Introduction || APPENDIX (CH-4) || APPENDIX (CH-9) || ANNEXURE (CH-12) || APPENDIX (CH-14) || APPENDIX (CH-24) || APPENDIX (CH-29) || Conclusion
Chapter- 1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || 36 || 37 || 38 || 39

APPENDIX (Chapter - 4)

NATIONAL BUDGETING AND THE PLAN

National budgeting is a technique of economic planning which has been used in recent years in countries like the United Kingdom, Netherlands, Norway and Sweden to ensure a certain balance between the demand for resources and the supply of resources from year to year. A national budget is different from other familiar forms of budgets (as those of governments and local authorities) in that it attempts to cover the economy as a whole and not just a part of the transactions within it. It takes into account not only the fiscal budget but also aggregate consumer income and expenditure, accounts of corporate and unincorporated enterprises, budgets of local authorities, etc. For ensuring a balance between the demand for particular goods and services and their supply (in addition to a balance between aggregate demand and aggregate supply), investment budgets as well as commo-iity, foreign exchange and manpower budgets are also constructed for the purpose of national budgeting.

2. The usefulness of an approach which encompasses the whole system and, in consequence, helps to formulate economic policies based on an analysis of their likely repercussions on all important aspects of its operation and growth cannot be ever-estimated. It might be even regarded as a pre-requisite of systematic planning. There are, however, several difficulties in practice. The most striking of these is often the dearth of statistical material in the required detail. Before a national budget can be constructed there should be, at the very minimum, a set of national accounts for a series of years which could be used as the basis of forecasting. Though progress in regard to national income statistics has been considerable in the last decade, the lacunae from the point of view of national budgeting are still many. Data in regard to savings are very imperfect in most countries, slice they are often derived as a residual and are not always directly computed. Even where a fairly reliable series of data exist, savings cannot always be related to the forms in which they are held or the financial intermediaries through which they flow, so that it is not possible to infer from them the asset-preferences of the community. On the side of investment, information on changes in the holdings of stocks is in almost all cases of a scattered nature and includes the effects of price changes. The relationships between these magnitudes* are vital factors in economic forecasting, particularly when there is a large sector in the economy which is only partially planned and controlled.

3. Apart from the statistical limitations, there are the usual problems involved in forecasting when a number of variables are involved and when the precise nature of the relationships between them is not clear. These relationships are often complicated by behaviouristic, institutional and technical factors like changes in tastes, shifts in the distribution-pattern of incomes, possibilities of substitution between one factor and another, innovations, rate of growth of education and technical skills, etc. In a growing, dynamic system these factors could make a considerable difference to the demand and supply of resources even in the short 'period.

4. The above considerations apply with special force at the present time in India. National income statistics are still in their infancy. There are large gaps in the information available about certain sectors of the economy, which probably introduce a high margin of error even into the estimates of aggregate national income. No estimates of aggregate consumption expenditure have been made on a basis comparable to the estimates of aggregate national income. Little is known of the processes of capital formation in the rural sector or of its magnitude. Estimates of the contribution of services (including trade) to the national product are by and large notional. At the same time there are evidently significant changes taking place in the distribution of incomes, not only as between the urban and rural sectors but as between various classes within these sectors. These are proceeding side by side with changes in the community's pattern of consumption and they have the effect, to some extent, of diversifying employment opportunities and absorbing part of the- unutilised and under-utilised resources. The rapid and growing rate of migration from rural to urban areas is another factor which affects consumption and employment patterns. Of all these only the barest details are known, insufficient even to reconstruct a picture of what precisely have been their effects on the demand and supply of resources in the last few years, not to mention their complete inadequacy for purpoaes of forecasting future trends.

5. Any attempt to bring out statistically the implications of planning in India in terms of concepts and relationships used in national budgeting elsewhere can, at this stage, serve only an illustrative purpose. The statistical basis of the estimates would be admittedly weak. In a country in which additions to investment are likely to take place to a great extent through the direct application of hitherto unutilised manpower, leading in turn in a variety of ways to improvements in income and consumption standards, the estimates may not even adequately reflect the nature of the changes that will come about as a result of development. They could, however, serve one purpose. Provided it is understood that the estimates represent only certain notional magnitudes, which have to be tested as more reliable statistics become available, they could provide a basis for making a provisional appraisal of the Plan and for checking in a general way its internal consistency.

