Introduction || Planning Commission
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 || Conclusion || Appendix A || Appendix B || Appendix C || Glossary

Chapter 6:
FINANCIAL RESOURCES FOR THE PLAN

The programmes of development in the public sector included in the Third Plan are estimated to involve an outlay of over Rs. 8000 crores. These programmes are closely interconnected and every effort has to be made to secure their full and orderly implementation. There are, however, uncertainties to be reckoned with. The actual expenditure incurred on several important projects depends upon how far the foreign exchange required is available and when precisely the necessary capital goods and equipment can be imported and installed. Progress in respect of important projects is linked with advance in certain others which are complementary. Any lag in one item of the investment programme may affect the pace of work on other items. The Third Plan postulates that the fullest effort will be made to mobilise internal resources and to' carry through the accepted programmes with expedition. Nevertheless, some shortfalls in expenditure may be unavoidable, and part of the outlays corresponding to the physical programmes that have been approved may spill over into the Fourth Plan. As regards external assistance, it has been assumed that the total of actual payments against such assistance during the Plan period will be limited to Rs. 2100 crores (apart from assistance for meeting repayment liabilities) although the requirements on present estimates add up to a higher figure. Bearing these considerations in mind, financial outlays in the Third Plan are being taken at Rs. 7500 crores; Rs. 6300 crores by way of investment expenditure and Rs. 1200 crores by way of current outlays on social services and other developmental but recurring items. The financial provisions envisaged at present could, it is felt, be improved upon if production and savings increase sufficiently; the objective must be to implement the physical programmes accepted by raising resources beyond the level indicated by the present estimates.

2. Of the investment outlay in the public sector of Rs. 6300 crores, about Rs. 200 crores represents, transfers to assist selected investments in agriculture, industry, housing etc., in the private sector. Private investment over the Third Plan is estimated as Rs. 4300 crores; the resources to be found by the private sector are of the order of Rs. 4100 crores.

3. The total investment programme for the Third Plan thus comes to Rs. 10,400 crores— Rs. 6100 crores in the public sector and Rs. 4300 crores in the private sector. The public sector has to find Rs. 7500 crores in all, including in this total Rs. 200 crores mentioned above and Rs. 1200 crores for current outlays.

4. An investment of the order of Rs. 10,400 crores over the five year period will mean a stepping up of the rate of investment from the current level of about 11 per cent of national income to about 14 per cent. Part of this investment is to be financed through external assistance. The rate of domestic savings will have to be raised from the current level of about 8.5 per cent of national income to about 11.5 per cent by the end of the Third Plan. It is evident that this will require the fullest effort to increase total output as envisaged in the Plan and steady pursuit of economic policies designed to keep consumption with'n the limits set by requirements of investment. Considering the progress that has been made over the last decade in increasing production as well as in strengthening the potential for further expansion, the investments and savings goals and the targets of the Plan are attainable, given efficient mobilisation and deployment of i resources and availability of foreign exchange.

5. Over the last ten years there has been a striking increase in investment in the economy. Public sector investment at the commencement of the First Plan was around Rs. 200 crores. By the end of the First Plan, it had risen to about Rs. 450 crores. In 1956-57. the very first year of the Second Plan. it reached a level of Rs. 500 crores and in the final year of the Second P'an it rose to about Rs. 800 crores. Thus t^e increase in public sector investment ''r\ financial terms over the last ten years has been about fourfold. The Second Plan has also been characterised by h'eh levels of investment in the private sector. While data on the br"ak-uo of this investment are not adequate, it is noteworthy that in large and medium industry mining, the level of investment averaged Rs. 145 crores over the last five years as compared to Rs. 45 crores in the First Plan period.

6. The First Plan involved a sizeable in investment—from about 5 per cent of national income to over 8 per cent. The substantial increases—both in agricultural arifl in industrial production—that were recorded du'-ina: the Plan period made it possible to achieve this step-up in investment without any significant strain on the domestic price leve! or on the balance of payments. In fact. the prices fell sharolv about the middle of the Fir<;t Plan and the index of wholesale nrices was lower at the end of that Plan as compared to the pre-Korean level.

7. The scale of investment envisaged in the Second Plan was significantly larger than in the First Plan. The pattern of investment was also markedly different. The investments in industry, transport and power by the public sector totalled Rs. 2650 crores as compared to Rs. 820 crores in the First Plan. Private investment in industry, transport and power in the Second Plan period was about Rs. 1025 crores as compared to about Rs. 310 crores in the First Plan period. These developmental tasks involved a greater strain on the economy, especially on the balance of payments.

8. Mobilisation of resources for securing an adequate rate of growth is the crux of the problem of planning in an under-developed economy. The problem may be presented in terms of the physical inputs needed and their availability or as one of finding a quantum of financial resources adequate to cover the cost of the various development programmes, public and private, included in the Plan. The two approaches, if worked out fully, should give the same result. Resources in physical terms are disparate, and the task of working out detailed physical balances that could be relied on in practice is a difficult one, especially in view of the inadequacy of data and the large number of assumptions inevitably involved. The estimation of needs of resources in financial terms has also its limitations. Each project authority is apt to make its estimate of the financial resources required on the assumption that it can secure whatever real resources it needs at current prices, irrespective of what the demands from other project authorities or the economy as a whole are likely to be. This is where the finan^ cial and physical possibilities have to be assessed together. The question ultimately is whether there are physical resources corresponding to the financial outlays. This aspect has to be taken care of by providing in the Plan adequate increases in outputs in key sectors and by ensuring that certain types of resources are obtained from abroad.

