Objectives and Orientation || Development Perspective || Macro Economic Dimensions || Policy Framework || Financing the Plan || Employment Perspective

FINANCING THE PLAN

Introduction

5.1.1 This Chapter after reviewing the financing of the Seventh Five Year Plan (1985-90) and the Annual Plans (1990- 92), provides the projected financing of the Annual Plan 1992-93 and the Eighth Plan, 1992-97. The Chapter brings out the changes in the actual financing compared to the projections during the Seventh Plan 1985-90 and Annual Plans 1990-92. It examines the critical issues that have risen in the financing of investment by the Central and State Governments as well as the public undertakings.

5.1.2 Financing the Plan has three major dimensions: first, estimating major sources of finance; secondly, allocating these resources to user sectors (both public and private) for investment; and thirdly, checking the consistency of the sources and application of resources with the overall growth of income, consumption and savings. •

5.1.3 The sources of financing projected in the Eighth Plan differ from the Seventh Plan in many respects. These projections reflect reduced dependence on borrowings, domestic as well as foreign and on deficit financing, and place. greater reliance on resource mobilisation through buoyancy in revenues and economy in non-Plan (revenue) expenditure(NPRE). Thus, the Eighth Plan calls for much greater effort towards raising the resources domestically and deriving more out of the same expenditure, in support of the targetted GDP growth at 5.6 per cent. The projections of Plan financing, imply rationalisation of fiscal, monetary and financial policies.

5.1.4 Since the Seventh Plan projections were made at 1984-85 prices, the review of performance is also made at these prices using estimated gross domestic product (factor cost) deflators. Data for the review are based on actual/RE figures of Central Government for Central sector and Central assistance to States; for others, they are based on information supplied by the State Governments.

5.1.5 The Seventh Plan financing placed considerable reliance on additional resource mobilisation (ARM) and contribution of public enterprises. The pattern that has emerged after five years shows the shortfalls in contribution of public enterprises and ARM, on the one hand, and substantial increase in non-plan revenue expenditure on the other. It reveals a nearly three-fold deficit in Balance from Current Revenues (BCR), at base rates, one third actualised surplus at current rates i.e., including ARM and more than two-fold of level of deficit financing compared to the original projections.

5.1.6 While the average growth of GDP during the Seventh Plan (5.8%) exceeded the projected rate (5%), the domestic savings rate (estimated at 20.4%) fell short of the projected rate (24.3%). The average savings rate during the Seventh Plan was just about the average rate during the Sixth Plan. The shortfall in domestic savings rate was largely on account of lower rates of public sector and private corporate savings. The household savings rate is estimated to have increased significantly to 18.1 percent by 1989-90, compared to 13.7 percent in the base year.

5.1.7 A review of savings and investment during the Seventh Plan, as compared to the projections, reveals three major features: First, household savings financed household investment to the extent of 8 percent of GDP as was projected. But, the overall gross (domestic) savings rate (20.4%) turned out to be substantially below the projections (24.3 %). The lower proportion was largely due to a change in the basis of estimating GDP in the new series, which raised GDP from 1980-81 onwards by over 8 percent as compared to the old series. The corresponding ratio (comparable to 24.3%) in terms of New Series of GDP would be around 22 per cent. Secondly, the overall rate of gross investment during the Seventh Plan is estimated to be 22.7 percent compared to the projected 25.3 per cent. Much of this shortfall wa^ in the public sector. Thirdly, despite some shortfall in investments, domestic borrowings and inflows from the rest of the world in the public sector were consistently in excess of projections. The private corporate borrowings, domestic and foreign also exceeded the projections.

5.1.8 The Seventh Plan review shows significant deterioration in budgetary savings and in theBCRofthe Centre and the States. Budgetary dissaving amounted to over 2 percent of GDP and BCR worked out to (-) 0.65 percent of GDP for the Centre during the Seventh Plan period. The overall fiscal (gross) deficit of the Centre amounted to 3.2 percent of GDP during the Plan. The budget deficits of the Central Government far exceeded the projections leading to pressure on the balance of payments necessitating foreign borrowings on a much larger scale than projected.

5.1.9 During the Seventh Plan period, the role of the capital market as the medium for mobilising additional resources expanded greatly. The aggregate level of new capital issues by the non-Government public and private limited companies reached about Rs.7,910 crores in 1989-90, compared to little over Rs. 1,787 crores in 1984-85. These companies raised about Rs.23,200 crores during the Plan period. The composition of resources raised changed in favour of debentures. This period was marked by some large-sized or mega issues each exceeding Rs. 100 crores. Institutional investors have played a major role in this process.

Financing of Public Sector Outlay in the Seventh Plan

5.2.1 The actual financing pattern of the public sector Plan compared to the projections for the Centre (including UTs), Central public sector enterprises (CPEs) and the States and their PSEs are set out in Statement 5.1 based on the latest estimates as included in the Annual Plan reviews.