Estimates Of Net Output By Industrial Origin

6. An estimate of national income by industrial origin is available for 1948-49 in the First Report of the National Income Committee. In the Five Year Plan there are targets of production for the more important industries and commodity groups. On the basis of these two sets of data an attempt can be made to estimate the likely dimensions of the national ncome by the end of the plan period. It is inevitable that the forecasts would be firmer for some sectors than for others. In agriculture, for instance, the commodities for which there are specific targets in the Plan cover about 60 per cent of the total output. The coverage of ihe Plan in respect of industries organized on a factory basis is also fairly large. But in other spheres, particularly in regard to small enterprises in industry and trade and the tertiary sector in general, the basis for -forecasting is less firm.

7. The estimates of net output in 1955-56, prepared on the basis indicated above, are shown in the following table according to industrial origin and in a form comparable to those published for 1948-49 by the National Income Committee :

* The estimates for 1948-49 are from the Pilst Report of the National Income Committee. Anamountof R?, o'8 hunched crores has however been transferred from 'Factory Establishments' to 'Small Enterprises', and R'. 0-2 hiin.lred crores from ' Railways' to ' Other Commerce and Transport'.8. It will be seen that the largest addition to national output is expected to come from the agricultural sector though, in terms of percentage increases, the greatest improvement is likely to be shown in industries organised on a factory basis. A more detailed breakdown of the estimates in respect of agriculture (excluding forestry and fishery) is given below:—

As for factory establishments, the estimates are based mainly on net values added by manufacture in 1949 (for which data are available from the Census of Manufactures) and on the production targets for 1955-56 in the working plans for industries prepared by the Commission. In the case of a few industries not covered by the Census of Manufactures, rough estimates have been attempted on the basis of available data on the gross value of output and the raw materials consumed. The industries which are covered individually in these ways account for about 2/3 of the net value added by factory establishments in 1948-49;in respect of ihese industries it is estimated that there would be an increase in net output of the order of 40 per cent by 1955-56. In the remaining industries (i.e., those accounting for 1/3 of the net value added by factory establishments in 1948-49) it is assumed that there would be an improvement of about 25 per cent in the same period.

9. The industries for which individual estimates have been attempted could be broadly divided into consumer goods and producer goods industries. The net output of the former, which covers industries like cotton and woollen textiles, sugar, soap, paper, electric fans, vegetable oils etc., is expected to go up by about 24 per cent as compared to 1948-49. The increases are likely to be more striking in producer goods industries where the improvement is expected to be of the order of 70 per cent. A breakdown of the estimates of the net output of factory establishments , reclassified roughly according to the nature of the product, is given below:

(Rs. crores)

(Rs.Crores)

10. Small enterprises cover village industries and crafts as well as urban industries not covered by the Indian Factories Act. The inadequacy of data in regard to these and the tentative nature of the estimate for even 1948-49 (the base year used in our calculations) has ban emphasized in the First Report of the National Income Committee. The Five Year Plan sets down certain targets for village industries like handloom, oil ghanis, khadi, gur and khandsari, leather etc.; the net value added by these industries, after allowing for subsidies that might be required by way of cesses on the factory industries, is likely to be about Rs. 40 to 50 crores higher by the end of the Plan than in 1948-49. For the rest, an increase in output of i per cent per annum over the period covered has been assumed.

11. The net value added by railways covers mainly the gross earnings adjusted for cost of raw materials; since the wages and salaries paid out in the capital expenditure of the railways do not come into the estimates elsewhere, some allowance has also to be made for these. The estimates for 1955-56 are based on an assumed increase of 15 per cent in the volume of passenger traffic and of 40 per cent in the volume of goods traffic as compared to 1948-49;about 50 per cent of the expenditure on the capital programme in 1955-56 is also assumed to be on wages and salaries and is taken credit for.