9. A Plan of economic development is not merely a list of programmes or projects to be implemented; it is a blue-print for the allocation of all the resources available to the community as between their different uses. The physical inputs needed for the accepted programmes have to be provided for; the consequential demands or adjustments called for elsewhere in the economy have also to be taken due account of. These complex interrelations cannot always be precisely gauged in advance. The scale of investment and the pattern of resource mobilisation have, in the last analysis, to be considered in terms of an overall judgment as to what the optimum feasible is. This judgement may have to be reviewed from time to time and there has to be a measure of flexibility in the Plan to permit the necessary adjustments in outlays. Since, however, the objective is to carry through the physical programmes approved, and since any shortfall or slowing down on these affects the pace of further advance, effort has to bs concentrated on mobilisation of the resources required. The techniques of resource mobilisation and the scope for using each one of these more effectively have thus to be kept under continuous review.

10. Whether one starts with the question as to how much of resources can be raised in various ways or whether one takes the scale of outlays as the starting point is a matter of procedure rather than of principle. The process of arriving at conclusions is one of assessment and reassessment of both these with a view to determining the optimum scale of effort and the results to be secured within a given period. Resources are not a fixed fund to be drawn upon; they depend partly on the scale of investment being undertaken and the resulting increases in output during the Plan period. A Plan of development has thus to be accepted on a consideration of whether the proposed scale and pattern of investment gives the results that are felt to be adequate in terms of certain economic and social criteria and whether, on a view of the growth of resources in the period of the Plan, the outlays proposed can be financed without causing serious strains and stresses in the system. It is on a balancing of these considerations that the phasing of programmes and limits for financial outlays have to be determined.

11. The resources position for the Third Plan has been studied in detail over the last two years or so. The estimates presented in the Draft Outline were based on 1960-61 budgets of the Central and State Governments. During August-September 1950, discussions were held with State Governments to arrive at an assessment of their resources for the Third Plan period. Some of these estimates were again reviewed in the course of discussions with the States on their Plan outlays. On the basis of these data and a further examination of the Centre's budget for 1960-61, revised estimates of the financial resources likely to be available to the Centre and to the States were submitted to the National Development Council in January, 1961. In the light of these estimates, the National Development Council decided that the resources available for the Third Plan should be taken at Rs. 7500 crores, although the cost of the physical programmes being approved was larger. The following Table gives the resources estimates for the Third Plan as approved by the National Development Council and the corresponding estimates of the Draft Outline :

Table 1 : Resources for the Third Plan (Estimates for the Draft Outline
and as presented to the N.D.C. in January 1961) (Rs. crores)

12. The National Development Council noted that considering the needs of the economy, every \ effort had to be made to bridge the gap between the figure of Rs. 7500 crores for the financial outlays indicated by the estimates of resources and the requirements adding upto over Rs. 8000 crores for implementing the physical programmes envisaged. It was evident that the answer to the problem depended upon how far domestic savings could be stepped up to match the larger needs. The Council appointed a Committee to study and explore further possibilities in this direction. In the course of the last few months, further studies have been made of the 1961-62 budgets of the Central and State Governments and of the scope for getting more resources under each of the heads shown in the table above. In the light of this examination the Committee felt that there was warrant for taking a more optimistic view of the total resources that could be raised by the Centre and the States. The latest budget estimates show a greater buoyancy in revenue than was allowed for earlier. It was, however, not possible at this stage to set out precisely the lines along which the gap between the requirements of physical programmes and the financial provisions could be bridged. It was also necessary to bear in mind the limitation in respect of foreign exchange resources. The problem would need continuous review in the light of the advance made each year in mobilising resources. Accordingly, while the financial outlays are at present being retained at Rs. 7500 crores, sustained efforts will be made to improve upon this estimate and to diminish the gap through more effective mobilisation of savings.

13. The scheme of financing the public sector Plan that is now envisaged is as indicated in the Table below. For comparison, the contribution by each major source of finance in the Second Plan period is also shown in the Table :

Table 2 : Financial resources (Estimates for the Second and Third Plans)
(Rs. crores)

(a) Inclusive of increased fares and freights.
(b) Included in items 1 and 8 in the Table.
(c) Includes investment by the State Bank out of P.L. 480 funds.
(d) In addition there was a gap of Rs. 400 crores to be covered by additional domestic effort.
(e) This includes investment of P.L. 480 funds by the Reserve Bank in special securities in 1960-61.

14. Over the Second Plan period, aggregate financial outlay in the public sector has been beiow me target inuiany accepted but a little above me revised target. The inflationary pressures and me balance of payments dinicuities that emerged in the early stages of tne Pian necessuaicd a reappraisal of me resources out-iook. ana it was decided (a) to limit tne hve-year ouiiays to Ks. 4500 crores or so and (b) 10 mobmse external assis lance on a larger scale and to concentrate ettori on tne implementation of 'core' projects, the Second Plan target tor addicional taxation has been substantially exceeded. un the other hand, the balance avaiiaole from current revenues has Shown a net tali of Rs. 400 crores as compared to tne estimates that were worKed out when tne Plan was tormuiatecl. On small savings also, ihe collections over me five-year period have been about Ks. 10U crores less man me level envisaged earlier. Deficit financing in the Second nan period has been within me limits set in tne Pian. Part ot tnis dencit nnancmg was onset oy me drawing aown ot lOi'eigii excuange reserve, ihe rise in prices thac has occurred despue this indicates inai tne scope ior luriner dencii nnancing in me coming years is limited.

15. The experience of the Second Plan highlights the fact that despite all the care that may be taken m estimating the contribution likely to be secured from each of the sources indicated in the tacie, the outturn on individual items is in practice, liable 10 diverge from the estimates. For the hve-year period ahead, it is, therefore, essential to focus attention on the adequacy of the financing schemes as a whole rather than on esumaies in respect of each item taKen by itseif. The estimates of surpluses from revenues, tor example, have to be made on certain assumption as to the growth of tax yields in response to tne increase in economic activity. The growth rates in. the economy may, however, vary from year to year and the response of tax yields depends on where the new incomes flows. Similarly, oh the expenditure side the likely trends in non-Plan expenditure, both developmental and non-developmental, can be estimated in terms oniy of broad orders of magnitude. A small change in the assumptions can make a sizeable difference to the total figure under this head, especially since account has to be taken not only of the Central budget but of the budgets of fifteen States. Then, again, the data available regarding surpluses of public enterprises other than the railways are incomplete. Some of the projects are in the early stages of production;some will commence production in the latter part or the Plan period. The estimates of unit costs for all these projects are not precise the estimates of the surpluses that have been made at this stage can be regarded as only rough indications. The different modes of raising resources are at some point inter-dependent, and it is possible that while ih ohe situation more can be secured by way of taxation, in another situation recourse to market borrowing may yield a better result. Timely availability of external assistance has also an important ocarmg on me domestic savings and investment etfort. in the paragraphs that loilow the estimates tor the Third fian in respect of eacn item are explained.

16. Balance from revenue.—Revenue receipts of the Central and State Uovernments over the Third Plan are estimated to total Rs. 9250 crores as compared to the estimated receipts of about Ks. 1600 crores in 196U-61 (R.E.). The aggregate expenditures, non-developmental and developmental including those on the maintenanc of schemes completed Dy the end of the Second Plan period, are estimated to add up to Rs. 8/00 crores. Thus the surplus available for nnancing flan outlays is at present estimated at Ks. SSl) crores over the Plan period. For working out the estimates of receipts, account has Decn iaKen of me increases in production in important lines as also of the expected rise in national income as a whole. On the side of expenditure, past trends have been projected, mdKing allowance lor expected variations and aner providing tor committed expenditure in respect ol schemes that were part of the Second Plan but will, on the completion of that Plan, become a prior charge on revenues. The substantial increase in me expected balance from revenues during the Third Plan as compared to the Second rehects the increases in tax receipts that have taken place in the last two years partly as a result of increased economic activity and partly because of the additional tax effort that has been put through. Taxation undertaken in 1961-62 is not taken into account under this head; it is part of the additional tax effort of Rs. 1710 crores envisaged for the Third Plan.

17. Contribution of the Railways.—This represents the surpluses of the expected current earnings of the railways over their working expenses (excluding expenditure on 'Open Line Works' which is treated as investment) after providing for depreciation outlays and the payment of interest and dividend in accordance with existing arrangements. In the Second Plan the contribution amounted to Rs. 150 crores; this was inclusive of receipts from increases in fares and freights carried out during the Second Plan period. The estimated surplus of Rs. 100 crores over the Third Plan is, however, exclusive of any additional resources that the railways might be able to raise during the Plan period by way of adjustments in fares and freights.

18. Surpluses of other public enterprises.— This item represents the balance of resources available with public enterprises after providing for their working expenses, normal replacements, interest and dividend. In other words, it does not represent merely net profits; it also includes net accretions to depreciation reserve funds and other funds of these enterprises, the assumption being that these funds will be utilised for financing the expansion programmes of these enterprises. The estimate is tentative, as the data on which it is based are not sufficiently firm. Of the total of Rs. 450 crores, Rs. 300 crores is in respect of Central Government enterprises, namely, iron and steel, fertilisers, oil companies, refineries, posts and telegraphs etc. and the remaining Rs. 150 crores is to come from the enterprises of State Governments, namely, electricity boards, transport undertakings etc.

19. Loans from the public.—Market borrowings over the Second Plan period amounted to Rs. 780 crores. The target set for the Third Plan is being taken at Rs. 800 crores, inclusive of the net collections under the prize bonds scheme. In comparing the target for the Third Plan with the total of market borrowings in the Second Plan period, it has to be borne in mind that the latter include substantial investments in Government securities by the State Bank of India out of the deposits of P. L. 480 funds as also sizeable purchases by the Reserve Bank. The net absorption of market loans by the public, including commercial banks, but excluding the Reserve Bank, was less than Rs. 300 crores. In the Third Plan period, P.L. 480 funds to the credit of the U.S. authorities will be held with the Reserve Bank which will buy special securities created for the purpose. Credit on this account has been taken under external assistance. Whatever support the Reserve Bank may have to give to the loan programme has of course to figure under deficit financing. The estimate of Rs. 800 crores for the Third Plan period envisages considerable increase in the absorption of Government securities by the Life Insurance Corporation, the various Provident Funds and other investors. Credit has also been taken for moderate absorption by commercial banks. Borrowing—other than normal bank advances—by electricity boards or other enterprises of State Governments are included in the respective State targets for market loans. The requirements of the cooperative sector are, however, not included in the above estimate. The Plan envisages a considerable expansion of this sector and in assessing what the capital market can provide by way of subscriptions to Central and State loans, the claims of cooperative agencies have to be borne in mind. Market borrowings of the order envisaged postulate a sizeable growth in the resources of the commercial banks and careful regulation of bank credit to the private sector.

20. Small savings.—The target of small savings in the Second Plan was Rs. 500 crores; the actual collections are now estimated at about Rs. 400 crores. The potentialities of small savings are large and they will grow further as incomes increase. The movement has so far been confined largely to urban and semi-urban areas. In the coming years a considerable proportion of rural savings will go to cooperative agencies and it is as important to ensure that the finance for the cooperative sector is provided for as to enlarge the resources coming into the public sector. Nevertheless, small savings renge sent a promising field in which further effort can bring large results. The question is one of proper organisation and the lines along which the present field agencies can be strengthened deserve careful study.

21. Provident funds, Steel Equalization Fund and Balance of Miscellaneous Capital receipts over non-Plan disbursements.—As compared to net additions to provident funds of the order of Rs. 170 crores in the Second Plan, the estimate for the Third Plan works out at Rs. 265 crores. This is because of the increased pay scales for certain classes of employees both at the Centre and in the States and the introduction of a compulsory provident fund scheme at the Centre. Under Steel Equalization Fund, the net accrual in the Third Plan period is estimated at Rs. 105 crores. In respect of other items of capital receipts, including betterment levies, funds and deposits, the net receipt in the Third Plan period is estimated at Rs. 170 crores as compared to Rs. 22 crores in the Second Plan. This is the net result of a large number of items of receipts and expenditure on capital account. The main sources of receipts are betterment levy, recoveries of loans and advances from local bodies, cultivators and others, transfer from revenues to funds, net receipts under miscellaneous deposits, funds, remittances etc. On the expenditure side, the items to be reckoned, among others, are compensation payments to refugees and zamin-dars, loans and advances to cultivators, losses on State trading, if any, and other items of non-Plan disbursements, including outlays on civil works outside the Plan. The estimate of Rs. 170 crores for the Third Plan period has been worked out on a study of the past trends and on the assumption that non-Plan capital disbursements are kept down to the minimum. The estimate also postulates that recoveries in repsect of arrears of outstanding loans and advances will be expedited.

22. Budgetary receipts corresponding to external assistance—The credit of Rs. 2200 crores taken against this item corresponds to total external assistance of Rs. 3200 crores that is envisaged in the Plan. The entire amount of Rs. 3200 crores does not come to the public exchequer. Rs. 450—500 crores of the total receipts of external assistance will go towards repayments of loans maturing during the Third Plian. About Rs. 300 crores might go directly to the private sector by way of private capital inflows or loans from agencies like the I.B.R.D., the International Finance Corporation and the U.S. Export-Import Bank. Another Rs. 200 crores may represent agreed retentions of rupee resources by the U.S. authorities and additions to buffer stocks from P.L. 480 imports. Thus, about Rs. 1000 crores in all would not be available for the budget; the net credit that can be taken under this head is about Rs. 2200 crores as against the total external assistance of Rs. 3200 crores.

23. Deficit financing.—In view of the rise in prices that has occurred during the Second Plan period and the fact that, unlike in the SecondPlan, there is no cushion of foreign exchange reserves that can be drawn upon as an offset to deficit financing, it is proposed to limit deficit financing in the Third Plan to the minimum warranted by the genuine monetary needs of the economy. There is, of course, no precise way of estimating the limits of safe deficit financing. Increases in money supply take place not only through the budgetary operations of Government but also through credit creation by the banking system. Both these have to be viewed together and their appropriate limits decided upon in the light of relative requirements as well as what the economy can absorb in the aggregate. On a broad view of all these factors, the limit for deficit financing in the Third Plan period has been placed at Rs. 550 crores, exclusive of the direct extension of credit by the Reserve Bank to co-operative agencies. The amout of deficit financing that can be undertaken has, however, to be judged from year to year in the light of emerging economic trends. What is required for implementing the Plan, whether in the public or in the private sector, are real resources and these depend upon the rate at which production goes up and the extent to which the community is prepared to defer consumption and enlarge savings. Deficit financing within moderate limits has a place in developmental planning but if it adds to purchasing power unduly at a time when the need is to keep it down so as to restrict consumption within the limits provided for the Plan, the consequences to the economy can be highly deleterious.

24. The following Table gives the resources estimates for the Third Plan separately for the Centre and the States :

Table 3 : Resources for the Third Plan
(Rs. crores)

25. On the basis of the discussions held with the States in August—November, 1960 the total of their resources came to Rs. 1416 crores. Annexure I at the end of this chapter gives the Statewise details of this estimate. This estimate needed revision in two respects: (i) interest liability on account of fresh loans from the Centre in the Third Plan and (ii) reduction in the earlier estimates of borrowings from the public. At the time of the discussions, precise estimates of interest liability in respect of loans from the Centre could not be made, and the ad-hoc figures taken at the time were found to be on the low side. In respect of borrowings from the public, the estimate as emerging from the discussions had to be corrected so as to make it consistent with the overall estimate for the Centre and the States together. After making these two adjustments the estimate of States' resources came to Rs. 1345 crores.

26. The further review of States' resources undertaken in the light of the 1961-62 budgets indicate that the resources picture for the States is considerably better; the total of States' resources now comes to Rs. 1462 crores. The main factor in the improvement is the larger transfers of resources from the Centre under income-tax and shareable excises. The following Table gives the estimates of States' resources as presented to the National Development Council in January, 1961, and as re-worked recently in the light of the 1961-62 budgets.

Table 4 : States' Resources for the Third Plan
(Rs. crorse)

The State-wise, details of this revised estimate have yet to be worked out.

27. With States' resources at Rs. 1462 crores and Central assistance at Rs. 2375 crores, the total of the resources available for financing State Plans comes to Rs. 3837 crores. This .Js close to the programme limit of Rs. 3847 crqres which has been suggested for State Plans. Oft present indications, thus, the gap between the programme limit and financial resources for the States is, if anything, negligible. With strict economies in expenditure, especially on outlays outside the Plan, it might, in fact, be possible for the States to finance out of their own resources some increases in outlays in respect of rural employment schemes.

Additional Taxation

28. The additional taxation target accepted initially in the Second Plan was Rs. 450 crores. It was recognised that this target was inadequate and that the bulk of the gap of Rs. 400 crores shown in the financing scheme for the Second Plan would have to be made good by additional taxation. The total of additional taxation actually put through in the course of the Second Plan was Rs. 1052 crores, which is considerably in excess of the initial target plus the gap just mentioned. Even with this measure of additional taxation the proportion of tax revenues to national income rose from about 7.5 per cent of national income at the beginning of the Second to about 8.9 per cent by the end of that Plan. With the normal increase in tax yields as a result of rising national income and the additional taxation of Rs. 1710 crores that is proposed over the Third Plan period, the proportion of tax revenues to national income will go up to 11-4 per cent by the end of the Third Plan. Considering the requirements of the Third Plan and the rise in incomes expected, this order of additional taxation is essential as well as practicable, and a substantial beginning towards this effort has been made in the Central budget for 1961-62.

29. It was stressed both in the First and in the Second Plans that a progressive enlargement of public savings is an essential element in sound financing of public sector programmes in a developing economy. Undoubtedly, there are limits to taxation and a number of complex economic as well as other considerations arc involved in working out the concrete taxation measures to be adopted for realising a given target. To a considerable extent, programmes of investment in the public sector have to be financed by channelling into the public exchequer a part of the aggregate savings arising in the private sector. The programmes of public borrowings and small savings have to be oriented to this end. Nevertheless, a significant element in the financing of investment in the public sector has to be public savings, that is, the surpluses of revenue receipts over non-investment expenditure together with the surpluses of public enterprises. The need to maximise the surpluses of pubHc undertakings has to be borne in mind in deciding on the price policy in respect of the products of those enterprises. Enlargement and ploughing back of profits of public enterprises have an important contribution to make to the financing of development.

30. The choice between different forms of taxation has to be made on a consideration of the existing levels and the likely incidence and effects of further increases in each direction. There is scope in a developing economy for increasing the receipts both from direct as well as from indirect taxation. Direct taxation seeks to keep down consumption and enlarge the investible surplus by reducing disposable incomes. Indirect taxation works through a reduction in the quantum of goods that can be brought against the incomes that are spent. The relative merits of each form of taxation have to be determined pragmatically. The crucial point is to locate the surpluses as they are being generated in consequence of development so that additional taxation could be directed appropriately. The details of tax measures to be adopted during the Third Plan will have to be decided upon in the light of the economic situation as it emerges from year to year. It must be stressed, however, that if taxation in the aggregate is inadequate, this means not merely a loss of so much of resources for investment but a pressure on domestic prices that may affect the structure of production and aggravate economic inequalities.

31. In the field of income tax, the scope for raising the rates generally is limited, although adjustments in tax rates in particular income brackets may be necessary from time to time. The objective of these adjustments must be to enlarge public resources and to spread the burden equitably as between different groups of income earners. There are at present a number of other taxes on personal incomes and wealth : the wealth tax, the capital gains tax, the expenditure tax and estate duty. The yield from these taxes is relatively small. The object of all these taxes taken together is not only to secure larger receipts for the public exchequer but also to reduce economic inequalities. It is essential in this context that the relevant tax laws leave as few loopholes as possible for evasion or avoidance of taxes. In regard to taxation of corporate incomes, a number of tax incentives and concessions are at present being given for investment. These have contributed in no small measure to high levels of private investment over the last five years. These incentives and concessions will need to be kept under continuous review so as to ensure that their benefit accrues to types of investment that have a high priority in the Plan. It becomes particularly important when these concessions are being .given that the expense accounts of companies are carefully scrutinised and suitable provisions made in the tax laws to ensure that wasteful' expenditures arc kept down, if not eliminated.

32. The Third Plan will involve a substantial increase in indirect taxation. The number of assessees paying direct taxes in India is very small. Although collections of direct taxes are expected to improve in the course of the Third Plan, the total of resources required cannot be raised without taxing consumption through indirect taxation over a wide range. In some cases, such taxation may be most effective at the point of final consumption; in other cases intermediate products or raw materials may be found more suitable. Indirect taxation along these lines tends to raise the price to be paid by the domestic consumer. This is a sacrifice that has to be accepted as part of the Plan. It should also not be forgotten that if taxation is insufficient, the benefit is likely to accrue to middlemen and traders in the shape of undue profits. Some of these indirect taxes affect the poorer classes but_ a great many fall on those who have comparatively high incomes. There is, in other words, an element of progression even in indirect taxes. There is, however, no escape from the fact, that in a country like India where the bulk of the people are poor. resources on an adequate scale cannot be raised without calling for a measure of sacrifice from all classes of the people.

33. A word may finally be said in this context regarding the role of the state governments in raising additional resources through taxation. It is inevitable that the larger part of the additional tax effort has to be put through by the Central Government but it is no less important that the State Governments also raise an adequate share for themselves. Taxation of the rural sector falls largely within their field. They have also to mobilise more effectively the elastic sources of revenue such as sales taxes. The collections under this head have improved noticeably in recent years but discussions with several States indicate that there is considerable scope still for a tightening of administration in this respect. On present estimates, the States have to raise about Rs. 610 crores out of the additional taxation target of Rs. 1710 crores envisaged for the Third Plan. The additional taxation by the States in 1961-62 has been below expectations. It will be essential to make up for this in the coming years. Effort will also be necessary in respect of public undertakings of State Governments to enlarge their surpluses.

Private Investment

34. From the point of view of resources to be raised, the investment programmes of the public and private sectors have to be viewed together, as both d^-aw upon the same pool of savings. The question, in other words, is whether if the public investment programme is to be financed alone; the lines indicated above, the private sector will be able to find adequate resources for carrying through the programmes for which responsibility has been placed on it in the Plan. The question could be put the other way also; given the investment programmes in the private sector, will the public sector be able to raise enough resources to cover its needs? The answer to these questions depends obviously on the estimates that can be made regarding the growth of savings in the aggregate and the adequacy of techniques for channelling them. A great deal depends upon the rate at which total output increases and the adequacy of the various constraints envisaged on consumption. Since data in respect of investment and savings over a considerable part of the economy are inadequate, it is not possible to attempt any very precise estimates regarding the sources and uses of funds for private investment. But, broadly speaking, considering the trends in the Second Plan period, and on a view of the likely trends in the course of the Third Plan, it is felt that a total of Rs. 4300 crores by way of private investment can probably be financed, consistently with the public sector claims on savings.

35. The following Table sets out the likely levels of investment in the private sector over the Third Plan period under major heads as compared to the initial estimates of the Second Plan and the estimates of investment as now revised in the light of subsequent studies :

Table 5 : Investment in the private sector*
(Rs. crores)

It must be emphasized that the estimates given above are exceedingly rough. The improvement in the total of private investment in the Second Plan as compared to the original estimate is in large part due to a change in the basis of estimation in the light of later data. For the Third Plan, a substantial step-up is envisaged in the field of industry, large as well as small scale, and transport, the total under these heads rising from Rs. 1085 crores to Rs. 1675 crores. The increases envisaged in agriculture, and housing and other construction are moderate and should pose no serious problem, especially as investment in these sectors is largely self-financed. The "These'figures'represent "aggregate investment in the private sector including that financed out of resources transferrfrom the public sector.financial resources required for the investment programmes for large and medium industries and in the field of minerals are large. Broad estimates regarding the financing of investments in these fields are given in Chapter XXVI. While the total requirements of capital for new investment as well as modernization and replacement in industry and mining come to Rs. 1350—1400 crores, the resources available would appear to be somewhat short relatively to needs. On this basis some of the programmes in this sector may probably spill over into the Fourth Plan, specially since they require foreign exchange.

36. Of the total investment of over Rs. 4300 crores in the private sector, Rs. 200 crores will be provided by way of transfer of resources from the public sector. The assistance by the Reserve Bank to agriculture, small-scale industries and cooperatives will also be on a larger scale. External assistance to the private sector may be of the orJer of Rs. 300 crores. Investment in the private sector during the Second Plan has been at high levels and there is evidence of greater readiness on the part of private enterprise to avail itself of the opportunities being created by the development process. Investment in the private sector of the order of Rs. 4300 crores appears by no means difficult of achievement. Some of the estimates given in the table above, such as on housing and other construction and transport may well be exceeded. Investment in agriculture depends partly on savings in the raral sector itself and partly on the assistance available to agriculture from Government and cooperative agencies. Considering the increase in agricultural production envisaged in the Plan it would probably be desirable to let investment in agriculture exceed substantially the figure shown in the Table. Although, as stated earlier, all investment is in a sense financed from a common pool of savings, it has to be recognised that some savings flow in particular directions only. For example, the farmer or the small artisan is apt to save if he is investing in his own farm or workshop. The decisions to invest and save are thus inter-linked. The same is true to an extent of housing. If investment of this type were to be reduced, there would probably be less savings. However, it has to be recognised that in a planned economy private investment, specially investment that draws on the organized capital market, has to be regulated with due regard to the limitation of aggregate resources for investment and the requirements of the public sector.

External Resources

37. The problem of external resources is a difficult one for a country in its early stages of industrialisation. With the best effort it can make to enlarge its foreign exchange earnings, it cannot for a number of years cope with the increasing import requirements of the economy. A shortfall in internal resources can, to an extent, be met by letting the economy operate under some strain. Foreign exchange is, however, a specific resource which has either to be earned by larger exports or has to be secured through an inflow of external resources. There was little strain on India's balance of payments in the First Plan period, but foreign exchange reserves fell sharply by Rs. 481 crores in the first two years of the Second Plan. There has been a further drawing down of these reserves in the subsequent years, and the Third Plan commences with a level of reserves that cannot bear any significant further decline.

38. The Third Plan has been formulated on the basis that it would be advantageous from the point of view of the recipient country as well as the donor countries to plan for substantial amounts of external assistance for a relatively short period rather than to proceed in terms of varying and uncertain amounts of assistance over an indefinite period. Development effort in India over the Third and Fourth Plans has to concentrate on expansion of capital goods and machine building industries—together with corresponding development of mining, power and transport—in a scale that would enable the country to build up in this period sufficient capacity to produce domestically the bulk of the capital goods and machinery that it will require in subsequent periods for supporting high levels of investment. This is a priority that follows as much from the objective of maximising the rate of growth of the economy as from the need to attain a viable external accounts position within a foreseeable future. It is evident in this context that the foreign exchange requirements— and the requirements of external assistance—in the Third Plan will be substantial.

39. The First Five Year Plan was directed mainly towards increasing agricultural production and strengthening the economic overheads of development, like irrigation, power and transport. In the field of industry, the stress was mainly on utilisation of existing capacity more fully; public sector investment in industry and mining was only a small proportion of the total. The direct foreign exchange component of the First Plan was about Rs. 400 crores. In 1951-52, the first year of the Plan, there was a balance of payments deficit of Rs. 234 crores, but the situation improved substantially in the subsequent years because of the increase in agricultural as well as industrial production. The deficit in the balance of payments over the Plan period as a whole was Rs. 318 crores. Of this, Rs. 196 crores was financed by external assistance and Rs. 122 crores by a draft on foreign exchange reserves.

40. The following table shows the balance of payments position for the Second Plan period (figures for 1960-61 are subject to revision).

Table 6 : India's balance of payments : Second Plan
(Rs crores)

The balance of payments deficit over the five year period is estimated at about Rs. 2100 crores as compared to the Plan estimate of Rs. 1100 crores. The external accounts came under heavy pressure soon after the Plan commenced, and the foreign exchange resources declined by Rs. 481 crores within a period of two years. A re-appraisal of the economic situation in 1958 led to the decis'on to scale down the Plan somewhat and to concentrate on "core" projects. The total external assistance utilised for the Plan has turned out to be more than 50 per cent over the level that was originally envisaged. The drawing down of foreign exchange resources amounted to Rs. 600 crores, as compared to the Plan estimate of Rs. 200 crores.

41. The adverse foreign exchange situaf'on that developed during the Second Plan was due partly to underestimation of the direct foreien exchange requirements of the Plan and partly to failure to take into account sufficiently the growing import needs of a developing economy. The sharp rise in the tempo of private investment in the early staees of the Plan also contributed to the difficulties, although this probably affected the timings of deficits rather than "heir total over the Plan period. The difficulties arising from these shor^conrn^s in planning were aggravated by two bad agricultural seasons juring the Plan period. Food imports provided for in the balance of payments estimates for the Plan were 6 million tons. Actual food imports over the Plan period have been about 20 million tons. Imports of raw cotton have also been on a substantial scale. However, since the emergence of the foreign exchanee crisis a str'nwnt import policy has been followed. A r'goro"s system of exchange allocations on a half-yearly basis has been adopted and no significant fresh commitments have been made unless they were covered by external assistance.

42. The estimates of balance of payments trends over a five year period inevitably present difficulties and must be regarded only as the best judgment that can be formed at this pa'ti-cular stage in the light of the available data. The Draft Outline of the Third Plan presented in June 1960 estimated export receipts at Rs. 3450 crores over the five year period. The net rec'eipts on invisibles were estimated at Rs. 120 crores. These total receipts would, it was suggested, be matched by payments in respect of maintenance imports totalling also Rs. 3570 crores. On this basis the reouirements of external assistance for the Third Plan added upto Rs. 2600 crores as follows :

(Rs. crores)

This total was exclusive of P.L. 480 imports. Taking into account the agreement entered into a morrh earlier with the United States for import of foodgrains valued at about Rs. 600 crores, the balance of payments gap for the Plan period was estimated at Rs. 3200 crores.

43. These estimates have been gone over again in recent months. The total investment envisaged in the Third Plan is reckoned at Rs. 10,400 crores and its direct foreign exchanee requirements are estimated at Rs. 2030 crores. As explained earlier, investment in the public sector is beiflg taken at Rs. 6100 crores—this corresponds to the outlay of Rs. 7500 crores— and that in the private sector at Rs. 4300 crores. The foreign exchange requirements for these investment programmes are shown in the table below:—JB

Table 7 : Investment and foreign exchange requirement: Third Plan.
(Rs. crores)

44. In addition to these import requirements related to Plan projects, there are the general needs of the economy by way of raw materials, components, replacement machinery, etc., to be provided for. In the estimates that follow a provision of Rs. 3650 crores has been indicated tor such imports. This is Rs. 80 crores more than the provision in the Draft Outline. Actually the needs are larger; an estimate of Rs. 3800 crores over the hve-year period would not be too high. Nevertheless, it is not possible at this stage to provide more resources for this purpose. This mean that some under-utilisation of capacity will have to be tolerated.

45. Maintenance imports for 1961-62 are estimated at Rs. 746 crores. They will decline in the latter part of the Plan as the production of raw cotton, iron and steel, aluminium, industrial machinery and transport equipment, chemical intermediates, etc. increases progressively in the course of the Plan. These increases Domestic output will result in some savings in imports, but these will in part be counter-balanced by increased requirements in certain other lines.

46. The provision of Rs. 200 crores suggested ia the Draft Outline for the import of components and other intermediate products needed to increase the output of machinery and transport equipment for the investment programmes included m the Plan is being retained. It should be emphasised in this context that the dividing line between maintenance and developmental imports is by no means clear-cut. The provision of Rs. 200 crores mentioned above is meant primarily to highlight the fact that the execution of Plan projects requires the import not only of complete machines but also of materials to fabricate equipment in the country. The components and intermediate products of various kinds required for maintaining the production of capital goods at full capacity level add up to a much higher figure, and these requirements will grow as macnine-building capacity develops. On a broader view, many of the other maintenance imports included m the estimate of Rs. 3650 crores are also to be used to increase the output of capital goods. For example, a major use of non-ferrous metals is the manulaciurer of cables to form part of electrical transmission systems, and the bulk of the estimated consumption of steel will go into construction and the fabrication of capital equipment. Foreign assistance for financing such imports thus contributes as directly for the fulfilment of the Plan as imports of machinery and equipment and, it is, indeed vital that a part of the total assistance for the Plan is secured in the form of such "non-project" imports.

47. It has been evident for some time past that a greatly intensified export effort is essential if the country is to be in a position to meet its growing import requirements and to move forward progressively towards a balance in external accounts. The objective as mentioned earlier, is to ensure that the economy is able to earn enough by way of exports so that it can, after a period of ten years or so, reduce substantially the dependence on assistance from abroad. Considerable stress has been laid on export promotion for the last two or three years. What is needed now is a clear acceptance of the sacrifices involved and sustained followup action with a view to getting results on a scale that is commensurate with needs. The lines along which this intensified effort is to be directed and the measures needed for improving on export performance have been indicated in another chapter.

48. Some other items in the balance of payments have also been reestimated in the light of later data. The following Table sets forth the balance of payments estimates for the Third Plan as they now emerge :

Table 8 : Financing of foreign exchange requirements for the Third Plan
(Rs. crores)

9. It will be seen from the above that the total receipts from exports during the Third Plan period are now being taken at Rs. 3700 crores as compared to the actual receipts of Rs. 3053 crores during the Second Plan period and the estimate of Rs. 3450 crores given in the Draft Outline. During the last few months further studies have been made of the import requirements of the economy and the steps necessary to meet them. It is clear that without a substantial move forward on exports, further progress of the economy will be seriously jeopardised. The estimate of Rs. 3700 crores shown in the Table is the minimum to be aimed at; the needs of the situation are, in fact, larger. Exports, however, take time to grow and it is not possible to estimate precisely what level of earnings is, in fact, likely to materialise over the five year period. The estimate of Rs. 3700 crores has been worked out on the basis of a study of the export possibility in respect of all major commodities, and the' fullest effort must be made to realise this target. The trends in exports should be kept under review at the highest level throughout the period of the Plan and all steps taken to ensure that export earnings are maximised. Two points need to be emphasised in this context. Firstly, while increased production will help in enlarging the surpluses available for export, foreign exchange earnings have at the present juncture to be increased even by sacrifice of domestic consumption. Secondly, exports will flow only to the extent that the prices of our products are competitive. It will be essential in the coming years not only to restrain consumption in the interest of exports, but also to increase productivity and to keep down costs.

50. Over the last five years net receipts from invisibles have shown a falling trend—from Rs. Ill crores in 1956-57 to Rs. 71 crores in 1959-60. The estimated net receipts for 1960-61 come to Rs. 55 crores. The tailing trend reflects the increasing payments of interest and dividend on the one hand and the declining receipts from foreign exchange holdings abroad. In the Third Plan period some improvement in gross receipts, particularly under foreign travel, transportation and insurance, is expected. This improvement will, however, be more than offset by the increase in interest liabilities on account both of the Second and the Third Plan loans. Provision has also to be made for the payment of 50 per cent of the freight on P.L. 480 imports. For 1961-62 a surplus of Rs. 22 crores on invisibles is estimated. This will, however, fall progressively in the subsequent years, so that over the five-year period, the receipts and payments in respect of invisibles will more or less balance.

51. The repayments of loans and credits failing due within the Third Plan period total Rs. 450 crores. Other capital transactions are estimated to involve a net outflow of Rs. 41 crores. The payments to Pakistan under the Indus Water Treaty agreement and to Kuwait for the return of Indian currency call for further foreign exchange resources amounting to Rs. 59 crores. The total provision required for capital repayments in the period of the Third Plan thus comes to Rs. 550 crores.

52. What emerges on the whole is that the balance of payments position will continue under to make the economy more and more self-relient, so that it is able to support within a period of ten or twelve years an adequate scale of investment from its own production and savings. Normal inflows of foreign capital may continue but reliance on special forms of external assistance has to be reduced progressively and eliminated. The Third Plan represents a crucial stage in this process.

Conclusions

57. The resources position for the Third Plan, it may be stressed, in conclusion, is inevitably a strained one. The development effort to be undertaken has to be commensurate with the need to ensure a satisfactory rate of growth in national income and in productive capacity. The process of transformation of a stagnant economy commenced in the First Plan and accelerated in the Second Plan has to be carried forward further with even greater speed. The recent population trend as revealed by the census makes the task for the next ten or fifteen years more arduous. It is essential in this situation to call for the maximum effort and sacrifice the community is capable of,

58. The financial provision of Rs. 7500 crores that has been accepted for the public sector programmes is not to be interpreted as indicating the limit of possibilities in this regard. As stated earlier, the lines along which savings can be enlarged progressively during the Third Plan period merit intensive and continuous study. There has to be a close scrutiny of all non-Plan expenditures; economies in expenditure, both on Plan and on non-Plan items, can release some resources for financing development. The experience of the Second Plan suggests that the scope for taxation may, in fact, be larger than is foreseen at this stage. Provident funds, extension of life insurance and similar social security schemes to institutionalise savings are a potential source for further resources. There is need for a country wide savings drive, particularly in the rural areas. In the States steps are being taken to place greater responsibilities on local self-governing institutions. Larger resources for development can be mobilized if through these institutions the community is induced to take greater interest and participate in local developmental programmes.

59. The limit to financial resources is never an absolute one; it is related to the quality of effort that is brought to bear on implementation of projects, on garnering of their surpluses, and on prevention, through fiscal and other measures, of leakages of resources into consumption or non-priority investment. Substantial investments have been made in the public sector over the last ten years and every effort must be made to ensure that they yield an adequate surplus on the basis of which to plan further advance. Development has in due course to become self-financing; the surpluses from past investments constitute the source for further development. It is important that in choosing their projects for implementation, the Central as well as State Governments keep constantly in mind the need to get results from these investments as quickly as possible. Even a comparatively small delay in completing a project and putting it into productive use can make a significant difference to the resources available for investment. The point is that as an economy develops, even marginal improvements in planning and execution over a number of points can yield a large return in the aggregate. With adequate attention to these aspects of the problem, resources can be raised beyond the limits that are at present indicated.

60. The problem of resources thus links up with the problem of administrative and organisational efficiency; the quest for additional resources has necessarily to be a continuing one and on this wider plane as well. The crucial tests for the Third Plan are two : (a) the extent to which the production of food and raw materials can be increased—what is needed is a striking advance rather than a varying performance; and (b) the energy and drive that are forthcoming for securing the substantial increases needed in export earnings. Given success in these directions, the present limitations of finance can progressively be overcome.

INDEX OF WHOLESALE PRICES

BASE 1952 -53 =100

ANNEXURE1 States' resources for the Third Plan
(As on the basis of the discussions held during August—November, 1960)
(Rs.crores)

*Revision of this amount to Rs. 133 crores has been suggested by the State Government.