RESTRICTED l OfPY AS122 SXVol. 1 I I This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representina their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION INDIAN ECONOMIC POLICY AND THE FOURTH FIVE YEAR PLAN VOLUME I THE MAIN REPORT May 22. 1967 A.qik Dtanarfrnent EQUIVALENTS 1 Indian Rupee U.S. $0. 13 1 TT C Tn Ila. D D 7 - 1 / 1 lakh 100 thousand 1 crore 10 million 1/ Following devaluation of June 6, 1966. The previous exchange rate was Rs. 4. 76 for one U.S. dollar. TABLE OF CONTENTS PREFACE .......................... 1 - BASIC DATA v...........................................O. iii - v SUMMARY ................................*...... coo .... . vi - xii INTRODUCTION .......................... s.........o.......... 1 Developments in the Third Plan Period .................. 1 The Long-Term Problem and Strategy of Development .......... 7 NEW POLICY DIRECTIONS .................................... 11 Devaluation ......... . ........... . . . .. . . . .. . . . .********* 12 Reduction of Administrative Controls over Imports (Liberalization) ................ .. tosses.... ..... .... 14 Relaxation of Controls Over Industrial Investment and Production to..........................****,... 17 Capital Issues Control ..................*************** 17 Agriculture ............0............. .......******* 17 Fertilizer ...... *... . ............ .......... .. ... * *** ** * 19 Population Control ...........................s.....* 20 Other Changes in Policy and Program ........................ 21 THE FOURTH PLAN ...................................******. 22 The Size of the Plan ..........................*******. 22 Resources for the Plan ......* 25 Cqnital Inflow .................................. 29 Project Imports ......... .................** ** 33 Rt.Mintair of tho PiAn _--------.--. e....................... 33 General Objective of the Plan ......................* *3. Productiormnandi T-mcome Ta-rgets+..q.----------------........ 3 Savings and Investment Targets ........................... 37 The Comnositinn of the Plan Exenditure Progran ............ 37 Agriculture .................* ****** 38 InduStr- - --------------.-.---...-- 40 Electric Power . ........... . ......***** a 46 Transortaton 0.... ..........- -- --14 Faily Planning o ................... . ... ..............***** ** 51 Conclusions ..........................*************** AID REQUIREMENTS ................................** * 53 In the Fourth Period and Beyond ........o.................. 53 .0mm1eulauti Alu ....mnu too . .....*** ******************* Non-Project Aid .......5.................*************7 Project Aid . .... ............******* **** 68 Indian Performance ........................... .... * 68 n T-"A nll~ This report is the product of a Mission which visited India in October-November 1966. Fost members of the Mission spent Iour to Live weeks in India, some were there for shorter periods. The Mission had two separate out closely related purposes. One was to examine the important changes made in Indian economic policy in 1966 and the manner in which they were being implemented. The other was to examine the proposed Fourth Five-Year Plan and the aid requirements associated with it. This volume constitutes the Main Report of the Mission. It is supplemented by several volumes which deal with individual sectors of the economy or particular programs, and especially by Volume II which treats "Agricultural Policy in India". This Main Report has four parts. The first briefly reviews India's experience in the Third Plan period. The second part describes and analyzes the major changes in policy and program instituted by the Government of India in 1966 in response to the experience of the Third Plan period. It notes that these - including the shift of emphasis to agriculture, the invigor- ation of the Family Planning Program, the devaluation of the rupee, the partial decontrol and liberalization of imports and the relaxation of con- trols over industrial investment and production - were important changes, that they are being fully implemented, but that there has not yet been time for their effects either to be felt to any significant degree or to be observed and evaluated. The third part reviews the proposed Fourth Five-Year Plan, its genera1 hiat-tives. its innme "nwt.h and nhysical nroduction tarpets. the size of the expenditure program it projects, the composition of the invest- ment and production nernms it.callc for, the reonres which it uill require and which may be available from domestic and foreign sources, and Au judament ofP +he DS" +hln te,4io 4+ nh-mdioe and the nrrlnt. for its execution. The fourth and final part of this volume sets forth our estimates of the apnroV4mate amon+.s of annital inflow which may be reuired nnd appropriate in the Fourth Plan period if India is to make significant from the Aid-India Consortium. We focus then on the crux of the matter, namely, Ina-UP 11 VINLU F.UL. IS a 4 4-s- 4-..rA4 n-i,- - aid, non-project aid, and project aid. It is emphasized that food is the the success or failure of the new policy directions hinges importantly on the supply of foo in this yer LnsoacinnIdaspr ar indicated which we believe would make for effective use of this aid together with india's own resources. it is well tnat we state our general view at tue outus thnt, although the Fourth Plan provides some useful perspective, Indian economic policy is in a state of transition. The precise arithmetic of the Plan ii should not be taken literally or regarded as a blueprint which is to be followed inflexibly. India's economic development program will be formu- lated and altered from year to year. What is of paramount importance is what is dmne now to carry forward thp gnnuinelv connerative effort which the Governent of India and the aid-giving nations have initiated. What should hp rinnp. in fiiturnt vpars should rpst on actual nprformance. At this time the effort deserves continued and solid support to ensure an adequate trial of the new nolJieJP and prnograms which we be1ievA offer the best promise of significant economic progress in India. This report is very much the product of the work of all the mem- hown f +h1n Md4 e4n ni+h, semn414 +w 4'm, theo ra-4 in h,as bn .* 'a '^.nVA+.Ina Y.7"4J.A"a hAn ht-.P_n assumed by only a few of them - by the Mission Chief aided by his deputy in +hn e a +ll MAJU-1 D. r)--4 Ia +I,- I-A-,A h amnluni& al the case of Volume II, and by others as indicated in the particular papers. Bernard R. Bell Sir John G. Crawford jean BaneVh Kenneth A. Bohr Atle Elsaas W. David Hopper Stanley Katz Donald C. Kimmel Stanley Please Sheldon J. Segal Lorne Sonley Wilfried P. Thalwitz Armand M. J. Van Nimmen iii BASIC DATA Area: 1,262,000 sq. miles. Population, 1966: 500 million (approx. est.) Rate of growth, 1962 - 1966: 2.5% p.a. Iod a 10IA. 9 cn o Population density (per sq. mile): 396 Political status: Independent since 1947. Gross national product, 1965/66: Rs. 234 billion. Rate of growth, 1960/61 - 1964/65: 4.7% p.a. .L7uL4 U-; ( - 1/ 1965/66: -3.7% Per capita, 1964/65: US $64 1/ Gross domestic product at factor cost, 1965/66: Rs. 211 billion. of which, in percent:.2 Agriculture: 45 Mining: 1 Manufacturing: 19 Commerce & transport: 17 Government & other services: 18 Percent of GDP at market prices: 1965/66 1955/56 - 1962/63 Gross investment 15 10 Gross savings 13 8 Balance of payments current account deficit 3 2 Investment income payments 1 1 Government (consolidated Centre/States) current revenues 16 15 Resource gap as % of investment: 15 17 Money and credit: Conversion: 1 rupee $ 0.13 1 = 7.50 ruoees iv Rate of change March 1you Past tree Rs. billion (Last Friday) Fiscal Years () Total money supply 45.30 +11 Time and savings deposits 24.84 +13 Commercial bank credit to private sector 19.58 +19 Other lending to private sector 4.22 +33 Rate of change in prices: Consumer prices (monthly average): + 9.5% 3/ +10.2% Wholesale (monthly average): +13.7% 5/ +10.6% Public sector operations (Rs. billion): 1950/51 - 1965/66 1965/66 (est.) Rate of change Government (Centre/States) current receipts 37.20 +10.7 Government current expenditures 20.48 +10.8 Surplus 16.72 + 9.3 Public investment expenditures 36.27 +18.5 Total external assistance to public sector 7.18 +13.0 4/ External public debt (US $ million): 1962 - 1965 1965/66 (Annual Average) Total debt outstanding 6017 4550 Total annual debt service 323 245 Debt service ratio (Q) 20 16 Balanc of' payments (US A mil'on. 1960/61 - 1965/66 Annual rat of 1965/66 change (%) Total exports170 Total imports 2,803 +4.3 Net invsile 65 Net current account balance -1,227 -5.5 1965/66 1960 - 1964 Gross foreign exchange reserves %f$~~16 -ilin 1966166 (or 2.9 months' (or 3.2 months' jimports) imports)' 1aF powition ky millonj: 1966 1960 Quota T$7 $600 Drawings $425 $128 V External financial assistance (US $ million): 1965/66 Average 1961 - 66 (est.) Commitments 7/ Disbursements Commitments Disbursements Total 1.552 1,598 1,212 1,197 Soft assistance (inr-l- PT. J1RC 1-)27 19091 822 Hard assistance 125 308 519 375 U.S. 960 903 551 705 TnD/TnA 2bt 22h 17R 136 Germany 86 97 129 93 TYV Al. Oa 1 0 70 U . It. . '' 0 Japan 60 65 58 37 TTC'T LI0nAo ..A Canada 41 41 36 26 France 20 - 17 C-4 9 IBRD AND IDA OPERATIONS (US $ million) A. Past operations Amount committed. 8/ Amount disbursed.8/ IBRD 1,000.5 825.1 IDA 890.5 553.3 Total 1,91.0 1,37d.4 B. Terms of IBRD/IDA operations Weighted. average (January 1, 1961 - October 31, 1966) Rate of Grace Repayment interest period, period. (C.a.) (vears) (years) 2.16 8.7 11.3 1/ Exchange rate of Rs. 7.50 = US $1.00 adopted.June 6, 1966; prior rate was- n- . '74 TTQCN- nd % ~4. (VJ VOt 4pDL.. 2 Percentages calculated on the basis of net d.omestic product, 1960/l prices 3/ March 1965 to March 1966, monthly average. 4/ 1960/61 - 19-65/66. 5/ Jute, tea and cotton yarns and manufacture. 6/ Includes net drawing of $137 million from the IFl in 1965/66; reserves were $60k million as of end.December 1966. 7/ Pledges by consortium members, plus PL 480 commodities. 8/ Total loans and credits net of cancellations as of January 31, 1967. vi qTTMMADV 1. The record of economic progress in India in the fifteen years 'SI- '.*'S t1 '' -LCLL UWJ 4.0 C'A I". VlLU 0 1jilt; WILUI 1t.. .V V"-LY UL . Uk IA%J. Aggregate output grew but at the quite modest rate of 3 to 4 per cent per year, WILLu 1a nu greatly exceeded Url rate of populauUU grokJU. Industrial capacity was expanded, diversified and modernized as a result of lrge invetments, and industrial output increased by 6 to 7 per cent per year. No comparable modernization of agriculture occurred. Although over the fifteen-year period agricultural output increased by about 3 per cent per year, the rate of increase appeared to be declining in the later part of the period. Simultaneously the rate or population growth was increasing, and India was experiencing increasing difficulty in feeding its enormously increased population and in providing productive work opportunities for its rapidly growing labor force. There was only very modest improvement in average living levels in the fifteen years and virtually none in the Third Plan period. Import requirements grew with the investment program and the enlargement and diversification of indus- trial production but export growth lagged behind. Capital import, largely in the form of foreign aid, grew continuously, although even by the end of the period it did not add more than about 4 per cent to domestic resources or amount to more than about one-fourth of gross investment expenditure. It was difficult at the end of the fifteen years to record great progress toward ultimately self-sustaining growth although the possibility of such progress was discernible. 2. In the fifteen years the broad structure of the Indian economy has not changed very much. Some 60 to 70 per cent of the labor force is still engaged in agricultural production and still accounts for aDproximately 15 per cent of national output. Ten per cent or less of the labor force is employed in industry and accounts for close to 20 per cent of national output, only a few percentage points more than at the beginning of the fifteen-vear Period. The remainder were nroviding services of one sort or another. Agriculture was still characterized by low yields per unit of labor and land. It was almost entirely labor-intensive and animal.-Powered, and used little equipment and machinery, modern tools and implements, or Plant protection materials and fertili.er althouAh fertilizer consumDtion was growing rapidly by the end of the period. Irrigation facilities had been extensiv1v rr3vP1nnPr1_ hut urntp.-r Tn.q iiqpfi fnr th most-. v nrt mn qn extensive rather than an intensive basis, principally to provide protection against dought, rathAr than +. ntimize + prad -vr-ieMiP in common use were selected with principal attention to their disease and pest resistant altogether inadequate. Although agricultural production had increased slghtl1y more than population during the fifteen-Ye a perio;_d,terndae of increase appeared to be declining and was not adequate to meet the growing I-U .n'J. JL&JJZ ~ d.L I L .L IU1J C2 L LV" LL"C" L.1kILJL UA fULlu Lt w '. approximately half the increase in output which had occurred seemed to have opprtu riesult o e n o. the area inreLUasVaingly 11 WILIC11 uimited. opportunities were increasingly limited. vii 3. In industry the rate of advance had been greater. Although industry's share in total national outDut had not increased very much. a significant transformation had occurred within the industrial sector. Large, modern factory enterprises by 1965/66 accounted for well over half of all industrial output whereas fifteen years earlier small primitively operated workshops and household onerations hna hAn nrPnominnnt. Pro- duction of the basic industrial materials, including iron and steel, aluminum and basic chemicaql. of fil.q_ incluiding bnth onal and petrolonm products, of industrial machinery and transport equipment, and of a great variety of consumer good hna increased grentiy Tranornt fac-ilitie especially the railways, and electric power generating and distributing facilities had aso been a-rpntv vnnan 1r, +h n-A n-r +In m-i nA however, a considerable amount of industrial capacity was seriously under- utilized( principally-K) foyr Ilc of im-orted production materlals, components and spare parts. Furthermore, many of the large industrial complexes in the nule in which great resources had 'been Jnvest1e, wee "iher not quite completed, and were producing very little, or, where completed, were no+ produc--ig in volumes or at cost coimmensurate with tilecapta invested in them or their capacities. Industry was operating in a highly Protected seller's market characterized generally by csonic shortages, inadequate competition, inflexibility in response to market conditions, lw leves o eff iceny an high costs. In adCLon, the scale of some public sector enterprises was troublesomely large and that of some private ones was uneconomuically small. Government direct investment in industry and Government controls over imports, investment, production and, to a Lesser extent, prices ana materlals distribution, in some Ways stimulated the growth of industry but in others retarded its growth and fostered its iLnefficienct,11Y. L. In the fifteen-year period the Government had been successful in mobilizing for investment and for Government consumption purposes a steadily increasing snare of the available internal and external resources, and the Plans had, despite their deficiencies, been effective instruments for this purpose. A substantial part of the resources so mobilized had been used to expand the capital base, a large part had been used to expand essential Government services such as educational and health services, but in the latter years a considerable part was being used for non-productive purposes, including notably derense. Capital inflow had been predominantly from governmental and inter-governmental sources. Although there were a large number of collaborations with foreign private firms which provided technical assistance and manufacturing processes, the amount of private capital invest- ment had been relatively small. The total amount of aid provided by foreign governments and inter-governmental organizations was large in the aggregate - amounting to approximately $9 billion net of principal repayment in the fifteen years - but small - perhaps $20 per capita in the entire fifteen years - in relation to the size of India's population and the enormity of the task of transforming India into a modern economy. Capital inflow added relatively little - 3 per cent or less per year - to total domestic resources but amounted to approximately one-fifth of gross investment in the fifteen years and filled many of the critical gaps in India's domestic production. viii 5. In the fifteen years the balance of payments gap widened appre- ciably. In part this reflected the continuous growth of imnorts reouired for expansion of the productive capital base of the economy and for the operation of a much larer and morn divprsified indnstry. Tn nart. however, it reflected the lag in agricultural production and in the development of exnorts- The basin strnteir mf thP rAvTlnment n nq nlled for the maximnum possible allocation of resources to the expansion of industrial capacity and olf the relatedpoweruavnnd Mikpatfaiite. h hopen orVexPecttion had been that food and other agricultural production would grow adequately to build fixed capital (except for irrigation facilities) or to provide el-lren rpouto. inp,at 0 Tb.iS h0 wCaS .jjJ~.JL diCaponte aLnJ it allso pro -~ved impossible, for both political and human reasons, to restrain the demand lagged far behind the growth of imports. In part the slow growth of exports * V. %A Whe laggad grwt ofU agriJ. cluna oL L uti.u-L, 141 .L1 par.L, LL re U.1J.J_V.' LU% the character of the planned development itself, with its emphasis on material balances and on physically oalanceu growtn anu its relatve nelect of comparative cost and comparative advantage. The resultant emphasis on import substitution and the lack o effective poicy to stmulate Ayuot production, combined with the newness of much of industry, its characteris- tically high cost and not very efficient output, and an over-valued rupee, all militated against any significant export growth. The widening balance of payments gap was financed first by the use of the large foreign exchEnge reserves which had been accumulated earlier and subsequently by increasing amounts of foreign aid. Although part of this aid, notably food aid, was provided on what was essentially a grant basis, and part on very soft terms, foreign debt and annual service payments on this debt grew rapidly and, by the end of the Third Plan period, debt service was rising above 20 per cent of exports and becoming a large and unwieldy element in India's balance of payments. 6. India's economic progress in the Third Five-Year Plan period was disappointing. In 1965/66, the final year of the period, aggregate national income in real terms was only 14 per cent above the 1960/61 level. On a per capita basis it was where it had been five years earlier. The year 1965/66, in which income declined, was an abnormal year, marked by severe and widespread drought, by a short-lived but costly war with Pakistan, and by the consequent partial interruption of aid commitments and flows. Even leaving aside this year, however, progress in the Third Plan period was no greater than in the preceding Plan periods, there was little improve- ment in average living levels and no evident progress toward ultimately self-sustaining growth. 7. The disappointing progress of the economy and especially the disruptive food shortages and price rises of the last years of the Third Plan period led to a reappraisal of policy by the Government of India during 1965 and 1966 and to a number of important changes in policy and Dropram. One of the most imnortant changes was the shift of emphasis to agriculture and the initiation early in 1966 of a well-conceived program to acelArate the growth of aricultural production. This nroaram embraced J.A the allocation of greater resources to agriculture in order to provide lCarer suppi"es of theur phkysikcal_ i44PULots rquired,UU inldn Lertiies plant protection materials, high-yielding seed varieties and water, along with the estalishment of InMum1 support prixce to prouctumre JetU at an incentive level, and a larger volume of agricultural credit. The program was desLgned to take advantage of research breakthrougn in niaa and else- where which made available new high-yielding varieties of rice and wheat, and also of hybrid corn, sorghum and millet. it included efforts to expand domestic production and distribution of fertilizers, agricultural chemicals, pumping equipment, and, on a limited scale, power equipment. It also pro- vided for immediately larger imports of all these materials. 8. Simultaneously the Family Planning Program was reorganized, energized and provided with virtually unlimited funds. Here, too, the program was designed to take advantage of a technological development, namely, the intra-uterine coil, which provided a simple, inexpensive device suitable for mass application. 9. In June 1966 with the agreement of the International Monetary Fund, the Government of India devalued the rupee. Shortly after, with an undertaking that an attempt would be made through the Indian Consortium to mobilize the amount of non-project aid estimated to be required for the purpose, the Government substantially removed administrative controls over imports of production materials and also significantly removed or relaxed controls over industrial production and investment. 10. In August 1966 the Government published a Draft Outline of the Fourth Five-Year Plan which gave effect to the new policies which were already being implemented, and which called for an investment program about 5O per cent larger than that of the Third Plan period, supported by a higher level of internal savings and a higher level of external aid. The Plan aims to increase National Income by 1970/71 to a level 38 per cent above that in 196h/65. or at the compound rate of 5-1/2 per cent per year, measured from 1964/65 (although at the rate of 8 per cent per year measured from 1965/66). It calls for foodgrain and other agricultural production to reach a level in 1970/71 about one-third higher than in 1964/65, and for industrial production to increase at the rate of about 9 per cent per year from 1965/66. It projects total imports during the Plan period at approx- imately $18 billion or about h per cent more than in the Third Plan period. and exports 36 per cent higher than in that period. It estimates that the gross inflow of canital reauired will be almost $10.3 billion. that approximately $500 million may be provided by private investment, and the balance by foreign aid. includinL ZA1 billion of food aid and 18-3 billion of other types of aid. 11. Although the projected Plan investment figure appears large it iq in f;ant :m11 in rplatinn tn Tndiint nirt FuthPrmnrA psitn thp probability that the efficiency of execution will not be improved with dAimA n ite dof notea s am n vh whorl hin Inial s n nnnno app implement. The level of internal savings for which it calls does not appear to be beyond the bou-1nds of po_ssibilk41ty p-rvide that+ t.he iv,ncea inoupu x and income projected are approximately realized and that non-Plan expendi- ture on the part of the Government, including especially defense expenditure, can be kept within the limits projected. The Indian planners have, in estimating the growth of income, assumed that the specific physical pro- duction targets will be achieved with a lag of about six months. A lag of roughly a year seems more likely. but such a lag is not likely to reduce the amount of capital inflow required in the period ending in 1970/71. The most critical constraint, in short. anners to be the amount of foreign aid which may be available. 12. Given approximately the amounts of aid assumed, and continued movement hv the Government of Tndin in the new nliny dirP-nn._ it. nnms entirely possible and likely that both agricultural and industrial output an agrgt incomne Y.i-411 tgrow1 app er4Y"n+.TveyQsesz+mated,1 an1+1ougcp wHi some lag. Specifically, provided that the necessary supplies of the physical i rn"11+_Q n"n w~ Mnl .4--"4 n - _4 11i lr n-.- 4 ~ iA +'n.0 , yielding seeds, and provided that incentive prices continue to be offered of 110 to 115 million tonnes in 1970/71. The evident determination of the . ---%w.n, - -I - ..4 A- 4-U-.. -2 +.. 1,- -P.,annrn.. a WAJ' . L4IL .AV V%UJ jJA. LVVJLL V~ L Jt;)1 LU4U."J L 1UQ~ ~ CLMA VLU . 6V~ J.VAQ .1. JVLQ 4./ Indian farmers are the basis for this judgment. In industry, continued and .L %". 4Ver UdeconUr-ol JLJJ .L Ully LUJ L. " re . ;J .UILVI V.L .LI,i_L U. % %J1.LL 44..L.Q Vv", L investment and production, an adequate supply of imports of production to produce the growth of output forecast, although some lags are likely to occur. There is also for the first time the prospect and the beginug of a family planning program sufficiently effective to cut the rate of popu- lation increase to less than 2 per cent per year by sme tLe in the 17Is. 13. The Plan is not to be taken as a precise blueprint of future action or an exact forecast of developments. It provides a generally reasonable perspective view of the future which is useful mainly as an aid to decision on the actions which need to be taken in the present. At this time the Indian economy is in a state of transition. New policies and shifts in program have only very recently been instituted. Encouraging beginnings have been made in the implementation of the policy changes, although it is too early for any significant effects to have been felt or to be observed and evaluated. These encouraging and hopeful developments are obscured at this moment by the misfortune of two successive years of severe drought. The direct costs to India of the food imports forced by this situation are heavy, despite the fact that substantially increased food aid has been provided. The impact of sharply rising food prices on costs and prices throughout the economy and on demand for other consumer goods has been very great. Furthermore, the efforts of the Government to restrain price rises by cuts in Government investment expenditure have had depressing effects on output and on private investment demand. The result is the anomalous situation of unused industrial capacity, unemployed labor and, possibly, slow utilization of non-project aid. The immediate bottle- neck is food and consequently the paramount necessity at this time is an adequate supply of food which can only be provided by food aid or by other aid which releases free foreign exchange resources for the purchase of food. xi th. The primary recommendation to the aid-givers at this time is therefore that food aid be given which would provide or permit import of approximately 10 million tons of foodgrains worth $700 to $800 million in calendar 1967. The second recommendation is that non-project aid in the amount of $900 million be provided for 1967/68 by the Aid-India Consortium. This is the amount estimated to be required to supplement India's earned foreign exchange resources in meeting the prospective 1967/68 demand for licenses for the import of production materials. It is estimated on the assumption that the food bottleneck will be broken and that India's invest- ment program will then move ahead on the basis of a reasonable degree of utilization of existing industrial production capacity. If these two types of aid are not provided in approximately these amounts there is serious danger that the recently instituted policy and program changes will have no visible effect and will be discredited and abandoned. The new policies and programs offer the best promise of significant economic progress and require continued solid support if they are to receive an adequate trial. 15. In addition, project aid commitments are required along with the other two types of aid suggested if they are to serve the purpose of furthering expansion of India's productive capacity and output. Project aid commitments for 1967/68 in the anroximate amount of 600 million are recommended. This amount appears to be consistent with India's efforts to acnelerate the -rowth of nutput :nd to maintain it at the rate of 4 to 6 per cent per year. At the same time it is not so large that it would permit tnn many new nrniet .aqrts and intnrin inflevibility into the nrnornm of the next several years. 16. The amounts of aid which India should receive after 1967/68 should he determined an-hem he4 of develments ini +h% oyming yeanr inltuding especially the effectiveness with which India utilizes the 1967/68 aid here nMmnnA nl^e "4+1-% +ha a+ha, ac.ananei n1,hla +o 4+ Tv +1- --a4 -A India should be expected and assisted to take actions which will accomplish thAe asi -,~ rpse -,,n~ It. -1- ,-+U 4-1-a -A Ths should =.1,a,1A4,a1,Aa j4U"Y V QA U W-. ~LUA .L vxw ±1~ JLVI4VL A "4. LtA%At-. Specifically this means continuation of the new agricultural program, further e+ a a,- "A Cn 14 a.nn Aa+ .