Introduction
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 || Conclusion || Appendix

Chapter 4:
FINANCE AND FOREIGN EXCHANGE

It is proposed in this chapter to indicate the. lines along which the financial resources needed for the. plan are to be raised and to deal with some of the important policy issues that arise in this connection. The problem of mobilising resources has to be viewed in the light of the requirements both of the -public and of the private sector, as they both draw upon the same pool of savings, and care has to be taken to ensure an adequacy not only of domestic finance but also of foreign exchange.

2. Basically, the issue is whether and how domestic savings to the requisite extent can be mobilised in the aggregate. This depends on a judgement not only as to the desirability of limiting consumption beyond a point, but also of the suitability, in the given economic and social set-up, of the means or techniques to be used for the purpose. The latter is an important consideration in shaping taxation and other economic policies in a democratic state, and especially in the context of the private sector functioning side by side with the public sector. The point to emphasize is that given the decision to invest a certain quantum of resources, the necessary savings have to be found, and clearly the bulk of them have to be found from within the economy. It has also to be bome in mind that foreign exchange resources present a problem to which special attention has to be given. A country which starts on industrialisation has necessarily to import the required machinery and equipment from abroad in the early stages, and it has, therefore, to conserve its foreign exchange resources to the utmost. The fact that supplemental resources from abroad on a considerable scale would still be necessary even after the utmost economy in the matter of imports highlights the need for an active export promotion policy.

Finance For The Public Sector

3. The scheme of financing envisaged for seeing through the developmental programme of the Central and State Governments aggregating to Rs. 4,800 crores is as follows:

The budgetary resources that can be raised by the Central and State Governments through taxation, borrowing and other receipts amount to Rs. 2,400 crores. A further Rs. 1,200 crores, it is suggested, can be raised through deficit financing. Adding to this Rs. 800 crores by way of resources from abroad, the total of resources for the implementation of the programmes in the public sector works out at Rs. 4,400 crores. This leaves a gap of Rs. 400 crores, the means of raising which will have to be decided upon in detail later. It is recognised that the gap has ultimately to be filled by raising additional domestic resources, and given the limits of deficit financing to which reference is made later, as also the fact that the scheme of financing as outlined here already relies heavily on borrowing, the only possible source that can be drawn upon for meeting this gap is taxation and, to the extent possible, profits of public enterprises.

4. The estimate of Rs. 350 crores as the balance available from current revenues at existing rates for financing expenditures under the plan has been arrived at after a detailed examination of the total revenue receipts of the Central and State Governments. In working out this estimate, provision has been made for only minimum increases in expenditure under non-development heads such as defence and administration. The maintenance expenditure on social services and similar developmental items at the level reached by the end of 1955-56 has also been allowed for, as expenditure of this type is not included in the plan. The total receipts of the Central and State Governments over the five-year period are estimated at Rs'. 5,000 crores at the rates of taxation prevalent in 1955-56. Of this, the non-developmental expenditures mentioned above and the maintenance expenditure under developmental heads will take up about Rs. 4,650 crores, which leaves a balance of Rs. 350 crores available for meeting plan expenditures. It is necessary to stress the point that a careful watch on non-developmental expenditure will be necessary in order to obtain for the plan the estimated amount of Rs. 350 crores from revenues at existing rates. Should these go up, or should there be any significant loss of revenues on account of the adoption of social measures such as prohibition, there will have to be a corresponding effort simultaneously to raise further resources, if the contribution of current revenues to the plan is not to go down.

5. The target for additional taxation of Rs. 450 crores mentioned above represents the minimum that has to be attempted. In arriving at this figure the recommendations of the Taxation Enquiry Commis-' sion have been taken into account, and it has been assumed that steps will be taken to implement these as early as possible after the commencement of the plan. The State Governments are expected to raise between them a total of Rs. 225 crores, and the Centre is to raise a like amount. On this basis, the contribution of current revenues to the plan amounts to Rs. 800 crores which is only one sixth of the total resources required. This contribution, as we indicate later, is, in our view, inadequate in relation to needs and a further tax effort will be called for, if the plan is to be implemented fully and inflationary pressures are to be kept down to the minimum.

6. The response to government borrowing programmes has been encouraging in recent years, and the target of Rs. 115 crores set in the first plan has been exceeded by about Rs. 65 crores. The improvement in the demand for government loans has occurred mainly in the last two years, the net offtake of new loans in these years being about Rs. 95 crores a year. During the period, the holdings of rupee securities (other than treasury bills) by the Reserve Bank have shown a decline of about Rs. 70 crores, which indicates that the net absorption of Securities by the market (including Commercial banks) has been of the order of Rs. 250 crores. If account is taken of the sales of securities held in reserve by the Central and State Governments, the net absorption of securities by the market would in fact be larger.

7. The estimate of Rs. 700 crores of borrowing from the public over the second plan period—an average of Rs. 140 crores a year—thus assumes that the annual receipts from this source will, on an average, be about 40 per cent. higher than they have been of late. While this is not in itself an over-ambitious target, it has to be bome in mind that the total amount of loans maturing in the course of the second plan is Rs. 430.! crores. Gross borrowings over the period will, therefore, have to be of the order ofRs. 1,130 crores. Judged in this light, and especially in the context of a brisk demand for funds in the private sector, the task of mobilising net private savings amounting to Rs. 700 crores in this way for purposes of public investment cannot be regarded as easy of fulfilment. In this connection, the possibility of extending the scope of social security schemes must be fully explored. These schemes are a means of giving a fair deal to employees, but they serve as a valuable source of additional savings. The net accumulations in provident funds and similar schemes are already an important source of finance for public loans, and it is to be expected that their importance will grow in the coming years. The nationalisation of life insurance, which is intended to foster the insurance habit, should also prove a growing source of demand for public loans.

8. The collections under small savings have been placed at Rs. 500 crores over the second plan period. The receipts under this head have gone up steadily in the last few years—from Rs. 33 crores in 1950-51 to Rs. 65 crores in 1955-56. AtargetofRs. 100 crores a year on an average over the second plan period will require a further substantial stepping up of these collections. The small savings drive will have to be intensified for the purpose, and a countrywide campaign reaching down to every family and with sufficient followup right upto the lowest level is called for. We suggest in this connection that a close examination be made of the strata reached so far by the small savings movement both in urban and in rural areas, and a concerted effort undertaken by State Governments and by non-official agencies to carry the message of the plan all over the country and to bring into the small savings movement all the areas and classes that have so far not been covered. The aim should be to induce every citizen of the country to make a contribution, however small, to the task of transforming the economy.

