this time, there is a natural tendency for departments to keep their estimates on the low side in seeking approval for projects. Equally, any shortfall in planned domestic production (e.g. of iron and steel) will add to import requirements. On top of this there are certain contingent liabilities in respect of imported equipment which are not specifically included in the Plan. The construction of additional oil refineries and pipelines is an outstanding example (see Annex IV). For all these reasons the mission is inclined to think that more foreign exchange will be needed to carry out the Third Plan projects than allowed for in the official estimates. We are not in a position, however, to challenge these estimates in detail. 164. The projected rise in "maintenance imports", excluding surplus com- modity aid, is from an estimated Rs. 28.9 billion in the Second Plan to Rs. 35.7 billion in the Third - an increase of nearly one quarter. In addition, an allowance is made in the Third Plan for Rs. 2 billion to be spent on imports of components and semi-processed products required in con- nection with the expansion of capital goods production, but not directly related to projects in the Plan - for example, components and accessories for the manufacture of railway wagons and commercial vehicles. 165. Indian import statistics are so incomplete that it is virtually impossible to obtain a commodity breakdown of imports during the Second Plan with which to compare the Third Plan forecasts. 1/ It would appear that, of the increase of nearly Rs. 7 billion in "maintenance imports", petroleum, non-ferrous metals and fertilizers account for about one fifth. For the rest, there are smaller increases in imports of a fairly wide range of items, including particularly chemicals, artificial silk yarn, rubber and wool, but these are partly offset by large absolute savings in imports of iron and steel. Commercial imports of raw cotton are projected at about the same level as in the past two years, which is 40 per cent below the average for the first two years of the Second Plan. Imports of raw jute are assumed to be almost eliminated. Commercial food imports are forecast at around Rs. 0.70 billion a year during the Third Plan, about half of this being made up of "normal commercial imports" of foodgrains and the other half of milk products, fish, spices, fruit and nuts, including cashew nuts for re-export (see Annex VI, Table 6). Foodgrain imports, excluding PL 480, are expected to be smaller than in the Second Plan and imports of other foods somewhat larger. If purchases under PL 480 are included, foodgrain imports during the Third Plan will anount to around 20 million tons, of which 5 million tons / The absence of complete information about imports is a major weakness in the present apparatus of planning in India. The main explanation for this lies in the "note pass" system under which many government imports pass through the customs without being recorded in the monthly trade statis- tics. The mission considers it important that this system should be changed in such a 7ay as to ensure that complete data on imports are readily available to the planning authorities. are intended (somewhat unrealistically) to go into a reserve stock. Food- grain imports intended for immediate consumption will average about 3 million tons a year - roughly the same as in the Second Plan. 166. The Indian import forecasts assume the continuation of a strict import licensing policy, including a virtual ban on imports of finished con- sumer goods other than food. These austerity standards can probably be maintained in the short run. Whether they can be indefinitely prolonged is another matter which we discuss in Chapter 10 below. There are nevertheless some very big 1ifs" involved in the assumptions underlying the Third Plan estimates. 167. If, for example, there were to be any failure of the raw cotton or jute crops comparable with the past year's experience, larger provision would have to be made for imports. In any case, the allowance for raw jute imports is too small to enable the jute industry to obtain the supplies of jute cuttings from Pakistan which it needs to maintain its competitive efficiency. The forecast of steel imports appears to be based on optimistic assumptions about the expansion of steel production in India and the forecast of petroleum imports on conservative assumptions about the growth of home demand for petroleum products. Further, the mission believes that fertilizer imports will have to be further increased if full advantage is to be taken of the opportunities for increasing agricultural production (see paragraph 70 above). 168. In short, the mission has considerable doubts as to whether the official estimates of Third Plan import requirements are consistent with the projected increases in investment and national output. It is certainly very difficult to find any items in the list of maintenance imports where economies in foreign exchange could be effected without adverse repercussions on the level of economic activity. Nor can it be assumed with any confidence that important savings can be secured from lower prices of imports, except in the case of oil, where the reductions announced since the mission's visit appear to indicate the possibility of significant foreign exchange savings during the Third Plan. Ships and fertilizers are other items for which there could. be some further decline in c.i.f. prices. On the other hand, it is not clear that India will be able to finance purchases of capital equipment in the "best" supplying market to the extent that this has been possible in recent years. She may to an increasing extent be forced to sacrifice price advantage in order to obtain finance. In any case, a large part of India's imports consist of capital equipment manufactured to order, the pricing of which is notoriously sensitive to upward adjustments in costs in the advanced industrial countries. The mission at any rate knows of no reason to suppose that a general downward adjustment of prices of such products is a likely prospect. Export Earnings 169. The prospects for exports are analyzed in detail in Annex VI. Actual export earnings in 1959/60 are provisionally valued at Rs. 6.23 billion; the Government's forecast for 1965/66 is Rs. 7.37 billion. Total earnings during the Plan have been assessed at Rs. 34.5 billion, which would be an increase of Rs. 31-4 billion (about 12 per cent) as compared with the likely outcome of the Second Plan. The mission feels, however, that this - 55 - estimate is rather conservative. The Indian forecasts for tea and jute exports are both on the cautious side, and the scope for developing some of the newer exports may well have been underestimated. The possible margin of error, however, is not likely to be anything like as large as in the case of imports unless there is a major change in world trading conditions. A prolonged recession in the West would, of course, alter the picture. 170. Three traditional exports - tea, jute manufactures and cotton textiles - still account for nearly half of India's export earnings, but they are responsible for only one fifth of the projected increase between 1959/60 and 1965/66. The most dramatic expansion forecast for the Third Plan is in exports of iron ore, which are expected to contribute almost one third of the increase. Much will depend on how quickly India can develop the new mines, railways and port facilities required. Larger iron ore exports might be possible during the Third Plan if the supplies can be made available. In the long run, engineering and electrical goods, transport equipment and other products of the metal-using industries constitute one of the most promising fields for export expansion. Exports of these items are still very small (about Rs. 70 million in 1959/60), but the aim is that they should be more than doubled over the next six years. If this is done, their contribution to the increase in earnings during the Third Plan will be greater than that expected from any one of the three major traditional exports. 171. In fact, it is quite easy to imagine circumstances in which some of these newer exports could grow even more rapidly. They are, by their nature, subject to technical and market conditions fundamentally different from those affecting tea, jute goods or textiles. They have comparatively high unit values. If a product "catches on" in a market, particularly a large market, amounts may be sold rather quickly which, given the small base from which value comparisons begin, make ordinary percentage growth estimates irrelevant. If India, for instance, could replace more distant suppliers for only three or four important kinds of machinery (say, sugar mill machinery, textile machinery of various kinds or general purpose machine tools) in markets of South East Asia and the Persian Gulf, or could break into the United States market for iron castings - all of which were mentioned to the mission by industrialists or officials as serious possibilities - the present estimates for exports of products in this category would begin quickly to look very small indeed. 