Report No. EC - 1i1 This report may not be published nor may it be quoted as representing the view of the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION A REVIEW OF THE CAPITAL MARKET IN INDIA September 20, 1962 Economic Staff Prepared by: Shiva K. Govil Currency Equivalents 1 Indian Rupee U.S. $0.21 1 U.S. Dollar = Rs. 4.762 Rs. 1 billion $210 million The fiscal year in India covers the period April-4arch. Unless otherwise indicated, the reference in the text is to fiscal years. For instance, 1961/62 refers to the period April 1961-March 1962. A REVIEW OF THE CAPITAL MARKET IN INDIA Table of Contents Page Summary i - vi I. Economic Growth, Investment and Financing of Investment 1 II. Financial'Institutions 10 III. Savings Channelled through Financial Institutions and Other Transferred Savings 41 IV. Financing of Five Year Plans in the Public Sector 5 V. Financing of Capital Requirements in the Private Sector 61 VI. Market for Securities 78 VII. Structure of Interest Rates and Capital Yields 105 VIII. Role of the Central Bank in the Capital Market 118 IX. Concluding Remarks 127 Table of Contents (continued) Tables Included in Text Page Table 1 - National Income by Industrial Origin 1 Table 2 - Net Investment in First and Second Plans 5 Table 3 - Financing of Total Net Investment in the First Plan Period and During 1956/59 6 Table 4 - Total Assets of Financial Institutions 11 Table 5 - Savings Channelled Annually Through Main Financial Institutions 41 Table 6 - Savings Deposits of Scheduled Banks 44 Table 7 - Sources of Finance for Plan Outlays in the Public Sector (During the First and Second Plan Periods) 54 Table 8 - Third Plan - Scheme of Financing for the Public Sector 59 Table 9 - Financing of Fixed Investment in Large and Medium Scale Industries in the Private Sector 65 Table 10 - Sources and Uses of Funds of Selected Public Limited Companies 66 Table 11 - Estimates of Resources for Private Fixed Investment in Large and Medium Scale Industries in the Third Plan Period 68 Table 12 - Number and Paid-up Capital of Joint Stock Companies in Selected Years 82 Table 13 - Companies and Securities Listed on Stock Exchanges in February 1961 84 Table 14 - Growth of Listed Stock Since 1946 85 Table 15 - New Capital Issues by Non-Government Non-Financial Public Companies during 1956/60 92 Table 16 - Relative Importance of Different Types of Corporate Securities 94 Tables Included in Text (continued) Page Table 17 - Underwriting of New Issues 97 Table 18 - Holdings of Marketable Loans of Central and State Governments 100 Table 19 - Absorption of Loans by the Public Excluding Banks during the Period January 1958 - March 1961 101 Table 20 - Average Yields on Securities after Deduction of Tax 106 Table 21 - Interest Rates and Capital Yields at the End of July 1962 108 Table 22 - Loans and Advances of 14 Selected Banks by Rates of Interest at the End of 1961 109 Table 23 - Trend of Profits and Dividends in the Case of 1001 Non-Government Non-Financial Public Limited Companies 116 Table 24 - Reserve Bank of India and Cooperative Credit 124 Statistical Appendix (Tables 1 - 40) SUNMARY 1. As a result of the development effort undertaken under the Five-Year Plans, the Indian economy has experienced significant growth over the last decade. National income in 1948/49 prices is estimated to have increased from Rs. 88.5 billion in 1950/51 to Rs. 126.9 billion in 1960/61, repre- senting an increase of about 43 per cent over the ten-year period. The average annual increase works out at somewhat less than 4 per cent. Per capita income in real terms in 1960/61 was higher than in 1950/51 by about 18 per cent. 2. According to the estimates of the Indian Planning Commission, the ratio of net investment to national income went up from a little over 5 per cent before the commencement of the First Five-Year Plan in 1951/52 to about 8.5 per cent at its end, and further to about 11 per cent at the end of the Second Five-Year Plan. The ratio was even more than 11 per cent in the first two years of the Second Plan, so that the average ratio during the Second Plan period as a whole appears to have been fairly close to 11 per cent as compared to 61 - 7 per cent over the First Plan period. In absolute terms, total net investment in current prices amounted to about Rs. 33.6 billion over the First Plan period and Rs. 67.5 billion over the Second Plan period. About h6 per cent of total net investment under the First Plan and 54 per cent of that under the Second Plan was accounted for by the public sector. 3. M4ost of the investment during the First Plan period (about 94 per cent) was financed by domestic savings. However, with the rise in the level of investment in the following years, the inflow of capital from abroad in the form of utilization of foreign exchange reserves and external assistance showed a considerable increase and accounted for about 30 per cent of total net investment under the Second Plan. Domestic savings appear to have averaged about 8 per cent of national income over the Second Plan period as compared to 6 - 6- per cent over the First Plan period. 4. The Third Five-Year Plan, which commenced in April 1961, envisages total net investment of about Rs. 104 billion over the five years 1960/61 to 1965/66. Net investment in the public sector is estimated at a minimum of Rs. 63 billion, or more than 60 per cent of the total. The ratio of net in- vestment to national income is expected to go up from about U1 per cent in 1960/61 to about 14 per cent by 1965/66. During the same period, net domes- tic savings are expected to increase from 8.5 per cent of national income to 11.5 per cent. The requirement of external assistance over the Third Plan period is placed at a total of Rs. 32 billion. 5. The money and capital markets in India reflect the stage of devel- opment reached by the country. Alongside well-functioning financial insti- tutions, there exist indigenous bankers and moneylenders who play an important role in financing agriculture, small industries and trade and constitute the so-called "unorganized sector" of the money and capital markets. - ii - 6. With the rising tempo of economic development under the Five-Year Plans, the activities of financial institutions have recorded a marked expansion over the last decade. Important changes have been made in the organization and practices of the earlier institutions, and new institutions, including specialized institutions for the provision of long and medium- term finance to large, medium and small scale industries, have been established. 7. Among financial institutions, the commercial banks are the most important. They have an extensive network of branches and play an important role in financing industry, trade and certain other activities as well as in collecting savings. Most of the bank credit is made available in the form of short-term advances. A substantial proportion of the short-term advances to industries is, however, renewed from time to time and represents, in effect, lending for a longer period. Formal term loans, that is, loans sanctioned for more than one year continue to be of a relatively small order. 8. The largest commercial bank is the State Bank of India, the bulk of whose capital is owned by the central bank. The State Bank has established a large number of new branches in rural and semi-urban areas. It has also been extending its activities in the spheres of rural credit, credit to small scale industries, medium-term finance, etc. The other banks also have expanded significantly the network of their branches. 9. The postal savings banks and other small savings schemes have been successful in collecting substantial amounts. More than other financial institutions they have been able to penetrate into the rural areas, but the amounts collected in these areas are relatively small. 10. Life insurance in India was taken over by the government-owned Life Insurance Corporation in 1956. Apart from some decline in that year, new life insurance contracted in each year has been increasing substantially. Nevertheless, life insurance at the end of 1960 covered only a small fraction of the population (less than 2%) and the total amount of life insurance in force was no more than about 16 per cent of national income. There would, therefore, appear to be considerable scope for increasing life insurance, especially in rural areas. 11. Provident funds have become compulsory for a large number of employees in both the public and private sectors. In many cases, provident funds have also been set up voluntarily by employers. The coverage of provident funds is increasi ng steadily and they have been playing an important role in mobilizing savings. 12. The cooperative credit movement, which made very slow progress for nearly half a century after its inauguration, has been considerably strengthened and expanded over the last decade and the central bank is making available credit facilities to cooperatives at low rates of interest on a greatly increased scale. As a result, cooperative credit has recorded a marked expansion over the last few years. Its share in total borrowings of - iii - the culti. -ators increased from about 3 per cent in 1951/52 to 10 - 12 per cent in 1 59/60, and there has been some further improvement since the] 0 Savings collected by cooperatives in rural areas are, however, relativelk small and the thrift aspect of the cooperative movement does not appear to havre been adequately emphasized. 13. The special financial institutions set up for the provision of long- and medium-term fnance to industries include the ITdustrial Finance Corpora- tion, Industrial Credit and Investment Corporation of Indias National Industrial Development Corporation, State Financial Corporations, National Small Industries Corporation and the Refinance Corporation for Industry. The last mentioned corporation provides only refinance facilities to specified banks and other financial institutions in respect of medium-term loans granted by them to small and medium-size industries, The corpora- tions have obtained the bulk of their funds from the government, World Bank, Agency for International Development of the U.S. Government and (in the case of the IFC and SFCs) through issue of bonds guaranteed by the government. 14. Savings channelled through financial institutions (inclusive of the amounts channelled through small savings certificates) have increased substantially, being of the order of Rs. 4 billion in 1960/61 as compared to about Rs. 2.3 billion in 1955/56 and about Rs, 1.1 billion in 1950/51. Correspondingly, the proportion of such savings to national income is es- timated at about 2.8 per cent for 1960/61 as compared to 2.3 per cent in 1955/56 and 1.1 per cent in 1950/51. 15. A little more than two-fifths of the total estimated amount of savings channelled through financial institutions over the three years ending March 1961 represents contractual savings in the form of net additions to life insurance reserves, provident funds, etc. 16. Total savings channelled through financial institutions in 1960/61 were equivalent to about one-fourth of the total estimated net investment in the economy in that year. 17. By far the greater part of the annual savings accruing at financial institutions becomes available to the government either directly by way of budgetary receipts (e.g. in the case of small savings and government provident funds) or indirectly by way of investment in government secur- ities. Some funds are, however, transferred by the government to the pri- vate sector by way of loans given directly or through specialized finan- cial institutions. 18. Taking into account individuals' subscriptions to the capital of joint stock companies and certain other transferred savings, the total amount of transferred savings in 1960/61 (without reckoning the small amounts representing additional deposits with merchants, moneylenders, indigencus bankers, etc.), might be placed at around Rs. 4.5 billion, or a little more than 3 per cent of national income. 19. The bulk of the investment in the public sector has been financed by loans from the general public, small savings, accumulations in govern- ment provident funds, miscellaneous capital receipts, external assistance in the form of loans and grants and deficit financing (resort to bank credit). Public savings have made only a limited contribution to the financing of investment outlays. - iv - 20. Iq the private sector, large and medium scale industries finance a substantial proportion of their requirements from internal resources con- sisting of depreciation reserves and retained profits. The share of inter- nal resources in financing total assets formation (including inveatories) was relatively low in 1956 and 1957, being about 37 per cent and 28 per cent respectively in the case of 1001 large and medium size companies. It, how- ever, rose in the following years and, in spite of a fairly high level of expenditure on assets formation in 1960, works out at about 56 per cent for that year. 21. The market for shares of companies has broadened significantly in recent years. The volume of funds made available annually to industries by the special finance corporations is also of a sizable order. Moreover, there are signs of an increased response of foreign investors to the expand- ing investment possibilities in the industrial .sector in the country. Medium-term bank credit to industries, however, continues to be rather limited and there would appear to be need as well as scope for a more rapid expansion of this type of credit. 22. Information available about financing of the rest of the private sec- tor, which constitutes the so-called unorganized sector of the econoty, is very limited and fragmentary. A small part of the investment is financed by transfer of resources from the public sector in the form of loans and grants. The rest is, however, financed predominantly from the investors' own savings. Further, the bulk of the borrowed funds comes from moneylenders and indigenous bankers. 23. In the field of agriculture, cooperative credit has recorded, as stated earlier, a marked increase over the last decade. The rates of interest charged by moneylenders have also tended to decline somewhat as a result of the ex- pansion of the activities of cooperatives. To support the agricultural dev- elopment program, the Third Five-Year Plan envisages a further substantial expansion of cooperative credit. Taking into account the credit facilities provided by moneylenders, etc., there does not appear to be a shortage of short-term finance for agriculture. However, the terms for the bulk of the credit are too onerous and there is need for a progressive expansion of institutional credit. At the same time, it is necessary to bring about greater coordination between the provision of short-term credit and other efforts to increase agriaultural output, e.g., in regard to supply of irri- gation, fertilizers, better seeds, and improved implements. The volume of medium- and long-term credit provided annually by cooperative institutions is rather small, and needs to be increased substantially. In this connection, the government is considering a proposal for setting up an Agricultural Development Finance Corporation to augment the availability of long-term credit. The question of increasing the supply of medium-term funds to coop- eratives by the Reserve Bank also needs to be considered carefully. .24* In the field of small scale industries, a well-devised machinery is functioning for the pr&vision of finance, but the volume of funds made avail- able annually has been insufficient in relation to needs. The progress made by the State Financial Corporations has been rather slow. Although most of them are in an early stage of development and there are inherent difficulties in lending to small scale units, there is a widespread feeling that the corpora- tions have adopted an over-cautions approach and that their procedures are rather rigid and cumbersome. 25, To stimulate institutional lending to small scale industries, the government has introduced a-scheme for guaranteeing partially the loans advanced to such industries by banks and other financial institutions and the refinance facilities provided by the Refinance Corporation have been extended to loans (medium-term) to small scale units. Proposals for organizing aidditional industrial corperative banks in suit-abl areas t^ finance industrial cooperatives and for providing government guarantee for loans given by banks and institutional agencies to the Khadi and Village Industries Commission, National Small Industries Corporation, etc. are also under consideration by the government. On the whole, it appears reasonable to expect that the volume of institutional finance available to small scale industries will increase progressively. 26. Institutional facilities for the provision of finance for housing are very limited. The government is, therefore, considering the question of setting up a special institution (Central Housing Board) whose primary object would be to augment the availability of funds for housing and help in developing a market for mortgages. The Life Insurance Corporation is also expected to provide larger amounts for housing. 27, The securities market in India is well-organized and quite active. With the growth of joint stock enterprise and large market borrowings by the government sector, the value and variety of securities available for trading has increased considerably over the last two decades. The ipcreased flow of savings to financial institutions has resulted in a marked rise in the volume of their annual investments in securities (mostly government securities) and the interest of the general public in corporate securities has become considerably more widespread. Investment advisory services, however, exist only on a limited scale. 28. At present there are seven stock exchanges, the most important being those in Bombay and Calcutta. Since 1956, a measure of government control and supervision over stock market activities exists for the whole country. This has helped substantially in curbing malpractices and maintaining orderly conditions in the market. 29. The new issue activity has shc'wn a rising trend in recent years. An interesting development is the growing proportion of new capital raised by new enterprises. Established business leaders and families have continued to play an important role in industrial expansion and forming new companies, but there is evidence to show that a new class of small entrepreneurs is coming up in the country. New issues have been frequently oversubscribed, especially in the case of companies which have foreign participation and whose shares are underwritten by leading underwriters. Substantial progress has been made in developing a proper underwriting system in the country. 30. The market for preference shares and debentures, however, continues to be rather thin. Debentures and preference shares offering such terms as an option for conversion into ordinary shares or with profit sharing - vi - features have not been issued on any significant scale. With the growing need of companies to raise capital to finance their expansion programs, the variety of securities offered by them might be expected to increase in future. 31. Financial institutions play only a limited role in the market for corporate securities. The most important financial institutions from the point of view of operations in this market is the Life Insurance Corporation. Investment trusts have not developed to any significant extent. In view of the widening of public interest in the country in shares in recent years and the growing number and variety of corporate securities available for invest- ment, conditions seem to be particularly favorable for the growth of invest- ment trusts. It therefore appears worthwhile to take suitable steps, including the offer of an adequate tax incentive, for the establishment of these trusts, particularly unit trusts. 32. The Central and State Governments have been raising substantial amounts annually by way of market loans. Local authorities and other semi-government bodies also borrow from the market on a limited scale. 33. The bulk of government bonds is held by the central bank, Central and State Governments and institutional investors like banks, Life Insurance Corporation, provident funds, joint stock companies, charitable trusts and local bodies. Bonds and debentures of local authorities and other semi- government bodies are also held mainly by institutional investors. 34L Under the statutory provisions relating to investment of funds by the financial institutions, it is compulsory for them to invest a part of their funds in government and other approved (mainly government guaranteed) se- curities; apart from these provisions, it is in any case necessary for the financial institutions, in order to ensure a sound pattern of their assets, to invest a reasonable proportion of their funds in government securities. There is, therefore, a large assured market for government securities. 35- The central bank (Reserve Bank of India) occupies a very important position in the money and capital markets. Apart from regulating credit (through general as well as selectilie credit controls) and performing other normal central banking functions, it has been playing an important role in expanding institutional facilities for financing not only trade and commerce but also industry and agriculture. It has also made a significant contribution to the development of the market for government bonds. 36* The general level of interest rates in the organized sector of the economy has moved up a little over the last three years. Nevertheless, it continues to be lower than in many other developing countries in which capital is scarce. The rates in the unorganized sector, that is, those charged by indigenous bankers and money lenders, are, on the other hand, high, and at times very high, especially in rural areas, although there appears to have been some decrease in these rates over the past few years, primarily as a result of the expansion of the operations of cooperative credit societies. - 1 - CHAPTER I Economic Growth, Investment and Financing of Investment A. Economic Growth 1. As a result of the development effort undertaken under the Five-Year Plans, the Indian economy has experienced significant growth over the last decade. National income in 1948/49 prices increased from about Rs. 88.5 billion in 1950/51 to Rs. 118.5 billion in 1959/60 and the preliminary estimate for 1960/61 is Rs. 126.9 billion. The increase in national income over the ten-year period 1950/51 to 1960/61, that is, the period covered by the First and Second Five-Year Plans, thus works out at about 43 per cent. Population increased from about 361 million in Mairch 1951 to 441 millio*n in March -1961, 1/ or by about 22 per cent. The rate of growth in per capita in- come was, therefore, sofaewhat less than 2 per eent per annum (Appendix Table 1) Structure of the Economy 2. The table below brings out the broad structure of the economy: Table 1 National Income by Industrial Origin (in current prices) 1950/51 196o/611/_ Percentage Percentage Rs. billion of Total Rs. billion of Total Agriculture and related activities 48.9 51 68.6 48 Manufacturing and mining 2/ Factory establishments- and mining 6.2 7 15.0 11 Small enterprises 9.1 9 11.4 8 Commerce, transport and communi- cations 16.9 18 23.6 16 Other services 14.4 15 23.8 17 Net income from abroad -0.2 - -0.4 - Total national ou-tput at factory cost = national -ijcome 95.3 100 142.0 100 1/ Preliminary estimates. v Establishments employing at least ten persons if working with power, or at least twenty persons if working without power. Source: Reserve Bank of India Bulletin for March 1962. It will be seen that agriculture and related activities still account for a little less than half of the total national output. Over the last decade, the production of large and medium scale industries (factories and mines) has expanded at a much faster rate than in other sectors, but this has not resulted in any striking change in the structure of the economy because of the large share of agriculture in national income. The growth in various sectors of the economy is briefly reviewed below. Agriculture 3. Production of foodgrains increased from around 53 million tons in 1950/51 to 79 million tons in 1960/61. Production of other agricultural commodities also showed a substantial increase. Total agricultural production in 1960/61 was higher than the 1950/51 level by about 45 per cent (Appendix Table 2).j 4. The measures taken to increase agricultural production included extension of irrigation, increased use of fertilizers and better seeds, adoption of improved agricultural practices, land reclamation and development, etc. The net area irrigated is estimated to have increased from 51.5 million acres in 1950/51 to about 70 million acres in 1960/61. During the same period, the consumption of nitrogenous fertilizers increased from about 55,000 tons to 230,000 tons and of phosphatic fertilizers from 7,000 tons to 70,000 tons. To some extent, land reform also contributed to the increase in agricultural production. Besides, an agricultural extension service has been introduced throughout the country as part of a comprehensive community development program for rural areas. Large and I4Iedium Scale Industries 5. Over the past decade, there has been a marked growth and diversifica- tion of industries. Production of finished steel increased from about 1 million tons in 1950 to 2.2 million tons in 1960, of coal from 32.5 million tons to 52.6 million tons, and of cement from 2.7 million tons to 7.8 million tons. The increases in output were much larger in a number of the newer industries, particularly in the case of such items as machine tools, diesel engines, power transformers, electric motors, spinning frames, carding engines, automobiles, bicycles, sewing machines, electric fans, radio receivers, ammonium sulphate, superphosphate and caustic soda industries (Appendix Table 3). Several products, including certain types of machinery, were manufactured for the first time in the country. 6. The amount of electricity generated increased from about 5.1 billion kwh. in 1950 to 16.4 billion kwh. in 1960. 2/ Figures relate to crop years beginning July 1. - 3 - 7. According to the official index (which covers mainly large and medium scale enterprises), total industrial production in 1960/61 was nearly twice as high as in 1950151. The actual increase appears to have been even larger as the official index does not give adequate weight to new industries, many of tihich have, as mentioned above, shown far greater increases. 8. The progress of industries has been especially marked since the beginning of the Second Plan period. Further, the public sector has been pLaying a very important role in industrial development over the past few years. Net investment in large and medium scale industries in the public sector (exclusive of investment in power projects and transfers to the private sector) increased from about Rs. o.6 billion under the First Plan to about Rs. 8.2 billion under the Second Plan. The bulk of the latter amount represented investment in three new steel plants of one million tons ingot capacity each and in fertilizer factories. Industrial capacity in the private sector was also expanded substantially. Net private investment in large and medium scale industries (exclusive of investment in electricity plants) increased from about Rs. 2.3 billion over the First Plan period to about Rso 7.3 billion over the Second Plan period. Village and Small Scale Industries 9. The village and small scale industries, which are widely dispersed throughout the country, provide employment to a very large number of people and meet a significant part of the demand for consumer goods. Although complete information regarding production in this field is not available, existing data indicate significant increases in the output of certain industries. For example, production of handloom cloth increased from about 742 million yards in 1950/51 to 1900 million yards in 1960/61. Substantial increases have also occurred in the small industries' output of such goods as machine tools, sewing machines, electric motors, fans, bicycles, hand tools, etc. The progress of many other small industries, especially village industries, howrever, appears to have been rather limited. 10. The measures adopted for developing small industries include provision of credit, technical advice, training facilities, supply of machinery on a hire-purchase basis and assistance in marketing, procurement of raw materials, etc. A number of industrial estates have also been constructed in different parts of the country to provide accommodation to small scale units together with power and transport facilities, etc. Transport and Communications 11. The rising level of economic activity in the country has called for a substantial expansion of transport and communications facilities. About 1180 miles of new railway lines were added during the First and Second Plan periods. Freight carried by railways increased from 9l.5 million tons in 1950/51 to 154 million tons in 1960/61. Passenger traffic also showed a significant increase. There was also substantial expansion in road transport, shipping and air services. For example, the mileage of surfaced roads in- - 4 - creased from about 97,500 in 1950/51 to 144,000 in 1960/61. During the same period, the number of commercial vehicles on roads increased from about 116,000 to 210,000 and the shipping tonnage from 390,000 GRT to 900,000 GRT. Social Services 12. Education and medical facilities as well as other social services have also expanded substantially. The average expectation of life at birth has improved by about ten years over the last decade. B. Trend of Investment 13. The level of total investment in the economy has shown a marked rise over the last decade. Annual estimates of investment, a part of which is dispersed widely over such fields as agriculture, village and small industries, rural and urban housing, etc., can be only rough. According to Planning Commission's estimates, net annual investment in current prices increased from somewhat more than Rs. 5 billion before the First Five-Year Plan began to about Rs. 8.5 billion at its end, and reached a level of about Rs. 16 billion by the end of the Second Five-Year Plan. If allowance is made for price movements as indicated by the indices of wholesale prices, the level of annual investment in terms of 1950/51 prices would appear to have increased to about Rs. 9.7 billion at the end of the First Plan, and to nearly Rs. 13.5 billion by the end of the Second Plan.1/ 14. The ratio of net investment to national income increased, according to estimates of investment indicated above, from a little more than 5 per cent at the beginning of the First Plan to about 81 per cent at its end. For 1960/61, it is estimated at around 11 per cent. Information available for the earlier years of the Second Plan indicates that the ratio was even more than 11 per cent in 1956/57 and 1957/58. On the whole, the average ratio during the Second Plan period appears to have been fairly close to 11 per cent. g/ In a study prepared by the National Council of Applied Economic Research, which is a private organization, net investment has been estimated at a much higher level - about Rs. 6 billion for 1950/51, Rs. 11.4 billion for 1955/56 and Rs. 16.4 billion for 1957/58 in current prices (Savings in India - A Monograph, by NCAER, 1961). Recently, it has been reported that the estimates of investment and savings prepared by the Central Statistical Organization of the Government are substantially higher than those of the Planning Commission. For example, the C.S.O's estimate of net domestic saving for 1959/60 is reported to be 11.6 per cent of net national product as compared to Planning Commission's estimate of about 8.5 per cent at the end of the Second Plan (Economic Times, February 27, 1962). It may be mentioned in this context that the Planning Commission's estimates probably do not take into account much of the non-monetized investment and changes in inventories in agriculture and trade. 5- 15. The increase in investment has been especially marked in the public sector. Thus, net investment by public authorities is estimated at about Rs. 8 billion for 1960/61 as compared to about Rs. 2 billion in 1950/51 (in current prices). As a result, there has been a substantial increase in the share of public sector in total net investment in the economy over the last decade. 16. Total net investment over the First and Second Plan periods is estimated at about Rs. 33.6 billion and Rs. 67.5 billion respectively (in current prices). Table 2 below shows its breakdown between public and private sectors. Table 2 Net Investment in First and Second Plans First Plan Second Plan (April 1951-March 1956) (April 1956-March 1961) Rs. billion % of total Rs. billion % of total Public sector 15.6 46 36.5 54 Private sectora/' 18.0 54 31.0 46 Total investment 33.6 100 67.5 100 a/ Excluding investment financed out of resources transferred from the public sector. Such investment is included in the figures for the public sector. For the Second Plan period, such investment is estimated at about fRs. 2 billion. 17. To a very large extent, public sector investment has been devoted to transport, power, irrigation, social services, etc. and heavy and basic industries, especially the iron and steel industry. Investment of this type is needed to accelerate development in the private sector itself. The total output of goods continues to be derived predominantly from private sector investment. According to an estimate published in April 1961, the share of government enterprises in total production of industrial factory enterprises was of the order of 10 per cent, 90 per cent being represented by private sector production; the share of government enterprises in total industrial and agricultural output was less than 2 per cent..IY 18. The distribution of net investment in the public and private sectors by major heads of development is shown in Appendix Table 4. S;/ The Role of Monetary Policy in a Developing Economy by Dr. B.K. Madan. See Reserve Bank of India Bulletin, April 1961. - 6 - C. Financing of Investment 19, Table 3 below brings out the broad picture in regard to financing of total net investment, public as well as private, over the First Plan period and in the first three years of the Second Plan. As the annual breakdown of the Planning Commission's estimate of net investment over the Second Plan period is not available, the estimates of net investment shown in the table for 1956/59 are those prepared by the Reserve Bank of India by adding domestic savings estimated directly and the net inflow of capital from abroad; these estimates are, therefore, only broadly comparable to the Plan- ning Commispion's estimate of Rs. 67.5 bil lion for the Second Plan period as a whole.-/ Table 3 Financing of Total Net Investment in the First Plan Period and During 1956/59 (Rs. billion, current prices) First Plan 5 years, 3 years, 1951/56 1956/57 1957/58 1958/59 1956/59 Net Domestic Savings Public savings 5.0 1.3 1.1 1.0 3.4 Private savingsa/ 26.5 8.6 7.1 8.8 24.5 Total 31. 9.9 27.9 Net Inflow of Ca,2ital from Abroadg/ Use of foreign exchange reserves 1.2 2.2 2.6 O.4 5.2 IIEF credit (net) - o.6 0.3 - 0.9 Other capital inflow (net) 0.9 0.8 1.6 3.3 5.7 Total 2.1 3 7 3.7 TT.5 Total Net Investment 33.6 13.5 12.7 13.5 39.7 a/ The figure for the First Plan period has been obtained by deducting from the estimated net investment the total of public savings and the net inflowy of capital from abroad. Figures for the period 1956/59 represent estimates prepared by the Reserve Bank of India (Appendix Table 5). / Represents the total of current account deficit (excluding official donations but including half of errors and omissions), imports in kind and retained earnings of branches and subsidiaries of foreign companies minus the increase in private holdings of gold. Source: Third Five-Year Plan document and the Reserve Bank of India Bulletin for August 1961. For the First Plan period, the Reserve Bank's estimate of net investment is higher than the Planning Commission's estimate by about Rs. 1.3 billion. - 7 - 20. It will be seen that most of net investment during the First Plan period was financed from domestic savings. Savings in the public sector, including those of railways and other government enterprises, financed about 15 per cent of net investment, while private domestic savings accounted for as much as 79 per cent of the total. Inflow1 of capital from abroad con.se- sequently financed something like 6 per cent. 21. With the rise in the level of investment in the Second Plan period, the pattern of financing showed a marked change. In the three years 1956/59, domestic savings financed only 70 per cent or so of total net investment, the remaining 30 per cent having been financed by an inflow of capital from abroad. Reliance on external resources on a large scale for financing net investment continued in the following years also. 22. Despite additional taxation of a sizable order,.2/the average annual public savings during 1956/59 were only slightly larger than in the First Plan period. This is explained mainly by the growth of current expenditures, both on non-developmental items like defense, administration and debt services as well as on developmental items like education, health and other social services. To some extent, it is also explained by the fact that the tax yields, without taking into account the revenue attributable to fresh taxation,were not responsive enough to increases in national income / 23. Private savings during the Second Plan period were, on an average, much larger than in the First Plan period. They showed a decrease in 1957/58, but the level in 1958/59 was again a little higher than in 1956/57. 