9. The contribution of the railways to the financing of their plan of Rs. 900 crores has been placed at Rs. 150 crores. In the first plan period the railways contributed Rs. 115 crores towards the estimated outlay on the railway plan of Rs. 267 crores. In the second plan period the railways' own contribution to their plan is a much smaller proportion of the total. It is understandable—and indeed inevitable—that the railways should draw upon the general exchequer to a significant extent at a time when the new developments envisaged in the economy require them to shoulder large additional responsibilities in a short space of time. The railways have also to make in the plan period a contribution ofRs. 225 crores for current depreciation, which has not been included in the plan. Nevertheless, a contribution of Rs. 150 crores by the railways for their plan can only be regarded as the minimum they must achieve. We would like to reiterate the point that the railways, like all developing enterprises, whether public or private, should endeavour to provide a sizeable part of their needs for expansion from their own resources. In the period of the second plan a considerable expansion in railway traffic is anticipated. Although part of this will be of a type which does not raise earnings proportionately, railway earnings as a whole will go up. Even after allowing for some unavoidable increases in working expenses, it would appear that part of the contribution from the railways should be forthcoming at existing rates in response to the growth of demand. Part will have to be found by selective adjustments in rates and freights. Considering the strain on the financial resources of Government which the second plan involves, we would in fact recommend that the railways exert their utmost to raise their contribution above the level of Rs. 150 crores which has been indicated for them.

10. The estimate of Rs. 250 crores under provident funds and other deposit heads is a projection of the current trends of receipts under these heads. The net accumulations of the Centre by way of provident funds are estimated at Rs. 17 crores for 1955-56 and for the States the corresponding receipts in 1955-56 work out at Rs. 6.6 crores. As against this total of Rs. 23.6 crores, tt is reasonable to assume receipts amounting to Rs. 150 crores under this head for the second plan period. The remaining Rs. 100 crores represents recoveries of loans, advances made by the Centre and the States and miscellaneous capital receipts.

11. The total of resources mentioned so far amounts to Rs. 2400 crores. The problem is to find another Rs. 2400 crores. Some 50 per cent of this, that is, Rs. 1200 crores can at the outside be raised through deficit financing. The plan takes credit for Rs. 800 crores of external resources. In the first plan period, the utilisation of foreign loans and grants amounted to Rs. 40 crores a year. An average of Rs.160 crores a year proposed in the scheme of financing presented above thus represents a large increase in the inflow of resources from abroad.

12. It is obvious that the second five year plan will strain the financial resources of the country. A measure of strain is implicit in any development plan, for, by definition, a plan is an attempt to raise the rate of investment above what it would otherwise have been. It follows that correspondingly larger effort is necessary to secure the resources needed. It is from this point of view and in the light of the continuing requirements of the economy over a number of years that the task of mobilising resources has to be approached. Domestic savings have.to be stepped up continuously and progressively in order to secure the objective of rapidly rising investment and national income.

Savings In Relation To Public Investment

13. The problem of financing the development programmes in the public sector may be looked at in another way. Of the total outlay of Rs. 4800 crores over the five year period, approximately Rs. 1000 crores represents expenditure of a current nature for increasing the scale of developmental activities under heads like education, health, scientific research, national extension and the like. Such expenditure does not result directly in the creation of productive assets and is, by 'convention, regarded as non-investment expenditure. Expenditure of this character has to be met from current resources. The investment component of the plan aggregating to Rs. 4800 crores is Rs. 3800 crores and this could be financed through borrowing. In a developing economy, in which expenditures on capital formation are growing rapidly, it would, in fact, be desirable to finance a part of them from the surpluses obtained by taxation. This principle was stressed in the report on the first plan, and it needs stressing again.

14. In the scheme of financing envisaged for the plan, surplus from current revenues for financing the plan amounts to only Rs. 800 crores as against the requirements of Rs. 1000 crores by way of current expenditures. The contribution of the railways amounting to Rs.150 crores must, in addition, be regarded as a contribution from current earnings. This means that the total current revenues available for the plan amount to Rs. 950 crores as against the estimated current outlay of Rs. 1000 crores. There is thus no public saving available for financing the investment outlay ofRs. 3800 crores; there is, in fact, a dissaving of Rs. 50 crores. In other words, the entire capital formation of Rs. 3800 crores—and a little more—will have to be financed by a draft on private savings. Allowing for Rs. 800 crores of external resources as a separate category since it represents savings from abroad, and reckoning in the proposed drawing down of accumulated sterling balances by Rs. 200 crores, the amount of current private savings within the economy to be channelled into public investment would work out at Rs. 2850 crores. Assuming further that the uncovered gap ofRs. 400 crores will ultimately be met from public savings, the transfer to the public sector of private savings will have to be of the order of Rs. 2450 crores.

15. Would it be reasonable to assume that private savings of the order of Rs. 2450 crores would become available to the public exchequer? In this context, it will be seen, the distinction between market borrowings, small saving and deficit financing is of minor importance. All these are devices for diverting private savings either voluntary or forced through price rises, to the public exchequer. The manner in which—and the extent to which—private savings get transferred to the public sector depends essentially upon the willingness of the public to hold their assets in different forms: cash, negotiable government bonds and small savings certificates, or deposits. So long as the total savings transferred are adequate, it is a matter of comparative indifference whether they take the form of subscriptions to loans or of small savings or are held in the form of currency created by the State. The first essential point, then, is whether private savings can be expected to be larger than the requirements for private investment by the amount that is needed by the State. Sufficiency of private savings in this sense can be postulated only if the necessary overall constraints on consumption are operative. In other words, the smaller the proportion of public savings available directly to the state in the form of surplus tax receipts or profits of public enterprises, the greater is the need for other measures or techniques for keeping down consumption within the desired limit.

16. If measures for increasing the overall rate of savings in the economy to the desired extent are nQt taken, any attempt on the part of the State to appropriate for itself resources on the scale envisaged here will inevitably lead to inflationary pressures—for these latter are only a symptom of the shortage of savings in relation to the competing claims from the different sectors of the economy. It must be emphasised in this context that the control of inflationary pressures and the maintenance of public confidence in the stability of the currency are prime requisites of successful policy for mobilising savings. The contrast between the experience of the earlier and later years of the first plan in the matter of response to government loans is sufficient indication of the fact that public loans and small savings succeed best in an atmosphere of financial stability when the avenues for speculative investment are few and the outlook as to the value of money is considered favourable.