172. A conflict inevitably arises in a rapidly expanding economy between export demand and home demand. Production of some basic commodities for which India could find markets abroad is still too small to satisfy what are considered to be essential home requirements. Obvious examples are coal, steel and vegetable oils. At the same time, in the newer manufacturing industries where production is still on a small scale, and there is strong demand at home, costs and prices are often too high to compete in foreign markets; in any case, the manufacturer has little incentive to seek out markets abroad when he has an easy sale at home. Various types of engineering goods and consumer durables fall into this category - bicycles, for example. Experience during the Second Plan does not supoort the conclusion that high consumer demand has discouraged exports generally. Many consumer goods indus- - 56 - tries, notably textiles, have had insufficient orders to keep all their capacity fully employed. There may, however, be a case for selective fiscal measures or other devices to push exports of specific goods at the expense of home consumption, 173. The development of new exports calls for special promotional efforts on the part of the Government, manufacturers and traders. It takes a long time to seek out and build up markets, to make the necessary shipping arrangements and to establish a reputation for quality and reliability. A growing realization of the importance of exports has led the Indian Govern- ment in the past few years to undertake a broad and many-sided export promo- tion program (see Annex VI). The mission was agreeably surprised to find how export-conscious some of the country's leading industrialists have become. There are many obstacles to export promotion which have still to be removed, not least in the field of government policy (see Annex VI), but the climate is very much more favorable now than it was two or three years ago. 174. The Government itself, through the State Trading Corporation, has played a major role in opening up new markets for exports. The Corporation has been widely criticized for interfering with normal channels of private trade (e.g. in iron ore and manganese ore) and for wasting public money. Whatever justification there may be for these criticisms in particular in- stances, the Corporation has been notably successful in negotiating agree- ments for increased trade with Japan, the United Arab Republic, Yugoslavia, the Soviet Union and other countries in Eastern Europe. The agreements with Japan are in a category by themselves in that they were concluded not with the Japanese Government, but with the Japanese steel industry, and are concerned with the supply of a single commodity, namely iron ore. The agreements with the other countries mentioned are on a government-to- government basis and provide for the bilateral balancing of trade and payments. 175. The Indian Government as a rule prefers to conduct its trade on a multilateral basis, but in its dealings with state trading countries in the Soviet Bloc it has found it advantageous to make some concessions to the methods employed by its trading partners. Initially, these countries' exports to India greatly exceeded their purchases of Indian goods, and it was India who insisted on the need to secure a better balance. The agreements have resulted not only in a rapid expansion, but also in a diversification of India's exports to the countries concerned. Exports under the agreements still consist mainly of such traditional items as tea, jute manufactures, cashew nuts, spices, mica, iron ore, hides and skins. However, they also include footwear, woollean goods, ferro-alloys and engineering products, and the Indian Government appears to have been having some success in persuading Soviet Bloc countries to take more manufactured consumer goods, possibly including air conditioners and refrigerators. Assurances obtained under bilateral agreements can be of considerable value in building up new export industries, as has been shown in the case of footwear. Indian officials admit that trade with the Soviet Bloc has in a few instances resulted in diversion of supplies from other markets (e.g. raw wool and goat skins), but they claim that these difficulties have usually been overcome either by an increase in domestic production or by the country concerned agreeing to reduce its purchases. - 57 - 176. Growth of trade with the bilateral account countries in Eastern Europe is expected to account for between one third and one half of the ex- pansion in total exports over the next five years. Exports to these countries are expected to reach about Rs. 0.65 billion in 1960, and the aim is to raise them to at least Rs. 1 billion a year by the end of the Third Plan. Trade with the Soviet Bloc would then account for between one seventh and one eighth of India's exports, as against one tenth at present. 177. If this shift in the geographic pattern of India's export trade occurs, it will not be for lack of trying on the part of the Indian Govern- ment to expand sales to makets in the sterling area, Western Europe and the United States towards which India's trade has been traditionally oriented (Statistical Appendix, Table 32). There are two main reasons why India finds it more difficult to increase exports to these markets than to less developed areas. First, the quality and prices of Indian products frequently fail to match the more exacting standards demanded by European and American customers. This is particularly true of the new manufacturing exports. Second, the growth of Indian exports to industrial countries in the West is hampered by high tariffs and restrictive quotas designed to protect local industries against competition from "low-cost" imports. 178. We shall have more to say on both subjects later in this report. It should be said here, however, that in our assessment of the outlook for India's exports over the next five years we have not assumed any major departure from present economic policies on the part either of India or of other countries. Taking a longer view, there are measures that India could take, and in our opinion will have to take, to push exports at the expense of increases in home consumption. There are also measures which the industrialized countries could take, and in our opinion ought to take, to make it easier for India to sell her exports abroad. If these measures were taken promptly, we would not rule out the possibility of exports reaching, say, Rs. 8 billion by 1965/66, in place of the Rs. 7.37 billion forecast. On the other hand, it seems to us only realistic to recognize that the obstacles to prompt action on either side are considerable, and probably surmountable only by major decisions at the political level. The Balance of Trade and Payments 179. Imports of Rs. 62.7 billion during the Third Plan and exports of Rs. 34.5 billion would leave a trade gap of over Rs, 28 billion for the five- year period as a whole. No useful purpose would be served by trying to sug- gest detailed revisions to the Indian forecasts. It is sufficient to say that, in the mission's view, both import requirements and export earnings have probably been somewhat underestimated, and that the possible margin of underestimation appears to be greater for imports than for exports. 180. In the Second Plan net invisible earnings contributed over Rs. 4 billion towards covering the visible trade deficit. Their contribution in the Third Plan will be much smaller; it is officially estimated at only Rs. 1.26 billion. The main reason for this decline is an increase in interest - 58 - payments on external debt coupled with a reduction in interest earned on India's sterling balances, which are now less than one quarter of what they were at the beginning of the Second Plan. Receipts of private donations from abroad are expected to diminish in line with the growing tendency for Indians living abroad to return home (e.g. from Africa and South East Asia). The official estimates assumo a substantial increase in net earnings from tourism, but only a very small improvement in the balance on shipping account. The mission considers that the first assumption may be rather optimistic and the second pessimistic (in view of the considerable sums earmarked for building up India's merchant shipping fleet, as indicated in Annex V). However, we see no reason to dispute the estimate for invisibles as a whole. 181. We are left therefore with a prospective deficit on current account of Rs. 27 billion ($5.7 billion), possibly more. To this must be added commitments for debt repayments and miscellaneous payments on capital account, which are officially estimated at around Rs. 5 billion (upwards of $ 1 billion). This includes Rs. L.2 billion for amortization payments on loans already con- tracted or expected to be contracted before the end of the Second Plan. The remaining Rs. 0.8 billion is necessarily an extremely rough estimate of net payments in respect of additional debt that might be incurred during the Third Plan, together apparently with some allowance for other capital transactions. It is not at all clear to the mission exactly what is supposed to be covered by this last item, and at best the official figure should be regarded as an approximation to the likely order of magnitude involved. Short-term capital movements obviously cannot be taken into account in a calculation of this kind, although they could have a significant effect on the overall position. Private Foreign Investment and Official Assistance 182. The mission can see no grounds for concluding that the Third Plan can be carried through with less foreign assistance than the Indian Govern- ment has indicated. On the contrary, we believe that it will require ex- ceptional efforts on the export front to keep the external deficit down to the Rs. 32 billion assumed, and the scope for covering any part of this deficit by further drawings on foreign exchange reserves is obviously very limited. The Reserve Bank's holdings of gold and foreign exchange at the end of June 1960 amounted to Rs. 2.74 billion ($576 million) - sufficient to pay for only about three months' imports. 183. The Indian estimate of the foreign exchange gap is arrived at without making any allowance for the inflow of private long-term capital. In other words, private foreign investment is treated, along with foreign assistance, as a means of covering the foreign exchange deficit, but nothing is said in the Plan about how much it might contribute. Estimates of private long-term investment are made periodically by the Reserve Bank. The latest study relates to the years 1957 and 1958, and the following table shows the estimated inflow of private foreign capital during these years, as compared with earlier periods. - 59 - Table 6. Inflow of Private Foreign Capital (Rs. million) 1954/55 Average 1956 1957 1958 Gross inflow 199 310 259 261 of which: Retained earnings 120 19? 96 98 Cash inflow 15 31 49 48 Non-cash inflow 64 85 114 115 Outflow 50 63 91 2hh Net inflow 149 247 168 17 184. More than half the gross inflow for the years 1954 to 1957, and two thirds of the outflow for 1958, are accounted for by oil companies. The re- patriation of profits by these companies in 1958 was exceptional, since earn- ings had been allowed to accumulate in India over the previous years. If oil company investments are excluded, gross inflow of private foreign capital amounted to Rs. 187 million in 1956, Rs. 86 million in 1957 and Rs. 199 million in 1958. Details for 1959 are not yet available, but the Reserve Bank expects the figures to show a marked increase. Independent evidence obtained by the mission also indicates an upward trend in private foreign investment in India during the past three years, most of it being accounted for, as in the past, by the United Kingdom and the United States. 