24. Corporate savings constitute only a small part of total private savings. For instance, the total savings of the corporate sector (including cooperatives) amounted to only a little more than Rs. 1 billion during 1956/59. This figure, however, relates, it must be emphasized, to retained net profits only; gross savings of the corporate sector, that is, retained net prof,ts plus additions to depreciation reserves, are of a much larger order.2 25. A substantial part of private savings represents savings accumulated at financial institutions. Savings of this type have shown, as mentioned in Chapter III, a considerable expansion over the last decade. In 1958/59, they were of the order of Rs. 3.5 billion. Savings in the form of absorption of new capital issues of joint stock companies have also increased signifi- The total yield during 1956/59 from measures of additional taxation is estimated at about Rs. 4.5 billion. The ratio of tax receipts at the 1955/56 rates of taxation to national income is estimated at 7.1 per cent for 1960/61 as compared to 7.6 per cent in 1955/56. Over the 3 calendar years 1956 to 1958, the total gross savings of 1001 non-financial public lirited companies, which accounted for about 78 per cent of the total paid-up capital of all such companies in the private sector, amounted to aVnut Rs. 2.5 billion. -8 - cantly in recent years. On the whole, however, the increase in domestic savings over the Second Plan period was relatively much smaller than that of investment. For instance, the average ratio of domestic savings to national income increased from 6 - 61 per cent in the First Plan period to only a little less than 8 per cent during 1956/59. By 1960/61, the rate of domestic savings is estimated to have gone up to about 8.5 per cent of national income as against 10 per cent envisaged at the time of the formulatior. of the Second Plan. The average rate during the Second Plan period as a whole appears to have been around 8 per cent of national income. 26. According to Reserve Bank estimates,2 the marginal savings - income ratio during 1?56/59 was somewhat lower than during the earlier three years, (14.2 per cent_Jduring 1956/59 against 19.1 per cent in 1953/56). This is attributed by the Reserve Bank mainly to the net effect on income distribution of such factors as gestation lags (which result in lowering the marginal profits/wages and salaries ratio) in the case of marny investment schemes of a highly capital intensive nature, relative movements of wages and prices, etc. 27. The net inflow of capital from abroad in the first three years of the Second Plan amounted to about Rs. 11.8 billion. In 1956/57 and 1957/58, a large part of the inflow represented utilization of foreign exchange reserves and INF credit. From 1958/59 onwards, however, the bulk of the inflow was by way of external assistance in the form of loans and official grants. Utilization of external assistance in the public and private sectors amounted (without allowing for loan repayments abroad) to about Rs. 7.2 billion during 1956/59. For the Second Plan period as a whole, total utilization of external assistance is estimated at a little over Rs. 14 billion. Of this, about Rs. 5.2 billion represented assistance for import of commodities under the U.S. Government's P.L. 480 program and the rest was utilized largely for steel plants and other industrial projects, railway development program, power projects, ports, etc. The largest amount of assistance came from the U.S.A. The rest of the assitance was provided mainly by the IBRD, the U.K., Canada and other Colombo Plan countries, West Germany, U.S.S.R. and Japan (Appendix Table 6). / "Estimates of Saving and Investment in the Indian Economy: 1950/51 to 1958/59". Reserve Bank of India Bulletin, August 1961. / As calculated with reference to the preceding three years. Calculation with reference to the First Plan period as a whole yields a higher ratio of 17.3 per cent. - 9 - 28. The Third Five-Year Plan, which commenced in April 1961, envisages total net investment of about Rs. 104 billion over the five years, 1961/66. Net investment in the public sector is'estimated at a minimum of Rs. 63 billion, or 73 per cent more than in the Second Plan period, the correspond- ing estimate for the private sector being Rs. 41 billion (exclusive of investment corresponding to transfer of resources from the public sector), or 32 per cent more than in the Second Plan period. 29. Net annual investment in the economy (in 1960/61 prices) is estimated to go up from about Rs. 16 billion in 1960/61 to Rs. 26 billion in 1965/66. Correspondingly, the ratio of net investment to national income is expected to go up from about 11 per cent in 1960/61 to about 14 per cent in 1965/66. 30. A part of the investment in the Third Plan is to be financed by external assistance, which has been taken at a total of Rs. 32 billion.- Net domestic savings are expected to rise from about 8.5 per cent of national income at the end of the Second Plan to about 11.5 per cent by the end of the Third Plan. See Chapter -IV also. - 10 - CHAPTER II Financial Institutions 31. The structure of money and capital markets in India reflects the stage of development reached by the country. Alongside well-functioning financial institutions, there exist indigenous bankers and moneylenders, who play an important role in financing agriculture, small industries and trade, and constitute what is termed as the "unorganized sector" of the money and capital markets. Attention in this chapter is focused on financial institutions in the organized sector and only a brief reference to indigenous bankers and moneylenders is included at the end. 32. At the time of Independence in 1947, the organized sector comprised a fairly large group of financial institutions, which included the central bank, commercial banks, cooperative banks and credit societies, insurance companies, post office savings banks, postal life insurance fund, provident funds, etc. Since then, the activities of the various financial institu- tions have shown a marked expansion, particularly over the last decade due largely to the rising tempo of economic development under the Five-Year Plans. Important changes have been made in the organization and practices of the earlier institutions and new institutions, including specialized institutions for the provision of long and medium-term finance to large, medium and small scale industries, have been established. 33. A broad idea of the relative importance of various financial institutions can be obtained from the comparison of their total assets given in the table on the next page. It must, of course, be borne in mind that the figures of total assets bring out only very inadequately the importance of institutions like the IFC and ICICI, a substantial part of whose operations represents underwriting of capital issues and (in the case of IFC) guaranteeing of deferred payments. - 11 - Table 4 Total Assets of Financial Institutions Rs. million Commercial banks 23,7321/ (Mar,. 1962) Cooperative credit institutions (a) State cooperative banks 1,823 2 (June 1960) (b) Central cooperative banks 2,588 t (c) Primary credit societies 3s949 (d) Central land mortgage banks 39_, (e) Primary land mortgage banks 222 Postal savings banks and other small savings schemes 8,267 (Mar. 1962) Life Insurance Corporation 6,225 (Dec. 1960) Postal life insurance 156 (Mar. 1960) Provident Funds (a) Central Government provident funds 2,853 (Mar. 1961) (b) Employeest Provident Funds scheme 1,953 f (Dec. 1960) (c) Coal Mines and Assam Tea Plantations Provident Funds 359 (Mar. 1960) (d) Others n.a. Industrial Finance Corporation 656 (June 1962) National Industrial Development Corporation 61 (Mar. 1961) Industrial Credit and Investment Corporation of India 225 (Dec. 1961) State Financial Corporations 422 (June 1962) National Small Industries Corporation 64 (Mar. 1961) Refinance Corporation for Industry 78 (Dec. 1961) Investment and trust companies 377Y (Mar. 1959) General insurance companies 756/ (Dec. 1960) Employees' State Insurance Corporation 19 § (Mar. 1961) n.a. = not available. 1/ Assets in India only. v/ Inclusive of loans to central cooperative banks and primary societies. 3/ Inclusive of loans to primary societies. T/ Inclusive of loans to primary land mortgage banks. 3/ Inclusive of balances held in provident fund accounts of certain employees not covered by the scheme. i/ Relates to paid-up capital. 7/ Exclusive of assets of three insurance companies for which information is not available. 8/ Relates to investment in government securities only. - 12 - 34. A brief description of the organization and operations of financial institutions is given in the following sections. Central Bank 35. The Reserve Bank of India, which is the central bank of the country,, was established in 1'35. Before that, the Imperial Bank of India (now State Bank of India) performed some of the central banking functions, al- though the issue of notes continued to be the direct responsibility of the Central Government. 36. The Reserve Bank has a paid-up capital of Rs. 50 million. Almost the whole capital was originally held by private shareholders. In 1949, the Bank was nationalized. 37. Apart from performing the usual central banking functions, the Bank has been playing an important role in developing the structure of institu- tional finance in the country. The role of the Bank in the cajital market is discussed in a separate chapter (see Chapter VIII). Commercial Banks 38. Among other financia) institutions, the commercial banks are the oldest and most important.Y They have an extensive network of offices and play an important role in financing industry, trade and certain other activi- ties as well as in collecting savings. They have also made substantial investments in government securities. 39. Banks listed in the Second Schedule of the Reserve Bank of India Act, 1934, are know as scheduled banks. To be eligible for inclusion in this Schedule, a bank must have paid-up capital and reserve of not less than Rs. 0.5 million and fulfill certain other conditions.V1 At the end of June 1962, there were 81 scheduled banks, of which 15 were foreign banks. In addition, there were 212 non-scheduled banks, which reported to the Reserve Bank, at the end of March 1962. However, banks belonging to the latter category are mostly of a small-size and restrict their activities to small localities. They accounted for about 2 per cent of total deposits of commercial banks at the end of March 1962. 1/ Commercial banking became well-established in India by the middle of the 19th Century. It, however, made only limited progress nntil the beginning of the present century. 2/ Only banks which (a) have paid-up capital and reserves of an aggregate value of not less than Rs. 0.5 million, (b) are organized as companies under the Indian Companies Act or incorporated under the laws in force in other countries or are institutions notified by the Central Government in this behalf and (c) satisfy the Reserve Bank of India that their affairs are not being conducted in a manner detrimental to the interests of their depositors are eligible for inclusion in the Second Schedule of the Reserve Bank of India Act, 1934. - 13 - 40. The foreign banks, other than those incorporated in Pakistan, are also known as exchange banks. The exchange banks initially concentrated on the financing of foreign trade and have specialized in foreign exchange business. In recent years, their share in the financing of foreign trade has decreased significantly. On the other hand, they have been playing a more important part in the financing of internal trade and industries. At the end of 1961, they accounted for about 13 per cent of total deposits of scheduled banks. Among Indian scheduled banks, the State Bank of India is the largest, accounting for a little less than 30 per cent of total deposits of scheduled banks at the end of 1960. Among the rest, 8 major banks accounted for another 39 per cent of total deposits of scheduled banks. 42. Over the last decade, there has been a marked growth of banking facilities as well as banking operations. The number of offices of scheduled banks increased from 2647 at the end of 1951 to 4401 at the end of 1961. The increase was particularly marked in the case of semi-urban and rural areas, which had remained largely outside the scope of commercial banking operations. For instance, the number of offices in places having a popula- tion of less than 25,000 increased from 750 at the end of 1951 to 1390 at the end of 1960. As indicated later, the State Bank of India has made an important contribution to the increase in the number of bank offeices. The growth of activities of commercial banks is brought out in Appendix Tables 7 and 8. 43. Banks accept current, savings and time deposits. In recent years, many banks have also been issuing cash certificates, mainly of three or five years' duration, but the amount of outstanding cash certificates is relatively small (about Rs. 271 million on September 25, 1959). Total time liabilities of scheduled banks, that is, time deposits (including cash certificates), the time liability portion of savings depositsl/ and certain miscellaneous liabilities, increased from about Rs. 2.8 billion at the end of the fiscal year 1951/52 to Rs. 11.6 billion at the end of 1962/62.2/ A part of the increase was, however, accounted for by the deposits of P.L. 480 counterpart funds with the State Bank of India. Allowing for this, total time liabilities of scheduled banks at the end of 1961/62 amounted to about three and a half times the level reached at the end of 1951/52. 44h Demand liabilities of scheduled banks incre sed from about Rs. 5.4 billion in 1951/52 to Rs. 9 billion in 1961/62.1" Since, however, the rate of increase in these liabilities was much smaller than in time liabili- ties, the ratio of the latter to total liabilities showed a sharp rise.17 j/ Savings deposits are withdrawable on demand, but there are restrictions on the amount that can be withdrawn at any one time and the number of withdrawals that can be made in a week or a month. 2/ Figures are exclusive of inter-bank borrowings, but inclusive of inter- bank deposits for which data prior to November 1960 are not available. y/ The slower rate of growth of demand liabilities is explained partly by the increase in interest rates on time deposits. - 14 - 45. Total credit extended by scheduled bankshas also shown a marked expansion over the last decade, being about Rs. 11.1 billion at the end of 1961/62;/as against Rs. 6 billion or so at the end of 1951/52 ./ The increase has been especially marked in the case of advances to industries; consequently, the ratio of such advances to total bank credit has increased substantially. The bulk of the credit is provided in the form of loans, overdrafts and cash cre ,ts, the proportion of bills purchased or discounted being relatively smallz/ 46. Reflecting the impact of British banking traditions, the commercial banks in India provide mostly short-term credit. A substantial proportion of the short-term advances to industries is, however, renewed,from time to time and represents, in effect, lending for a longer period,4/ Fcrmal term loans, that is, loans sanctioned for a period of more than one year, continue to be small. 47. The bulk of the bank credit isgiven against security. At the end of March 1962, secured advances of scheduled banks represented about 86 per cent of their total credit. 48. Investments of scheduled banks in government securities increased from about Rs. 3 billion at the end of 1951/52 to over Rs. 7 billion at the end of 1959/60. A large part of the increase was, however, due to the investment of P.L. 480 funds in government securities by the State Bank of India. In 1960/61, the scheduled bankts investments in government securities decreased by about Rs. 1.6 billion, due partly to the revision of arrange- ments regarding the accrual of P.L. 480 funds to the State Bank of India.i/ This was followed by an increase of about 0.4 billion in 1961/62. 49. In recent years, the banks have also been underwriting capital issues of joint stock companies to a significant extent. 50. The commercial banks function under the overall control and super- vision of the Reserve Bank of India. As mentioned in Chapter VIII, the Reserve Bank has taken a number of steps to strengthen the banking structure and promote its development along sound lines. A Deposit Insurance Corpora- tion to insure deposits up to Rs. 1,500 per depositor has also been established recently. / Exclusive of inter-bank advances. i/ Precise iiiformation in respect of foreign bills purchased and discounted at the end of 19515/2 is not available. 2/ Cash credits are generally given against pledge or hypothecation of stocks while overdrafts are granted against personal security, government securities, shares and debentures, etc. / See Chapter V. Since May 12, 1960, these funds are being invested directly in special government securities. Furthermore, the State Bank refunded a part of the past accumulations of these funds to the govermnent in monthly installmrents of Rs, 120 million during July 1960 - June 1961. - 15 - The State Bank of Indial/ 51. An important development in the field of banking was the establishment in July 1955 of the State Bank of India on the basis of a special Act; this Act spelled out the conditions for taking over the operations of the Imperial Bank of India, which was the largest commercial bank in the country. The Bank was set up, following the recommendation of the Committee of Direction of the All-India Rural Credit Survey, for the "extension of bank- ing facilities on a large scale, more particularly in the rural and semi- urban areas, and for diverse other public purposes". Its paid-up capital is a little over Rs. 56 million, of which about 92 per cent is held by the Reserve Bank of India and the rest by private shareholders. The Bank functions as an independent institution. The Act requires it to act on business principles, regard being paid to public interest. The Central Govern- ment may, in consultation with the Governor of the Reserve Bank of India and the Chairman of the Bank itself, issue directives to it on matters of policy involving the public interest. 52. The Act required the State Bank to open not less than 400 additional branches within a period of five years from the date of its establishment or such extended period as might be specified by the government. The Bank was able to fulfill this obligation a little before the end of five years, that is, by June 1, 1960. By the end of 1960, the number of new branches increased to 429. 53. Most of the new branches have been opened at relatively small places where banking facilities were either inadequate or non-existent. Thus, of the 400 centers at which new branches were opened by June 1, 1960, all except 24 had a population not exceeding 50,000. Seventy-seven places had a population of less than 10,000 and 209 places a population of 10,000 to 25,000. In sixty-four centers, there were no banking facilities when the State Bank opened its branches. 54. Opening of branches in smaller places involves a loss in initial years. These losses are being met partly from a fund which has been created by crediting to it the dividend payable on shares held by the Reserve Bank to the extent of 55 per cent of the issued capital. 55. The total number of State Bank's offices in India at the end of 1961 was 941. Furthermore, eight State-associated banks,.which had been incorporated in the former Princely States, have become its subsidiaries. The number of offices of the subsidiary banks was 49Q at the end of 1961. Together, the State Bank and the subsidiary banks have a wide network of offices spread all over the country. j/ The figures given in the paragraphs dealing with the operations of scheduled banks include those for the State Bank of India as the latter is a scheduled bank. - 16 - 56 The deposits at the newi branches opened by the State Bank amounted to about Rs. 283 million at the end of 1959. According to the Chairman af the Bank, there is still considerable scope for collecting additional deposits from semi-urban and rural areas. 576, A sub-committee appointed by the State Bank in July 1960 has recom- mended the opening of 300 additional branches (including those already established since July 1960) in the rural and serni-urban areas by the bank and its subsidiaries during the five years ending June 1965. This recom- mendation has been accepted by the bank. 1/ 58* The operations of the State Bank of India have been expanding steadily. It is inportant to note in this connection that nearly two-thirds of the Bank's total outstanding credit at the end of October 1960 was accounted for by industries. Furthermore, the Bank has been extending its activities in the spheres of rural credit, credit to small scale industries, medium- term finance, foreign exchange business, etc. It also acts as an agent of the Reserve Bank in places where the latter has no branches. Although the funds made available by the State Bank to the rural sector and small scale industries as well as in the form of medium-term loans to all industrial units are small in relation to both needs and the bankts aggregate resources, a basis has been established for greater progress in the future. 59. In the field of rural credit, the State Bank has been providing remit- tance facilities to cooperative banks on an increasing scale. While the Reserve Bank continues to be mainly responsible for financing the cooperative institutions, the State Bank has been providing suplementary finance to some extent. Apart from making advances to cooperative banks, it has been playing a significant role in financing cooperative marketing and process- ing societies. It has also been subscribing to the debentures of land mortgage banks and granting them interim accommodation (against government guarantee) pending the raising of funds through flotation of debentures. By granting advances against debentures of land mortgage banks, it has been helping to increase their marketability. It has also started financirn of industrial cooperatives in certain circumstances and on certain terms and conditions. 60. As at the end of September 1961, the aggregate credit limits sanctioned for cooperative institutions amounted to about Rs. 246 million and the out- standing credit was Rs. 66 million. 61. The Bank has also been lending against warehouse receipts issued by the warehouses of the Central and State Warehousing Corporations, thus encouraging their use as security for bank advances. 62. The Bank's pilot scheme for the provision of coordinated finance to small scale industries by various lending agencies, which was initiated in 1956 at nine branches, has been extended to all branches since January 1959. Important branches numbering 35 have been working as "intensive centers" for achieving better results. At the end of 1961, the limits sanctioned to small scale iiadustries and the amount outstanding were Rs. 101 million and Rs., 51 million respectively. The number of units assisted was 1/ It has also been decided that the branch expansion programs of the State Bank and its subsidiaries would cover 145 and 155 centers respectively. - 17 - 2 8ail The lending procedures under the scheme have been liberalized and tre rate of interest does not normally exceed 61 per cent per annum (inclusive of incidental charges). Furthermore, the Bank has agreed to act, at selected centers, as an agent of State Financial Corporations in their dealings with small scale industries. Agreements with saven State ?inancial Corporations were in force in 1961, but the Bank's services were utilized only to a limited extent. 63. The State Bank's original statute prohibited it from lending, except in certain specified cases, for more than 6 months or against the security of immovable property. The Act was, however, amended in 1957 and the Bank has made some progress in extending term credit to industries. At the end of 1960, the outstanding medium-term loans amounted to about Rs. 38 million. 64. Thus, the State Bank occupies a unique position in the banking structure of the country. It has undertaken several developmental activities in the public interest and has a good record of performance. Its sub- sidiaries have also started participating in the various developmental activities. Cooperative Banks and Credit Societies 65. The cooperative movement, which owes its origin largely to the initiative of the government, was launched in 1904, with the primary objective of providing credit on reasonable terms to agriculturists, artisans, etc. and promoting cooperation and thrift among them. The cooperative credit structure, as it has evolved in the country is federal in character and consists of two distinct types of institutions - one dealing with the provision of short-term and medium-term credit and the other with the provision of long-term credit. The former comprises primary cooperative societies at the base, central cooperative banks at the intermediate level (generally one central bank in a district) and state cooperative banks at the top (generally one bank in each State). The organization for the provision of long-term credit, which is relatively much less developed, consists ordinarily of central land mortgage banks at the State leve2,1/ and primary land mortgage banks at the taluka (sub-division of a district) level. In certain places, where there are no primarxy land mortgage banks, the central land mortgage banks operate through their own branches or central cooperative banks acting as their agents. 66. Primary credit societies are divided into agricultural and non- agricultural societies. An agricultural credit society operates in a village or a group of villages. Non-agricultural societies cater to the require- ments of artisans, traders, salaried employees, etc. in urban and semi- urban areas. In lNadhya Pradesh, where there is no central land mortgage bank, the state cooperative bank has established a separate department for the provision of long-term finance. For the Vidarbha area in Maharashtra also, the Vidarbha Cooperative Bank has established a separate land mortgage banking department. - 18 - 67, Tha working capital of primary societies consists partly of share capital, reserves and deposits and partly of borrowings, mainly from central banks. By far the greater part of the funds of agricultural credit societies represents borrowings from central cooperative banks. Deposits with these societies are rather small. Non-agricultural societies have, on the other hand, been able to raise substantial amounts by way of deposits and depend on borrowings only to a limited extent (Appendix Table 9). 68. The funds of the central and state cooperative banks consist partly of share capital, reserves and deposits from cooperative institutions as well as individuals and partly of borrowings. The central banks borrow mainly from state cooperative banks. To some extent, they also borrow from commercial banks, government, etc. State cooperative banks borrow mostly from the Reserve Bank at concessional rates of interest (Appendix Table 10). 6/0. The central banks lend mostly to cooperative societies, while the state cooperative banks finance mostly the central cooperative banks and other cooperative institutions. 70, The central and state cooperative banks thus provide links between the rural societies and the organized money market and the Reserve Bank and serve as balancing center' for the surpluses and deficits at various points in the cooperative structure for short-term and medium-term credit. 71.. Primary land mortgage banks raise a small part of their funds through share capital, deposits, etc. and the rest by way of loans from central land mortgage banks. In the case of the latter, debentures constitute the most important source of funds. They are generally guaranteed by State Goavern- ments and subscribed mainly by the Rieserve Bank, State Bank and other commercial banks, Life Insurance Corporation, cooperative institutions, etc. 72. For nearly half a century after the inauguration of the cooperative movement, the progress of cooperatives .had been very slow. In 1951/52, the share of cooperative institutions in total borrowings of cultivators amounted to only 3 per cent or so. Since then, however, the operations of cooperative credit institutions have shown a marked expansion, especially during the last five or six years. The number of primary credit societies/ increased from about 125,000 at the end of June 1952 to 224,000 at the end of June 1960. During the same period, their membership increased from about 7.8 million to 19.9 nmillion. The annual amount of loans advanced by them increased from about Rs. 750 million in 1951/52 to Rs. 2.9 billion in 1959/60 (Appendix Table 12) LI i/ Including grain banks, which generally make advances in kind. The annual amount of grain banks' advances is, however, small. 2/ Data relating to cooperative credit institutions are for the years beginning July 1. - 19 - 73. The progress has been especially marked in the case of agricultural credit societies, For example, the annual amount of loans provided by them increased from about Rs, 2h6 million in 1951/52 to Rs. 1.7 billion in 1959/60, and further to Rs. 2.1 billion in 1960/61. For 1961/62, the loan disburse- ments are estimated at about Rs. 2.4 billiono The share of cooperatives in the total borrowings of cultivators is estimated to have increased to about 10-12 per cent in 1959/60 and there has been some further improvement since then. 74 EThe internal resources (share capital, reserves and deposits) of agri- cultural credit societies, central banks and state cooperative banks have increased at a much lower rate than advances to agriculturistse As a result, their dependence on the Reserve Bank for financing of loan operations has increased considerably. The total amount of short-term loans of the Reserve Bank to state cooperative banks for financing seasonal agricultural operations and marketing of crops increased from about Rs. 65 million at the end of 1951/52 to Rse 782 million at the end of 1959/60. The proportion of Reserve Bank credit to total outstanding advances of agricultural credit societies and marketing societies increased from about 22 per cent to 46 per.cent between i955/56 and 1959/60. 759 Land mortgage banking has made only limited progress so far. The first land mortgage bank was set up in Punjab in 1920, but the effective begin- ning of land mortgage banking was in 1929 when a central land mortgage bank was established in Madras. At the end of 1959/60, there were 16 central land mortgage banks and 408 primary land mortgage banks with a total membership of about 767,000.1/ The total outstanding loans of primary land mortgage banks amounted to about Rs. 192 million at the end of 1959/60, while those of central land mortgage banks to individuals added up to another Rs. 100 million. 76a Considerable progress has been made in reorganizing and strengthening the cooperative credit structure, broadly along the lines recommended by the Rural Credit Survey Committee in 195,. The share capital of cooperative insti- tutions at various levels has been augmented by government contributionss which totalled about Rs. 214 million by the end of 1959/60. This was equivalent to a little more than one-fourth of the total contribution by individuals to the share capital of these institutions. These contributions are provided largely out of loans made by the Reserve Bank from a fund (Long-Term Operations Fund)2/ set up by transfer of a part of the Bankts profits, which are otherwise payable to the government. Financial assistance in the form of subsidies and loans has also been made available by the goverrnment to cooperative insti- tutions. A number of societies, which were in a weak position, have been revitalized, the number of societies taken up for revitalization in the Second Plan period being about 42,000. In addition, about 15,000 societies were taken up for revitalization during 1961/62. Steps are also being taken to achieve better results in the matter of revitalization of the societies. At the same time, moribund societies are being weeded out. The central banking structure has been rationalized to a considerable extent through a process of amalgamation and elimination of weaker units with a view to establishing 1/ Including about 62,000 nominal members in the case of central land mortgage banks. i/ See Chapter VIII. - 20 - one strong central bank in each district. Training facilities for coop- erative personnel have also been expanded substantially. The progress made in linking credit to cooperative marketing of crops so as to facil- itate recovery of advancea has, however, been rather slow. 77. As suggested by the Rural Credit Survey Committee, a numDer of large-sized credit societies (about 7,000) were also organized in the first three years of the Second Plan. The program was, however, virtually given up after 1958/59 and he present policy of the government is that "while, as a general rule, co eratives should be organized on the basis of the village community as he primary unit, where villages are too small, the number of villages to be servel by a cooperative society could be increased in the interest of vi ility".- 78. A number of mu ti-purpose societies, i.e., societies performing more than one function, have also been organized. According to a review of the cooperative movement b the Reserve Bank, however, most of the multi-purpose societies existing at the end of 1957/58 were doing mainly credit work, the value of non-credit business undertaken by them being small. 79. Despite the progress achieved over the past few years, a number of societies continue to be in a'weak financial position. Several of them are dormant. B number of central banks also do not come up to the minimum s_/recommended by the Standing Advisory Committee on Agricultural Credit in 1952 in respect of paid-up capital and reserves as well as work- ing capital. Overdue loans of agricultural credit societies continue to constitute a large proportion of total loans (over 20 per cent at the end of 1959/60). In view of the large expansion of cooperative credit envisaged in the Third Five-Year Plan, a large scale effort will be necessary for re- organizing and strengthening the institutions at various levels. Post Office Savings Banks and Other Small Savings Schemes 80. The post office savings banks were established in 1883 with a view to -ncouraging savings among the middle and working classes. During World War I, the government introduced 5-Year Post Office Cash Certificates. Since then, the types of investment facilities available under the small savings schemes have been increased significantly to suit the needs of different categories of savers. The number of post office savings banks, which are dispersed widely-throughout the country in both urban as well as rural areas, was 17,926 at the-end of March 1960. Altogether, the small savings schemes have been playing a--very important role in mobilizing savings in the country, the net annual collections having shown a marked increase over the last decade. g Third Five-Year6 Plan, page. 202. j About Rs. 0.3 million in respect of paid-up share capital and reserves and Rs. 2-2.5 million in respect of working capital. - 21 - 81. At present, the small savings schemes consist of (1) post office savings bank deposits which can be withdrawn on demand subject to a limit of Rs. 1,000 in any one week and bear interest at the rate of 3 per cent annum on deposits up to Rs, 10,000 in individual accounts or Rs. 20,000 in joint accounts and of 21 per cent on the balance of deposits in the individual and joint accounts as well as on all other deposits; (2) 12-Year National Plan Savings Certificates, which are issued in denominations of Rs. 5 to Rs. 5,000 and yield 4l per cent per annum compound if held up to the date of maturity; (3) 10-Year Savings Deposits Certificates, which are available in multiples of Rs. 50, offer interest at the rate of 4 per cent, payable annually, and are encashable before maturity (but not during the first year) at the cost of a part of the interest drawn; (4) 15-Year Annuity Certificates, which are available at issue prices of Rs. 1,330 to Rs. 26,600, and offer a yield of 44 per cent per annum compound; (5) Cumulative Time Deposits, which can be made monthly in amounts of Rs. 5 to Rs. 200 for a period of 5 to 10 years and of Rs. 5 to Rs. 300 for a period of 15 years, the rate of interest (compound) being 3.3 per cent on a 5-year account, 3.8 per cent on a 10-year account and 4.3 per cent on a 15-year account. 82e The National Plan Savings Certificates are available at post offices engaged in savings bank activities. Cumulative time deposits are also accepted at these post offices. The Treasury Savings Deposit Certificates and the Annuity Certificates are, on the other hand, available at certain offices of the Reserve Bank, branches of the State Bank, Treasuries and Sub-Treasuries, etc. 83. A prize bonds scheme was also introduced in April 1960. The bonds, which were issued in denominations of Rs. 100 and Rs. 5, were bearer bonds repayable at par on or after April 1, 1965, and offered, instead of interest, prizes drawn quarterly out of an amount equal to 3- per cent per annum on the total value of bonds in each series. The scheme has been discontinued since the end of June 1962, mainly because the receipts had greatly dwindled.j/ An alternative scheme is, however, proposed to be introduced shortly. 