Deficit Financing

17. This brings us to the question of the scope and limits of deficit financing. In the first plan report, deficit financing.was defined as Government spending in excess of Government receipts in the shape of taxes. earnings from state enterprises, loans from the public, deposits and funds and other miscellaneous sources. This definition is based on two underlying principles. Firstly, it stresses the fact that a deficit must be judged not merely in terms of the revenue account but must cover all those transactions on revenue as well as on capital account and of both the Centre and the States. Secondly, in defining what type of financing constitutes deficit financing, the criterion should, by and large, be whether or not the transaction in question tends to increase money supply. The first of these two principles is clearly unexceptionable. The second raises the question whether it is possible to infer directly and in any precise way the impact of a particular type of budgetary operation on monetary circulation merely in terms of the type of operation Withdrawals from cash balances and increases in floating debt normally tend to increase money supply and are as such recognised as part of deficit financing. But, in regard to the latter, it could be asked if all short-term borrowing necessarily leads to an increase in money supply, or whether, one ought not to distinguish between short-term borrowing from the central bank, from the commercial banks and from the public at large. There is, in principle, a case for such distinctions—both in the case of short-term and long-term borrowing by Government. In so far as government expenditure is financed by central bank credit there is a direct increase in currency in cir culation. Purchase of government securities by commercial banks is also not on par with the purchase of these securities by the public directly. While the monetary impact of government's borrowings will differ according to type of subscriber, it would clearly be impracticable to record government's borrowing operations on this basis. Nor does the ownership of public debt remain with the same persons or institutions that bought it to begin with. This is an area in which fiscal policy of government and the monetary policy of the central bank get intermingled and it is difficult to isolate the impact of one from that of the other. The only practical course is to adopt a convenient convention which under prevailing practices gives as near an approximation to the purpose in hand as possible. In India, where the normal practice is not to rely on the central bank for subscription to new issues of long-term securities and where short-term debt of the government is largely held by the central bank, a deficit measured in terms of withdrawals of cash balances and net increases in floating debt gives on the whole, a reasonably reliable indication of the impact of the budget on money supply. We should, however, emphasize the point that there is no substitute for a close analysis, in a given context, of all relevant budgetary, monetary and foreign exchange transactions.

18. To give an example, it is clear that if a decline in cash balances or an increase in short-term debt is matched by a corresponding withdrawal from foreign exchange reserves, there will not, on balance, be any increase in domestic money supply. It is convenient, however, to treat a decline in cash balances or an increase in short-term debt as deficit financing and to allow separately for the money-withdrawing effect of any decline in foreign exchange reserves. Mention may also be made in this connection of a similar problem which arises in the case of sales of securities by the Central and State Governments from their cash balance investment accounts. These transactions were regarded in the first plan as deficit financing. The underlying assumption was that in the circumstances of the time such sales would in effect have to be absorbed by the Reserve Bank. This has not happened in fact As mentioned earlier, the long-term securities held by the Reserve Bank have declined. In effect, therefore, the sales of old securities have not resulted in an increase in money supply. Thus, whereas on one assumption sale of securities from reserves is tantamount to deficit financing, it will, in another situation, have the same effect as borrowing from the public. Whether one includes the sale of securities from reserves in deficit financing or not, it is clear that in judging the effect of deficit financing on money supply it will be necessary to bear in mind other related data such as the change in the holdings of securities by the central bank. Further, the significance of a given increase in money supply has itself to be assessed with reference to a number of other circumstances.

19. Coming to an assessment of the likely reactions of the proposed deficit financing in the plan, it may be noted that against the deficit financing of Rs. 1200 crores, we must set off the drawing down of sterling balances by Rs. 200 crores. The remaining deficit of Rs. 1000 crores represents the net addition to currency in response to the government's budgetary operations. This may be expected to result in a secondary expansion of credit by banks. The ability of banks to create such credit is limited by the fact that the people in India have a distinct preference for holding currency rather than bank money, so that an initial accretion to the cash held by banks permits a relatively small increase in bank credit. If we assume that the ratio between currency in circulation and deposit money remains unaltered, money supply would show something like a 66 per cent increase over the plan period. National income over this period is expected to increase by 25 per cent and we may assume that an increase of the same order in money supply would in any case be safe. Some allowance must also be made for the increased monetisation of the economy and for the increased demand for cash as levels of living improve and the convenience of holding cash comes within the reach of a larger proportion of the people. Even so, the expansion of money supply of the order mentioned cannot but be regarded as the outside limit.

20. Deficit financing will augment the ability of banks to extend credit to the priva.te sector. Such expansion will be needed and will have beneficial results upto a point. Care will, however, have to be taken to prevent excessive credit expansion which may react adversely on prices and to ensure that credit does not flow into speculation to the detriment of productive activity. The Reserve Bank has wide powers of supervision and control over commercial banks. It can vary its own accommodation to the banks and can issue directives to them under certain circumstances. Quantitative as well as qualitative controls on credit, including variations from time to time in the relationship to be maintained between the liabilities of banks and their reserves, should, we suggest, be regarded as an important accompaniment to the scheme of deficit financing we have recommended. Central banking policy along these lines can and has to play a vital role in steering the economy on an even course.

21. We have had ^occasion in an earlier chapter to mention some of the safeguards that can be adopted against the adverse consequences of deficit financing, and they need no more than a brief mention here. A major safeguard is building up of sufficiently large stocks of foodgrains in order to counteract inflationary pressures that may emerge from time to time, and this has been referred to in chapter II as an important constituent of economic policy. No amount of prudence in financial management can by itself eliminate completely the risk of inflation in an economy attempting to develop rapidly. The best defence against inflation is, is in a sense, to keep clear of it, but a policy of "playing safe" is not always conducive to development. A measure of risk has to be undertaken, and the most effective insurance against this risk is command over reserve stocks of food grains—and a few other essential commodities— which can be used to augment the supplies in the market as and when necessary. Prices of food and cloth occupy a strategic position in the Indian economy, and a sharp rise in these prices has to be prevented by the use of all available devices. So long as these prices can be maintained at reasonable levels, the cost of living of the large bulk of the population can be kept under control. Increases in prices of other commodities would be a matter of comparative unim-portance, although any excessive rise in prices anywhere in the system does carry the danger of a drawing away of resources into low-priority uses. Corrective action can, however, take care of such a situation. A further defence against inflation is discriminating but prompt use of the instrument of taxation to prevent excessive increases in consumption in certain lines and to mop up the excess profits or windfall gains that deficit financing tends to generate. Finally, physical controls, including rationing and allocations, can be used to prevent consumption from increasing beyond a particular level and for economising scarce materials or scarce productive resources. But experience of the past suggests that physical controls, especially on essential and staple consumer goods, are not a device that can be relied upon to function effectively or equitably for any great length of time. This makes it all the more necessary to utilise to the full all the other available safeguards and correctives, for a curtailment of the plan itself can, in the nature of things, be thought of only in a situation of extreme difficulty.