12. The estimate in regard to 'Other commerce and transport' assumes that the contribution of these to the national product will go up by roughly 10 per cent of the increase in commodity production which is taken roughly as the output under agriculture, mining, manufacturing and hand-trades. The estimates for 'Other Services' are notional.

13. The use of 1948-49 as the base year in the above calculations prevents a direct estimate being derived of the increase in national income in the period of the Plan. It may, however, be safe to assume that the level of per capita income was perhaps only maintained constant between 1948-49 and 1950-51. If this assumption is made, the national income in 1950-51 (at 1948-49 prices) would work out to about Rs. 8900-9000 crores, and the increase in the national income by the end of the Plan at n to 12 per cent of the 1950-51 level. It must he emphasized however that this estimate of the increase in national income in the Plan period docs not take iully into account the possible increases in income from some of the schemes like the community development programme which figure in the Plan. Direct application of unutilised resources and concentrated efforts for increasing productivity may in specific areas raise incomes by 25 per cent or more, but in what manner this will come about or how widespread such increases will be cannot be precisely foreseen at this stage.

Saving And Investment In The; Economy

14. The information available on saving and investment in the economy is naturally even more fragmentary than the data for estimating national income. We should therefore stress once again that the estimates presented here are only intended to be illustrative and to serve as a basis for fixing certain magnitudes which, however notional, are useful for planning.

15. On the side of investment, the most reliable estimate that can be made is for investment in the public sector. An analysis of government expenditures shows that the net investment on public account in 19-so-si was of the order of Rs. 185 crores.*

This was roushlv distributed as follows :—

(Rs. crores)

In regard to investment in the private sector the data available are more suggestive than conclusive. For instance, in 1950-51, imports of' Machinery and Mill Work' amounted to about Rs. 80 crores; together with 'Instruments, Apparatus and Appliances' and 'Vehicles' (excluding motor cars and cycles but including locomotives, wagons and spare parts), the total imports of capital goods in this year amounted to about Rs. 121 crores. Approximately Rs. 40 crores of the imports were probably for investment in the public sector, and another Rs. 10 crores or so were likely to have been in the nature of durable goods used directly by consumers.

*In conformity with the definition of net investment used here, which relate? mainly to investment in fixed capital (i.e. machinery and capital equipment, tools and implements, communicaiicns, building',etc.) net of depreciation, an amount of abc.ut Rs. 47 crores has been deducted from 'development expenditure in the public sector' to allow for recurring expenditures in the development programe.

The remaining Rs. 70 crores could be considered as having been imported for private investment in industry and transport. For a more accurate measure of the net investment in the private sector on capital equipment, it would appear that the following adjustments would also have to be made :

1. addition of 25 per cent of imported value of equipment to cover customs duty, distribution charges and installation
2. addition of about Rs. 60 crores for the output of equipment by the domestic engineering industry organised on a factory basis; and
3. a deduction of about Rs. 30 crores to allow for equipment required to meet depreciation.

Thus we arrive at a figure of about Rs. 105-110 crores as the likely order of net investment in capital equipment in industries and transport, large as well as small-scale, in 1950-51. There is apt to be some double-counting here since imported material may to some extent be figuring also in the output of the domestic engineering industry. But, on the other hand, this estimate does not cover the output of durable capital goods by small enterprises in the country (e.g. bullock carts and hackney carriages, tools and implements, iron castings, etc.).