849 Income from small savings is exempt from income tax and super tax. Investments in small savings are also exampt from wealth tax. As a result of a further tax concession announced in the current fiscal year, a deduction from income tax is also permitted in respect of deposits in the 10-year and 15-year accounts under the Cumulative Time Deposits Scheme. A similar tax deduction is also permitted in the case / Explanatory Memorandum on the Budget of the Central Government for 1962/63. - 22 - of life insurance premiums and contributions to provident and pension funds. The aggregate amount in respect of which tax deduction can be claimed is. however, limited to one-fourth of the income or Rs* 10v000 per annum, whichever is less. 85. Up to the end of May 1962, the total amount which an individual could invest in all types of small savings, except prize bonds, was Rs. 105,000; this limit has, however, raised substantially as a result of certain changes in the Cumulative Time Deposits Scheme-1/ In the case of prize bonds, there was no limit on individual holdings. How- ever, as stated earlier, the sale of such bonds has been discontinued since the end of June 1962. 86. The small savings movement is directed and coordinated by the National Savings Organization which functions under the overall control of the Central Ministry of Finance. The Organization has regional officers and district organizers in the States. Some of the States have also set up their own complementary organizations. 87. The National Savings Organization has a large network of agents spread throughout the country for promoting sales of National Plan Savings Certificates and Treasury Savings Deposits Certificates. The agents include primary school teachers, employees of various government and non-government establishments, postmasters in rural areas, and institutions like village panchayats (elected bodies), other local bodies in rural areas, cooperative societies, scheduled banks, women's organizations, etc. The agents get a commission of 1*4 per cent on sales of National Plan Savings Certificates and a per cent on those of Treasury Savings Deposits Certificates. The number of agents increased from 17,264 in 1956/57 to 78,518 in 1959/60. 1/ There is, a separate limit for investment under each type of small savings scheme. The main objective of the limits is to preserve the essential-character of the schemes which are intended to cater primarily to-the needs of small savers as also to restrict the quantum of tax benefit in the case of each individual or insti- tution.- The-changes made in the Cumulative Time Deposits Scheme in June 1962 included the introduction of a 15-year account and raising of-the limit for investment in the 10-year account from Rs. 100 per month to Rs. 200 per month. - 23 - Life Insurance Corporation of India 88. Following nationalization of life insurance, the Life Insurance Corporation was established in September 1956 to take over the business of life insurance companies and other insureres, except post offices. It has a paid-up capital of Rs. 50 million, which is owned entirely by the government. 89, The Corporation took over the business of 2h5 life insurers, including 16 foreign insurers, 3 State Insurance Departments (which provided life insurance on a limited scale) and 75 provident societies (which caterd to the needs of people of moderate means). The assets pertaining to the life insurance business of these insurers aggregated about Re. 4.1 billion, 90. The main reason for nationalization of life insurance, as given by the Finance Minister of India, was that the business was "not being managed either efficiently or with an adequate sense of responsibility" in the case of a vast majority of companies. Despite the operation of the Insurance Act, it had not been possible to check the various malpractices in regard to investment of funds. Besides, the govern- ment felt that the nationalized insurance would be able to spread the insurance habit more widely and, in doing so, would make available substantial sums for the implementation of the country's development plans. 91. After the Partition of the country in 1947, new life insurance contracted in the Indian Union ranged from about Rs. 1.4 billion in 1948 to Rs. 1.6 billion in 1953. Thereafter, it increased sharply to about Rs. 2.4 billion in 1954, due mainly to a reduction of premium rates and influx of new business under staff insurance schemes and estate duty policies. In 1955 also, it was maintained at about the same level as in the preceding year. However, due to heavy lapses, total life insurance1/ in force in India increased from about Rs. 7.1 billion at the end of 1947 to only Rs. 11.3 billion at the end of 1955, representing an average annual increase of about Rs. 525 million. 1/ Including bonuses declared in the case of policies participating in profits. 92. As an initial reaction to nationalization, the amount of new life insurance showed a decline in 1956. Thereafter, it increased at a fairly rapid rate. New insurance contracted in India amounted to about Rs. 2.8 billion in 1957 and Rs. 4.2 billion in 1960. The quality of business, as judged by the lapse ratio,_/ was also better than in the case of private insurance companies. (The ratio has, however, shown an increase since 1959 and efforts are necessary to check this trend.) Total life insurance in force in India increased from about Rs. 11.3 million at the end of 1955 to Rs. 21.8 billion at the end of 1960 Insurance in force outside India also showed a moderate increase (from about Rs. 920 million at the end of 1955 to Rs. 1.1 billion at the end of 1960). The annual premium income (in respect of insurance in India as well as outside India) increased from about Rs. 586 million to Rs. 969 million and the number of policies rose from 4.8 million to 7.7 million. 93. Life insurance in India continues to make steady progress and the annual amount of new insurance contracted in the country increased to about Rs. 6 billion in 1961. As stated earlier, the tax system provides for re- lief from income tax in respect of payments for life insurance (within certain limits. W; this tax concession appears to have helped signifi- cantly in expanding the volume of life insurance. 94. The bulk of insurance in India is accounted for by endowment and whole life insurance policies. Group life insurance (which is less irmpor- tant from the point of view of accumulation of funds as it involves payments for the risk coverage only) accounted for only a small fraction of new in- surance in 1960 and 1961. - 95* The gross rate of interest (without deduction of tax) realized on the mean life insurance fund was 4.58 per cent in 1960. Post Office Life Insurance Fund 96. The post offices write life insurance on a limited scale. The scheme was introduced in 1883 for the benefit of postal employees. Subsequently, it was extended to other government employees as well as to certain cate- gories of semi-government employees, including employees in industrial under- takings where the government has a majority share. 97, The post offices issue whole life as well as endowment policies. The maximum amount for which insurance is available is Rs. 30,000, except in the case of defense services personnel and civilian employees liable to military service for whom the maximum limit is Rs. 20,000. 98. The total number of policies in force at the end of March 1960 was 155,222 for a sum of about Rs. 355 million and the life fund amounted to Rs. 156 million. 1/ Ratio of insurance lapsed minus insurance revived in a year to the mean insurance in force during that year. 2/ See para. 84. - 25 - Provident and Pension Funds 99. Provident funds operate over a fairly wide area in both the public and private sectors and cover about 9 million employees. They acsount for a substantial part of total transferable savings in the economyoTJ 100. In the private sector, a large part of the annual provident fund accumulations is accounted for by the Employeesl Provident Fund Scheme which was introduced under an Act in 1952. Initially, the Act applied to only six industries. Since then, it has been gradually extended to a number of other industries, as well as motor transport by road, commerce and trade, hotels, restaurants, film studios, etc. In the industries and other fields brought within the scope of the Act, the Employees' Provident Fund Scheme covers all establishments which employ at least 50 persons and have been in existence for three years as well as those (subject to an excep- tion in the case of cooperative societies) which employ 20-h9 persons and have completed five years of existence.!! 101. In the establishments covered by the Employees' Provident Fund Scheme, it is compulsory to set up provident funds for employees earning up to Rs. 500 per month (ba ic wage, dearness allowance , including the cash value of food concession,3 and retaining allowance,4/ if any, paid during the off- season). Employees as well as employers are required to contribute at the rate of 61 per cent of basic wage, dearness allowance and retaining allow- ance (if any) paid to employees. In addition, employers have to contribute towards the administrative charges of the scheme. The employees can, if they so desire, contribute up to 8-1/3 per cent of their basic wage, etc. though the employers are, even so, obliged to contribute at the rate of 6- per cent. If an establishment has its own provident fund, gratuity or pension scheme and the total quantum of-benefita offered to employees is not less than that available under the Employees1 Provident, Fund Schames it can be allowed to ran its scheme on certain conditions, the most important one being that investments should be made exclusively in Central Government securities. Provident fund. accumulations of other establishments, i.e., non-exempted establishments, are also invested exclusively in Central Government securities. 102. At the end of May 1962, the scheme covered about 18,500 establish- ments and 3.25 million employees. 1/ See Chapter III. 2/ Cooperative,societies employing less than 50 persons and working without the aid-of power are not covered. On the other hand, all newspaper establishments employing 20 or more persons are covered, regardless of the period-for which the establishments have been in existence. / This tak-es the form of sale of food articles by employers to their employees at concessional prices. 4/ Allowance in lieu of wages. - 26 - l03. The question of extending the scheme to certain additional industries as well as banks and insurance companies is under consideration by the government. It has also been decided to increase the rate of compulsory contribution to 8-1/3 per cent in the case of both employees as well as employers in the iron and steel, cigarettes, electrical, mechanical and general engineering products and paper industries. 104l. The employees in coal mines and assam tea plantations are covered by separate statutory schemes of compulsory provident funds. At the end of 1960, these schemes covered about 0,9 million employees. 105. In a number of cases, provident funds have also been set up voluntarily by employers. The rate of contribution ranges from 6-1.4 per cent to 8-1/3 per cent of salary for employees as well as employers. Pension funds are, however, not common. 106* In the public sector, most of the employees of the Central Government as well as the bulk of the employees of the State Governments, local authorities and other semi-government organizations are covered by provident funds, and the net annual accretion to these funds is of a considerable order (Appendix Table 22). Regular employees of the Central and State Governments, except those belonging to certain specified categories, are also covered by separate pension schemes. The pension schemes, however, do not usually involve any contribution on the part of employees, the pension payments being almost exclusively the liability of the Central and State Governments. Normally, no separate funds are established under the general pension schemes, the pension being provided out of the budgetary resources of the Central and State Governments. Certain minor funds have, however, been established for family pensions, etc., but the annual accretion to such funds is of a small order. 107. The provident funds are broadly of two types - those involving contributions by employees only and those involving contributions by employees as well as employers. Provident funds of the former type have been instituted mainly for pensionable employees as well as temporary employees of the Central and State Governments; contributions to such funds by Central Government employees, which were optional up to the end of March 1960, have been made compulsory. In many States also, the contributions are compulsory. The minimum rate of contributions for Central Government employees, other than those belonging to the railways, is generally 6 per cent of the emoluments.l/ For railway employees, the minimum rate of contribution is 8-1/3 per cent. Provident funds involving contributions by both employers and employees have been instituted for non-pensionable employees, other than temporary employees, of the Central and State Governments as well as employees of local authorities, etc. In the case of Central Government employees, the Dearness allowance and certain other allowances paid to government employees are not included in "emoluments". - 27 - rate of contribution is generally 8-1/3 per cent for both employees as well as the Government. In the case of other employees, the rate generally ranges from 6-1/4 per cent to 8-1/3 per cent (for employers as well as employees). In some cases, e.g., in the case of Reserve Bank employees, the rate is somewhat higher./ Industrial Finance Corporation 108. The Corporation was established in July 1948 under a special Act for the purpose of "making medium and long-term credits more readily available to industrial concerns a/ in India, particularly in circumstances where normal banking accommodation is inappropriate or recourse to capital issue methods is impracticable". It is authorized to give assistance to public limited companies and cooperative societies only. 109, The Corporation has an authorized capital of Rs. 100 million. As at the end of June 1961, paid-up capital was Rs. 50 million, of which Rs. 20.27 million was owned by the Central Government and the Reserve Bank and Rs. 11.73 million by the Life Insurance Corporation. The rest of the capital was held mostly by scheduled banks (including the State Bank of India) and cooperative banks, The Government had guaranteed repayment of the principal of the share capital and payment of annual dividend on it at a minimum rate of 2-1/4 per cent. In March 1962, the Corporation issued further share capital to the extent of Rs. 20 million. Its paid-up capital has thus increased to Rs. 70 million. 110* Until December 28, 1960, the Corporation was authorized to give assistance by: (a) guaranteeing loans raised in the market and repayable within a period of 25 years; (b) granting loans or advances and subscrib- ing to debentures repayable within a period of 25 years; (c) guaranteeing deferred payments in connection with the import of capital goods from outside India, / and (d) underwriting the issue of stocks, shares, bonds or debentures. Sinc6 December 29, 1960, it.has also been authorized to subscribe 2 As mentioned in Chapter III, accumulations in provident funds of govern- ment employees are not invested separately; they are taken credit for in the capital budget of the government under the head "unfunded debt". The government pays interest on accumulated balances. Provident fund accumulations in the semi-government sector are invested mainly in government securities. At present, these are defined as concerns w4hich are engaged or are to be engaged "in the manufacture, preservation or processing of goods or in shipping, or in mining, or in hotel industry or in the generation or distribution of electricity or any other form of power". The guarantee may be in Indian currency or foreign currency. In case the guarantee is in foreign currency, the enterprise concerned has to make satisfactory arrangements for the availability of the necessary foreign exchange. Risks arising from foreign exchange fluctuations have also to be borne by the enterprise seeking guarantee. - 28 - directly to the stock or shares of an industrial concern and provide financial assistance in certain other forms, e.g., guaranteeing of de- ferred payments in connection with the purchase of capital goods in India, guaranteeing of loans obtained from scheduled banks or state cooperative banks, etc. 111. The Corporation has to function on business principles, "due regard being had by it to the interests of industry, commerce and the general public". The Central Government is authorized to give instructions to it on questions of policy. If the Boand of the Corporation fails to carry out these instruc- tions, it may be superseded and replaced by a new Board. 112 To augment its resources, the Corporation has obtained loans from the government, the outstanding amount of such loans being about Rs. 198 million at the end of 1962. 113. The Corporation has also raised substantial amounts through issue of bonds guaranteed by the govermnent. The total amount of bonds outstanding at the end of June 1962 wuas about Rs. 222 million. Information relating to initial allotments of bonds indicates that a little more than half of the total amount (about 52, per cent) was subscribed by the commercial and coopera- tive banks while another 29 per cent of the total was subscribed by the Reserve Bank, Life Insurance Corporation and the insurance companies (includ- ing the former private life insurance companies). 214. Since 1960, the Corporation has obtained three foreign currency loans - two loans aggregating $30 million (about Rs. 143 million) from the Agency for International Development (formerly the U.S. Development Loan Fund) and one loan of D.M. 15 million (Rs. 17 million) from a West-German bank. 115. The Corporation can borrow from the Reserve Bank (a) money repayable on demand or for a fixed period not exceeding 90 days against government securities, and (b) an amount up to Rs. 30 million for fixed periods not exceeding 18 months against securities of the Central Government or against its bonds and debentures maturing within a period of 18 months. No such loans from the Reserve Bank were, however, outstanding at the end of June 1962. 116e The bulk of the assistance made available by the Corporation to industries has been in the form of loans. They are generally granted for purchase of land for factory sites, construction of factory buildings and purchase and installation of machinery. Usually, the maturity period of loans is 10 - 15 years and the minimum amount of a loan is Rs. 1 milliom. 1/ Loans for the purpose of working capital or repayment of existing liabilities are given only in exceptional cases. Before granting loans, the Corporation satisfies itself that the capital structure of the borrowing concern is sound. The loans are secured by a regular mortgage covering all existing as well as future fixed assets of the borrowing concern. Except in certain 1/ As mentioned later, loans of a smaller amount are advanced by State Financial Corporations. - 29 - cases of imported plant and machinery, the Corporation generally aims at securing a minimum margin of 50 per cent, i.e., loans are advanced to the extent of half the value of the assets mortgaged by the borrowing concern. The Corporation also requires personal guarantees of the managing agents of the borrowing concern or some of its directors where there are no managing agents. The repayment of loans is made in equal or graduated installments., beginning usually three years after the granting of loans. Loans of more than Rs, 10 million to a single industrial concern require the prior approval of the Central Government./ Certain other loans also require the prior approval of the Central Government under the directives issued to the Corp oration. 117U The annual amounts of loans approved and disbursed by the Corporation since its inception are showm in Appendix Table 13. Total loans approved by the Corporation up to the end of June 1961 amounted to about Rs. 1058 million (inclusive of dollar loans of Rs. 43 million out of the D.L.F. loan). Of these, loans amounting to Rs. 141 million had been subsequently declined or were not to be made available. Besides, loans of Rs. 197 million were awaiting approval of the government or the D.L.F. Loan disbursements increased significantly from 1956/57 onwards and totalled Rs. 574 million by the end of June 1961. 118. The amount of loans approved and disbursed in 1960/61 (July-June) was about Rs. 212 million and Rs. 66 million respectively. L19. Of the total loans of Rs/ 1058 million approved up to the end of June 1961, loans for an amount of Rs. 765 million were for new undertakings, i.e., factories which went into production after August 15, 1957. The remaining loans of Rs. 293 million were granted to old establishments for purposes of renovation, modernization and expansion. 120. Nore than two-thirds of the total amount of loans approved up to June 1961 was accounted for by loans of more than Rs. 5 million per concern. 121' An important feature of the Corporation's operations is that about 22 per cent of total loans approved represents assistance to cooperative societies (mostly sugar cooperative societies), in view of the declared policy of the government to afford special encouragement to them. In most cases, these loans are guaranteed by the Central Government and the State Government concerned in the ratio of 50:50. 122. The sugar industry accounted for the largest proportion (about 29 per cent) of total loans approved by the Corporation, due mainly to the loans given to cooperative sugar societies. The bulk of the remaining loans was accounted for by the textiles, paper, chemicals, cement, metal, metal products and machinery industries. 1/ Up to December 28, 1960, such loans required government guarantee as to the repayment of principal and payment of interest. _ 30 - 123. In 1957/58, the Corporation started underwriting of capital issues and guaranteeing of deferred payments in connection with import of capital goods. To provide this type of assistance, it has to obtain prior approval of the government in each case. In 1960/61, it also began guaranteeing of deferred payments in respect of indigineous capital goods. As at the end of June 1961, it had approved underwriting of shares and debentures to the extent of Rs. 42 million and deferred payment guarantees for Rs. 255 million. In addition, it approved guaranteeing of a dollar loan of about Rs. 15 million (including interest) to a concern from the U.S. Export Import Bank. National Industrial Development Corporation 124e The Cornoration was set up in October 1954 for the promotion and development of industries. Its paid-up capital (Rs. 3.5 million at the end of March 1961) has been provided wholly by the Central Governmenf. The additional funds required by the Corporation for financing its activities are also made available exclusively by the Central Government in the form of loans and grants. 125, The Corporation was conceived mainly as an instrument of the govern- ment for securing a balanced and integrated development of industries in both the public and private sectors. It is primarily a development corpora- tion, entrusted with the task of formulating projects for setting up new industries or developing new lines of production with a view to filling gaps in the industrial structure. It has, in most cases in collaboration with foreign firms and experts, dealt with several projects, especially in fields in which private enterprise was not expected to take the initiative. Some of the projects have already been taken up for implementation in the public sector. Certain schemes, e.g., for the production of aluminum, carbon black, cemented carbides and rayon pulp, in respect of which preliminary studies were carried out by the Corporation, were assigned to the private sector for follow-up action and establishment of production units.l/ 1ˇ6. The Corporation has also been functioning as an agency of the govern- ment for granting loans on liberal terms to the cotton textile and jute industries for modernization and rehabilitation, and, more r3cently, to the machine tools industry for rehabilitation as well as expansion. 12?. Up to the end of March 1962, the Corporation sanctioned total loans of about Rs. 238 million for the modernization and rehabilitation programs of the cotton textile and jute industries. Disbursements on these loans amounted to Rs. 88 million. Loans sanctioned for the machine tools industry amounted to Rs. 10 million while disbursements against them were of the order of Rs. 4 million. 128. The Corporation has introduced two new schemes for giving short-term assistance to cotton textile and jute industries. The first scheme is in- tended to provide domestically produced machinery on a hire-purchase basis. 1/ In 1960/61, the Corporation set up a Technological Consultancy Bureau for dealing with preliminary investigation of projects as well as for the provision of consultancy and engineering services mainly for the public sector projects. - 31 - The other scheme aims at providing short-term loans for the installation of imported machinery. Assistance provided under these schemes up to the end of 1961/62 was. hoiever, of a small order. Industrial Credit and Investment Corporation of India 129. The Corporation was established in January 1955 at the initiative of the IBRD to encourage and assist orivate industrial development in India. It is a public limited company I with an authorized capital of Rs. 250 million. The issued and paid-up capital is Rs. 50 million. Initially, an amount of Rs. 20 million was subscribed by Indian banks, insurance companies, directors of the Corporation, etc., Rs. 15 million by the general public in India and Rs. 15 million by investors in the U.K. (including the Commonwealth Development Finance Company) and in the U.SA. With the nationalization of life insurance, the shares owned by life insurance companies in India passed into the hands of the Life Insurance Corporation. 130. The ICICI assists industrial enterprises in the private sector by: (a) providing finance in the form of long or medium-term loans or equity participations, (b) sponsoring and underwriting new issues of shares and other securities, (c) guaranteeing loans raised from other private investment sources, and (d) making available managerial, technical and administrative advice and services. 131. The Corporation grants financial assistance primarily for the purchase of capital assets in the form of land, buildings and machinery, but applications relating to additional permanent working capital may also be considered in suitable cases. Loans are given for periods not exceeding 15 years. All loans and guarantees have to be secured; the form of security may, however, be varied as conditions require. Normally, the lower limit of financial assistance in an individual case is Rs. 0.5 million, but smaller amounts can be made available in appropriate cases. 132. The Government of India advanced to the Corporation in 1955 an interest free loan of Rs. 75 million, repayable in 15 equal instalments commencing after the expiry of 15 years. In 1959, the Government sanctioned another loan of Rs. 100 million out of P.L. 480 funds. This loan is available to the Corporation on call, bears interest at 4-1/2 per cent per annum and is repayable over 10 years beginning in the eleventh year. The IBRD sanctioned four loans to the Corporation for an aggregate amount of $60 million (about Rs. 285 million) by the end of March 1962. Further, the Corporation obtained loans of $5 million (Rs. 24 million) from the U.S.A. through the D.L.F. and of DM 5 million (Rs. 6 million) from West Germany through the Kreditanstalt. The total amount of loans available to the Corporation by the end of March 1962 was thus about Rs. 490 million. 2/ A public limited company is one which does not restrict the number of shareholders of place restrictions on the transfer of shares. - 32 - ,33. The Corporation has been playing an important role in financing industries and developing the capital market through its own activities as well as by encouraging other financial institutions and firms, etc. to collaborate in its operations. Further, in the context of the scarcity of foreign exchange, it has become an important source of foreign exchange loans for industries. 134. Total financial assistance sanctioned by the Corporation in various forms up to the end of 1961 (exclusive of assistance subsequently withdrawn, reduced or not proceeded with) was about Rs. 427 million as shown below: (Rs. million) Foreign currency loans 194.2 Rupee loans and guarantees 102.1 Underwriting of shares and debentures 102.2 Direct subscriptions to shares 28.6 427.1 By the end of 1961, disbursements against foreign exchange loans amounted to about Rs. 64 million, while those against rupee loans and guarantees totalled Rs. 56 million. The amount of underwriting operations completed was about Rs. 93 million, of which Rs. 40 million in shares and debentures had to be taken up by the Corporation. Actual payments in respect of shares and debentures amounted to about Rs. 38 million. In addition, direct subscrip- tions to shares amounted to approximately Rs. 26 million. The total amount actually loaned (i.e. disbursed) and invested by the Corporation up to the end of 1961 was thus about Rs. 184 million (Appendix Table 14). State Financial Corporations 135. An Act to enable State Governments to establish State Financial Corporations on a uniform basis for providing financial assistance to medium and small scale industries was passed by Parliament in 1951. The provisions of this Act are broadly similar to those of the Industrial Finance Corpora- tion Act. All States, except Madras, have set up State Financial Corpora- tions under the Act. In Madras, the Industrial Investment Corporation, which had been established in 1949 under the Companies Act, has been providing financial assistance to medium and small-scale industries. Al- together, there are at present 15 Corporations. - 33 - 136e At the end of March 1962, ;he total paid-up capital of the Corpora- tions was about Rs. 158 million,l of which Rs. 75 million was owned by State Governments and Rs. 24 million by the Reserve Bank. The bulk of the remain- ing capital was held by banks, insurance companies and other financial insti- tutions, the amount owned by individuals and others being about Rs. 6 million only. The State Governments have guaranteed repayment of the share capital and payment of a minimum annual dividend. 137. The Corporations have also raised substantial amounts by issuing bonds guaranteed by State Governments. The amount of bonds outstanding at the end of May 1962 was about Rs. 150 million. Information available in respect of initial allotments of bonds indicates that a little more than half of the total amount was subscribed by commercial banks and another one-fourth by the Life Insurance Corporation. Three Corporations, viz. those in Madras, Kerala and Andhra have accepted deposits. The fixed deposits with the Madras Corporation (inclusive of cash certificates) amounted to about Rs. 48 million at the end of May 1962. These have been guaranteed by the Madras Government. The deposits with the Kerala and the Andhra Corporations are, however, very small. 1380 The Corporations can obtain short-term advances (for periods not exceeding 90 days) from the Reserve Bank against government and other secur- ities, eligible bills, etc. They can also borrow limited amounts (up to 60% of their paid-up capital) from the Reserve Bank for a period not exceed- ing 18 months against government securities or their bonds and debentures. Further, they can borrow from the State Governments and avail themselves of the refinancing facilities provided by the Refinance Corporation (see later). 139. The Corporations can provide assistance to medium and small scale industries in the form of loans, subscriptions to debentures, underwriting of issues of stocks, shares, bonds or debentures, guaranteeing of loans raised in the market or from a scheduled bank or a state cooperative bank and guaranteeing of deferr ed payments in connection with purchase of capital goods within the country*7/ Except in the case of underwriting of securities and guaranteeing of deferred payments, the maximum amount of assistance given by the Corporation to any concern cannot exceed Rs. 2 million, if the concern is a public limited company or a cooperative society, and Rs. 1 million in all other cases.y2/ 140. The assistance made available by all Corporations, except the Madras Corporation, has been mainly in the form of loans. These are given primarily for fixed capital requirements, although a part of the loans might also be 1/ By the end of June 1962, the paid-up capital increased to about Rs. 161 million. / The loans granted by the Corporations and the debentures subscribed by them may carry an option for conversion into stocks and shares and, in the exercise of such an option, the Corporations may convert the loans and debentures into stocks and shares and also subscribe to the related issues of "rights shares". 3/ The provisions of the State Financial Corporations Act do not apply to the Madras Industrial Investment Corporation which has been established, as stated earlier, under the Companies Act. - 34 - utilized for meeting working capital needs. The period of loans is normally 10-12 years. As a general rule, the Corporations keep a margin of 50 per cent on the security offered but this requirement (as well as the other terms and conditions) may be relaxed in appropriate cases (see below). In most cases, they also take personal guarantees of directors of an enterprise. 141. As the following figures show, the activities of the Corporations have expanded substantially from 1960/61 onwards. Rs. million Loans sanctioned Loans disbursed annually annually 1958/59 50 33 1959/60 59 40 1960/61 92 48 1961/62 129 81 Nevertheless, the annual volume of the Corporations' loan disburs ments con- tinues to be rather small. Besides, the small industries' sharel- of loans granted by the Corporations is relatively minor. For example, of total loan disbursements of a little over Rs. 300 million up to the end of March 1962, the small industries accounted for about Rs. 61 million only, the rest of the amount having been loaned to medium-size industries. 142. The slow progress made by the Corporations is, of course, explained partly by the fact that most of them are in an early stage of development. Certain difficulties are also inherent in lending to small scale units. There is, how- ever, a widespread feeling that the Corporations have adopted an over-cautious approach and that their procedures are rather rigid and cumbersome. 143. The question of liberalizing the lending policies of the Corporations was considered at their annual conferences in 1959 and 1960 and it was decided that the terms and conditions might be relaxed in appropriate cases. Loans given by the Corporations to small industries have been made eligible for guarantee under the scheme introduced by the government in 1960 for guaranteeing loans to small industries (see Chapter V). The Refinance Corporation (see later) has also ex- tended refinance facilities to medium-term loans given by the Corporations. The Conference held in 1961 suggested that the Corporations should examine the feasi- bility of liberalizing their loan rules in the context of the guarantee facilities available to them and also accepted certain suggestions for relaxing the terms and conditions respecting the granting of loans for working capital. On the whole, therefore, it seems reasonable to expect that the volume of the Corporations' lending will increase progressively in future. 144. The M4adras Corporation has also been underwriting capital issues on a sig- nificant scale. The total amount of underwritings up to the end of March 1960 was about Rs. 34 million; these underwritings were mostly of the nature of agreements to purchase securities, so that the Corporation's subscriptions to the securities underwritten by it amounted to over Rs. 31 million by the end of February 1960. The Corporation stated in March 1960 that it intended to concentrate largely on pure underwriting operations in future. 1/ At present, a small scale industrial unit is defined as an undertaking whose "investment of a capital nature, including the value of rented premises, if any, but excluding the amounts spent on housing and amenities for workers," is not in excess of Rs. 0.5 million. - 35 - 145. In several States, the Corporations are also functioning as agents of State Governments for granting loans of smaller amounts to small industries on concessional terms. 146, Almost all Corporations, except the Madras Corporation, had to resort to subventions from State Governments to pay a part of the guaranteed dividends on share capital, though the magnitude of subventions has been declining in the case of several Corporations. The Corporations in AsIam, Bombay, Punjab and W. Bengal did not require any subventions in 1961/62._ National Small Industries Corporation 147. The Corporation was set up in February 1955 to promote the growth of small industries in India. It has a paid-up capital of Rs. 0.4 million, which is owned entirely by the Central Government. 