Resources of State Governments

22. So far we have considered the resources position of the Central and State Governments in the aggregate as against the total plan of Rs. 4800 crores. We may now analyse separately the resources position of State Governments. Appendix I at the end of this chapter sets forth the relevant data, and the following table presents in summary form the contribution Part A and Part B States are expected to make towards the financing of their plans:

Financial Resources of Part A and Part B States

*These represent accumulations in provident funds, recoveries of loans and advances, appropriations from current revenues for reduction or avoidance of debt and miscellaneous capital receipts minus committed disbursements on capital account including repayments of loans, payments of compensation to zamindars and jagirdars, etc.

It will be seen that the balance which these States can make available from their resources at existing rates of taxation is below Rs. 100 crores. Their share of additional taxation against the total ofRs. 225 crores for all States works out at Rs. 216 crores. The States are likely to get about Rs. 57 crores as their share from the additional taxation to be raised at the Centre. Making allowance for interest charges in respect of new loans to be raised from the public, the revenue resources of Part A and Part B States aggregate to Rs. 337 crores. The target for new loans to be raised by State Governments in the second plan period has been placed at Rs. 300 crores. This is a gross figure, the repayments against which amount to about Rs. 35 crores; the net borrowing of some Rs. 265 crores by the States may be compared with the total borrowing programme of Rs. 700 crores for the Centre and States together. The State Governments are expected to receive as their share of small savings about Rs. 180 crores. Allowing for other net receipts on capital account, the total of States' resources on capital account works out at Rs. 486 crores. Altogether Parts A and B States are thus expected to find about Rs. 823 crores as ag?inst their total plan of over Rs. 2100 crores.

23. The plans of Part C States together with those for Andaman and Nicobar islands, N.E.F.A. and Pon-dicherry are estimated to involve an expenditure ofRs. 125 crores. The resources of Part C States for meeting these expenditures are negligible and in fact the Centre has to finance gaps on revenue account in respect of several of them. Measures for additional taxation amounting to Rs. 9 crores over the five year period have been suggested for Part C States; their estimated receipts by way of loans from the Centre against their collections of small savings are around Rs. 20 crores. The overall position is that the Centre has to finance the entire plans of these States as also of the other areas mentioned above.

24. It will thus be seen that the resources of all the States taken together fall far short of their requirements—by as much as 60 per cent. of the total. In the circumstance, large transfers of resources from the Centre to the States are inevitable. It has to be remembered at the same time that the Centre's own resources are limited and if a plan of the dimension envisaged is to be implemented in full, it will be necessary for the State Governments to contribute their utm'ost by way of resources for the plan.

25. The target of Rs. 225 crores of additional taxation to be raised by Stale Governments has been determined on the basis of detailed discussions with them and an assessment of the likely yield of the various measures recommended by the Taxation Enquiry Commission. The measures in view include land revenue surcharges, increases in rates and extension of territorial coverage of agricultural income tax, more extensive adoption of property taxes and taxes on transfer of property by local bodies, a widening of the coverage and an increase in rates of sales tax, etc. So far as the Centre is concerned, some of the recommendations of the Taxation Enquiry Commission were implemented in 1955-56. The yield from these measures has been taken into account in estimating the resources available for the plan at existing rates of taxation. The Central Budget for 1956-57 contains proposals which are expected to yield an additional annual revenue of approximately Rs. 35 crores. A substantial step has thus been taken towards realising the target of Rs. 225 crores of taxation by the Centre over the five year period. That target, as we indicate later, needs to be raised. But, we should like in this context to reiterate the importance of early action on me part of States to obtain the additional tax resources of Rs. 225 crores which they are expected to find. Details have been worked out with State Governments for raising about Rs. 166 crores of this total ofRs. 225 crores, and with some of the States discussions are proceeding in regard to further measures. A rough breakdown of the tax measures to be adopted for raising Rs. 225 crores of additional taxation by States is as follows: (Rs. crores)

It will be seen that what is envisaged is a little more effort along existing lines rather than any far-reaching innovations in the sphere of State taxation.

26. Reference has been made earlier to the specific need for augmenting public revenues so as to secure, on net, a surplus which could be utilised for capital formation. The least that is necessary is, obviously, that each public authority should balance its revenue account. There is scope for some transfer om items of expenditure from the revenue to the capital account; also the present practices in regard to this classification are not uniform in all the States. This aspect of the question is being looked into. Once an agreed classification of revenue and capital items has been worked out, revenue resources must be found by each taxing authority to meet its recurrent needs. The Finance Commission appointed at the end of every five years under the Constitution recommends such transfers of resources from the Centre to the States as it deems fit in view of all the circumstances. Given this award, large or continuing deficits in revenue budgets are clearly indefensible either on principle or on any practical grounds.

The Role of Public Savings in A Developing Economy

27. An important conclusion that emerges from the above, review of the financial resources of the Centre and States vis-a-vis the requirements of the plan is that an enlargement of the savings of public authorities is urgently necessary if the State is to discharge effectively the new and growing responsibilities it is being called upon to shoulder. When the role of the State is to supply entrepreneurship and management over a wide field, this must carry with it the corresponding capacity to find the finances needed. A basic weakness of the present situation is that the State has very' little resources of its own by way of surpluses it can utilise for investment, and it has, therefore, to depend upon whatever transfer of private savings it can bring about through its borrowing programmes or through deficit financing. Over the first plan period, the total volume of public savings raised by the Centre and .Stales for financing their investment (as distinct from development programmes) appears to have been around Rs. 250 crores. A large part of these public savings became available in the first two years of the plan when export duties yielded large amounts. In the second plan period, as shown earlier, the contribution of current revenues to the financing of the plan is, in fact, somewhat less than is required to meet the current expenditure of Rs. 1000 crores. This, we should like to emphasize, is a limitation on the State's capacity to push through a big programme of investment.

28. Over a period a substantial increase in the tax resources of the Centre and States is necessary and feasible. As is well known, the proportion of tax revenues to national income in India is around 7.5 per cent. which is much lower than the share of the public exchequer not only in countries like the U.K. and U.S.A. but also in certain relatively under-developed countrie.s. The Taxation Enquiry Commission has drawn attention to ihe fact that this proportion has remained practically unchanged over several years, and that a widening and deepening of the tax structure is called for if the various demands of a welfare state are to be adequately met. Considering the financial requirements of the second plan which are considerably larger than were assumed by the Taxation Enquiry Commission—and the dangers of deficit financing, or in the alternative, any cutback in plan expenditures—we recommend that the possibilities of stepping up of the target of additional tax resources substantially within this plan period be investigated fully and the goal set at covering by taxation or from state trading, suitable fiscal monopolies and profits of public enterprises, the gap of Rs. 400 crores which remains in the scheme of financing that has so far been envisaged. Considering the needs of the plan on the one hand and the degree of reliance that is being placed on borrowings and deficit financing, the conclusion is inescapable that the target for additional taxation has to be raised from Rs. 450 crores to around Rs. 850 crores. This will reduce the dangers of any serious inflationary situation developing and will represent a step in the right direction from the more long-range point of view of strengthening the investment potential of the public sector.