16. The other important item of capital formation on private account is construction of buildings. In regard to this again, the information available is inconclusive. The allocations for construction of buildings of certain materials like cement and steel provide the only basis on which estimates can be attempted at this stage. The available data on these allocations, applied to certain rough estimates as to the cost of building covered by materials like cement and steel, suggest that net private investment in constructions using these materials was probably of the order ofRs. 100 crores in 1950-51. The differences in construction materials used in different areas and in different types of buildings are however so great that this estimate can be regarded as only a first approximation. It will be noticed also that it does not cover constructions which do not use cement and steel (mainly in the rural areas).
17. The gap in our information is greatest in respect of investment in agriculture, small-scale and cottage industries'and residential construction in rural areas. Such investment draws mainly upon local materials and direct contributions of labour. Transfers of savings for the purpose are probably small relative to the magnitude of investment, and they are in any case difficult to trace. We might surmise that the greater part of the direct investment in rural areas is for covering depreciation of existing capital stock, but it cannot be assumed that the volume of net investment is insignificant. It is also important to bear in mind that, in a programme of development, the largest potentialities lie in the direct application of manpower and local materials to investment.

18. On^the side of savings, the savings of the public sector corresponding to the definition of net investment used here can be computed roughly from the accounts of the Central and State Governments. Income tax statistics show the incomes of corporate enterprises (exclusive of depreciation provisions) as well as taxes and dividends paid by them, from which arou'gh estimate can be made of corporate savings. As for personal savings and savings of unincorporated enterprises, they are of two kinds: (a) those directly invested in agriculture, small scale and cottage industries, and residential housing; and (Vl those invested in financial assets and which, therefore, lead to corresponding increase in financial liabilities in the system. Any estimate of savings directly invested in agriculture, small scale and cottage industries, and rcsidcntiul housing would naturally have to correspond to the estimate of such investment; as already mentioned, there is little information available on these, and so the margins of error arc likely to be substantial. As for savings invested in financial assets, which find their way into real investment through the government and other institutional agencies, fairly reliable data are available on some of the assets into which private savings flow. But there is again some chance of double-counting here, and moreover, with the available information the net cannot be cast wide enough to cover the entire range of private savings invested in finincial assets.

19. Subject to all the limitations and deficiencies detailed above, an attempt can be made to construct an -illustrative model of the pattern of saving and investment in the economy. The following statement shows rough estimates for the major categories of saving and investment in 19^0-51:

*Excludes investment in inventories.
Represents the increase in net external assets on account of the surplus in balance of payments in this year.

Since about Rs. 47 crores have been deducted from the development programme in the ' public sector to allow for recurring expenditures not coming within the definition of 'net investment' used here, a simih amount is deducted from ' public savings ' as shown in Chapter III of this Report.

The estimate ofRs. 470 crores for net investment excludes changes in inventories; there is evidence that the stocks of raw materials held by manufacturers went down substantially in 1950-51, but it is probable that this was more than counterbalanced by increased stocks held by traders and primary producers on account of the prevailing inflationary conditions. Allowing, however, for the fact that the above estimates are in terms of 1950-51 prices and the estimates of national incomeJbr 1950-51 estimated earlier is expressed at 1948-49 prices, the proportion of savings may be placed roughly at 5 per cent of the national income.

20. The assumption in the Plan is that, through appropriate measures, domestic savings will be raised to about 150 per cent of the level in 1950-51, that is, if savings in 1950-51 are estimated at about Rs. 450 crores in terms of 1948-49 prices, they will go up to about Rs. 675 crores by 1955-56. The sectors in which the additional saving will be done and the manner in which they will be channelled into investment cannot be forecast in precise terms, but the broad features of the process can be foreseen. Savings in the public sector are likely to be larger, and so also, with higher production, will be the undistributed profits of corporate and unincorporated enterprises. Agricultural extension services, together with other schemes in the Plan for mobilising under-utilised local resources, will also in effect raise the level of savings in the community. The unsatisfied and growing demand for cement, steel and other materials for residential constructions also indicates that when the supplies of these are increased the resources necessary for undertaking such investment will be forthcoming.

21. If domestic savings go up as assumed, gradually in the first two years and more rapidly in the later years, the resources available internally for investment over the fiveyear period would probably amount to about Rs. 2700-2800 crores. These are expected to be supplemented by (a) withdrawal from sterling balances, and (6) other external resources; the two together are estimated at about Rs. 800 crores. Internal and external resources would thus make possible an aggregate investment programme in the public and private sectors of the order of Rs. 3500-3600 crores.