148e Initially, the main function of the Corporation was to assist small scale units in securing contracts from the government for supply of goods. Subse- quently, the Corporation was assigned several other functions; as at the end of 1960/61, these additional functions included: (a) supply of machinery on liberal terms under a hire purchase scheme, (b) development of small industrial units as ancillaries to large units, (c) distribution of raw materials, etc. at reason- able prices, (d) provision of marketing assistance both in internal and over- seas markets, (e) construction of two industrial estates to provide factory buildings to small industries and management of one of them, (f) establishment and runninf of two centers to provide training facilities and develop proto- types of machine tools for mass production by small units, etc., and (g) guaranteeing, in the case of manufacture of goods to be supplied to government departments, etc. against orders placed through the auspices of the Corporation, of margins on loans made by the State Bank of India to small industries against the security of raw materials, so as to enable the State, Bank to make loans up to 100 per cent of the value of raw materials pledged.,a/ 149. By the end of March 1961, the Corporation had accepted applications (ex- cluding rejections and withdrawals) for supply of machinery valued at about Rs. 190 million under its hire purchase scheme and delivered machinery valued at Rs. 42 million against these applications. g50. The Corporation has established four subsidiary corporations at Bombay, alcutta, Madras and Delhi. The main functions of these corporations are the execution of a part of the hire purchase scheme and operation of certain marketing assistance schemes. 151. Before 1960, the funds required by the Corporation to finance its activi- ties were being made available exclusively by the Central Government in the form of loans and grants. In 1960, the Corporation also received a credit of $10 million (about Ts. [8 million) from the D.L.F. for utilization in the operation of its hire purchase scheme. 1/ The Financial Express, August 14, 1962. 2/ The guarantee is limited to Rs. 25,000 in each casJ and the total amount of such guarantees is not to exceed Rs. 3 million. Commission at the rate of 2 per cent is charged on the amounts guaranteed. The Corporation has agreed to enlarge the scope of the guarantee scheme to cover all stages of production. - 36 - Refinance Corporation for Industry 152. The Refinance Corporation was established in June 1958 mainly with the object to channel through it counterpart funds of $55 million (about Rs. 260 million), which had been earmarked for relending to private enterprise in India under the P.L. 480 arrangements. The authorized capital of the Corporation is Rs. 250 million. The paid-up capital is Rs. 125 million of which Rs. 50 million has been subscribed by the Reserve Bank, Rs. 25 million by the Life Insurance Corporation and Rs. 23 million by the State Bank. The balance of the capital is held by 13 other larger scheduled banks. The Government of India has agreed to lend to the Corporation up to Rs. 260 million (out of P.L. 480 funds). The amount actually loaned by the Government to the Corporation up to the end of 1961 was Rs. 50 million. Early in 1962, the Corporation negotiated two further loans aggregating Rs. 20 million from the Government. 153. The Corporation provides refinancing facilities (in the form of loans) to certain selected banks and other institutions against medium-term loans given by them to industrial units in the private sector, mainly for the acquisition of fixed assets. To be eligible for refinancing, the amount of the loan in each case should not exceed Rs. 5 million. Initially, the Corporation provided refinance facilities to only the scheduled banks which had subscribed to its share capital. A quota was fixed for each bank. Only loans given for periods between 3 and 7 years to concerns having paid-up capital and reserves of Rs. 0°5 - 25 million were eligible for refinancing. Loans had to be for the purpose of increasing production in the private sector, mainly in an industry included in the Five-Year Plans. The Corporation charged an interest of 5 per cent per annum on its loans. The banks were required to keep a minimum spread of l, per cent between the lending rate and the rate at which they borrowed from the Corporation and not to charge more than the rate charged by local financial agencies like the IFC, etc. In effect, therefore, the banks could usually charge 63 per cent per annum. 154. The Corporation was not able to lend any significant amount in the first two years. The total amount of applications sanctioned in these two years was about Rs. 40 million. No loans were, however, disbursed in the first year. In 1959, loan disbursements amounted to about Rs. 8.5 million. This slow progress can be attributed partly to the reluctance of scheduled banks to make term loans to industry and their improved liquidity position in 1958 and 1959. In part, it appears to be due to banks' feeling that the return of 11 per cent allowed to them on loans refinanced by the Corporation was not sufficient to compensate them for the risk and expense involved. - 37 - 155e To expand its operations, the Corporation made a nunber of changes in 1960 in the scheme for the provision of refinance facilities. The scheme has been ext4nded to 43 other commercial banks, all State Financial CorporationsI and 3 state cooperative banks. Loans to small scale industries made by financial institutions covered by the scheme and guaranteed by the Guarantee Organization set up by the government (see Chapter V) have also been made eligible for refinancing. The insti- tutions have been given discretion to charge appropriate interest rates, subject to review by the Corporation. In exceptional cases, the Corporation is willing to extend refinance facilities for loans given for more than 7 years but less than 10 years, as well as for loans given to industrial units whose paid-up capital and reserves amount to more than Rs. 25 million. Loans to any industry which is considered by the Corporation to be in conformity with the purposes of the Five- Year Plans will also be eligible for refinancing. The Corporationts surplus funds, which were earlier kept as short-term deposits with member banks, have been withdrawn and invested in government securities. 156. In 1961, the Corporation agreed to entertain applications for refinancing loans given jointly by two or more banks or by a bank and a term-lending institution such as the Industrial Finance Corporation (provided such loans satisfy the other criteria for refinancing). A proposal for refinancing the medium-term part, viz. instalments falling due within 7 to 10 years, of the longer term loans has also been formulated. Moreover, the Corporation had decided to extend refinance facilities to medium-term export credits(for periods ranging from over 6 months to 5 years) granted to exporters of engineering and capital goods. 157. As a result of the steps taken by the Corporation and such factors as the existence of stringent conditions in the money market and the introduction (in October 1960) of the system of graduated rates of interest on scheduled bankst borrowings from the Reserve Bank_/(which made it advantageous for certain banks to have recourse to the Corporation), the Corporation's rate of lending has increased substantially from 1961 onwards. For example, loans sanctioned by g/ The State Financial Corporations (except the Madras Corporation which has been incorporated under the Companies Act) however, could not avail themselves of the refinancing facilities provided by the Refinance Corporation until April 1962, when the necessary changes were made in the State Financial Corporations Act. See Chapter VII. - 38 - the Corpora-;ion iff i961 amounted to about Rs. 107 million as compared to about Rs;, 18 hiillion in the preceding year. Loan disbursements totalled Rs. 47 million in 1961 as compared to Rs. 14 million in the preceding year. Other Financial Institutions 158. The other financial institutions in the organized sector include mainly the general insurance companies, investment and trust companies and the Employees' State Insurance Corporation. 159. At the end of 1961, there were 155 non-life insurers. Of these, 73 were non-Indian insurers, Total assets of Indian insurers amounted to about Rs. 640 million at the end of 1960 and the increase in their reserves during that year was of the order of Rs, 28 milliono The assets of foreign insurers in India amounted to about Rs. 116 million at the end of 1960.1/ 160. Investment trusts have not made any significant progress in India. At the end of March 1959, there were 595 investment and trust companies with a total paid-up capital of about Rs. 377 million as compared to 610 companies with a total paid-up capital of Rs. 296 million at the end of 1950/51. But most of the companies are entrusted with the management of funds of a few rich individuals and families or of managing agents for investment in the companies controlled by them. By and large, there is little or no evidence of disinterested diver- sification of investments. Two notable exceptions are, however, provided by the Investment Corporation of India, which had total invest- ments of about Rs. 46 million spread over more than 400 different securities at the end of June 1960 and the Industrial Investment Trust which had investments of about Rs. 13 million spread over more than 200 different securities at the end of 1959. 161. The Employees' State Insurance Corporation, which provides medical, sickness and certain other benefits to factory employees, has been accumulating some funds over the past few years. Its receipts consist mainly of contributions by employers and employees and interest on accumulated balances. The State Govermnents also contribute towards its expenses by bearing a part of the cost of medical treatment and attendance provided to insured persons. In 1959/60, the receipts of the Corporation amounted to about Rs. 79 million. After allowing for benefit payments and other expenses, the surplus in that year amounted to about Rs. 17 million. A rough idea of the funds accumulated by the Corporation can be obtained from the fact that its investment in govern- ment securities amounted to Rs. 191 million at the end of March 1961. g/ Figures are exclusive of those for one Indian insurer and two foreign insurers. - 39 - Indigenous Bankers, Mloneylenders, etc. 162. Indigenous bankers and moneylenders have been in existence for centuries. It is difficult to distinguish clearly between them. According to the Indian Central Banking Enquiry Committee, the expression "indigenous bankers" includes any individual or private firm receiving deposits and dealing in bills or lending money .. Moneylenders, on the other hand, do not generally receive deposits. 163. Indigenous bankers exist mainly in cities and tofns and finance mostly trade and small scale industry. Many of them engage in other forms of business such as trading and acting as commission agents. In a number of cases, the resources of indigenous bankers are of a fairly large order. 164. Moneylenders operate in urban as well as rural areas and make advances for both production and consumption purposes. They may be classified into two broad groups, namely (a) professional moneylenders and (b) non-profession- al moneylenders, such as landowners, large agriculturists, merchants and traders, etc. According to one estimate prepared in 1954, the 9mber of moneylenders (in both urban and rural areas) was about 300,000.J 165. Some other semi-indigenous institutions, such as the loan offices in Bengal and "Nidhies" and "Chit funds" in South India,also perform certain banking functions on a limited scale. They cater mainly to the needs of people belonging to lover income groups. The loan offices and Nidhies invite deposits and make loans. The Chit funds usually involve periodic payments by members with a view to making lump sum loans to one of them at a time. Some of the funds also have a lottery feature. 166. With the expansion of institutional credit facilities, the relative importance of the indigenous credit sector has been decreasing steadily. Nevertheless, this sector continues to be of fairly large dimensions; a broad idea of this can be obtained from the fact that borrowings from indigenous bankers and traders' own funds finance about half of the total volume of trade in the country while the bulk of the funds borrowed by cultivators continues to come from moneylenders and relatives. 1i67. The financial activities in the, unorganized sector are outside the scope of the Reserve Bank's control..2/ There are, however, certain links betwjeen the organized and unorganized sectors, and these links are growing continuously. Indigenous bankers supplement their resources by borrowing See Report of the Committee on Finance for the Private Sector, 1954, p.66. 2/ Financial Intermediaries in India by M.G. Mluller, a mimeographed paper. y/ Legislation passed in various States imposes certain restrictions on moneylenders' activities, but there is large scale evasion of some of the restrictions, especially those concerning rates of interest. - !i0 - from commerciai banks, especially during the busy season (November-April) when crops are harvested and moved from producers to wholesalers. The out- standing amount of scheduled banks' loans to indigenous bankers was about Rs. 172 million on April 28, 1961 and Rs. 191 million on April 29, 1960. To a very limited extent, bank credit also flows to moneylende in the form of direct loans or indirectly through indigenous bankers, etc..' Further, some credit needs can be covered on either of the two markets. The forces operating in the organized market, therefore, have an impact on operations in the unorganized market as well. J In some cases, small moneylenders borrow from the bigger moneylenders, who, in turn, may borrow from scheduled banks. CHAPTER III Savings Channelled through Financial Institutions and Other Transferred Savings 168. With tlhe rising level of national income and the increased effort for the mobilization of savings, the total amount of savings channelled annually through financial institutions has recorded a considerable increase over the last decade, as shown below: Table 5 Savings Channelled Annually through Main Financial Institutions 1950/51 1955/56 1958/59 1959/60 1960/61 Commercial banks (time liabilities) 244 396 1113 1031 488 Cooperative banks and credit societies Deposits 46 163 275 193 2h6 g/ Share capital 32 / 82 1/ 97 138 1292/ Post office savings banks and other small savings schemes (net receipts) 3/ 317 641 723 777 1121 j Life insurance companies 5/ (life funds) 172 i 265 6 340 435 60h Postal life insurance (life funds) - 7 18 8 8 7 Employees' State Insurance Scheme (reserves) - 31 23 17 17V Provident funds (net addition) Government employees 119 223 273 343 589 Other employees 119 483 612 653 768 Total 1049 2291 3474 3595 3970 1/ Represents increase in total share capital as separate information in respect of capital owned by individuals is not available. 2/ Provisional. 3/ Exclusive of investments of provident funds. Figures for 1950/51 and 1955/56 have been taken from the Reserve Bank of India Bulletin for March 1960 while those for the later years are calculated on the assumption that about 10 per cent of the net receipts from provident funds in the non-government sector represented investment in small savings. 4i Includes net receipts of Rs. 158 million from prize bonds. / Life Insurance Corporation since September 1956. / In the case of Indian insurance companies, it is assumed that the ratio of the increase in reserves in respect.of the business in India to the total increase in reserves was the same as that of the business in force in India to the total business in force. 7/ Relate to 1959/60. Note: Figures relating to life insurance companies (Life Insurance Corpora- tion since September 1956) are for calendar years. Figures for coop- erative banks and societies are for the years beginning July 1. These figures are assumed to be valid for fiscal years. 169. Thus, the annual amount of savings channelled through financial institutions is estimated at about Rs. 4 billion for the fiscal year 1960/61 as compared to Rs. 2.3 billion in 1955/56 and Rs. 1.1 billion in 1950/51. Correspondingly, the proportion of such savings to national income is estimated at about 2.8 per cent for 1960/61 as compared to 2.3 per cent in 1955/56 and 1.1 per cent in 1950/51. 170. A little more than two-fifths of the total estimated amount of sav- ings channelled through financial institutions over the three years ending March 1961 represents contractual savings in the form of net additions to life insurance reserves, provident funds, etc. The remaining amount repre- sents mainly increases in time liabilities of commercial banks and personal deposits with cooperative credit institutions, individuals' contributions to the share capital of cooperative credit institutions and the net collections under the small savings schemes. 171. Total savings channelled through financial institutions in 1960/61 were equivalent to about one-fourth of the total estimated net investment in the economy in that year. 172. As the review in the following sections brings out, by far the greater part of the annual savings accruing at financial institutions becomes avail- able to the government either directly by way of budgetary receipts (e.g., in the case of small savings, government provident funds, etc.) or indirectly by way of investment in government securities. It has, however, to be remembered that some funds are transferred by the government to the private sector by way of loans given directly or through financial institutions-T 173. The bulk of the savings collected by financial institutions comes from urban areas. Although more than 82 per cent of the total population lives in rural areas, the savings collected in these areas are relatively small. This is due partly to the low level of incomes and, consequently, the low level of savings of the vast majority of cultivators and other people living in rural areas, and partly on account of the utilization of a large proportion of sav- ings for self-investment in agriculture, small industries, housing, etc. 174. A survey of urban households conducted for 1960 by the National Council of Applied Economic Research in 30 towns and cities in India throws interest- ing light on the savings habit of the urban population. There is a high degree of concentration of savings. A top group of 15 per cent of the urban house- holds had an income of Rs. 3000 or more and earned about 48 per cent of the aggregate income of urban households. This top group saved nearly as much as the aggregate amount of urban households' savings. In other words, 85 per cent of urban households made almost no net contribution to total saving, the sav- ings of those who saved (about one-third of the total number in this group) being roughly offset by dissavings of others. Among the occupational classes, those engaged in business, self-employed or in managerial, executive and admin- istrative capacities and also those engaged in professional and technical work saved most. The order of saving preferences was found to be as follows: investment in own business; housing; government securities and small savings; 1/ See Chapter V. - 43 - and contractcaal savings. v 175. The role of the various financial institutions in the mobilization of savings is indicated in the following sections. A. Savings Accruing at Financial Institutions - other than Contractual Time Liabilities of Commercial Banks 176. As mentioned in Chapter II, there has been a marked expansion of the commercial banks' time liabilities over the last decade. Excluding P.L. 480 deposits, the average annual increase in commercial banks' time liabili- ties during the three years 1957/58 to 1959/60 works out at about Rs. 1.1 billion as compared to an increase of Rs. 396 million in 1955/56 and Rs. 244 million in 1950/51. In 1960/61 the rate of annual increase (after adjustment for changes in P.L. 480 deposits) dropped sharply to about Rs. 490 million, / but it rose to a new high level of about Rs. 14 billion in the following year. 177. The expansion of the banks' time liabilities over the last few years is explained partly by the rising level of incomes and partly by such factors as the extension of banking facilities (particularly to smaller towns), growth of the banking habit and the raising of interest rates on time and savings deposits. 178. Time liabilities include, as mentioned in Chapter II, time deposits (including cash certificates), the time liability portion of savings deposits and certain miscellaneous liabilities. The average annual increase The information given in this paragraph has been taken from "The Hindu Weekly Review"' January 19, 1962 and "Indian Finance" dated February 10, 1962. More detailed information available for the top 15 per cent of the households indicates that only about 71% of the households in this group had net savings. j/ The drop in the rate of annual increase in 1960/61 is explained by such factors as the slower rate of deficit-financing by the government, the larger deficit in the balance of payments, the failure of two scheduled banks which temporarily affected to some extent public confidence in commercial banks (as stated later, this probably resulted in some transfer of deposits from commercial banks to post office savings banks), the diversion of some funds to the unorganized sector to take advantage of the substantially higher returns obtainable in that sector and the increase in deposits with some industrial companies which offered higher rates of interest. - 44 - in the conmercia7 bankst time deposits, exclusive of PoL. 80 deposits, amounted to about Rs. 860 million during the four years 1957/60 as compared to an increase of Rs, 533 million in 1955 and of Rs. 88 million in 1951.g Separate data in respect of the time liability portion of savings deposits are nct available. The trend of total savings deposits of scheduled bank8 is, however, shown below: Table 6 Savings Deosits of Scheduled Banks Total Deposits Increase Dur- at End of Year ing the Year 1951/52 1357 -22 1955/56 1694 179 1958/59 2288 206 1959/60 2534 246 1960/61 2818 284 1961/62 3337 519 Source: Reserve Bank of India Bulletins Thus, the annual rate of growth of savings deposits has risen sharply in recent years. In 1961/62, the increase in savings deposits of scheduled banks amounted to as much as Rs. 519 million. 179. A breakdown of time and savings deposits by various categories of depositors with scheduled banks covered by the Reserve Bankts Surveys of Ownership of Bank Deposits is given in Appendix Table 16.2/ Although the coverage of these surveys is not quite complete, the data indicate the broad trend of deposits of various categories of depositors. 180. Time deposits (other than P.L. 480 deposits) come mainly from individuals belonging to higher income groups, business concerns, govern- ments and local authorities, During the four years 1956/59, the average annual increase in personal time deposits with scheduled banks covered by j/ Figures have been taken from the Statistical Tables Relating to Banks in India. In these tables, deposits are classified as current, savings, fixed and others. Figures given in the text pertain to fixed deposits. j/ The definitions of savings and time deposits adopted for the purpose of the Surveys of Ownership of Banc Deposits are slightly different from those adopted in the case of savings and fixed deposits in the Statistical Tables Relating to Banks in India. - 45 - the Reserve Bank's Surveys mentioned above was about Rs. 470 million as compared to the average annual increase of Rse. 35 million during the four years 1950/53.2/ The number of personal time deposits accounts with scheduled banks increased from about 0.3 million at the end of 1951 to 1 million at the end of October 1961. 181. Savings deposits represent mostly personal deposits and come largely from salaried and professional classes. The number of personal savings accounts with scheduled banks (covered by ownership surveys) increased from about 1.9 million at the end of 1951 to over 4 million at the end of October 1961. A little less than three-fourths of the total number of accounts at the end of October 1961, however, had deposits of less than Rs. 500 each and the total amount held in these accounts was about 11 per cent of the aggregate savings deposits. 182., The maximum rates of interest payable on deposits by Indian scheduled banks having deposits of more than Rs. 50 million each and all foreign banks are fixed by an inter-bank agreement. The rates were raised somewhat during 1960/61 in the case of time deposits and from April 1, 1961 in the case of savings deposits./ At present, the larger banks, except the State Bank of India, generally pay 3 per cent on savings deposits and time deposits for periods of 30 days or less and up to 5 per cent on deposits for five years or more. The rates offered by the State Bank of India are slightly lower. On the other hand, the rates offered by the smaller banks are somewhat higher. 183. As mentioned in Chapter II, a Deposit Insurance Corporation has been established recently to ensure greater public confidence in banks. 184.. The commercial banks are required to keep at least 20 per cent of their deposits in the form of cash (including balances held with the Reserve Bank), gold and/or unencumbered government or other approved securities. Deposits with Cooperative Banks and Credit Societies 185. The increase in deposits with cooperative banks and credit societies under the category "individuals and other sources", which relates mainly to personal deposits, amounted to about Rs. 246 million in 1960/61 (July-June) as compared to Rs. 163 million in 1955/56 and about Rs. 46 million in 1950/51. (Appendix Table 17).3/ 186. Total deposits of cooperative banks and credit societies under the category "individuals and other sources" increased from about Rs. 725 million y Accounts of less than Rs. 500 each have been treated as personal accounts. The increase in interest rates ranged from about 1/8% per annum on deposits for 61-90 days to about 3/14% per annum on those for 2 years. Deposits for more than 2 years, which were formerly not accepted by banks, were also made acceptable (banks did, however, issue cash certificates for a period of 3 years or more even before 1960/61). The increase in interest on savings deposits was 1/2% per annum. y/ Figures are inclusive of current deposits for which separate data are not available. The figure for 1960/61 is provisional. - 46 - at the end of June 1950 to about Rs. 2 billion at the end of June 1961. The bulk of the increase was, however, accounted for by the state cooperative banks, central cooperative banks and non-agricultural credit societies, which receive deposits largely from urban and semi-urban areas. The amount of savings collected by the cooperative institutions from rural areas is relatively small. For example, deposits with agricultural credit societies amounted to only Rs. 140 million at the end of June 1960, and the anmual increase in these deposits was about Rs. 17 million in 1959/60 and Rs. 28 million in 1960/61. 187. About 30 per cent of the deposits held by agricultural credit societies at the end of June, 1960 came from one State, viz. Punjab. A large part of the deposits in that State represented savings out of remit- tances received from persons employed in urban areas or residing abroad. 188. On the whole, it appears that the thrift aspect of the cooperative movement has not been fully emphasized. Some of the societies, especially the smaller ones, also have not been able to irnspire conf-ddnee among investors.l/ Furthermore, the higher rates of interest obtainable on loans to others as well as on deposits with merchants, moneylenders, etc. render deposits with cooperatives (or entrusting of funds to other financial institutions) less attractive. 189. The state and central cooperative banks are required to maintain a part of their deposits in fluid form, i.e. in the form of cash, balance with other banks, unencumbered government and other approved securities and un- drawn portion of the credit available from banks. The urban cooperative banks (which are classified as non-agricultural credit societies) are also generally required to keep a part of their deposits in fluid form. Increase in Paid-Up Capital of Cooperative Credit Institutions 190. In recent years, contributions by individuals to the share capital of cooperative credit institutions, have shown a substantial increase (Appendix Table 18). In 1960/61 the additional contributions by individuals amounted, according to preliminary data, to about Rs. 129 million. Furthermore, a major proportion of these contributions was accounted for by agricultural credit societies. Thus, the cooperatives in rural areas have been able to raise much larger amounts through increases in share capital than by way of deposits. This is explained mainly by the fact that borrowings by members from primary societies are generally related to the share capital held by them. Small Savings 191. Net annual receipts from small savings have shown a considerable increase over the last decade. Total net receipts in 1960/61, exclusive of those from prize bonds introduced in April 1960, are estimated at about Rs. 1040 million as compared to Rs. 684 million in 1955/56 and Rs. 334 j/ Report of the Committee on Cooperative Credit, New Delhi, May 1960, P. lll1. - 47 - million in 1950/51. In addition, net receipts from prize bonds amiounted to about Rs. 158 million in 1960/61. Nevertheless, total net collections over the five years of the Second Plan (about Rs. 4 billion exclusive of receipts from prize bonds) were substantially lower than the target of Rs. 5 billion indicated in the Plan. 192. A part of the receipts from small savings represents investment of provident fund accumulations (see later in the chapter). In the light of the Reserve Bank's estimates of small savings collections from the household sector during the period 1950/51 to 1957/58,%/ the investment of provident fund balances in small savings might be taken to be of the order of 10 per cent of total annual provident fund accumulations in the non-government sector. On this basis, the investment of provident fund balances in small savings in 1960/61 would work out at about Rs. 77 million. Allowance for such investment has been made in estimating total savings channelled through financial institutions. 193. The small savings schemes have the most extensive geographical coverage. As they operate through post offices, treasuries and sub- treasuries, branches of the State Bank of India, etc., and a number of agents spread throughout the country, they have been able to penetrate into the rural areas to a significant extent. Nevertheless, progress made by the small savings movement in rural areas has been rather limited. 194, A breakdown of small savings collections by urban and rural areas is not available. Data made available by the Union Ministry of Finance, however, indicate that a little more than one-fourth of total net receipts in 1959/60 came from seven big cities.Z/ 195. The progress of the small savings movement in different parts of the country has been very uneven. For example, the net collections per capita in 1959/60 ranged from less than Rs. 1 in Kerala, Madbya Pradesh, Madras,3/ Orissa and Rajasthan to more than Rs. 5 in the Bombay State and more than Rs. 8 in Delhi. 196. The trend of net annual receipts under the various small savings scnemes is shown in Appendix Table 19. It will be seen that the 12-Year National Plan Savings Certificates, which were introduced in June 1957 and offer a yield of 41 per cent compound (if held until maturity), have become a very important medium of collecting small savings in recent years. Over the four years, 1957/58 to 1960/61, total net receipts from the various types of savings certificates (after allowing for discharges of certificates belonging to the earlier series) amounted to about Rs. 2.2 billion as compared to Rs. 1.1 billion from post office savings bank deposits. The annual rate of increase in post office savings bank deposits showed a large decline in 1956/57 and 1957/58, but started rising thereafter, the rise being especially marked in 1960/61, due presumably in part to some diversion 17 Estimates of Savings in the Indian Economyn, Reserve Bank of India Bulletin, March 1960. j Bombay, Calcutta, Delhi, Madras, Ahmedabad, Indore and Shillong. 2/ Net collections of small savings in Madras were exceptionally low in 1959/60. - 48 - of deposits from commercial banks as a result of public reaction to the failure of two scheduled banks in that year. 197. Various measures have been adopted to intensify the small savings drive. The measures adopted over the last 6 years include: (a) increase in the number of post offices doing savings bank work and expansion of the network of agents; (b) simplification of the procedure for deposits and withdrawals at post offices and extension of the facility of withdrawal by checks to more post offices; (c) increase in interest rates on small savings in June 1957 and August 1962; (d) increased publicity and propaganda, particularly in rural areas; (e) introduction of the cumulative time deposits scheme in 1959 and of the prize bonds scheme in 1960 (as stated in Chapter II, the prize bonds scheme has been discontinued since the end of June 1962); (f) changes in the cumulative time deposits scheme in 1962, including the provision of an additional tax concession in respect of deposits in the 10-year and 15-year accounts under the scheme; (g) raising of the maximum limits for investment in small savings; (h) issue of gift coupons which can be exchanged for National Plan Savings Certificates and introduction of a payroll savings scheme which enables an employee to have deductions made from his salary for investment in small savings; (i) making available of the facility of pledging savings and treasury deposit certifi- cates with banks, etc., and offer of certain other attractions; (j) special efforts for increasing collections in selected places, issue of boxes (called thundi" boxes) for deposit of savings in certain places, organiza- tion of savings groups, etc.; and (k) increase in the share of State Govern- ments in small savings collections to encourage them to intensify their efforts. 198. Receipts from small savings are treated as budgetary receipts of the government. Credit for receipts from all types of small savings, except prize bonds, is taken under the budget head "unfunded debt", Prize bonds are treated, like other government bonds, as part of the funded debt of the government. EWo-thirds of the receipts from small savings are made available to State Governments in the form of interest-bearing loans for financing expenditures included in their capital budgets.l/ The remaining amounts (as well as loan repayments by the States) become available for financing the expenditure of the Central Government on capital account. Other Non-Contractual Savings 199. These include mainly savings in the form of deposits with the Madras Industrial Investment Corporation and individuals' subscriptions to de- bentures of land mortgage banks, Industrial Finance Corporation and the State Finance Corporations. The annual amount of such savings is, howiever, very small. B. Savings Accruing at Financial Institutions - Contractual Life Insurance Corporation 200. With the substantial expansion of the life insurance business in recent years, the net increase in life funds (after deducting loans to policy-holders) has shown a marked upward trend. Thus, the net increase in the life fund of the Life Insurance Corporation in respect of the business written in India amounted to about Rs. 604 million in 1960 as compared to about Rs. 2h1 -/ In the case of prize bonds issued between April 1960 and June 1962, half of the receipts were loaned to State Governments, million in the 16 months September 1956 to December 1957, and the data available in respect of new life insurance contracted in 1961 indicate a further improvement in that year in the rate of net annual increase in the life fund. 201. The marked growth of life insurance in recent years is explained largely by the expansion of incomes, particularly of middle classes and upper income groups, as a result of the higher level of economic activity. In part it is also due to the various measures taken by the Life Insurance Corporation to popularize life insurance, especially in semi-urban and rural areas. These measures include, apart from increased publicity and propaganda, (a) offer of premium rates which are generally lower than those charged earlier by private insurers; (b) opening of more offices and provision of better facilities for payment of premiums; (c) introduction of new schemes like the Janata Policy Scheme (which was devised to meet the requirements of low income groups), salary savings scheme, group insurance and superannuation schemes and convertible term insurance scheme;/ and (d) intensified effort in certain rural areas covered by the community development program and issue of policies to people in rural areas, where facilities for medical examination are not available, without requiring them to undergo medical examination subject, of course, to a limit on the amount of insurance provided in each case and other safeguards as to age, term of assurance, etc. 202. As a result of the intensification of efforts at smaller places, new life insurance written at places having a population of less than 100,000 more than doubled between 1957 and 1960. Its proportion to total new insurance contracted in India increased from about 37 per cent in 1957 to 46 per cent in 1960. 