29. The lines along which this further effort may be made will have to be examined carefully. In an earlier chapter, mention has been made of some of these, such as a tax on wealth, a gifts tax and a widening of the concept of income so as to include in it capital gains. Reference has also been made to the suggestion that the basis of personal taxtaion be shifted, at least for the higher income groups, from income to expenditure. The reform and strengthening of the tax system along these lines may open out possibilities not only of augmenting public revenues but of closing some of the loopholes in the present system which offer scope for tax evasion. Such evasion cannot always be stopped by a mere tightening of administration; it may require a modification of the very basis and procedures of assessment. It must be recognised, of course, that taxation has its limits, and this means in turn that it has to be supplemented by institutional arrangements which bring directly into the public exchequer the surpluses which accrue from the sale of goods and services to the public. It is through devices of this type, that is, through appropriate pricing policies in respect of the products of public enterprises and Enough state trading or fiscal monopolies in selectc J lines that some of the under-developed countries with levels of living not much higher than those in India are raising the resources required for their developmental effort. An essential corollary—if not a prerequisite—of a growing socialist pattern of society is a corresponding growth in what we have called public savings.

30. Finally, it must be mentioned that the carrying through of substantial investment programmes in the public sector implies the exercise of the greatest degree of economy in boTh plan and non-plan expenditures. Certain increases, in non-plan items may be unavoidable, but the temptation to undertake developmental schemes outside the plan has to be strongly resisted. Here too, there may be unforeseen needs, but the necessary adjustments have to be made through annual plans within the framework of the five year plan. The concept of economy in this context is not the limited one of pruning expenditures; attempts at mere pruning, as experience has shown, rarely bear much fruit. What is required is meticulous care in the use of resources, especially of scarce resources like cement and steel, and the optimum utilisation of available manpower and materials in all projects so as to bring them into early fruition. It is in the light of these considerations that the National Development Council has recently constituted a high-powered Committee to watch over the progress of developmental projects so as to secure the maximum possible economy and efficiency in their implementation.

Investment In The Private Sector

31. In addition to the investment programme of Rs. 3800 crores in the public sector, the requirements by way of investment in the private sector are estimated at Rs. 2400 crores. The broad break-up of these requirements has been given in Chapter III. The question arises whether the resources available to the private sector would be adequate to finance investment of this order, after making allowance for the resources claimed by the State. In one sense, the answer to this question is already implied in the assumption that aggregate savings on the scale required to finance the total investment in the economy would be forthcoming. The problem, as stated earlier, is to see that domestic savings rise from about 7 per cent of national income at the beginning of the second plan period to some 10 per cent by the end of the period. This rate of domestic savings would be adequate if external resources of the order of Rs. ] 100 crores become available over the five year period. The stepping up of domestic savings as envisaged in the plan is by no means excessive. It implies, a marginal rate of saving of a little over 20 per cent In a sense, therefore, the answer to the question posed in this paragraph is in the affinnative.

32. It is important however, to stress the point that this overall equality between projected investment and postulated savings is not a complete answer. Operationally, the problem is to ensure that the investments undertaken can be seen through without an excesssive strain on the economy through price rises and similar distortions, and the issue is essentially one of the adequacy of instruments or policies for getting the desired result. It is virtually impossible to know in advance whether the necessary savings world be forthcoming; nor is it easy to predict where any shortage of savings would impinge. It can be argued that since the investment programmes in the public sector depend to a large extent on borrowings from the private sector, the impact of any shortage in savings will probably fall mainly on the public rather than on the private sector. On the other hand, the public sector has certain advantages in the matter of getting access to scarce resources. It is also not true that the savings of the private sector emerge at precisely the points at which private investment is to take place. Very much, therfore, depends upon the relative efficiency of the two sectors in getting at the savings where they emerge. This fact highlights the need for suitable fiscal and other policies to ensure an overall sufficiency of savings and for safeguarding to the extent possible the priority programmes of investment in the private sector, should need arise, through special measures of assistance.

33. It is difficult to indicate for the private sector the sources of savings in any detail, as only a small proportion of the total savings utilised in that sector passes through institutional agencies. A large part of the investment in agriculture, trade, construction and small scale industries is financed by direct savings, that is, by the savings of the persons undertaking the investment or the savings of their friends and relatives. In this part of the private sector, any shortage of resources gets reflected directly in a failure to invest. Estimates of the sources of funds for investment in the organised sector of private industry can be made, though inevitably on certain broad assumptions. The scheme for financing such investment is shown in Chapter XIX. The State can assist in the fulfilment of the programmes in this sector partly by cutting out undesirable investment—through capital issues control, control over exports and imports and licensing of industries; partly through tax adjustments and concessions'and in part by way of selective financial assistance through the various corporations which have been set up for the purpose. The progress of investment in the private sector has to be constantly watched even as that in the public sector and the necessary adjustments in policy have to be made from time to time. Broadly speaking, it would appear that considering the fairly high rates of investment already achieved in organised industries and the increasing strength of the capital market, it should not be difficult for them to raise the resources needed for fixed investment. As regards working capital, there should be even less difficulty in view of the deficit financing proposed in the plan. The problem in fact, as argued earlier, might well be to check an excessive expansion of bank credit and a diversion of resources speculative purposes'.

Foreign Exchange Resources For The Plan

34. We now turn to the problem of foreign exchange resources for the plan. It is to be expected that the second five year plan with the substantial stepping up of aggregate investment that it envisages and its stress on industrialisation will involve a heavy strain on foreign exchange resources. Estimates of foreign exchange earnings and requirements over a period of five years cannot be made with any great precision. There are many uncertainties in the situation. Several of India's important export commodities, such as tea, jute goods and manganese ore are subject to sharp fluctuations in demand, and a relatively small adverse turn in the monsoon is apt to necessitate substantial imports of foodgrains and raw materials. Again, the terms of trade change from time to time. Even a ten per cent." deterioration in these can make a difference of as much as Rs. 80 crores to the payments position in a single year. The annual phasing of import requirements presents special difficulties, for this depends not merely on the requirements of the development programme but also on the availability of machinery or key materials like steel from abroad. These uncertainties notwithstanding, it is essential to form, a view of the likely trends in the balance of payments and to assess the adequacy of foreign exchange resources in the light of requirements.