-- ,A + --- St, - _ - -4C, nti - n-a - ,48.U. - f. W aj.% .8.4.8 U. A 4~ LJW A.V.LtUtL O.J.MJ Io A. , ..LO V .8 4J 5.LU -AV0 U4&UL~ prise in this effort, continuation of the movement toward import decontrol anu J"-veraZizuautio L.AaRULOH or erEUllQnL1ablOr 01 LUe reZi11a31ng CO- trols over industrial investment and production, and vigorous prosecution of thle I ani-V. r.LZUULJ1 r.LVgL'dJ1J kFilJ UTXM U.LL .Lurul,er Atepsto W upanu UAPOrubs. kc) More effective utilization o existing production facliaies. (d) Reconsideration and possible deferral of plans to establish new capacity of certain types in the light of the true potential of existing facilities and the possibility of expansion or that potential. xii (e) Further effort to attract and enlist foreign private capital and experience in other areas besides fertilizer production. (f) Determined restraint and reduction of non-productive public expenditure, including defense expenditure. (g) Exploration of opportunities for mutually advantageous economic cooperation with Pakistan. INTRODUCTION Developments in the Third Plan Period 1. India's economic Drogress in the Third Five-Year Plan neriod has been disappointing. The final year of the Plan, 1965/66, was in fact a year of disaster. marked by the mnst sevenr drought in many vers. hIv a fortunately short-lived but nevertheless costly war with Pakistan and by the nartial and tmpmnoary intenrintinn of aid cnmmitments and fln which were one of its consequences. The setback which these events gave to the Indian eonomy made the f4Nmal tmcra orf +h ThIrA an pm4nel An1"' by developments between 1960/61 and 1965/66, even more disappointing than it apeared at. theo ewndl of' its first fo rnyears bno a as , thner:n iofcf/A oubeAy as and as maul-' as I interrupted trends of the preceding years, it did not represent a complete di ~ ~ n TrrwH 7i-I- +1144 +}I.1qdM ~ ,i, -- 4-44-41 - -4 -- " - 4 o' the, preceding years. Rather it accentuated them and brought them into sharper relatively modest expectations projected in the Third Plan, but, more importAntly, in4 J.1aV.on to India-s urgent, and massive needs, n lot what it was widely believed by observers both in and out of India might 41AWe1Je& 6h- eire J.V~W-LL41 WM~ 1_LL1(t;; Id4au Wul ava1.-LU).oo 0.0 The.± D-nda-m-L-0 - - - - - --t - - - --- - - 1 .1 1AL lulluumlual w la is Umaura-ug tne m1dra Plan period oua-L output grew only modestly. In the first four years of the Plan period Uoss Vmueste Product appears to nave grown at the average rate of a little more than 4 per cent per year, but, with the drop in output which occurred in o96o/66, growth in the entire five-year period was only about 14 per cent. Population grew more rapidly than during the 1950's, at an estimated 4-1/2 per cent per year, or, in the five-year period, by virtually as much as total output. In absolute numbers the population increase was a staggering > million. Expressed in 1965/6 prices and translated into dollars at the Rs. 7.50 - $1.00 exchange rate, GDP increased from some- thing over qpr oi I.lion to about $31 billion and, in per capita terms, remained at the level of not much more than $60 per year. Agricultural output, although it appears to have been increasing at the long-term (10 years to 1964/65) rate of about 2-1/2 per cent per year and although in 1904/65 it was about 10 per cent higher than in 1960/61, fell well (about 10 per cent) below the 1960/61 level in 1965/66. 1/ Growth and 1/ The available evidence suggests that the long-term trend rate of growth of agricultural output was a declinine one. having been more than 2-1/2 per cent over a longer than 10 year period (see Volume II). decline of both foodgrain production, which represents about half the followed this pattern. 4. Industrial production grew more rapidly and by 1965/66, value addedU inl iUstr-y andU miningU1r, incUlud"1ng smlul- e"erLOes -a-simtdt be 35 per cent 2/ higher than in 1960/61. Production in the so-called organa1ed secor, whinh uc±ude any mnag and factory esaluments employing more than 10 workers and which in 1960/61 accounted for somewhat more than half of all industrial production, grew more rapidly and -creased more than 40 per cent in the five-year period. By 1965/66 the industrial sector as a whole, employing not more than 10 per cent o tue UOUCL. Ia"Je of workers, accounted for roughly 20 per cent of Net Domestic Product and agriculture, employing perhaps 70 per cent of the total number of woriers, accounted for more than 40 per cent. 5. Given the relatively modest growth in output and income during the period it was impossible to achieve the full measure of increases in invest- ment, or capacity expansion, and also the improvements in living levels which had been anticipated. The import surplus, which increased during the period, largely as a result of an increasing flow of foreign aid, augmented domestic resources, but, in the aggregate, not very much. Even in 1965/66 the import surplus amounted to only about 3.6 per cent of GDP. 3/ The increase in the import surplus in the period was less than 7 per cent of the increment in GDP. The Government did, however, succeed in mobilizing and using an in- creasing share of the total resources available, by increased taxation 4/ and by reservation for its own use of an increasing share of private savings. It was also the recipient of a major part of the capital inflow, mostly foreign aid, from abroad. These together permitted a large increase in both consumption and investment expenditure on the part of the Government. The increase in its consumption expenditure was, however, larger than the increase in its investment expenditure and of the increase in the former approximately half was for defense. Gross investment, public and private together, and in this aggregate public is the larger part, increased by perhaps a third, or / This is the figure from the document entitled "Inaterial and Frinancial Bal- ances of the Indian Economy, 1964/65, 1970/71, 1975/76" prepared by the Perspective Planning Division of the Planning Commission which underLies the published Draft Outline of the Fourth Plan. Data presented in the Draft Outline itself indicate a figure below 30 per cent. The difference appears to express in part a different estimate of the growth of output of small enterprises. 3/ Calculated at the Rs. 7. 0 ner $1.00 rate. This calculation is technical) inadmissible since other magnitudes in the 1965/66 National Accounts woulc havn hoon =1t.pre if in fact thp R. 7.q0 per .-00 rate had actually pre- vailed in 1965/66. Nevertheless, valuation of imports and exports on this basic--~ +hn" /%n +.ho 'rn4 r-f' fho~ IQOAA nffini-il erchangn rate con- veys a more realistic approximation of the relative magnitudes of domestic output an of - mpot a exports 1/ Tax revenues increased from 8.4 per cent of GDP in 1960/61 to 12.1 per cer in 1965/66. - 3 - much more rapidly than total output and income, in the five-year period and, the estimates suggest, represented about 15 per cent of GDP in 1965/66 as compared with about 13 per cent in 1960/61. As a corollary. gross domestic savings appear to have increased from about 10-1/2 to about 12-1/2 per cent of GDP, suggesting a marginal rate of about 17 per cent, q/ Government con- sumption expenditure apparently increased from approximately 7 per cent to 11 per cent of GDP and, as Dart of that, defene ependiture from less than 2 per cent to almost 4 per cent of GDP. Aggregate private consumption expendi- ture appears approximately to have kept pace with population growth in the first four years but not the last year of the Plan period so that average living levels were lower at the end than at the beginning of the Plnm peod 6. Although as already stated the import surplus in the aggregate added less than 4 per cent to domestic output throughout the period, and although even in 1965/66 imports amounted to less than 10 pe cent of GP, their strategic importance was considerably greater than that figure would indicate. Imports f'illed~ prticular gaps in domsti prdutin Thewre,thougou the period, especially important to investment expenditure designed to expand prodcionm aacty Altog India inusr beam inrasnl capable of producing a wider range and larger volume of the materials and equipment required for expansion of industrial, transport and other capacity, the in- creasing amount and diversity of capacity being established required that this domestic output of capital goods be both supplemented and complemented by imports. Furthermore, nearly all of the domestic output itself was in some degree dependent on supplies of imported materials, parts and components. Import was not important in either the domestic production or the total supply of consumer goods other than food. Only negligible imports of finished con- sumer goods other than food were permitted or occurred and the import component in domestic production of such goods was much smaller than in the case of investment goods, though not entirely absent. Food, however, became a large and increasingly important part of the import bill during the period, reflect- ing the lag in food production, a sharp rise in food prices, and the necessity of averting the most extreme privation. With these particular gaps in India's domestic production to fill, imports during the period became an increasingly important constraint upon the growth of domestic capacity and output. The task of fitting limited import capacity to the objective of the greatest possible expansion of production capacity and to other demands became increas- ingly difficult and complex. 6/ Almost inevitably, as the machinery of administrative control over imports became more pervasive and restrictive, the resulting inefficiencies and negative consequences multiplied. Mainte- nance of the rupee exchange rate established much earlier, in the face of rising domestic prices and costs, did nothing to alleviate the problem or to contribute to the efficient allocation of resources. 7. Imports, despite the restraints imposed, increased between 1960/61 and 1965/66 by almost $500 million or 21 per cent, as compared with the in- crease of about 14 per cent in output. The increase was almost entirely in 5/ This marginal rate figure is in terms of the current prices of each year. In constant 1960/61 prices, the marginal rate of increase in gross domestic savings was about 22 per cent between 1960/61 and 1964/65. 6/ The difficulty and complexity was heightened by the fact that aid, which fian ced so lare a part of imports was for the most part country-cd r and commodity-restricted. two types of goods, foodgrains and machinery. The fact that imports of production materials as a group did not increase reflected in part growing domestic output of these materials but in part especially severe restriction of imports of these goods with the result that there emerged during the period a considerable amount of under-utilized industrial capacity. This was attributable in part to the general preference of many aid-givers for capital goods as an object of finance and in part to the preoccupation of the Indian authorities with capacity expansion rather than utilization. Desnite the imoort control system which attempted to afford complete pro- tection to Indian industry, the pre-devaluation exchange rate provided nowerful inentives to imnnrter. to nrocure from foreign in preference to domestic sources. 8. Exports increased during the period and in 1965/66 were approxi- mately -Q,10n m"lan t, 91 nm rp%+. hiahm t.hin in 1960/61- The increase is probably somewhat over-stated as a result of a number of statistical changes .,., *~--~ rll'o - v,~ the~ --rlie -t yI figires- Tn any case. however, the result was for a number of reasons less encouraging than the figures might4 suget For one, hen lo- t~han the. incrnase in imports, so that the trade gap, which was already $1 billion in 1960/61, ~~~ V_ m-rra4~ ~ ~ r~o vn 4- IQeS9/66- and valued "deed y $VO 1- "J'13-ion. EVLr 2V- , - _- -' -, - --y - - --- - at the Rs. 7.50 = US $1.00 exchange rate, amounted to only 6 per cent of GDP. ment in output than in the case of imports. Furthermore, very little of the increae in xports -was frm the newer ^u% -ovT, n. Ai +Ann nI products. Only a tiny percentage of the increase in industrial output found its way to export markets. Finally, an iJncreasing part of ta eprt required the provision of special financial benefits, some in the form of tax incentives and some in the form of import entUlemenU whih Al h- exporters the opportunity to earn premiums, directly or indirectly, from sales in the domestic market. The absence of a larger and more soalUI ma-e6 growth of exports has been an important defect in the Indian performance. It has been attributable in part to the absence of a wider, morest abu1 end less arbitrary and selective financial incentive such as might have been provided by an exchange rate basically more favorable to export. It pro- bably also reflected the lag in agricultural production which might other- wise have been a source of additional export. 9. Given the facts that neither agricultural nor industrial output increased as rapidly as had been expected, that food output increased less than required by population growth, that imports could not fully cover the shortfalls, that substantial resources were diverted to defense, that there was a desire to expand governmental services and a reluctance voluntarily to trim investment expenditure, the rise in prices and the pressure on the balance of payments which were experienced were inevitable. Although the rise in food prices in the Plan period ran counter to any initial plans of the Government, it was recognized in the latter part of the period that such a rise, along with the guarantee to farm producers of minimum support prices, was desirable as a part of the effort to stimulate increased food- grain production. What was contemplated along with the minimum assurance provided by support prices was some improvement in the relative prices re- ceived by food producers. The extent of the lag in food production, however, produced a very large rise indeed. Wholesale foodgrain prices (according to the official index which may understate the reality) rose hh per cent between March 1961 and March 1965 and 57 per cent from March 1961 to March 1966, despite the moderatin effects of increasing imports of foodyrains. Prices of all other coTmodities measured by the index increased 13 per cent in the four-year period and 28 per cent in the five-vear neriod. rn art the rise in other prices reflected the difficulty of preventing such large and sharp increases in food prices from being reflected, even thout7h with a lag, in costs and prices elsewhere in the economy, to the detriment of the food producers gain and of Pynort. Vinancial piny which miaht have been able successfully to manage a lesser increase in foodgrain prices without substantial innfhp pAother Pesa unii not copa -ith oe or the mnri- tude which occurred. 10. There was a steady increase in the import of cereals during the Pl,qn nperiod;- thei" rnvlu, 4_c1uA4_g fweght a-I--- $600n mjl ; 1964/65 and in 1965/66 was $740 million, or some $360 million more than in 1960/Al1 ThIntentoa pamet efet Xwere--1 fortunately miiatdb the fact that 80 per cent or more of all cereal imports in the period were Pro-vided under VT I.An or1- simla wragmnt nte atrpato uh period, however, with the changes made in these arrangements, 20 per cent or more of the c.i.f value 01 rl 1u grain imports represented od-c pay- ments and it was beginning to appear that less favorable arrangements might bie on the hori n. The increasingly serious impact of lagging agricultural production on the overall development of the economy led many in India and lsehwere uo question the wisdom of the policy of depending for increased agricultural output mainly on increasing inputs of labor and extensions of physical land area and on a system of cultivation which provided very low returns per unit of both land and labor. 7/ It appeared that the hope that it would oe necessary to provide only minimum scarce imported and domesti- cally produced materials for use in agriculture, and that these could be largely reserved for use in expanding industrial and transport capacity, could not be realized and that this was contributing to a lower rate of growth of total output in the economy than might be achieved by an altered policy and program. 11. In the case of industrial investment and production, the expansion of output achieved in the period did not seem commensurate with the resources applied. In part this reflected the emergence of under-utilized capacitye already mentioned. In part, however, it reflected inefficiencies of various sorts in the planning, design, construction and operation of the public sector enterprises which had absorbed so large a part of total investment resources. In part also it reflected comparable inefficiencies in the private sector of industry, fostered and compounded by the extensive govern- ment controls over imports and investment which helped to create and preserve 7/ There was, in addition, investment in irrigation facilities which in part permitted larger input of water in the production of a given crop on a given land area. In part, however, irrigation was designed to extend land area either by permitting double-cropping or by bringing new areas into cultivation. The emphasis furthermore was on major projects which, as conducted, were very long in gestation. - 6 - an excessively protected and non-competitive industrial environment and which limited speed and flexibility of response to changing conditions. A cur- ious aspect of policy in the industrial sector was that on the one hand the Goverment, in the laudable effort to capture the economies of scale, sometimes chose public sector production units so large as to be excessively difficult to manage or to bring into production without inordinate delays which wiped out the return on investment promised. On the other hand, in the economic and social interest of preventing excessive concentration of control and the elimination of competition, Government sometimes prevented the establishment of private sector production units of economically-scaled size. All these phenomena together appeared to offer the opportunity, by changes in policy, for greater returns on investment than were being ob- tained during the period. 12. The developments of the Third Plan period also indicated that limited imports were one of the chief factors restricting the rate of growth of the Indian economy. Although for the reasons mentioned above maximum returns were not being obtained from the import resources available, the margin of additional outnut and canacitv Lrowth which a more efficient use would permit was probably not large enough adequately to relieve the con- straint unon growth imnosed by limited imnort canacitvy. Whether nrovided by greatly increased export, by increased private capital inflow or by foreign aid, increased imnorts noild have qionificnnt1v ante-1ratd thp rate of growth of output and capacity in the economy. 13. Two central conclusions may be drawn from the above observations: fir.qt_ t.hn. In i -ni mhm- ,%? -r Ymr+.c +.Ho nr1-r-im nri n-narnn. -,f' fh-e Gomvern- ment of India were important obstacles to India's economic progress; and, it was unlikely that India could have made satisfactory progress in in- supporting and sustained growth unless the inflow of capital from abroad, -A. spciicll the4 dficid en es o L,4 sva -. D'L nL, l,airgendre gam11 L4L4 L .IL LLJ. V A l %U iJL . L%A 16 4 U..J . . IU 41 L.i.i C. allocate to agriculture the resources necessary for an effective effort tO accelerate adequately th1-e growuh ofL agricu_lt.uradl prodAUction1; Lb) the acsence of a mausive and vigorous program of population control; (c) the maintenance of an exchange rate for the rupee which discouraged the growth of exports and of import-substituting proauction, resulted in the mis-allocation of resources, and required the use of an extensive and growing system of administrative controls, and selective and variable subsidies in the attempt to overcome these effects. - 7 - (d) the operation of an elaborate system of administrative con- trols over imports, industrial investment and production, and, to a lesser extent, prices and the flow of materials, which promoted inefficiency in the use of resources, fostered non-competitive and inefficient production, and created arowth-defeatine rieidities throughout the economy: (P) imhalance in thp alnction of fnrPian -xchanLt resources which left a substantial part of domestic industrial capacity, including -annitv to nrodnc nAd.d .nnita1 oneviq. seriously und.r-utilized (fl defPicient pnreaaton,_ a-trn1ii+Ann -n,cnstructiioAn, mann.aemennt. and operation of public sector investment projects; (g) reluctance to take full advantage of the opportunities to arign p o- mat vpal,-na -na4plic mmagexndial e rnr the lag in food output and the difficulties in effecting even more rapid I"c ea e 4n +, + 4-4 -- +k- --1n --1,4--fl% rA. .j.L%.J. ~ J U CX"CV.AO. L VLO7d1 WVL V OL%11.LVV "J %JLJ Ue-C d 1..V in4 caurrange111nts .L VL' LC"1.Lk.LLAO1r' VUL%A ev l LE4 information on current developments in the economy and, partly as a result, IUexiiliy in the conduct of plans and programE anUd inaduequate coordina- tion of Center-State and other operations. 15. Another obstacle to economic progress was the increased diversion of real resources, of foreign exchange, and of Government revenues, to defense purposes during the Third Plan period, triggered initially by the Chinese attack of 1-Yo. 16. Finally, it seemed evident in the course of the Third Plan period that not only was an increase in the level of aid necessary to significant economic progress out that an increase in the proportion whicn rinanced imports of production materials was necessary and desirable to permit fuller use of india's domestic manufacturing capacity and provision of adequate supplies of agricultural inputs. It was also evident that improvement of the terms of aid was desirable if any given quantity of gross aid was not in the future to be excessively reduced by debt service payments. The Long-Term Problem and Strategy of Development 17. Some longer perspective along with an assessment of development in the Third Plan period is helpful in consideration of current Indian economic policy and the Fourth Plan. India in 1950/51 at the outset of the three Five-Year Plan periods was a nation of some 360 million people. Some 70 per cent of the working force was engaged in agriculture, perhaps 10 per cent or 15 million people in industry, including household industry, mining and construction. Less than 3 million were employed in factory 0 U- establishments. The textile industry dominated industrial production. Agriculture contributed 50 per cent of national product and industry about 16 per cent. Between half and two-thirds of the value of agricultural output was represented by foodgrains; the balance consisted principally of other food and fiber crops, including cotton and jute, and of some plan- tation crops such as tea and coffee. Agricultural production was for the most part conducted with little in the way of inputs but human labor and animal power. Techniques were relatively labor-intensive, with some 100 million workers operating on about 300 million acres of cultivated land. Yields were low, probably even lower than possible with the existing tech- nology. The major part of the grains and other foods was consumed by their producers or in the rural areas where they were produced. Jute and cotton provided the raw materials for the textile industry, which produced for export as well as domestic markets. Comparatively little other large-scale modern industry existed, though there were the beginnings of a steel industry producing almost 2 million tons of crude steel, sizeable production of coal (about 33 million tons), some production of iron ore (about 3 million tons), and some production of cement (about 3 million tons). Pro- duction and refining of petroleum was negligible. Fertilizer production was virtually non-existent. Electric power generating capacity was only about 2 million k.w. and the distribution network was small. The rail transport network was comparatively well developed and widespread, though not adapted to heavyv traffic loads. There were less than 100,000 miles of surfaced roads and about 100,000 commercial vehicles in operation. Inter- national trade was not important. with exoorts and imports each representing about 6 per cent of national product and equalling about $1-1/4 billion per vear- A fair-.qi7d P.ntrPnrPnPirial Proun existed and operated the major part of existing industry. 18. With the First Plan the Government of India set out on a course of nt.ion which- with minn variations in Pmnhasis, has remained consistent throughout the fifteen years of the three Plans. Broadly it aimed at a major change in the StUcture of the economy by a grant eynansion and diversi- fication of its industrial capacity. Although the need for increases in agrianit al n^Ant+Aen wa reonized and frePnntly declared it was not considered that this required a structural transformation, a significant change in tehnlogy o +mant investment exnpt to .znand irri-ation. Investment resources were to be reserved primarily for expansion of industry and the related neceSSar'y e xpafnsion ofr trannsprt+ ndr pnmor Taac ty t was recognized that savings would need to be increased and it was believed that inrae reore fo invst-m-it I=.,, for~ t1+he mos pl-artto mnhiliz.Pr hy government through tax and other measures. This fitted with a preference incz deasinL 4L. I.Ug5J J dixecu go e uAL 4VL_ LLA V.II %J1ALL'6L,VJW LA' W-. 'I '~ . 0 activity. It was intended also that, although investment in fixed pro- UUL~L~LJ11 Ls WULU UV V.LVDOVU AlaL U.1 JO4-V V .L J-L.LU LLI VG. be used by government for a great extension and improvement of education anU d±4 ±v u dJu ji uJu 1LtIcL.LULJ Ot1V.1t; a . --u alJO. -,*-- -In -,,va sumption and living levels, particularly those of the lowest income segments of the population. - 9 - 19. Although it is sometimes remarked that Indian planning has had a deliberate bias toward "building machines to produce machines", it is probably a more accurate observation that it has proceeded, both implicitly and explicitly on the principle of balanced growth. 8/ The technique of planning has relied heavily on material balances. The focus has been upon physical production requirements and investment in the creation of capacity required for the achievement of physically balanced growth. Almost, though not necessarily inevitably, planning has been to a high degree for self- sufficiency. It has not been centrally concerned with comparative cost, com- parative advantage or comparative return on investment. It would not be correct to say that these criteria have been ignored but they have come into play not as the basis for investment decisions, but as marginal considerations which might, in extreme cases, modify decisions made basically on other grounds. Contributing to the acceptance of this planning approach is the fact that India is a very large country, with potentially, at least, a market large enough to permit maximum economies of scale. Even today after all India, in terms of aggregate national product and income is larger than all but about half a dozen countries of the world. The focus on domestic balance therefore does not necessarily deprive India of the economies of scale and does permit it to gain the e-rternal economies which, given the interdependence of production, balanced growth may yield. 20. There are, however, a number of economic disadvantages and costs which are imposed bY this plan for growth. For one, internationlal trade figures in this type of planning only awkwardly. Investment in production for export m,arkets and rodcto fo4r such4 markets is not areally integral part of the planning operation. Export reflects for the most part traditional pre"Plan investment and prdcto and. th disposal of more' r les accidentai surpluses of newly created production capacity and output. Import reflects possibility, to be filled as rapidly as possible. Hence the emphasis on imaport substitution and on the identification of import subs titutio oppor tunities on largely physical rather than comparative economic grounds. Hence, also, the concepts frequently expressed, that export prices or prema should be set at the levels that are "needed" to dispose of "surpluses" and that all prouucers snoula ve required to export some fixed propurtion of thei output* Hence, also, the tendency to view with suspicion the profits from some exports which may grow out of genuine comparative aUdvaUntage. 