A review of the capital market in India

Report No. EC - 1i1 This report may not be published nor may it be quoted as representing the view of the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION A REVIEW OF THE CAPITAL MARKET IN INDIA September 20, 1962 Economic Staff Prepared by: Shiva K. Govil  Currency Equivalents 1 Indian Rupee U.S. $0.21 1 U.S. Dollar = Rs. 4.762 Rs. 1 billion $210 million The fiscal year in India covers the period April-4arch. Unless otherwise indicated, the reference in the text is to fiscal years. For instance, 1961/62 refers to the period April 1961-March 1962.  A REVIEW OF THE CAPITAL MARKET IN INDIA Table of Contents Page Summary i - vi I. Economic Growth, Investment and Financing of Investment 1 II. Financial'Institutions 10 III. Savings Channelled through Financial Institutions and Other Transferred Savings 41 IV. Financing of Five Year Plans in the Public Sector 5 V. Financing of Capital Requirements in the Private Sector 61 VI. Market for Securities 78 VII. Structure of Interest Rates and Capital Yields 105 VIII. Role of the Central Bank in the Capital Market 118 IX. Concluding Remarks 127  Table of Contents (continued) Tables Included in Text Page Table 1 - National Income by Industrial Origin 1 Table 2 - Net Investment in First and Second Plans 5 Table 3 - Financing of Total Net Investment in the First Plan Period and During 1956/59 6 Table 4 - Total Assets of Financial Institutions 11 Table 5 - Savings Channelled Annually Through Main Financial Institutions 41 Table 6 - Savings Deposits of Scheduled Banks 44 Table 7 - Sources of Finance for Plan Outlays in the Public Sector (During the First and Second Plan Periods) 54 Table 8 - Third Plan - Scheme of Financing for the Public Sector 59 Table 9 - Financing of Fixed Investment in Large and Medium Scale Industries in the Private Sector 65 Table 10 - Sources and Uses of Funds of Selected Public Limited Companies 66 Table 11 - Estimates of Resources for Private Fixed Investment in Large and Medium Scale Industries in the Third Plan Period 68 Table 12 - Number and Paid-up Capital of Joint Stock Companies in Selected Years 82 Table 13 - Companies and Securities Listed on Stock Exchanges in February 1961 84 Table 14 - Growth of Listed Stock Since 1946 85 Table 15 - New Capital Issues by Non-Government Non-Financial Public Companies during 1956/60 92 Table 16 - Relative Importance of Different Types of Corporate Securities 94  Tables Included in Text (continued) Page Table 17 - Underwriting of New Issues 97 Table 18 - Holdings of Marketable Loans of Central and State Governments 100 Table 19 - Absorption of Loans by the Public Excluding Banks during the Period January 1958 - March 1961 101 Table 20 - Average Yields on Securities after Deduction of Tax 106 Table 21 - Interest Rates and Capital Yields at the End of July 1962 108 Table 22 - Loans and Advances of 14 Selected Banks by Rates of Interest at the End of 1961 109 Table 23 - Trend of Profits and Dividends in the Case of 1001 Non-Government Non-Financial Public Limited Companies 116 Table 24 - Reserve Bank of India and Cooperative Credit 124 Statistical Appendix (Tables 1 - 40)  SUNMARY 1. As a result of the development effort undertaken under the Five-Year Plans, the Indian economy has experienced significant growth over the last decade. National income in 1948/49 prices is estimated to have increased from Rs. 88.5 billion in 1950/51 to Rs. 126.9 billion in 1960/61, repre- senting an increase of about 43 per cent over the ten-year period. The average annual increase works out at somewhat less than 4 per cent. Per capita income in real terms in 1960/61 was higher than in 1950/51 by about 18 per cent. 2. According to the estimates of the Indian Planning Commission, the ratio of net investment to national income went up from a little over 5 per cent before the commencement of the First Five-Year Plan in 1951/52 to about 8.5 per cent at its end, and further to about 11 per cent at the end of the Second Five-Year Plan. The ratio was even more than 11 per cent in the first two years of the Second Plan, so that the average ratio during the Second Plan period as a whole appears to have been fairly close to 11 per cent as compared to 61 - 7 per cent over the First Plan period. In absolute terms, total net investment in current prices amounted to about Rs. 33.6 billion over the First Plan period and Rs. 67.5 billion over the Second Plan period. About h6 per cent of total net investment under the First Plan and 54 per cent of that under the Second Plan was accounted for by the public sector. 3. M4ost of the investment during the First Plan period (about 94 per cent) was financed by domestic savings. However, with the rise in the level of investment in the following years, the inflow of capital from abroad in the form of utilization of foreign exchange reserves and external assistance showed a considerable increase and accounted for about 30 per cent of total net investment under the Second Plan. Domestic savings appear to have averaged about 8 per cent of national income over the Second Plan period as compared to 6 - 6- per cent over the First Plan period. 4. The Third Five-Year Plan, which commenced in April 1961, envisages total net investment of about Rs. 104 billion over the five years 1960/61 to 1965/66. Net investment in the public sector is estimated at a minimum of Rs. 63 billion, or more than 60 per cent of the total. The ratio of net in- vestment to national income is expected to go up from about U1 per cent in 1960/61 to about 14 per cent by 1965/66. During the same period, net domes- tic savings are expected to increase from 8.5 per cent of national income to 11.5 per cent. The requirement of external assistance over the Third Plan period is placed at a total of Rs. 32 billion. 