35. The difficulties that are inevitably involved in forecasting foreign exchange requirements and earnings over a period of five years are amply illustrated by the experience of the first plan. When that plan was formulated (i.e. in December, 1952) it was estimated that there might well be a deficit in the balance of payments of the order of Rs. 180—200 crores per year during the remainder of the plan period. In the event, however, the deficit on current account (exclusive of official donations) for the five year period as a whole has been of the order of only Rs. 50 crores—the large deficit of Rs. 142 crores in 1951-52 and the small deficit of Rs. 9 crores in 1954-55 being partially offset by surpluses in the remaining years. One of the main reasons for this favourable outcome has been the lower volume of food imports on account of a large increase in domestic production. Imports of machinery have also been lower than was anticipated in the first plan report.

36. The following table sets forth the estimated balance of payments position for the second plan period.

India's Balance of Payments on Current Account (1956-57 to 1960-61)
(Rs. Crores)

Over the five years, the aggregate deficit on current account works out at about Rs. 1100 crores. The phasing of exports and imports given in the table above is necessarily very rough. But, it will be seen that a large part of the deficit is expected to occur in the second and third years of the plan. The "hump" in the middle of the plan period is accounted for by the fact that imports of steel, machinery and equipment anticipated in the earlier years oflne plan reach a peak about the time the plan is halfway through The construction of the new steel plants and a large part of the expansion and re-equipment of the railways have to be completed before the last year of: the plan. As these and other programmes get completed, the strain on the balance of payments will diminish.

37. The general picture that emerges is that while exports will rise modeiutely from an estimated level of Rs. 573 crores in 1956—57 to Rs. 615 crores in 1960-61, imports will rise substantially over the first four years, resulting in a negative trade balance of about Rs. 1375 crores over the plan period—or Rs. 275 crores a year on an average. After allowing for the surplus on invisibles, the deficit on current account works out to a total of Rs. 1120 crores—or Rs. 224 crores a year.

38. Before turning to the details of the expected level of exports, imports and invisible transactions, it 'is important to underline two assumptions on which the estimates given here are based: (a) that the terms of trade in the next five years will remain, on an average the same as they have been in 1955-56 (first nine months), and (b) that inflationary pressures will be held firmly under control. The terms of trade index (with 1952-53=^! 100) stood at about 100 in the first nine months of 1955-56 as against 133 in 1951-52 when the Korean boom was at its height, 101 in 1953-54 and 110 in 1954-55. These figures give a rough indication of the comparative significance of the particular terms of trade we have chosen as the basis of our calculations. The second assumption is one that underlies all our calculations of savings, investment and financial resources for the second plan, but it is relevant to emphasize this fact in the present context. The balance of payments is particularly sensitive to inflationary pressures. Rising domestic prices create new demands for imports and come in the way of exports. While commerical policy can mitigate these adverse repercussions for a time, there is no doubt that the corroding effect of a sharp or continued inflation within the economy cannot long be prevented from making itself felt in the country's balance of payments position. In the interest of domestic economic stability as well as of a healthy balance of payments position, effective control of inflationary pressures is a prime necessity.

Exports

39. The following table gives the expected earnings from major exports over the second plan period as compaied to those in 1954 and 1955 :-

Merchandise Exports

The estimates for the plan period are in terms of prices prevailing in 1955-56 (first nine months) whereas the data for 1954 and 1955 are in terms of prices then current It will be seen that the average level of export earnings in the second plan period is expected to be higher than in 1954, and export earnings in 1960-61 are estimated to exceed the 1954 level by 9 per cent If allowance is made for the fact that export prices in 1954 were roughly 5 per cent higher than those assumed by .us for the plan period, export earnings over the period of the plan can be said to show significant improvement over 1954. As compared to 1955, the level of exports in the plan period shows little improvement. This is mainly because the exports or oils and cotton in 1955 were unusually high and are not expected to continue at that level. In items other than these two, there are however significant increases even as compared to 1955.

40. Tea exports suffered a serious setback in 1955. Exports in that year amounted to some 362 million Ibs. as compared to 450 million Ibs. in 1954. These exports may be expected to recover in the course of the second plan period, and to reach a,level of 470 million Ibs. by 1960-61. The average annual rate of exports over the plan period has been assumed at 450 million Ibs. Export prices of tea have varied sharply in recent years. In 1954-55 the index (base 1952-53= 100) was as high as 169 as against 115 in 1953-54. In the first nine months of 1955-56 tea prices declined steadily, the index for the period as a whole being 149. It will thus be seen that in estimating export earnings (at 1955-56 prices) we have assumed a level of export prices lower than in 1954-55, but significantly higher than in the earlier two years.

41. Exports of jute manufactures in 1954 amounted to 841,000 tons. In 1955 they rose to 893,000 tons. Since competition from other jute manufacturing countries in likely to be felt increasingly over the coming years, it does not seem advisable to count on average exports of more than say 875,000 tons per year during the second plan period.

42. Exports of cotton piece-goods—mill-made and handloom—amounted to 867 million yards in 1954. They declined to 747 million yards in 1955. These exports are expected to rise progressively during the plan period, reaching a level of 1000 million yards by 1960-61. Cotton textiles is one of the oldest industries in the country and it would be natural to expect it to play an increasing role as a foreign exchange earner. On the other hand, the domestic demand for textiles is on the increase. It is important therefore, that every effort should be made to maintain and improve the competitive position of the industry. Effort should also be made to increase the exports of handloom products for which there is growing interest in foreign markets.

43. Earnings from non-mineral oils are accounted for almost wholly by non-essential vegetable oils. The exports of these oils increased sharply from 16.8 million gallons in 1954 to 75.7 million gallons in 1955. Production of oilseeds is expected to increase considerably during the second plan period, it would be reasonable to expect that although the 1955 level may not be maintained, exports of non-essential oils will average significantly above the 1954 level. There is considerable scope for increase in the export of these oils particularly to new markets. If, as suggested earlier, the targets for agricultural production can be stepped up above the level envisaged in the plan it should, in fact be possible to maintain and even improve upon the 1955 level of exports.

44. Exports of raw cotton increased sharply in 1955 teaching a level of 93,000 tons as against 26,000 tons in 1954. On an average, raw cotton exports in recent years have. been of the order of 50,000 tons per year. We have allowed for the maintenance of exports at this level in the second plan period.