203. Although data on life insurance by size of policies are not available, it appears that people in the lower income groups, e.g., small cultivators) artisans and industrial workers, etc., account for only a small proportion of total life insurance. This conclusion is supported by the facts that (a) the response to the Janata Policy Scheme has not been very encouraging, and (b) the average sum assured per new policy (in India) increased from Rs. 3021 in 1955 to Rs. 4097 in 1961. Furthermore, it appears that a number of people in rural areas are ignorant about life insurance.Z/ j/ The salary savings scheme enables an employee to have the premium for insurance deducted from his salary. The group insurance and super- annuation schemes enable employers to provide life insurance and retirement benefits to their employees at a low cost. The convertible term assurance scheme provides term assurance cover for a maximum period of seven years with option to convert the policy into a limited payment life or an endowment assurance policy. 2/ A recent sample survey conducted by the State Bank of India in an area within 20 miles from the location of one of its branches indicated that all small farmers interviewed were totally ignorant about life insurance. (The purpose of the survey was to find out how far the objects of the State Bank's branch expansion program had been achieved by the new branch at Nandurbar in the State of Maharashtra). - 50 - 204. At the end of 1960, life insurance covered only a small fraction (less than 2 per cent) of the population. Total life insurance in force was about 16 per cent of national income. There would, therefore, appear to be considerable scope for further continued expansion of life insurance in India, especially in the context of the rising level of incomes. 205. The Life Insurance Corporation is required to invest 25 per cent of its funds (other than funds 2/ regulated by the law of any country outside India) in government securities, another 25 per cent in government or other "lapproved"l securities (mainly securities guaranteed by the government) and a further sum equal to not less than 35 per cent in government securities, other approved securities or approved investments. The approved invest- ments include, among others, first mortgages on immovable property and debentures, preference shares and ordinary shares of concerns which satisfy certain specified criteria, e.g., in regard to payment of interest, dividends, etc., over a certain period. The remaining 15 per cent of funds can be invested in any manner considered appropriate by the Corporation. / 206. A detailed breakdown of the assets of the Life Insurance Corporation at the end of 1960 as well as those of the former life insurance companies on August 31, 1956, that is, immediately before they were taken over by the Life Insurance Corporation, is given in Appendix Table 21. It will be seen that government securities represented a little more than half of the total assets of the Corporation, Shares and debentures of joint stock companies (mostly non-government companies) constituted about 15 per cent of total assets. Among other assets, the securities of local authorities and other approved securities as well as loans on policies were relatively more important. Mortgages on property, on the other hand, constituted only 12 per cent of total assets. 207. Apart from a substantial increase in the share of State Governments' securities along with some decrease in that of the Central Government securities, the pattern of investment of funds of the Life Insurance Corporation does not show much change as compared to that of the former life insurance companies at the end of August, 1956. Postal Life Insurance 208. The annual increase in the postal life insurance funds amounted to about Rs. 8 million in 1959/60. Employeest State Insurance Scheme 209. The net increase in funds under the Employees' State Insurance Scheme (after allowing for benefit payments and other expenditures) amounted to about Rs. 23 million in 1958/59 and to Rs. 17 million in 1959/60. l/ Funds pertaining to life insurance contracted outside India. y/ The investment can be made only after securing the unanimous recommenda- tion of the Corporationts Investment Committee, or, if no such recommendation can be obtained, on the basis of a resolution of the Corporation passed by a majority of at least three-fourths of the members present at the meeting, - 51 - Provident Funds 210. In India provident funds have become a very important means of collecting savings. According to rough estimates, the total net accretion to provident funds (contributions plus interest and other receipts minus disbursements) increased from about Rs. 238 million in 1950/5l to more than Rs. 1.3 billion in 1960/61.1/ Information available for various years is set out in Appendix Tables 22 and 23. 211. The increase in annual accretions to provident funds has occurred in both the public and private sectors. Net annual receipts from provident funds for the employees of the Central and St te Governments increased from about Rs. I19 million in 1950151 to Rs. 5892T million in 1960/61. In the private sector, net annual receipts under the Employees' Provident Fund Scheme, which was introduced in 1952, amounted to about Rs. 37B million J in 1960/61. Net receipts from provident funds for employees in coal mines and the Assam tea plantations amounted to about Rs. 76 million in 1959/6O. Taking into account the accumulations in other provident funds, including those of local authorities, the total net receipts from provident funds in the non-government sector are estimated roughly at about Rs. 768 million for 1960/61 as compared to Rs. 119 million in 1950/51A. T she estimate ,or eacih year represents the total of' (a) net accretion to provident fhlnds of government employees, and (b) rough estimate prepared by the Reserve Bank of India in respect of gross contributions to provident funds in the corporate sector (net in the case of the Reserve Bank). See Appendix Table 22. It is assumed that the overestimation on account of non-exclusion of outflows in the form of refunds, loans, etc. to members would be offset by the underestimation as a result of non-inclusion of interest earned on provident fund balances as well as non-inclusion of accumulations in provident funds of employees of local bodies, educational institutions, unincorporated business enterprises, etc. See articles on savings in Reserve Bank of India Bulletins for March 1960 and August 1961. / Inclusive of a small amount representing non-recurring receipts as a result-of the-.transfer to provident funds in 1960/61 of deferred pay in the case of defXnse services personnel, / After deductingloans given to subscribers for the construction or acquisition 6f--houses. The amount involved is, however, vexy small. 4/ See footnote l above. - 52 - 212. Net :'eceipts under the Employeest Provident Fund Scheme, Coal Mines Provident Fund Scheme and the Assam Tea Plantations Provident Fund Scheme have to be invested exclusively in Central Government securities (including National Plan Savings Certificates).,/ Provident fund accumulations in the rest of the private sector have to be invested, in so far as exemption from income tax is claimed in respect of contributions, in government and other approved securities, first mortgages on immovable property, post office savings bank deposits and, to a small extent, in deposits with banks. 213.. Net receipts from provident funds of employees of local bodies and other semi-government institutions are invested mainly in government securities. Accumulations in the provident funds of government employees are, however, not invested separately; these are treated as part of the unfunded debt of the government and become available (by way of budgetary receipts) for financing the outlays in the capital budgets of the Central and State Governments. C. Other Savings Transferred to Institutions Subscriptions to the Capital of Joint Stock Companies 214. The broad position in recent years regarding savings of individuals in the form of absorption of shares and debentures of joint stock companies is showm below: Rs. million Capital Capital Increase in holdings of raised by issued Capital Government non-govern- to non- issued to and local Corporate ment companies residents residents authoritiesa/ sector Others 1957 681 76 605 11 177 417 1958 555 75 480 64 20h 212 195~9/ 712 63 649 43 262 344 a Figures are for fiscal years. i/ Figures are tentative. Source: Reserve Bank of India. .2/ Except in the ease of establishments which are allowed to run their own schemes, 20 prei cent,of net annual receipts under the Employees' Provident Fund Scheme have to be invested in National Plan Savings Certificates and th-e 'remaining 80% in the bonds of the Central Govern- ment. The same pattern is adopted in investing the annual provident fund accumulations in coal mines. 215. Thus, the average annual absorption of savings of individuals and unincorporated organizations in the form of subscriptions to shares and debentures of joint stock companies works out at about Rs. 325 million for the three years, 1957/59. Deposits of Public with Joint Stock Companies 216. Many joint stock companies, especially the cotton textile concerns, also obtain deposits from the public. Separate data in respect of such deposits are, however, not available. The net annual increase in total deposits with 1,001 companies, which account for a little more than three- fourths of the paid-up capital of non-financial public limited companies in the private sector, amounted to about Rs. 29 million in 1958 and to Rs. 13 million in 1959. Increase in Share Capital of Non-Credit Cooperatives and in Deposits with them 217. Some savings are also tapped by non-credit cooperatives in the form of contributions to share capital by individuals. The annual order of such savings is, however, small. D. Aggregate Savings Transferred to Financial as well as Non-Financial Institutions 218. On the whole, the savings channelled through financial institutions as well as the savings made available by individuals to non-financial institutions in 1960/61 might be placed roughly at a total of Rs. 4.5 billion or a little more than three per cent of national income. This estimate does not take into account the increase in deposits with merchants, indigenous bankers, moneylenders, etc,., as no data are available in respect of such deposits. The annual increase in these deposits, however, appears to be of a relatively small order. - 54 - CHAPTER IV Financing of Five-Year Plans in the Public Sector 219. Plan outlays in the public sector include net investment as well as certain'current developmental expenditures on education, health and other social services, subsidies, etc.' Total public sector outlay on development programs under the First and Second Plans is-estimated at:about Rs. 19.6 billion and'Rs. 46 billion respectively,-the-corresponding estimates of net public investment being Rs. 15.6 billion and Rs. 36.5 billion respectively. 220,'. The broad picture in regard to financing of the First and Second Plans in the publicisector, as shown by the latest estimates of the Planning Commission, isbrought out in the following table, Table 7 Sources of Finance for Plan Outlays in the Public Sector First Plan Second Plan Outcome' Original Estimates Latest Est. Rs. % of, Rs. % of Rs. % of billion Total billion Total billion Total 1. Balance from current revenues (a) at pre-plan rates of ) taxation ) 6.4 32.6 3.5 7.3 -0.5 -1.1 (b) additional taxation ) 4.5 9.4 10.5 22.8 2. Railways'-contribution 1.2 6.1 1.5 3.1 1.5 3.3 3. Loans from the public (net) 2,0 / 10.2 7.0 14.6 7.8 17.0 4. Small savings (pet) 2.4 12.3 5.0 10.4 4.o 8.7 5. Other unfunded debt and mis- cellaneous capital re-,! ceipts (net) 2.h 12.3 2.5 5.2 2.3 5.0 6. Budgetary resources correspond- ing to external assistance 1.9 9.7 8.0 16.7 10.9 23.7 7. Deficit financing 3.3 1I." 12,0 25.0 9.5 20.6 8. Gap in resourcesY/ - - 4.0 8.3 - - 9. Total plan outlay 19.6 100,0 48.0 100.0 46.0 100.0 / Includes grosp receipts from narket bor zings in the case of State-oavern- - ments, whose loan repayments have been' allowed for u6deritem 5. Net re- ceipts of the Central and State Governments from market borrowings during the First Plan period amounted to about Rs. 1.8 billion. / The gap was to be covered by additional effort'to'raise domestic resources. The annual estimates of the contributions of various sources are given in Appendix Table 24. 221. Before discussing the pattern of financial resources for the plans, it seems necessary to point out certain limitations of the data shown above from the point of view of economic analysis. For example, the Planning Commissionts estimates in respect of loans from the public relate to net receipts (gross receipts minus repayments) from loans floated by the Central and State Governments in the market, including those subscribed by the Reserve Bank of India and other banks, and a small amount raised in 1960/61 (about Rs. 0.2 billion) from prize bonds introduced in that year. While net receipts from market loans over the Second Plan period are taken at about Rs. 7.6 billion, the net absorption of government loans by the public, ex- cluding banks, over this period appears to have amounted to less than Rs. 2.7 billion, the difference of about Rs. 5 billion being explained by the absorption of government loans by the Reserve Bank, Cettral and State Govern- ments and other banks. The net absorption by the Reserve Bank and the Central and State Governments is estimated roughly at around Rs. 2.9 billion. The bulk of the remaining difference between net receipts from market loans ad their absorption by the public (excluding banks) was accounted for by investment of P.L. 480 counterpart funds in government securities by the State Bank of India. 222. Since the absorption of government loans by the Reserve Bank results in an addition to money supply, it represents deficit-financing rather than borrowings from the public. The absorption of government loans by other banks over the First and the Second Plan periods, except that part of the absorption which was accounted for by the investment of P.L. 480 counter- part funds, also gave rise to an increase in money supply 1/ and, therefore, represented deficit financing. The rupee funds arising as a result of import of commodities under the P.L. 480 program represent the counterpart of external assistance and credit for them has to be taken under external assistance. 223. Budgetary resources corresponding to external assistance over the Second Plan period are estimated by the Planning Commission at Rs. 10.9 billion. This does not take into account the P.L. 480 counterpart funds which were deposited with the State Bank of India (in the U.S. Government Title Account). The total amount of such deposits with the State Bank at the end of the Second Plan was of the order of Rs. 2 billion. Since this amount was invested mostly in government securities, including treasury bills, the total utilization of external assistance in the public sector over the Second Plan period would appear to have been close to Rs. 12.9 billion as compared to about Rs. 1.9 billion in the First Plan period. A part of the P.L. 480 assistance in the Second Plan period, however, might have been utilized for additions to buffer stocks of foodgrains, etc. but precise information in this regard is not available. 1/ The increase in the banks' time deposits over the First and Second Plan periods was much smaller than the increase in credit extended by them to the private sector alone. 82X. As regards deficit financing, the Planning Commission's estimates include (a) net drawings by governments on their cash balances, (b) net absorption of treasury bills (including treasury bills subsequently re- placed by long-term government securities) by the Reserve Bank, and (c) net increase in the Reserve Bank's advances to State Governments. Estimates of government deficit-financing, as measured by net credit ex- tended to governments by the Reserve Bank as well as other banks in all forms (including absorption of government loans) and net increase in the Central Government's currency liability to the public, have been recently prepared by the Reserve Bank of India. According to these estimates, total deficit-financing over the Second Plan period (after treating deposits of P.L. 480 counterpart funds with the State Bank as an offset to bank credit extended to governments) was of the order of Rs. 12 billion. The corresponding estimate for the First Plan period is about Rs. 2.5 billion. 225. It may, however, be noted that the inflationary impact of deficit- financing was partially offset by drawings on foreign exchange reserves and IMF credit as also, of course, by such factors as increases in national income, increase in the degree of monetization of the economy, etc. The net reduction of foreign exchange reserves over the Second Plan period amounted to about Rs. 6 billion as compared to about Rs. 1.2 billion in the First Plan period. In addition, the net utilization of IIF credit over the Second Plan period amounted to about Rs. 0.5 million.V 226. WTe may now compare the pattern of mobilization of resources for plan outlays in the public sector in the Second Plan period with that in the First Plan period. As the estimates given above show, there was a consider- able increase in the utilization of external assistance and deficit financing in the Second Plan period. According to the Planning Commission's estimates, budgetary resources corresponding to external assistance amounted to about Rs. 10.9 billion over the Second Plan period as compared to about Rs. 1.9 billion over the First Plan period. Total utilization of external assistance in the public sector over the Second Plan period, inclusive of a small amount which might have been utilized for building up buffer stocks of food- grains, etc., is estimated, as mentioned earlier, at close to Rs. 12.9 billion. Deficit-financing as measured by the extension of net bank credit to govern- ments and net increase in the Central Government's currency liability to the public, amounted to about Rs. 12 billion over the Second Plan period as compared to about Rs. 2.5 billion over the First Plan period. On the whole, it seems that external assistance anddeficit-financing together accounted for 1/ According to rough estimates prepared recently by the Reserve Bank, the government sector's transactions involved a foreign exchange deficit of nearly Rs. 3.3 billion over the Second Plan period and Rs. 5.6 billion over the First Plan period. See RBI Bulletin for July 1961, p. 1061. - 57 - more than half of the total plan outlay over the Second Plan period as compared to about 22 per cent over the First Plan period. Correspondingly, the share of the rest of the sources in financing plan outlays showed a considerable decrease in the Second Plan period. 227,L The total contribution from current revenues of the Central and State Governments towards the financing of plan outlays is estimated at about Rs. 10 billion in the Second Plan period as compared to Rs. 6.4 billion in the First Plan period. The entire contribution in the Second Plan period is, however, accounted for by the estimated yield from additional taxation. The balance from current revenues over the Second Plan period at the 1955-56 rates of taxation actually works out at a negative figure of about Rs. 0.5 billion. It must, however, be borne in mind that the entire expenditure on maintenance of social services and similar developmental items at the level reached by the end of 1955/56 is treated as non-plan expenditure for the Second Plan period. Besides, there were considerable increases under certain items of non-plan expenditure, particularly under defense, administration, debt services, etc., during the course of the Second Plan. The tax yields, without taking into account the revenue attributable to additional taxation, were also not responsive enough to increases in national income, the ratio of total tax receipts at the 1955/56 rates of taxation to national income being estimated at 7.1 per cent for 1960/61 as compared to 7e6 per cent in 1955/56. 228. The railways' contribution towards the financing of their development program under the Second Plan (after allowing for depreciation provision and payments of interest and dividends to the Central Government according to prescribed arrangements), is estimated et about Rs. 1.5 billion, which showrs a moderate improvement over the performance in the First Plan period. 29j, The net absorption of government loans by the public, excluding banks, over the Second Plan period is estimated, as mentioned earlier, at less than Rs. 2.7 billion. The corresponding estimate for the First Plan period is Rs. 2.5 billion. The net absorption of government loans by institutional investors like the Life Insurance Corporation, provident funds and the Employees' State Insurance Corporation showed a substantial increase over the Second Plan period. Holdings of government securities by the rest of the public (excluding banks),js a whole, on the other hand, appear to have shown a sizeable decrease.-' Net receipts from prize bonds amounted to about Rs. 158 million in 1960/61. 1 As against theestimated total net absorption of government loans by the public (excluding banks) to the extent of less than Rs. 2.7 billion over the Second Plan period, net investment of the Life Insurance Corporation in government securities amounted to about Rs. 1.2 billion during the period September 1956/December 1960 while net investment (of exempted as well as non-exempted establishrments) under the Employees" Provident Funds Scheme, mainly in government securities, amounted to another Rs. 1.3 billion during April 1956 - December 1960. Investments of other provident funds and the Employees' State Insurance Corporation were also of a substantial order. - 58 - 23tY. Net collections of small savings recorded a substantial increase over the Second Plan period. Total net collections over this period (ex- clusive of receipts from prize bonds which are included under loans from the public) amounted to about Rs. 4 billion, or 67 per cent more than in the First Plan period. 231, Under the item "other unfunded debt and miscellaneous capital receipts", a substantial part of the net inflow represents accumulations in provident funds for government employees. Total net accretion to these funds over the Second Plan period &f;ounta3. GO . As. 1,7 billion as compared to Rs. 0.9 billion over the First Plan period. The rest of the inflows represent the net result of receipts and disbursements under a number of items in the budgets. 232. A comparison of the actual financing of the Second Plan in the public sector wlith the scheme of financing originally envisaged for it shows that, despite a shortfall in total outlay, the reliance on external resources turned out to be much larger than visualized at the time of the formulation of the plan. Utilization of external assistance in the public sector over the Second Plan period is estimated, as mentioned earlier, at close to Rs. 12.9 billion as compared to the original estimate of Rs. 8 billion. Further, the drawals on foreign exchange reserves-(on account of the transactions of both public and private sectors) amounted to about Rs. 6 billion as compared to the original estimate of Rs. 2 billion. 23-. The increased reliance on external resources had its counterpart in a shortfall, as compared to the original expectation, in the contribution of domestic sources as a whole. The balance from current revenues at the pre-plan rates of taxation (1955/56 rates) shomed a shortfall of about Rs. 4 billion as compared to the original estimate, due mainly to larger increases in current non-plan expenditures. The yield from additional taxation, however, exceeded the plan target, even after including in this target the addition- al effort visualized for covering the gap which remained in the scheme of financing for the plan, by about Rs. 2 billion. The railways' contribution was of the same order as envisaged earlier. Small savings showed a short- fall of about Rs. 1 billion. Net receipts from loans from the public exceeded the original target according to the Planning Commission's figure. The actual absorption of loans by the public was, however, considerably smaller than visualized at the time of the formulation of the plan. Net inflow under other unfunded debt and miscellaneous capital receipts was slightly lower than estimated earlier. 234. As for deficit-financing, the Planning Commission's latest estimate places the total for the Second Plan period at about Rs. 9.5 billion as compared to the original estimate of Rs. 12 billion. Since, however, the Planning Commission's estimates leave out the absorption of government loans by the banking system, the comparison just indicated is not of much practical significance. Deficit-financing as measured by the extension of net bank credit to governments and net increase in the Central Government's currency liability to the public is estimated, as mentioned earlier, at about Rs. 12 billion for the Second Plan period. Howyever, as the drawals on foreign exchange reserves were much larger than anticipated earlier, the net inflationary financing of plan outlays was substantially smaller than envisaged at first. Even so, wholesale prices rose by about 28 per cent over the Second Plan period. Although prices at the beginning of the Second Plan period were relatively low, indications are that the rise in prices over this period imposed a good deal of strain on the economy. 235. Reference may also be made to the scheme of financing envisaged for public sector outlay in the Third Plan. The development program included for the public sector in the Third Plan is estimated to involve an outlay of more than Rs. 80 billion. Financial provision for public sector outlays in the Third Plan has, however, been limited to Rs. 75 billion, of which Rs. 12 billion is for current outlay and the rest for net investment. The financial provision could, it is suggested in the Plan, "be improved upon if production and savings increase sufficiently". Table 8 belct shows the scheme of financing for public sector outlay in the Third Plan. Table 8 Third Plan - Scheme of Financing for the Public Sector Rs. Billion % of Total 1. Balance from current revenues (excluding additional taxation) 5.5 7.3 2. Contribution of railways 1.02/ 1.3 3. Surpluses of other public enterprises 452 6.0 4. Loans from the public (net) 8.0J 10.7 5. Small savings (net) 6.o 8.0 6. Provident funds (net)ki 2.7 3.6 7. Steel equalization fund (net)5/ 1.0 1.3 8. Balance of miscellaneous capital receipts over non- plan disbursements 1.7 2.3 9. Additional taxation, including measures to increase the surpluses of public enterprises 17.1 22.8 10. Budgetary receipts corresponding to external assistance 22.0 29.4 11. Deficit financing 5.5 7.3 Total 75.0 100.0 2 Exclusive of yield from increases in fares and freights. Credit for such yield has been taken under item 9, (Figures given in Table 7 for the railways' contribution over the First and Second Plan periods are inclusive of yields from increases in fares and freights). V In Table 7 , surpluses of public enterprises other than railways are included under items l(a) and 5. / Inclusive of receipts from prize bonds. 1/ Provident funds for government employees only. Investment in government securities of provident funds in the non-government sector are reflected in the figure for loans from the public. / Receipts from surcharge on steel minus certain disbursements. - 60 - 236. As Table 8 shows, budgetary resources corresponding to external assist- ance are expected to finance nearly 30 per cent, deficit financing 7 per cent and the rest of domestic resources 63 per cent of the total public sector outlay in the Third Plan. 237. Total utilization of external assistance over the Third Plan period in both public and private sectors has been taken, as mentioned in Chapter I, at Rs. 32 billion. Of this, Rs. 4.5-5.0 billion is expected to finance re- payments of foreign loans maturing during the Third Plan. Assistance going directly to the private sector in the form of private capital inflows and loans from IBRD, International Finance Corporation, U.S. Export-Import Bank, etc. has been taken at about Rs. 3 billion. Additions to buffer stocks and retentions of rupee resources by the U.S. authorities out of P.L. 480 assist- ance are estimated to account for another Rs. 2 billion. The availability of external assistance forifinancing plan outlays in the public sector (budgetary resources corre$ponding to external assistance) has, therefore, been taken at Rs. 22 billion. 238. Deficit financing over the Third Plan period is proposed to be limited to Rs. 5.5 billion. This does not take into account the likely absorption of public loans by banks (other than the Reserve Bank), so that the actual money-creating type of financing by the government sector might be expected to be somewhat larger than indicated by the figure just mentioned. It must also be borne in mind that drawings on foreign exchange reserves to any significant extent cannot be counted upon (in view of the low level of these reserves) to offset deficit financing. 239. The targets set in the Third Plan for contributions from other sources are fairly high and will call for maximum effort by the Central and State Governments for mobilization of resources. A detailed examination of the prospects in the case of each source of finance, however, cannot be undertaken in the present study. CHAPTER V Financing of Capital Requirements in the Private Sector 240, For the private sector, detailed information on financing of capital requirements is available only in the case of large and medium scale industries. Information available in respect of agriculture, small scale industries, houAsing, etc., which constitute the so-called unorganized sector of the economy, is very limited and fragmentary. An attempt has, however, been made to bring together the available information with a view to present- ing a rounded picture. Financing of Large and Medium Scale Industries 241. Apart from internal resources consisting of depreciation reserves and retained profits, the main sources of finance for large and medium scale industries are as follows: a. New issue market b. Commercial banks c. Special finance corporations d. Loans and participation in capital by government e. Foreign investment In addition, some concerns also obtain deposits from the public and/or loans from their managing agents ./ 242. As indicated in Chapter VI, the new issue market in India has widened significantly in recent years and, according to preliminary data which are probably somewhat inco,mplete, the total amount of new capital raised by non- government companies.!in 1961 through shares and debentures (other than bonus issues, but inclusive of shares and debentures taken up by non-residents) was about Rs. 890 million. 243. Commercial banks play a vital role in financing large and medium scale industries. Reflecting the progress of industrial development, the tota. credit extended by scheduled banks to industries (other than plantations) increased from a little less than Rs. 2 billion at the end of larch 1951 to 1/ As stated in Chapter VI, the unique institution of managing agents (compris- ing individuals, firms and companies) has played a very prominent role in the promotion, financing and management of companies in India. Their im- portance has, however, declined considerably in recent years, mainly as a result of the restrictions placed (with a view to curbing malpractices) on their operations, tenure, remuneration, etc. and the number of companies which can be man3ged by one managing agency. (Apart from making loans, the managing agents also assist the companies managed by them in obtaining loans from banks, etc. by guaranteeing such loans. The amounts of loans guaranteed by managing agents are, however, dependent mainly on the financ- ial position of the borrowing company and the security offered.) / The capital of government companies, i.e., companies with a majority share- holding by the Central and/or State Governments, is provided mostly from government sources. - 62 - over Rs. 6.5 billion by the end of April, 1961. During the same period, the ratib of industrial credit to total credit extended by scheduled banks increased from about 34 per cent to 50 per cent. 244. Commercial banks provide, it may be noted, mainly short-term credit for financing working capital requirements of industries. As a result of encouragement from official quarters and the refinance facilities provided by the Refinance Corporation in respect of loans to medium and small scale industries, there has been an increase in medium-term bank loans (generally for 3-7 years) in recent years. But the total of such loans continues to be small. A part of short-term advances given to industries is, however, renewed from time to time, and constitutes, in effect, lending for a longer period. In many cases there is an understanding that repayment will be after a period of one year. 245. According to the information available for June 30, 1960, in respect of 29 commercial banks, which accounted for more than 85 per cent of total bank credit, loans formally sanctioned for a period of more than one year as well as advances in respect of which there wias an understanding that repayment will be after a period of one year accounted for a little more than half (54 percent) of advances to industries and about 30 per cent of the aggregate advances. Loans formally sanctioned for a period of nore than one year, however, amounted to less than 5 per cent of total bank credit. 246. Apart from providing finance directly, commercial banks assist industries in raising capital from the market through underwriting of their capital issues. They also indirectly partake in long-term industrial finance through (a) investment in shares and debentures of industrial concerns (b) advances against shares and debentures, and (c) investment in shares and bonds of various financial corporations. Their total investment in shares, debentures and bonds is, however, small, being of the order of Rs. 260 million at the end of 1960. Advances outstanding against shares and debentures totalled about Rs. 1.1 billion at the end of 1961. 24h7. The special finance corporations, which provide finance directly to large and medium industries, include the Industrial Finance Corporation, Industrial Credit and Investment Corporation of India, Nationa) Industrial Development Corporation and the State Financial Corporations.V2 They have been providing long and medium-term capital to industries on a substantial scale. The order of magnitude of assistance made available by them annually in the form of loans, mainly long and medium-term loans against the security g/ Steps are being taken in certain States (e.g. Andhra, Kerala and Uttar Pradesh) to set up Industrial Development Corporations, one of whose functions will be to provide finance in medium range above Rs. 1 million. See "Structure of Industrial Financing in India" by H.T. Parekh in Indian Finance, November 18, 1961. - 63 - of fixed assets, is shown below: Loans Disbursed Period Rs. million Industrial Finance Corpo- ration July 1960 - June 1961 66 Industrial Credit and Invest- ment Corporation of India 1961 45 National Industrial Develop- ment Corporation Apr. 1961 - Mar. 1962 25 State Financial Corpo- rations Apr. 1961 - Mar. 1962 81 Total 217 248. While the IFC, ICICI and NIDC make loans mostly to large and medium scale industries, a part of those made by the SFC's (about one-fifth of total loans disbursed by the end of March 1962) is in respect of small scale industries. 249. Apart from loans, the ICICI has been providing equity capital to industries to some extent. Recently, the IFC has also been authorized to participate in equity capital of industrial concerns. In addition, the ICICI, IFC and the Madras Industrial Investment Corporation have been underwriting capital issues. (See Chapter VI). The IFC has moreover been guaranteeing deferred payments in respect of imports of capital goods. 250. The Central and State Governments provide financial assistance to large and medium scale industries mainly in the form of loans and subscriptions to share capital. The total amount of such loans and share subscriptions over the Second Plan period is es ,mated at about Rs. 200 million, or an average of Rs. 40 million a year._ 251. Foreign investment in the private sector has recorded a marked increase in recent years. The net inflow of foreign capital in the private sector (other than banking) in the form of (a) net increase in foreign liabilities of branches of foreign companies operating in India, (b) net increase in foreign holdings of shares, including a proportionate share of retained profits, anddebentures of Indian companies and (c) net increase in loans from official sources abroad, mainly the IBRD, U.S. Export-Import Bank and the Development Loan Fund, amounted to about Rs. 1528 million over the four years 1956/59, or Rs. 382 million a year, as compared to an annual average of Rs. 163 million during 1954/55 (Appendix Table 25). I/ See Table 9 on page 63. - 64 - 252. Of the net foreign capital inflow of about Rs. 1528 million during 1956/59, Rs. 968 million, or more than 60 per cent of the total, represented inflow from oftlicial sources. The bulk of this latter amount was accounted for by IBRD loans, mainly to steel and electricity companies. Net inflow of private foreign capital during 1956/59 amounted to about Rs. 560 million as shown below: a/ Rs. rhilliorT Gross inflows 1105 (a) Retained profits 539 (b) New capital receipts 565 Outflow 546 Net inflow 5 a/ Rounded figures. The bulk of the capital outflow occurred during 1958 and 1959 and was accounted fur largely by the petroleum industry. The outflow in 1959 was, however, much smaller than in 1958. 