185. The Indian balance of payments forecasts for the Third Plan include an allowance for the repatriation of capital and profits by private companies, and all fresh capital receipts in the form of cash or goods (but not retained earnings) can be regarded as a means of covering the external deficit. Ex- cluding oil, it might be reasonable to look for a contribution of at least Rs. 1 billion ($210 million) from this source during the next five years. Oil has to be considered as a case apart. At present the outlook for fresh in- vestment by the oil companies is obscure pending decisions by the Government of India on the grant of new exploratory concessions and the expansion of refinery and distribution facilities. The Plan makes no provision at present for new refineries in either the public or private sectors, apart from those already under construction. On the other hand, it includes Rs. 600 million in foreign exchange for exploration and distribution by government enterprises. Within this figure there would be room for additional private foreign invest- ment in oil to contribute towards closing the prospective gap in the balance of payments. 186. We make no attempt in this report to evaluate Indiats prospects of obtaining foreign assistance for the Third Plan. As indicated above, the amount required, excluding aid under PL 480, would be Rs. 26 billion or 21 times as much as actual disbursements of aid during the Second Plan, though - 60 - it would not represent such a large increase as corpared with the final year of the Second Plan, when foreign aid receipts will probably be around Rs. 3 billion. Part of the requirement will be met by the carry-over of aid from the Second Plan and by additional aid which has already been negotiated for the Third Plan. Taking these two sources together, it can be said that most of the PL 480 aid and rather over Rs. 4 billion of other aid are assured. The latter figure includes about Rs. 2.50 billion from the Soviet Union, Rs. 0.38 billion from other Soviet Bloc countries and Rs. 0.19 billion from Yugoslavia. The remaining Rs. 1 billion or so is made up of the unspent portions of loans and grants already extended by the I.B.R.D., the United States, Canada, Germany and Japan. - 61 - CHAPTER 8. FINANCE FOR THE PLAN - (B) INTERNAL RESOURCES Nature of the Problem 187. The amount of investment-to be financed out of domestic resources during the Third Plan is such that, if national income rises at the rate of just over 5 per cent a year, private consumption and current government expenditure have to be prevented, between them, from absorbing more than about 80 per cent of the increase. With a slower rate of income growth the restraint of conuption would have to be both absolutely and proportion- ately more severe. Any judgment as to the feasibility of raising the internal resources required to carry out the Plan hinges therefore on the view taken about the likely growth of national income. It also- hinges on the view taken about the possibilities, in a poor country, of imposing restraints on the growth of consumption. 188. As to the first question, the mission doubts whether India will succeed in achieving the full 5-6 per cent a year growth rate assumed in the Plan. But we feel that, so'long as production is not held back by shortages of imported materials, a 4-5 per cent growth rate should be attainable (see paragraph 238 below). 189. The second question is essentially a political one. India has the institutional framework needed to mobilize larger domestic savings -- a tax system which, for all its limitations, is quite elaborate and efficiently administered; an organized private capital market; a well- established-tradition of government borrowing; a public Life Insurance Corporation, as well as private insurance companies; small savings institutions, provident funds and so forth. The prospects fcr the individual categories of financial resources are reviewed in detail in this chapter, and in-Annex VII. The limitations of-an analysis of this kind should, however, be recognized. For one thing, the outcome will depend on major policy decisions (e.g. in respect of taxation) which have still to be taken by the Central and State Governments; and the mission cannot anticipate exactly what these decisions will be. For another, all forms of taxation and voluntary savings are in varying degrees inter- dependent. Measures to mobilize larger resources for the public sector through taxation and government borrowing will have an effect on the resources available for financing private inirestment. HeavieY tAxatior' of personal incomes may have adverse repercussions on voluntary savings. The amount of deficit financing in the public sector that can be absorbed without inflationary consequences will depend on the amount of additional credit extended to the private sector. 190. The mission has tried to give the proper weight to all these points in arriving at its conclusion about the feasibility of raising - 62 - internal finance for the Third Plan. In the last resort, however, as is made clear in paragraph 211 below, the conclusion rests as much on a judgment of the political factors involved as on. the analysis of financial and economic trends. Problems of Definition 191. Proposals for raising internal resources for the Third Plan are set out in detail in Annex VII. The definitions of the various sources of finance used by the Planning Commission follow the conventions of Indian budgeting, and the picture they present is apt to be misleading from the point of view of economic analysis. In particular, the Planning Commission's figures for public loans make no distinction between govern- ment securities taken up by individuals and non-banking institutions and securities absorbed by the banking system. During the first four years of the Second Plan alone the Reserve Bank plus the commercial banks (other than the State Bank) accounted for almost Rs. 2 billion of the net increase in the amount of medium and long-term government securities outstanding. The mission considers that such operations should be re- garded as deficit financing rather than public borrowing. Moreover, some Rs. 2 billion of government securities were absorbed by the State Bank during the first four years of the Plan, largely on account of special deposits with this bank in connection with the sale of PL 480 commodities. In the mission's view this amount should be treated as the counterpart of foreign aid rather than as public borrowing. 192. The treatment of PL 480 counterpart funds raises complex issues (see Annex VII). For the period of the Second Plan, the Planning Com- mission, following the budget practice, has counted PL 480 assistance as having been received only at the time when the funds have been released from the U.S. Government account for spending in India, whereas in effect the Indian Government is able to mobilize the proceeds from the sale of PL 480 commodities as soon as they accrue, and in a form which provides non-inflationary finance for public investment. Accordingly the mission in its estimates, as shown in Table 7, has counted the full counterpart of PL 480 imports among external resources for financing public expend- itures under the Second Plan. The Planning Commission's target figure for foreign assistance in the Third Plan does include the counterpart of expected PL 480 imports, except for Rs. 2 billion, which represents the value of PL 480 commodities expected to go into reserve stocks. In this case, therefore, the mission has accepted the official figure. Resources for the Public Sector 193. Using the mission's definitions, the following table shows how it is proposed to finance public expenditures under the Third Plan. These expenditures comprise Rs. 10.5 billion of current outlays in addition to investment of Rs. 62 billion. - 63 - Table 7. Financin of Public Expenditures under the Plan (Rs. billion) Second Plan Estimated Third Plan Results % of Total Proposals % of Total Total Plan expenditure 46.0 100 72.5 100 financed by: " - Foreign assistance 13.1 a/ 29 22.0 b/ 30 Use of external reserves 5.6 12 - - Total external resources =. 7 T2. 30 Balance from current revenues at existing rates of taxation -1.0 -2 3.5 5 Railways' contribution 1.5 3 3.1 c/ 4 Surpluses of other public enterprises dd.4 6 Additional taxation 10.0 22 14.9 21 Public loans (net) 3.0 6 6.5 e/ 9 Small savings 3.8 8 5.5 8 Unfunded debt and miscellaneous 2.3 5 5.1 7 Deficit financing 7.7 f/ 17 7.5 / 10 Total internal resources 27.3 59 p0.5 70 a/ Includes aid under PL 480, but excludes foreign assistance to private sector. b/ Includes aid under PL 480, except to the extent that this is to be used for building up reserve stocks of foodgrains; excludes foreign assistance to private sector and aid required for repayment of external obligations. c/ Includes an allowance for increases in rates. / Included in the balance from current revenues. 2/ The Planning Commission's estimate for public loans in the Third Plan is Rs. 8.5 billion. However, this includes absorption of government securities by the banking'system3 which the mission treats as deficit financing. We have assumed that the amount of such absorption during the Third Plan might be of the order of Rs. 2 billion. We have accordingly deducted this amount from the estimate for public loans and added it to the figure for deficit financing. f/ Excluding the element of deficit financing matched by the use of external reserves. This treatment assumes that foreign exchange reserves have been used entirely to finance imports for the public sector. 194. In the Second Plan the forecast which in the event proved widest of the mark was that for the revenue surplus. The main reason was that increases in expenditure on defense, civil administration and debt service considerably exceeded expectations. This time the revenue surplus has been more cautiously estimated. In particular, reasonable allowances appear to have been made for increases in major items of expenditure such - 64 - as the pay of government employees, defense outlays, interest payments and the maintenance of social services. The official forecast of revenue is, of course, based on the assumption that national income will rise by 5-6 per cent a year. The slightly slower rate of growth assumed by the mission would not necessarily be inconsistent with the forecast, but it would reduce the chance of the forecast being exceeded. 