5.2.2 At 1984-85 prices, the deterioration in the Centre's and the States' BCR (i.e., the excess of non-plan revenue expenditure (NPRE), over revenue receipts), excluding ARM worked out to be over Rs. 7253 crores compared to the projected level of BCR at (-) Rs. 5249 crores and the contribution of public enterprises also fell substantially short. The Centre's BCR, even after ARM, deteriorated, at current prices, sharply from a positive Rs.959 crores in 1984-85 to a negative Rs.4214 crores in 1989-90. Among States, the BCR (including ARM), of 10 special category States deteriorated from a little over Rs.42 crores in 1985-86 to about minus Rs.474 crores in 1989-90, while in the case of the 15 non special category States the BCR, including ARM, deteriorated from Rs.3306 crores in 1985-86 to Rs.2124 crores by 1989-90. The deterioration in the BCR of the Centre and the States including ARM, was the result of increased expenditure on pay and allowances, interest payment liabilities and other NPRE, notably subsidies. In certain States, even net Miscellaneous Capital Receipts (MCR) i.e., recoveries of loans and advances and deposits and advances less of disbursements by way of repayment of loans to the Centre and financial institutions, non-Plan loans and advances; and construction of official buildings, non-Plan capital outlay, etc. were negative at a substantial level, mainly because of higher loan repayment liability. There were increased losses of certain CPEs and States' electricity and transport undertakings.

5.2.3 This erosion of own resources was met by increased borrowings and RBI support or deficit financing. Market borrowings and MCR far exceeded the projections and deficit financing was more than twice the projected level at base year prices. Public enterprises' borrowings increased rapidly. Though domestic resources contributed the major part of investible funds, plan financing turned out to be inflationary. With the increase in borrowings, the burden of debt servicing has become significant and this would loom large over the finances of the Centre and the States during the Eighth Plan,

5.2.4 Dependence on foreign savings taken as a whole continued to be at a lower level compared to most of the developing countries with low per capita income. However, current account deficit as a proportion of GDP turned out to be much higher than what was originally envisaged. Besides, there was increased dependence on non-concessional foreign inflows and substantial drawdown on the country's foreign exchange reserves.

Centre and Central Public Sector Enterprises

5.3.1 The approved plan outlay for the Centre (including the UTs) for the Seventh Plan was Rs.99,302 crores and as per the latest estimates, their expenditure is placed at Rs.1,31,236 crores. But, expenditure at 1984-85 prices amounted to about Rs. 1,08,746 crores which was 9.5 percent more than planned.

Centre's Balance from Current Revenues (BCR)

5.3.2 The total revenue receipts of the Centre increased by 17 per cent per annum, during 1984-85 to 1989-90, whereas the revenue expenditure has been rising by 20 per cent per annum. Hence the Centre's BCR at 1984-85 prices shows a deterioration of Rs. 5338 crores as the non-plan revenue expenditure exceeded the original estimates by Rs. 9274 crores, though the revenue receipts (including ARM) were higher by Rs. 3936 crores. Excluding ARM also the revenue receipts exceeded the original estimates by Rs. 6483 crores. However, total additional resources mobilization was lower by Rs. 2,545 crores. The full realisation of ARM improved the BCR considerably. On expenditure side, subsidies and interest payments and other NPRE increased by 24 per cent and 20 per cent per annum in nominal terms; defence expenditure increased on an average 15 per cent annually during 1984-85 to 1989-90.

5.3.3 The publ ic sector enterprises also could not achieve the targetted ARM. They raised Rs. 8506 crores through fresh measures against the target of Rs. 14,240 crores. Thus, the estimated ARM (net of States' share) during 1985-90 by the Central Government including PSEs amounted to Rs. 14,211 crores, at the base year prices compared to the plan projection of Rs. 22,490 crores.

Public Sector Enterprises

5.3.4 The total resources of Central Public Enterprises (CPEs), both departmental and non-departmental, (at 1984-85 prices) during the Seventh Plan was originally estimated at Rs.51,694 crores, including ARM, but the latest estimates (Rs.39,649 crores) even after including bonds were less by nearly Rs. 12,045 crores. The estimated ARM by these enterprises was considerable but there was a shortfall of Rs.5734 crores as compared to projections. Altogether, total internal resources (retained profits, depreciation, etc.) fell considerably short of target and dependence on borrowings increased. Extra budgetary resources (EBRs) were higher, as also were the inter-corporate transfers. The budgetary support (equity and loans) by the Central Government amounted to Rs.38,515 crores (at current prices) during the Plan period.

5.3.5 The CPEs' extra budgetary resources (EBRs) besides external commercial borrowings/suppliers credit and deposits (as also intercorporate transfer of funds) included public loans through the issue of bonds/debentures, on a selective basis, allowed to supplement resources for outlays and to tap the private savings. They totalled Rs.10,796 crores (at current prices) during the five years.

5.3.6 The CPEs in selected sectors were also allowed to issue tax-free bonds from 1987-88. Out of the total issue of bonds during 1987-90, about two-thirds were tax-free bonds, at the interest rate of 9 percent, and the rest were at the rate of 13 per cent. As much as 85 percent of bonds were picked up by the financial institutions, banks and corporate bodies against the original target group of rural savers.

Centre's Borrowings and Deficit Financing

5.3.7 Reliance on domestic borrowings in the form of market borrowings, small savings and provident fund and net capital receipts for financing the Plan was higher than the original estimates. These items of domestic borrowings financed 67 percent of the Centre's Plan as against about 50 percent envisaged in the original Plan estimates. Deficit financing has totalled Rs.35,626 crores (at current prices). At base year prices, this is more than twice the level projected in the original Plan at Rs. 14,000 crores.

Central Assistance

5.4.1 Total Central assistance including advance (adjusted) plan assistance, normal as well as for relief and special plan loans for Punjab added to total Rs.38,921 crores at current prices, which works out to Rs.30,941 crores at 1984-85 prices (Statement 5.1) compared to Rs.29,737 crores in the Plan that is higher by 8.3 per cent. The total of releases of Central assistance for the States' Plans and special assistance for area programmes during the Plan amounted to Rs. 36,554 orores as per details given below (Rs. crores):-

5.4.2 Allocations of Central assistance for State Plans ofnon- Special Category States were made following Gadgil formula as modified at the beginning of the Sixth Plan.

States and State-level Public Enterprises (SLPEs)

5.5.1 The approved Plan outlay for all States for 1985-90 was Rs.80,698 crores. As per the latest estimates made jointly with the States and the Ministry of Finance, the resources actually available for their plans are placed at Rs.87,464 crores. But adjusting for price changes, the actual resources work out to be lower by 11.9 percent and expenditure lower by 16.9 percent compared to the approved outlay. The latest estimates of resources indicate a deterioration in the States' BCR including ARM. The BCR shows deterioration due to lower turn out of their own tax revenues, as also from non-tax sources; and increase in interest payments and other non-plan non-development expenditure. Market borrowings for State Plans, at 1984-85 prices were realised at a level lower than projected in the Plan. Share of small savings, net accrual of State Provident Funds and negotiated loans were larger than projected. Together, these capital receipts (excluding bonds of CPEs), exceeded the Plan estimates, at comparable prices, by about 25 percent. The review shows that the share of Central assistance in financing of the States' Plan actually turned out to be 48 percent compared to the projected share of 36.8 percent. The Central assistance, at comparable prices, worked out to be higher (by 4.0 %) at Rs.30,941 crores compared to the projected level of Rs.29,737 crores. Despite increased Central support, the share of the States in total public sector resources turned out to be less than 39.1 percent compared to 44.8 percent projected.

5.5.2 Among Special Category States, theBCR as also the opening balance was negative in all cases. In view of this, ARM through tax and non-tax measures as also contribution of Departmental Undertakings, (including their ARM), was left to cover their deficits under BCR and opening balance. Central assistance exceeded their Plan expenditure as it covered their BCR gap until 1988-89.

5.5.3 The latest estimates( at 1984-85 prices) of the BCR of the States, including ARM show a surplus of Rs. 12,746 crores which is significantly less than the projected surplus of Rs.19,762 crores. This deterioration was mainly due to shortfall in the projected buoyancy of revenue (in real terms) and increasing NPRE, especially non-development expenditure.

5.5.4 Prior to 1989-90, in the case of Special Category States, the gap in BCR was covered through Central assistance. However, from 1989-90, States were expected not to show any negative BCR as the Ninth Finance Commission (NFC) provided revenue gap grants based on their assessment. In view of this, the gap in BCR, if any, of the Special Category States was left to be covered by these States through ARM and reduction in the NPRE. But, all the Special category S'tates had gaps in their BCR which they maintained was due to the NFC having over-assessed their revenues and underestimated their non-Plan revenue expenditure.

State-Level Public Enterprises

5.5.5 State Electricity Boards/Undertakings (SEB) and State Road Transport Corporations/Undertakings (RTC) have shown an estimated level of deficit (negative contribution) of Rs.2,194 crores, compared to their estimated contribution at Rs.7,243 crores in the Seventh Plan. By the terminal year of the Plan, only the SEBs of Andhra Pradesh, Madhya Pradesh and Maharashtra contributed positively, in terms of commercial surpluses, (i.e. adjusted for depreciation) to Plan resources in revised estimates. Only RTCs of Andhra Pradesh, Tamil Nadu and marginally of Goa contributed positively in the revised estimates. Departmental transport undertakings in the concerned States showed negative contributions, except for Haryana Roadways.

Review of Annual Plans 1990-91 and 1991-92

Annual Plan 1990-91

5.6.1 The Annual Plan 1990-91 was formulated initially as part of the Eighth Plan envisaged for the period 1990-95. While the tempo of economic development through larger investment and outlay in the public sector was proposed to be maintained, due emphasis was placed on containing deficit financing within limits in view of the inflationary trends. The need for ARM by the Centre and State Governments and their enterprises in financing their Plan was given due weight. The resource requirements of the States for larger State Plans and for more financial autonomy in the developmental activities of States was fully recognised and Central Plan assistance to the States was substantially stepped-up.

5.6.2 As Statement 5.2 shows, the approved Plan outlay for the Centre and the UTs for 1990-91 was Rs.40,400 crores and the outlay for the States' Annual Plan 1990-91 was at Rs.24,317 crores. Thus, the total outlay of Rs.64,717 crores (against initially estimated resources of Rs. 65,002 crores) for the Annual Plan 1990-91 was nominally higher by 12 percent (14% at the Centre including UTs and 9% in the case of the States) over the outlay of 1989-90 Plan.

5.6.3 According to the details available now, as indicated in Statement 5.2, Plan expenditure for 1990-91 was Rs. 39,066 crores in the case of Centre (including the UTs) and Rs. 22,360 crores in the case of States. The resources for financing the Plan is now placed at Rs. 39,486 crores in the case of Centre (including UTs) and Rs. 21,651 crores in the case of States, indicating overall deterioration of Rs. 3,865 crores compared to the Annual Plan estimates. Deterioration in Balance from Current Revenues compared to the Annual Plan estimates has occurred in the case of Centre due to slower growth in revenue receipts and increase in non-plan revenue expenditure including subsidy and interest payments. Substantial shortfall compared to the Annual Plan estimates also occurred in the internal resources of public enterprises and in the realisation of Miscellaneous (net) Capital Receipts and Provident Funds.

5.6.4 Net inflow from abroad in the form of grants and loans to the Centre is now estimated at Rs. 3767 crores (against the total ofRs. 6320 crores, including borrowings by public enterprises) compared to the Annual Plan/Budget Estimates of Rs. 4327 crores (against the total of Rs.5793 crores). The budget deficit/deficit financing in 1990-91 was of the order of Rs. 11,347 crores which is higher by Rs. 4141 crores over the Annual Plan estimates.

5.6.5 The shortfall in the resources of States has been mainly due to deterioration in ARM, increase in NPRE and erosion in the contribution of the State Public Enterprises.

5.6.6 The Central Assistance for the State Plans and special assistance for Area Programmes during 1990-91 as per States' estimates was only lower at Rs. 10,261 crores compared to the budgetary provision ofRs. 10,526 crores. Plan revenue deficit grants and contribution towards Calamity Relief Funds provided to the States by the Centre were to the tune ofRs.991.53 crores and Rs.603 crores respectively, both in pursuance of the recommendations of the NFC.

Annual Plan 1991-92

5.6.7 The approved outlay in the Annual Plan 1991-92 for Centre and States together, as Statement 5.3 brings out, was at Rs.72,317 crores, with a nominal increase of Rs.7,600 crores i.e. 11.7 percent increase, over the Plan Outlay of Rs.64,717 crores for 1990-91. Improvement in the BCR of the Centre and the States and a higher draft on private savings through market loans, small savings and provident funds were expected to finance the increase in the Plan outlay for 1991-92.

5.6.8 The financing strategy during 1991-92 focussed on fiscal deficit which is broadly defined as Centre's total revenue receipts, loan recoveries and other capital receipts (excluding borrowings) minus total revenue and capital expenditure (including loans and advances to the States). The budgetary deficit of Rs. 10,722 crores in the revised estimates for 1990-91 was proposed to be brought down to Rs.7,719 crores in 1991-92. Several measures to prune NPRE including subsidies and expenditure on defence and establishment were initiated. The ARM measures were expected to yield Rs.2,005 crores of tax revenue (net of States' share). The administered prices of the Central Public Enterprises were raised to help additional resource mobilisation for Plan financing. The Central Public Undertakings were allocated market borrowings through issue of public bonds/debentures for financing a part of their Plan outlays.

5.6.9 Total provision for Central assistance for the State Plans and Special assistance for Area Programmes during 1991- 92 amounted to Rs.l 1,835 crores. In addition, the States were given Plan revenue deficit grants of about Rs.l,333 crores as per recommendation of the NFC. The States were expected to reduce NPRE, step-up the efforts for mobilisation of additional resources and improve the performance of their undertakings to meet the financing of approved outlays.

5.6.10 The latest estimates of finances for the Annual Plan 1991-92 may also be seen in the Statement 5.3. These show that the BCR of the Centre deteriorated compared to the Plan estimate. Contribution of Public Enterprises also showed shortfall. The States' resources fell considerably short of the Plan estimates, with the BCR turning out to be negative at a significant level. Central support was lower only to the extent of national economy measure selectively exercised in Central assistance amounting to around 10 per cent. As a result, revised estimates of outlays of the Centre and the States are at significantly lower levels compared to the approved outlays.

5.6.11 In pursuance of the recommendations of the National Development Council which met in October 1990, it has, inter alia, been decided that:

1. the entire external aid (compared to 70% earlier) meant for externally aided projects implemented by the States would be passed on to them and
2. the grant-loan pattern of assistance to Assam and Jammu and Kashmir States would be 90:10, from 1st April, 1991, as prevalent for other Special Category States.

Besides, a Committee of Experts has been appointed to suggest durable solutions for the financial problems of the Special Category States.

Annual Plan 1992-93

5.7.1 The Annual Plan 1992-93 has been formulated in the context of the Eighth Plan, 1992-97. The measures initiated by the Government in 1991-92 for fiscal correction and consolidation will be continued in 1992-93. Thus, efforts for mobilising resources and restraining expenditure taken during 1991-92 will be continued during 1992-93. The objective is to reduce the fiscal deficit to 5 percent of GDP during 1992-93.

5.7.2 The Annual Plan 1992-93 recognises the importance of maintaining fiscal discipline at all levels. The basic premise is that Plan expenditure should not depend on ever increasing budgetary support. In future, the ability to finance Plan expenditure will depend critically upon the internal resources generated by the public sector. Thus, the Plan draws attention to the importance of efficiency in the public sector.