253. In recent years, there have been signs of an increased response of foreign investors to the expanding investment possibilities in the country. Approvals for allotment of shares to non-residents totalled over Rs. 190 million2iin 1959 as compared to Rs. 130 million in the preceding year. The rate at which shares were actually allotted to non-residents in 1959 was, however, rather slow; consequently actual share allotments in 1959 (Rs. 63 million) were somewhat lower than those in 1958 (Rs. 75 million). For 1960, data are available only in respect of approvals; these were maintained at roughly the same high level as in: the previous year. 254. The broad picture in regard to financing of fixed investment in large and medium scale industries in the private sector during the First and Second Plan periods, as shown by the latest estimates, is brought out in Table 9. It will be seen that the availability of funds from almost all sources,, except direct loans and participation by Central and State Govern- mentsL, increased considerably over the Second Plan period. The increase was especially marked in the case of institutional agencies (special finance corporations), new capital issues and direct foreign credits and participa- tion in capital; consequently, their relative importance in financing industries rose substantially. 255. A more detailed picture of financing of capital requirements is avail- able for the corporate sector (non-financial) as a result of studies made by the Reserve Bank of India in respect of selected companies for various years. Data on sources and uses of funds 5qr the selected large and medium public limited companies (non-government)- are set out in Table 10. / Exclusive of approvals for switches in existing non-resident investment. g/ The decrease over the Second Plan period in financial assistance by the Central and State Governments in the form of loans and direct participation in capital appears to have been mainly due to the large increase in the flow of funds from special financial institutions. 3/ A public company is one which does not place any restriction on the number of shareholders, transfer of shares, etc. Both government as well as non- government companies may, therefore, be organized as public companies. Table 9 Financing of Fixed Investmenta/in Large and Medium Scale Industries in the Private Sector First Plan Second Plan (1951/56) (1956/61) Rs. mil. % of Total Rs. mil. % of Total From institutional agenciesY 180 5.3 800 9.4 Direct loans and participation by Central and State Governments 260 7.6 200 2.4 New capital issues2/ i400 11.8 1500 17.6 Internal resources of enterprises (net of repayment liabilities) 1500 41.2 4000 47.1 Direct foreign credits and participation in capitadW 1420-450 12.3-13.2 2000 23.5 Miscellaneous sources (including advances from managing agents) 610-640 17.9-18.8 e/ i Total 3400 100.0 8500 100.0 a/ Includes net investment and expenditure on replacement and moderniza- tion of plant and machinery to make up a backlog of depreciation, but does not include increase in inventories. Net investment in fixed assets is estimated at about Rs. 2.3 billion for the First Plan period and at Rs. 7.25 billion for the Second Plan period. b/ Special finance corporations, including the Refinance Corporation. c/ Including debentures. i Figures shown against this item are not comparable with those given in respect of net inflow of foreign capital on pages 61 and 62, as the former relate to gross inflow and include suppliers' credits but exclude retained profits belonging to non-residents. Further, the coverage of the figures in the table above is restricted to large and medium scale industries. e/ Included in internal resources of enterprises. At the time of the formulation of the Second Plan, the estimate was Rs. 800 million. Source: Second and Third Plan documents. - 66 - Table 10 Sources and Uses of Funds of Selected Pablic Limited Comnaniesi/ (Rs. million) 5 years 5 years 1951/55 1956 1957 1958 1959 1960 1956/60 Number of Companies 750 1,001 1,001 1,001 1,00] 1,001 1,001 Sources of Funds Internal resources (depreciation reserves and retained profits)Z/ 2,451 979 666 825 962h/ 1 525/ 4,952 (59) (37) (28) (49) (62) (%6) (45) External resources Paid-up share capital and debentures (excluding capitalized reserves) 378 223 282 251 298 207 1 261 (9) (8) (12) (15) (19) (8) t11) Borrowing from banks 265 680 473 113 -38 584 1,812 (7) (25) (19) (7) -(2) (21) (16) Other sources2" 1,037 799 998 504 325 420 3,046 (25) (30) (41) (29) (21) (15) (28) Total 1,680 1,702 1 753 868 585 1,211 6,119 (41) (63) t72) (51) (38) (44) (55) Total increase in liabilities 4,131 2,681 2,419 1,693 1,547 2,731 11,071 (100) (100) (100) (100) (100) (100) (100) Uses of Fundy Gross fixed assets 2 709 1 388 1,787 1,490 1 0594/ 1,226 / 6,950 t66) (52) (74) (88) W68) (45) (63) Inventory 619 939 521 52 151 1,010 2,673 (15) (35) (21) (3) (10) (37) (13) Other assets (including cash and bank balances) 803 354 131 151 337 495 1 448 (19) (13) (5) (9) (22) (18) (24) Total increase in assets 4,131 2,681 2,419 1,693 1,547 2,731 11,071 (100) (100) (100) (100) (100) (100) (100) / The sample of 750 companies for 1951/55 accounted for about two-thirds of the total paid-up capital of non-financial public limited companies in the private sector. The coverage of 1001 companies was about 78 per cent. Data for each year relate to the accounting years of companies that ended during a period of 12 months commencing from July 1 of the year indicated. / Net of advance payments of income tax. / Include borrowings from the International Bank for Reconstruction and Development and the various finance corporations in the country, trade dues, etc. v Not adjusted for dowmward revaluation of fixed assets by about Rs. 24 billion. / Not adjusted for upward revaluation of fixed assets by about Rs. 1 million. Note: Figures in brackets indicate percentages of totals. Source: Reserve Bank of India and its bulletins. - 67 - 256. As Table 10 shows,a little less than 60 per cent of the total expenditure on assets formation (gross) by the selected public companies during the five years 1951/55 was financed from internal resources, consist- ing of depreciation reserves and retained profits. This proportion, however, amounted to only about 37 per cent in 1956 for an enlarged sample, due mainly to a sharp rise in the expenditure on assets formation. In the follow- ing year, when profits declined substantially, the share of internal re- sources in financing assets formation decreased further to about 28 per cent. On the other hand, the share of borrowings from banks amounted to about 25 per cent and 19 per cent respectively in 1956 and 1957 (due mainly to large additions to inventories) as compared to 7 per cent during 1951155. The share of new capital issues as well as other sources, which include borrowings from the IBRD (mostly by steel and electricity companies) and the various finance corporations in the country, trade dues, etc., also was on the whole higher in 1956 and 1957 than during the preceding five-year period. 257 . With an improvement in the level of profits and decline in the tempo of investment (mainly as a result of drastic import curbs in force since 1957 and the virtual completion of the investment programs in some industries under the Second Plan), the share of internal resources in financing total assets formation recovered to about 49 per cent in 1958, and increased to 62 per cent in 1959. The share of new capital issues also recorded a substantial increase. 258 , In 1960, there was a marked expansion of internal resources. Although total expenditure on assets formation also rose considerably in that year, the share of internal resources in financing this expenditure amounted to about 56 per cent. Net borrowings from banks were also of a large order. 269. Over the five years 1956/60 as a whole, internal resources accounted for about 45 per cent of total assets formation of the selected public limited companies, while new capital issues accounted for about 11 per cent. 260 . Data available for private limited companies for the years 1956/59 indicate that, during these four years, about 47 per cent of the total gross assets formaton of 333 selected companies, which accounted for about 30 per cent of the total paid-up capital of non-government private limited companies in the sectors covered, was financed from internal resources. 261 The Indian tax system provides certain important concessions to industries. New industrial undertakings are exempt from tax on profits up to 6 per cent of the capital employred for a period of five years. A development rebate equal to 20 per cent of the cost of all new plant and machinery (40 per cent of the cost in the case of new ships) is allowed to be deducted from profits in the year of installation for purposes of determin- ing the amount of taxable profits. -/ In the event of insufficiency of profits, j/ Up to March 31, 1961, the development rebate was equal to 25 per cent of the cost in the case of new plant and machinery. - 68 - the development rebate can be carried forward for a period of eight years. This rebate is in addition to normal depreciation allowance as well as extra shift depreciation allowance. Losses can be carried forward (for a period of 8 years) for being offset against profits in the following years. Inter-corporate dividends derived from companies in specified industries are taxed at a lower rate in the hands of corporate recipients. These and other concessions have not only helped in augmenting the internal resources of industries to some extent but contributed to the positive decision to establish enterprises in certain cases. 262 The Third Five-Year Plan envisages net investment of Rs. 11 billion in large and medium scale industries in the private sector. In addition, expenditure on replacement and modernization of plant and machinery to make up for an existing backlog of depreciation is placed at about Rs. 2.5 billion As against these requirements, the resources expected to become available for financing fixed investment are placed at about Rs. 12.5 billion, as shown below: Table 11 Estimates of Resources for Private Fixed Investment in Large and Medium Scale Industries in the Third Plan Period Rs. million % of Total Institutional agencies 1300 10.4 Direct loan participation by Central and State Governments and other assistance 200 1.6 New capital issues 2000 16.0 Internal resources (net of repayment liabilities) 6000 48.0 Direct foreign credits and participation in capital 3000 24.0 Total 12500 100.0 Thus, there is a shortfall in estinated resources of the order of Rs. 1 billion. In view of this shortfall and the difficult foreign exchange position of the country, the Plan recognizes the possibility of a shortfall in actual performance as compared to the targets for various industries, but an endeavor is to be made to ensure the full achievement of targets in the case of industries of high priority. 263. The pattern of financing envisaged in respect of private fixed investment in large and medium scale industries in the Third Plan period corresponds broadly to that in the Second Plan period. - 69 - Financing of Agriculture 264.. A good deal of information in respect of financing of agriculture is available for 1951/52 from the Rural Credit Survey Committee Report published in 1954. According to this Report, nearly 69 per cent of gross capital formation (exclusive of purchase of land and livestock) in agriculture in 1951/52 was financed from the cultivators' own resources. Further, more than 90 per cent of the total funds borrowed by cultivators in that year for all purposes (including consumption and repayment of debt) care from moneylenders,_. professional as well as non-professional, and relatives. The share of coopera- tives and commercial banks in the cultivatorst total borrowings amounted to about 3 per cent and 1 per cent respectively while that of the government amounted to another 3 per cent of the total. / 265. As mentioned in Chapter II, cooperative credit has recorded a marked increase over the last decade. The annual amount of short and medium-term credit advanced by agricultural cooperative credit societiesj/increased from about Rs. 246 million in 1951/52 to Rs. 2.1 billion in 1960/61, and the estimate for 1961/62 is Rs. 2.4 billion. The annual amount of long-term loans made to individuals bylpnd mortgage banks increased from about Rs. 13 million in 1951/52 to Rs. 8 6imillion in 1959/60. Although the total annual borrowings of cultivators have also increased substantially over the last few years, the share of cooperative institutions in these borrowings is estimated to have gone up to about 10-12 per cent by 1959/60 and there has been some farther improvement since then. 266. The bulk of the credit made available by agricultural credit societies represents short-term advances, mainly for seasonal agricultural operations and other productive purposes./ M4edium-term loans, which are given largely for purposes like purchase of cattle, minor improvements to land, etc. are of a relatively small order, the amount of such loans advanced in 1959/60 being about Rs. 150 million, or less than 10 per cent of the total credit advanced by agricultural credit societies. This is explained partly by the fact that the resources available with the societies in the form of own funds (share capital and reserves) and medium-term borrowings from central coopera- tive banks, etc. are rather limited. It must be mentioned in this connection / The rates of interest charged by moneylenders are generally high and some- times very high. See Chapter VII. 2 Total borrowings of cultivators in 1951/52 are placed at about Rs. 7.5 billion. / Including grain banks, which provide generally short-term advances in kind. The annual amount of grain bankst advances is small, being about Rs. 15 million in 1959/60. 4/ All loans by primary land mortgage banks have been treated as loans to individuals. / There is, however, no effective machinery to ensure that loans are used for purposes for which they are ostensibly intended. - 70 - that the funds provided by the Reserve Bank (through the state and central , cooperative banks) for medium-term lending by the societies have been small. 267. About 44 per cent of total advances of agricultural credit societies outstanding at the end of 1959/60 was secured by immovable property, 14 per cent by personal guarantees and 15 per cent by agricultural produce. 268. Long-term loans made by land mortgage banks in 1959/60 (mainly against the security of land and other immovable property) were largely for land improvement and purchase of machinery. 269. Although the volume of cooperative credit continues to be very in- adequate in relation to needs, it is important to note that its expansion has resulted in some decrease in interest rates charged by moneylenders. 27-. An important shortcoming of cooperative credit is that it is often not available at the appropriate time. In many cases the cultivators themselves apply rather late. Efforts are, however, being made to improve the lending procedures of cooperatives. 271. The volume of credit extended to cultivators by 9pmmercial banks continues to be very small. Total agricultural advances of scheduled banks amounted to only Rs. 76 million, or less than 0.6 per cent of total bank advances, on April 28, 1961. They were actually much higher (about Rs. 194 million) a year ago, i.e., on April 29, 1960. Commercial banks, however, make available some finance for agriculture indirectly through merchants. 272. As mentioned elsewhere (see Chapter II), the State Bank has been playing a significant role in promoting the development of institutional credit in rural areas. Apart from taking certain other steps, it has been providing finance to some extent to cooperative banks, cooperative marketing and processing societies and land mortgage banks. At times, the other commercial banks also make advances to cooperative banks and take up debentures of land mortgage banks. 273. The State Governments provide financial assistance to cultivators in the form of loans (known as taccavi loans) and subsidies for relief from 2/ The outstanding amount of the Reserve Bankts medium-term loans to state cooperative banks amounted to about Rs. 76 million at the end of March 1961. Up to October 1960, medium-term loans out of funds provided by the Reserve Bank could be made to ultimate borroters only against the mortgage of land. Since then, this condition has been waived in the case of loans of less than Rs. 500 each. 2`urther, ULi 2es3rva B3ank has ar-.read, to the .rant of loans of Rs. 501 - 1000 against tne creation of a c3harge on tl9 borroajerts land, provided that certain conditions are `lfilled. 2/ z.xc1lhi.ve of advances to .lantations of tea, coffee, etc. - 71 - natural calamities like famine, drought, etc., as well as for agricultural development. The latter type of assistance is made available among other purposes, for construction of irrigation facilities, other land improvements_ purchase of fertilizers, seeds, etc. Total government assistance made available towards the financing of net private agricultural investment under the Second Plan is estimated at about Rs. 500 million, or about 7 per cent of such investment. 274. Mention may also be made of some schemes under which special credit facilities are available to farmers in certain areas. One such scheme is the Full Finance Scheme which has been in operation in selected areas in certain districts in the State of 1Madras. The main objective of the scheme is to extend cooperative credit (on an adequate scale) to all families engaged in agricultural production in the selected areas. A second scheme is the Intensive Paddy Cultivation Scheme in the State of Bombay; it envisages, among other things, provision of credit to every cultivator member of a cooperative society to meet fully his requirements for production of paddy under the Japanese method of cultivation and also partially his consumption needs. A third scheme is the one taken up for intensive agricultural development in selected districts on the basis of the suggestions of an Agricultural Production Team sponsored by the Ford Foundation. The scheme aims at providing, in the districts selected, all the essential elements for increasing agricultural production to the extent needed, such as supplies of fertilizers, pesticides, improved seeds and improved implements, credit facilities, scientific demonstrations on a large scale, etc.; credit is to be made available on a scale sufficient to reach all farmers, including those previously considered uncreditworthy, and an effort will be made to link it with marketing. To begin with, the scheme was taken up in one district in each State. Recently, it has been extended to certain additional districts. A proposal has also been formulated for providing special long- term credit facilities (through land mortgage banks) in development project areas as well as for plantation crops. 275. To sum up, it appears that the major part of agricultural investment is financed from the cultivators' own resources. The share of cooperatives in total annual agricultural credit has increased substantially over the past few years, but the bulk of the total credit continues to come from non- institutional sources. 276. To support the agricultural development program, the Third Five Year Plan envisages a considerable increase in the volume of cooperative credit available to cultivators. The annual amount of short and medium-term credit is expected to increase from a little over Rs. 2 billion in 1960/61 to Rs. 5.3 billion in 1965/66. During the same period, the outstanding amount of long-term loans is expected to increase from about Rs. 345 million to a little more than Rs. 1.5 billion. To achieve these targets, the Plan envisages a - 72 - considerable strengthening of the cooperative structure and an increased flow of resources to cooperative institutions from the Reserve Bank. Subsidies to cooperatives are also being provided on a larger scale. In addition to subsidies towards management expenses in suitable cases, it has been decided to make outright contributions to the funds of primary societies and cooperative central banks at the rate of 3 per cent and 1 per cent respective- ly (4 per cent and 2 per cent respectively in intensive agricultural develop- ment districts) of the additional credit provided by them over the level in the preceding year. These outright contributions are to be credited to special bad debt reserves and their main objective is to enable cooperatives to provide credit to all classes of cultivators on the basis of their produc- tion requirements and repaying capacity. The continuance of the contributions is contingent on extension of credit to the weaker sections of the community. A careful assessment of the contribution of outright grants to the extension of credit facilities is to be undertaken at an appropriate stage. 277. A proposal for setting up an Agricultural Development Finance Corpora- tion to augment the resources available for long-term loans is also being considered by the Reserve Bank in consultation with the Central Government. The loans of the Corporation will be channelled largely through central land mortgage banks. Financing of Village and Small Scale Industries 278. Apart from own resources of artisans and small entrepreneurs, the main sources of finance for the village small scale industries are as follows: a. State Financial Corporations b. National Small Industries Corporation c. State Bank of India and other commercial banks d. Cooperative banks and societies e. Government f. Indigenous bankers, moneylenders, traders, etc. The contribution of these various sources to the financing of the village and small scale industries is brought out in detail in the following para- graphs. 279. The SFCts make loans to small industries mainly for the acquisition of fixed assets. The NSIC provides financial assistance mostly in the form of supply of machinery on a hire-purchase basis. In certain cases, the NSIC also guarantees margins on loans advanced to small industries by the State Bank of India (see Chapter II). The total amount of assistance made available by these institutions so far has, however, been rather small. Loan disbursements by the SFC's to small industries totalled about Rs. 61 million by the end of March 1962, while the value of machines delivered by the NSIC on, a hire-purchase basis amounted to about Rs. 42 million by the end of March 1961. 280. Commercial banks provide, as in the case of large and medium scale industries, mainly short-term credit to small scale industries for meeting their working capital requirements. As mentioned in Chapter II, the State - 73 - Bank of India has been playing a significant role in recent years in financing small industries under its scheme for the coordinated provision of finance to such industries. It has also started to make funds available to industrial cooperatives in certain cases. The other larger commercial banks, however, do not show much inclination to lend to small industries because of the inherent limitations of such industries to provide suitable security and difficulties of credit investigation, assessment of the market for the products of small units, etc. The smaller local banks are perhaps more responsive to the needs of small industries. On the whole, however, the volume of bank credit to small industries is relatively small. A survey conducted by the Reserve Bank showed that the total outstanding advances of all commercial banks (including the State Bank of India) to small industries on October 28, 1960 amounted to about Rs. 368 million or about 3 per cent of the total credit extended by them. 28.1. The cooperative banks and credit societies also provide funds to small industries on a limited scale, mainly for meeting their working capital re- quirements. They play a particularly important role in financing industrial cooperatives, like handloom weavers' societies, etc. The annual flow of credit to small industries through the cooperative institutions has been increasing significantly in recent years. The Reserve Bank has been providing special assistance to state cooperative banks for financing handloom weavers' societies;/and the question of provision of similar assistance to state cooperative banks for financing cooperative units in other industries is being z_x-ainod. In ct~i r^n r , thor-- are separate industri. cooperativo baris for financing industrial cooperatives and a' proposal to establish similar banks in some other suitable areas is being considered by the government. It may, however, be noted that the cooperatives account for only a small proportion of the workers engaged in small industries. 282. In view of the emphasis placed on the development of village and small scale industries and the weak financial position of artisans and small entre- preneurs in many cases, the Central and State Governments have been providing substantial financial assistance to small industrial units in the form of loans on easy terms, participation in share capital, subsidies, etc. The assistance is made available for acquisition of fixed assets and, to a limited extent, for meeting working capital requirements. Total government assistance towards the financing of net private investment in village and small scale industries over the Second Plan period is estimated at about Rs. 500 million, or more than one-fifth of such investment. (The figure of Rs. 500 million is inclusive of the assistance provided by the NSIC) 2 / Losses arising in respect of loans provided out of funds made available by the Reserve Bank are to be borne mostly by the Central and State Governments (subject to an upper ceiling in respect of total losses to be borne by the Central Government). 2/ In addition to financial assistance, the government has been providing technical advice, training facilities and assistance in marketing, etc., to small industries. Industrial estates have also been constructed in different parts of the country to provide accommodation to small industrial units, together with power and transport facilities, etc. (See Chapter I). - 74 - 2&3. Finally, the small industries depend, for meeting the rest of their requirements of funds, on indigenous bankers, moneylenders, relatives, etc. Precise information in this respect is not available but there is little doubt that small industries borrow substantially from non-institutional lenders, often at high rates of interest.i/ 284* A significant development in the field of financing of small industrieE has been the introduction, as from July 1960, of a scheme for guaranteeing loans granted to such industries by specified banks and other financial institutions, including the State Financial Corporations and State Cooperative Banks, to provide a measure of protection to lending institutions against possible losses. The scheme provides for sharing of losses between the lending institutions and the government in such a manner that the government's share is larger in the case of smaller loans. The maxinum amount recoverable from the government against the guarantee in respect of any one advance is limited to Rs. 0.1 million. The guarantee fee has been fixed at 4 per cent per annum of the maximum amount of advance sanctioned. The guarantee would, however, not extend beyond seven years. 285.. Loans by financial institutions other than those specified under the scheme are also eligible for guarantee if a specified institution partici- pates in such loans to the extent of at least 25 per cent of the total amount* As a result of a subsequent change, loans involving only risk participation, i.e.9 participation in resultant losses, if any, by a specified institution, have also become eligible for guarantee.j/ 286. The scheme is administered by the Reserve Bank, which has been designated as "Guarantee Organization't for this purpose. Initially, the scheme operated in 22 districts selected on the basis of the relative amounts of outstanding loans to small industries and the potentialities for their expansion in future. By the end of June 1961, it had been extended to 52 districts. 287. Up to the end of July 1962, applications for an aggregate sum of about Rs. 100 million had been accepted for guarantee. Gaurantees for most of the amount (about 94 per cent) were issued in favor of the State Bank of India and its subsidiaries. Recently, the Reserve Bank has recommended that the scheme may be placed on a permanent basis and extended to cover the entire country. 288, The scheme might be expected to help substantially in increasing the flow of institutional credit to small industries. 1 "The small business sector is forced to turn to the indigenous bankers and other non-institutional sources for much the larger part of its credit needs." See Seminar on Financing of Small Scale Industries in India, Hyderabad, July 20-23, 1959, Vol. II Background Papers, page 65. 2 This change is intended to facilitate the working of the participation arrangements, particularly in the case of cooperative institutions. 74 - 2B3. Finally, the small industries depend, for meeting the rest of their requirements of funds, on indigenous bankers, moneylenders, relatives, etc. Precise information in this respect is not available but there is little doubt that small industries borrow substantially from non-institutional lenders, often at high rates of interest.i/ 28184, A significant development in the field of financing of small industriec has been the introduction, as from July 1960, of a scheme for guaranteeing loans granted to such industries by specified banks and other financial institutions, including the State Financial Corporations and State Cooperative Banks, to provide a measure of protection to lending institutions against possible losses. The scheme provides for sharing of losses between the lending institutions and the government in such a manner that the government's share is larger in the case of smaller loans. The maximum amount recoverable from the government against the guarantee in respect of any one advance is limited to Rs. 0.1 million. The guarantee fee has been fixed at 4 per cent per annum of the maximum amount of advance sanctioned. The guarantee would, however, not extend beyond seven years. 285.. Loans by financial institutions other than those specified under the scheme are also eligible for guarantee if a specified institution partici- pates in such loans to the extent of at least 25 per cent of the total amount. As a result of a subsequent change, loans involving only risk participation, i.e., participation in resultant losses, if any, by a specified institution, have also become eligible for guarantee. 2/ 286. The scheme is administered by the Reserve Bank, which has been designated as "Guarantee Organization" for this purpose. Initially, the scheme operated in 22 districts selected on the basis of the relative amounts of outstanding loans to small industries and the potentialities for their expansion in future. By the end of June 1961, it had been extended to 52 districts. 287. Up to the end of July 1962, applications for an aggregate sum of about Rs. 100 million had been accepted for guarantee. Gaurantees for most of the amount (about 94 per cent) were issued in favor of the State Bank of India and its subsidiaries. Recently, the Reserve Bank has recommended that the scheme may be placed on a permanent basis and extended to cover the entire country. 288* The scheme might be expected to help substantially in increasing the flow of institutional credit to small industries. / "The small business sector is forced to turn to the indigenous bankers and other non-institutional sources for much the larger part of its credit needs." See Seminar on Financing of Small Scale Industries in India, Hyderabad, July 20-23, 1959, Vol. II Background Papers, page 65. / This change is intended to facilitate the working of the participation arrangements, particularly in the case of cooperative institutions. , 75 - 289. A proposal for providing government guarantee for loans given by banks and institutional agencies to well-established organizations in the field of small industries such as the Khadi and Village Industries Com§ission (a statutory body which prepares and executes programs for the development of khadi - hand produced cloth - and village indust4es) and the National Small Industries Corporation has also been formulated.iF 290. Among other developments, mention may also be made of the extension of refinance facilities by the Refina ce Corporation to medium-term loans to small industries. (See Chapter II).22 291. To sum up, a well-devised machinery is now functioning in the country for the provision of finance to small industries. Although the annual volume of finance made available so far has been insufficient in relation to needs, it may be expected to increase progressively in the coming years. Financing of Housing 292. Housing accounts for a substantial part of private investment. Net private investment in housing and other construction (excluding construction for industrial purposes) over the Second Plan period is estimated at about Rs. 10 billion, or about 30 per cent of total net private investment. 293. A small part of private investment in housing is financed by assistance from the government under the housing schemes for industrial workers, low income groups, etc. While assistance under the industrial housing scheme is made available by way of loans as well as subsidies, assistance under other schemes is mainly in the form of loans. Total government assistance towards the financing of private housing investment over the Second Plan period is estimated at Rs. 500 million (exclusive of funds provided by State Govern- ments out of loans made available by the Life Insurance Corporation for middle income group housing), or about 5 per cent of total net private investment in housing and other construction over that period. 294. Funds available for housing from institutional sources are very small. There are no building societies of the type existing in the U.K. or building and loan associations as those in the U.S.A. Commercial banks provide hardly any assistance for housing. Loans for housing by primary cooperative housing societies have been increasing steadily, but their annual volume continues to be small, being of the order of Rs. 36 million in 1959/60 (July-June). Since 1958, a part of the funds loaned by these societies is being made available by the Life Insurance Corporation through the apex cooperative housing societies. Besides, the Corporation has been providing limited / Third Five-Year Plan document, page 433. / Since January 1962, the Reserve Bank has also agreed to grant additional credit to a scheduled bank at the bank rate of 4 per cent up to an amount equal to the increase as compared to a base period in its lending to small scale industries and cooperative institutions, provided the amount is not less than Rs. 0.1 million. Further, the Life Insurance Corporation has decided to make loans to industrial cooperatives and joint stock companies for setting up industrial estates. - 76 - amounts (about Rs. 105 million over the three years 1958/61) through State Governments for construction of houses by people in middle income groups.l/ It has also revived mortgage lending and introduced schemes for granting housing loans to policy holders, loans to housing cooperative societies of employees of public limited companies, etc., but the progress made so far in these directions has been rather limited. For example, total disburse- ments under the scheme for granting loans on mortgage of immovable property amounted to less than Rs. 9 million by the end of June 1962, while those under the scheme for granting housing loans to policy holders, etc., were of an insignificant order. Loans for housing from provident fund accumulations are also of a small order,L/ On the whole, therefore, most of the investment in private housing appears to have been financed so far by the investors' own resources and, to some extent, borrowings from relatives, friends, money- lenders, etc. 295. Apart from private investment, the Central and State Governments as well as other public authorities and bodies undertake substantial housing programs for the provision of accommodation to their employees. Besides, the housing schemes for industrial workers, etc., also involve some outlay on direct construction in the public sector. Nevertheless, the country faces a serious housing problem. As a result of the growth of population and rapid urbanization, the shortage of houses in urban areas is estimated to have increased from about 2.5 million in 1951 to at least 5 million in 196l.4/ Further, it has been roughly estimated that approximately 50 million houses in rural areas would require to be reconditioned or entirely rebuilt. 296 The Third Five-Year Plan makes a much larger allocation for housing in the public sector as compared to the outlay incurred in the Second Plan (the increase being mainly in respect of direct construction in the public sector). Investment in the private sector is also expected to increase moderately from about Rs. 10 billion in the Second Plan period to Rs. 11.3 billion in the Third Plan period. 1/ The Life Insurance Corporation also grants loans to State Governments for construction of houses for their low-paid employees. / The Corporation is considering the question of extending the mortgage lending scheme, which was operating at 21 centers at the end of June 1962, to additional centers and of revising the scheme for granting housing loans to policy holders so as to make it more attractive. 