Manpower, Commodity And Foreign Exchange Budgets

22. Within the framework of an economy in which there are vast resources of manpower, and in which the problem is one of under-employment and low productivities, manpower budgets of the kind drawn up in advanced industrial systems can have but little significance.

*The net change in the holdings of government securities has not been listed here, as it is diffculi to estimate the net change in the holdings of the public excluding those of official and banking instillitions heic and abroad ; part of th; investment in government securiiies would also be covered t-y prernia paid to insurance companies. Rcpresents largely money savings as a result of rise in prices in this year.

In the latter, forecasts of manpower movements follow from the investment budgets whose shape and pattern are themselves determined mainly with reference to factors other than manpower. This way of planning manpower movements so as to follow and support investment programmes is appropriate in countries in which the problem is shortage of manpower. But the approach will have to be different in a country which has large surpluses of manpower and where the limiting factor is the capital necessary to employ them*. The surpluses themselves c.'i'not be determined statistically except in a general way with reference to techniques of production and movements in productivity. Given thesc^ the investment programme will have to be so framed as to make the maximum utilisation of underemployed manpower, and (A) improve techniques of production and thus raise productivity per head. As explained in the earlier chapters of the Report, the importance attached to each of these will have to depend on a variety of considerations. Measures to utilise underemployed manpower should not, except in special cases and in the transitional stage, be such as to reduce productivity in any line. On the other hand, the techniques of production envisaged should not, except in the case of basic industries and services necessary for the rapid expansion of the whole economy, be such as would absorb large amounts of capital leaving little for the employment of surplus manpower.

23. With the data available at the present time on production and disposal of manpower in different lines of activity, only broad judgments can be made on these aspects of the problem, and the investment programme cannot be related in precise statistical terms to productivity in each line and to "surpluses" of manpower calculated on the basis of the changes planned in techniques of production. Broadly we might say that the number dependent on agriculture and ancillary activities will be about 5 per cent higher in 1955-56 than in 1950-51 and, since meanwhile agricultural output is estimated to increase by over 15 per cent, productivity in agriculture is likely to go up by about 10 per cent in this period. In industries organised on a factory basis, production is expected to go up by 40 per cent;probably as much as two-thirds of this increase will come about through higher productivity and the rest from higher employment. In small-scale enterprises no increase in productivity has been assumed, but the information available on output and manpower employed in the different industries in this sector is so meagre that any generalisation is apt to be misleading. In the government sector, the National Income Committee has estimated wages and salaries paid in the capital programme in 1948-49 at about rough] v 60 per cent of the expenditure. Since the development outlay on public account is to be more than doubled by 1955-56, a corresponding increase in payments of wages and salaries and in employment may be assumed.

24. With the available information on the pattern of income and consumption in the country, estimates of demand for the purpose of constructing commodity budgets can also be only in the nature of very broad approximations. In the case of the basic commodities of consumption like foodgrains and cloth, supplies are the limiting factor today and one might *The special problem arisingon account of shortages of technical and administrative personnel is dealt wilh elsewhere in the Report, assume that if prices are maintained at a fairly stable level increased output will be readily absorbed by domestic demand. In regard to the less essential commodities, the level of prices will be a more important determining factor, and demand may not increase unless the general level of incomes in the community rises or the prices of the commodities concerned are lowered ; lack of effective demand would in turn affect production unless the cost structure of the industries is sufficiently elastic to enable them to lower prices. All these depend on a variety of elasticities concerning consumption and production. Even in countries with more advanced statistical information, estimates in regard to demand and supply are therefore difficult to make. In India the problem of estimation is still more complex. In the various chapters of this Report estimates have been put forward regarding the likely production and consumption levels of specihc commodities by the end of the Plan. These, it must be emphasised, are based on a variety of assumptions. Estimates of export and import volumes are also based on such rough assessments of factors affecting demand and supply. These estimates are shown in Chapters III and xxx of the Report. The commodity budgets which figure in this Report must therefore be regarded as operational balance sheets rather han as forecasts.