21. Another cost which India seems to have incurred partly by virtue of its basic balanced-physical growth planning conceptions is that involved in investment in long-gestation capacity to provide output needed to satisfy rather distant physical requirements. It is not always certain that, with 8/ The fact that serious imbalance has developed between food production and food requirements or demand is not an exception to this obser- vation. This imbalance was not planned. It represents over-reliance on the hope that agricultural production would increase with little investment input and the belief that food demand could, if necessary, be restrained. - 10 - proper time discounting of all the anticipated ultimate benefits, these are the investments which most further the long-term growth of the economy. The ultimate economies of scale which some of these projects offer may be wiped out by the time required for their realization. 22. Perhaps the most important disadvantage of the Indian domestically balanced growth planning, as it has been conducted, is that it has tended to accentuate imbalance in India's external accounts. The basic conceptions which governed public sector investment and production operations and govern- ment controls and influences over private sector operations created an en- vironment not conducive to export. Yet, given the ever-widening range and number of gaps in domestic output as production is diversified and techno- logy changes, imports needed to maintain growth tend always to exceed anti- cipations. With export tending to stagnate, a trade gap larger than expected has tended continually to appear. The attempt to press investment to the limit of available resources, the lag in food production, and rising domestic costs and prices have. of course. strongly reinforced this tendency. 23. The results achieved in the fifteen years of the three Plans are much obscured and in part vitiated by the enormous growth of population which occurred in the Deriod. One might say in fnct that it has been a triumph simply to feed and clothe, however poorly, an additional population of 130 million and to provide some Pnrod ve+.vP eimoman+. fn norhan n to 50 million additional persons. The enormity of the investment that would have been rennired to provida m no+4wti v.wor opportun+.t emplying menr technologies defies comprehension. Accordingly, it is not surprising that the broad st.nic~-tirp nf +hz TnHancnom hasnot chage very much in the fifteen years since India launched its First Five-Year Plan. At that time - --- -- -, r - - - - w J A . 11 V.LVIL.L . UU. U UA.L IL %, P.L UJV.LV..,A now is about 42 per cent. 9/ The proportions of the population living in mrn nrn. nn A -- -cu14-. re fo -aJ same as in 1950, crop pattern and cultivation methods are much the same. The chanes J +b'~ rel -r O- ulle maLi -L-LLu±u-L11.g anuL sre.Li s~ctors hadve been small with the former increasing from 16 to 17 per cent of national _nc AA and % theLatuter from about 35 tuo aboutv 4U per cent. 2U. W i O t brULy sUIC picTure, however, there has been a major transformation of the industrial sector. In 1950 more than 60 per cent of value added by manufacturing was from small-scale, more or less family type enterprises. Now the proportions are reversed and 65 per cent comes from factories with fixed assets worth Rs. 2.5 million or more. Furthermore, there has been a marked shift toward metals, machinery and chemicas which nave increased since the mid-firties from about 15 to about 40 per cent of industrial production whereas the textile and food processing lndLustries have fallen from 60 to less than 40 per cent. Crude steel pro- duction has increased to more than 7 million tonnes, coal production to 70 million tonnes, iron ore to 23 million tonnes, cement to 10 million tonnes, crude petroleum to 5 million tonnes, petroleum product refining to almost 10 mil- lion tonnes, and machinery output of all types has grown dramatically. Installed 9/ The comparison is in constant prices of 1948/49. In current prices agriculture, because of change in relative prices, accounted, in 1965/66, for closer to 50 per cent of net national product. - 11 - nating freight on the railways to 200 million tonnes, and the number of commercial vehicles in operation to more tana 3uuu0. 25. These important beginnings of a modern industrial structure together with the expanding force of trained and educated manpower and the basically rich land and water resources, if effectively used, provide a far better base for economic progress than existed fifteen years ago. The Plan investment expenditure which brought this productive capacity into being in the fifteen years, expressed in today's prices, would probably amount, very roughly, to about Rs. 300 billion, the equivalent of $hU billion. In the same period the inflow of foreign aid, net of principal repayments, has been approximately $9 billion, and this has been supplemented by a much smaller amount of net private capital investment. Speaking again in very rough terms, aid from all sources and of all types has amounted to a little more than $20 per capita in the entire fifteen years - less than the people of some more fortunate countries have received per year. The contrast between the two figures - the large one for aggregate aid in the fifteen years and the tiny per capita one - illustrates one of the problems in viewing the Indian development effort in proper perspective namely the difficulty of comprehending the sheer magnitudes involved. 26. Overall in the fifteen years, national output increased by 62 per cent or at the rate of a little more than 3 per cent per year, and per capita output or income by 18 per cent, or a little more than 1 per cent per year. These, however, are modest rates and together with the particular developments of the Third Plan period were disquieting and led to a reappraisal of policy by the Government of India during 1966. NEW POLICY DIRECTIONS 27. The preparation of the Fourth Plan was delayed beyond April 1, 1966, the beginning of the Fourth Plan period, as a result of the war with Pakistan, the accompanying partial interruption of aid commitments and flows, uncertainty with respect to the future of aid and the necessity for the rethinking of a number of important aspects of economic policy. The Draft Outline of the Fourth Plan was not completed and published until August 1966. For more than a year prior to the publication of the Draft Outline, however, the need for alteration in nolicies and programs had been under discussion within the Government of India. The note prepared by the Planning Commission as a basis for discussion at the Sentember 1965 meeting of the National Development Council (which consists of the Cabinet plus the Chief Ministers of the States) clearly stated the necessity for giving genuine priority to agriculture in the allocation of resources, for stimulating the growth of exnorts, for fuller and more Affective utilization of existing facilities, and for increased domestic savings. The Council accepted these recnmendations and directed that the Fourth Plan Draft Outline give effect to them. In March 1966, pending completion of the Fourth Plan, the Annual Plan, for ,1,66 was adpe,it expressed these decisions, notablyr n its emphasis on agriculture. Finally, in the spring of 1966 the Govern- of India intended to pursue in a number of critical areas, and of the amut n 4-,-e of,.,. aid whc it estiate would be. reuie in..1 i/06,1/6 Ain - 12 - order for these new policies to be instituted. The Government requested that the Bank attempt to mobilize this necessar-y support from the Aid-ITndia Co(n- sortium. Early in June 1966 the Government informed the INF that it proposed The Fund agreed to the proposed devaluation and the Bank, on the basis of the new poice outlined, agee toatmtt oiie$0 ilo fn project aid for 1966/67, the amount it estimated would be required to make possible the Qecoutrol 0 imports proposu by the ouvermwntof i India. mm - upon in June 1966 the Government took the actions it had proposed. The specific steps taken to implement the policy decisions are described below. Devaluation 28. On June 6, 1966 the par value of the rupee was changed from $0.21 to $0.1333, equivalent to a 36.5 per cent devaluation, or a 57.6 per cent rise in the rupee price of foreign exchange. This move was combined with a reduction of customs duties. The standard rates of duty on imports of capital goods and raw materials were reduced from 45 per cent and 50 per cent, respec- tively, to 27.5 per cent; the standard rate on processed industrial materials, including components, was reduced from 70 per cent to 50 per cent. The duty on consumer goods was kept at 100 per cent, while foodgrains, fertilizer, contraceptive materials, and newsprint remained duty free. Agricultural machinery was given a concessional rate of 15 per cent. A few materials, notably copper, tin and stainless steel, remained subject to special rates. A few other imports also continue to bear additional protective duties, and a fair number of items are completely banned, via a published list. 29. The impact of these measures was to raise the cost of imports by about hO per cent on the average; by 39 per cent for capital goods and pro- cessed materials, 33 per cent for raw materials and 57.5 per cent for other imports. It is to be noted, however, that in 1965/66 about $130 million of imports (a relatively small part of the import total) had been moving through the import entitlement system; with the entitlements transferrable at premia of 100 to 200 per cent, the cost of one dollar worth of these imports had been about Rs. 11.19 to 17.60. including imnort duty, as against Rs. 9.56 to 11.30 now, again including import duty. 30. On the export side, the devaluation was accompanied by the imposi- tion of export duties on about a dozen commodities, including notably tea, jute manufactures, raw cotton, iron ore, coffee, oil cakes, hides and leather, and tobacco, At this time, following some changes in the originally deter- mined duty rates, the export duties on the major commodities subject to such duties nre, expresand as a percentae of the ex-duty price, as follows: Tea - 2l9% Jute manufactures 30 to 40% Raw cotton 2 23 (Bengal Deshi) Ol1 cakes - 20 to 26% Coffee - 8% oban ore 20% Tobacco - 20% Hides~ ad.leather - o - 13 - In addition, the import entitlement system and the special profits tax credits, which had provided subsidies to selected exports, were abolished but, in August 1966, cash export subsidies were established for a limited number of commodities, including many of those which had received substantial premia under the import entitlement system. These were either 10, 15 or 20 per cent of f.o.b. value and are reported to be calculated to equal 25 per cent of domestic value added. 31. The net effect. f theme various steps was to raise the effective exchange rates for all except a very small part of India' s exports and to increase the degree of uniformity in these rateso. The eteint of the increase in the effective rates was not uniform, varying from a few per cent for a small in between. The number of different effective rates was reduced but is still the import entitlement system but are stable unless altered by decisions to chLL0ag expor tax anEJ.dU cash0~ subid.JUy ratesL~. SpecicaJ.l.l.yy a grou of1- comodiie which in 1965/66 accounted for approximately 60 per cent of total exports are subject; to. exor tae ring~i fromIL approAMJIA telLy 10to'L. 40 per± cetd in effect were benefitted to the extent of 13 to 40 per cent. Another 25 per cent of 1965/66 exports (mostly agricultural commodities) have benefitted to the extent of 57.6 per cent or almost that. Another 6 per cent of 1965/66 exports (including some of the newer engineering goods, iron and steel, and sugar) now receive cash subsidies of 10 to 20 per cent of f.o.b. value. Taking into account the abolition of some of the pre-existing arrangements they have benefitted to the extent of somewhere between 10 and 30 per cent. For the remaining 9 per cent of 1965/66 exports, including some cotton tex- tiles, the present effective rates are either no higher or are even lower than the earlier ones. It is difficult to be precise about this because of the fluctuating values of the premia which had been received under the old system. Finally, all comodities which were not exported at all in 1965/66 will now receive the 7.50 rather than the 4.76 rate, a benefit of 57-1/2 per cent. 32. So far as import is concerned, the rise in the rupee costs of all imports is sizeable, and should, combined with the reduction in administrative controls over imports, tend both to rationalize imports and the allocation of resources, to reduce aggregate import demand, though not aggregate imports, and to stimulate domestic production of commodities which can compete at the new level of import costs. It is too early, however, at this point, for the effects to be observable. This is equally true with respect to the impact of devaluation on exports. Some observers have commented that exports appear to have declined in the several months after deval- uation for which there are figures. The important fact is that neither an increase nor a decrease in exports in the months immediately following devaluation would be meaningful as a test of its impact, since in the Indian circumstances the effects could only be expected after some time and after the new export prices had exerted influence on both investment and production. Aside from this fact there is some doubt about both the figures themselves and the underlying phenomena. The rupee figures derived - 14 - um cutus data, i translatea into dollars at the old and the new exchange rates for the respective periods, indicate that exports in the five months followiing devaluation were $91 million (or about 15 per cent) lower than in the immediately preceding five months, and $95 million lower than in the june-Ctober period of the preceding year. There is some uncertainty, however, about the rates at which the trade receipts were being reported in customs documents. If some of the foreign exchange receipts were, subsequent to the devaluation, being expressed in rupees at the old rates in the customs documents, the effect would be an under-statement of export receipts. More importantly, however, there was an interruption in trade, especially with the rupee trade area of Eastern Europe for some time following devaluation, pending adjustment in the prices of exports. Furthermore, prices in same external markets were declining and the impact of the 1965/66 drought upon the supply of agricultural commodities for direct export and for the jute and cotton textile industries was being felt. About all that can be con- cluded is that judgment of the actual impact of devaluation on India's exports will be possible only after a much longer period of time has elapsed. There is, however, no reason to doubt that, if domestic cost rises do not overtake the changes in export exchange rates, the devaluation should have a stimulating effect upon both investment and production for export. 33. There is, however, room for doubt with respect to the appropriate- ness of some of the export taxes and the adequacy of the export subsidies. In the case of jute textiles and tea there is some iustification for export taxes. In effect they represent an effort to exert monopolistic power to maxmize foreign exchange earnings from sales of commodities the world demand for which is price inelastic. The difficulty, however, is that India does not have a comnlete monopoly and that, in the absence of commodity agreements among the several producers, India has been losing ground to Ceylon and a number of newer producers in the case of tea, and to Pakistan and substitute products in the case of jute textiles. In the case of the other commodities subjec.t to export taxes, india has nothing resembling a monopoly position and the argument for these taxes rests principally on the supposed in- taxes may of itself restrict the supply response. In the case of the export subsidies,- fr' which t-he infant industry argument can legitiatl be made it is doubtful that they apply to a sufficiently broad range of commodities. in amount, at 25 per cent of domestic value added, they should beaeqae taken together with the usual provision for rebate of import duties on the reduction of import duties which accompanied the devaluation reduces the remaining protection should be further reduced, along with the absolute rotetion providefor saume prouct Dy the bannea lis of impurs, the handicap to exports would be further reduced. Reduction of Administrative Controls Over Imports (Liberalization) 34. Near the end of June 1966, a few weeks after the devaluation, the uovernment of India took its first steps toward the removal of administrative - 15 - controls over imports. 35. As the central step in the operation, the Government designated 59 priority industries which account for about 85 per cent of the value of industrial production. All producers in these industries were permitted to apply for and to receive licenses for the import of production materials, spare parts and components actually used in their production operations in whatever amounts they desired, subject only to the condition that no items on the published banned list could be imported. It was also provided that within the limits of the total value of the license, the licensee could himself determine the amounts to be used for any of the items covered by the license. The critical changes in policy here were that the decisions with respect to the total auantity of materials to be imported and to the mix of items within this total were shifted entirely from the Government administrator to the producer and that the scrutiny of each individual license application for purposes of the so-called "indigenous angle clearance" (to determine that none of the items could he procured in India, whatever their cost) was abandoned. The first change meant that Government was no longer determining nrnntion levels for and alloating markets among individual producing units but was leaving them free to make their own nrnrnct.ion level determinatinns and t.o nmn+.& fnr the mrket. The second change meant that there was no longer an absolute ban on the import of anvthing which sz nrduned i n India and no longer absolute nrPt .ian for such production against import competition, except in the case of those i+_arn,z em~ +'hm n11N1- 1)1nq lnnn,OA 14;C+ rPn, +Tan _q Ir'e n i-n" czi Anvnl I r i- duced the time required for the processing of licenses which in itself had made for inr A cost "-A- reue - fiA ec CPP. inusr i-,4 C to say that in June all or even an important part of Indian production was su dnl. exposedL ~AJ.,~ 4 U .LL 4~ 110.n t U10. -J1 -4-4 +4J M'LJll . 1 , A~1 -14 _+ L',I -L ' extensive, prevents this although, as has been found in the last few months, . LU UU~ L± y ±U.± U em±, pr. -~I -±u u- e - 1 J iui.~ - Ind id u uvt.i I Ui 11 tention of the Government, however, in this first step to introduce inter- nat.ional conpip_ u ~uL LtCazj~iU UU Culy b.~L.Li.LLCU1 Uut"l-t:t-, _LUI Vilo Laivurli±u that the introduction of competition among domestic producers would in it- self require substantial adjusuments and that further adjustuentu hau best be deferred for the time being. The technique of freely licensing the imports of all prodJuctionV maLLteri-_a_Ls ret;quiredU bJy cert1a_in inus01trie seemsl super:iorU1 to the Open General Licensing technique because under the latter technique some of the materials required by producers might still be subject to afi-inis- trative allocation. This would in effect mean administrative determination of individual firm production levels and would vitiate one of the central purposes of decontrol. 36. Simultaneously other steps were taken, on a more cautious but nevertheless considerably liberalized basis. Small enterprises, non-pro- ducing importers, and producers in non-priority industries, were permitted to apply for and to receive licenses for the import of production materials they required in amounts which were multiples of the amounts licensed to them in earlier years. No decontrol of finished capital goods imports was effected. 37, Processing of license applications was comparatively speedy and by the end of October licenses had been issued in response to virtually all ap- plications received except in the case of the non-priority industries where - 16 - the processing was still under way. Although the initial regulations were different, it has now been provided that all licenses issued are valid for a period of twelve months. It has further been provided that additicnal licenses may be requested whenever either letters of credit have been opened to the extent of 70 per cent of the value of the licenses or ship- ments to the extent of 90 per cent of the value of the licenses have been made. The shipment requirement is only 50 per cent in the case of the rupee trade area. On the basis of the licenses already issued by the end of October 1966 plus estimates of those still to be issued, the Government has forecast that total licenses issued or foreign exchange allocations made for maintenance imports 10/ in the year 1966/67 will be approximately $2.3 billion as compared with71.3 billion in 1965/66 and a little more than $1.6 billion in 1964/65. All three figures exclude: (a) amounts allocated for capital goods not financed by project aid ($267 million in 1964/65, $64 million in 1965/66, and an estimated $100 million in 1966/67); (b) allocations for the import of food and the payment of freight on PL 480 shipments. We will revert to this subject, but it may be noted here that the amount of maintenance imports licensed in 1966/67 is substantially higher than in either of the two preceding years, more than 40 per cent, or $700 million, higher than in 1964/65. 38. There has not yet been sufficient time for the import decontrol and devaluation steps to have had any significant impact on the economy. The time required for the placement of orders and the actual receipt of goods is such that it was unlikely that any flow of imports in response to the licenses issued could occur prior to December 1966 or January 1967. As of the end of the calendar year, no such flow had become apparent. Although data with respect to the placement of orders are currently being compiled by the Government of India, no information is available at the time of this writing indicating to what extent or how ranidilv the lirinee issued were being utilized. The latest systematic data available on indus- trial production (The Industrial Production Tndey relqt. tn t.h mcnt.h nf October 1966. On a seasonally adjusted basis the overall index shows no change in the level of industrial pnriinction in renent monthq nr n rAme a with the earlier part of the year although, for the five months June-October 1966. it is about L uer cent higher than it had heen a vnr earlier Tf. iq the general impression of observers that this situation did not change in the next two months and that as of the end of the 1nandar year there ha beno pickup in industrial production. Whether this reflects only the fact that there had not vet been time for an Inceaed fln of immtnd mn+eils to occur, or whether it reflects a general slackness of demand and possibly even much lpqq than fiMl wze of thei impo%rt- licen-e issued is uncertan We will return to the issue of slackness of demand, one which has wide imnli cat ins 10/ "Maintenance imports" is the somewhat misleading term used in India for imports of production materials, components and spare parts as dis- tinguished from finished capital goods. The "maintenance import" cate- gory sometimes also includes finished consumer goods, of which the only one quantitatively significant is food. - 1'7 - n 17 ax .L.: 4 Is n - T-A.--- .11 T- +-n AT"A + , _397A appr o-Adrately thez sam ika e as.41 theC Gojvernment11 took theA te of devaluation and partial decontrol of imports, it took several important sueps to relax the restrictive controls it had exeIctha, via the inuosria licensing system, over both investment and production in industry. The steps taken were all in the direction of permitting decentralized M-S-uO1 by producers themselves acting competitively in response to the market and price system. One of the steps was to exempt entirely a conouderavae nUmer of industries from the industrial licensing requirement. In May 1966 eleven industries, including iron and steel castings and forgings, elecUrjc motors of less than 10 horsepower, cement and gypsum products, and a number of other important ones, were so exempted. In July several more were added to We exellpt list and in November twenty-nine more, again including important ones, were added to the list. This meant freedom of entry into these lines of production, and, for existing producers, freedom to expand plant and production. Freedom to expand plant was still, of course, not absolute, since if imported machinery and equipment were required for the purpose, the necessary import licenses had to be obtained, but with more and more machinery and equipment procurable in India this is now a less serious restriction than in the past. 40. A second step in this area was to authorize firms operating under industrial licenses (which not only limit plant size and output but specify product and process) to diversify their production, provided that products other than those specified in their licenses do not exceed 25 per cent of the value of their output and are not on a forbidden list of products reserved for small enterprises, and further provided that additional imported equip- ment is not required for the purpose. 4l. A third and possibly the most important step was to abandon (with- out formal announcement) all restrictions imposed by licenses on the volume of production. This of course. fit with and increased the importance of the unrestricted import licensing in the 59 priority industries and the lihralI.e imnort lir-Pnsinc PPwiswher_11/ Canital Tssne Control I12. A less substantively imnortant sten but one which is symbolic of the change in policy was the recent elimination of control over the capital isqCls of ompnnis Tnq nnnital qtriturA met certain standard conditions. . By early o .nf the Rnv.nment. of Tndia had formulated and adopted what it called "The New Agricultural Strategy".12/ The Annual Plan for 11/ A recent further decontrol measure t importance kLnuuiS%o in Ap1i- 1967) was the removal of all Government Controls in the steel industry and the transfer of responsibility for the regulation of steel pricing and dOsi- bution to a committee of producers. 12 / Set forth in a number of documents published in 1o> by the Departmen of Agriculture of the Government of India. See Volume II of this Report. - 18 - 1966/67 along with actions taken both prior and subsequent to its approval represented the beginnings of implementation of this strategy. The subject is discussed more fully below where we deal with the Fourth Plan and in more detail in Volume II. This reflects a decided shift in Government thinking with regard to agriculture. It seems entirely clear that the Government accepts and is acting on the necessity for diverting real re- sources to the task of increasina agricultural output, even at the expense, in the very short run, of industrial claimants. It is also restructuring industrial investment and output in order more fully to provide the inputs required by agriculture. There is a coherent and, in our judgment, well- conceived nrogram to inorease agricultural nrduction- nttithstandinL that there are many problems to be solved and difficulties to be overcome in executina it. ThArp - nl.n nn nnnn.iinty w-hich nevr P-itd before for marked gains in output as a result of the development of new high-yielding seed variA-.i- Finnllr t.hpvp j _- iT+.h +.ho high ra+.ive nrjn. nnw nrevailinm for farm and especially food products, a vigorous response on the part of the ---"_ roducers,- The comb-inaton of the-e the -fcors, the A a new technology, the willingness of the Government to provide the necessary vigorous response of the farmer, together represent the most dramatic and encouraging d4evelOpment in A- Ini toAy- T+ prvde heejorbsi "o our belief that the possibility exists of considerable and rapid growth of GA-c-u. U L 1J. Ud L11 Ln ia a u ICLU~ , 91J.VVL1 IJ L U.LU' t.dS.". continued intelligent direction of economic policy, the odds on Indian of the Indian economic and social scene today, in which a second year of Urought, among other things, conceas the change for the better in agi- cultural policy and program. 