3/ These loans are available only to subscribers to provident funds. Third Five-Year Plan document , page 680 and Monograph on Housing Situa- tion in India, page 31. The Report of the Ministry of Works, Housing and Supply for 1960/61 places the shortage of housing units in urban areas at a still higher figure. - 77 - 297. The Life Insurance Corporation is expected to play a significant role in the provision of housing finance to the public as well as the private sectorse Further, the government is considering the possibility of setting up a Central Housing Board. Such an organization could, according to the Third Five-Year Plan document, "help to channel additional funds into housing, encourage the flow of credit on easy terms, amongst other things by means of insured mortgages, improve lending practices and provide the machinery needed for the creation of a sound mortgage market in housing". It is expected to channel funds, including those obtained from the Central Govern- ment and the Life Insurance Coporation, to the private sector as well as State Governments or State Housing Boards. / 1/ State Housing Boards already exist in certain States. They function at present mainly as construction agencies of the State Governments. CHAPTER VI Market for Securities 2?.F The market for securities constitutes a fundamental part of the capital market. By imparting liquidity to securities, it encourages the flow of savings in long-term investments. It thus assists the private sector in raising capital for investment as well as the government and semi-government bodies in raising large amounts by way of loans. 299, The securities market in India is well-organized, and, considering the stage of the country's economic development, it is sufficiently broad and active. With the growth of joint stock enterprise and large market borrow- ings by the government sector during World War II and under the Five-Year Plans, the value and variety of securities available for trading has increased considerably over the last two decades. The increased flow of savings to financial institutions has resulted in a marked rise in the volume of their annual investments in securities (mostly government securities) and the interest of the general public in corporate securities has become consider- ably more widespread. Investment advisory services, however, exist only on a limited scale. Stock Exchanges 3Y(. Stockbroking in India dates back to the end of the 18th century when transactions 1n the securities of the East India Company used to take place in Calcutta._/ A regular market in securities, however, developed only in the sixties of the 19th century. An organized stock exchange came into existence for the first time in 1875, when a brokerst association with about 300 members was organizbd in Bombay. Later on, organized stock exchanges were established at other places also. 301. At present, there are seven stock exchanges, the most important being those in Bombay and Calcutta. The stock exchanges are organized either as voluntary associations of persons or as public joint stock companies or companies limited by guarantee ./ The year of establishment, number of members and certain other details of organization of each stock exchange are shown in Appendix Table 26. Government Control of Stock Exchanges 3'2. The Securities Contracts (Regulation) Act of 1956 lays down the broad framework of control, regulation and superivision of stock exchange activities by the Central Government on an all-India basis. Under the Act, only a stoclk / The Stock Exchange: A symposium, published by the Calcutta Stock ExchangE: Association in 1958. y In a company limited by guarantee, members undertake to contribute up to specified amounts towards meeting the company's liabilities. exchange recognized by the Central Government is permitted to function in a particular area. The Act also provides for licensing of dealers in securities in other areas, but this provision has not yet been brought into force. 3or . The ct applies only to transactions other than spot delivery contracts.-' The exemption of spot delivery contracts is explained mainly by the fact that such transactions are normally not expected to involve any large scale speculation. The exemption is also expected to help genuine investors. Pawer has, however, been taken by the Central Government to regulate and control dealings in spot delivery contracts also, if this is considered expedient in the interest of trade or the public. Transactions not involving spot delivery can be entered into, in areas in which recognized stock exchanges exist, only through, with or between members of recognized stock exchanges. Further, any such transaction in contravention of any of the specified by-laws of stock exchanges shall be void as respects the rights of any member of the recognized stock exchange who has entered into such contract and also as respects the rights of any other person who has knowingly participated in the transaction entailing such contravention. 3O &. A stock exchange is recognized only after the Central Government is satisfied that the rules relating to the constitution of the exchange as well as the by-laws of the exchange for the regulation and control of contracts conform to conditions prescribed for fair dealing and protection of investors. These rules and by-laws can be amended only with the approval of the government. Furthermore, the government is empowered to make or amend them at its own initiative. 3O5. The Act provides for the representation of the Central Government on each stock exchange by such number of persons not exceeding three as may be nominated by the Central Government. o6 The Central Government has been given a number of other powers. It can call for information from a stock exchange and its members, make inquiries into the;affairs of a stock exchange and its members, supersede the governing body of a stock exchange, suspend (in an emergency) such of its business as may be specified, and finally, withdraw the recog- nition granted to it. To prevent undesirable speculation, the Government may place restrictions on transactions in specified securities. Contracts A spot delivery contract is one which provides for the actual delivery of securities and the payment of a price therefor either on the same day as the date of the contract or-on the next day, the actual period taken for thel dispatch of securities or the remittance of money there- for through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality. implying the right to buy or sell securities (so-called options in securities) are prohibited. 307. The rules framed by the Central Government under the powers conferred by the Securities Contracts (Regulation) Act prescribe the qualifications for membership of recognized stock exchanges and requirements with respect to listing of securities, maintenance and preservation of books of account and other documents by every stock exchange and its members, information to be included in the annual reports of stock exchanges and several other matters. 308. To ensure fair dealing, a member of a stock exchange is prohibited from entering into any contract as a principal (i.e., for his own account) with non-members without securing the consent or authority of the latter. 309. On the whole, the rules, by-laws and regulations of stock exchanges are now more or less uniform. The nomination of government representatives on the boards of all recognized stock exchanges has enabled the government to exercise close supervision over stock exchange activities. It has also helped significantly in restraining price manipulations by corporate officials and others having inside knowledge of a companyts affairs. The working of stock markets has become more orderly. This has given greater confidence to the investing public in regard to safety of their investments in securities and has contributed a good deal towards the broadening of the market for corporate securities in recent years. Requirements for Listing of Securities 310. As already mentioned, the rules framed by the government under the Securities Contracts (Regulation) Act specify certain requirements for listing of securities for trading on a recognized stock exchange. Only a company which has offered at least 49 per cent of each class or kind of its securities, except those taken up or agreed to be taken up by the government or foreign participants in the company, for public subscription through newspaper advertisements forl at least three days and made the allotment fairly and unconditionally.y is eligible for listing on a stock exchange.=" Listing can be granted only on receipt of an application from a company. At the time of application, a company must furnish copies of memorandum and articles of association, prospectuses, other offers of capital for subscrip- tion or sale during the last five years, copies of balance sheets and audited / Allotments have' (b) Bonds of State Governments h41 - h.5 (c) Bonds of local authorities and other semi- government bodies 4.1 - h.8 Average yield on corporate securities: (a) Debentures 5,9S! (b) Preference shares 8 / (c) Ordinary shares 6.74/ Rates generally charged by moneylenders 12 - 25 1/ Relates to the half-year ended December 196L1 2/ Relate to the year ended June 1961. 3/ Average for July 1962. il Represents average annual yield in the fiscal year 1961/62., - 109 - The posit: on is brought out in great~er detail in the following sectionso Rates of Interest Charged by Commercial Banks 412. The rates of interest charged by commercial banks on loans and advances vary generally with the type of security offered, status of borrower, purpose of loans, maturity period, etc. The table below shows the distribution of loans and advances of 14 selected banks by interest rate charges as at the end of 1961. Table 22 Loans and Advances of 1 Selected Banks- /by Rates of Interest at the end of 1961 Amount of Loans Proportion Rate of Interest and Advances of Total (per cent) (Rs. million) (per cent) Up to 5 (inclusive) 1178 12.5 More than 5-6 (inclusive) 3341 37.8 More than 6-7 (inclusive) 3103 35.2 Over 7 1200 13.6 8822 100.0 1/ These banks accounted for 77e7 per cent of the total loans and advances of scheduled banks. Loans and advances include money at call and short notice and due from banks but exclude bills purchased and discounted. Source: Reserve Bank of India. It will be seen that a little less than three-fourths of the total loans and advances were contracted at rates of interest ranging from over 5 per cent per annum to 7 per cent per annum. Loans carrying interest rates of more than 7 per cent per annum constituted less than one-seventh of the total. 413. As already mentioned, the Reserve Bank has prescribed the minimum lending rate for scheduled banks. No limits have been fixed for maximum rates. Competition among banks is, however, very keen and this tends to keep down their normal lending rates. - 110 - 414, By tradition, the State Bank of India generally charges somewhat lower rates as compared to those of other major scheduled bankso Its prime rate, i.e8, the rate which it charges to borrowers of the highest standing, is 5 per cent per annum, which is the minimum prescribed by the Reserve Bank for scheduled banks, 4150 The average annual rate of interest on loans and advances of all schedule banks works out at about 605 per cent for the half-year ended December 1961 as compared to 6 per cent for the half-year ended December 1960 and 5.8 per cent for the first half of 1960o 416. Data available by size of banks indicate that the average rate of interest on loans and advances of smaller banks is higher than on those of larger banks. For example., the average rate during the half-year ended June 1960 was about 7 per cent in the case of scheduled banks having deposits of less than Rs. 50 million each as compared to 5e. per cent in the case of those having deposits of Rs. 1 billion or more each. In the case of non-scheduled banks, the average rate was about 9 per cent in 1959e 417. The average rate of discount on bills is higher than the average rate of interest on loans and advances, the difference being especially marked in the case of foreign bills. For example, the average rate of discount of scheduled banks in the half-year ended June 1960 was about 6o3 per cent in the case of inland bills and 8.4 per cent in the case of foreign bills0 The higher rate of discount on foreign bills is explained partly by such factors as the inclusion of commission on exchange trans- actions, inclusion of interest on overdue bills, etc. 418. The scheduled banks can obtain short-term advances from the Reserve Bank against eligible securities, bills,1/etc. Normally, banks borrow substantial funds from the Reserve Bank during the busy season (November to April) in order to finance a part of their credit expansion. However, in the slack season (May-October), when bank credit against agricultural commodities contracts, the outstanding amount of the Reserve Bank's advances drops to a low level. As already mentioned, the Reserve Bank has instituted-since October 1960 a system of graduated interest rates on scheduled banks' borrowings from ite Each scheduled bank is assigned a quota for each quarter for borrowing at the bank rate of h per cent0 Up to July 1, 1962, this quota was equal to 50 per cent of the average of the statutory reserves required to be kept by each bank with the Reserve Bank in the previous quarter against its demand and time liabilitieso Additional borrowings not exceeding an equal amount were charged at the rate of 5 per cent while further additional borrowings were charged at the rate of 6 per cent. The system has, however, been revised starting July 2, 1/ The banks usually do not rediscount bills with the Reserve Bank but lodge them as security against advances. - ll - 1962, in order to tighten somewhat further the conditions for borrowing by 'he scheduled banks from the Reserve Bank. Under the revised system, th: amounts which a scheduled bank can borrow in a quarter at the bank rate of 4 per cent are limited to 25 per cent of the average of the statutory reserves required to be kept by it with the Reserve Bank in the preceding quarter, the additional borrowings being charged at the rates of 5-6 per cent, 419e The average rate of interest charged by the Reserve Bank on scheduled bankst borrowings outstanding at the end of March 1961 was 5.46 per ce t, which indicates that borrowings at the slab rate of 6 per cent)! were not of an insignificant order during the busy season of 1960/612/ 420. As stated in Chapter II, medium-term loans by specified banks and other financial institutions to medium and small size industries are eligible, subject to certain conditions, for refinancing by the Refinance Corporation at the rate of 5 per cent per annum. Initially, the banks were required to charge generally 61 per cent on loans refinanced by the Corporation, In 1960, however, the banks were given the discretion to charge appropriate rates of interest on such loans, subject to review by the Corporation. Rates of Interest Charged on Long and Medium-Term Loans by Special Finance Corporations 421L As stated earlier, the Industrial Finance Corporation has recently raised its rate of interest on rupee loans by 1 per cent per annumo It now charges 72 per cent per annum on such loans but allows a rebate of 1 2 per cent for repayment of principal and payment of interest on due dates. The effective rate of interest on rupee loans is thus 7 per cent per annume On dollar loans made available out of the credit received from the D.L.F., the effective rate of interest is 7-3/4 per cent per annum plus 4 per cent per annum for incidental expenditure. 42. Until recently, the Industrial Credit and Investment Corporation generally charged 62 per cent per annum on rupee loans and 7-3/4 per cent plus a non-recurring fee of 4 per cent on foreign exchange loans. In August 1962, the Corporation decided to raise its rate of interest to 7 per cent per anum on rupee loans and to 8 per cent per annum on foreign exchange loans. 3 / As mentioned earlier, the highest slab rate up to July 1, 1962 was 6 per cent. 2/ The average rate of interest charged by the Reserve Bank on scheduled banks' borrowings outstanding on March 30, 1962 was 4.84 per cent. This indicates that the scheduled banks' total borrowings from the Reserve Bank in the busy season of 1961/62 were much smaller than in the preceding busy season. 3/ The non-recurring fee of 4 per cent, which the Corporation had been charging on foreign exchange loans, has been discontinued. - 112 - 423.. Tie National Industrial Development Corporation charges 71 per cent per ;72. As a complement to the provision of more liberal financial assistance, the Reserve Bank has undertaken a scheme of voluntary inspection of coopera- tive banks and some primary societies. These inspections are designed to serve the wider purpose of improving the machinery and operations of cooperative credit, and are complementary to the inspections made by the Registrars of Cooperative Societies under the auspices of State Governments. Expansion of Facilities for Long and Medium-Term Industrial Finance 473. The Reserve Bank has played an active part in the setting up of special institutions like the Industrial Finance Corporation, State Financial Corporations and the Refinance Corporation for Industry to provide long and medium-term credit to industries. The Bank has subscribed a part of the capital of these institutions and rendered organizational assistance to them., In addition, it provides narginal financial assistance to the I.F.eC and the SFC's. (See Chapter II)._i 1/ Purchases of ordinary debentures of land mortgage banks were not financed from the Long-Term Operations Fund. / The Bank has also agreed to forego the dividends accruing on its shares in the Industrial Finance Corporation; these dividends, as well as those accruing to the Central Government, are being credited to a special reserve fund. This arrangement is to continue until the special reserve fund amounts to Rs, 5 million, - 126 - 47h. The Reserve Bank is represented on the Board of Directors of the institutions mentioned above, and is closely associated with their working, especially in the case of State Financial Corporations and the Refinance Corporation,Y The Bank's advice is sought on several important matters of policy, including issue of bonds or debentures by the IFC and SFC's. It has also been conducting inspections of SFC's. h75. The association of the Reserve Bank as well as the government with various Corporations, has helped in bringing about a measure of coordination between the activities of various lending agencies in the field of industrial finance.a 476. More recently, the Bank has been entrusted with the administration of the scheme of guaranteeing loans to small scale industries by specified financial institutions. 1/ In the case of the Refinance Corporation, the Governor of the Reserve Bank is the Chairman of the Board of Directors. One of the Deputy Governors of the Bank is also represented on the Corporationts Board and the Chief of the Industrial Finance Department of the Bank is the Corporation's General Manager. - 127 - CHAPTER IX Concludi Remarks 477. In the preceding chapters, the most important features of the capital market of India and the main developments concerning this market since the country became independent have been examined in detail. The purpose of these concluding remarks is to recapitulate briefly the major elements of progress achieved in developing the capital market and its financial institutions as well as to mention once again some fields where further action appears to be particularly appropriate. Many of the measures taken in India are no doubt of considerable interest to other developing countries which are in need of more domestic financial resources and better institutional facilities as a prerequisite to the stepping up of their development effort. Major features of progress in India, then, have been as follows: (a) Despite low incomes, it has been possible to increase substantially the flow of savings to financial institutions over the last decade. Political stability and confidence of savers in institutions as well as in currency have, of course, greatly assisted in this process; (b) The commercial banks have expanded significantly the network of their branches and enlarged tlheir role in financing industry, trade and certain other activities as well as in collecting savings. The State Bank of India, the largest commercial bank, has been particularly active in establishing a large number of new branches in rural and semi-urban areas, Also, it has been extending its activities in the spheres of rural credit, provision of credit to small scale industries and medium-term finance; (c) Substantial amounts of savings have been collected through the government's small savings schemes. Total net collections in 1960/61 (exclusive of receipts from prize bonds) were more than three times the level in 1950/51; (d) Life insurance in India has showm marked expansion in recent years, Provident funds also operate over a fairly wide area in both the public and private sectors. Contractual savings in the form of net additions to life insurance reserves, provident funds3 etc., probably amounted to more than 40 per cent of the total savings channelled through financial institutions (including small savings certificates) over the three years ended March 1961. (e) The activities of cooperative credit institutions have expanded considerably over the last decade, mainly as a result of strong support (including participation in share capital, subsidies, etc.) by the government and increased credit made available by the central bank at low rates of interest. The Third Five-Year Plan envisages a further substantial expansion of cooperative credit. - 128 - (f) The network of special finance corporations has been strengthened; they provide substantial funds to large and medium scale industries, mainly for financing fixed investment. (g) In the field of small scale industries, a well-devised machinery is functioning for the provision of finance. A scheme for guarantee- ing partially the loans advanced to small scale industries by banks and other financial institutions has also been introduced. Proposals for organizing additional industrial cooperative banks in suitable areas to finance industrial cooperatives and for providing government guarantee for loans given by banks and institutional agencies to the Khadi and Village Industries Commission, National Small Industries Corporation, etc., are under consideration by the government. On the whole, it appears reasonable to expect that the volume of institutional finance available to small scale industries qill increase progressively; (h) The market for securities is well-organized and quite active. The interest of the general public in corporate securities has become more widespread and companies have been able to raise substantial amounts through new capital issues. A good deal of progress has been made in developing a proper underwriting system; (i) Apart from performing other functions, the central bank has been playing an important role in expanding and diversifying the system of institutional credit facilities. It has also made a significant contribution to the development of the market for government securities. 478. In spite of considerable progress achieved in these various fields, efforts will be required to stimulate the further development of the capital market and its institutions. A number of lines for further action, emerging from the analysis in the previous chapters, may be summarized as follows: (a) Scope remains for a further increase in collections from small savings. The progress of the small savings movement in different parts of the country has been very uneven and although the various savings schemes have penetrated into the rural areas, amounts collected in these areas so far have been relatively small; (b) Similarly, there is scope for a further stepping up of contractual savings from life insurance and provident fund schemes; (c) In spite of the expanded activities of cooperative credit institu- tions, the share of cooperative credit in total borrowings of cultivators is still at a low level (10 - 12 per cent in 1959/60). Savings collected by cooperatives in rural areas are also relative- ly small and the thrift aspect of the cooperative movement does not appear to have been adequately emphasized; - 129 - (d) Taking into account the credit facilities provided by moneylenders, etc., there does not appear to be any shortage of short-term credit for agriculture. However, the terms for the bulk of the credit are too onerous and there is need for a further expansion of institu- tional credit. At the same time, it is necessary to bring about greater coordination between the provision of short-term credit and other efforts to increase agriculture output, e.g., in regard to supply of irrigation, fertilizers, better seeds and improved implements. The amount of medium and long-term funds provided annually by cooperative institutions is rather small and needs to be increased substantially; (e) The volume of medium-term bank credit (for 3 - 7 years) to industries continues to be relatively small and there would appear to be need for a further substantial expansion of this type of credit. The Refinance Corporation, which provides refinance facilities in respect of medium-term loans to medium and small- size industries by banks and other financial institutions may be expected to make a growing contribution in this field. (f) In spite of progress, the volume of funds made availab'le to small scale industries has been insufficient in relation to needs. Various measures taken or under consideration to improve the situation have been mentioned already. As in agriculture, the problem of extending additional credit facilities to small scale industries is related to a wider backgroundc1 viz. the need to strengthen the technical and economic foundation of these enter- prises through technical assistance, construction of industrial estates, provision of marketing facilities, etc. (g) Institutional facilities for the provision of finance for housing are very limited. There appears to be need, therefore, for establishing a separate institution for increasing the availability of funds for housing and developing a market in mortgages; (h) In the context of the securities market, the market for preference shares and debentures continues to be rather thin. Debentures and preference shares offering such terms as an option for conversion into ordinary shares or participation in profits have been issued only in a limited number of cases; (i) Investment trusts have not been developed to any significant extent. In view of the widening of public interest in shares in recent years and the growing number and variety of corporate securities available for investment, conditions seem to be particularly favorable for the growth of investment trusts. It, therefore, appears worthwhile to take suitable steps, including the offer of an adequate tax incentive, for the establishment of such trusts, particularly unit trusts, STATISTICAL APPENDIX Table No. Page 1. National Income 130 2. Agricultural Production 131 3e Industrial Production - Selected Goods 132 4. Investment under the Second and Third Plans 133 5. Reserve Bank's Estimates of Net Domestic Savings 134 6. External Assistance 135 7. Scheduled Banks - Business in India 136 8. Scheduled and Non-Scheduled Banks - Liabilities and Assets 137 9. Cooperative Banks - Liabilities and Assets 138 10. Cooperative Credit Societies - Liabilities and Assets 139 11. Land Mortgage Banks - Liabilities and Assets 140 120 Annual Advances of Cooperative Credit Societies 141 13. Loans Approved and Disbursed by the Industrial Finance Corporation 142 14. Financial Assistance Sanctioned and Disbursed by the Industrial Credit and Investment Corporation of India 143 15. Annual Increase in Time Liabilities of Commercial Banks 144 16. Ownership of Time and Savings Deposits of Scheduled Banks 145 17. Annual Increase in Deposits with Cooperative Credit Institutions from "Individuals and Other Sources" 146 Statistical Appendix (continued) Table No. Page 18d Annual Increase in Paid-up Capital of Cooperative Credit Institutions 147 19. Net Annual Receipts from Small Savings 148 209 Annual Increase in Life Insurance Funds 149 21. Assets of Life Insurance Companies at the end of August 1956 and of the Life Insurance Corporation at the end of 1960 150 22, Total Annual Accruals to Provident Funds 151 23. Net Annual Accruals to Statutory Provident Funds in the Private Sector 152 24. Financing of Annual Outlays in the Public Sector under the First and Second Plans 153 25. Inflow of Foreign Capital in the Private Sector 154 26. Organization of Recognized Stock Exchanges 155 27. New Registrations of Companies During the First and Second Plan Periods 156 28, Government Companies set up During the First and Second Plan Periods 157 29. Companies and Securities Listed on Individual Stock Exchanges in Various Years 158 30. Increase in the Number of Shareholders of Certain Companies 159 31. Index Numbers of Security Prices 160 32. Capital Raised by Non-Government Companies Through Shares and Debentures 161 33, Consents for Capital Issues by Non-Government Companies 162 3h. Consents for Capital Issues by Non-Government Companies - Breakdown by Public and Private Companies 163 Statistical Appendix (continued) Table Yo. Page 35. Denomination Pattern of Stock Issues Listed on Stock Exchanges in February 1961 164 36. Details of New Capital Issues by Existing Non-Government Non-Financial Public Companies 165 37. Details of Initial Capital Issues by Newly Established Non-Government Non-Financial Public Companies 166 38. Subscriptions to New Issues of Preference Shares of Non-Government Non-Financial Public Companies 167 39. Underwriting of New Capital Issues of Non- Government Non-Financial Public Companies 168 4o. Loans of Central and State Governments and their Absorption 169 - 130 - Table 1 Natiomal Income . Nationail-:nc ~m Per C ita Income Index No. of National Income Index No. of Per Capita Rs. , on) 9 At (190 0 0 I-come 194/9 - 00) ________ current At ~~~~1948A9 At4 6 9____49 Year A Att current At AtAt cArrettE current A I Blame pices prices ee apr-ices _L_ces prices 1948/49 86.5 86.5 249.6 249,6 100.0 100*0 100.0 100.0 1949/5O 90.1 88.2 256.0 250.6 104.2 102.0 102.6 100.4 1950/51 95.3 88.5 266.5 247*5 110.2 102*3 106.8 99.2 1951/52 99*7 91.0 274.2 250.3 115.3 105.2 109.8 100.3 1952/53 98*2 94,6 265.4 255*7 113.5 109.d 106.3 102.4 1953/54 104.8 100.3 278.1 266.2 121.2 116.0 111.4 106.6 1954/55 96.1 102.8 250.3 267.8 111.1 118.8 100.3 107.3 1955/56 99.8 104.8 255.0 267.8 115.4 121e2 102.2 107.3 1956/57 113.1 110.0 283.4 275.6 130.8 127.2 113.5 110.4 1957158 113.9 108.9 279.6 267.4 131.7 125.9 112.0 107.1 1958/59 126.0 116.5 303.0 280e2 145.7 134.7 121.4 112.2 1959/60 129.4 118.5 304.7 279.0 3.49.7 137.0 122.1 111.8 1960/61 / 142.0 126.9 327*3 292.5 164.2 146.7 131.1 117.2 3/ Fiscal year beginning April 1. i/ Preliminary estimates. Source: Economic Survey for 1961/62, Government of India, New Delhi. - 131 - Table 2 Agricultural Production 1V Commodity Unit 1950/51 3 1955/56 1958/5 19E 9/6 > 1960/61 Foodgrains- i Rice UJlion tons 20.9 27.1 30.3 310 33.7 Wheat u 6.6 8.6 9.8 10.1 10.7 Other Cereals un 16.3 19.2 22.5 22.1 22.4 Pulses u n 8.5 10.9 12.9 11.5 12.5 Total tt n 52.3 65.8 75,5 74.7 79.3 Oilseeds 5.1 5.6 6.9 5.9 6.5 Sugar dane " 5.6 6.0 7.1 7.7 8.7 Cotton Million bales | 2.9 4.0 4.7 3.7 5-4 Jute Million bales i 3.3 4.2 5.2 4.6 4.0 All Commodities 95.6 116.8 132.0 128.7 139.1 (Index number: 1949/50 - 100) y Figures relate to years beginning July 1. Partial.1y revised estimates. "Final" estimates (subJect to revision). Estimates for 1950/51 and 1955/56 have been adjusted for changes up to 1956/57 in the coverage of crop statistics and techniques of estimation. 5 Bale u 392 lb. i Bale m 400 lb. Source: Third Five-Year Plan and Economic Survey for 1961/62. - 1l - Table 3 industrial Production - Selected Goods Unit 1950 1955 1960 1961 1/ Capital Goods Diesel engines: Vehicular type 000 nos. - 3.9 9.7 9.5 Stationary type 1000 nos. 416 10,2 41.7 W4.4 Potwer transformers '000 k.v.a. 172 565 1,248 1,762 Power driven pumps '000 nos. 30.0 34.8 102.0 126.2 Electric motors '000 h.p0 81.6 / 252.0 680.4 820.9 Complete Ring Spinning Frares nos. 2762/ 864. 1,128 1,1400 Looms nos. 2,5082/ 2;736 5,628 7,597 Carding engines nos. 1087/ 600 1,068 1,312 Machine tools mnill. rupees 2.7 7.4 60o1 76.0 Automobiles 1000 nos. 1)4.6 23.1 51.7 54.3 Intermediate Goods Coal mi'll. tons 32.5 38.8 52,6 56.1 Finished steel ii I1. tons 1.0 1.3 2.2 2.9 Aluminium (virgin metal) '000 tons 3.7 7.3 18.5 18.6 Cement mill, tons 2.7 4.6 7e8 8.2 Sulohuric acid '000 tons '104 169 360 411 Caustic Soda 1000 tons 11 35 99 120 Soda ash 1000 tons 44 79 145 177 's'imonium Sulphate 1000 tons 48 399 388 395 Super-phosp-hate '000 tons 53 75 322 367 Paper and paper boards t000 tons 111 188 345 364 Rubber tires and tubes mill. nos. 8.9 13.1 26.2 27.3 Electricity generated mill. kwh. 5,107 8,468 16,433 19,01`2 Consumer Goods Cotton c'loth mill. metres 3,351 14,658 4)6'16 4,699 Footwear miLl. pairs 21.4 W0.5 53.8 55.6 Sewing machines '000 nos, 31 101 296 31 4 E'lectric fans '000 nos. 193 282 991 1,050 Radio receivers '000 nos. 44 201 267 326 Bicycles tOO nos. 103 491 1,051 1,055 Sugar '000 tons 992 1,620 2,485 3,027 Tea mill. kg. 278 303 314 350 :?/ Provisional figurei. P/ Relates to 1952. ,e Relates tc 1952. Source: Economic Survey for 1961/62, Goverinment of India, liew Delhi. - 133 - Table L Investment under the Second and Third Plans Ps. Billion Percentages Second Plan Third Plan Second Plan Third Plan Public Private Public Private Public Private Public Private Sector Sector;/ Total Sector Sectorl/ Total Sector Sector-' Total Sector Sector / Total Agriculture and community development 2.10 6.25- 8.35 6.60 8.00 14.60 6 20 12 11 19 14 Major and medium irrigation 4.20 / 4.20 6.50 / 6.50 12 J/ 6 10 v 6 Power 4.45 0.40 4.85 10.12 0.50 10.62 12 1 7 16 1 10 Village and small industries 0.90 1.75 2.65 1.50 2.75 4.25 2 6 4 2 7 4 Organized industry and minerals 8.70 6.75J 15.45 15.20 10.50/ 25.70 24 22 23 24 26 25 Transport and communications 12.75 1.35 14.10 14.86 2.50 17.36 35 4 21 24 6 17 Social services and miscellaneous 3.40 9.50 12.90 6.22 10.75 16.97 9 31 19 10 26 16 Inventories - 5.00 5.00 2.00 6.00 8.00 - 16 8 3 15 8 Total 36.50 31.00 67.50 63.00 41.00 104.00 100 100 100 100 100 100 / Exclusive of investment financed out of resources transferred from public sector. Such investment is included in figures for public sector. -Included under agriculture and community development. Jj D.,not include outlay on modernization and replacement. Source: Third Five Year Plan, Planning Commission, New Delhi. Table 5 Reserve Bank's Estimates of Net Domestic Savings 1/ kRs. million, current price's) Government Domestic Corporate Household Sector k/ Total Sector 2/ Sector 3/ Urban Rural 1950/51 938 322 3,200 1,899 6,359 1951/52 1,923 565 598 1,950 5,036 1952/53 884 43 3,058 1,868 5,853 1953/54 710 229 2,986 2,062 5,987 195) /55 822 389 3,927 1,689 6,827 1955/56 699 543 6,104 1,756 9,102 1956/57 1,289 537 5,960 2,144 9,930 1957/58 1,1)44 172 4,815 2,051 8,182 1958/59 1,030 343 5,952 2,h23 9,748 1/ Do not include household sectorfs saving in the form of inventories in agriculture and trade, non-monetized investment and consumerst durables. 2/ Includes local authorities and governnlent corporations. 