5.7.3 The Annual Plan outlay (Centre, UTs and States) for 1992-93, as shown in Statement 5.4, will be of the order of Rs.80,771 crores; implying an increase of 11.7 percent over the Plan outlay of 1991-92. The proposed Plan outlay for the Centre including UTs at Rs.49,698 crores (at current prices) will be 61.5 percent of total outlay. The details of financing of public sector outlay in the Annual Plan 1992-93 are given in Statement 5.4.

5.7.4 Prior to the Fourth Plan, the allocation of Central assistance was based on schematic pattern and there was no formula for allocation. In view of the general demand for an objective basis for allocation of Central assistance for State Plans, a formula known as Gadgil Formula was evolved, which in its original form was adopted for distribution of Central Plan assistance during Fourth and Fifth Plans. According to this formula, allocation for States (other than special category States) was based on population (60%), per capita income (10%), tax effort (10%), on-going irrigation and power projects (10%), special problems (10%). Since the criteria in respect of on- going programmes were weighted in favour of rich States, Gadgil formula was modified in the beginning of Sixth Plan, and the weightage for on-going schemes was added with per capita income, making its weight 20%. This modified formula became the basis of allocation of Central Plan assistance to States in Sixth and Seventh Plans and Annual Plan 1990-91. Keeping in view suggestions made by some of the States for revising the modified Gadgil formula, various alternatives were considered by the NDC in October, 1990 and the formula was revised and it laid down criteria with weightage of population (55%) per capita income (20% - deviation method; 5% -distance method), fiscal management (5%), special development problems (15%). This formula was followed for distribution of Central assistance for 1991-92 only. Most of the State Governments expressed reservation on this formula and keeping in view their concerns, a Committee under the chairmanship of Shri Pranab Mukherjee, Deputy Chairman, Planning Commission was constituted to evolve a suitable formula for distribution of Central assistance. The suggestions made by the Pranab Mukherjee Committee were discussed by the NDC on 23-24, December, 1991 wherein a consensus emerged and a revised formula evolved which was equitable and acceptable and was made the basis of allocation of Central Plan assistance to the States for the Eighth Plan. Mukherjee formula containing criteria for allocation of Central assistance for the non-special category States is given below:

Criteria                                               Weight

i) Population (1971 Census)                       60%
         ii) Per capita income -
         (a)'Deviation'method - Covering           20% 
          States with per capita SDP
          below the national average

(b) 'Distance' method                              - Covering all 5%
          States

iii) Performance -          _
         (a) Tax effort; |
         (b) Fiscal Management; and             7.5%
         (c) Progress in respect of national 
          objectives
 iv) Special problems                                  7.5%

Under the criterion of the progress in respect of national objectives, the approved formula covers four objectives viz., (a) population control and maternal and child health; (b) universalisation of primary education and adult education; (c) on-time completion of externally aided projects; and (d) land reforms. Distribution of Central assistance for the Special Category States' Plans would be as in the modified Gadgil formula, on the basis of the lump sum amount (about 30 per cent taken out of total allocable among the States; aside from the pre-assigned including NEC, additional Central assistance for externally aided projects and REC).

5.7.5. In case of Special Category States, out of the total Central Assistance after providing funds for externally aided schemes and Special Area Programmes, a part (nearly 30%) was earmarked separately for these States right from the days when the Gadgil Formula was adopted for the distribution of Central Plan assistance. This formula was slightly modified in October, 1990 when the share allocated to these States also included the allocation for North Eastern Council (NEC). This, however, was modified under the Mukherjee formula (1991) by which the share allocated to Special Category States excluded the allocation of NEC and thus restoring the position as it existed before 1990.

Plan Financing During the Eighth Plan, 1992-97

Approach to overall financing

5.8.1 Financing investment of Rs.798,000 crores during the Eighth Plan would call for massive domestic effort particularly when net inflow from abroad is to be kept at moderate level amounting to 1.6 percent of GDP. Inter-sectoral flow of funds in respect of the projected level of investment shows that financing of public sector investments at the rate of 10 percent of GDP constituting 45.2 percent of total, is projected to come from borrowings out of savings of households to the extent of 71.6 percent, from the rest of the world to the extent of 9.34 percent, and the balance from its own savings. The projected investments would still call for significant mobilisation effort in the Government sector, where the budgetary savings need to improve significantly which will depend on higher revenue (net) realisation and economy in NPRE.