45. The increased export earnings under "metallic ores and scrap" are expected to arise mainly from larger exports of iron ore. Domestic production of iron ore is scheduled to rise from 4.3 million tons in 1954-55 to 12.5 million tons in 1960-61 and domestic consumption from about 3 million tons to 10.5 million tons. Moreover, foreign demand for the ore is strong. Exports of iron ore may thus be expected to increase, and may reach a level of about 2 million tons by the last year of the plan, as compared with exports of around 1 million tons in recent years.

46. No comment seems necessary on other export items which consist of a large number of "miscellaneous commodities inasmuch as they are assumed to bring in about the same level of earnings as at present Mention may, however, be made of the export possibilities for some of the new industries which have developed in recent years. The hope was expressed in the first plan that new lines of export, particularly in the light engineering field, e.g. sewing machines, electric fans, cycles, etc. will assume increasing importance as the economy gets diversified. These exports have not yet reached a level where their earnings could be regarded as quan-titatively significant. It will be some time before these new industries establish themselves firmly and secure sizeable export markets.

47. On the whole the fact remaps that the increase in exports that we envisage over the plan period is not very striking. India's export earnings are derived from a few commodities. Three of them, namely, tea, jute manufactures, and cotton piecegoods account for one-Half of the total. These major exports are meeting increasing competition abroad. This limits, the scope for any substantial increase in exports in the short run. While every effort has to be made to promote exports of new items and to develop and diversify the markets for the country's major exports, it has to be recognised that it is only after industrialisation has proceeded some way that increased production at home will be reflected in larger export earnings.

Imports

48. The following table shows the estimated level of imports required in the second plan period:

MERCHANDISE IMPORTS
(Rs. crores)

It will be seen that the bulk of the additional imports relate to machinery and vehicles, iron and steel and other metals. Of the total imports of machinery and vehicles estimated at Rs. 1500 crores over the plan period, the requirements of the public sector take up about Rs. 1050 crores: Rs. 425 crores for transport and communications (Rs. 290 crores being for the railways alone); Rs. 290 crores for industries and minerals (of which Rs. 180 crores is for the steel plants); Rs. 170 crores for irrigation and power schemes; and about Ry. 165 crores for other governmental requirements. Imports of machinery and vehicles needed by the private sector for purposes of expansion, modernisation and replacement are estimated at Rs. 450 crores over the second plan period. The large requirements of imports of machinery and vehicles reflect the emphasis in the plan on the development of basic industries. This emphasis, while it strains the balance of payments position in the short run, is calculated in the long run to strengthen the country's external accounts as well as its investment potential.

49. Imports of melals, and especially of iron and steel, are expected to be on a greatly expanded scale during the second plan period. Iron and steel imports increased from Wi lakh tons in 1954 to nearly 7 lakh tons in 1955; they are expected to total 70 lakh tons over the plan period, practically all the imports coming in the first four years. Requirements of non-ferrous metals such as aluminium and copperwill also increase materially. Taken together, imports of iron and steel and other metals are estimated to amount to a total of Rs. 650 crores over the planperiod. This works out at an average rate of Rs. 130 crores a year, as compared to the imports of Rs. 75 crores in 1955.

50. In regard to foodgrains, total imports of 6 million tons over the plan period have been allowed for. Imports of foodgrains have declined in the last two years. They amounted to 840,000 tons in 1954 and 755,000 tons in 1955. With increasing population and rising incomes, the consumption of foodgrains is certain to go up in the coming years. The stocks held at present by Government are very low, and they need to be replenished early. Considering these facts, imports aggregating to about six million tons in the plan period would appear to be essential, and a substantial proportion of this total will have to be imported in the first half of the period. In the case of sugar it is assumed that, in view of the large increase in domestic production that is envisaged, import requirements will not exceed a total of 5 lakh tons during the plan period.

51. The bulk of the country's total imports of oils consists of mineral oils. It is expected that with the third oil refinery going into production, practically all the requirements of motor spirit will be rpet from domestic production, imports of motor spirit being repiaced by cn'de petroleum. Aviation spirit, kerosene oil and other mineral oils will, however, have to be imported in substantial' quantities. Taking account of all these factors, it is estimated that the average rate of imports of oils during the plan period will be about Rs. 82 crores per year, which is below the level of imports in 1954 but above that in 1955.

52. Despite increased domestic requirements, the average rate of imports of chemicals, drugs and medicines during the second plan period is expected to be virtually the same as in 1954 and 1955. Substantial increases in the domestic production of chemicals, especially caustic soda and soda ash, are envisaged in the plan. While there will be mateiial savings in the imports of caustic soda and soda ash, imports of other chemicals will go up. Imports of dyes and coloures are expected to be smaller on ar average than-at present owing to the substantial increase envisaged in domestic production. Similarly, some savings in imports is expected because of the increased domestic production of newsprint and other paper.

53. Import-s of consumer goods, such as, cutlery, hardware and electrical goods and apparatus should normally increase in response to the improvement in the lev't'5 of living in (he country. Part of the increased demand will be irel froar, t.dJ.itional domestic production. For demands ib and ^e this level it is assumed, in view of the over-all shortage of foreign exchange resources, that policy will be directed to preventing any material increise in these imports.

54. Imports of raw cotton declined from 123,000 tons in 1954 to 106,000 tons in 1955, and raw jute imports increased from 217,000 tons in 1954 to 248,000 tons in 1955. We have assumed that on an average the imports of raw cotton and of raw jute would run at about the same rate as in 1954-55.

55. We have allowed for a small increase in "Other imports", mainly in order to provide for imports of cement which have become necessary of late. A total provision of Rs. 25 crores has been made over the five year period for this purpose. Other imported commodities in this group consist of a large number of consumer goods such as provisions, tobacco and textiles, and of raw materials such as raw wool, rayon pulp and timber. On the whole, imports of these commodities are assumed to run more or less at present levels.

Invisibles

56. On invisible account (excluding official donations) there was a surplus in 1954 of Rs. 73 crores and in 1955 of Rs. 72 crores. D.uring the second plan period this surplus is expected to average about Rs. 51 crores a year. A substantial fall in receipts of investment income is expected in view of the anticipated reduction in official holdings of foreign assets (sterling balances). At the same time payments of interest and dividends abroad will rise appreciably because of increases ia private business investment as well as in official borrowings. Compared to 1954-55, net payments of investment income are estimated to be higher by about Rs. 20 crores on an average per year during the plan period. On other items such as foreign travel, transportatior and private donations, no significant changes in net receipts are expected.