195. Considerable reliance is being placed in the Third Plan, as in the Second, on additional taxation. The incidence of taxation in India is ex- tremely uneven. Whereas the marginal rates of income tax (including supertax) applicable to individuals with large incomes - say, for purposes of illustra- tion, those above Rs. 48,000 ($10,000) a year - are amongst the highest in the world, the middle income groups - say, those with annual incomes ranging between Rs. 3,600 (750) and Rs. 36,000 ($7,500) - get off comparatively lightly. Taxes fall heavily on corporations, particularly foreign concerns, but many rich merchants and landowners succeed in evading tax altogether. The rural community as a whole is much more lightly taxed than the urban. 196. Total tax revenues at present account for about 8)- per cent of the national income, and the additional taxation proposed would raise the propor- tion to 11 per cent by the end of the Third Plan. In the mission's view this should be regarded as a minimum target, and we believe that it can be achieved, indeed exceeded, without imposing intolerable hardships on those least able to bear them. Indirect taxes on consumption, particularly on semi-luxuries such as bicycles, will inevitably have to be raised further. We do not advocate further increases in corporation tax or in supertax on individuals. There may indeed be a case for selective remissions in these taxes on the grounds that this will leave companies with more money to reinvest, offer greater incentives to effort and risk-taking and reduce the amount of tax evasion. Property taxes on the other hand could be increased, especially land taxation. This will be unpopular with well-to-do landowners, who carry great weight in the State legislatures, but all tax increases have to be unpopular with someone. The Government is also considering higher taxation of the middle income groups, including the better paid wage-earners who are doing very well out of development. 197. In principle, it is highly desirable that the railways and other public enterprises should be run at a profit and that the profits should be reinvested in the economy. Potentially, this is one of the most important sources of savings in India, because of the rapid extension of the public sector in industry. The railways, as a going concern, reached their target in the Second Plan and should be able to do so again in the Third so long as the Government faces up to the need for increases in freight rates for the bulk commodities which constitute a growing proportion of railway traffic; passenger fares will also have to be increased again. As far as the target of Rs. 4.4 billion for other enterprises is concerned, the principal contributions are expected from the steel plants, fertilizer plants and electricity undertakings, with the remainder coming from government oil refineries, road transport concerns and miscellaneous sources. The mission expects that it will take longer and cost more to develop production of steel and fertilizers than the estimates have allowed for. Nor would it be surprising if the operations of the government oil refineries were less profitable in their early stages than has been assumed. On the other hand, we believe that there is considerable scope for raising - 65 - electricity charges, and if this is done, it should be possible to obtain much bigger surpluses from the State Electricity Boards than have been assumed in the Plan Outline. The Central Government favors higher electricity rates, but the decision rests with the States, and they have for the most part displayed extreme reluctance to raise rates, partly out of the mistaken belief that low rates are necessary to attract new industries. A strong lead from the Center in this matter will be essential if the target of Rs. 4h4 billion is to be achieved. 198. So far as public loans are concerned, the miscalculation in the Second Plan lay in assuming that the net increase under this head would represent a corresponding withdrawal of purchasing power from the general public. In fact, as already noted, less than half the resources mobilized in this way will come from individuals and non-banking institutions. Similarly in the Third Plan we assume that a substantial proportion of any increase in the issue of government bonds would be taken up by the banking system. We have accordingly scaled down the Planning Commissionts target of Rs. 8.5 billion for public loans by a notional amount of Rs. 2 billion (see Table 7). This leaves a target of Rs. 6.5 billion for non-inflatimary borrowing from outside the banking system. In our view this is the maximum that can reasonably be expected from such borrowing. It should be added that the target is more imposing than it looks, since redemptions of existing loans falling due in the next five years are exceptionally heavy. Borrowings on a gross basis will have to be almost double the net figure. 199. The Third Plan target for small savings calls for a 45 per cent increase as compared with the collections expected during the Second Plan. Though ambitious, this is not an unrealistic estimate. The organized savings movement is still heavily concentrated in urban areas, and almost three quarters of the small savings in India come from five states - the former state of Bombay, West Bengal, Uttar Pradesh, Bihar and Punjab - which between them contain about half of India's population. Bombay alone has accounted for almost 30 per cent of the small savings total, having raised its collections from Rs. 0.16 billion in 1956/57 to Rs. 0.26 billion last year. The mission was impressed by the account given by the Bombay State Government of the various measures taken to achieve this result, and it believes that the adoption of similar measures in other States would produce good results. Since 1957 State Governments have been allowed to retain two thirds of the net receipts from small savings, and this incentive appears to have given added impetus to the movement. 200. The item "unfunded debt and miscellaneous" embraces receipts from provident funds, betterment levies and the steel equalization fund, together with a large number of miscellaneous debit and credit items such as payments and recoveries of loans and advances to local bodies, loans to foreign governments, profits or losses incurred in state trading in foodgrains and so forth. The contribution expected from provident funds (Rse 2,30 billion) appears realistic in the light of recent trends. But the estimates for betterment levies (Rs. 0.75 billion) and the steel equalization fund (Rs. 1.60 billion) both look distinctly optimistic (see Annex VII). 201. The residual gap to be covered by deficit financing is assessed in the Plan Outline at Rs. 5.5 billion. We have adjusted this figure to - 66 - Rs. 7.5 billion to take account of the likelihood that at least Rs. 2 billion of public loans will be placed with the banking system. The danger of exces- sive money creation is fully recognized in the Plan Uutline, and great emphasis is rightly placed on the need for price stability. The measure of deficit financing proposed is considered by the Planning Commission to be consistent with stable prices so long as national income grows in line with expectations; it allows for a simultaneous expansion of bank credit to the private sector. It is obviously impossible to predict in advance what the "tolerable" level of deficit financing will turn out to be. The mission considers nevertheless that the amount suggested for the Third Plan is not prima facie excessive, and we believe that the economy should be able to absorb the resulting increase in money supply without severe inflationary strains, so long as foreign ex- change resources are adequate to provide the imports needed for the continued groith of output. Resourcss for the Private Sector 202. Total net investment in the private sector during the Third Plan is estimated at Rs. 42 billion, including Rs. 2 billion to be financed from funds transferred from the public sector. Included in the total is a notional allowance of Rs. 6 billion for inventory accumulation. Fixed investment in organized industry and mining, excluding modernization and replacements, is estimated at Rs. 10.5 billion, and it is envisaged that a further Rs. 2.5 billion ill be privately invested in power and transport. It is hoped that private foreign investment and loans from foreign governments and international institutions will between them contribute resources to the private sector to the extent of Rs. 3 billion, and this amount has been deducted from the total foreign assistance assumed in arriving at a figure of external sources of finance for the public sector. 203. Very little is said in the Plan Outline about how the rest of private investment is to be financed. Agriculture and small-scale industry will receive some financial assistance from the Government and the Reserve Bank, but in the main they are expected to look after themselves. Organized industry and mining financed an estimated 40 per cent of its total investment out of retained earnings during the Second Plan, and a similar pattern is apparently envisaged in the Third Plan, with the remaining 60 per cent provided, by new issues, government loans and borrowings from the banks and other sources. 