3/ Includes cooperatives. h/ Includes unincorporated enterprises, educational institutions, etc. Source: Reserve Bank of India Bulletin for August, 1961. Table 6 External Assistance Rs. million) Aid Utilized Aid Utilized up to the end during the of First Plan Second Plan Period Loans and credits repayab'le in foreign currencies World Bank loans 338,2 2,227.9 Loans frora foreign cauntries U.S.A. 903.1 361.7 U.S.S.R. 729.8 U.K. - 1,218.5 W. Germarny - 1,198.7 Canada - 157.1 Japan - 160.1 Sub-total 903.1 3P825.9 Loans repayable in rupees (from the U.S.A.) 22.9 1,168.3 Gr-ants: U.S.A. 442.6 855 9 Colombo Plan counltries Canada 197.0 603.0 Australia 52.0 7h44 New Zealand 3.3 29,0 U. K. 0.3 4.3 Norway 6.6 18.7 W. Germany - 601 U.S.S.R. - 11.5 Sub-total 701.8 1 602.9 Other assistance (from the U.S.A.)'1/ P.L. 480 assistance - 5,178.8 P.L. 665 assistance 50.7 268.1 Third country currency assistance - 25.1 Sub-total 50.7 5,472.0 Grand Tota'l 2,016.7 14,297.0 1| Including grants. c,ource: Economic Survey "or '1961/62, Govermemrt of India, New Delhi. - 136 - Table 7 Scheduled Banks - Business n India (At end of the year.Y) (Rs. million) 1951/52 1955/56 1960/61 1961/62 Demand liabilities Inter-b4nk borrowings 253 49 140 190 OthersJ 5,420 6,308 8,275 8,965 Time liabilities Inter b nk borrowings 10 30 111 133 Others/'J' 2,801 4,124 10,631 11,596 Borrowings from Reserve Bank Against usance bills and/or promissory notes 278 274 454 407 Others 263 377 491 123 Borrowings from State Bank and/or a notified bank / 197 185 176 Bank credit Advances- 5,301 6,125 11,277 113901 Inland bills purchased and discounted 504 1,020 1,594 1,807 Foreign bills purchased and discounted n.a. 468 492 485 Investments in government securities 2,961 3,599 5,586 6,014 Money at call and short notice 122 63 208 375 Balances with Reserve Bank 448 489 710 746 Balances with other banks in current account 11k 108 178 178 Cash 340 358 456 489 / Fiscal year. Figures relate to last Friday of each year. / Figures are inclusive of inter-bank deposits for which data prior to November 1960 are not available, On March 30, 1962, inter-bank demand and time deposits amounted to about Rs. 537 million and Rs. 148 million respectively. Included under inter-bank borrowings. / Inclusive of inter-bank advances for which separate figures prior to November 1960 are not available. On March 30, 1962, inter-bank advances amounted to about Rs. 117 million. Source: Reserve Bank of India Bulletins. - 137 - Table 8 Scheduled and Non-Scheduled Banks - Liabilities ard Assets (At end of the year) (Rs. million) 1951 1955 1959 1960 Liabilities Paid-up capital '1/ 414 411 412 2 4i3 Reserves 296 3 1 / 34 i340_2 Deposits arnd other accounts Fixed 2,635 3,919 10,502 10,280 Savings 1J,507 1,851 2., 4 2,918 Current and contingency accounts 5,h61 5,671 6,668 6,836 Others 135 151 91 134 Borrowings from banks, agents, etc. In India 452 481 579 922 Outside India 53 21 36 63 Other liabilities 2,332 2,961 3,415 4,204 Total 13,285 15,777 24,790 26,160 Assets Cash and balances with Reserve Bank as well as other banks 1,498 1,513 2,271 2,348 Money at call and short notice 127 156 360 290 Investments Government ar-d other trustee securities 3,120 4,222 8,092 6,,749 Shares, debentures and bonds 261 180 272 259 Other investriients 238 198 222 234 Advances In India 5,346 5,492 8,432 '10,318 Outside India 292 212 291 324 Bi'ls purchased and discounted Payable in India 468 897 1,163 1,251 Payable outside India 309 437 571 565 Other assets 1,626 2,470 3,116 3,822 Total 13,285 '15,777 24,790 26,160 1/ Includes calls received in advance and forfeited shares- Figures relate to Indian banks only. 2/ Relate to Indian banks only. Source: Statistical Tables Relating to Banks in India. - 138 - Table 9 Cooperative Banko " Liabilities and Assets (At the end of the rea=r2/ (Ro. tXlon2 State Cooperative Banks Central Coorative Banks 1950/51 29551LL 1Y50/59 1959/60 1950/51 1j955/5 195 /59 1959/60 Working Capital Paid-up capital Held by government ( 6 19 46 56 ( 56 88 Held by otherm ( 25 60 90 (140 85 75 227 Roservus 22 33 44 51 48 66 86 102 Deposits From cooperative insti- tutions 90 178 363 373 124 183 298 379 From individuals and other sources 131 189 221 229 254 374 482 575 Borroviap From Reserve Bank and State cooperative tinks 31 143 640 852 79 197 707 1,005 From government 19 47 60 59 ( 17 36 45 From others 35 2 44 38 ( 4 56 53 Other liabilities n.ao nea. 42 60 n.a. n.s. 82 86 Total liabilities / noa. noa. 1,520 1.808 n.a. noa. 1,978 ,560 Loans and advances To cooperative institutions 159 322 975 1,263 310 508 1,274 1s726 To others 20 26 37 36 32 35 34 35 Investments / 114 184 320 282 141 233 360 411 Other assets n.ea n.a. 199 242 no.a. n.a. 334 416 Total assets /noe. n.ao n . . 1. 823 na n.ea. 2.002 2.588 Tear ending Jurn 30. 7/ The reasons for difference between total liabilities and assets are not known. 3 Including fixed deposits. Source: Statistical Statements Relating to Cooperative Movement in India - 139 - Table 10 Cooperative Credit Societies - Liabilities and Assets (At the *nd of the year 1/) (Ra. mi12ion) Agricultural Credit Sociotios Non!a;jicultra1 Credit Societies 3950 15/ M E 58/5 19916o 2950/51 1955/56 1951/59 1959/60 Working capital Paid-up capital Hold by government 814 16814 52 £2 (in Held by others ( ( 328 52( 26 Reserves 89 JIl 245 160 54 90 110 121 Deposita From cooperative institutiona 2 6 3 6 7 6 10 9 Froa individuals and other souress 43 64 96 312 343 529 748 824 Borrowings From cooperative banks 188 418 1,030 1SlJ19V 39 35 542/ 564/ From government 4 l 214 30 3 7 6 7 From others n.a. n.ea 34 40 noa. n.e. 22 51 Other liabilities n.a. n.a. 98 327 n.a. n.e& 68 99 Total liabilities / nea. n.8. 1.807 2.364 u.s. rba. 1.283 1.473 Loans and advances 291 598 1,350 1,777 405 609 905 1,065 Investzents 32 30 231 269 217 171 228 245 Other Assets n.a. n..a 301 394 na.. no.. 178 199 Total Assets 5nea. n4e. 1L862 2.440 n. noe 1.331 L509 % Year ending June 30. / Inclusive of figures for grain banks. 3 Less than 0.5 million. Borrowings from central cooperative banks only. The reasons for difference between total liabilities and assets are not known. n.a. - not available. - Source: Statistical Statements Relating to Cooperative Movement in India. - 140 - Table.3U Land MortUd Bnk- Liabilities and Assets. LAt tlle end M or = art (RA*. miii± Central larnd mortgage banks 2/ 1950/51 1951955/50 1 95 9/60 1 Paid-up tapital Hol by govemren t ( ( 16 18 5( ( ( 16 Held by othera ( ( 13 17 ( ( 9 (13 Reserves 3 5 8 10 2 2 4 5 Deposits . 5 2 3 Debentures 67 3U9 245 21 1 1 2/ Other borroiing From cooperative barks 1 2 5 20 57 100 ( ( Nvaa er=nt 2 9 13 20 1 - (246 (181 From others - 22 a 13 1 1 ( ( Other liabilities n.M. na. 13 12 n.o n.m, 10 16 Total liabilities i/ n.a n.a. 326 386 u.n.a. no. 175 221 Loans Banks and societies 60 131 36 15 nao na (3152 92 Infdividuals noa, n.a, 70 3100 63 13A 5 ( Investrants 17 52 87W 85 n na. n.. 8 n Other assets nme. n.a. 18 22 n.ea n.a. 16 19 Total assets n a.s n.a. 331 392 nba- nma. 176 222 V Year ending June 30. 2 Including land mortgage banking departments of two state cooperative banks. v Included under "other borrowings". v The reasons for difference between total liabilities and assets are not known. 5 Includes cash and bank balances for which separate data are not available. Investments out of balances held in sinking and other reserve funds only. j Government and other trustee securities only. n.a. - not available. Source: Statistical Statements Relating to Cooperative Movement in India. Table 12 Annual Advances of Cooperative Credit Societies (Rs. million) Year i Agricultural Grain Non-Agricultural Total. Credit Banks Credit Societies Societies 1950/51 229 2/ 473 702 1951/52 242 Th 510 756 1952/53 257 3 543 803 1953/54 297 3 605 905 1954/55 355 4 621 980 '1955/56 496 6 721 1,223 1956/57 673 5 821 1,499 1957/58 961 10 868 1,839 1958/59 1,255 '10 1,102 29367 1959/60 1,691 15 '1,174 2,880 1/ Beginning July 1. 2/ Included under agricultural credit societies. Source: Statistical Statements Relating to the Cooperative Movement in India. Table 13 Loans Approved and Disbursed by the Industrial Finance Corporationi/ Year Number of applica- Amount of loqns .ouSj of loans (July-June) tions approved approved-2/ disbursed (Rs. million) (Rs. million) 1948/49 21 34.2 13.3 1949/50 23 37.7 20*8 1950/51 17 23.9 23c8 1951/52 33 44.5 17.8 1952/53 14 14h4 25e0 1953/54 29 52.7 28.2 1954/55 27 73.4 16.4 1955/56 44 151X3 22.0 1956/57 51 119.1 97.8 1957/58 22 77.8 83.3 1958/59 19 37.9 74.8 1959/60 29 179.2 84.1 1960/61 57 212e1 66.2 Total 386 1058.2 573.5 / In addition to making loans, the Corporation provides assistance to industries in the form of underwriting of capital issues, guaranteeing of deferred payments, etc. / Including loans subsequently declined or not to be made available and loans requiring government or D.L.Fo approval. Source: Report of the Industrial Finance Corporation for 1960/61. _ 143 - Table 14 Financial Assistance Sanctioned and Disbursed by the Industrial Credit and Investment Corporation of India (Amount in Rs. million) Up to December 31, -1959 During 1960 During 1961 Total No. of Mount Amount No. of Amount Amount No. of Amount Amount No. of Amount Amount opera- sanc- dis- opera- sanc- dis- opera- sanc- dis- opera- sanc- dis- tio'ns !'tioned bursed tions tioned bursed tions tioned bursed tions tioned bursed Loans and Guarantees: Rupees 13 35.0 34.6 19 30.5 5.1 16 36.6 16.4 48 102.1 56.1 Foreign exchange 22 67.4 22.8 24 58.9 12.6 50 67.9 28.2 96 194.2 63.6 Total 35 102.4 57.4 43 89.4 17.7 66 1D4.5 44.6 144 296.3 119.7 Underwriting:2 Ordinary shares 17 39.3 11.4 5 7.6 3.2 5 7.0 2.7 27 53.9 17.3 Preference shares 15 33.8 5.7 2 3.0 4.0 - -1.5 5.7 17 35.3 15.4 Debentures 2 10.0 2.9 1 3.0 2.4 - - - 3 13.0 5.3 Total 34 83.1 20.0 8 13.6 9.6 5 5.5 8.4 471/ 102.2 38.0 Direct Subscription: Ordinary shares 22 17.0 10.0 13 2.0 3.8 9 3.5 6 5 44 22.5 20.3 Preference shares 6 6.6 6.1 - - - - -0_5,- / - 6 6.1 6.1 Total 28 23.6 16.1 13 2.0 3.8 9 3.0 6.5 504/ 28.6 26.4 Grand Total 97 209.1 93.5 64 105.0 L_ 80 a 241 k _ 18.1 1 Amount sanctioned refers to the amount of shares and debentures underwritten by the Corporation while the amount disbursed indicates the amount paid by the Corporation in respect of shares and debentures which it had to take up. 2/ Previous year's sanction reduced. 3/ 10 operations cover both Ordinary and Preference shares. 4/ operations cover both Ordinary and Preference shares. Source: Annual Report of the Industrial Credit and Investment Corporation of India for 1961. - 4/. - Table 15 Annual Increase in Time Liabilities of Commercial Banks (Rs. million) Scheduled Non-Schedi;led All Commercial Banks!! Banks/ Banks 1950/51/ 244 244 19511/52 - 80 123 43 1952/53 291 45 336 1953/54 164 - 17 1h7 1954/55 497 11 508 1955/56 370 26 396 1956/57 593 27 620 1957/58 2489 -133 2356 1958/59 1920 - 2 1918 1959/60 2081 43 2124 1960/61 -576 - 45 -621 1961/62 962 - 37 925 / Figures up to 1960/61 are inclusive of changes in inter-bank deposits for which data prior to November 1960 are not available. / Figures relate to deposit liabilities only. 3/ Fiscal years beginning April 1. Figures from 1956/57 onwards are not comparable,with those for earlier years due to deposits of PoL- 480 funds with the State Bank up to June 1960 and subsequent refund of a part of these deposits by the State Bank. See texts, pp. 13 and 14. 4t/ Less than Rs. 1 million. Source: Banking and M4lonetary Statistics of India and Reserve Bank of India Bulletins. - 1245 - Table 16 Ownership of Time and Savings Deposits of Scheduled Banks (Rs. million) End of End of End of October 28, October 27 190 1 1959 15961 Time deposits Personal,&/ 1,295 1,761 3,636 3,960 4,517 Deposits of non-financial business concerns h 1X65 769 l,h24 1,701 1,759 Deposits of financial concerns / 117 159 509 536 618 Deposits of government and local authorities 367 j 1,065 4 699 832 Others 391 285 3,527 Y/ 651 896 Total 2,268 3.l3hl 10,161 L k7 8,,622 Savings deposits Personal 1,318 1,578 2,408 2,588 3,025 Others 52- 47 74 79 93 Total 1,370 1 25 2,482 3,118 Total savings and time deposits 3,638 L4j966 12643 1,214 0 2 sUnclassified deposits, i.e deposits of less than Rs* 500 each have been treated as personal deposits. Figures from 1960 ornwards include deposits of concerns o>med and/or mranaged by government* Included under other deposits, Includes deposits p:government concerns. Inclusive of' P .L. 40 and P.L. 665 deposito Figures for the subseauendyeaars.reiexclusive of such depositsn. Source: Banking and Mone tary Statistics or Indi. and Iies erve Mak IdaiuI is - 146 - Table 17 Annual Increase in Deposits with Cooperative Credit Institutions from "Individ,uals and Other Sources" (exclusive of deposits of cooperative institutions) 1 (Rs. million) 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60 1960/612/ State cooperative banks -0.9 -2.9 7.7 -10.1 24.9 38.1 16.8 -15.1 31.1 7.5 59.2 Central cooperative-banks 19.9 13.5 6.7 11.7 31.9 56.3 19.6 50.0 38.8 92.8 91.8 Agricultural credit societies 3.6 -o.6 -0.3 2.3 6.5 13.8 7.5 10.7 12.9 16.9 27.5 Non-agricultural credit societies 24.2 21.9 15.9 38.9 63.6 45.5 108.9 -81.2 191.2 76.0 65.0 Grain banks L/ 0.1 0.2 0.4 0.7 -0.3 1.2 -1.3 0.3 o.6 Central land mortgage banks&' -0.8 U 1.7 0.9 0.1 9.0 -8.8 0.9 1.4 -0.6 0.9 Primary land mortgage banks/ v0.2 $ 0.1 0.3 5/ -0.1 0.2 0.8 o.6 0.4 1.2 Total 46.2 31.9 31.9 44.2 127.4 163.3 143.9 -32.7 274.7 193.3 246.2 / Figures are for years beginning July 1. 2 Preliminary figures. / Included ia figures for agricultural credit societies. / Figures up to 1956/57 relate to changes in deposits as well as loans from individuals and other sources (excluding government, cooperative institutions, etc.) while those for 1958/59 to 1960/61 relate to changes in total deposits. The figure for 1957/58 represents the difference between outstanding deposits and loans from individuals and other sources at the end of 1956/57 and total deposits outstanding at the end of 1957/58. U Less than 0.1. - Source: Statistical Statements Relating to the Cooperative Movement and the Reserve Bank of India. - 147 ~ Table 18 Annual Increase in Paid-up Capital of Cooperative Credit Institutions-V (Rs. million) 1950/51 1951/52 1952/53 1953154 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61ˇ' State cooperative baniks 2.3 3.2 2.7 5.8 4.9 11.3 9.4 31.7 20.9 40.5 36.2 (0.1)- (0.02) (-0.2) Central cooperative banks 5.0 5.8 5.6 8.1 9.2 15.8 26.1 59.6 60.6 83.5 74.9 (-0.3) (0.2) (-0.1) Agricultural credit societies 12.3 12.1 9.8 15.3 18.3 35.4 30.3 83.9 89.6 97.9 107.6 (67.5) (90.3) (102.5) Non-agricultural credit sdcieties 11.6 12.4 10.5 15.8 14.4 16.5 17.5 31.8 24.8 41.0 18.3 (24.7) (41.0) (18.0) Grain banks 2 / -0.7 0.2 0.2 0.7 -0.1 2.0 1.0 1.9 2.3 Central land mortgdge banks 0.5 1.2 0.6 0.7 0.5 1.8 3.1 11.6 6.5 5.9 8.3 (1.8) (2.0) (2.8) Primary land mortgage banks 0.6 0.6 0.9 0.6 0.5 0.8 1.3 0.8 1.8 3.0 4.1 Total 32.3 35.3 29.4 46.5 48.0 82.3 87.6 221.4 205.2 273.7 251.7 T%9 .6) (13-8 .4) (129.4) Note: All figures, except those in brackets, relate to changes in total capital, including capital held by the government and cooperatives. Figures in brackets for 1958/59 to 1960/61 represent changes in capital held mainly by individuals; similar information for earlier years is not available. f Figures are for yearB beginning July 1. L/ Preliminary figures. 3/ Included in figures for agricultural credit societies. Source: Statistical Statements Relating to the Cooperative Movement and the Reserve Bank of India. Table 19 Net Annual Receipts from 9mall&inr (Rs. million) 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 Pogt Office Savings Bank Deposits 163 128 178 142 246 370 313 180 202 277 445 National Savings Certificates2/ 173 178 185 203 198 193 190 -222 -258 -210 -186 10-Year National Plan Certifi- cates;P - - - - 74 90 90 -22 -21 -12 -10 12-Year National Flan Savings Certificatesa/ - - - - - - - 714 813 689 651 10-Year Treasury Savings Deposit CertificateaW 53 131 73 65 51 41 30 51 52 94 121 15-Year Annuity Certificatea / - - - - 5 4 4 5 5 5 7 Cumulative Time Deposit 2 - - - - - - - - 1 8 18 Post Office Cash & Defence Savings Certificates and Defence Savings Deposits -55 -52 -35 -31 -22 -14 -12 -10 -10 -8 -6 Prise Bonds - - - - - - - - - - 158 Total Net Receipts 2L 285 401 8 L2 684 615 696 78 3L 1198 2 Figures are for fiscal years beginning April 1. 2 Include 32-year, 7-year and 5-year certificates, the last being discontinued with effect from July 1953 and the others from June 1, 1957. / Issued from May 10, 1954 to May 30, 1957. J Issued frcm June 1, 1957. / Interest on Treasury Savings Deposit Certificates issued since June 1, 1957 raised frcm 3* per cent per annum to 4 per cent per annum. S First series issued frcm July 1954 to December 1957 and second series from January 1958. / Cammenced from January 2, 1959. Source: Figures for the period 1956/57 to 1960/61, except the one in respect of prize bonds, have been supplied by the Ministry of Finance, New Delhi. The rest of the figures have been taken from the Reserve Bank Reports on Currency and Finance and the Reserve Bank bulletin for July 1962. - 149 - Table 20 Annual Increase in Life Insurance Funds (Other than the Postal Life Insurance Fund) (Rs. million) 1950 1951 1952 1953 1954 1955 1956 1956/57 1958 1959 1960 (Jan.-Aug.)(Sept.56-Dec.57) Indian insurers (other,han provident societies)* (a) Increase in life insurance funds / 185-/ 148 217 249 278 271 179 300 374 475 651 (2.44) ~(347) (449) (621) (b) Increase in loans on policies 15?/ 362/ 39 37 39 5?J 25/ 22/ 9 10 29 0(3) (7) (14) (17) (c) Net increase in life insurance funds 170 112 178 212 239 266 154 297 365 465 622 (241) (340) (435) (604) Non-Indian insurers - increase in life insurance funds v 16 15 20 26 19 23 A/ /.*/ J Provident societies - net increase in life insurance funds 1 / 1 1 1 1 A! A/ Av * Life Insurance Corporation from September 1956 onwards. Figures in brackets pertain to the Corporation's business in India. / Based on data given in revenue accounts of insurance companies. Information regarding loans on policies is not available in the case of non-Indian insurers. / As the data available for certain years are somewhat incomplete, these figures indicate only the rough order of annual increases. L Assumed to be same as in the case of loans on policies in India. A Included in figures for Indian insurers. L Less than 0.5 million. Source: The Indian Insurance Year Books and Life Insurance Corporation. Table 21 Assets of Life Insurance Companies at the end of August 1956 and of_the_Life_InsuranceCorporation at the end of 1960 August 31, 19 December 31, 1960Q?J Amo'unt Percentage Amount Percentage (Rs.mil..) of total (Rs.mil.) of total Government of India Securities 1710 41l2 2283 36.7 Indian State Government securities 337 8.1 949 15.2 Foreign securities: Securities of governments, municipalities, etc. 132 3.2 128 2.0 Debentures and shares of joint stock companies 16 0.4 5 0.1 Government guaranteed and other approved securities 302 7.3 416 6.7 Shares and debentures of companies in India/ Ordinary shares 230 5e5 475 7.6 Preference shares 134 3.2 207 3.3 Debentures 205 5.0 238 3.9 Nlortgages on Property 150 3.6 92 1.5 Loans on policies 359 8.7 436 7.0 Land,and house property 193 4.7 265 4.3 Other assets 382 9.1 731 11.7 Total 4150 100l 0 6225 100.0 1/ Figures relate to assets of life insurance business of Indian and non- Indian insurers as well as provident societies. / Figures relate to assets of the Life Insurance Corporation in respect of life business only. / Include sheres and debentures of companies which are incorporated outside India but have their principal factories or works in India (Rs. 22 million * at the end of 1960) and some shares and debentures (other than those representing "approved" securities) of cooperatives. Source: Reserve Bank of India Bulletin for November, 1962. - 151 - Table 22 Total Annual Accruals to Provident FundsJ/ (Rs. million) 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 Central Government (net) 85 102 86 149 156 162 181 193 185 228 432_" State Governments (net) V 34 45 38 52 64 61 69 77 88 115 157A/ Reserve Bank of India (net) 2 2 3 3 4 4 4 5 5 6 7 Scheduled and A2 Class non-scheduled banks (contributions of employees and employers / 15 16 17 17 18 24 24 27 30 33 36 Insurance companies including Life Insurance Corporation (contributions of employees and employers) 8 10 10 11 12 13 15 14 19 19 20 Non-financial corporate sectorW (contri- butions of employees and employers) 94 112 186 396 434 442 452 514 558 595 705 Total 23 287 340 628 688 706 830 885 996 2 Estimates are for fiscal years beginning April 1. / The increase in 1960/61 as compared to the 1959/60 level is explained largely by the extension of compulsory provident funds to almost all Central Government employees since April 1960. (To some extent, the increase was also due to the transfer to provident funds in 1960/61 of deferred pay in the case of defense services personnel.) / Figures up to 1955/56 are for Part A and B States only. The figure for 1950/51 does not include net accrual in the former Travancore-Cochin State. A/ As per data made available by the Planning Commission, New Delhi. / Non-scheduled banks having paid-up capital and reserves of Rs. 0.5 million and above belong to the A2 Class. / Including enterprises covered by statutory provident funds. Data on net accruals to statutory provident funds are set out in Appendix Table 23. Source: Reserve Bank of India. (As mentioned in footnote 3 above, the figure of net accretions to providents of State Governmente' employees in 1960/61 has been made available by the Planning Ccmmission, New Delhi.) - 152 - Table 23 Net Annual Accruals to Statutory Provident Funds in the Private Sectol" (Rs. million) 1952/53 1953/54 1954/55 1955/56 1956/57 1957/58 1958/59 1959/60 1960/61 1961/62 Enployees' Provident Funds Non-exempted establishments 15Z/ 66/ 50 66 85 160 146 147 177 225 Exempted establishments 51 106 116 115 135 141 116 152 201 197 Total 66?/ 1722" 166 181 220 301 262 299 378 422 Coal Mines Provident Fund 6' 7- 74' 15 28 34 -37 43 n.a. n.a. Assam Tea Plantations Provident Fund - - - 22 35 28 32 33 354' n.a. Grand Total 72 179 173 218 283 363 331 375 n.a. n.a. 4 Figures pertaining to REployees' Provident Funds and Coal Mines Provident Fund are for fiscal years beginning April 1, while those for Assam Tea Plantations Provident Fund are for years beginning October 1. / Exclusive of interest earned on investments. / Inclusive of interest earned in 1952/53. L Figures relate to contributions only. Information regarding other receipts and disbursements is not available. Source: Central Cammissioner of Employees' Provident Fund and Ministry of labor. (Reserve Bank in the case of figures in respect of the coal mines provident fund for the years 1952/53 to 1954/55). n.a. = not available - 153 - Table 24 Financing of Annual Outlays in the Public Sector under the First and Second Plans (Rs. billion) FIRST PLAN SECOND PLAN Outcome latest estimates Origimal esti- mates f or five- 1951/52 1952/53 1953/54 1954/55 1955/56 Total 1956/57 1957/58 1958/59 1959/60 1960/61 Total year period Balance from current revenues (a) at pre-Plan rates of ) 0.94 0.01 -0.36 -0.10 -0.99 -0.50 3.50 taxation ) 1.83 0.99 0.87 1.23 1.45 6.37 (b) additional taxation ) 0.54 1.78 2.18 2.77 3.25 10.52 4.50 Railways' contribution 0.38 0.23 0.13 0.19 0.22 1.15 0.33 0.29 0.22 0.36 0.30 1.50 1.50 Loans from the public (net) -0.23 0.16 0.02 1.20 0.89 2.04 1.44 0.73 2.30 1.81 1.52 7.80 7.00 Small savings (net) 0.39 0.40 0.40 0.56 0.68 2.43 0.61 0.70 0.79 0.86 1.04 4.00 5.00 Unfunded debt and miscellaneous capital receipts (net) -0.45 - 1.46 0.48 0.90 2.39 -0.45 -0.52 1.22 1.31 0.74 2.30 2.50 Budgetary receipts corresponding to external assistance o.65 0.46 0.19 o.16 0.43 1.89 0.39 0.89 2.30 1.98 5.34 10.90 8.00 Deficit financing 0.02 0.44 o.36 0.94 1.57 3.33 2.53 4.96 1.36 1.12 -0-49 9.48 12.00 Gap2/ _ - - - - - - - - - - - 4.00 Total plan outlay 2.59 2.68 343 4.76 6.14 19.60 6.33 8.84 10.01 10.11 10.71 46.oo 48.00 / Include investment of P.L. 480 counterpart funds in special government securities to the extent of Rs. 2.4 billion. / This was to be covered by additional effort to raise domestic resources. Source: Planning Commissiom, New Delhi. Table 25 Inflow of Foreign Capital in the Private Sector (Rs. million) 1954 and 1955 (annual average) 1956 1957 1958 1959 Private foreign capital Gross inflow: (i) Retained earnings 120 195 95 98 151 (ii) Cash inflow 15 31 59 48 33 (iii) Non-cash inflow 64 85 114 123 72 Total 199 312 269 268 256 Outflow 50 63 91 2W4. 148 Net inflow 149 249 179 24 108 Official capital (net) 2/ 14 121 321 253 273 Total net inflow of foreign capital 163 370 500 277 381 1/ Figures exclude foreign investments in the banking system. Totals may not add up because of rounding. g/ Mainly from the IBRD and other official agencies such as the U.S. Export Import Bank and the Development Loan Fund. Source: Reserve Bank of India Bulletin, May 1961. - 155 - Table 26 Organization of Recognized Stogk i~xbwAnUe (As of January 1961) No. of Author- Name of Year of Type of Date of Entranee Fee/ Current Value of Membership Annual No. No. of ized Assistants No. of Stock Establish- Associ- Government Period of Par Value of Share or llembership Security Subscrip- of Active or Clerks of Remi- Exchange ment ation Recognition Recognition Share (Rs.) Right oruCardf (Rs.) Deposit (Rs.) tion (Ba.) ,eembers Members aierl! Bombay 1875 Voluntary 8/31/1957 Permanent - 28,001 20,000 15 504 409 1,537 220 non-profit making asso- ciation Calcutta 1908 Public 10/10/1957 5 years 10,000 8,400 20,000 48 619 408 355 _ (Incorpo- limited rated in dompany 1923) Msdras 1937 Company 10/15/1957 5 years 2,500 - 5,000 180 37 30 21 - (Reorgan- limited by (10,000 per ized in guarantee firm) 1958) Ahmedabad 1894 Voluntary 9/16/1957 5 years 6,101 - 5,000 25 462 156 427 _ non-profit making asso- ciation Delhi, 1947 Public 12/9/1957 5 years 4,000 8,200 One addition- - 105 94 55 - limited al share company Hyderabad 1943 Company 9/29/1957 5 yeaas 2,571 3,000 64 57 8 - _ limited by guarantee Indore 1930 Voluntary 12/24/1958 5 years 1,001 3,000 10 n.a. n.a. n.a. n.a. non-profit making asso- ciation / Appointed by members. They cannot transact any business except through the appointing members or their authorized assistants or clerks. Source: Bombay Stock Exchange - 156 - Table 27 New Registrations of Companies During the First and Second Plan Periods (Rs. million) Public Companies Private Companies Total Period Authorized Authorized Authorized No. Capital No. Capital No. Capital First Plan 1951-52 568 721 1,298 802 1,866 1523 1952-53 287 211 1,046 753 1,333 964 1953-54 204 229 989 1325 1,193 1554 1954-55 211 1695 992 565 1,203 2260 1955-56 186 679 1,262 890 1,448 1569 Total 1,456 3535 5,587 4335 7,043 7870 Second Plan 1956-57 84 541 764 1565 848 2106 1957-58 65 527 896 500 961 1027 1958-59 58 587 1,037 2257 1,095 2844 1959-60 87 671 1,365 934 1,452 1605 1960-61 153 1572 1,530 1295 1,683 2867 Total 447 3898 5,592 6551 6,039 1,0449 Grand Total 1,903 7433 11,179 1,0886 13,082 1,8319 Note: Figures of authorized capital of newly registered companies relate to the time of registration of companies and do not cover subsequent increases. Source: Article entitled, "The Contemporary Corporate Scene in India" by R.K *. Nigam, Director, Research & Statistics, Dept. of Company-Law-Administration. See Commerce, August 26, 1961. - 157 , Table 28 Government Companies Set Up During the First and Second Plan Periods (Rs. million) No. of Authorized Paid-up / Companies Capital Capital First Plan 1951-52 4 415 234 1952-53 4. 168 70 1953-54 4 3060 3035 1954-55 3 115 55 1955-56 6 318 170 Total 21 4076 3564 Second Plan 1956-57 13 1199 644 1957-58 18 86 16 1958-59 16 983 46 1959-60 23 301 4 1960-61 17 314 n.a. Total 87 2883 710 Grand Total 108 6959 4274 _/ As of March 31, 1960. Source: Article entitled, "The Contemporary Corporate Scene in India" by R.K. Nigam, Director, Research & Statistics, Dept. of Company Law Administration. See Commerce, September 2, 1961. - 158 - Table 29 Companies and Securities Listed on Individual Stock Exchanges in Various Years Paid-up Capital Average per Company (Rs. million} H_arket Value of (Rs. million) No. of Issues Name of Stock No. of Listed No. of Stock Ordinary Pref. Total Capital Total Paid- Market Value on the Cleared -xohanne Year Companies Issues Listed Shares Shares Deb. Total (Rs. million) UP Capital2/ of Capital Securitiea List* Bombay 1946 197 271 1233 6.3 28 1958 358 2460 356 63 2879 4319 67 1960 275 479 2592 472 332 3396 12.3 67 1961 297 538 2946 556 310 3812 6451 12.8 21.7 65 Calcutta 1946 576 807 1475 2.6 1958 848 2360 356 161 2877 13 1960 570 918 2336 535 340 3211 5.6 12 1961 576 924 2357 547 354 3258 5481 5.7 9.5 12 Madras 1946 192 298 406 2.1 1958 384 608 102 143 853 1135 12 1960 246 446 718 109 109 1006 4.1 12 1961 249 451 819 120 182 1121 1801 4.5 7.2 12 Ahmedabad 1946 81 82 15452 27.2 1958 162 354 131 485 14 1961 96 208 679 157 - 836 2145 8.7 22.3 9 Delhi 1946 73 92 7292/ 12.2: 1961 103 198 683 159 6 848 1269 8.2 12.3 4 Hyderabad 1958 28 108 37 145 138 1961 19 27 596 35 2 633 1211 33.3 63.8 - Indore 1961 8 9 29 2 - 31 47 3.9 5.9 2 Figures for 1946 pertain to ordinary and preference shares only. Securities in which forward trading is permitted are known aS / Figures pertain to 56 companies only. "cleared" securities. See page 83 of the text. 2 Figures pertain to 60 companies only. Source: 1946 - Report on The Regulation of the Stock Market in India by P.J. Thomas 1958 - The Capital Market of India by S.L.N. Simha 1960 - "Scope of Stock Exchanges" by Raj K. Nigam, Commerce Annual, 1960 1961 - Bombay Stock Exchange Records (Table prepared by Bombay Stock Exchange) _ 159 - Table 30 Increase in the Number of Shareholders of Certain Companies Number of Shareholders Name of Company % Increase in 1960 over 1947 1952 1960 1947 1952 Tata Iron & Steel 28,410 70,000 146 Associated Cements 22,450 25,415 44,067 96 73 Scindia Steam 24,700 31,000 39,432 60 27 Tata Chemicals 9,496 10,138 14,881 57 47 Voltas 3,937 6,586 67r Bombay Burma 6,959 8,873 28 Orissa Cement 3,5592/ 8,191 13 4 Sirpur Paper 1,427 1,112 3,393 138 205 Belapur 2,725 3,920 Svadeshi Mllls 2,135 2,690 3,693 73 37 Tata Mills 2,668 2,604 4h,919 84 89 Tata Power 7,446 10,723 44 Tata Hydro 5,660 7,869 10,659 88 35 Andhra Valley Power 3,459 5,319 54 New India Assurance 10,800 13,694 27 Central Bank 20,400 23,263 24,707 21 6 Bank of India 8,549 10,154 19 Union Bank 6,180 6,040 8,056 33 2 Relates to 1957. a Increase in the number of shareholders in 1960 as compared to that in 1957. 3/ Relates to 1955. Increase in the number of shareholders in 1960 as compared to that in 1955. Source: Bombay Stock Exchange - 160 - Table 31 Index Numbers of Security Prices2i Group Indices Selected Sub-eroup Indices of Variable Dividend Industrial Securities Variable Trans- Eleo- Machinery YearJ/ Prefer- Dividend Cotton Jute Iron port trical other than Basic Indus- Elec- Shipping or Government Deben- ence, Industrial Tex- Tex- and Equip- Machin- Transport & trial Chemi- trio- and other Month Securities tures Shares Securities Coal Sugar tiles tiles Steel ment erv Electrical cals Cement Paper itv Transport Base: 1938 = 100 1951-52 95.8 97.2 127.8 126 97 16 100 163 172/ 176 144 128 90 99 1952-53 91.7 90.8 107.3 91 84 13 78 131 140 135 141 114 83 86 Base: 1949-50 = 100 1952-53 90.1 87.3 94.0 84 85 94 91 97 1014/ 94 113 151 115 88 1953-54 90.4 101.1 87.3 95.6 78 85 96 82 107 113 k 99 116 159 116 94 1954-55 90.5 100.7 88.4 112.9 82 101 107 93 140 156 132 141 211 123 108 1955-56 90.9 100.8 87.3 121.6 81 105 118 95 154 189/ 144 164 256 123 106 1956-57 90.5 100.1 82.9 121.2 78 105 134 70 147 1884/ 144 176 266 112 118 1957-58 89.3 98.1 74.5 100.3 67 95 105 52 119 1514/131 141 211 103 117 Base: 1952-53 = 100 1957-58 98.3 99.6 88.0 125.4 89 160 120 63 116 175 163 148 109 125 160 89 123 1958-59 99.9 100.1 87.2 137.3 107 164 114 80 145 198 143 166 123 129 185 93 134 1959-60 101.2 101.8 92.2 155.3 114 179 129 97 161 288 133 198 167 136 209 90 125 1960-61 101.0 100.8 87.2 171.7 120 187 151 90 160 399 140 211 208 144 224 82 108 1961-62 100.9 101.1 83.2 183.7 123 158 180 91 164 405 165 218 212 149 211 84 96 Mar.-62 100.7 100.9 82.6 192.2 160 145 201 102 156 399 177 237 206 164 224 87 94 June-62 100.7 99.7 81.8 189.9 165 138 188 104 164 392 185 247 199 167 231 86 94 / Annual and monthly averages. / Fiscal year beginning April 1. / Indices for cotton, woollen and silk textiles. v Indices for general engineering securities. / Average of 40 weeks. Source: Reserve Bank Reports on Currency and Finance and Monthly Balletins. - 161 - Table 82 Capital Raised bv Non-Government CQmnanies throush Shares and Debentures (Rs. million) 1957 19S8 19S9 1960 1961 (Preliminary) 5 years. 1957/1961 Public Private Public Private Public Private Public Private Public Private Public Private Type of Issue CCmpanies Companies Total Companies Companies Total Campanies Companies Total Companies Companies Total Companies COmpanies Total Companies Companies Total Initiaj%' Ordinary 70.8 36.8 107.6 57.8 73.8 131.6 97.6 171.12/ 268.7 141.1 129.7 270.8 225.4 96.6 322.0 592.7 508.0 1100.7 Preference 8.7 4.1 12.9 8.0 0.8 8.8 6.8 1.4 8.2 4.4 0.3 4.7 15.8 0.9 16.7 43.7 7.5 51.3 Total 22 LO.9M 120.5 65.8 74.6 140.4 104.4 172.5 276.9 145.5 1s0 Z75.s 24-1.2 97 S 636.4 S15.5 1152.0 Further2/ Ordinary 323.9 86.8 410.7 152.7 84.6 237.3 209.5 90.4V/ 299.9 338.1 94.8 432.9 334.8 88.4 423.2 1359.0 445.0 1804.0 Preference 47.0 4.2 51.1 47.6 6.3 53.9 38.1 1.3 39.4 71.6 1.5 73.1 36.1 1.3 37.4 240.4 14.6 254.9 Total 370-9 91.0 461.8 200.3 90.9 291.2 247.6 91.7 322.2 409.7 96.3 506.0 7zQ2 89.7 460.6 199.L 459.6 2058.9 Debentures 92.8 5.4 98.1 124.0 1.1 125.1 96.9 3.5 100.4 93.9 - 93.9 82.0 6.0 88.0 489.6 16.0 505.5 Grand Total Lj 137.2 680.5 340.1 166.6 556.7 448.9 267.7 716.6 649.1 226.3 875,4 6 1 19.2 887.3 2 991.0 3716.S Note: Data relate to capital raised against consents granted by the Controller of Capital Issues as well as under the Exemption Order but do not cover bonus issues. They are based on reports received from companies/registrars of companies up to April 15, 1962 and do not take into account capital raised by companies for which no reports were received up to that date. For 1957, figures do not add up to totals because of rounding. 2/ Capital issues by new companies. Capital issues by existing cacpanies. 2/ Including Rs. 0.5 million in respect of government companies. Source: Reserve Bank Report on Currency and Finance for 1960/61 and the Ministry of Finance, Government of India. - !6:-. - Table 33 Consents for Capital Issues by Non-Government Companies (Rs. million) Shares2 Debentures Total 1951 412 41 453 1952 214 30 244 1953 416 117 533 1954 662 203 865 1955 698 174 872 1956 987 103 1090 1957 683 91 774 1958 500 163 663 1959 1024 99 1123 1960 943 196 1139 2$6J 1115 212 1327 2/ Ordinary as well as preference shares. Bonus issues are not included. Source: Reserve Bank Reportson Currency and Finance and Builletin for February 1961. - 163 - Table 34 Consents for Capital Issues by Non-Government Companies - Breakdowm by Public and Private Compqniesi! (Rs. million) 1951 1952 1953 1954 1955 1956 1957 1958 1959 Public companies Shares2! 294 166 368 607 559 870 424 380 784 Debentures 41 30 115 200 103 99 92 175 123 Total 335 196 483 807 662 969 516 555 907 Private companies SharesR/ 118 48 48 55 139 116 277 131 334 Debentures V - 2 3 71 5 5 8 10 Total 118 48 50 58 210 121 282 139 344 All companies Shares / 412 214 416 662 698 986 701 511 1118 Debentures 41 30 117 203 174 104 97 183 -33 Total L53 244 533 865 872 1090 798 694 1251. / Figures for the years after 1955 have been revised but the breakdown of revised figures by public and private companies is not readily available. The revised figures for public and private com- panies cambined are shown in Table 33. 2/ Exclusive of-bonus issues. Source: Reserve Bank of India Bulletin, Februany '961. Table 35 Denomination Pattern of Stock Issues listed on Stock Exchangesin February 1961 Ordinary Shares Preference Shares Debentures No. of No. of No. of No. of No. of No. of Denomination Stock Units Stock Units Stock Units Issues issued Issues issued Issues issued Rs. ('0oo) (1000) (7000) 1 25 18,L49 - - - - 2 41 25,319 1 69 - - 5 46 31,447 11 1,247 - - 10 594 218,388 116 8,467 - - 25 30 5,781 14 589 - 50 63 5,o40 40 550 - 75 1 3,671 - - - 100 367 20,058 448 10,060 54 1,876 250 17 163 6 14 - 500 11 31 3 13 29 124 1000 10 90 5 17 56 303 5000 - - - - 4 28 Others 98 74,222 15 579 6 I/ n.a. Total 1303 402,459 659 21,605 149 1/ n.a. 1/ Denomination not knonm. n.a. = not available. Source: Boubay Stock Exchange. - 165 - Table 36 Details of New Capital Issues by Existing Non-Government Non-Financial Public Companies-/ (Amount in Rs. million) Issued through Prospectus Total Issues Right Issues Amount reserved for ou Type of Promoters, Di- Foreign par- 1nstitution- offered Year Security No. Amoupt No.S/ Amount No..Z'Amount rectors, etc. ticipants al investors to public Ordinary shares 35 287.3 34 284.3 2 3.0 - 3,0 1956 Pref. shares 15 24.3 14 22.1 2 ?.2 _ 2.2 Debentures 2 0.2 - - 2 0.2 - - - 0.2 Ordinary shares 53 218.9 51 183.1 8 35.8 1.8 5.2 0.2 28.6 1957 Pref. shares 10 16.7 8 13.4 4 3.3 0.2 - _ 3.1 Debentures 4 4.3 - - 4 4.3 - 4.3 Ordinary shares 41 164.9 40 156.7 3 8.2 - - - 8.2 1958 Pref. shares 11 44.2 10 27.4 3 16.8 - - 16.8 Debentures 6 45.8 - - 6 45.8 - - - 45.8 Ordinary shares 74 272.6 72 249.1 5 23.5 0.g 0.4 - 22.2 1959 Pref. shares 24 106.3 21 74.8 6 31.5 2.0 - - 29.5 Debentures 5 39.4 - - 5 39.4 - - 39.4 Ordinary shares 76 188.8 70 164.1 8 24.7 3.3 o.6 10.0 10.8 1960 Pref. shares 1D 16.7 7 8.6 4 8.1 0.1 0.7 7.3 Debentures 2 6.o - - 2 6.o - _ 6.o Ordinary shares 279 1132.5 267 1037.3 26 95.2 6.o 6.2 10.2 72.8 Total Pref. shares 70 208.2 60 146.3 19 61.9 2.3 - 0.7 58.9 Debentures 19 95.7 - - 19 95.7 - - 95.7 1/ Data are somewhat incomplete as information for all companies is not available. g/ Certain issues involved a rights issue as well as a prospectus issue. Source: Bombay Stock Exchange - 166 - Table 37 Details of Initial Capital Issues by Newly Established Non- Government Non-Financial Public Companie sA (Amount in Rs. million) Total Issues Amount reserved for Amount Type of Promoters, di- Foreign par- Institutional offered Year shares No. Amount rectors, etc. vticipants investors to public 1956 Ordinary 5 20.5 5.7 5.0 - 9.8 Preference 5 11.4 3.7 0.2 - 7.5 1957 Ordinary 2 702 3.6 - _ 3.6 Preference 1 1.0 0.5 - - 0.5 1958 Ordinary 5 55.0 16.0 15.3 0.2 23.0 Preference 1 -1.0 - - 1.0 1959 Ordinary 9 96.8 4o.6 16.2 _ 40.0 Preference 6 24.8 1.2 _ _ 23.6 1960 Ordinary 31 264.1 102.O 35.5 3.5 123.1 Preference 10 55.3 1.9 - 0.5 52.9 Total Ordinary 52 443.6 167.9 72.5 3.7 199.5 Preference 23 93.5 7.3 0.2 0.5 85.5 / Data are somewhat incomplete as information for all companies is not available. Source: Bombay Stock Exchange - 167 - Table 38 Subscriptions to New Issues of Preference Shares of Non-Government Non-Financial Public Companies (Rs. million) Issues Fully All Issues .SSubscribed Issues Undersubscribed Issues Oversubscribed Amount Amount Applied Amount Amount Applied Amount Amount Amount Applied for as % of Amount Applied for as % of Year No. Offered No. Offered No. Offered for Amount Offered No. Offered for Amount Offered 1957 1 1.3 - - 1 1.3 - 1958 1 1.0 - - 1 1.0 0.1 10 - - - 1959 5 11.7 2 0.9 - - - - 3 10.8 13.4 124 1960 5 34.9 - - 4 32.4 6.6 20 1 2.5 2.8 112 Total 12 48.9 2 0.9 6 34.7 6.7 19 4 13.3 16.2 122 I/ Negligible Source: Bombay Stock Exchange Table 39 Underwriting of New Capital Issues of NoD7Government Non-Financial Public CompaniesY (Rs. million) Total Amount underwritten by amount of / All Under- Year new issues ICICI LIC IFC Banks Brokers Others-J writers 1956 344 8 - - 8 2/ 1 17 1957 248 9 1 - - 15 1 26 1958 311 18 12 7 19 11 8 75 1959 540 15 4 9 28 33 19 108 1960 531 10 13 2 50 22 14 111 Total 1974 60 30 18 105 81 43 337 y/ Data are somewhat incomplcte as information for all companies is not available. j Mainly investment companies. / Less than 0.5 million. Source: 'Bombay Stock Exchange - 169 - