Foreword || A Review of the Economic Situation || The Perspective || Rate and Pattern of Growth || Financial Resources || Plan Outlays and Programmes of Development || Resolution of the National Development Council on Power and Irrigation Systems || Resolution of the National Development Council on the Fifth Five Year Plan || Annexures

Chapter-1:
A REVIEW OF THE ECONOMIC SITUATION

The Draft Fifth Five Year Plan was formulated in terms of 1972-73 prices and in the context of the economic situation obtaining in the first half of the fiscal year 1973-74. Thereafter, two major developments took place. The inflationary pressures gathered momentum till September, 1974; and the balance of payment position worsened due to the steep rise in the prices of imported oil and other materials.

1.2. The first intimations of the inflationary pressures came in 1972-73, thereafter these pressures gathered strength in 1973-74 and continued unabated right upto September, 1974. During this period, the index rose by 31.8%. Food articles and industrial raw materials accounted for about two-third of the price increase. The prices of machinery, transport equipment and manufactured goods contributed to a little over one-fourth to the overall increase in prices. These pressures were first felt as a result of severe drought conditions in 1 972-73, followed by shortages of various essential consumer goods and critical raw-materials and inputs. Shortage of power together with higher international prices of imported inputs and their inadequate availability led to the stagnation of industrial production during 1973-74. The price situation was aggravated by continued expansion in money supply partly due to large deficit financing and partly due to excessive expansion of bank credit to the commercial sector. Thus in 1973-74 the money supply increased by 15.4% over and above the increase of 15.9% registered in 1972-73. Acting together with the unaccounted money unregulated expansion of money supply in a situation of shortages provided an added impetus to the activities of speculative and unsocial elements. Owing to the escalation of costs and prices, even the administered prices of important intermediate goods such as steel, coal, cement and aluminium had to be raised as a defensive action. The procurement and issue prices of important cereals such as rice and wheat were also increased significantly. This not only had a direct impact on the cost of living index but also strengthened the inflationary tendencies.

1.3. The balance of payment position also came under severe strain. Large quantities of foodgrains and essential wage goods had to be imported. The four-fold increase in oil prices and increase in prices of cereals, fertilisers, machinery and equipment, non-ferrous metals and other imported goods severely eroded the resources. The value of the three principal items of imports, namely food, fertilisers and POL accounted for as much as 53.2% of the total import bill in 1974-75, as against 42.6% in 1973-74 and 23% in 1972-73. In absolute terms the import bill for these items increased from Rs. 431 crores in 1972-73 to Rs. 1260 crores in 1973-74 and to about Rs. 2500 crores in 1974-75. No doubt value of exports also increased but the balance of trade showed a deteriorating trend. The trade gap turned from a surplus of Rs. 103.4 crores in 1972-73 to a deficit of Rs. 432 crores in 1973-74 and Rs. 1190 crores in 1 974-75. This trend was both on account of sharp deterioration in the terms of trade since 1 973 and larger imports of certain commodities mentioned above. Borrowings from IMF including special oil facility to the extent of about Rs. 485 crores was resorted to in 1974-75 to meet the deficit in balance of payment. These developments together with uneasy economic conditions in some countries abroad and unstable international monetary conditions could not but have an adverse impact on the Plan.

1.4. Inevitably, the financial and physical magnitudes of the Plan as well as the balance of payment position got distorted. Escalation in costs, higher outlays on public consumption and non-development expenditure led to erosion of resources for the Plan resulting in staggering of programmes owing to dimuni-tion in the size of investment in real terms. Investments in the private sector also felt the impact. With such fluidity both at home and abroad, the finalisation of the Plan had to await the emergence of a more stable situation.

1.5. Deferment of the finalisation of the Plan did not imply a Plan holiday but a rephasing of the Plan outlays, in the light of emerging circumstances. It implied that while planning, one had inevitably to pay considerable attention to the short-term management of the economy. Measures had to be devised urgently for containing inflation at home and for keeping the economy in proper alignment with the fast changing international developments. Necessarily priorities had to be defined even amongst the stated priorities, consistent with the objectives of the draft Plan. Naturally, food and energy became the most important sectors for investment planning. The successive Annual Plans had to be formulated on these considerations.

1.6. The Annual Plan 1 974-75 was formulated at a time when the inflation rate was quite high. It was, therefore, designed mainly to control inflation and increase production particularly in the key sectors. The Plan outlays had to be kept at a modest level. Yet care was taken to ensure adequate provisions for agriculture including irrigation and fertilisers, energy (power, coal and oil), ongoing projects in steel, non-ferrous metals and certain basic consumer goods industries. Emphasis was on fuller utilisation of the unutilised capacities. The piovision for social services was restrained but kept at a reasonable level.

1.7. During the year, a comprehensive strategy was evolved and a package of measures—fiscal, monetary and administrative—was introduced. It included mobilisation of additional resources (both by the Centre and the States), allocation of funds to high priority projects, restraint on growth of money supply and a crack down on anti-social elements. Disposable incomes were regulated through impounding of certain additional incomes, imposition of restrictions on dividends and compulsory savings by tax payers in the higher brackets. The procurement prices of major agricultural crops were not allowed to rise. These measures effected deceleration in the rate of growth of money supply, significant improvement in price situation and easy availability of essential goods. The money supply increased by only 6.9% in 1 974-75 as against an increase of 1 5.4% in the previous year. The index of wholesale prices declined by 7.1% between end September, 1974 and end March, 1975.

1.8. Though inflation was contained, yet the economy was still operating under various constraints. Agricultural production in 1 974-75 declined by 3.1 %. Industrial production grew at 2.5%. While the rate of aggregate investment (net) increased from 13.6%, in 1973-74 to 14.8% in 1974-75, the rate of domestic savings (net) recorded a marginal increase from 12.8% in 1973-74 to 13.1% in 1 974-75. As already mentioned the balance of payment deteriorated.

1.9. Having achieved a certain measure of price stability by the end of 1974-75, the Annual Plan for 1975-76 could aim at growth under conditions of price stability. Agriculture, Irrigation, Power, Coal, Oil and Fertilisers, therefore, continued to receive priority. Projects capable of yielding quick results received special attention. Labour discipline and sustained anti-hoarding/smuggling operations created an appropriate climate. An excellent harvest gave timely vigour and push. The national income is estimated to have increased by 6 to 6.5% during 1 975-76—agricultural production by about 10% and industrial output by 5.7%. Procurement of nearly 1 3 million tonnes of foodgrains in 1 975-76, alongwith imports enabled the build-up of a high level of stocks of foodgrains (17 million tonnes). The wholesale price index fell from 307.1 at end of March, 1975 to 283.0 at the end of March, 1976—by about 8%,. The year 1975-76 closed with an overall budgetary surplus of over Rs. 200 crores against a deficit of Rs. 490 crores estimated earlier. The balance of trade continued to be a matter for concern during 1975-76 and the trade gap was as high as Rs. 1216 crores. This was in spite of the fact that the value of exports had increased by 18.4% and imports by only 14%. However, as a result of larger inflow of private remittances because of effective action against smuggling and illegal dealings in foreign exchange and increase in net foreign aid the balance of payments was not strained. The foreign exchange reserves reached a high level of Rs. 1885 crores at the end of the year as against Rs. 969 crores at the end of the previous year.

1.10. With stability of prices and growth in economy achieved during 1 975-76, a bolder programme of investment was drawn up for 1976-77. The Annual Plan 1976-77 envisages an outlay of Rs. 7852 crores which represents an increase of 31.4% over the original Plan allocation for 1975-76. The New Economic Programme and consideration of social justice could receive greater attention. The high priority accorded to critical sectors of the economy—agriculture including irrigation, energy and intermediate goods was continued. Not only did on-going schemes receive full attention, but new starts in critical sectors could also be envisaged on a selected basis. This strategy together with mobilization of additional resources was expected to maximise the growth potential of the economy.

1.11. Thus, the efforts made so far have succeeded in checking inflationary tendencies and giving the economic situation a promising turn. Some of the constraints which seriously hampered the process of growth in the earlier period have been removed to a considerable extent. There is easy availability of essential raw materials and inputs. There is greater economic discipline and a renewed dynamism in the country at present. A considerable measure of price stability has been achieved and it is hoped that the recent increase in price level will be contained by effective measures which have been initiated. There is a large buffer stock of foodgrains with the public agencies and the position of foreign exchange is satisfactory. The international monetary system has also stabilised to a certain degree. The Planning Commission, therefore, consider this an appropriate time to finalise the Fifth Plan. With this end in view a meticulous and detailed examination of the development programme for the remaining two years of the Fifth Five Year Plan has been undertaken. What emerges is a clearer delineation of the targets and policies specially in relation to the priority sectors.