5.8.2 The resource constraint is expected to continue at both the Centre and the States, particularly due to the drain by loss-making Central public enterprises and the States' electricity and transport undertakings and the moderate increases in surpluses of profit-making enterprises. But, RBI support (deficit financing) is projected at a lower level so as to move in the direction of non-inflationary financing. Substantial economies in NPRE and increasing ARM would, therefore, be needed to finance the projected outlays of the Centre and the States almost fully from domestic sources. As the Sarkaria Commission has observed, the agriculture sector has lagged in contributing to resource generation compared to its contribution to GDP. The per cent share of direct tax revenue from agriculture has gone down to about 0.7 percent of GDP (1989-90) compared to about 1.2 per cent in 1950-51, while the share of all direct tax revenues in aggregate GDP has gone up to 2.8 per cent compared to 2.6 per cent in 1950-51. Even if 1.2 per cent share observed in 1950-51 is again achieved there would be additional revenue from agriculture sector to the tune of Rs.600 to 700 crores, over the present level of Rs.750 crores. This can be achieved through widening the base of the taxation in agriculture requiring certain legislative changes by the States for which consensus needs to be developed in the National Development Council. All in all, there is need to raise the ratio of direct tax revenues to GDP. Attention in this regard needs to be paid to eliminating or reducing the numerous concessions and exemptions. The level of tax arrears in the case of the Centre as well as the States is considerably large. The level of arrears in regard to Central direct taxes is quite high. Total arrears are estimated to be over Rs.5,000 crores of which a large amount may be recoverable. Among States, the level of tax arrears, for example, was over Rs. 1,250 crores in Uttar Pradesh at the end of March 1990. Other States having significant tax arrears include Andhra Pradesh (Rs.461 crores); Orissa (Rs.385 crores); Karnataka (Rs.272 crores);Tamilnadu (Rs.253 crores); Gujarat (Rs.233 crores); Madhya Pradesh (Rs.147 crores); Ra-jasthan (Rs. 108 crores); Punjab (Rs. 106 crores); Kerala (Rs.105 crores) and Haryana (Rs.90 crores). The tax arrears are also significant in case of Kerala but largely due to electricity duty to be also recovered from State departments/undertakings. States must strive to get about three-fourth of the recoverable arrears in the exchequers even if legal cases are pending. In case of loans and advances also there are substantial arrears. Their recovery is within the States' efforts. There is also large amoun| of revenue foregone through exemptions in regard to taxes, notably excise. Definite measures would be needed to stop the leakages in the revenue system.

5.8.3 The performance of Central public enterprises has improved in recent years but it is still much below the expectations and will have to be considerably improved during the Eighth Plan. Internal resource generation has to be the main source of financing their outlays, particularly as the budgetary resources from Government and external commercial borrowings will have to be contained. There is ample room for improving the capacity utilisation, rationalising tariffs, increasing efficiency and exercising economy in staff expenditure. This would help the CPEs to mobilise resources from the capital market.

5.8.4 Realisation of the projected financing pattern of the Eighth Plan would call for rise in revenues faster than growth in GDP and restriction on NPRE to keep it much below the growth of GDP. In the Eighth Plan, special attention needs to be given to the containment of growth in staff and expenditure on them and further reduction on other non- development expenditure such as subsidies. The scale, the content and the rationale of subsidies will have to be critically reviewed. Through peoples' participation in development programmes, not only the outlay requirements corresponding to the growth targets and programmes can be reduced, but their effectiveness can also be increased. Furthermore, the assets created during the previous Plans can be maintained better and the maintenance expenditure can be reduced which would help contain the revenue deficit of the Government at the Centre and the States. Experience of certain States suggests that the efficiency and economy in expenditure on social services can indeed be brought in through people's involvement. Hard decisions will also be needed to make economic and social services yield their due. National consensus on measures is emerging for making higher education self-financing to some extent; making the direct taxes yield their due and indirect taxes responsive to their base and prevailing prices; and in the case of the States, reducing the differentials in the rate of sales tax among States within a narrow range, raising the irrigation tariff to cover at least operating expenses and charging a minimum power tariff.

Financing the Private Sector Investment

5.9.1 To finance the projected investment of Rs. 149,000 crores during the Plan period, the private corporate sector is expected to mobilise resources of the order of Rs.68,930 crores out of its own savings and Rs.58,770 crores as transfers from the household sector. The rest, Rs.21,300 crores, may be net inflow from rest of the world. The household sector's investment of Rs. 2,88,000 crore would be met out of its savings of Rs.605,170 crores. The balance of savings over investment is to be transferred to the public and the private corporate sector. Until the eighties, the net increase in household savings consisted mainly of bank deposits and loans to Government. In recent years, investment in corporate stocks has been increasing due to their higher returns compared to even tax-rebate-adjusted deposits and loans to Government. This effect is likely to be stronger in future as access to capital market increases and new instruments are brought in. The chunk of small investors is indeed growing fast. The capital market has been able to offer a good hedge for inflation, particularly if investment is made in equities. The share prices have appreciated much faster than that of the conventional hedges like gold and even real estate. The institutions responsible for capital market would need strengthening to promote a competitive atmosphere and improved efficiency in the use and deployment of funds. The level of resources mobilised by Non-Government Public and Private Limited Companies through capital market during the Seventh Plan period can at least be doubled during the Eighth Plan period and increased further with certain institutional developments which may help to tap the rural sector.

5.9.2 According to macro balances, the private corporate sector has been allocated Rs.21,300 crores as inflow (net) from abroad. While a major part will come in the form of suppliers' credit and market borrowings, recent policy changes should result in increased investment by Non-resident Indians and foreign companies and portfolio investment from abroad. If the present expectations about larger foreign investment materialises, the position will improve.

Financing of Public Sector Outlay in the Eighth Plan

5.10.1 Public sector outlay for the Eighth Plan is placed at Rs.434,100 crores, at" 1991-92 prices. Of this, investment would be Rs.361,100 crores, the rest Rs.73,100 being current outlays. Public sector investment would amount to 45.2 percent of aggregate compared to 47.8 percent as originally envisaged and 45.7 percent as realised in the Seventh Plan. This outlay in public sector during the Eighth Plan would amount to 141 percent increase and at comparable prices to about 32 percent increase over the Seventh Plan Outlay in public sector.

5.10.2 Such an increase is based on the expectation of (i) additional tax and non-tax revenues and miscellaneous receipts; (ii) containing growth of Government current expenditure especially net consumption expenditure and (iii) increased contribution of public sector enterprises, including Railways, amounting to 4.3 percent of GDP compared to 3.7 percent in the Seventh Plan.

5.10.3 The public sector plan outlay is to be financed, given the BCR of Rs.35,005 crores, and contribution of public enterprises at Rs. 148,140 crores, both including ARM, and net MCR of Rs. 202,255 crores and deficit financing of Rs.20,000 crores and external resources of Rs.28,700 crores. Thus, financing is to come from domestic sources to the extent of 92.2 percent. Deficit financing would be contained at 4.6 percent of total public sector resources and at 0.58 percent of GDP. This depends crucially upon achieving the target of BCR of Rs.35,005 crores which involves a massive improvement in fiscal performance from recent trends involving both better revenue collection and very tight control over growth of current expenditure. This calls for hard decisions on several fronts and unless these are taken, the viability of financing the Plan will he jeopardised.

5.10.4 Detailed estimates of financing of public sector including the Centre and UTs, Central PSEs and the States during the Eighth Plan, provided in Statement 5.5 are based on the macro-level balances, and updated estimates of the finances of the Centre and States.

Centre and Central Public Sector Enterprises (PSEs)

5.10.5 The total resources, excluding transfer of Rs.78,500 crores as assistance for the State Plans, have been estimated at Rs.254,115 crores for the Centre (including the Union Territories) and Central PSEs which is 156 percent higher compared to the Seventh Plan projection at respective base- level prices and about 40 percent higher at comparable prices.

Centre's Balance from Current Revenues (BCR)

5.10.6 The BCR of the Centre is estimated at Rs.22,020 crores including the expected ARM by the Government and providing for transfer to the States' of their share in Central taxes. The NPRE of the Centre is estimated to be contained especially the consumption expenditure. Increased commitments of the Government have meant higher budgeted subsidy expenditure under several heads, as also higher revenue expenditure by way of debt relief to farmers in 1990-91. Many reliefs and concessions are reflected in 'Other' subsidies. Increased establishment expenditure would be mainly on account of the increased pay and allowances including dearness allowances and travel.

Central Public Enterprises (CPEs)

5.10.7 The resources including borrowings of central public enterprises (CPEs), both departmental and non-departmental, are estimated at Rs. 144,140 crores including ARM. However, for this the estimated rise in operating expenses/cost escalations, has to be contained within limits. The estimated resources of the CPEs imply a shift from increasing budgetary resources to the capital market.

5.10.8 In view of the tax revenue which has to be foregone and distortions in interest rates which are created by tax-free 9 percent interest bonds, recourse to them is to be reduced to a pro-determined limit. Their placement is to be watched closely. The periodical review should enable their containment and moving in the direction of original objective of tapping peoples' savings especially rural savings.

5.10.9 With estimated borrowings and miscellaneous (net) Capital receipts at Rs. 117,7§5 crores, the overall deficit in the Central Budget or RBI support, over the Plan period, is expected to be contained at Rs.20,000 crores, which is much lower than the observed estimates for the Seventh Plan. This is in line with the approach to the Eighth Plan regarding non-inflationary financing of the Plan and reducing the moneti-sation of public debt through Reserve Bank of India. Therefore, adherence to annual budgetary deficit, financed by the RBI support, within this limit, would be necessary to ensure price stability. The States are more or less adhering to the policy of not resorting to overdrafts beyond the specified short time limit following the guidelines issued by the Central Goverment.

Central Assistance for State Plans

5.10.10 The total Central assistance for State Plans (including Plan revenue deficit grants) is projected at Rs.78,500 crores which finance 43.6 percent of the projected Plan outlay of the States' which would be much higher than the Seventh Plan projection at 37 percent. The Central support would also include allocation of market borrowings and loans from financial institutions. While the State-wise allocations of Plan grants would be as per recommendations of the Ninth Finance Commission, (up to 1994-95) allocation of Central assistance for State Plans would be made in accordance with the formula agreed upon in the National Development Council meeting held in December, 1991. All Special Category States will be allowed assistance in the grant:loan pattern of 90:10. Allocations for externally-aided projects are based on approved projects and aid utilisation possibilities. These will be made on cent percent basis. Central assistance against externally-aided projects should not replace the existing budgetary allocations to the specified sectors as this is aimed to result in additionality. The Central allocations are likely to be distorted when in place of additionalities, there is replacement.

5.10.11 In pursuance of the decision taken at the time of the revision of modified Gadgil Formula, a Committee of Experts has already been set up to suggest durable solutions for the financial problems of the Special Category States.

States and State-Level Public Enterprises

5.10.12 The total outlay of the States has been kept at Rs. 179,985 crores which would be about 41.5 percent of the total public sector outlay. The estimates of resources under various heads for financing the above outlay are given in Statement 5.5.

States' Balance from Current Revenues (BCR)

5.10.13 The overall BCR including ARM by the States (covering the non-special category States) is estimated at Rs.12,985 crores as per the macro-level dimensions of the Plan. Much higher levels of BCR is expected as per States' commitments of resource mobilisation.

5.10.14 The resources/contribution of State Electricity Boards and State Road Transport Corporations and Power/Transport Departments/Undertakings; including ARM (net), are estimated at Rs.4,000 crores only. But, this would also call for substantial reforms so that ARM (net) is realised to correspond to cost escalations in net terms.

5.10.15 A study of finances of the State -level enterprises, other than SEBs and RTCs, promoted by the Planning Commission, shows their overall negative contribution presently which entails budgetary support by the respective State Governments. Necessary reform measures need to be taken, to lead to a turn around and positive contribution to resources.

5.10.16 The outlay levels for the States are determined keeping in view their development requirements to he financed by States own resources; and Central support which include Plan assistance; market borrowings; negotiated loans from financial institutions namely LIC, GIC, RBI, NABARD, IDBI, REC and others; and Plan revenue deficit grants recommended by the NEC. Among State's resources, aside from BCR management and increased contribution of public enterprises, net MCR of the States projected to be negative, the projected increase in share in small savings would call for substantial effort for collection while that of Provident funds would require prudent management. The present commitments by the States in these regards have been conservative and would have to be raised to realise the projections given in the Statement 5.5 which may reduce the ARM requirements on budgetary account envisaged by the States.

5.10.17 Several States have maintained that the period so as to generate their own resources their future tax revenue have been over-esti- for their increasing developmental require-mated and revenue expenditure under-estimated ments. This, as well as other observations made by the NFC. While this may be true, NFC has by the NFC for ARM, are to be achieved during taken a normative approach with the objective the Eighth Plan. of phasing-out revenue deficits and making the States' as well as Centre's finances viable over

Statement - 5.1

Financing Pattern of the Public Sector Outlay during the Seventh Plan
(Rupees Crores at 1984-85 prices)

$ In case of States, total of resources and total expenditure differ due to reporting time lag, difference in coverage and certain adjustments.

Statement 5.2

Financing Pattern of Plan Outlay for 1990-91, Centre (incl. UTs.) and States
(Rs.Crores)

(a) Including upgradation grants and special problem grants, includes BCR of Non-special category States.
* BE in Central Budget is Rs.4500 crores, excess due to additional savings estimated to be mobilised by the
States.
# Among Special Category States only positive sum of capital resources (small savings, state provident funds,
misc. capital receipts, market borrowings and negotiated loans) of certain States included in Plan funding while
negative sum of capital resources of other States ignored. Negative contribution of State Public Enterprises and
negative BCR of all the States ignored.
** Including assistance for externally aided projects. Area programmes and Plan Loans.
## Approved outlay Rs. 24317 crores. Surplus in resources of some of the Non-special Category Statesdue to
additionalties in Central transfers (including due to Finance Commission).
$ The total of releases above differs from preactuals provided by States totalling Rs. 10261 crores on account of lag in
accounting in two respects i.e. budgetary actuals and releases received by State Governments which included plan
loans, special assistance and assistance for Area Programme.
Note :

1. The excess of estimated resources over the actual expenditure in case of the Centre may be due to difference in reporting time; probable over-estimation of ARM and actual savings in non-plan expenditure both determining the BCR; gap in disbursements compared to sanction of budgetary support including assistance for the State Plans; element of target of certain capital receipts; and under'/over-reporting of balance with the RBI.
2. The excess of expenditure over the resources in case of the States may be due to under-receipt of revenue and Central transfers.

Statement - 5.3

Financing Pattern of Plan Outlay for 1991-92 of the Centre (incl. UTs.) and States
(Rs.Crores)

+ As per Central Budget 1991-92, the Plan Outlay of the Centre (inci UTs) is Rs. 44251 crores,, the discrepency is due to the provision of outlays for Ideal villages/ Equity base for Cooperatives in respect of the Union Territories.

+ + The outlay of the States and UTs was subsequently reduced by Rs. 151 crores consequent upon the decision to drop the Schemes viz. Model Villages andequity base for Cooperatives, as part of economy measures.

$ Revised approved outlay.

* Including only non-special category States' estimates. ft Among Special Category States only positive sum of capital resources (small savings. State provident funds, miscellaneous capital receipts, market borrowings and negotiated loans) of certain States included in Plan funding while negative sum of capital resources of other States ignored. Negative contribution of State Public Enterprises and negative BCR of all these States ignored.

** Including assistance for externally aided projects , Area programmes and Plan Loans.

## Difference with revised outlay due to different points of time of exercises.

$$ The total releases above differs from latest estimates provided by the State Governments totalling Rs. 11387 crores on account of lag in accounting in two respects i.e. budgetary actuals and releases received by the States which included plan loans, special assistance and Rs.824 crores for Area Programmes.

Statement 5.4

Financing Pattern of the Plan Outlay for 1992-93
(Rs. crores)

** Including assistance for Externally Aided Projects, Area Programmes and Plan Loans.
ft Difference is due to the higher levels of assistance for projected external aid utilisation by States.

Statement - 5.5

Projected Financing Pattern of the Public Sector Outlay in the Eighth Plan : 1992-97
(Rs. crores at 1991-92 prices)

including Additional Resource Mobilisation.
**Including only non-special category States' estimates.
@vering market borrowings, small savings, provident funds and loans from financial institutions.
©©Including plan revenue deficit grant under Article 275(1)