4h. As already indicated, a number of actions have already been taken in furtherance of the new agricultural program. One was the establshment of minimum Government support or purchasing prices for foodgrains at levels which provided stable incentives to farmers and established quite favorable relations between output prices and those of purchased inputs such as ferti- lizer. As it happens, the rise in grain prices, with the severe drought of 1965/66 and the partial one of the first part of 1966/67, has left these support prices far behind, and revision is now required. The action was, however, of operative significance when it was taken. Major in its impact was action to import sizeable quantities or new high-yielding varieties of rice and wheat developed elsewhere and to begin the process of adaptation, multiplication and production in the Indian environment. Simultaneously steps were taken to increase the volume of commercial production and the use of high-yielding hybrid corn, sorghum and millet seed which had been developed under a combined Rockefeller Foundation and Indian research pro- gram. This is discussed more fully in Volume II. Another and in some respects the most significant action was the allocation of substantially increased amounts of foreign exchange for the import of fertilizers and the beginning of serious action to expand the domestic production of fertilizers. This was especially important because of the key role that fertilizers play in the new strategy and technology and because the provision of large quantities of fertilizer, whether by import or by domestic production, pre- empts substantial amounts of foreign exchange and investment resources. Fertilizer 4a. In 1965/66 the Government allocated for the import of fertilizers the equivalent of 1163 million. an amount substantially in excess of alloca- tions for this purpose in any prior year, and in the face of reduced avail- ability of foreign exchange resources, in 1966/67 al1ocations for this purpose have been further increased to $268 million and the resultant supply will far exceed that of earlier vears Tn December 1965 the Grovernment. in the effort to stimulate both foreign and domestic private investment in fertilizer production, ann.ounced that all fertilizer plants licensed prior to March 31, 1967 would be free of price and distribution controls for seven years after they began production, subject only to the retention by the Government of an option to purchase 30 per cent of their output at a. nego- but in our judgment mistaken, effort to speed the decision-making process of potential private investors. Subsequently the Government dispatched abroad a team of officials to attempt to interest and provide information to) fore~i companies with1 experience in1 the~ ferlie ind~ ustry. Thsls effort for a variety of reasons has thus far produced little result. Simul- taneously, the Government pressed ahead with the planning and negotiation of arrangements for financing and building a number of public sector nitrogen fertilizer plants, in some of which private companies were to be partners. The efforts of the Government to obtain private foreign investment were strongly opposed and attacked by many elements in Indian political life. The attacks appear to reflect in part the hostility to and suspicion of private foreign enterprise which exists in India and other countries. These attacks have not brought about a retreat in policy but appear to have deterred greater efforts by the Government in this direction. The net result has been that the efforts made have not been as vigorous or as fruitful as hoped and do not ensure that domestic fertilizer production will match requirements and demands at any time in the next five years. Nevertheless they have not been entirely uithout result. 46. Approximately 1,000,000 tons of additional nitrogen capacity, principally in eight new plants, is now in construction, about two-thirds of it only just started. Arrangements are being made, but have not been completed, for the establishment of an additional 600,000 tons of nitrogen capacity, principally in three large new plants to be constructed at Goa, Kanpur and Mangalore. If these three plants should materialize and if their actual construction should be started early in 1967/68, then, with the 450,000 tons of existing capacity (which is not likely to produce more than 350,000 tons in 1966/67) and the 1,000,000 tons under construction, total production capacity by sometime in 1970/71 would be about 2,000,000 tons, though production in that year would certainly be substantially less. By our estimates, it is not likely to exceed 1.3 million tons. In that year - 20 - fertzer requirements, 11 11t: agicult1ural producion targets are W ue met, are likely to be from 2.0 to 2.4 million tons. Capacity, in view of the need fur UntinueU growth of nitrogen supplies, should however be well In excess of these figures. 47. Of the one million tons of capacity under construction, 100,000 tons are in addition to existing plants, all public sector except a single very small one. The remaining 900,000 tons is in eight new plants. Of these, four with an aggregate capacity of approximately 415,000 tons are entirely public sector plants; two with a combined capacity of 285,GOO tons are mixed public-private, one with the Center Government and foreign private capital as partners and the other a State Government-private Indian capital combine; the remaining two plants, with a combined capacity of 200,000 tons, are entirely private, one of them involving Indian capital alone and the other Indian and foreign capital together. The 600,000 tons of capacity for which it is hoped final arrangements will shortly be concluded is in three plants, two of which are partnerships of Indian and foreign private capital and the other a Government-foreign capital combination. Although these facts are encouraging, it is clear that fertilizer production will lag behind requirements throughout the five-year period. Whether it will catch up subsequently depends in part on the extent to which arrangements can be made for more participation in the effort by foreign companies, with the requisite experience and management as well as capital. Population Control 48. In the hitherto rather somnolent area of population control or family planning there are also new and encourazino developments, indicating that the Government of India has now begun to conduct a vigorous, determined and purposeful program. This subiect is discussed more fully in Volume IV of this report. Here we summarize some of the developments which have occurred in recent months, )19. A qnnrnt.P nPnn-.mnn of Faynily Plnningl 'hben etbis_hedA within the Ministry of Health, headed by senior and able men willing and able to exercise nuthority, nrovidAd with nnnrting navnnnel commnsurate with the needs of the program, and armed with the knowledge that they have comnlte sunnort at the higheft anhinet lpvlQ_ T+ has hen made any lm that there is no budgetary ceiling on the program; ample allocations have been mna a-ndtheei assur nn+ that . these 'k- beP suplemnte i. exhaused. Furthermore, the States have been assured that the Center will provide 90 1-4 I~ C6L -I. IAK-,4y Q. JIL IWAI ULIV 4;CI1".Lj A LWJ-LJL.J'Lr A . j'cul O Ji .- respective of agreed ceilings on expenditures for Health in the State Plans. ~ ~ ~ *~~VV ~ Jhed Stat A%A~ JL1L J. .L.L%L, L'C4U".LZ LJ_U"J..d. LLJ A±~. and progress has been made in the critical and difficult task of staffing them withn the 3,0-pcait eqie.Mashv een found of ofrn more than the usual salary scales in order to attract medical personnel. "ffUrt are beng made ou eniistu private douctors in the program by providing them with free supplies of IUDs and paying them fees for insertions. An IujD manulacturing plant has been estab-ished at Kanpur and is now turning out 30,000 devices per day along with inserters. Distribution arrangements - 21 - are simple and effective so that there is no supply problem at any level. Another development has been the establishment of a "Task Force" of doctors, employed by the Central Government for assignment to Districts that are pre- pared to utilize them. These doctors, both ladies and men, are paid a premium wage scale. The present authorization is for 200 general practitioners and 15 specialists, but this limit will be raised if the need requires and the supply permits. For the long run the Department of Family Planning is offering 1,000 fellowships to medical students. in return for a commitment to work one year in the Family Planning Program for each year of fellowship. During 1965. five hundred fellowshins were offered and over four hundred accepted. 50. It is estimated that by the end of 1964, India had about two million rn n .Jtiina contranption, hy mannc nf qitth P triliv.qtAnn r the use of conventional contraceptives. WJith an official Family Planning Program 'hnincy'p.rn inIQ<)i it tookL aq decadelp ton reachl thep fT.To millioin marl, Bir mid-1966, eighteen months later, the four million mark was reached. It is encouraging +ht the advnt fn the TTD has not aused a lvnrn+Ann nf offnrt with respect to other methods, i.e. sterilization and condoms. The incomplete +n11w -P- TTTT) + P-^- T-- - +1--pl, A--+ ioAA AAo nno. mH+.h the States not accounted for included in the estimate the total is probably ( W.S VVJ. OnJ. V1L W LJ 1. LJ4 ..LI. JUH L U LLC. %4O, U1I 0 VL± ..L.1.L_LZI V.ll U 'JU14J. -1 .4 first eight months of 1966 can be estimated as 350,000. With the winter tally of IUD and sterilizations may have reached two million for the single yerl perf~1ormanceU. JL_LU1Uk11 ZjUUUCLUnr0 QCL11± Ut.uul CLIIU CLIU .UV U% and although the new effort has not gone nearly far enough to disclose the moIuvi"ona, technca' anu other prou.Lu R uu U may yet be LUVUiUU there is now a basis for hope that the program as it is enlarged will bite sufficiently widely and deeply to put a measurable brake on population growth in India in not too many years. Other Changes in Policy and Program 51. The policies and programs described above and others are expressed in the Fourth Plan. They are subsequently discussed further in te conUe.U of the Fourth Plan. At the same time the Government of India has not waited upon formal adoption of the Plan to effect these policy and program changes. It has moved ahead on the basis of the $900 million of non-project aid pro- vided by the Consortium in 1966 and the expectation, insofar as assistance was required for the purpose, of the continued receipt of the necessary aid. As we have attempted to indicate, a number of the new policy and program directions represent major changes which could have profound effects. The present period is a distinctly transitional one; it is far too early for the effects of the new policies and programs to have been felt and it is too early for judgments of their success or failure. The circumstances seem clearly to call for continued support of the Government in its present efforts. - 22 - THE FOURTH.. PLAN Introduction 52. The Draft Outline published in August, 1966, as it states, "sets out the substance of the proposals of the Planning Commission for the Fourth Five Year Plan". In effect, it constitutes the proposals of the Executive branch of the Government offered for consideration by Parliament, the State Legislatures and the public. It is also the framework within which more detailed programs and specific measures are to be elaborated. It is intended that after consideration of the views and the more detailed proposals of all concerned, a final Plan will be prepared and submitted to Parliament for approval, perhaps in April 1967, following the elections which are to occur in February. The discussion which follows here is based on the Draft Outline, on a series of unpublished documents which underlie and elaborate the Draft Outline and on discussion with the Indian authorities. In a number of instances, these latter documents and discussions reflect work done subsequent to the preparation of the Outline and some alteration of it. 53. The Plan is in one sense an ambitious one. It aims at increasing the National Income by some 38 nercent above the level achieved in 1964/65 or at the compound rate of 5 1/2 percent per year over the six year period. The drop in National Income in 1965/66 means that the National Income target for 1970/71, the last year of the Fourth Plan period, is 50 percent above the 1965/66 TAvP1. Thp P1nn nins tn nontinnt- tn inrri;s investment and internal savings more rapidly than national income and calls for a I rrrpr i nflorw i-n bh. gross,.- ndt net. tervms, ofn fore-igan capnita.l, domnrinntly foreign aid, than in the Third Plan period. It expresses the fundamental nnrnmi +.Ynn of thel or.10-nMent. of India to ecoannnm4 prgrs ndls the1 widely shared and deeply felt desire for the earliest possible elimination of depenAndene n foegndn another" sese however thei Plan ia modest one. Although it strains at the bounds of the resources which may VLI ,UJJ. Q V '.J -6 1 V Ul t I'JJ W CL1. LV rw ' - 'y a small part of the way toward meeting India's massive and urgent needs. .~ ~. ., -j .LZ i QZ ;1 1 A. J LJkAU VI"L.y Vt-LJY 1ILWU1U0UZ PJF .LV6JU0 on the long road toward the goals of economic development. The Size of the Plan Sh. Total proposed Fourth Plan expenditure is Rs. 23,750 crores, in- LU3u US. U,U oraCES 1o Une puix secWor and ns. (.7.u crores in the private sector.1i/ Of the proposed public sector expenditure, Rs. 13,600 crores are -uvestment expenditure, for the creation of fixed assets and the expansion of inventories, and Rs. 2,400 crores are current outlays which are to cover the recurrent expenditures during the Plan period for the operaTion 12/ All expenditure, income and other related estimates for the Plan period are in terms of June 1966, post-devaluation prices. There has been some further appreciation of internal prices since that date, but unless this should continue,r it would not significantly alter the Plan estimates. - 23 - Of vco4- and progras which vibcoe operative uuriug tne perloa. l. of the estimated private sector expenditure is for investment in fixed assets or inventoies.13/ Total proposed investment expenditure, according to the Plan documents, is therefore Rs. 21,350 crores.L4/ This is the equivalent of *u. bi"ion or an average of $>.7 billion per year. . How big is this proposed investment program? In terms of needs obviously and in terms of utilizing India's labor resources effectively, it is not big at all. India's labor force is estimated at present to number approximately 170 million. It is expected to grow by about 23 million during the Fourth Plan period, or an average of 4.6 million per year. If' we assumed that all the existing labor force was employed and was equipped with suffi- cient capital to permit its labor to be reasonably productive, an assumption which is patently false, the proposed investment expenditure would provide for each new entrant into the labor force about $1,200 of equipment, tools and other capital. This is a small fraction of the comparable figure any- where in the western world. Or, taken in relation to the average size of the total labor force in the period, the proposed investment would add about $30 per head each year to the capital stock, hardly an amount likely to bring about a significant transformation in technology or productivity or to modern- ize the Indian economy except over a long period of years. These are very crude and aggregative measures but they help to indicate that the Plan is not. in one sense at least, an ambitious one. The Indian authorities themselves estimate that the investment program they propose. riven its particular mix of technologies, will result in the addition, in the Plan period, of some 4 million to the existing number of totally unemploved, which they estimate to be about 10 million. These, too, are extremely rough estimates which ignore the phenomena of undRr-Amnnvment. and hich1v nnnidnitiv .mnloyment. They are cited only because they help to put the size of the investment Drogram in some perqnr-Aivex 13/ Plan investment is all investment expenditure other than that for the ventionally defined, since it includes expenditure financed by the excess of depreciation proviASion. over actual repaceen ---- ture--. A;+,- It is in fact a better measure than net investment conventionally defined of inVCSVme-&C0 which creatu. IlmP-LU;._dctso _ I est- mating resources available for Plan investment, replacement expendi- tu--s in both the public and private sectors are separately provided or allowed for and are not counted as available for Plan investment purposes. Keplacement expenditures are smaller than depreciation provisions and part of the latter are therefore resources available for Plan invesAment. In projecting Government Plan outlays, current non-investment expenditure on facilities and programs established in the Plan period is included because in estimating Government savings (Government receipts less current expenditures), these particular current expenditures are not counted as part of current expenditure. .L"/ Inis figure is a slight understatement since the methods used for calculating investments to be made in shipping and aircraft in the Transport sector understate their costs by approximately Rs. 280 crores. - 24 - 56. How big is the proposed Plan expenditure in other terms? It is difficult to compare it with that either planned or actually made in the Third Plan period, because the facts are not fully known and because of the large price changes which have occurred. The Third Plan projected total Plan expenditure at Rs. 11,600 crores (in 1960/61 prices) and the Fourth Plan documents report actual Plan expenditures, in the current prices of each year, to have totalled Rs. 12.730 crores. 'his figure. however. com- bines actual figures on public sector expenditure which, in the current prices of each year. exceeded Plan figures by l nercent. with thp nanned rather than any actually reported figure on private investment, and proba- bly therefore understates the fact. Taking this fnct into annonnt lon1n with the apparent time distribution of expenditures and price changes, Third Plan total expenditure might. in 196q/66 prices ancd qt. thp present exchange rate, be the equivalent of at least Rs. 15,000 crores. This would suggest that in real terms pronosed Furth Plan ePendi+nre my be a10nnrn mately 50 percent larger than actual Third Plan expenditure. 57. Looking at the matter in another way, 1965/66 Plan expenditure public and privnto. tnor+.hpy, nnr +nincy accouint o-f tbe hange in thE ex change rate, may, for purposes of comparison with the projected Plan expendi- tureofRs.23~~cL C37%5U crrs eetiae taot R06 3,0 rrs ontinued at this level for five years it would amount to Rs. 17,500 crores. Proposed Fourth~L Plnexediue s3 percent lare LLt: Theuet ionI thenU ib whether Plan expenditure at an average annual level about one-third higher than in 196/66 and in toa aout, 50 percent hrgUer than in the Third Plan period is "too big". We have already indicated that it does not seem so in terms a Ida -u needu and Opportunities. it may be so in terms of the investment resources which can be made available, a matter which is only partly under no .La counto. We explore tnis question brther celow. There is also, however, the question of India's capacity to use effectively for the Plan purpues resources of the magnitude proposed. Does the Plan call for a larger program than can be undertaken, planned in its specifics, and managed effectively by India's civil servants, lo corps of public sector enterpriwe managers, its business entrepreneurial group, and its farmers? Are there or can there be quickly developed the specific project plans of which the investment program consists? Can they be put in train and carried forward sufficiently rapidly to permit the magnituae ana pattern of investment expenditure contemplated? Our judgment on this matter is that the answer to these questions is on the whole "yes". We qualify this immediately by saying that we do not believe that the entire investment program can be executed or the entire investment expenditure made by March 31, 1971. The setbacks of 1965/66 and the current year have brought some loss of momentum. New policies and new programs call, in some cases, for the creation of new institutions and new mechanisms, for the mobilization and deployment of technical personnel, for changes in procedures, for coordination of efforts and for a whole series of decisions. All of these take time, and some will take more time than is allowed in the Plan. - 25- Furthermore, the planning, the organization and the conduct of many programs and the management of many operations and facilities is seriously deficient. Weaknesses in Indian planning and management and cumbersomeness and delay in procedures and decision-making will not be eliminated overnight. A great many of the projects which would constitute the program are not yet ready in the sense that. if the resources were today available. construction or even detailed design could begin immediately. Furthermore, there are many areas in which neither design. construction nor oneration could be handled without experienced outside assistance, in the form either of foreign private investment and entreareneurshin or foreign mnn"erial and technical assistance to Indian government and private organizations. The amount of such assistance required is PrPater than thp nmoiint. uniq hPrmtnforP hut is not so great. however, as to be beyond the bounds of reasonable possibility. It may be beyond the hunds of Tndian aillingnpe +. cok and anPt +.h nPen.ssnry outside usistance, but whether this will be so remains to be seen. Our general -I iimen+ -remanins, howevear,- thatn+ gyi rvno iymrvemn i-n mnranemnt- triven willingness to permit private foreign investment and collaboration in some -reas~ andV .he us of4 +ut-ld - - -~ - - - - -- ~f£fC TTnl and given a continuation of the new willingness to relax and eliminate program projected is not too big to be undertaken in the period. 59. We distinguish between the undertaking of the program and its cumpeion. As we nave a-Lreauy sateu, we douV Una hLe eniure Iuv_kuenU program can be completed or the entire investment expenditure made by March 31, 1971. Uorrespondingly we doubt that all of the output expected from newly established capacity or newly undertaken programs will materialize within the Plan period. The Indian authorities themselves assume that there will be a lag of perhaps six months in the achievement of the physical output targets of the Plan and in their forecast of the overall growth of national output and income in the Plan period discount accordingly. A rough ap- proximation on our own part is that the lag might more nearly approach a year, or stated in another way, that, given the necessary resources, the Plan might be executed in the 5 years beginning April 1, 1967. Resources for the Plan 60. In examining the probability that the resources required will materialize, it is necessary to consider separately internal savings and net capital inflow. As projected in the Plan documents, the general out- line of the matter is as follows. Gross investment in the period, including Plan and replacement investment, is estimated at approximately Rs. 27,000 crores and net (Plan) investment at Rs. 21.350 crores. Capital inflow net of principal repayment and capital amortization is put at Rs. 5,385 crores - 26 - (the equivalent of approximately $7.2 billion).15-/ This leaves the re- quired internal savings at Rs. 21,615 crores gross of replacement and Rs. 15,965 crores net. At the rate of growth of output projected in the Plan documents the cumulative total Gross Domestic Product will be approximately Rs. 152,000 crores. Gross investment would therefore be 17.8 percent of GDP and gross internal savings required 14.2 percent of GDP, taking the period as a whole. As we have indicated, investment and savings are projected to rise more rapidly than output and income in the Plan period. Between 1965/66 and 1970/71, gross investment is projected to rise from about 15 percent to a little more than 18 percent of GDP and gross domestic savings from a little more than 12 percent to almost 17 percent of GDP. The import surplus is projected to decline from about 3 percent to less than 1 =& percent of GDP. The marginal savings rate implied is high, about 25 percent. This compares with a marginal gross savings rate in the Third Plan period which appears to have been in the neighborhood of 20 percent. It would not be surprising, however, if the much hiher income growth nroir.tped for thp Fotirth Plan npriod should have associated with it a much higher savings rate. 61. In the net terms more commonly used in India, the projection _.... ..... .. At the rat of grwt of Natona Inco_-e--- projected between 1965/66 and 1970/71 we estimate that the cumulative tota.-l N_ntinnnl Innme in the Plan" period woul be . l)7, r ln Plan investment in the period is projected at Rs. 21,350 crores or 16.8 ±41 I .LlJ IdL L~ U .L J J_.L.(UI; Ue Ld~ UdJ. .L L LU V I VZk.L" UU CI Y'VL, L. .L.% gross plus $1.4 billion of food aid, less $1.7 billion of principal repayment "Leaving $8.1 U1JLLLo of 0.1eLt capitlUL Jinfl.LL 1L11.3 L;D ULIU equivalent of Rs. 6,075 crores but in their calculations the Indian authUribtes take Utli u U only Ms. 5,3u crures by Ueductg frmU food aid the cost of freight and a number of other items. This re- sults in an understatement of estimated net capital inflow. The internal savings estimates are correspondingly somewhat overstated vus it estiuating overnmenUt avings the Inudan duthoritie have not counted as items of current expenditures the freight and other items netted against food aid. In addition, since publication of the Draft Outline, estimated import requirements have been increased by 60.7 billion and the $8.4 billion estimate of gross nonood aid has accordingly been revised upward by the Indian authorities to $9.1 billion, so that net capital inflow required is now estimated to be $8.8 billion. Since the additional imports are to substitute for previously expected domestic output, this $0.7 billion, which is the equivalent of Rs. 525 crores, reduces the domestic savings requirement to that extent. This reduction is not taken into ac- count in the discussion which follows. 16/ The Plan documents estimate the figure at Rs. 132,500 crores by calculating growth at 5.5 percent per year from the 1964/65 base. - 27 - na,o+ r' NTtinal Tnrma UNr+ in+ 'vnl onir4ncyc r%f P 1f QC O^Ira-n (including in savings the Rs. 1,700 crores by which depreciation provi- cent of National Income in the period. Net domestic savings, defined in Income in 1965/66 to 14.8 percent of National Income in 1970/71.17/ The 4-,1 --. - _*- _ - A '_3 _ - ------- _ _4 - -- J4 11 4"Cur'.LLICL ii DCLV.LLJFo uate ItIl.L.L~u Lz CU dercent Ct~± OUO1U S CI.L.aL. higher rate than in the Third Plan period. 62. These estimates make clear that the Plan projections of in- creased internal savings rest on two basic assumptions, that the projucted rate of growth of income and output will be achieved and that the rate of uomestic savings can be increased more rapidly than in the Third ran period and more rapidly than income. Roughly 60 percent of the total domestic savings projected for the Plan period would materialize even if both income and savings rates remained exactly where they were in 1965/66. The remaining 40 percent, or the anticipated increment in savings, is expected to arise out of the combination of the projected increase in in- come and the rise in the rate of savings. In approximate numbers, and in terms of net savings: the total net savings estimated to be required in the Plan period for Plan investment of Rs. 21,350 crores, are Rs. 15,965 crores; at the 1965/66 levels of income and savings, net domestic savings available for Plan investment would in the five years be about Rs. 9,500 crores; the 47 percent increase in income projected from 1965/66 to 1970/71 and projected accompanying increase in the savings rate is expected to provide an additional Rs. 6,465 crores. It is evident that any significant shortfall in output and income or in achieving higher rates of internal savings would seriously affect the possibility of mounting an investment program of' the size projected, unless the inflow of capital were to be larger than that assumed. Some additional financial resources for invest- ment can probably be provided by deficit financing and expansion of credit to the private sector if the food supplies required to permit mobilization of unemployed labor should be available. The extent to which this may be possible without inflationary effects is, however, uncertain and probably limited. 63. Where are the savings to come from? Such data as are available suggest that in 1965/66 Personal savings accounted for about 60 percent of net domestic savings, corporate savings for another 20 percent and Government savings for the remainine 20 nercent.18/ It is estimated that about half the personal savings were in physical assets such as farm tools and eauipment. housing and simil-r n ts and nhmit hqlf wpre in finqnninl assets, including bank deposits, provident funds, Government and other securities. Pnd other similar asets Pn-rt. nf +.h nA-rnnA1 nvincr. in +.he 17/ In this calculation we have taken the exchange rate at Rs. 7.50 per 411-n in Ew+Ti oA/AA -A 1070/71 repl cIeU mentO ULoutl ays .Vt .LV11 Pi VL_LU1I V replacement outlays. - 28 - form of financial assets were voluntary, part comoulsory or contractual. Although the Government plans to multiply mechanisms to attract personal financial savings, the Plan projections count on these and non- financial personal savings increasing only slightly more rapidly than income. Approximately the same assumption is made with rpsnprt to nnrpo- rate savings. The major means by which the Government expects to increase the rate of savings is by increasing Government. t.ny and othe raints from the public much more rapidly than it increases its current expendi- tures. It anticinates that. with t.he buiti.n oiatini+'[r nP mv4C+inr taxes, revenues from these taxes will increase more rapidly than National Income. It also plans +. inreas cetain + rates an to ;--4n+u -e, taxes. Furthermore, it plans to increase prices or rates charged for com- rnnditj P., ;nr qPj-rj r-A r Q1 A~ )-%x AVW~ - ---- -r-on4os-%e_s-A. restrict very carefully the growth of both Center and State Government current expenditu_res,JVA-AA tha isLt:. V ULI.1 ULIdla expenditures. 64. More specifically, the Indian authorities estimate that the built-in elastici y of existing taxes (Center and State) is such that revenues from these existing taxes will increase at the compound rate of 8.u percent per year and will rise from 14 percent or National income in 1965/66 to 15 percent by 1970/71. Experience in the past suggests t,W, this is entirely possible, provided, of course, that national in- come rises as projected. Nontax receipts are expected to rise at about the same rate. They estimate further that total non-Plan expenditure of the Center and State Governments can be held to an increase of 8.1 per- Cent compound per year. This is on the basis of an increase of only 3.6 percent per year in defense expenditure, which represented more than 30 percent of total non-Plan expenditure in 1965/66, a 16.4 percent annual increase in interest payments, and a 7.9 percent annual increase in all other non-Plan expenditures. The difference between the 8.8 percent annual increase in current receipts and the 8.1 percent annual increase in non- Plan expenditure is estimated to provide Government savings of Rs. 3,346 crores in the five-year period. In addition, public enterprises are ex- pected to yield increasing surpluses in the five years on the basis of the rates and prices they were charging in 1965/66. In the five years these surpluses are expected to total Rs. 1,345 crores. Beyond these, however, new taxes or higher tax rates and higher prices or rates on the part of public enterprises are to be instituted and are expected to yield Rs. 2,700 crores in the five-year period. Measures already put into effect in 1966/67 are expected to yield one-third of this total. All of these efforts to increase taxes and rates will be difficult and some may affect costs as well as after-tax income. It seems entirely possible, however, that, properly selected, they can be effected. Perhaps the most critical single element in the calculation, however, is the outlook for defense expenditure. If it can. in the Fourth Plan period, be hPId to the levels projected, or lower ones, then the chances of realizing the projected Government savings are much imnroved -f a in +hp ThlijA PIan period this proves not to be the case, then the prospect for Government savings is much dimmer. - 29 - 65. The Government also plans to continue to borrow from the public, in some cases tapping voluntary savings and in other cases reserving for its own use certain involuntary or contractual savings, suchas the Provident Funds. It will channel back to the private sector some part of the funds mobilized, but there is serious question whether with the possible impact of increased taxes on private savings and the Govern- ment draft on such savings, there will be adequate resources left for investment in the private sector. The answer depends in part on the extent to which Bank credit to the private sector, in agriculture as well as industry, is expanded. The fact that it is the Government's intention not to incur deficits in this neriod offers encourazement that the private sector will be able to obtain from the banking system the substantial resources. including the long-tArm m;nital, that it will require. Budgetary support of the long-term financing instituticna is however. very likely to be rniired in nadit.inn CaDital Inflow 66. Tn a1l there an np a r to n be a e s n b e po s b l t .hat- the internal savings estimated would materialize if the growth of output and innnynn~ in +.hn np"irlA nn,rI&A I -~ - 4 4- M'ele + A4. - -P , )- bJ S. WJ~C -0 J V tWJ ' UWV%.. ..,I LA AO VJLAe .LJLL*vU capital from abroad will be at the levels projected depends on decisions t-o be0 Mad-e by theI ad-er and byfr1- ivsos The nrap+ Outline of the Plan estimated the gross inflow of capital required at %..' y~ L4 UL-"LVLL WkoLUU.L[U, L- 4WV L,10 Total 21,208 13,682 Receipts Exports 10,710 7,847 Invisibles (net) 2/ 239 271 Total 10,949 6,118 Capital Inflow Required 10,259 5,564 Direct private investment - - 3/ PL 480 and other food aid 1,426 1,731 Aid disbursements other than food 8,333 4,053 IMF Drawings Net 158 Use of Reserves 44 Other Capital Movement incl. Errors and Omissions -422 Division between Maintenance and Project imports in Thira Plan roughly estimated. Asomed in Draf+ Ani+lm to apno-4mn+1al -Prof+ DT . freight payments Included in "Other Capital Movement". substantial increase in debt service obligations. It should be noted that than gross aid commitments. The latter, including consortium and other sources, appear to have been about $A." bilo an pleges not all. of whichU were translated into commitments, were about $6.3 billion. 67. In the large the estimate of payments requirements does not appear to be exaggerated in the context of the investment and production programs projected. It may be that the estimate of $5.2 billion of "project imports" (finished capital goods) required is more than necessary for the investment program contemplated, in view of the large increases in domestic output of capital goods which should be possible with the production capacity available and with larger supplies of imported production materials and components. Furthermore, it is likely that some of the projects which are planned will simply not be executed as rapidly as projected, with the result that some of the project imports will not be required within the Plan period, although they will be subsequently. Moreover, as we indicate later, there is doubt about the wisdom of some of the particular investments contemplated, notably in heavy industry and in shipping where the purchase of fewer ships would affect no other part of the program and might have little or no effect on net payments for shipping services. 68. On the other hand, the estimate of $11.5 billion of "maintenance imports" (principally production materials, components, spare parts) required may prove to be too low. A comparison of the ratio of maintenance imports (excluding food and other finished consumer goods) to the gross value of industrial production (excluding food and textile products) in 1964/65 with the ratio projected for 1970/71 indicates a sharp decline between the two years. so shar as to seem imnossible. Furthermore, we anticipate that some of the domestic output of production materials which the Plan projects will not be realised and that if final outnut oals are to be achieved, additional imports of some of these materials will be required. A case in point is fertilizer, We estimate that in the year 1970/71 the shortfall in domestic output of nitrogen fertilizers alone will be approxi- mately 700.000 tonnes. and that cumulatively through +.he Plan period it will total 1,200,000 tonnes. To make good this shortfall, and it will need to be made good if the food and other aoricltural production targets are to be met, $320 million for imports of nitrogen over and above those already planned will be required in +h Pln peid. To +h extent +h+ +he shv+ fall in domestic output is the result of a lag in the investment expenditure on fertilizer plants,teeml be som offsttin reductions in4- , project- imports directly required as well as maintenance imports indirectly required for construction of these plants. Especial'y since it is likly h-nevr. that within the Plan period it is the output of fertilizer which will lag much1~ more ~ thanJ th invetmen exenitre th reuto i mot on this account is not likely to offset more than a small part of the increase in ferilze LO LimporL t4L eq iements Ji the period. The1 fertiliz~er case is~ duplicated in the case of a number of other production materials where it seems uliely that the output levels projected will be fully achieved - 32 - W. L W(e Fa perioa, out the corresponaing reduction in imports required by the investment program wil not offset the increased requirement for impur of the particular production materials. The net effects of all this are that project imports might be lower than estimated and that uports of certain production materials also might be lower than forecast, reflecting in part a slower rate of investment expenditure, but that imports of other production materials are likely to be higher than forecast as a result of the failure of domestic output of these materials to reach the levels forecast within the Plan period. On the other hand increased effi- ciency in the utilization of existing capacity may mean larger output of some materials than is forecast, Steel is a case in point. On balance, we believe, total import requirements would not be reduced and might well be increased, unless the investment program should be significantly curtailed. 69. All of this discussion is of course within the context of the pro- jected investment and output program. It need hardly be stated that a reduction in this program would of course reduce the import requirements. A reduction in the investment program could be made which would have more effect on output in the Fifth than the Fourth Plan period. This would be one which cut out of the program investment pro'ctn whinh will not vield output until the Fifth Plan period. Our own rough estimates indicate that approxinately two-thirds of the investment. .ratJnd rn lannor for the Fourth Plan period falls in this category. This is to a considerable degree inevitable in view of +hp time in in the b,es of c-ircu-stas betwen investment to expand capacity and output from such capacity. Such a step 1.I _d_n yQ_ hn ^_ -+.- 4 --1 -4-,UJ 4-L _LL 4-L., JVUL ± -4 . l--1 -QU would reduce requirements of both project and maintenance imports in this --- -_ --.L.. tWb J LItull ' U -~Loki J-t-UUUJ.11, W.lt-z 6 UWLI of output in the next period. 70. The estimate of export receipts made by the Government appears to be on the whole a reasonable but not ambitious one. On the one hand in aggregate terms it puts exports in the Plan period as a whole at 35 per cent above Uheir level in the Third Plan period and it calls for an increase by 1970/71 of 50 per cent over the level of 1965/66. On the other hand, ey 71-71 exports would be only 5.4 per cent of U just as they were in 1965/66. With the stimulus provided by devaluation and special organi- auonal effurt it should be possible and it is certainly desirable to increase exports more rapidly than GDP. The rate of increase of export wou±u in hat event seem high, but the base is low. Examination of specific commodity forecasts made by the Government suggests some possible over- optimism with respect to a few commodities, including tea, but indicates considerable caution with respect to other commodities, including some agricultural comodities where the possibility of substantial increases in output may not be fully recognized, and also including the newer industries where the increases forecast seem large, but represent only tiny fractions of the increment in domestic output anticipated. It should be possible here with appropriate export subsidy treatment and organized marketing efforts to do better. Nonetheless time is required for such measures to be fully effective. In the light of these considerations the export estimate made seems on the whole as reasonable a one as could be made at this time, although it should, we repeat, not be regarded as ambitious. This judgment, we emphasize, assames special efforts. rot yet under way, to expand export. - 33 - Project Imports 71. Table 54 summarizes Maintenance Imports by category, as projected hr +.ho 1avm m Phl o To )%mmo o he bo cec+r the W ovoymrentsfimmige of project imports, the latter being defined as finished capital goods required with project and non-project aid. Project aid may and frequently does finance imports"). The projected maintenance imports, as Table 54 indicates, include Large amounts for fertilizers, steel, non-ferrous meuals, cruue peUru±eumJ, components and spare parts for machinery and transport equipment, and also, in the "miscellaneous" category, for non-rL 400 100 and for aefenue _Um1. As Table 55 indicates, project imports are required in large part for the investment programs of a few sectors. Almost $2.6 billion or virtual.ly half of total estimated project imports are required for the expansion of industrial capacity, split almost evenly between the public and private sectors. More than $750 million are for the steel industry alone and an estimated $380 million for fertilizer projects. Another $43 million is for mineral develop- ment, including principally petroleum exploration, production and refining, and also coal and iron ore mining. Out of the remaining $2.6 billion of project imports $1.4 billion are for electric power, transport and communica- tions development, with the acquisition of ships, airplanes, railway and port equipment figuring heavily here. Some $550 million is estimated to be required to supply equipment for agriculture and irrigation, with about 40 per cent of this tractors and other power equipment. The remaining $265 million is for capital goods required for all other purposes, including health, water supply, education and research. The Structure of the Plan 72. Although the Plan is often thought of as essentially an investment program, it is both more and less than this. It is less in the sense that it sets forth in specific terms only part of the prospective investment program. It is quite specific about the investment program of the Center Government which represents about one-third of the total investment program. It specifically identifies parts of the State investment programs which represent another one-third of the total, and it identifies specifically only a few major projects within the investment program to be undertaken by the private sector. For the rest. with resoent espncially to the orivate sector. the Plan merely indicates the sectors of production in which it is either hoped or exnPntPd that invnAtmAnt will h madp Thp Plan in this wav and in the production and capacity targets it sets gives some guidance to Government in the shaning and noPration of ineontives and controls which influence private and also State Government decisions, but especially in the case of the private sector these are only general gidesoQ. TIn capcit ni + tnroets in some degree determine public sector investment and output operations, but rather than controlling. 73. In another way the Plan is more than an investment program in that investment resources, it gives general guides to fiscal, monetary, credit, PIceU andL oVter Policies0 andU it sugests institutionia.L mr~ii~t Lor the - 34 - effectuation of policies and programs. There is another important aspect of the Plan which is not treated in any but the most general terms in the published Draft Outline but which is plotted in the associated Plan documents in more specific detail. This is the imrt nrngram and the proamm fr foreign exchange allocation which in so many ways is determinative of the structure and level of outnut in the economy Another ma++r- .hich 4 aln important in this regard, though less so than formerly, and which is not treated at all in the Plan, exen+ in +Ih mi+ s w4a1 +--.m. -1 priority, is the allocation of scarce domestic materials. These broader but not vpr n-pecseaspects o pfim The Pan"f are at leas as -4orana the more sharply drawn program of investment in fixed assets - the Plan -_. . . .± 11-t5--. ILUV L.LLUtLIZ 1- PcJ. d L_t,.LLU_LCL.LJVy _U11JJVJ d.L1LU _L1 assessing the structure and character of the Plan, since some of its essenti-al chamaterosi not visible rom an inspection of nlan Investment or Plan Expenditure alone. General Objectives of the Plan 74. The Draft Outline's statement of the broad objectives of the Fourth ILan differs strikingly from that contained in the Third Plan document. It puts the major emphasis on "self-reliance" or rather "the attainment of economic self-reliance". Although it "reaffirms the objectives enunciated in the earlier Plans", it does so only by a rapid reference in the opening sentence of the section entitled "Objectives and Strategy of the Fourth Plan". The comparable sections of the Third Plan document developed the theme stated in its opening sentence - "The basic objective of India's development must necessarily be to provide the masses of the Indian people the opportunity to lead a good life". The emphasis was on the goals of a higher standard of life and social justice. It spoke of a socialist society but took care to characterize this not as a rigid institutional pattern but as a phrase symbolizing the positive goals of higher living standards, enlarged opportu- nities and democratic participation in the life of the nation. The Fourth Plan statement does not abandon these goals but clearly puts the attainment of self-reliance ahead of them. In support it states that "experience during the recent emergency, when there was a sudden suspension of certain non- commercial foreign credits and the devaluation of the rupee have underlined the over-riding importance of attaining this goal as early as possible". The statement proceeds then to set its sights on 1975/76, the end of the Fifth Plan period, as the time when dependence on external tredits for the maintenance of consumption and continuing economic growth should cease. More specifically it aims at elimination by that ynr of the hnPnnP of pAments aan in the sense that foreign exchange earnings should at that point exceed payments for maintenance imoorts and the sArvin of dle, Inclding both interest and principal; bilateral aid should, after declining during the 1970/71 to 1975/76 period. have conaed and gros caintal n-ir. choeq after 1075/74 be nnly "inflow through normal commercial channels or international agencies". With this nerspnttivo +.In inimant proceeds then" toatcuaeastaeyno h Fourth Plan period. 75. The program which emerges is not radically different from th~tof he sverl prcedng lansI, bu it does contain some new emphases and it does strive to correct some of the major imbalances which~~~ ha en emted to devrelop. pcfcly hr smc more emphasis on the necessity for accelerating the growth of food and t aiulura ploductoin, on the neoDl Jor ac,:e3oratig tre _)rJr.n oi - 35 - exports, as well as of import-SubstltU Ug p1-uuUU.u1, lu mus s1mmuse growth of population. There is reference to the desirability of completing and utilizing new capacity under construction as we..l as that already in existence, but this is not stressed. There is the suggestion, carefully put, that for the time being consunption levels may need to be hel down aund avins rates increased more, projects and expenditures which are not absolutely essential more ruthlessly excluded, and a greater degree of general discipine and austerity accepted. There is no clarion call for greater reliance on private initiative and decentralized decision-making or on the market and price system as an effective allocator of resources. References to the possibility and desirability of substituting the market, influenced by fiscal and monetary policies, for direct controls are matched by references to the necessity for better machinery for "the direction and regulation of the private sector in accordance with Plan priorities". Touched upon, but not in sufficiently sharp terms or with adequate proposals for action is the problem of ineffective management of the public sector enterprises into which vast resources have been poured but from which no commensurate outputs are as yet being obtained. It would be difficult on the whole to quarrel with the general program, and it is hard not to applaud the aspiration for economic independence although we question both the feasibility and the validity of the target of a surplus on current account 10 years hence when per capita income in India, if Plan targets Are achieved. will still be less than 170 per year. Regrettably no reference is made to the significant contribution which could be made to Indian economic progress v a ricHtion in rio rp nnditure or to the possible benefits from economic collaboration with Pakistan. The only reference made to defense ex- penditure S+stes that it s no mren than ) to prcent of national income. No suggestion is made with respect to the possibility of reducing this ex- pendite or the ndAA +ns 11-a- H r-v, h orliin+i on mi cht be nossible. I -I II~ Le verldlL JCUrZV .LU%.L UIL~J~U. AVU4 A- .--- ------- - income from Rs. 200 billion in 1965/66 to Rs. 295 billion in 1970/71, and inU GDPF fLO-11U R. 6), J.JJ.Ull Wj TLC$. )_?[ L1J.L L'I, C.-J _ prices. Actually the rate of growth implied is not as large as these figures year. The year 1964/65 is a better base for this projection and comparison. In that year, again expressed in lyo6p5/66 AVLM -A-WA billion so that the level targeted for 1970/71 would imply an increase of 37.8 per cent over the 1964/05 level or growth at te comouvnd rate o *m5 per cent per year during the six-year period. Industrial output, as measured by the index of industrial Production, is expected to Ibreasby 7 erOe - in the six-year period or an average of 9.8 per cent per year. Value added in all of Indian industry, including the sma." enterprise secv along wvyiV the organized sector, is expected to increase by 79 per cent in the six-year period or an average of 10.2 per cent per year. Agricultural prouctiV, as measured by the Index, is expected to increase by 31 per cent in the six-year period or an average of 4.6 per cent per year. Value added in agriculture is expected to increase slightly less in the same period. The increase in pro- duction of foodgrains in the six-year period is targeted at 31 million tons or almost 35 per cent. The more important production targets are liet3d in Table 38. As can be observed from the Table, large increases are projected in the production of intermediate materials such as steel, chemicals, fuels, including coal and petroleum products, and machinery and equipment of all types. - 36 - 77. Since population control efforts cannot be expected. to have a significant effect on population growth within the five-year period, the population is expected.to grow by 65 million and to be 560 million by mid.- 1970-71. Gross domestic product per capita is therefore estimated at Rs. 637 in that year as compared. with Rs. 475 in 1965-66, an increase of 32 per cent frcm that year, although a lesser increase measured from 1964-65. Disposable personal income after personal taxes, is estimated. at Rs. 469 per capita, the equivalent of $63, in 1970-71. 78. To a major degree, although this is difficult to quantify, the achievement of both the agricultural and. industrial production targets depends on fuller and, more effective utilization of capacity which already existed.at the end of the Third. Plan period. In some degree it depends on the completion of projects which were und.erway at the end of the Third Plan period.and which, as a result of further investment expenditure during the Fourth Plan period. will begin to produce in this period. Only to a lesser extent, again difficult to quantify, are the targeted. outputs to come from new capacity created. entirely during the Fourth Plan period and coming into operation at some time during the period.. We have estimated roughly that. taking the investment nrogram as a whole. not more than one-third of the projected.investment expenditure will yield any Droduct durini tht- Fourth Plan npriod it.q1f_ nlfniiah qiinh invest- ment is essential to continuing growth in the subsequent periods. In the case of the Public Sector T-n1ii,ztr rgnermn anhmi_ nna_fifiA of Uhp onented investment expenditure in the Fourth Plan period is to complete projects already underway and aler+hn about onet h'ird. of the total expendit re will result in output at some point within the period.. 79. This is not to suggest that investment in the creation of new effectiveness with which existing capacity is used. and. the way in which cu r n e or e ar deployedu. ULICLU VJ..L.L L 0U1Lt__ U.C;t:.LLL111-_ UIJLU ..L'CVt-J-0 of output and income achieved. in this Plan period. For this reason the "L u LLu m1AU UU Vui ne use zi e.siig uapaLuy anlu existing resources and should be directed. toward extracting the maximum return possji from these. A furthe point- whc follows is tht,tain into account the fact that capacity was, at least until 1965-66, being expManded. at anaccel-rating rate- durin the -- ThirPla peid,efetv use of this capacity and adequate provision of the current inputs required. sould pmte a sgnicantly higer level of output and more rapid. rate of growth of output during the Fourth Plan period. than the Third. For t gneral reason and, also on the basis of such examination as we couLa. make of the major producing sectors of the economy, we believe that the u levels and. rates of growth forecast by the Indian planners are not wildly over-optimistic or unattainable. As we indicated earlier, where the Indian authorities assume a lag of about six months in achievement of the overall physical targets of industrial and. agricultural production, we believe a lag of about one year is more likely. The Indian planners may in certain respects, however, be over-cautious. We believe that while the Indian planners are, as we have already suggested., over-estimating the speed with which newly undertaken projects may be completed,and yield output, they may be under-estimating the increases in output that could - 37 - be obtained. from existing facilities provided that adequate effort, attention andO resoce were devoted f fhiz nirnnq nnd that nolicies were framed. with this end. in view. We refer here to opportunities in agriculture emmneA more n aefully in Unluma TT of +.his -rnort. We cite also the existence of great unused. and. poorly used. capacity in some of the large pulic seto indust4AQrial unetaig -A "~mmn1 rn~~ nf c~apacity in the private sector of industry. Savings and. Investment Targets so. We have already indicated, in the discussion of resources for the Plan, that the Plan projects not only a considerable ncea i rate of growth of output and income, but also an even higher rate of increase in savings and. investment. We add. here that the proportion ui ruO ment to be financed. out of external savings is expected to be reduced. from about 27 per cent in 1yo5/6o to 12 per cent in 1970/71/. Nu/ We dU not share this expectation since we expect net imports to rise steadily during the period rather than to peak in the period and. begin declining before its end.. The Composition of the Plan Expenditure Program 31. The distribution of proposed.investment by major sectors is not very different from that which was projected. in the predecessor plans. The proportion to be invested directly in agriculture and. irrigation (about 16 per cent) is slightly lower than was proposed in the Third. Plan. The proportion to be invested.in industry (32 per cent) is somewhat higher than in the Third. Plan. Comparison of the relative amounts or proportions to be invested in the two sectors does not, however, truly reflect the degree of emphasis put on each sector. For one thing, the investment figures reflect only expenditure for the creation of fixedassets. In the case of agriculture, increased, production is dependent not so much on the creation of additional fixed assets as on expanded supply and.use of current imports such as fertilizer. improved. seed. varieties, and plant protection materials. Fixed assets creation is significant mainly in relation to the increase in water suDalies by expenditure on either major or minor irrigation facilities. Increase in tools, equipment, and farm buildines are not important ingredients of the agricultural program since the "new technology", although it embraces the use of larger current innut supplies, is to remain a labor-intensive and overwhelmingly animal-powered.technology. The significant increase in the allocation of resoUrn. t ngrimiltmrp iq thArAfore not disclosed. by the figures on planned. investment in the agricultural sector per se. It is evidenced.by the cominnqtion of investment in the indi-,trial qerto)r and by the proposed. allocation of foreign exchange resources for imports. Within the industry and. mining Seor, i nirs+.mnn. i n fortilIi g-r anti neqti rid ci-Droduction caDa- city accounts for Rs. h93 crores ($650 million) or about 8 per cent of the +-tJ a". T1 hsUL .-lsJ f. ar. .large 5th-,an,. . .. ...exndiuri faThvPnn-rid both in absolute terms and. as a proportion of the total. Imports of fertlizr Ad. fertilizer materials are pro'Jected. at R.1to~n crores (about $1.3 billion), which is more than four times as much as was U0 voe Us the Rupuo7 e U11. LAtL in U A L LbhA.. _L1 s 20/ Using the Rs. 7.50 per $1.00 rate in both years. - 38 - s uetr outay, -nuudJng currenB- as we2 as investment expenaltures, agriculture and irrigation account for 21 per cent of the total public sector outlay of ns. o16,0 crores. In addition, accoraing to the Plan documents, construction of new distribution lines for electric power is to give first priority to irrigation pumping requirements and 20 per cent of road construction funds to be expended by the States is to be used for rural roads. o2. Investment in transportation, comunication and electric power facilities is designed to provide the capacity which will be required during the Plan period if the production targets should be achieved, and also to have under construction additional capacity likely to be required in the post-Plan period. In addition, within the transport sector a substantial investment in ocean shipping is planned with the objective of carrying a larger percentage of India's international trade in Indian vessels. Investment in the social services sector accounts for 16 per cent of the total projected Plan investment and about 13 per cent of the projected public investment. Approximately one fourth of the public investment projected in this mctor is for the expansion of education facilities. Water supply, housing, and family planning are the other major objects of expenditure in this sector. Agriculture 83. The agricultural program of the Fourth Plan represents the application of the policies expressed in the "new strateLv". We hqve outlined these briefly in an earlier secticn of this report and we examine them in some detail in Volume TT. The main enments of the stratpav are first, to assure supplies of the newly developed high-yielding seed varieties, of much larger quantities of fPrtflier and plant prec+.oAn materials and more and better managed water supplies; second, to provide more ample and less costly creditw.hich tsi1 able the cultivaors to oh+ai supplIe of these current inputs; third, maintenance of producer prices which will nrovidp finnriial irin-&n+A-ue n+hi use; -n4- "+nkt cnt4mr nd J-1 iprove the research required to permit continuous and increasingly effective use of the new technolo In niarfif annlication of th a Q+"12+d +h Govern- ment has selected areas with assured water supply, from rainfall, irri- antion or P onnmhinntinn nf +1nn *tv.i n-"e4 -A +1.nh. i.v,w1-Ia,hien - ----- - - -... ..11.- two , oi.. -. faora. Jl otJ- r*e L phy -- conditions. The area selected amounts to 32.5 million acres or some 11 pAr npnt. nf' the normal fi-l crop- aceae As, rapi&y4- astepo ton and multiplication of the high-yielding varieties of rice, wheat, corn, soghman iUtpeardit, supplies of these.A sedsYill be tonnluuU the selected areas which are also to receive ample and assured supplies of fertilizer and other --4-44 mteral -A faciliti.4 Othr aea also will receive supplies, but it is intended that the selected areas wi.d-ll reCeive priority; furhvLUr itwsblee steprogram wa formulated that in these areas of superior physical characteristics, incluing especLaiaLy assured water suppies, cultivators would respond more vigorously, and the risk of failure would be minimized. The puossbIty that supplies of some of the physical inputs, notably seed, and of credit and administrative talent would not be adequate to saturate - 39 - %Amlau I ai areas was procauly also a consideration in ne proposea concentration on selected areas. The Government estimates that production in unese areas will increase steadily and that by 17u tnese area3 alone will produce an additional 25.5 million tonnes of foodgrains, and other areas an additional 5 to 10 million tonnes, additionality being defined on the base of 90 million tonnes, taken as 1965/66 output under normal rainfall conditions. 84. Our own judgment is that, provided the requisite supplies and credit are available and price conditions are favorable, the rate of growth of food production can over the next four years be accelerated from the 2 per cent trend of the past 10 years to 5 per cent or even better subject of course to year-to-year fluctuations reflecting weather conditions. We believe that the chances of increasing foodgrain output to the level of 110 to 115 million tonnes by 1970/71 are good. An even better performance is not impossible, although we would expect that if foodgrain production tended to rise more rapidly, other crops would compete for acreage and supplies more successfully. We do not believe that either the supply of inputs or the increases in output will or can be so heavily concentrated as planned in the limited area of 32.5 million acres. Nor do we believe they need be so concentrated, since the production of the hiph-vieldine varieties of seed can go forward rapidly enough to supply a larger area, since a larger area is reasonably assured of water, and since the demand on the oart of farmers in a wider area seems certain to be effective. We emphasize, however, that our oroviso is critical. Thern arp nrohlems to h sol-vd in the organization of the seed industry and in the development of additional water suolies: there are diffinilt nranni7n+An and financial nrblems still to be solved in providing the necessary credit supplies; above all there is thp nrblem of proviing auate fertiliersupnes. We have already indicated that domestic output of fertilizers will in tho fiaA- parjnod fall fP"arn- shor of - theO--ment estiates -Ad that provision of the requisite amounts will compel substantially larger Imp0rts Uan have been estimated by the planners. Specifically, in the case of nitrogen fertilizers if the supply and consumption target is put ~~~~~~ 5 - * . J~ L JJ U . L .LJ LA M15: L LV t: Y edA -Z , IL b L[ AK J IV MhT J .U M .L .L.LIU L ]I W M 5 I n11 1966/67 to 2.0 million tons in 1970/71, as in the Plan estimates, the actual IMPorts required n th e perioU wiL, accorcing to our estimates, be 3.8 million tons rather than the 2.5 million tons estimated by the Indian planners, and the cost of the necessary imports will be approximately $1.0 billion rather than the $700 million they have estimated. If, as we veieve, the supply and consumption requirement for the period as a whole is almost 1 million tons higher than the panners have estimated and will reach 2.4 rather than 2.0 million tons by 1970/71, then the import requirement in the period will be 4.7 million tons and its cost almost $1.3 billion rather than the $700 million estimated by the planners. Shortfalls in domestic production of phosphate fertilizers and also of plant chemicals will add somewhat, though relatively modestly, to the additional import burden. - 40 - 89. The danger in this to the agricultural production Droaram is obvious. Although the commitment of the Government to the program is in our judgment a full one, additional foreign exchange reanirements of $400 to $700 million for it in the period would. confront the Government with difficult choices. If the amonnt of aid aviiTh!e shmild he ;i- nificantly less than the amounts hoped for, the difficulty of these choices would. be magnified. If. funthermor_ t.he aid-pivers shonil regard fertilizer as not a suitable object of finance or one for which long term credits were nnt anpnrnninf.a fthon the ncoh1i+ of adequate imports of these materials would, become dim indeed.. Correction of the imbalance which has an np-"mis +n nwnep be+.en fond su lies and demand is vital to both the immediate and the long-term growth of the Tndin) ecornmy. The experi ence of the past two years has indicated cl-arly that there are limits beyondwhich in India foodconsumption cannot be derese.below demand wit*hout seiu eecsin nthel hl range of domestic prices and. costs and. on the balance of payments. Efforts on the pat ote uenter Uoverlaent to averb tnese by raUtoning, Uy buu- sidies, and. by drafts on the supplies produced. in the "surplus" States have not solved the problem, particularly since the "surplus- States understandably regard. the latter efforts as in effect a spread-the-hunger policy. In any case in a situation of total shortage such efforts cannot provide other than temporary and only partially effective solutions except where Government has the power, the will, and. the desire to impose a degree of deprivation not voluntarily accepted.by its people. The Government of India has now chosen to devote scarce resources to the increase in food.production. However pending the development in India of sufficient output of the necessary input supplies, substantial and, in our judgment, much larger than planned., imports of such supplies will be required., supplemented also for a time by supplies of food. itself. It is to be hoped that in this interim period., the Government of India will make the difficult choice in favor of maximizing agricultural input supplies by import, and. that attitudes on the part of the aid-givers will not compound the difficulty of this choice. Industry 86. The investment program for industry resembles an expanded version of the Third Plan program in many respects. There is the same emphasis on the creation of capacity, on import substitution, on capital and intermediate goods (investment in consumer goods accounts for only about 12 per cent of total industrial investment and. less than 4 per cent of investment in public industry) and, on the metals and machinery industries. Metals and machinery account for over half of the industrial investment program and 60 Per cent of investment in public industry. Much of the public sector program is worked. out in considerable project detail. This is less true for the private sector where there is some - 41 - project identification, especially in fertilizer, non-ferrous metals and steel. but where most of the other industrial nrograms are roughed out with broad investment allocations presumed to be consistent with nlannpd intro in Pnr-iy.v ani ntnt Thp nlni allnnations of industrial investment are as follows: Fourth Plan Allocation of Fixed Investment rrivate LUaL. Machinery and engineering 347 450 797 rertilizer and pesticide 273 220 493 Intermediate goodsl/ 310 640 950 Consumer goods 02 o0u 722 Minerals and oil 891 100 991 Miscellaneous ho 22U 200 Total 3,543 2,650 6,193 1/ Mainly petro-chemicals and other chemicals, cement, paper, forgings, and castings. 87. The concentration of nearly a third of total industrial invest- ment in metals reflects the heavy emphasis of the plan on steel which accounts for 40 per cent of the proposed investment in public industry. Most of the rest of the public program is for non-ferrous metals, heavy machinery and heavy electrical equipment, fertilizers and other chemicals, coal and iron ore. nnd oil production and refining. Private expansion would also be in steel and non-ferrous metals, a variety of machinery and eneineerine industries. fertilizers and other chemicals and coal as well as a large number of other intermediate and consumer goods industries. Some of the %ains in inAn.tri.1 mitnut envi.a'd durina the Fourth Plan are indicated in the following table: - 42 - VOUU U11 -LdL 1 du VA U L.dCL-L.L VUL%,U.LUI VJ. -0V Estimated actual Target Finished steel,million tons 4.6 8.8 Aluminium, 000 tons 65 330 Copper, 000 tons 9.8 37.5 Commercial vehicles, 000 34 80 Passenger cars, 000 24.5 60 Electric generators, million Kw - 2.2 Transformers, million KVA 5.3 12.0 Electric motors, million Kw 1.8 4.5 Machine tools, Rs. crores 23 105 Metallurgical equipment, 000 tons 11 70 Textile machinery 28 55 Railway wagons 33.5 L0 Agricultural tractors, 000 5.6 35 Power pumps, 000 200 00 Diesel engines, 000 85 200 Nitrogen fertilizer, (N) 000 tons 233 2,000 Sulphuric acid, 000 tons 664 2,400 Drugs and pharmaceuticals, Rs. crores 150 250 Automobile tires, million 2.6 6.0 Paper and news print, 000 tons 580 1,050 Cotton cloth, million meters 4.134 5,486 Rayon and staple fiber, million kgm 93.5 102 Iron ore, million tons 23 54 Coal, million tons 70 106 Petroleum products. million tons 9.86 20 88. In total the objective of industrial production is an annual avera JnczP hv 19Q70/71 nf nlmr%, inpr cent nuv--r thP 19A)/6< 1PVPl This is slightly less than the Third Plan target of 11 per cent but would he anidebly more than th n record of ahout 7.5 npr cent in thp first four years of the Third Plan period. Highest priorities among n + n Aafinr il +h WnIr+h Plnn +n h, 11infr iml inn1i+.Q for agriculture, such as, fertilizers, pesticides, farm equipment, etc.; metals and machine i1nA4tr i,+.4 nclu-A4ng, o+nl al-1m1miulim inl of" * intermediate goods industries, namely, industrial chemicals, petroleum, nn^.l 4ro a. n d "e-1 ~al o-i ngs -4v. -Prn- re ..n,.P-n+. or- -A ennn ; * nd I 4 L 'U A,,t 0 U iJ '.a W.LU$50 ObflA. ' A& IJ1 6, * ~ O.h1~LI & .tt l industries which produce essential consumer goods such as sugar, cloth, -17. UL1UUQ-iU.EL.L kJAxI.LLir, cLLU kJ10J:: VI -CFE11-C~J.~LiU0,1 11LO UL A U11 J.LQJ JV ,% over Third Plan practices. Estimates of costs and foreign exchange require- ments seem realistic. Tecnnical groups for inuutrial guiuance wiuhi Ut Government have been strengthened, and economic aspects of industrial projects are given much more attention than in the past. rAforts are being made with some success to standardize the procedure and content of feasibility studies for public sector projects. Furthermore, a much needed - 43 - program has been started to assemble information on the actual status of construction and operation of public projects. 90. The improvements should not be taken to mean, however, that past shortcomings of industrial plan preparation And exention hnve hPn eliminated. It has not been possible of course to make any complete and detailed review of the industrial program. and- hpmne the fnllnwino*nmments are based on only a partial coverage of industrial plans. This has been sufficient. however, to indiante t.hnf. fhaa i.4 2+.ill wide Iria+m in 'twe quality of detailed industrial planning. For example, heavy electrical and petrochemicq rvlopnment. anppna to e suppo+te by more pb -- pble ni efforts than previously. But the effort put into planning for the steel industyr7 sern defi ciimn ~nsiAm"4-- th resu-es 4n-01- an the po-si bilities for economies in their use. While costs and returns are being is still much of the industrial program which is wanting of any very definite retu-rn. on investm.enft or cost-b0enefLIt acltoso ote exWmJn-'Ji - X. either short or long-term comparative economic advantage. And it is still not clear that thes e eo consideratioxus are nearly as important i project selection as the place of a particular plant in the conception of a pysay-baluanced long-run industrial input-output mosaic. A major aim of industrial policy is still to meet the longer term input-output targets as much as possible from domestic production. Inere seems to be little more emphasis in the Fourth Plan industrial program than in earlier ones on identifying and fostering the kinds or industrial development in which India might have an international comparative advantage and which might extricate te Indan economy from the export stagnation which so clouds its economic prospects. There is, of course, recognition of the importance of industrial export expansion as well as industrial import substitution. But most of the considerable preoccupation of the Fourth Plan with "self-reliance", i.e. eventual achievement of an external balance, runs in terms of domestic substitutes for imports and there is little specific attention to the development of some export dynamism in manufacturing. * Another and a major matter which seems inadequately considered in the Fourth Plan industry program is the necessity for effective use of existing or nearly completed capacity. Part of this problem in the past stemmed from foreign exchange bottlenecks which are no longer such a diffi- culty under the recently adopted liberal import licensing policies. But there are other difficulties of capacity use, especially among public sector industries completed or nearly completed in the Third Plan period. A number of these are to be producing far less than their facilities permit and in some maintenance also leaves something to be desired. Much of this reflects inexperience, some of it reflects unwillingness to use outside experience, some of it reflects the problems involved in developing a new organizational and conceptual framework within which efficiency in the operation of public sector enterprises can be achieved. Another factor is that the approach to planning of public industries in India has tended to set up projects to supply particular products to particular industries - a plant to produce steel mill equipment. another for mining enuinment. another for chemical plant equipment, etc. Although conceived as special purpose plants. many have the same basic fneiities and. un to a noint- an - 44 - pro uc a1.L. ~ UILJ VCLL.LJ. Y Ul t-,U.LJ(LILU ctiLU Iri(Lt;LL.LL'Y* L1LVZV.LU -. ZJV1U of the original planning forecasts of demand have turned out to be somewhat o11 the marK. At present some of the plants are having difficulty in find- ing markets for their planned specialized products, and also are encounter- ing resistance from consumers or these specialties in connection wItn guarantees of performance, firm delivery dates, etc. If effective use is to be made of heavy investment in capital goods industries, public sector enterprises will have to become not only efficient producers of reliable products on schedule but also more aggressive in finding markets for their products and more flexible and imaginative in adapting their capacity to market possibilities and demands. If these challenges can be successfully met, output from these plants could make an important contribution and the need for investment in still further facilities of similar type may be obviated or moderated. Otherwise the output of these plants and their contribution either to domestic demand or to export may continue to fall short of expectations and opportunities. 92. The importance of making the largest and earliest possible use of existing and nearly completed capacity is emphasized by the long time periods that can be expected before additional production can be expected from much of the Fourth Plan investment in new industrial capacity. This is due in large measure to the highly capital intensive nature of much of the public industrial investment and the extended time periods inevitably required for plannina and preparation. construction, and full operation. The Fourth Plan makes a considerable allowance for these time requirements, but in many cases it seems doubtful that the allowance is adeauate and that output will be realized according to the Fourth Plan schedule. This conclusion is based not on any thoronuah review of all of the industrial programs but on an examination of a few which make up a substantial part of the inv.t.ment in nublin indnstry Partlv beuns of dela in arraning external financing and partly for internal reasons, it is unlikely that a number of the pro pected t cntribute output in the Fourth Potn period will be completed and in production by 1970/71. Considering the stage of -anto today and the-I,, e required under IndiMnod to- make project studies, secure government approval, obtain financing, place tenders,- nhfnin Aolivrinrdo M Antrc plnsi+ is2 linlilalu ft1 hnt. qnmp of' the projects are yet far enough along to absorb all the investment resources allocated in. the Plan by -1970/7-1. InT-4' 'prti nv r or advanced, the investment may be completed but there may still be insufficient UV.k IA IUCL J Li J.U U .LIL 06.At:;%LU-LU " Lo I L fauu .d. l CL. L VJ kU U-J - - 0 Some of the recent revisions in the import requirements estimates reflect new Some examples of proba-ble delaUY and shortfaJ-l- I uUt in theU industrial program are as follows: 93. (a) Steel. Production of 1.2 million tons of ingots is expected by 1970/71 from the second expansion of the Rourkela and Durgapur plants. Neither expansion is underway and financing for one of the schemes has not yet been arranged. Further delay is inevitable and output from these projects within the Plan period is most unlikely. (b) Copper. The Plan assumption of 21,000 tons of copper from the Chetri copper project by 1970/71 is not likely to be realized except perhaps in token amounts. (c) Aluminum. Considering the present stage of project preparation on the Koyna and Korba projects it seems probable that the shortfall in production as compared with Plan targets may be 60,000 to 90,000 tons, or a quarter to a third of the projected increase. (d) Fertilizer. We have already commented to the effect that not enough of the needed capacity is as yet under construction so that achievement of the output targets of the Plan period is not possible. (e) Iron Ore and Coal. The iron ore program is lagging badly and, for want of adequate coordination among all the elaments of the program - mining. transport. ports. achievement of production near the target of the Plan is unlikely. Increased public sector production of coal depends on the develonment of tT.o new dePn mines which arp hardly vet at a stage where they are likely to reach full production by 1970/71. Delays and shortfalls are nrobablv alsn to he A-mAntind in increasinn, orivate coal oroduction. ,C.Thein~n~ n~f +.oo n-ehn'hn qhortfalls in the Fourth Plan period are that on the one hand, import requirements of certain materials .rqired as, i1npt f ",+or other curen vrim-+ on- -Fnrti I i zer for agriculture for example, will be increased. On the other hand, imports required, of both finished capital goods and of some production the balance will be. In the case of fertilizer it seems clearly to be on ull! ~.e s-1 u ira u _otal 11upori t4L1 eurmUS~U. 41LL steel for example, it is likely to be on the side of a net reduction in total import requirements, within the Plan period, obU am, by definit vo an increase in the post-Plan period. 95 We have been referring to probable shortfalls in output and lags in investment expenditure which are the unplanneU and iuaverVtent rsuo of the fact that more time will be required for some of the decisions, arrangements, and actual construction than nas been allowed for in the planning estimates. It is also possible deliberately to defer certain new project starts and there are cases where in our judgment delay might seriously be considered in the interests of first achieving effective use of and maximum outputfrom existing similar facilities, particularly where they are under the very management responsible for the projected expansion programs. We have not studied these individual matters in the detail necessary for firm judgment, but we believe that one or more of the proposed steel mill expansions may be cases in point. It is possible that the gains which would accrue from immediate concentration on effective use of existing facilities would outweigh the costs that would accrue some years hence if the initiation of one or more of these projects were delayed a year or two. Certainly in the event that choices should need to be made between the immediate initiation of such projects and other uses of resources, deferral would commend itself even more strongly. - h6 - We are not here suggesting general reduction in the size of the investment program in order to reduce imediately prospective import requirements. Such a general reduction would of course do so, but we need not labor the point that it would also reduce the growth of output in India in this Plan period and the succeeding ones. Our general conclusions are that the industry program as set forth in the Plan may need some re-shaping, that some of the long-gestation, heavily capital- intensive projects may not be well-chosen or at least well-timed, that effective and fuller use of existing facilities and the allocation of more resources as well as energies to this purpose is desirable, and that more careful search for comparative economic advantage and exploitation of such advantage in the export as well as the domestic market would be desirable and rewarding. 97. In this connection we believe that the relaxation of controls over investment and production in the private sector and the decontrol and liberalization of imports of production materials by this sector, together with devaluation. may result in healthy and productive develop- ments as a result of private initiative which are not and could not be foreseen in the Plan. This is early in the stage of transition in India. if the transition is not put into reverse, and the reactions of private producers have not yet taken shane and cannot be discerned. It is con- ceivable, however, that just as during the Second Plan period there was an unexoected thrust of nrivate indutrial activity, Mrented Almost entirely toward the domestic market, there may be in this period, given the recent changn in thp climate fn nivate inasrianl activity, a considerable spurt of such activity in unexpected directions, including some in t.ha Anort asrwll as the domestic market It mar be that this will not occur and that Indian private industrial firms, as well as those in the puboic sec+rn, Will prefer to pe-'-'-' in the continu-ing shelter of protected markets and collusive agreements which restrict efficiency and In that event appropriate financial, institutional and other policies .will need to be dlevi;sed to meet the situatin. At ths pointU it is too early to tell what will occur in a transition to a new industrial envi- Xoo lurig oUne roarth Plan perioo mnaia nopes to aouoLe installea electric power generating capacity from 10.17 million KW in 1965/66 to 20 millon an in -hi0/71. This compares with actual percentage increases in each of the three preceding five-year periods of 55 per cent, 65 per cent and u per cent. The Fourth Plan investment in power is estimated at Rs. 2,080 crores, all but Rs. 50 crores of which would be public invest- ment. The proposed allocation of proposed public investment by purpose would be: Generation Rs. 1,150 crores Transmission and distribution 605 Rural electrification 250 investigations, etc. 25 Total Rs. 2,030 crores - 47 - JLt UuV(dU[(dtj Luv un grenerbon i iairly low in relation to tne planned increase in capacity - much lower than during the Third Plan period. Thi is partly because of a large spl1Lover of uncompleted projects from the last plan period and partly because the Fourth Plan has a larger sare of thermal and smaller of hydro capacity tnan tne Third, thermal power investment costs being generally lower per unit of installed capacity. The power program would also put proportionately more investment this time in transmission and distribution facilities and would make up for deficiencies of the previous five years in this respect. It also proposes more efficient use of power capacity through the integration of State power systems under the guidance of Regional Electricity Boards. Two other interesting aspects of the program include completion of 580,000 KW of nuclear power capacity in two plants already under construction, and the supply of Indian-built generating equipment- boilers, turbines and generators - for about half the new thermal capacity. These will be the first large generating units of Indian manufacture, although the first of these units will contain a high proportion of imported components. 100. Considering that these ventures into the production of heavy electrical equipment are new for India, and considering also that some of the manufacturing capacity is not yet completed and may still be a long way from smooth operation, it seems unlikely that the power program can be kept on schedule. Delays might be reduced if lags in production schedules could be detected in time to supply imports when domestic output falls behind. It is probably not realistic. however, to exoect timely adjustments of this kind to the extent that would probably be necessary to reach the targets of the power nrogram. )01 Nevertheless. some delays in the nrogram nholrl not h -riminq because the targets appear to be generous in relation to prospective requirements. Indian stndie of nnnit.v rouirc3 fn-" triang onnNmir growth rates suggest that the proposed increase in power supply would be adeauate for a somewhat higher Invo nd mand than so likely to develo in the Fourth Plan period. Broad relationshi]ps between power and economic growth must. of course, be adiusted fe ,artuninr reginal requirement and the load characteristics of particular power demands. It is for these reasons that thn Plan tarets are se sewhm-a on +h h-3i-e. It would appear nevertheless that the Fourth Plan provision for power is airn e in relat+ioni to~ vplan -4 prdutin 44. 4.---1 -- --'-.. ..'-' ~AI.4 U4.J. J.U Lt IAJL1A.tV it is p ub b9~ l,e.LJ that industrial demand for power will not increase as fast as assumed, givenLJJU tAe shrfllLeaniiat nte est AbLlihent . ofd eUccitL Y and production. 100. Prospects for a slower pace of power expansion than allowed of finances required for the power program. Whether this would also mean a lower foreign exchange requirement is difficult to say. here should be a reduction in some import items because of smaller power equipment Lqui1ements. On the other hand, this reauction may De offset to the extent that the domestic content of power equipment will probably not cemo up to Fourth Plan expectations. - 48 - Transportation 103* The Fourth Plan transportation program would do not much more than keep up with the traffic requirements which would be associated with achievement of the targets for growth in output and income. Some improvements in standards and quality are envisaged for roads and road transport in order to make up in part for past neglect, and there is somewhat more emphasis on rural roads. But by and large the main elements of the program are closely integrated with the freight and passenger traffic corresponding with the Fourth Plan economic growth patterns. 104. On the basis of the Plan output targets, goods traffic measured in ton kilometers is expected to increase by about 5q ner cent in the period 1965/66 to 1970/71. The heaviest tonnage increases would be in coal, iron ore, steel and fooderains. InnrenRes in nnssenqpr traffic nre fore- cast at about 35 per cent, with the most rapid growth in road (bus) travel and suburban rail transnort. l0. The bulk of the goods traffic exnansion is enoted to be on the railways, on which the volume of traffic is expected to go up from 11 billion ton kilometer inn 60AC/ to 170 biain in 1070/71 The projected growth in road traffic is from 33 billion ton kilometers to 6c) billion- WAhi1fletis- is less inaslteaon than for the rai-way it represents a proportionately larger increase. This reflects official nol i(-.-x rprn J 7J rr n n Szh ~-I - -P - - - - - - - 4 nA - 4 n e -;o1_ _ - '-'S SW LWCLUS kW.110P U cuiu 0 UCULA'_ .L. " J.E to relax some of the administrative restrictions and fiscal practices hihin the past have ten ded to favor raJl Over road transportU. AccolU1rdn to the projections the share of rail traffic will decline from about 71 1 %s .~ J CLUUtJLL tJU yul- u~tt-1 U Lli J_y ( U/ J. E;Ulu UhaL of. roadU trans- port would increase from 21 per cent to 24 per cent. Other means of trans- port are projected to remain at about 0 per cent. reninUg comrp_letionV1 of-L regional transport studies which are now under way, a more precise determi- naion of the econoicaLly appropriate distribution of investment among rail, road, coastal shipping and aviation has not been possible. It seems unikely, however, that the proposed program involves any serious mis- allocation of investment among different modes of transport. It does seem pWosule, however, that the proposed allocation for rural roads is not adequate in view of the important contribution which such roads can make Uo the agricultural production program, a matter not sufficiently appreciated in India. 106. The traffic projections have been translated into physical and financial investment requirements, taking account of the commodity com- position of traffic, its length and direction of haul, import and export patterns, and special requirements such as expansion of rural road services and overseas shipping for example. In total the Plan provision for invest- ment in transportation comes to Rs. 3,250 crores (excluding communications, tourism and inland water transport). Next to industry this is the largest sector of proposed investment in the Fourth Plan. Actually this figure is an understatement of the planned net investment in transport since for the purchase of ships only Government contributions toward installment payments within the Plan period are included rather than total cost. Inclusion of the total would add about Rs. 145 crores to the total. The costs of air- craft purchases may also be understated sinc7e they appear to have been calculated at the pre-devaluation rate. Furthermore, that part, of investment - 149. - in portsc whichVis to ben f-inane -- -o' resources n1- texCeSS Of replacement funds has not been counted. The allocation of total Plan nvesment (adjsted for the undersucaements) among the different modes of transportation is as follows (in crores of rupees): Railways 1410 Roads 70 Road Transport 700 Ports 264 Shipping 236 Civil Aviation 160 73-0 9107. Although a very large part of India's proposed investment during the Fourth Plan period, the transportation program appears to be tightly scaled to the targets of increased production and traffic. Indeed, even with the proposed additions to capacity the transportation system will still be pressed to meet traffic requirements if India's production objectives are realized. There is, of course, the possibility that the proposed investments in international shipping and aviation could be scaled down with a corresponding greater reliance than contemplated on foreign facilities. These, however, are seen as profitable and needed additions to India's foreign exchange earning capacity. Some considerations in this respect with regard to shipping investments are discussed below. 10. Some of the more important elements of the transportation program may be briefly described, For the railways, over 40% of proposed gross investment is for rolling stock including locomotives. Imorovements and renewals of line capacity; including double tracking, track and bridge replacements, electrification and other works woiild take about another 40 percent. New lines account for under 10 percent and a number of mis- cellaneous rouirpment makp- nn th- roct 1.10. Thn rnri, nnrl 1 rnnrl sr prorn areliv(idedanmnng then Center and the State Governments and the private sector. The Center effort will hP nonnPPnt maA+.1v nn illinr imYnv+_an+. ravnn in +hn network of national highways and on improving the presently low standard insufficient pavement strength. State programs, which are still being worked out in detail, would1, nlso include both1 extensin andl JiproV1vAen of State roads with particular attention to rural road construction for which 20 percent ofStaezoa invsten is to be allctd This i welcome shift in emphasis although the funds that would be available for . Je UtL ULI.0 PLVDJ..;jUL.UU WUU.U d.L-UW LUL U-Ly a UUMUMUidi UUg11- ning on the heretofore relatively neglected rural road problem. The private secoU isO APueu O iou undertke mous of Me expansion of road transport capacity. At present the commercial vehicle fleet consists of about 250,000 trucks and 70,000 buses. The increase needed to handle projected traffic growth is estimated at 205,000 vehicles. In addition, vehicle replacement requirements are estimated in the period 1966/67 to 1970/71 at about 95,000 so that the total num=bcr of commercial vehicles needed for the program would hA Aboutf Inn nnnC 711M pIni 4C +^~ f%k+n4V% +Aconb+4Vn~11r -P^ dq^mn+A- production and it is estimated that this will require an increase in anni-a outp+ fPm i 35,000 4- -16f/44 + abAou 8nnnA by 170/71 exists at present, especially at Bombay, Calcutta and Madras, and in- cr aiJLg L"-And.]_LngA capacJ.LIJy .L.LL.IMA C%uU J ;U 1±±±±L11UU 11 Vji~~ .L ucu-6 ul7)/ A to about 80 million tons by 1970/71. In addition to major improvement of the auve-mentioneu ports anu ausu Of VishaKapatnam C 1och1, 1urcigaU aU Kandla, a major new port is proposed at Haldia near Calcutta, and the gl2erage ports of uticorin and Mangalore would be converted into deep draft ports. The most important single element of expansion in port cargo-handling requirements is iron ore, exports of which are lorecasu in the Plan to double from the 11 million tons in 1965/66 during the Plan period. Other important projected increases are in fertilizer, 3t millon tons; petroleum, 3.3 million; coal, 1.2 million; and general cargo 7.9 million. 111. The main element of the program for shipping is the acquisition of 1.7 million GRT of additional ocean going shipping tonnage which, allow- ing for replacements, would increase the Indian fleet from 1.5 million in 1966 to 3 million in early 1971. A small part of this increase would be acquired from domestic production but most of it would be purchased abroad. The shipping program also provides for a small increase in coastal vessels. At present less than 15 per cent of India's foreign trade is carried in Indian flag vessels. The Indian shipping fleet is divided among 13 well established companies with long experience. The largest of these and one of the smaller companies are government-owned and the remainder are private. They are all full members of conference agreements on lines between India and U.S., U.K./Continent, Japan, Australia, Middle East, USSR and Poland. 112. The program for civil aviation consists mainly of additional planes to carry prospective domestic and international traffic and, in the case of Air India, to keep up with changing technology in competitive international air operations. Air India expects traffic expansion of nearly 90 per cent by 1971 and Indian Airlines foresees an approximate doubling in the same period. The Air India program consists of the addition of 5 subsonic jets while Indian Airlines proposes to acquire 28 medium-range aircraft. The aviation program also includes Rs. 360 million of investment in ground installations many of which reflect commitments made in agreements with the International Civil Aviation Organization. l1 As noted. there is not much "give" in the transportation program if it is to measure up to the traffic which would be generated by Plan production targets. There are. nevertheless. parts of the program which may be difficult to carry out within the Fourth Plan time limits. The narticular nroblem areas in this resnpnt are in road transport and ports. In road transport both vehicle producers and truck operators face iiffimiltv in financing the Pynansion of their onerations Tn the oase of ports the problems are physical. Progress in the detailed planning of nrt.Pannnsion ham een slow, and it 4m n+. ean +.hn+.+hp rpminina time available in the Fourth Plan will be adequate for the building of the additional port capacit projeted. Nor is it catth o estimates are adequate. - 51 - U. There is room for doubt about the wisdom of the proposed expansion of qhinninr canity On the hasis o- ^prntr Pr'-I+ _n+no the proposal appears sound from the standpoints of both a satisfactory ret.urn on Jmnvestment anel a crernifi^-+ farabale co-ribtio to th1e balance of payments. There is, however, uncertainty about future freight rate fncr twoY 7re2c^- Vc,+ 44,1- -*4A _.P -- is likely to release large shipping tonnages and thereby to depress rates. now employed in military supply operations. These developments could deprss AtO oU mAu 1n oCLme tise to come the margin Ueween co;ts and rates would provide a totally unsatisfactory return on proposed * We have ittle to add here to what has-already been said with respect to Family Planning. The Plan provides unlimited funds for this vuqoe , adequate supplies of the materials required are assured, the beginnings have been created of an effective organization and a suffi- ciently large corps or technical and other personnel to conduct a genuinely large-scale, vigorous and intensive program. There are, and there will be, problems to be solved, largely in connection with the mobilization and employment of qualified personnel and possibly in motivation of some sectors of the populatibn although, as yet, there is no evidence indicating how important this last problem will be. Never- theless, we are encouraged to believe that the program may succeed in reaching its goal of some 25 million contracepting families in India by about 1972, in which case a significant decline in the rate of population increase may be experienced in the years which immediately follow. Economic Cooperation Between India and Pakistan 116. The Plan documents make no reference to one of the important economic opportunities before India - namely economic cooperation with Pakistan. The published Plan documents may not be considered the appropriate means of initiating either action or public discussion of action in this direction. There are, nevertheless, a number of areas in which economic collaboration between the two countries might well be economically advantageous to both. Some of these areas which might be explored are the use of one another's natural fuel resources - Pakistani natural gas in India and Indian coal in East Pakistan; trade in other commodities such as Pakistani cotton, rice and jute and Indian cement and machinery; coordination in the use of transport facilities and water re- sources; and agreement for coordinated marketing of jute manufactures. ,Q44arD ut, less extensive opportunMes exist for economic cooperation with other countries of the region including Ceylon and Burma. Conclusions We have indicated that the Plan embraces the strategy required lor a successful attack upon the two major problems which India faces: that of sharply increasing, approximately doubling, the rate of growth of fooa and other agricultural production and that of sharply reducing the rate of population increase. The Plan appears to us to give these two programs the priority which they deserve, although the foreign exchange resources which it has estimated will be required for the agricultural program will need to be augmented. We have also indicated that the Government of India has, since the beginning of the Plan period, taken critically important economic policy steps in devaluing the rupee, decontrolling and liberalizing imports, and significantly relaxing govern- ment controls over industrial investment and production. He have indicated, furthermore, that these latter steps may have positive consequences for production and export as well as import substitution. We cannot predict the size or the precise nature of these consequences and we have suggested that the Plan itself may not take them adequately into account. On this score the output and income and export forecasts of the Plan could turn out to be over-cautious. On the other hand, we have suggested that the specific industrial investment program contemplated in the Plan. particu- larly in the public sector, does not seem fully to have been influenced by the new policy directions and may need some re-shaning in its particu- lars. We also have judged that some of the particular outputs forecast will not be achieved and that some of thn investment Axnanditures forecast in the industry, power and transport sectors may be overstatements simply because more time is likely to h runnired for the snpeifin nlanning and execution of some of the projects. Ue have also indicated that in general we believe that. proviead naee amon+ c aptnal nflow and, more specifically, foreign aid are available there is a good prospect that Something approanhing +hInaval r;ae of _u+ .P no+ut+ nome forecast can be achieved. Finally we have suggested that achievement of alI of' these_ resui+_ ltsnepndsc vry heanvily not ony n -"1-" in the new policy directions and effective implementation by the Government have indicated that the amou)ts required seem likely, in the aggregate, to ~ ~ ~ ~ & bel aprCmaeyth munsal'-' b h ln This amount L1r'1-I conceivably be reduced by some recasting of the industrial investment r r., " a.Y Svo U11cULLoVU Irg 1o1 Ai11lLL plUfirlcil U4J WU WUU-LU 11o expect the reductions to be appreciable. The internal savings problem culdA be eased and reuctions os ae signuicance coula be maue in foreign exchange requirements if it were possible to reduce defense expeniUUres. U t0 s difcult to judge wnat the ellects woula De of the provision of significantly less aid and we have no guidance in this matter from the Government of Inia, but the Government would in this event face very hard choices. These choices could be made in such a manner that they would nave relatively small effects on the growth of output in the Fourth Plan period but larger effects on growth in the post-Plan period. Choices could be made in a different manner and the final outccme of possible alternative choices is problematic. 118. We address ourselves in the next and concluding section of this report to the matter of aid requirements in the Fourth Plan period and more specifically in the current year. - 53 - AID REQUIREMENTS In the Fourth Plan Period and Beyond 19. The total capital inflow required during the Fourth Plan period is, according to the Government of India estimates, almost p0.3 billion, gross of debt service estimated at $3.0 billion 21/ and including food aid eUmateU inlusive of freight at approximately zl.4 billion. (oee Table 1, page 31). These figures represent actual disbursements required. It may reasonably be estimated, however, that the carryover of undisbursed commit- ments will be the same at the beginning and the end of the Plan period, so that the $x1.3 billion figure can be taken to represent new commitments required. 22/ If food aid (including freight) is excluded the figure is a 11ttle more than $8.8 billion. The Government has estimated that approxi- mately $500 million may be provided by private capital investment. Gross non-food aid required is therefore estimated at approximately $8.3 billion. The Soviet Union has already agreed to provide $1.0 billion of aid in the Fourth Plan period, including in the total the undisbursed portion of commit- ments made during the Third Plan period. 23/ If Fourth Plan aid commitments from other Eastern European countries (Poland, Czechoslovakia and Yugoslavia) are assumed to equal those made by the same countries in the Third Plan period, namely $70 million, and if non-food Fourth Plan commitments by other non-Consortium countries are assumed to be $30 million as in the Third Plan period, then the remaining non-food aid commitments required amount to $7.2 billion. This is an amount 27 per cent higher than the amount pledged by the Consortium for the Third Plan period. 120. If $7.2 billion of gross non-food aid were to be provided by the Consortium, it would amount to $h.9 billion in net aid, since principal and interest payments due to Consortium members during the Fourth Plan period are estimated at $2.3 billion. This $2.3 billion includes A1.9 billion due to Consortium members on commitments in existence April 1, 1966. If the terms of new aid commitments should be much that no nrininnl or interet wore navable during the Fourth Plan period, then the gross aid required would be reduced by $0.4 billion to 16.8 hillion; not a vani r' ourse rma n n. bIlinon. At this level gross Consortium aid in the Fourth Plan period would be 24 per cent higher than the amount pledged hv the Connortium for the Third Plan period. As we have already indicated, we believe that with approximately this amount of' gross non-f^od id fro P, theP---- Consoti ct $. 2 bilo or _--M_- what less if the terms are improved, and with continued movement by India in 21/ AsALI indicated earlie the %iP_r of $3 ..0Lon, icue$25llion-. estimated to be due on account of aid committed (including undisbursed by the GOI to represent service on new aid commitments expected during 22/ The carryover of undisbursed commitments as of April 1, 1966 was approxi- mately $2.1 billion. This figure does not include Consortium pledges which had not been translated into commitments, nor does it include food aia commitments. 23/ Our assumption is that the entire 11.0 hillinn will he r1iqhur.qPr in the Fourth Plan period, since it includes the carryover of Soviet aid from the Third Plan Deriod. the no pol4iy diretion and effect'V-1 Im'ementation, india can ake solid economic progress in the Fourth Plan period. We should make clear that even though, in our Judgment, there may be a lag of about a year in the achievement of the overall physical targets for industrial and agri- cultural production, and some modest shortfall in the overall income growth achieved by 1970/71, we believe that aid commitments of approximately the magnitude indicated will be required and appropriate in the period April 1, 1966 to March 31, 1971. 121: One can only speculate with respect to the longer term perspective. We cannot, however, share the degree of optimism with which the Fourth Plan documents view this perspective. They suggest that given continuous growth o tne economy at about the forecast Fourth Plan rate, India's gross aid requirements in the Fifth Plan period would be significantly smaller than in the Fourth Plan period and its net aid requirements of course smaller by a wider margin, and that by the Sixth Plan period gross aid required would be quite small, substantially less than debt service in that period. This Indian projection assumes for the Fifth and later Plan periods, a high rate o0 internal savings, a high rate of growth of exports and a growth of imports so low as, in our view, to be incompatible with the rate of growth of output wnich is anticipated. Our difference, however, is one of degree. We think it entirely possible, although a forecast would be idle, that India will be able to sustain a satisfactory rate of future economic growth including some improvement in living levels with gross capital inflow in the Fifth Plan period at approximately the level required in the Fourth and with the modest beginnings of decline in this level after 1975/76. 122. The growing magnitude of India's debt service obligations bears directly on this outlook. If aid commitments from all sources during the Fourth Plan period should be at approximately the level discussed here and on terms similar to those of 1965/66, then debt service obligations would be approximately $3 billion in the Fourth Plan neriod and won1d rise to $5 billion in the Fifth Plan period. They would be in the neighborhood of 30 per cent of prosnective exnort receipts in both periods, assuming very healthy export growth in the Fifth Plan period, and they would be equal to approximately 30 per cent of reouired gross canital infiow in the Hurth Pln period and a higher percentage in the next, unless gross aid were to increase very substantially in that next neriod, Obviously any improvement which can be made in the terms of new aid will moderate the growth of debt and debt service and improve the outlonk fr tho years ahead Re d4cto +h interest rate on debt outstanding would have the same desirable effect. It also seems clear that if there is not improvement in the terms of aid, ther the amounts of gross aid required could not begin to decline until after 197/76. if then and in addition debt service will have become a completely unwieldy element in India's balance of payments. 123. The figures cited above make clear that an improvement in the terms of aid granted during the Fourth. Plan period would sMAIle-what reduce the amoun of gross aid required in this period. This reduction in itself would reduce the amount of debt on which payments were due in the subsequent period, and unless the new terms were perverse would consequently also reduce debt service in that subsequent period. Immediate Aid Requirements 12h. The pressing problem for India and for foreign sources of external financing for India is the problem of immediate aid requirements. India in 1966 set out on a new policy course with respect to imports. It requested and received the support of the Consortium in the form of commitments of $900 million of non-roject aid designed to assist in meeting the demand for maintenance imports which it was estimated would materialize subsequent to devaluation and nartial decontrol and liberalization of imports of pro- duction materials. During 1966/67 it has also received new project aid c"mmitment. from somp of th Conortinm members as well as other donor countries, although no great emphasis was given to this type of aid. The question t+ this noint. is within the contpxt of the Fourth Plan. and in the light of actual developments thus far in 1966/67, what aid commitments are reqnired and esilable at th3 tim and snificallv for the year 1967/68. 125. As we have already said, implementation of the new policies and SUJ."'Y d UOU I.U'C'aL .U _LQ~U.J have occurred or new judgments to be made. We have no reason to doubt, suuject UO qu Ua"-.LUc2U.LV1VU~ J" .L.L U_LOLU0O LJU-VV,44 ". consequences of the shifts in policy can occur. Hence, it is most important to maintain the external support required for the import Ueoto-ieaia tion program and simultaneously to begin to provide the project aid required ior the investment program of the Fourth Plan. For reasons which we shal explain we believe that in addition a substantial amount of food aid is required immediately, and that it is the most critical aid need at tis time, on which the success or failure of the entire new policy and program probably depends. 126. At this time in India industrial production actLvy sO, U the whole, stagnating. Although the picture is both mixed and cloudy, it seems that, largely as a result of high and rising food prices, uemanu ±I Votr consumer goods has declined and as a result production of such goods has declined and investment in the expansion of capacity for such production is not going forward. Furthermore, Government, in the effort to hold down the deficit in its budgetary operations, has cut its investment expenlitures, so that demand for and output of many types of capital goods produced by Indian industry has declined, or at least has not risen. The further consequence has been that private sector investment in the expansion of capacity to produce capital goods has also declined. Prices of food, as a consequence of food shortages and the relatively inelastic demand for food, continue to rise and the resulting pressure on wage rates has been pushing other prices up as well. The Government has been attempting to deal with this problem of rising prices by as restrictionist a fiscal policy as it could manage, attempting to hold down its total spending and its total deficit by restrict- - 56 - ing its investment expenditure. It has been especially cautious in this regard because it has taken steps to permit this year a sizeable expansion of bank credit to the private sector. partly in recognition of the need for financing of a larger volume of and higher cost imports and a higher level of industrial operation on the basis of these larger maintenance imports. As of this time, however, the flow of maintenance imports has not increased. It may be that there simply has not been sufficient time for an enlarged flow of imports to occur and that inventories were too depleted to permit an immediately higher level of onerations in anticipation of this flow. It seems increasingly possible, however, that the import licenses issued have not been ranidly ntili7ed and that inventories continue to be husbanded simply because of deficiencies in demand. 127. So long as the food bottleneck persists there is probably no alternative nopn to the Government. nt.+.n oipue as restrictionist a nolicv as possible, in the attempt to restrain continued rapid price rises, despite qt.AanP+Ann in ornrwi me-+Ay -tr nT~i ~ ,rf' +.hiq q itivation it is entirely possible that the foreign exchange resources provided to finance intended, in the interests of expanded and more efficient output. This would defeat the.. pu=F-es L' thU eauaindcoto1peaKn5n ol prevent the growth of output which is the objective of the entire Indian of the food shortage, no positive effects in the form of increased output policies run the danger of being discredited and abandoned. 