204. Private industry's chances of raising the money it needs for expansion will depend essentially on the general state of the economy and on the overall availability of foreign exchange and domestic savings. Inevitably, the public and private sectors will be competing with each other at the margin for limited funds, and in the last resort it is the Government which will have to decide how the balance is struck. Experience of the Second Plan has not confirmed the fears expressed in some quarters that private investment would be made to bear the brunt of any cuts. There has been a noticeable improvement in the tone of the capital market during the past two or three years. There is no precise information about the total amounts of fresh capital raised by private industry. It appears that the amounts of new issues were slightysmaller in each of the years 1958 and 1959 than in 1957, but the response in the two latter years has generally been better. Even so, as pointed out in Chapter 5, the mission believes - 67 - that firms should be allowed to retain a larger proportion of their gross profits for financing expansion, and that modifications of present government policies with regard to taxation and price-fixing would have a healthy effect on the growth of the economy. Interest Rates 205. The Indian Government and the monetary authorities have become wedded to a policy of low and stable interest rates. The official discount rate has stood at 4 per cent since 1957; before that it was 31 per cent. In defense of the present policy it is argued that an increase in rates would add to debt charges in the budget and aggravate an already difficult fiscal problem. It is further argued that low interest rates have helped to encourage investment, and that stability of rates has been important in maintaining public confidence in government securities. Investors (including the commercial banks) are in fact protected against a substantial fall in prices of government securities. Commercial banks, including the State Bank, now own more than Rs. 6 billion of medium and long-term securities of the Central and State Governments as compared to only about Rs. 1 billion of Treasury Bills. 206. Some critics of the present policy point to what they regard as an anomolous relationship between the official discount rate in India and in, for instance, Western European countries, many of which have frequently had higher rates in recent years. It is argued that a country wishing to attract capital ought to keep its discount rate substantially above those of countries that offer possible sources of supply. In so far as this argument applies to official discount rates we regard it as misplaced. Manipulating the discount rate in Bombay would have almost no effect on capital movements between India and other countries. India does not have that kind of a capital market. There is, however, another sense in which low interest rates in general in the organized markets of India may adversely affect the counEfy's attractiveness to foreign capital. This may happen because of the influence of these quoted rates of interest on what the public authorities tend to regard as "normal" or "fair" rates of gross profit in industry. Low interest rates tend to lower the level of gross profits considered acceptable, and this may indeed adversely affect the willingness of foreigners to invest in India. To the extent that a low discount rate contributes to low rates generally in the organized markets it may thus have international effects inconsistent with the Governmentts stated policy of encouraging foreign investment. 207. Advocates of a change in interest rate policy stress the anomaly of charging a low price for capital in a country in which capital, above all, is scarce. They maintain that, while in present Indian conditions the level of interest rates is unlikely to affect greatly the total amount of investment carried out, low interest rates result in the wasteful use of capital and a serious distortion of the pattern of investment. The interest rate, according to this view, has a key role to play in guiding investment decisions and determining the most profitable uses for the limited capital available. The Government's practice of using a low interest rate of 4 per cent or 4L per cent in calculating costs and benefits of projects makes it difficult to discriminate between more and less profitable schemes; it also has an - 68 - important bearing on the charges fixed for public services, which tend to be too low (e.g. electricity tariffs and railway rates). Low interest rates give undue preference to projects with a high capital cost such as nuclear and hydro power, at the expense of projects such as conventional thermal power stations for which the capital output ratio is more favorable (see Annex IV). Further, they may lead to the neglect of opportunities for making more extensive use of labor in place of machinery in construction, though this will not necessarily be so. The disadvantages of following a convention which results in consistently underestimating the true cost of capital are particularly serious when foreign exchange is scarce, and much capital equipment has to be imported. 208. The pros and cons of higher interest rates have long been debated in India without any conclusion being reached. No one can really predict what the full ramifications of a rise in interest rates would be, and the authorities are clearly reluctant to make a change. Indeed, it is the missionts impression that fear of change rather than any strong faith in the value of low interest rates as such has been the main factor making for the continuance of the present policy. We do not profess to be able to measure the consequences that might follow from a rise in rates, but for the reasons stated in the previous paragraph we are firmly convinced that a move to a generally higher pattern of interest rates is desirable. 209. The change should in our view be gradual and not abrupt, paying due regard to the interest of those who have been encouraged to increase their holdings of government bonds. Also we do not consider that frequent variations in interest rates would be an appropriate instrument of monetary management in India. We have great confidence in the technical capacity of the management of the Reserve Bank to make the necessary adjustments with a minimum of disturbance. As an immediate step, we suggest that the rate at which the Central Government lends to State Governments, the railways and other public authorities should be raised, and that all departments and enterprises responsible for drawing up projects for invest- ment in the public sector should be instructed to use a higher rate of interest (at least 6 per cent) in calculating prospective costs and returns. A higher rate of interest might also be offered on small savings. General Conclusions 210. There is no doubt that the mobilization of internal resources on the scale required for financing the Third Plan will be a challenging task. Domestic savings failed to come up to expectations during the Second Plan, and a much larger effort is now called for. There are nevertheless grounds for confidence that the rate of saving can be very substantially increased over the next five years. The tax system in India, as it existed prior to the Second Plan, was distinctly unresponsive to increases in national income, but the new taxes introduced during the past three years (mainly indirect taxes) have yielded much more encouraging results, as can be seen from Table 5 in Annex VII. This is no doubt partly because of the increasing importance of excise duties and sales tax, as distinct from customs duties, in the make-up of indirect taxation. At the same time the extension of the industrial and urban sectors of the economy - 69 - is making it easier to mobilize savings in the form of business profits, surpluses of public enterprises and direct taxation, taxation of urban incomes presenting many fewer difficulties in Indian conditions than taxation of agricultural incomes. The same applies to indirect taxes on consumption. This shift in the structure of the economy is a factor of considerable importance in assessing the prospects for domestic savings. 211. Finally, we would point out that the Indian Government has displayed considerable political courage in facing up to the need for tax increases during the Second Plan, and if the measure of the task is fully appreciated, a similar response may be expected in future. State Governments, heavily supported as they are by grants and loans from the Center, have not been subject to quite the same compulsions, and they have generally been more hesitant about introducing unpopular tax measures, although some States have a good record in this respect. The mission was nonetheless impressed by the evident determination of many of the State ministers and officials with whom it talked to make a success of the Third Plan and to adopt appropriate fiscal measures. 212. For all these reasons the mission believes that, while there may be shortfalls under some heads, lack of rupee finance as such is unlikely to prove a major limitation on the execution of the presently proposed investment program. External finance will be a much more difficult problem, and larger domestic savings cannot be regarded as a substitute for foreign exchange resources, since the latter are wholly required for the purpose of making payments abroad. If the necessary foreign exchange can be found to carry out the Plan, we do not anticipate any insuperable difficulties in raising the internal resources required. 213. There is no point at which it can be said that so much extra revenue will be needed and no more. The present balance of the economy is obviously tilted more towards inflation than deflation. With so many demands pressing on resources the margin of safety is a narrow one, and so it will remain. Fear of inflation has restrained, and rightly restrained, the authorities from giving casual approval to schemes for putting under- employed manpower to work at such tasks as agricultural improvements, road construction and the building of schools. It is highly desirable nonethe- less that more work of this kind should be organized if additional savings can be mobilized to finance it. The larger the tax effort, the greater will be the employment that can be safely created and the more rapid will be the growth of the economy. 