5. The money and capital markets in India reflect the stage of devel- opment reached by the country. Alongside well-functioning financial insti- tutions, there exist indigenous bankers and moneylenders who play an important role in financing agriculture, small industries and trade and constitute the so-called "unorganized sector" of the money and capital markets.  - ii - 6. With the rising tempo of economic development under the Five-Year Plans, the activities of financial institutions have recorded a marked expansion over the last decade. Important changes have been made in the organization and practices of the earlier institutions, and new institutions, including specialized institutions for the provision of long and medium- term finance to large, medium and small scale industries, have been established. 7. Among financial institutions, the commercial banks are the most important. They have an extensive network of branches and play an important role in financing industry, trade and certain other activities as well as in collecting savings. Most of the bank credit is made available in the form of short-term advances. A substantial proportion of the short-term advances to industries is, however, renewed from time to time and represents, in effect, lending for a longer period. Formal term loans, that is, loans sanctioned for more than one year continue to be of a relatively small order. 8. The largest commercial bank is the State Bank of India, the bulk of whose capital is owned by the central bank. The State Bank has established a large number of new branches in rural and semi-urban areas. It has also been extending its activities in the spheres of rural credit, credit to small scale industries, medium-term finance, etc. The other banks also have expanded significantly the network of their branches. 9. The postal savings banks and other small savings schemes have been successful in collecting substantial amounts. More than other financial institutions they have been able to penetrate into the rural areas, but the amounts collected in these areas are relatively small. 10. Life insurance in India was taken over by the government-owned Life Insurance Corporation in 1956. Apart from some decline in that year, new life insurance contracted in each year has been increasing substantially. Nevertheless, life insurance at the end of 1960 covered only a small fraction of the population (less than 2%) and the total amount of life insurance in force was no more than about 16 per cent of national income. There would, therefore, appear to be considerable scope for increasing life insurance, especially in rural areas. 11. Provident funds have become compulsory for a large number of employees in both the public and private sectors. In many cases, provident funds have also been set up voluntarily by employers. The coverage of provident funds is increasi ng steadily and they have been playing an important role in mobilizing savings. 12. The cooperative credit movement, which made very slow progress for nearly half a century after its inauguration, has been considerably strengthened and expanded over the last decade and the central bank is making available credit facilities to cooperatives at low rates of interest on a greatly increased scale. As a result, cooperative credit has recorded a marked expansion over the last few years. Its share in total borrowings of  - iii - the culti. -ators increased from about 3 per cent in 1951/52 to 10 - 12 per cent in 1 59/60, and there has been some further improvement since the] 0 Savings collected by cooperatives in rural areas are, however, relativelk small and the thrift aspect of the cooperative movement does not appear to havre been adequately emphasized. 13. The special financial institutions set up for the provision of long- and medium-term fnance to industries include the ITdustrial Finance Corpora- tion, Industrial Credit and Investment Corporation of Indias National Industrial Development Corporation, State Financial Corporations, National Small Industries Corporation and the Refinance Corporation for Industry. The last mentioned corporation provides only refinance facilities to specified banks and other financial institutions in respect of medium-term loans granted by them to small and medium-size industries, The corpora- tions have obtained the bulk of their funds from the government, World Bank, Agency for International Development of the U.S. Government and (in the case of the IFC and SFCs) through issue of bonds guaranteed by the government. 14. Savings channelled through financial institutions (inclusive of the amounts channelled through small savings certificates) have increased substantially, being of the order of Rs. 4 billion in 1960/61 as compared to about Rs. 2.3 billion in 1955/56 and about Rs, 1.1 billion in 1950/51. Correspondingly, the proportion of such savings to national income is es- timated at about 2.8 per cent for 1960/61 as compared to 2.3 per cent in 1955/56 and 1.1 per cent in 1950/51. 15. A little more than two-fifths of the total estimated amount of savings channelled through financial institutions over the three years ending March 1961 represents contractual savings in the form of net additions to life insurance reserves, provident funds, etc. 16. Total savings channelled through financial institutions in 1960/61 were equivalent to about one-fourth of the total estimated net investment in the economy in that year. 17. By far the greater part of the annual savings accruing at financial institutions becomes available to the government either directly by way of budgetary receipts (e.g. in the case of small savings and government provident funds) or indirectly by way of investment in government secur- ities. Some funds are, however, transferred by the government to the pri- vate sector by way of loans given directly or through specialized finan- cial institutions. 