128. it is for this reason that we urge that the food bottleneck be broken and we stress the critical importance of immediate action to break it. At this time this can be done in significant measure only by increased food aid shipments. With sufficient food supplies to meet the demand for food without higher, and preferably with somewhat lower, food prices, Government investment expenditure could safely be expanded somewhat, demand for both investment and consumer goods other than food would rise, the level of pro- duction would rise, the existing recessionary mood would change, and private sector investment to expand production capacity, especially of capital goods, would increase. Obviously this could go beyond the levels desired and ap- propriate, but at this time the problem is that it is below those levels, with the anomalous result that there exist unused production capacity, unemployed labor, and, possibly, slow use of foreign exchange which has been made available to finance imports of production materials. In our judgment food aid which would permit India to acquire from abroad approximately 10 million tons of foodgrains in calendar year 1967, and as much as possible of this amount early in the year, would be adequate for the purpose, espe- cially if at an early date the Government of India could be given assurance that this total amount could be counted upon. 129. As of early February 1967, food aid commitments had been made which provided approximately 2.1 million tons of foodgrains although they left for India payment of most of the cost of ocean shipment of these grains. In addition India had purchased approximately 200,000 tons. Late - 57 - in February the United States Government made a further food aid commitment in the amount of $135 million which is expected to provide, in the 5ecuu calendar quarter of 1967, 2 million tons of foodgrains valued at $122 million plus some fats and oils, but which will not finance ocean freight. The Congress of the United States was also requested to authorize additional 1967 food aid in the amount of $190 million, estimated to be sufficient to cover the f.o.b. cost of up to 3 million tons of foodgrains, provided that other countries appropriately matched this effort. It is understood that matching "food aid" may be food itself or aid funds which can be used to pay for ocean freight on food, or for the purchase of agricultural inputs. To the extent that "food aid" is in this last form, it will help to provide the necessary quantity of food if India can use equivalent amounts of money for the purchase of food. If the outcome of this United States' initiative is that $380 million of additional food aid is provided, then India will have received approximately enough food aid in 1967 to finance the f.o.b. cost of the 10 million tons of foodgrains which we estimate to be required. India will need to pay out of other than food aid funds (a) for foodgrains (wheat and rice) commercially purchased, largely in accordance with "normal market- ing" obligations, and (b) for almost all of the ocean shipping costs on foodgrains provided by aid. The Government of India estimates that expendi- tures under (a) will amount to $57 million and under (b) to $108 million, a total of $165 million. Non-Project Aid 130. Demand for maintenance imports in 1966/67 was assessed by the Bank early in the fiscal year at about $2.500 million and it was estimated that in addition $100 million would be required to finance imports of capital goods not finanned by nroiect aid. These figures excluded all food imports, however financed, as well as cotton and other commodities financed by PT. )9n- Resniirnes Tqhinh the (vernment of Tndia could count on to meet this demand, and on the strength of which it could make the commitments involved in licnning the imnorts. demanAeA were a. a. at! (a) M1h million which would remain from its prospective 1966/67 foreign exchange earnings after L_JA/~ __ " ,-~ __/ ~n-rv -,rpon d after navments for PL 80 freight, on debt, and profit remittances; plus (b) the amount of i+.o non+ve 1OA7/AA fPrnein agexhnng arnJng. which wmnld remain after similar 1967/68 payments, which amount we estimated at $1,075 million. The osm P f the tr Atms was $1 A001 million, hnntrna IQnn millIn as the estimated amount of the additional resources required to cover the payments which would need to0 be madLe duJ_rin 1966/67 -AndZ 6/8ontL$,00.4~nr~~1ne expected to be issued. We reproduce here the three tables summarizing these *1.& * a .IJ± LU CLJ.I~ L LL . LL.Q J1JO.U O J-~~SJ~S~~~-- issued up to the end of October and the applications in hand, that licenses issued in l9UQ/67 for- mualitenacet iJVports: Plus c.aital.C. goods no finance by project aid will total $2,392 million, or approximately $200 million less than estimated in7barly 1966. information is currently being oumpileAU on the extent to which orders have actually been placed under these licenses and on the probable time of arrival of gooas. Applicauons for supplmentary - 58 - TA,BLE 2: Pew Consortium Aid Commitments Required in 1966/67 ($ million; Ex PL 480) Demand for Imnorts Not Financed by Project Aid 1 - Estimated Demand for Maintenance Imports 2,500 1/ 2 - Estimated Demand for Capacity-expanding imports Not Financeable by Project Aid 100 2/ 3 - Total Import Demand Not Financable by Project Aid 2,77 Existing (April 1, 1966) Resources Against Which Licenses Can be issued )4 - Net Free Foreign Exchange Available in 1966/67 257 3/ 5 - Net Rupee Trade Exchange Available in 1966/67 357 TV 6 - Unobligated Non-project Aid Commitments C 7 - Total ExistinF Resources =1 Anticiated Resources 8 - Anticinated Net Free Foreign Exchange Available in 1967/68 75/ 9 - Anticipated Net Rupee Trade Exchange Available in 1967/68 6 10 - Total Anticinat.ed Resources c Total Resources 11 (7 + 10) 1,89) Cap to be Filled by New Aid Commitments 12 - (3 - 11) 13 - Plus Minimum Amount of 1967/68 Earned Foreign Exchange Which Must be Reserved to Meet Payments in 1967/68 on Licenses Issued in 1967/66 200 L - Total New Non-project Aid Commitments Required in 1966/67 9I 8/ 9/ 1/ Calculated as follows: 1 - Maintenance imports licensed in 196h/65 = $1,615. 2 - Assume demand (at 1964/65 effective exchange rate) was b0% higher than allocations =$1,615 x 1.0 = $2,261. 3 - Assume demand (capacity requiring imports) has increased by 5% per year or 10% in the two years - $2,261 x 1.10 = $2,087. 0 - Assume price increase of 68% (40% devaluation). 5 - Assume price elasticity of demand = -0.2. 6 - Demand will then be reduced (by shift to domestic supply.sources) by 13.6% = $338. 7 - Demand is then $2,487 - $338 = $2,19. E - Assume speculative and re-stocking demand = $000. 9 - Total demand = $2,550. 10 - This is 58% higher than 1964/65 allocations 11 - And estimated base demand ($2,149) is more than 1/3 higher than 196h/65 allocations. 12 - PL O8n cotton supplies $50 million of this demand. 2/ GOI estimate reduced by $37 million. S/ See Table 3. ,4/ See Table 4. 7/ From Table 3. 8/ F'om Table 4. 7/ For commodities such as foodgrains (other than P1 480), raw jute, chashew nuts, some P.O.T., etc., which involve quick delivery and payment and are not ourchasable from aid-giving countries. 8/ Figure obviously requires pre-emption of major part of 1967/68 foreign exchange earnings for payments on 1966/67 licenses. Clearly. therefore, 1967/68 licensing will require substantial nonproject aid in that year. 9/ Additional licensing of S2 million equivalent from rupee trade area possible. Sourcet Bank estimates as of early 1966/67; see paragraph 130. - 59 - TABLE 3: Free Foreign Exchange, 1966/67, 1967/68 and 1968/69 ($ million) ,-1LIy Q4 47I- 1OAR /40 Receipts 1. Excports 1300 1380 14uu 2. IIF drawing 187 - - 3. U.K. Balance of Payments Loan -- - 4. Debt Deferment - - Total 1057 1380 140U Less: 5. Debt Service -317 -365 390 6. Invisibles and private cap. move - 0 - - 7. Profit remittances - 69 - 70 -70 8. P.L. 480 freight -130 - 70 - 50 Total -51 5 9. Balance available for import payments 971 875 970 10. Less: payments on licenses issued in earlier years -714 -675 -770 11. Balance available for payments in year on licenses issued in year 257 200 200 Source: Bank estimates as of early 1966/67; see paragraph 130. - 01 - TABLE 4: Rupee Payments Trade - yoo/o, _1yo(/oo ana 1yo0ov ($ million) 1966/67 1967/6 . 1968/69 Receipts 1. Exports 431 470 500 Less: Non-Import Payments 2. Debt Service 42 60 70 3. Balance Available for Import Payments 389 410 430 4. Less: Payments on Licenses Issued in Earlier Years 32 110 130 5. Balance Available for Payments in year on licenses issued in year lq7l/ 1/ - 1/ 1/ Plus .,2 millinn in ither onp or the nfhr yern of prinninil naymnts on debt deferred. Source: Bank estimates as of early 1966/67; see paragraph 130. - 61 - licenses may, according to the regulations, be requested whenever letters of credit nave been opened to the extent or 90 per cent of the license or shipments have been made to the extent of 70 per cent, or 50 per cent in the case of the rupee trade area. To date we have received no report that any applications for supplementary licenses have been submitted. 24/ The Lndian authorities believe, however, that such applications may begin to come in at any time. They are anxious to be in a position to meet this demand when it arrives. In the circumstances, neither they nor we are in a position to predict precisely when that will be. If there has in fact been slow and incomplete use of the licenses the demand will arise later rather than early in the course of 1967/68. The Indian authorities have not attempted to estimate precisely what the magnitude of the demand for maintenance imports will actually be in 1967/68 and we cannot confidently forecast it in view of the present uncertainties discussed above. If the shortage of food and the related need for caution in increasing Government expenditure levels persists until near the end of calendar 1967 when the next major food crop is harvested, then the actual demand for maintenance imports will probably be lower than either the Indian authorities or we anticipated earlier, and, contrary to all plans and desires. manufacturing capacity in Indian industry will continue to be under-utilized. If, as is desirable, food supplies should be quickly and significantly augmented and investment expenditure increased, or if that should occur for other reasons which we cannot foresee and do not predict. then the demand for maintenance imports will, as would be desirable, rise to levels which will be commensurate with much fuller use of existing industrial capacity. 132. In the present circumstances the level of licensing in 1966/67 gives no better basis for estimating the level of maintenance imports which might be demanded under such conditions of relatively fill i of apanity, or at least that major part of capacity which produces capital goods. With no information on ordArs nlnna n" q+.nn1-c it is % n^cahlo .r 4^ men than revert to the earlier estimates of the probable demand, given reasonable buovancy in thp eoonomy On is hass, Amand fn mantn+a"n 4mprt in 1967/68 is likely to be in the neighborhood of $2,200 million. The Indian antiritiesq believei that the fig-re of $ e2 Io milli4 1 Jon is: more -111--e conditions of reasonable buoyancy in the economy. They suspect that demand for licePnsesn in 1Q66/67 wasz r-estricted by prodicer expetations of Limited demand and that, with an improvement in the general demand situation a __JJJ. C L W -L '.L.L.L' U A X . U CUV in 1967/68. Their view is that last year's Bank forecast of demand for - ~ V'- ~' LJ~L'J~ .L~ .LA CUL%A ~.k IMLUUU M.4C, U 4L.L1LAUIL Lil .J7UJ(1VU, will prove correct, although the distribution between the two years will bedt e ae moe inc to believe thau despite Lte Uepressed expectations of 1966/67 the initial post-decontrol volume of applications 24/ Since the writing of this report the Indian authorities have informed us that as of mid-January annications for qinnPmPntary licenses hqa been received in the amount of $98 million; these were being processed and sunolemental licenses were hing _iPr_ - 62 - ii 10A/AI7 io i% liL-a1% +.n ho arnllpq r-r P-wrpyrldp in 1907/68- Bth the Indian authorities and we are obliged to speculate about prospective demand for Liene we ha-e.1o firm or ~aw + e-ae ai for' psirlnt±Ain the volume of imports of production materials which would be required for re aonaolJ y Ifl-11..± u i zti. P...s. T-. A-;'.u -4-z ..fU.W +ULJ. "S4~ IS. i + -%r T .li irim stances we adhere to tho earlier estimate for 1967/68 of $2,200 million, recognizin tha thr sIU 1C;V_ inevitably considerLable possibiit- o rrrjn this estimate. 133. We call attention to the fact that this estimate fits well with tne estimate of maintenance import requirements in the Fout Plan period as a whole which we cited in an earlier section of this report. That estimate, which assumed full use of Indian iladustry*S capacity tu prouce capital goods, was, for the five-year period, $11.5 billion. The figure of $2.2 billion for the second year of the Plan period is consUent wi it. 134. In February 1967 the GOI attempted to forecast India's balance of payments in 1966/67 and 197/6. Table 5 presents these forecasts and also the Government's latest estimates for 1965/66. As the table indicates, the Government of India estimated that the loss of foreign exchange reserves in 1966/67 will, including net use of $137 million of IMF resources, amount to $227 million. As of February 10, 1967 the loss in the year had been $177 million. 135. As Table 5 also indicates, the Indian authorities forecast that payments for maintenance imports other than food, however financed, and other than cotton and other commodities financed by PL 480 (but including a small amount of capital goods not financed by project aid) will amount to $1,706 million in 1966/67 and $2,293 million in 1967/68. They also estimated that in 1967/68 after payments of $515 million on account of debt and invisibles, there would remain $1,270 million out of their export earnings. Of this, $165 million would, according to their estimates, be required to Day for food imports principally normal marketing purchases and freight on food shipments, not paid for by food aid (see para. 130) so that $1,105 million would remain available to pay for maintenance imports. -In addition, the Indian authorities estimate, some $480 million of the 1966/67 $900 million non-Dro.iect aid commitments would be available for payments in 1967/68. As the table indicates, $240 million of the $900 million is estimated to have been used for narments in 1966/67. leaving $660 million available. The Indian authorities believe, however, that because the commitments were made -o lIte qnd be-.nqe they nre surrounded by restriction on their use, only $480 million of the $660 can be used for payments in 1967/68 and $180 million will he I nehht for thiq nurnone oniy in 1968/69. On this basis their estimate is that they will have available to pay for $2,293 million of 1967/68 maintenanc ipos n a t.q1 nf M 9 million. ronsistinL of the $1.105 million mentioned above out of export earnings plus $480 million out of noAA/A7 4 oA onmitmpn Thair indicntp thprefore that $708 million, the difference between $2,293 million and this $1,585 million, will need to t be par by disburse nts out of $n 1 i7/l non-coect ii. The r suggest further that so large an amount as $708 million could be disbursed in r)4,7 14 out ofP -1c47 /Ap no-pojc A cmn- +Ynpn,c nlyI i f aqsuhstqntial - 63 - TABLE 5: Government of India Estimates of Balance of Payments, 1965/66-1967/68 1/ ($ Million) 1965/66 1966/67 1967/68 1. TImor+s (ci.. 2, 03 301310 14O Food imports (aid-financed and other) 798 791 721 Non-food imports financed by PL 480 66 36 60 Other Maintenance imports 2/1,291 1,70 2,293 2. x-orts (f.o.b.) ,i __ 3. Trade Balance -1,109 -1,uo -1909 4. Other Payments -Joo -427 -515 Interest on foreign debt -139 "11 214 Principal payments on debt -176 -223 -235 Repayments to I.M.F. -75 -50 -57 Other services and capital +4 -3 -9 5. Overall Deficit -1,57 -2,175 -2,424 6. Financing of Deficit 1 547 2 175 2,24 Food ai n AS3/ Project aid 848 777 620 PL 480 aid (other than food) 66 36 6n Non-project aid (1966/67 and prior yeax' co-11mit-nents 137533480 I.M.F. drawings 137 187 - ( = increase) -101 90 - ,7/6u Nun-project aid 4/ - 4 1967/68 "Cash" aid 5/ - 277 l/ Prepareu iu Fevruary 1.7. 2/ Including small amount of capital goods not financed by project aid. / Including (a) commitments already made as of February 2, 1967, (b) $380 million of commitments anticipated in accordance with February 2, 1967 proposal of President johnson, (c) anticipated commitments for January-March 1968. 4/ Provided out of new commitments of $900 million. W7 Provided by debt rescheduling or refinancing. - 64 - part, $277 million by their estimates, were provided as "cash", either by resneuling or refinancing of debt service payments. The balance of the gap, namely $431 million, can be met, in their view, by new non-project aid commitments of $Y00 million, provided that these commitments are made early in the year and are free of most of the usual restrictions. Thus total non- project aid commitments, they suggest, should be $1,177 million. 136. We do not concur in this Indian estimate of 1967/68 non-project aid requirements. We do, however, agree with the judgment that India will not be able to meet its 1967/68 payments obligations on account of mainte- nance imports unless a significant part of the non-project aid it receives is in a form which makes it as freely useable or almost as freely useable as its free foreign exchange earnings. It has been apparent for some time in considerations of external assistance for India that in the nature of the balance of payments problem it is necessary to provide non-project aid of a quick-disbursing character, and that to the maximum extent possible it should be free of commodity restrictions and not country-tied. When a large proportion of maintenance imports must be financed by aid, it is extremely difficult to reconcile decontrol of such imports with country-tied and, more especially, commodity and otherwise restricted non-project aid. The combination of several types of restrictions which. in varying degrees of severity, surround the use of such aid in effect compels the Government of India to operate a series of separate pools and sub-pools of foreign exchange and to attempt somehow to fit import license demand into this mosaic. It is difficult to do so and vet avoid the imposition of stringent administrative controls over imports involving exactly those inefficient Government-determined alloations rather than nrniePr Hiiion. whinh the Government of India, with Consortium encouragement, has been attempting to abandon. The avoidance of such contlin dos no+ demand that nll the forign exchange available to India be completely free of use restrictions. It does. how ver- reqiire thatn+ a l arge pool^ of freenly- useabe, fCoreig"nexchng"e be available than at present. 137. Another reason, closely related to the first, is that a significant pA-rt. of I ndAia'sQm 1^ m ma- -4 4 ties - cmoA+- -~ ar o produced in and cannot be purchased in aid-giving countries. Among the (-nmmnrH+.JP_. %rTh4e ,4 z4 +*kn^~ "^+ nirn4ln n.1e + n1l or ot--4 41 "l-1 4. ,-P' -------------- n.,-. _v L _L aw _1.. . AL V V .J.WL .LAA Q" U.J. cient quantity from the aid-giving countries are: crude petroleum, copper, In the case of still other commodities which are available in aid-giving countries, restrictios 4-~---- -e_sons o project aid prevent the use of this aid for their purchase. Some agreements exclude specifried commodities, VUAUL U&Lii~tl- specif-y a limitedU nUtube of eligible commodities. Agreements prescribe procedures which are sometimes culc lt et. iossb l for Inrian Mporteir b aoeLOW Or condiuionschif cult to meet. Some fix order or payment eligibility dates which exclude - 65 - substantial amounts of imports. Removal of many of these restrictive provisions would go some distance toward meeting the Indian problem. Changes in Government of India procedures and some greater ingenuity there would help. It is doubtful, however, that the problem can be fully met in the years immediately ahead unless a part of non-project aid is provided in "cash" form, as it would be by either refinancing or rescheduling of debt. We have already indicated that action to reduce the burden of debt service in the near future is in any case necessary, if debt service pay- ments are not to become an unmanageable element in India's balance of pay- ments. 138. Although we agree with the Indian authorities that a part of 1967/68 aid needs to be provided in "cash" form via debt refinancing or rescheduling, we do not, as we have already stated, agree with their esti- mate of total 1967/68 non-roject aid requirements. We believe, first that it should be possible to use more of the 1966/67 $900 million of non- Droject aid to effect payments in 1967/68. This would reduce the amount to be paid out of new commitments from approximately $700 million to $650 million or less. 139. Furthprmorp_ wA hplipvp thnt nitnt..ql nf tQ00 million of nw 1967/68 non-project aid, rather than the $1,177 million estimated by India, should be adematn to meet the remaiing prospective payments, provided that part of this is in "cash" form, that the balance is subject to fewer restric- tions on usp thnn t. npreent, and +.hat it is mp ivqi1hl1 Pqrv in the year. We believe, in short, that under these conditions it should be pos- sible to make yn men+s of $6f million r las out of $Q0 million of new commitments. 140. Our estimate can also be put in commitment rather than payments terms. It is o pu -,+ Able 6 M W1 - t t<-A 7 A- ++ +++ after various payments obligations other than those for maintenance imports resources to pay for maintenance imports in 1967/68. Payments on such enose ueu in dr1iter ylearS May- vDe in U11t nVLV,1Uoru1UUU u.L .u million but approximately $530 million out of 1966/67 non-project aid will be availa.ble for this,10 purpose. TUs more tha-(fn $50 1- milio may be aa;I able out of 1967/68 earnings toward the issuance of new licenses. Taking into account that actual payments on much of the y2,200 m"llion of licenses which may be issued in 1967/68 will come due only in 1968/69 when further I, I .-,,, - __ _t-'. _- _ _) nnn earneu resurces will ue avallaule, It would appear Unat an aUiunal gyu million of non-project aid in 1967/68 would be an adequate basis for issuance of the $2,200 million of maintenance import licenses which may be requesteu. We emphasize that this estimate is of necessity an approximation. If it should turn out to be high, an unlikely consequence, the only result would be that India's reserves might in the particular year increase somewhat or its obligations to the lAF be reduced. If they should turn out to be low then the matter of the amount of such aid in 1967/68 and related matters affecting the demand for maintenance imports would require reconsideration at some point late in the year. - 66 - TABLE 0: Estimated Non-Project Aid Re2uired in 107/00 to Meet Anticipated Demand for Maintenance Imports 1. Estimated demand for maintenance imports, excluding food 1/ 2,200 2. Resources available in 1967/68 (a) 1967/68 foreign exchange earnings remaining after payments on non-trade obligations and 2/ for food or freight on food. 1,105 (b) Portion of 1966/67 non-project aid ($900 3/ million) not utilized for payments in 1966/67. 530 Sub-total 1,635 3. Less: payments in 1967/68 on licenses issued in 4/ 1966/67. 1,109 4. Balance available in 1967/68. 526 5. Plus: anticipated 1968/69 foreign exchange earnings 787 rt-mnining qft.prm nnvmnt.q on nnn-trndie obligations for food or freight thereon and after reservation of .WinO million for payments in 1968/69 on lienses issued in 1968/69. 6. Total resources against which licenses may be issued in 1967/6A .l I QfJS rA MR II UJ~ 'ISUL.LI'4 jJ *~%- or say 900 1/ Including small amount for capital goods not financed by project aid. Q- M1.i--'ke '7 / Our estimate. 1/ UUVeUtUU U India data. / See Table 7. - 67 - 1aDieTh j; imated roreign Excnange harnings, .L>yoUO-YOoUy (In US $ million) 1966/67 1967/68 1968/69 Receipts Exports 1,562 1,785 1,950 Less Debt Service -374 -hb9 -560 Net invisibles and private capital -3 -9 -9 PL 480 and other purchases of and freight for food -239 -165 -71 Repay to DIF -50 -57 -123 Total -666 -680 -763 Balance available for imort Dayments 896 1.105 1,187 Source: Estimated by Mission. - 68 - Project Aid 141. The Indian authorities have presented a list of projects and pro- grams which they believe to be at the point where loan commitments would be appropriate. This list totals $1.6 billion. We have not attempted to examine or evaluate the merits or the status of the specific projects and programs listed, but it is apparent that many are appropriate elements in the Indian investment program and merit consideration. We recommend there- fore, in the context of the total Plan and the total aid roughly estimated to be required in the Plan period, that pledges of project aid commitments in the amount of approximately $600 million be made for 1967/68 and that the project aid proposals made by the Government of India be considered on their merits by the individual members of the Consortium. This suggested magnitude while not precise is. in our judgment. broadly consistent with the perspective of the years immediately ahead. It would provide a degree of assurance to the Government of India with resnect to the amounts of total aid commitments which could be counted on in this year, if projects should have merit and be ready for imnlementation. With the nrivate invest- ment commitments of at least $100 million to $200 million which ought to be obtained in this year. the $6nn million amount shoiA nrmit the investment program to be carried forward but without so many new project starts that all flexibility in the sizn of hen n-nr m mni Ahde removed 112.In suim we hAve -nroended frv IO67/A8: () foode ainsffcin to deliver approximately 10 million tons of foodgrains to India in the 1967 OraTndar yanr (2) nnn^ojec+ aid commitme+of $9 000 millin, p-wrl in the form of debt rescheduling or refinancing; (3) project aid commit- Ments of app-roxima+tl $600 m-411ion .T 1-e ---4- +U,+* +l- - -~ I o-P aid is required to support India's efforts to accelerate the growth of its W. VL VVV1L VIA -L CLLO UL ) IJJU V AU UI JtW year. We have also suggested that this total amount of aid would permit **. .- L1 UV%U LVUJ ILJ "JLC±dJ CLUJH4JV'LU.Lt:- tV) CUUflLIIUU~ L U JJJQVU -L" un, neUW policy and program directions in which they have begun to move. What should be done in future years 3nould rest on actual performance. Mean- while a genuinely cooperative effort of the aid-givers and the Government ensure an adequate trial of the new policies which we believe offer the best promise of significant4 UnU1A"k prugres50 -L4. Throughout this report we have indicated the policies and actions on the part of the 001 which we believe are important to the effectiveness of Iua's development effort. These may be briefly summarized in the following paragraphs. Of first importance is the continuation of the new agricultural program with continued high priority to providing an adequate supply of the physical inputs required, including especially fertilizers, plant protection materials, high-yielding seed varieties and water. It also means renewed and more vigorous efforts to expand domestic capacity to produce fertilizers, - 69 - high-yielding seed, and agricultural chemicals and to enlist private foreign capital and experience in this effort. It calls for immediate steps to establish new and effective farm credit institutions and to provide them with resources, and continued assurance to farmers of satisfactory and assured minimum prices. 145. Continued movement in the new policy directions means also con- tinuation of the import decontrol and liberalization and, as resources per- mit, further steps along these lines. Along with this goes further relaxation and preferably elimination of the remaining controls over industrial invest- ment and production. 146. A vitally important part of the effort is further vigorous pro- secution of the massive and intensive Family Planning Program which has been initiated, and rapid effective response to all the personnel, organizational, motivational and other problems which will be encountered. 1L7. Continued effort in the new dirP.tinn rpnuirns al -o immediate steps to expand exports by ensuring that the existing export taxes are not an imnediment- that the exnnrt qnh.ir1v nrnarnm iq qnnrnrinit%r widp in application, that selected excise taxes discourage rising domestic consumption of exnortable products, that organized Peffnrt + find and denvlon markets and marketing channels are made and facilitated, and that the necessary steps to n~'~ nrr-+Atinn fnir rr414+n+a- tronspor of-potbepdcsar taken. 148. Beyond these efforts, all of which are under way, there should be aoncntrat4,~i of ef'frt ndatenio ownA lbsm more - -P-P c- -1-44 of existing facilities in industry, in agriculture, transport and other sec- ors,. and a c_arefUl consideration of '_-Cfor capacity in the light of the potential of existing facilities, and the extent ±11L-.LLI ~JUV. UIIVQV 1IL v±UJ.UU1i ti±±UJLVCLIIU U11CL PUA LL_L±L iptLubr er* noe snouu alsou ve vgor o u s effo r ts o re s tr a1n- puublic exp11enUU 1u_LUUrU which does not contribute to India's economic progress, including defense expenditure. Not~~ unrelatIedI tLo tI I th-eiaiiyof'u~icoea tion between India and Pakistan as suggested in paragraph 116. 150. Continuing efforts along these lines by India justify continuing support from abroad and provide a basis for the hope of significant economic progress by India.