214. The progress of development will also, of course, depend on how successful the Government is in keeping down the costs of investment and in restraining expenditures outside the Plan. Both matters are stressed in the Plan Outline, in which a special section is devoted to the subject of economy in construction costs. Recent international developments have created new problems for India in the sphere of defense, and rising defense expenditures are obviously a potential threat to the success of the Third Plan. This, however, is a matter which lies outside the scope of our report. - 70 - CHAPTER 9. FEASIBILITY OF THE THIRD PLAN 215. The Mission is persuaded that, taken as a whole, the pattern of production and investment proposed for the Third Plan makes good sense when viewed in the perspective of a process of development stretching over twenty or thirty years. The strategy of Indian development is based on the assumption that external aid will be forthcoming on a generous scale for at least the next ten years, and in the missionfs view it may well have to be a good deal longer. If this assumption were to be invalidated, a totally different a.proach would have to be adopted to development involving either a much slower rate of growth or drastically different methods of political and economic organization or, quite possibly, both. 216. External finance is unquestionably the key to the success or failure of the Third Plan. We do not underestimate either the importance or the difficulty of mobilizing the additional domestic financial resources required, but we believe that this will be a manageable problem if the foreign exchange can be found to cover the prospective gap in the balance of payments. While administrative limitations will be a critical factor affecting the growth of production, we do not visualize them acting as a brake on investment, except in agriculture. External Conditions 217. We find it impossible to accept the view that the Third Plan could at this stage be remodelled in such a way as to greatly reduce its dependence on external support, and yet to retain its identity. The types of investment which are most dependent on foreign exchange have generally to be planned and coordinated well in advance, and it is difficult to cut back on one part of the program without disrupting others. For example, investments in transport, power, coal, iron ore and steel are closely interlinked and all take several years to organize and execute; between them, moreover, they constitute the base for the development of other manufacturing industries. To postpone investment in one sector, while going ahead in others, would throw the program out of balance and lead to waste and confusion. To hold back all along the line now would disrupt the progress of development altogether. Investment cannot be turned on and off like a tap. 218. This is not to say that there can be no "flexibility. But nothing does more to limit the scope for flexibility than the fact that much of the foreign assistance (and private foreign investment) received tends to be tied to large industrial projects for which the equipment is to be supplied by the aid-giving country. These projects get committed, even though they may not be of the highest order of priority, and the Government is then virtually - 71 - committed to other investments needed to support them (e.g. in providing additional coal, power or transport). To forego this kind of aid may mean abandoning or postponing projects which make sense within the frame- work of the investment program as a whole, assuming that the whole program can be carried out, and this the Government is understandably reluctant to do. One effect of emphasizing the project approach to aid in this narrow sense is often to strengthen the hands of particular ministers or departments and correspondingly to weaken the authority of the Ministry of Finance and the Planning Commission. An offer from abroad to construct and finance a steel plant, an atomic power station or an oil refinery is very difficult to turn down, so long as it falls within the general scope of the Plan. 219. A restricted conception of project assistance, as distinct from aid in the form of free foreign exchange that can be used to pay for maintenance imports, not only tends to add to the size of the Plan and reduce its flexibility. It also has the effect of encouraging large projects in the public sector at the expense of the expansion of private industry, whose requirements are often difficult to fit into a project framework - particularly when a large number of fairly small firms are involved. It is simpler, for example, to make one loan for coal-mining equipment to a public coal corporation than a lot of separate loans to private colliery companies. We feel that this aspect of project assist- ance has been insufficiently understood in some aid-giving countries that profess a desire to encourage private investment. 220. If cuts have to be made in the Third Plan to save foreign exchange, the mission feels that there are some programs which could bear them more easily than others. Unfortunately, many of the more obviously marginal projects are amongst those for which foreign exchange has already been committed. This is particularly true in the heavy engineering field. However, there are a number of industrial projects in both public and private sectors which could probably be postponed without grievous loss to the economy. In the public sector we question the urgency for the construction of a second shipyard, nor are we persuaded of the need for an alloy steel plant in view of the fact that provision is made in the private sector for a substantial increase in alloy steel capacity. We also have considerable doubts about the wisdom of starting a fourth steel plant during the Third Plan, at any rate unless means can be found of staffing it which do not impose an additional strain on Indiats existing resources of higher managerial and technical talent. 221. We believe that there may be room for economies in the program for development of the railways, but we urge that every effort should be made to avoid cuts in the plans for expanding production of commercial motor vehicles. At the same time we are strongly of the opinion that the road program should be increased; this would be comparatively inexpensive in terms of foreign exchange. So far as port development is concerned, some parts of the program could in our view be deferred, particularly at Bombay, but against this we consider that it may be necessary to spend more on others, notably the scheme for a new port at Haldia. On the basis of the limited information made available to the mission we should be very hesitant - 72 - about suggesting any cuts in the electric power program, although we question the advisability of going in for nuclear power at this stage. Investment in coal production, which may well turn out to be one of the most serious bottlenecks in the Plan, should likewise be pushed ahead as a matter of the greatest urgency. High priority should be given in our view to increasing the allocation of foreign exchange for fertilizer imports in the early years of the Plan. The case for purchasing more ships abroad is much less compelling and we feel that some of the purchases proposed could well be deferred. 222. The buoyancy of Indian industry during the Second Plan, and the prospect of continued expansion in future, have attracted a growing volume of private foreign investment in manufacturing industry. High taxation, which bears with special severity on foreign companies, is still an obstacle. More has to be done, too, to make living in India easier for the employees of overseas firms who set up business there. Nevertheless, active steps are being taken by the Government to encourage foreign investment (see Annex VI), and we believe that the inflow of business capital should be larger in the Third Plan than in the Second. Oil apart, it would be illusory to suppose that private foreign investment can make more than a marginal contribution to the financing of the Plan - the amounts involved are still much too small. But in qualitative terms the participation of foreign capital and technical know-how can be of invaluable help to India at this stage of her development. 223. Oil investment is another matter. Here, in marked contrast to most other sectors of the economy, the mission feels that ideological considerations have been allowed to override Indiats immediate economic interests. Much can be said on both sides about the disagreements which have arisen between Government and the oil companies. Much can also be said in support of the Government-s desire to enforce a greater moasure of competi- tion in the supply and pricing of oil. The fact rmaitas that the policy pursued over the past few years of excluding private capital from further investment in oil exploration and refining has added very considerably to the pressure on India's foreign exchange resources. A change in this policy could free substantial amounts of foreign exchange for other uses during the Third Plan by attracting additional foreign capital into the oil industry. If cuts have to be made in the program of public investment, oil distribution and refining is the obvious place to start. 224. Exports have been receiving increasing attention in India, and many of the criticisms directed at the Government's export policies two or three years ago no longer apply. Nevertheless, the mission feels that more can still be done to increase export earnings during the Third Plan if it is really accepted that this is a job of the highest priority, taking precedence., for example, over increases in home consumption or measures to safeguard domestic employment, The installation of more automatic looms in the cotto textile industry, liberalization of imports of jute cuttings from Pakistan, some relief in taxation of the tea industry, the reservation of a proportion of oilseeds production for export, higher taxes on domestic purchases of certain durable consumer goods, speedier action to develop mining and - 73 - transport of iron ore - these are examples of the kind of measures that might be taken in support of the export drive. Objection 'can be raised against each of them, but we are not convinced that they are overwhelming. 225. If India could raise export earnings to Rs. 8 billion by the end of the Third Plan, instead of Rs. 7.37 billion at present envisaged, the net addition to earnings over the five years might be as much as Rs. 2 billion ($420 million). It would be a mistake in our view to regard this as a possible contribution towards covering the Rs. 32 billion deficit because we believe that import requirements may have been underestimated by at least this amount and possibly more. On the other hand, we do not consider that the present target for exports is as high as it should be. In the long run it is essential that India should do very much better in the development of exports than present projections contemplate. 226. Measures by India to promote her exports call for a more encouraging response from the industrialized countries which between them (excluding the Soviet Bloc) accounted in 1959 for two thirds of India's total earnings from exports and re-exports. Import restrictions and high tariffs in many of these countries are a serious barrier to the entry of Indian manufactures. W'hen all possibilities are considered, it seems clear that a large part of the needed growth in India's exports during the Third Plan and thereafter must be in exports of manufactured products to the more advanced countries. Western Europe is the region where alteration of commercial policies could probably have the biggest and quickest effect on Indian exports. The mission would like to emphasize the lack of realism in policies which seek to promote exports of capital equipment to India, financed on camercial terms, while failing to tackle the underlying problem of providing India with a reliable and growing export base for her industrialization. Internal Conditions 227. Massive external assistance is clearly necessary for the realiza- tion of the investments included in the Third Plan. There remain to be considered the other conditions which must be fulfilled if the investments in the Plan are to be carried through, and if the targets for production, consumption and employment are to be achieved. 228, It goes without saying that the maintenance of a reasonable degree of internal financial stability is the first essential. If the money supply were to be too sharply increased and severe inflation resulted, there would be widespread loss of confidence in the Government and the currency, price relationships would be distorted, private savings would be discouraged, resources would be diverted into non-priority uses and the export drive would be crippled. We believe that these dangers are fully recognized by the responsible authorities. India has a long tradition of conservative finance, and there is evidence of a strong determination on the part of the Finance Minister and of the Reserve Bank to keep inflationary pressures in check. Whether they can be kept in check will depend essentially on political and social factors, and on the measure of success achieved in maintaining the growth of the economy. - 7L - 229. The targets for voluntary savings and additional taxation proposed for the Third Plan are high, but with firm political leadership they should not be unattainable. Indeed, the mission feels that they could be exceeded. One of the key issues here is the readiness of the State Governments to play their full part in making a success of the national Plan. During the Second Plan the Central Government comfortably exceeded its taxation targets, but most of the State Governments - with some notable exceptions such as Bombay and Madras - fell short of theirs. 230. More generally, any strengthening of separatist tendencies in the States or any sharpening of regional divisions would react unfavorably on the development of the economy. As it is, the Government is under strong pressure to make concessions to regional interests in such matters as the location of projects and the allocation of funds. The Plan Outline stresses the need for balanced regional development, and up to a point this is a desirable aim, But the national interest as a whole may suffer if it is pursued too far in defiance of the facts of geography and the location of natural resources. In economic development, as in war, it is usually a sound principle to reinforce success. Too much money is in danger of being invested in India in areas and in projects where the necessary conditions for success do not exist. 231. Full cooperation between the States and the Centre must be con- sidered as one essential condition of carrying through the Third Plan. The cooperation of organized labor is another. Pressures from government employees and industrial workers for increased wages and better working conditions pose a constant threat to price stability. These pressures have so far been fairly successfully resisted, and the Government has displayed a combination of tact and firmness in dealing with the situation. Nevertheless, there is evidence of deep-seated industrial unrest in India which flares up spas- modically in strike action, and for which there are np7 possible explanations. This is not surprising in view of the rapid changes which are taking place in the country and the uprooting of large numbers of people fram their traditional environment. It is none the less disquieting. 232. Many well-deserved tributes have been paid to the high quality of public administration in India and many criticisms have been made of its shortcomings. The shortcomings are most apparent in the operation of the new government enterprises, particularly in the steel industry* The tendency towards excessive control and review, "rupee pinching", undue concern for precedent, "small thinking" on the part of subordinate officials and what has been described as a "monumental failure" to delegate were criticaW examined in a report by an independent consultant published in 1957.;I The Mission has little to add to what was said in that report. Its conwents and criticisms seem to us for the most part to have been amply borne out by what has happened since, as the public sector of industry has expanded. 233. The Mission earlier stressed the need for a radical overhaul of the organization and management of the public steel plants. Unless the 1/ Paul H. Appleby, Re-examination of India's Administrative System - 75 - present weaknesses are corrected, we are afraid that the performance of the steel industry will fall well short of expectations. Similar problems will arise in connection with machinery and fertilizer plants that are to be completed during the Third Plan. Management and higher technical skills constitute in our view one of the most critical shortages facing India in its program of industrialization - a shortage even more critical, as far as the operation of industry is concemed, than the shortage of foreign exchange. Building the new plants is one thing, running them is quite another. This is essentially a problem of time and experience; quick solutions can be ruled out. If the present tempo of industrial development is to be main- tained, we believe that India will need to draw heavily on foreign personnel to fill key positions in the management of new industrial undertakings. The problem of filling these positions, whether with Indians or foreigners, will be more difficult in public enterprise than in private industry so long as the Government feels that it is unable to increase the remuneration of those employed in the public service to bring it into line with what is paid outside. 234. One of the declared objectives of the Third Plan is"to bring about a reduction of inequalities in income and wealth and a more even distribution of economic power." It has frequently been remarked that this objective is difficult to reconcile with a policy of rapid economic development. Foreign critics of Indian policy are apt to overlook the fact that the gulf between the very rich and the very poor is greater in India than in almost any developed country, and that economic power in industry, and for that matter in agriculture, is still heavily concentrated in a few hands. It is there- fore understandable that the Government should be concerned to promote greater social equality. Unfortunately, the methods chosen to bring about this result only too often have the effect of discouraging effort and enterprise on the part of the more progressive and hard-working members of the community, while leaving the root of the problem untouched. The wisdom of heavy taxa- tion of industrial profits and the scaling down of the salaries of senior public officials may fairly be questioned from this point of view. Chances of Reaching the Production Targets 235. The growth of national income during the next five years will depend first and foremost on what happens in agriculture. Changes in the pattern of output come about slowly, and it will be many years before the mass of the Indian population feel the impact of industrialization. It could be argued from this that the Third Plan gives too much emphasis to industrial investment. By the same argument India would be indefinitely condemned to a state of rural over-population and agricultural inefficiency. 236. The Plan calls for an annual increase in agricultural production of 5-6 per cent. We doubt whether this can be achieved by letting things go on as they are. A new drive has to be imparted to the agricultural expansion program. Water and fertilizers are the principal physical obstacles, the quality of agricultural administration and the inertia of the mass the principal human ones. The assurance of profitable and reasonably stable prices will be all-impoyrtant if farmers are to be persuaded to take full advantage of the opportunities for investment in water, fertilizers and other agricultural improvements. Some of the irrigation facilities that - 76 - have been created in the Second Plan are not being fully exploited. On the other hand, supplies of fertilizers are not keeping pace with demand. With better administration, adequate price incentives and the liberalization of fertilizer imports we believe that a 5-6 per cent annual inerease in output might be feasible. The conditions for achieving this, however, are not yet assured, and it may be more realistic to look for a somewhat lower rate of growth - say between 4 per cent and 5 per cent a year. 237. Chances of reaching the industrial targets for the Third Plan will depend more on the availability of "maintenance imports" than on the new capacity created during the next five years. Supplies of coal and power will be critical factors affecting the utilization of capacity in manu- facturing industry, and shortages of these things cannot be made good by imports. In the iron and steel industry, and in the new heavy engineering plants, problems of external and internal organization and management are likely to set the limits to the expansion of output. Even if foreign exchange difficulties can be surmounted, it would seem to us unduly optimistic to expect everything to turn out according to plan. No matter how well regulated the economy may be, some parts of the program are bound to get out of phase with others when development is taking place so rapidly. There will be shortages here, surpluses there. But the rapid upsurge in industrial activity in the past two years has shown what India can do* With a broader and stronger base to start from, industry can be expected to take another big step forward during the Third Plan. When allowance is made for the fact that the results of much of the private industrial investment undertaken during the Second Plan have not yet been reflected in output, we would not rule out the possibility that total industrial production will increase during the Third Plan by the 80 per cent assumed. This would represent an average annual growth rate of 124 per cent. 238. Our broad conclusion is that the growth in national income as a whole during the Third Plan is more likely to fall short of than exceed the projected rate of 5-6 per cent a year. If a figure has to be chosen, we would settle on 4-5 per cent as a reasonable estimate, or 2-3 per cent on a per capita basis. But it is right that a figure of at least 5 per cent should be retained as the target. This is a modest enough ambition for a country in India's position. 