The Deficit

57. To sum up, on current account, the total deficit over the five years is likely to amount to Rs. 1100 crores. On capital account, amortisation payments on the U.S. wheat loan and I.B.R.D. loans contracted in the past would be more than offset by the receipts from the U.K. Government on account of sterling pensions. Some of the new loans and credits obtained during the second plan period will also entail some repayments, but these can be allowed for by reckoning these credits on a net rather than a gross basis. On balance, capital commitments on government account are not expected to have any significant effect on the payments position. On private capital account, allowance has to be made for repatriation of capital invested in the country. Here again, while there would be some repatriation of capital, new private capital will flow in and the overall impact on balance of payments may be reckoned on a net basis. It follows then that the current account deficit ofRs. 1100 crores mentioned above has to be matched by a net inflow of foreign resources of that order either on private or on government account

58. Part of the deficit ofRs. 1100 crores can be financed by drawing down the foreign exchange reserves of the country. The extent to which these reserves can safely be drawn down must be judged in relation to the fluctuations to which the balance of payments is normally subject. Foreign exchange reserves are required essentially to enable the country to tide over temporary balance of payments difficulties. If the reasonable level of such reserves be taken at some six or seven months' imports, Rs. 200 crores or so of the sterling balances to India's credit could safely be utilised to meet part of the foreign exchange requirements of the plan. It will be recalled that the first plan report envisaged a withdrawal of Rs. 290 crores from sterling balances over the first plan period. It was then felt that a reduction in sterling assets of that order would bring foreign exchange reserves to a normal level. The sterling balances of the country have declined by about Rs. 140 crores over the first plan period. In recommending a further draft of Rs. 200 crores over the second plan period, we are in fact suggesting that the normal level of reserves can be taken as lower than what was envisaged in the first plan report India has repurchased its currency from the International Monetary Fund in the last two years, and is again in a position to draw upon the Fund which is a supplementary line of reserve in case of need.

59. After allowing for a withdrawal from foreign. exchange reserves of Rs. 200 crores, there remains a gap ofRs. 900 crores, which can be filled (a) by floating public issues in foreign money markets, (b) by arranging for bankers' credits and export credits for supply of goods from foreign countries, (c) by borrowing from the International Bank for Reconstruction and Development and the newly formed International Finance Corporation, (d) by loans and grants from other international institutions such as the United Nations Technical Assistance Administration or the proposed Special United Nations Fund for Economic Development, (e) through private foreign investment, and, finally, (f) through loans and grants from friendly foreign governments. It will be necessary for the country to take advantage of all these sources of finance for meeting the foreign exchange requirements of the plan.

60. Over the period of the first plan, a total ofRs. 298 crores of external finance was made available to India for programmes of development in the public sector. Of this about Rs. 204 crores is estimaied to have been utilized in the first plan period. The details of the funds authorised and utilised during the first plan period and the balance available for utilization in the second plan are indicnied in the following table:—

(Rs. crores)

Rs. 94 crores available from past authorizations. In addition, arrangements have been made for a credit of Rs. 63 crores from the U.S.S.R. Government for the financing of the Bhilai steel plant. Allowing for a repayment of a part of this credit in the plan period, net accretion of resources on this account will be Rs. 43 crores. Further, for the Durgapur steel plant, finance of the order ofRs. 33 crores has been promised by the British Government and by British bankers. Resources amounting to Rs. 170 crores are, thus, already assured for the plan in the. public sector, leaving a balance ofRs. 630 crores for which arrangements have yet to be made.

63. As against the net inflow of Rs. 100 crores of foreign capital postulated for the private sector, a sum of approximately Rs. 22 crores is already available as the undisbursed pprtion of the loans made by the International Bank for Reconstruction and Development to the Indian Iron and Steel Company, the Tata Hydro-electric companies and the Industrial Credit and Investment Corporation of India. Allowing for new loans by the International Bank and by the International Finance Corporation and taking into account the possibilities of an inflow of private foreign investment, it is not unreasonable to assume that, some repatriation of private capital notwithstanding, the net amount of foreign capital available to the private sector will come up to the level envisaged.

64. To sum up, the foreign exchange requirements of the second five year plan are large. The estimated balane of payments gap is sizeable, both absolutely and in relation to the funds that have so far been forthcoming. All possible avenues have therefore to be explored for securing the required inflow of resources. It is pertinent in this context to stress the fact that the extent to which development programmes can rely upon resources from abroad can hardly be determined in advance. The problem of raising resources— externally and internally—is in fact to be viewed as a whole. Any shortfall in resources to be raised externally must be made good by greater effort at augmenting domestic resources, if the plans for investment are to go forward smoothly. In any case, the accent of policy must necessarily be on maximising export earnings and economising to the utmost on imports.

APPENDIX—I Financing OF THE state plans—part 'A' ANC 'B' states
1956—61 (Rupees in crores.)

Finance and Foreign Exchange

•These represent accumulations in provident funds, recoveries of loans and advances, appropriations from current revenues for reduction or avoidance of debt and miscellaneous capital receipts minus committed disbursements on capital account including repayments of loans, payment of compensation to zamindars and jagirdars, etc.
@To be covered by Central assistance, further resources to be raised by the States and from the proceeds of sales of securities held in reserves.

notes:—1. The estimates of additional taxation agreed to with the State Governments aggregated to Rs. 166 crores for Part 'A' and 'B' States. In this statement, the estimate for each State has been revised upwards keeping in view the revised target of additional taxation of Rs. 225 crores for all States, the share of Part 'A' and 'B' States being taken at Rs. 216 crores.

2. The above estimate of additional taxation does not take into account the estimated yield of Rs. 31.1 crores from betterment levy which is to be earmarked for repayment of loans to the Centre and would, therefore, not be available for the State,Plans. The State-wise break-up of this amount of Rs. 31.1 crores is as follows:—

(Rs. in crores)

3. It has been assumed that of the total additional taxation of Rs. 225 crores by the Centre during 1956-61, the share of State Governments would be roughly of the order ofRs. 60 crores. For three Part 'B' States viz., Mysore, Saurashtra and Travancore-Cochin, no credit has been taken for the share of Central taxation for the first four years as they are expected to continue to receive revenue gap grants until 1959-60.

4. New loans from the public (gross) to be raised by the State Governments as agreed to in discussions held with them in July to September, 1955, aggregated to about Rs. 218 crores. The revised target of gross borrowings for all States is now placed at Rs. 300 crores. The State-wise break-up of this target is based on the trend in actual borrowings of each State in recent years.

5. Of the total collections of small savings estimated at Rs. 500 crores for the second plan period, the share of States has been assumed at about Rs. 200 crores on the basis that the States would receive as their share each year 25 per cent. of the average annual collections in 1951-56 and 50 per cent. of the excess above that level. Of Rs. 200 crores, the share of Part 'A' and 'B' States has been taken at Rs. 180 crores.