18. Taking into account individuals' subscriptions to the capital of joint stock companies and certain other transferred savings, the total amount of transferred savings in 1960/61 (without reckoning the small amounts representing additional deposits with merchants, moneylenders, indigencus bankers, etc.), might be placed at around Rs. 4.5 billion, or a little more than 3 per cent of national income. 19. The bulk of the investment in the public sector has been financed by loans from the general public, small savings, accumulations in govern- ment provident funds, miscellaneous capital receipts, external assistance in the form of loans and grants and deficit financing (resort to bank credit). Public savings have made only a limited contribution to the financing of investment outlays.  - iv - 20. Iq the private sector, large and medium scale industries finance a substantial proportion of their requirements from internal resources con- sisting of depreciation reserves and retained profits. The share of inter- nal resources in financing total assets formation (including inveatories) was relatively low in 1956 and 1957, being about 37 per cent and 28 per cent respectively in the case of 1001 large and medium size companies. It, how- ever, rose in the following years and, in spite of a fairly high level of expenditure on assets formation in 1960, works out at about 56 per cent for that year. 21. The market for shares of companies has broadened significantly in recent years. The volume of funds made available annually to industries by the special finance corporations is also of a sizable order. Moreover, there are signs of an increased response of foreign investors to the expand- ing investment possibilities in the industrial .sector in the country. Medium-term bank credit to industries, however, continues to be rather limited and there would appear to be need as well as scope for a more rapid expansion of this type of credit. 22. Information available about financing of the rest of the private sec- tor, which constitutes the so-called unorganized sector of the econoty, is very limited and fragmentary. A small part of the investment is financed by transfer of resources from the public sector in the form of loans and grants. The rest is, however, financed predominantly from the investors' own savings. Further, the bulk of the borrowed funds comes from moneylenders and indigenous bankers. 23. In the field of agriculture, cooperative credit has recorded, as stated earlier, a marked increase over the last decade. The rates of interest charged by moneylenders have also tended to decline somewhat as a result of the ex- pansion of the activities of cooperatives. To support the agricultural dev- elopment program, the Third Five-Year Plan envisages a further substantial expansion of cooperative credit. Taking into account the credit facilities provided by moneylenders, etc., there does not appear to be a shortage of short-term finance for agriculture. However, the terms for the bulk of the credit are too onerous and there is need for a progressive expansion of institutional credit. At the same time, it is necessary to bring about greater coordination between the provision of short-term credit and other efforts to increase agriaultural output, e.g., in regard to supply of irri- gation, fertilizers, better seeds, and improved implements. The volume of medium- and long-term credit provided annually by cooperative institutions is rather small, and needs to be increased substantially. In this connection, the government is considering a proposal for setting up an Agricultural Development Finance Corporation to augment the availability of long-term credit. The question of increasing the supply of medium-term funds to coop- eratives by the Reserve Bank also needs to be considered carefully. .24* In the field of small scale industries, a well-devised machinery is functioning for the pr&vision of finance, but the volume of funds made avail- able annually has been insufficient in relation to needs. The progress made by the State Financial Corporations has been rather slow. Although most of them are in an early stage of development and there are inherent difficulties in lending to small scale units, there is a widespread feeling that the corpora- tions have adopted an over-cautions approach and that their procedures are rather rigid and cumbersome.  25, To stimulate institutional lending to small scale industries, the government has introduced a-scheme for guaranteeing partially the loans advanced to such industries by banks and other financial institutions and the refinance facilities provided by the Refinance Corporation have been extended to loans (medium-term) to small scale units. Proposals for organizing aidditional industrial corperative banks in suit-abl areas t^ finance industrial cooperatives and for providing government guarantee for loans given by banks and institutional agencies to the Khadi and Village Industries Commission, National Small Industries Corporation, etc. are also under consideration by the government. On the whole, it appears reasonable to expect that the volume of institutional finance available to small scale industries will increase progressively. 26. Institutional facilities for the provision of finance for housing are very limited. The government is, therefore, considering the question of setting up a special institution (Central Housing Board) whose primary object would be to augment the availability of funds for housing and help in developing a market for mortgages. The Life Insurance Corporation is also expected to provide larger amounts for housing. 