239. The success or failure of democratic planning in India will be judged as much by the appearance of the industrial landscape as by any statistics of production. Blast furnaces, cooling towers and factory chimneys have come to be regarded, and not without reason, as symbols of economic progress. People must feel that they are progressing if they are to make the effort and put up with the sacrifices which economic growth demands. Only a small minority of Indiats population is directly concerned at this stage with the business of industrial revolution. But it is this minority which will determine where the country is going. - 77 - CHAPTER 10. LONG-RANGE ECONOMIC PROSPECTS 240. In the short run, Indiats ability to meet her external debt obligations clearly depends on the receipt of fresh external assistance. Without such assistance the present pattern of growth would be disrupted. Details of outstanding external debts and projected service payments are set out in the Statistical Appendix (Tables 33-34). Total public debt re- payable in foreign exchange, including amounts undisbursed, amounted at the end of 1959 to the equivalent of approximately $2.2 billion. Annual service payments on this debt average around $200 million over the next ten years. The peak years are 1964-66, when payments average $24 million a year or the equivalent of about 13 per cent of Indiats present external receipts on current account. Various additional debts have been incurred since the end of 1959, including a $70 million railway loan from the IBRD, German credits equivalent to $60 million and a credit from the U.K. of $28 million equivalent. 241. In the long run, Indials creditworthiness will be closely related to the growthof the economy and to the progress made towards viability. Illustrative projections made by the Indian Planning Commission envisage that by 1970 or thereabouts export earnings will have risen to a level suf- ficient, together with invisible earnings, normal commercial credits and private foreign investment, to cover necessary import payments and external debt service. The calculation assumes, first, that exports can be raised during the next ten years to over 60 per cent above their present level and, second, that merchandise imports can be reduced by about 15 per cent as compared with the average assumed for the period of the Third Plan. 242. India's main future as an exporter appears at present to lie as a supplier of tea, jute goods and manufactured consumer goods to the more advanced industrial countries and as a provider of coal, iron ore, steel and metal products to countries in Africa and South East Asia. It is, of course, axiomatic that India will have to become more or less self- sufficient in food if she is to have any hope of attaining vability. A real break-through in agricultural production, such as cannot be expected in five years, but might be conceivable in ten or fifteen, could take India beyond mere self-sufficiency and provide a margin for export. The projected expansion of exports should not therefore be ruled out as totally im- practicable, though it certainly cannot be achieved without radical changes in the policies both of India and of her trading partners along the lines already discussed. 243. On the other hand, the idea that India ten years from now will be able to sustain a 50 per cent larger national income without some - 78 - increase in imports (let alone with a reduction) strikes us as inherently improbable. The conclusion reached by the Bankers' Mission which visited India in 1960 is worth quoting in this context: "The emphasis given in the program of industrial development to import saving by no means implies, however, that the import requirements of India will necessarily follow a declining trend over the next 5, 10 or 15 years. On the contrary, it is likely that, as the Indian economy moves towards progressively higher stages of development, new types of imports required to sustain this progress will outweigh the economies achieved in other areas. The greater the pressure for rapid industrialization and general economic development, the greater the likelihood that there may be a progressive racheting upward of import requirements." 244. An examination of the experience of other countries that have passed through a period of rapid industkialization reveals no case in which rapid economic growth over a period of two or more decades has been associ- ated with a decline in the volume of imports. There are some cases, notably Brazil and the USSR, in which growth has apparently occurred at a rapid rate for a period of five to ten years in spite of declining imports. In both cases there are so many special factors that clearly do not apply to India that the mission regards the evidence as providing no support for the belief that a similar evolution can be expected in India during the next five or ten years. It is worth noting, however, that in neither the Russian nor Brazilian case was the period of growth with declining imports associated with anything like the 60 per cent expansion in exports that Indian planning contemplates. Even if one could anticipate policies that might eventuate in the projected import decline, it seems to us that such policies would alost certainly be inconsistent with a substantial growth in exports and a rise in per capita consumption. 245. It would be rash to be too dogmatic on this subject. Things could happen to change the picture. For instance, if oil or non-ferrous metals were to be discovered in India in really large quantities, an entirely new prospect would open out, since between them these commodities account at present for about 15 per cent of Indiats total expenditure on imports, excluding foodgrains. Against this, it is very far from certain that India will succeed in raising production of coal, steel and capital goods to the levels assumed in the projections, which imply that by 1970/71 India will be a substantial exporter in all these fields. In our view therefore it would be prudent to assume that total imports will go on rising over the next ten or fifteen years, although the proportion of imports to national income should certainly decline. 246, The mission does not in fact believe that any specific date can be set in advance for the Indian economy to reach the proclaimed goal of self-sustained economic growth. By any definition this goal is one that has to be reached in stages, and over a fairly long period. One cannot be sure that it has been reached until long after the critical period has passed. It is not a concept that fits in easily with quantitative planning. Any prediction that self-sustained growth can be realized by the end of the Fourth Five-Year Plan, or for that matter by the end of the Fifth, should therefore be treated with considerable skepticism. The great uncertainties - 79 - surrounding the future trend of the Indian population are alone a good reason for suspending judgment, The latest Indian estimates assume that the growth rate will decline from around 2 per cent to less than lf per cent in the five years 1971-1976. Allowance is made for a continued fall in the death rate, but this is assumed to be more than offset by a decline in the birth rate from 40 per thousand at present to 33 per thousand in 1966-1971 and 27 per thousand in 1971-1976. At the moment this must be taken as an expression of hope rather than as aforecast of achievement. The mission is unaware of any objective evidence to support it. 247. A growth rate of 4 per cent in India's national income at the present time implies about $1.05 billion of additional production each year, as against annual net investment of the order of $2T-3 billion. In five years time, if a growth rate of 4-5 per cent is maintained in the interval, the annual increase of production would be around $1.30 billion, as com- pared with a projected annual rate of investment of $4-41 billion. The stated requirement of external assistance during the Third Plan, including surplus commodity aid, works out at an average of just over $1 billion a year net of debt repayment. If reference is made to the past experience of other countries, the assumed inflow of foreign capital does not seem out of line either with the scale of investment proposed or with the prospect- ive increase in national output. 248. In short, the mission believes that India has demonstrated a capacity to make good use of foreign aid, and that the continuance of aid on a generous scale during the Third Plan can be justified on economic grounds. It is of the greatestimportance that most of this aid should be extended in a form that does not add to the already heavy burden of debt repayment.
Группа Всемирного банка · Pre-2003 Economic or Sector Report
India - Third five year plan (Vol. 1 of 9)
Открыть оригинал документа
Полный текст размещён на сайте публикующей организации. lawenc.com индексирует метаданные и ведёт на официальный источник.
Полный текст
Основные сведения
Организация
Группа Всемирного банка
Тип документа
Pre-2003 Economic or Sector Report
Страна
Индия
Источник
Всемирный банк