27, The securities market in India is well-organized and quite active. With the growth of joint stock enterprise and large market borrowings by the government sector, the value and variety of securities available for trading has increased considerably over the last two decades. The ipcreased flow of savings to financial institutions has resulted in a marked rise in the volume of their annual investments in securities (mostly government securities) and the interest of the general public in corporate securities has become considerably more widespread. Investment advisory services, however, exist only on a limited scale. 28. At present there are seven stock exchanges, the most important being those in Bombay and Calcutta. Since 1956, a measure of government control and supervision over stock market activities exists for the whole country. This has helped substantially in curbing malpractices and maintaining orderly conditions in the market. 29. The new issue activity has shc'wn a rising trend in recent years. An interesting development is the growing proportion of new capital raised by new enterprises. Established business leaders and families have continued to play an important role in industrial expansion and forming new companies, but there is evidence to show that a new class of small entrepreneurs is coming up in the country. New issues have been frequently oversubscribed, especially in the case of companies which have foreign participation and whose shares are underwritten by leading underwriters. Substantial progress has been made in developing a proper underwriting system in the country. 30. The market for preference shares and debentures, however, continues to be rather thin. Debentures and preference shares offering such terms as an option for conversion into ordinary shares or with profit sharing  - vi - features have not been issued on any significant scale. With the growing need of companies to raise capital to finance their expansion programs, the variety of securities offered by them might be expected to increase in future. 31. Financial institutions play only a limited role in the market for corporate securities. The most important financial institutions from the point of view of operations in this market is the Life Insurance Corporation. Investment trusts have not developed to any significant extent. In view of the widening of public interest in the country in shares in recent years and the growing number and variety of corporate securities available for invest- ment, conditions seem to be particularly favorable for the growth of invest- ment trusts. It therefore appears worthwhile to take suitable steps, including the offer of an adequate tax incentive, for the establishment of these trusts, particularly unit trusts. 32. The Central and State Governments have been raising substantial amounts annually by way of market loans. Local authorities and other semi-government bodies also borrow from the market on a limited scale. 33. The bulk of government bonds is held by the central bank, Central and State Governments and institutional investors like banks, Life Insurance Corporation, provident funds, joint stock companies, charitable trusts and local bodies. Bonds and debentures of local authorities and other semi- government bodies are also held mainly by institutional investors. 34L Under the statutory provisions relating to investment of funds by the financial institutions, it is compulsory for them to invest a part of their funds in government and other approved (mainly government guaranteed) se- curities; apart from these provisions, it is in any case necessary for the financial institutions, in order to ensure a sound pattern of their assets, to invest a reasonable proportion of their funds in government securities. There is, therefore, a large assured market for government securities. 35- The central bank (Reserve Bank of India) occupies a very important position in the money and capital markets. Apart from regulating credit (through general as well as selectilie credit controls) and performing other normal central banking functions, it has been playing an important role in expanding institutional facilities for financing not only trade and commerce but also industry and agriculture. It has also made a significant contribution to the development of the market for government bonds. 36* The general level of interest rates in the organized sector of the economy has moved up a little over the last three years. Nevertheless, it continues to be lower than in many other developing countries in which capital is scarce. The rates in the unorganized sector, that is, those charged by indigenous bankers and money lenders, are, on the other hand, high, and at times very high, especially in rural areas, although there appears to have been some decrease in these rates over the past few years, primarily as a result of the expansion of the operations of cooperative credit societies.  - 1 - CHAPTER I Economic Growth, Investment and Financing of Investment A. Economic Growth 1. As a result of the development effort undertaken under the Five-Year Plans, the Indian economy has experienced significant growth over the last decade. National income in 1948/49 prices increased from about Rs. 88.5 billion in 1950/51 to Rs. 118.5 billion in 1959/60 and the preliminary estimate for 1960/61 is Rs. 126.9 billion. The increase in national income over the ten-year period 1950/51 to 1960/61, that is, the period covered by the First and Second Five-Year Plans, thus works out at about 43 per cent. Population increased from about 361 million in Mairch 1951 to 441 millio*n in March -1961, 1/ or by about 22 per cent. The rate of growth in per capita in- come was, therefore, sofaewhat less than 2 per eent per annum (Appendix Table 1) Structure of the Economy 2. The table below brings out the broad structure of the economy: Table 1 National Income by Industrial Origin (in current prices) 1950/51 196o/611/_ Percentage Percentage Rs. billion of Total Rs. billion of Total Agriculture and related activities 48.9 51 68.6 48 Manufacturing and mining 2/ Factory establishments- and mining 6.2 7 15.0 11 Small enterprises 9.1 9 11.4 8 Commerce, transport and communi- cations 16.9 18 23.6 16 Other services 14.4 15 23.8 17 Net income from abroad -0.2 - -0.4 - Total national ou-tput at factory cost = national -ijcome 95.3 100 142.0 100 1/ Preliminary estimates. v Establishments employing at least ten persons if working with power, or at least twenty persons if working without power. Source: Reserve Bank of India Bulletin for March 1962.  It will be seen that agriculture and related activities still account for a little less than half of the total national output. Over the last decade, the production of large and medium scale industries (factories and mines) has expanded at a much faster rate than in other sectors, but this has not resulted in any striking change in the structure of the economy because of the large share of agriculture in national income. The growth in various sectors of the economy is briefly reviewed below. Agriculture 3. Production of foodgrains increased from around 53 million tons in 1950/51 to 79 million tons in 1960/61. Production of other agricultural commodities also showed a substantial increase. Total agricultural production in 1960/61 was higher than the 1950/51 level by about 45 per cent (Appendix Table 2).j 4. The measures taken to increase agricultural production included extension of irrigation, increased use of fertilizers and better seeds, adoption of improved agricultural practices, land reclamation and development, etc. The net area irrigated is estimated to have increased from 51.5 million acres in 1950/51 to about 70 million acres in 1960/61. During the same period, the consumption of nitrogenous fertilizers increased from about 55,000 tons to 230,000 tons and of phosphatic fertilizers from 7,000 tons to 70,000 tons. To some extent, land reform also contributed to the increase in agricultural production. Besides, an agricultural extension service has been introduced throughout the country as part of a comprehensive community development program for rural areas. Large and I4Iedium Scale Industries 5. Over the past decade, there has been a marked growth and diversifica- tion of industries. Production of finished steel increased from about 1 million tons in 1950 to 2.2 million tons in 1960, of coal from 32.5 million tons to 52.6 million tons, and of cement from 2.7 million tons to 7.8 million tons. The increases in output were much larger in a number of the newer industries, particularly in the case of such items as machine tools, diesel engines, power transformers, electric motors, spinning frames, carding engines, automobiles, bicycles, sewing machines, electric fans, radio receivers, ammonium sulphate, superphosphate and caustic soda industries (Appendix Table 3). Several products, including certain types of machinery, were manufactured for the first time in the country. 6. The amount of electricity generated increased from about 5.1 billion kwh. in 1950 to 16.4 billion kwh. in 1960. 2/ Figures relate to crop years beginning July 1.  - 3 - 7. According to the official index (which covers mainly large and medium scale enterprises), total industrial production in 1960/61 was nearly twice as high as in 1950151. The actual increase appears to have been even larger as the official index does not give adequate weight to new industries, many of tihich have, as mentioned above, shown far greater increases. 8. The progress of industries has been especially marked since the beginning of the Second Plan period. Further, the public sector has been pLaying a very important role in industrial development over the past few years. Net investment in large and medium scale industries in the public sector (exclusive of investment in power projects and transfers to the private sector) increased from about Rs. o.6 billion under the First Plan to about Rs. 8.2 billion under the Second Plan. The bulk of the latter amount represented investment in three new steel plants of one million tons ingot capacity each and in fertilizer factories. Industrial capacity in the private sector was also expanded substantially. Net private investment in large and medium scale industries (exclusive of investment in electricity plants) increased from about Rs. 2.3 billion over the First Plan period to about Rso 7.3 billion over the Second Plan period. Village and Small Scale Industries 9. The village and small scale industries, which are widely dispersed throughout the country, provide employment to a very large number of people and meet a significant part of the demand for consumer goods. Although complete information regarding production in this field is not available, existing data indicate significant increases in the output of certain industries. For example, production of handloom cloth increased from about 742 million yards in 1950/51 to 1900 million yards in 1960/61. Substantial increases have also occurred in the small industries' output of such goods as machine tools, sewing machines, electric motors, fans, bicycles, hand tools, etc. The progress of many other small industries, especially village industries, howrever, appears to have been rather limited. 10. The measures adopted for developing small industries include provision of credit, technical advice, training facilities, supply of machinery on a hire-purchase basis and assistance in marketing, procurement of raw materials, etc. A number of industrial estates have also been constructed in different parts of the country to provide accommodation to small scale units together with power and transport facilities, etc. Transport and Communications 11. The rising level of economic activity in the country has called for a substantial expansion of transport and communications facilities. About 1180 miles of new railway lines were added during the First and Second Plan periods. Freight carried by railways increased from 9l.5 million tons in 1950/51 to 154 million tons in 1960/61. Passenger traffic also showed a significant increase. There was also substantial expansion in road transport, shipping and air services. For example, the mileage of surfaced roads in-  - 4 - creased from about 97,500 in 1950/51 to 144,000 in 1960/61. During the same period, the number of commercial vehicles on roads increased from about 116,000 to 210,000 and the shipping tonnage from 390,000 GRT to 900,000 GRT. Social Services 12. Education and medical facilities as well as other social services have also expanded substantially. The average expectation of life at birth has improved by about ten years over the last decade. B. Trend of Investment 13. The level of total investment in the economy has shown a marked rise over the last decade. Annual estimates of investment, a part of which is dispersed widely over such fields as agriculture, village and small industries, rural and urban housing, etc., can be only rough. According to Planning Commission's estimates, net annual investment in current prices increased from somewhat more than Rs. 5 billion before the First Five-Year Plan began to about Rs. 8.5 billion at its end, and reached a level of about Rs. 16 billion by the end of the Second Five-Year Plan. If allowance is made for price movements as indicated by the indices of wholesale prices, the level of annual investment in terms of 1950/51 prices would appear to have increased to about Rs. 9.7 billion at the end of the First Plan, and to nearly Rs. 13.5 billion by the end of the Second Plan.1/ 14. The ratio of net investment to national income increased, according to estimates of investment indicated above, from a little more than 5 per cent at the beginning of the First Plan to about 81 per cent at its end. For 1960/61, it is estimated at around 11 per cent. Information available for the earlier years of the Second Plan indicates that the ratio was even more than 11 per cent in 1956/57 and 1957/58. On the whole, the average ratio during the Second Plan period appears to have been fairly close to 11 per cent. g/ In a study prepared by the National Council of Applied Economic Research, which is a private organization, net investment has been estimated at a much higher level - about Rs. 6 billion for 1950/51, Rs. 11.4 billion for 1955/56 and Rs. 16.4 billion for 1957/58 in current prices (Savings in India - A Monograph, by NCAER, 1961). Recently, it has been reported that the estimates of investment and savings prepared by the Central Statistical Organization of the Government are substantially higher than those of the Planning Commission. For example, the C.S.O's estimate of net domestic saving for 1959/60 is reported to be 11.6 per cent of net national product as compared to Planning Commission's estimate of about 8.5 per cent at the end of the Second Plan (Economic Times, February 27, 1962). It may be mentioned in this context that the Planning Commission's estimates probably do not take into account much of the non-monetized investment and changes in inventories in agriculture and trade.  5- 15. The increase in investment has been especially marked in the public sector. Thus, net investment by public authorities is estimated at about Rs. 8 billion for 1960/61 as compared to about Rs. 2 billion in 1950/51 (in current prices). As a result, there has been a substantial increase in the share of public sector in total net investment in the economy over the last decade. 16. Total net investment over the First and Second Plan periods is estimated at about Rs. 33.6 billion and Rs. 67.5 billion respectively (in current prices). Table 2 below shows its breakdown between public and private sectors. Table 2 Net Investment in First and Second Plans First Plan Second Plan (April 1951-March 1956) (April 1956-March 1961) Rs. billion % of total Rs. billion % of total Public sector 15.6 46 36.5 54 Private sectora/' 18.0 54 31.0 46 Total investment 33.6 100 67.5 100 a/ Excluding investment financed out of resources transferred from the public sector. Such investment is included in the figures for the public sector. For the Second Plan period, such investment is estimated at about fRs. 2 billion. 17. To a very large extent, public sector investment has been devoted to transport, power, irrigation, social services, etc. and heavy and basic industries, especially the iron and steel industry. Investment of this type is needed to accelerate development in the private sector itself. The total output of goods continues to be derived predominantly from private sector investment. According to an estimate published in April 1961, the share of government enterprises in total production of industrial factory enterprises was of the order of 10 per cent, 90 per cent being represented by private sector production; the share of government enterprises in total industrial and agricultural output was less than 2 per cent..IY 18. The distribution of net investment in the public and private sectors by major heads of development is shown in Appendix Table 4. S;/ The Role of Monetary Policy in a Developing Economy by Dr. B.K. Madan. See Reserve Bank of India Bulletin, April 1961.  - 6 - C. Financing of Investment 19, Table 3 below brings out the broad picture in regard to financing of total net investment, public as well as private, over the First Plan period and in the first three years of the Second Plan. As the annual breakdown of the Planning Commission's estimate of net investment over the Second Plan period is not available, the estimates of net investment shown in the table for 1956/59 are those prepared by the Reserve Bank of India by adding domestic savings estimated directly and the net inflow of capital from abroad; these estimates are, therefore, only broadly comparable to the Plan- ning Commispion's estimate of Rs. 67.5 bil lion for the Second Plan period as a whole.-/ Table 3 Financing of Total Net Investment in the First Plan Period and During 1956/59 (Rs. billion, current prices) First Plan 5 years, 3 years, 1951/56 1956/57 1957/58 1958/59 1956/59 Net Domestic Savings Public savings 5.0 1.3 1.1 1.0 3.4 Private savingsa/ 26.5 8.6 7.1 8.8 24.5 Total 31. 9.9 27.9 Net Inflow of Ca,2ital from Abroadg/ Use of foreign exchange reserves 1.2 2.2 2.6 O.4 5.2 IIEF credit (net) - o.6 0.3 - 0.9 Other capital inflow (net) 0.9 0.8 1.6 3.3 5.7 Total 2.1 3 7 3.7 TT.5 Total Net Investment 33.6 13.5 12.7 13.5 39.7 a/ The figure for the First Plan period has been obtained by deducting from the estimated net investment the total of public savings and the net inflowy of capital from abroad. Figures for the period 1956/59 represent estimates prepared by the Reserve Bank of India (Appendix Table 5). / Represents the total of current account deficit (excluding official donations but including half of errors and omissions), imports in kind and retained earnings of branches and subsidiaries of foreign companies minus the increase in private holdings of gold. Source: Third Five-Year Plan document and the Reserve Bank of India Bulletin for August 1961. For the First Plan period, the Reserve Bank's estimate of net investment is higher than the Planning Commission's estimate by about Rs. 1.3 billion.  - 7 - 20. It will be seen that most of net investment during the First Plan period was financed from domestic savings. Savings in the public sector, including those of railways and other government enterprises, financed about 15 per cent of net investment, while private domestic savings accounted for as much as 79 per cent of the total. Inflow1 of capital from abroad con.se- sequently financed something like 6 per cent. 21. With the rise in the level of investment in the Second Plan period, the pattern of financing showed a marked change. In the three years 1956/59, domestic savings financed only 70 per cent or so of total net investment, the remaining 30 per cent having been financed by an inflow of capital from abroad. Reliance on external resources on a large scale for financing net investment continued in the following years also. 22. Despite additional taxation of a sizable order,.2/the average annual public savings during 1956/59 were only slightly larger than in the First Plan period. This is explained mainly by the growth of current expenditures, both on non-developmental items like defense, administration and debt services as well as on developmental items like education, health and other social services. To some extent, it is also explained by the fact that the tax yields, without taking into account the revenue attributable to fresh taxation,were not responsive enough to increases in national income / 23. Private savings during the Second Plan period were, on an average, much larger than in the First Plan period. They showed a decrease in 1957/58, but the level in 1958/59 was again a little higher than in 1956/57. 24. Corporate savings constitute only a small part of total private savings. For instance, the total savings of the corporate sector (including cooperatives) amounted to only a little more than Rs. 1 billion during 1956/59. This figure, however, relates, it must be emphasized, to retained net profits only; gross savings of the corporate sector, that is, retained net prof,ts plus additions to depreciation reserves, are of a much larger order.2 25. A substantial part of private savings represents savings accumulated at financial institutions. Savings of this type have shown, as mentioned in Chapter III, a considerable expansion over the last decade. In 1958/59, they were of the order of Rs. 3.5 billion. Savings in the form of absorption of new capital issues of joint stock companies have also increased signifi- The total yield during 1956/59 from measures of additional taxation is estimated at about Rs. 4.5 billion. The ratio of tax receipts at the 1955/56 rates of taxation to national income is estimated at 7.1 per cent for 1960/61 as compared to 7.6 per cent in 1955/56. Over the 3 calendar years 1956 to 1958, the total gross savings of 1001 non-financial public lirited companies, which accounted for about 78 per cent of the total paid-up capital of all such companies in the private sector, amounted to aVnut Rs. 2.5 billion.  -8 - cantly in recent years. On the whole, however, the increase in domestic savings over the Second Plan period was relatively much smaller than that of investment. For instance, the average ratio of domestic savings to national income increased from 6 - 61 per cent in the First Plan period to only a little less than 8 per cent during 1956/59. By 1960/61, the rate of domestic savings is estimated to have gone up to about 8.5 per cent of national income as against 10 per cent envisaged at the time of the formulatior. of the Second Plan. The average rate during the Second Plan period as a whole appears to have been around 8 per cent of national income. 26. According to Reserve Bank estimates,2 the marginal savings - income ratio during 1?56/59 was somewhat lower than during the earlier three years, (14.2 per cent_Jduring 1956/59 against 19.1 per cent in 1953/56). This is attributed by the Reserve Bank mainly to the net effect on income distribution of such factors as gestation lags (which result in lowering the marginal profits/wages and salaries ratio) in the case of marny investment schemes of a highly capital intensive nature, relative movements of wages and prices, etc. 27. The net inflow of capital from abroad in the first three years of the Second Plan amounted to about Rs. 11.8 billion. In 1956/57 and 1957/58, a large part of the inflow represented utilization of foreign exchange reserves and INF credit. From 1958/59 onwards, however, the bulk of the inflow was by way of external assistance in the form of loans and official grants. Utilization of external assistance in the public and private sectors amounted (without allowing for loan repayments abroad) to about Rs. 7.2 billion during 1956/59. For the Second Plan period as a whole, total utilization of external assistance is estimated at a little over Rs. 14 billion. Of this, about Rs. 5.2 billion represented assistance for import of commodities under the U.S. Government's P.L. 480 program and the rest was utilized largely for steel plants and other industrial projects, railway development program, power projects, ports, etc. The largest amount of assistance came from the U.S.A. The rest of the assitance was provided mainly by the IBRD, the U.K., Canada and other Colombo Plan countries, West Germany, U.S.S.R. and Japan (Appendix Table 6). / "Estimates of Saving and Investment in the Indian Economy: 1950/51 to 1958/59". Reserve Bank of India Bulletin, August 1961. / As calculated with reference to the preceding three years. Calculation with reference to the First Plan period as a whole yields a higher ratio of 17.3 per cent.  - 9 - 28. The Third Five-Year Plan, which commenced in April 1961, envisages total net investment of about Rs. 104 billion over the five years, 1961/66. Net investment in the public sector is'estimated at a minimum of Rs. 63 billion, or 73 per cent more than in the Second Plan period, the correspond- ing estimate for the private sector being Rs. 41 billion (exclusive of investment corresponding to transfer of resources from the public sector), or 32 per cent more than in the Second Plan period. 29. Net annual investment in the economy (in 1960/61 prices) is estimated to go up from about Rs. 16 billion in 1960/61 to Rs. 26 billion in 1965/66. Correspondingly, the ratio of net investment to national income is expected to go up from about 11 per cent in 1960/61 to about 14 per cent in 1965/66. 30. A part of the investment in the Third Plan is to be financed by external assistance, which has been taken at a total of Rs. 32 billion.- Net domestic savings are expected to rise from about 8.5 per cent of national income at the end of the Second Plan to about 11.5 per cent by the end of the Third Plan. See Chapter -IV also.  - 10 - CHAPTER II Financial Institutions 31. The structure of money and capital markets in India reflects the stage of development reached by the country. Alongside well-functioning financial institutions, there exist indigenous bankers and moneylenders, who play an important role in financing agriculture, small industries and trade, and constitute what is termed as the "unorganized sector" of the money and capital markets. Attention in this chapter is focused on financial institutions in the organized sector and only a brief reference to indigenous bankers and moneylenders is included at the end. 32. At the time of Independence in 1947, the organized sector comprised a fairly large group of financial institutions, which included the central bank, commercial banks, cooperative banks and credit societies, insurance companies, post office savings banks, postal life insurance fund, provident funds, etc. Since then, the activities of the various financial institu- tions have shown a marked expansion, particularly over the last decade due largely to the rising tempo of economic development under the Five-Year Plans. Important changes have been made in the organization and practices of the earlier institutions and new institutions, including specialized institutions for the provision of long and medium-term finance to large, medium and small scale industries, have been established. 33. A broad idea of the relative importance of various financial institutions can be obtained from the comparison of their total assets given in the table on the next page. It must, of course, be borne in mind that the figures of total assets bring out only very inadequately the importance of institutions like the IFC and ICICI, a substantial part of whose operations represents underwriting of capital issues and (in the case of IFC) guaranteeing of deferred payments.  - 11 - Table 4 Total Assets of Financial Institutions Rs. million Commercial banks 23,7321/ (Mar,. 1962) Cooperative credit institutions (a) State cooperative banks 1,823 2 (June 1960) (b) Central cooperative banks 2,588 t (c) Primary credit societies 3s949 (d) Central land mortgage banks 39_, (e) Primary land mortgage banks 222 Postal savings banks and other small savings schemes 8,267 (Mar. 1962) Life Insurance Corporation 6,225 (Dec. 1960) Postal life insurance 156 (Mar. 1960) Provident Funds (a) Central Government provident funds 2,853 (Mar. 1961) (b) Employeest Provident Funds scheme 1,953 f (Dec. 1960) (c) Coal Mines and Assam Tea Plantations Provident Funds 359 (Mar. 1960) (d) Others n.a. Industrial Finance Corporation 656 (June 1962) National Industrial Development Corporation 61 (Mar. 1961) Industrial Credit and Investment Corporation of India 225 (Dec. 1961) State Financial Corporations 422 (June 1962) National Small Industries Corporation 64 (Mar. 1961) Refinance Corporation for Industry 78 (Dec. 1961) Investment and trust companies 377Y (Mar. 1959) General insurance companies 756/ (Dec. 1960) Employees' State Insurance Corporation 19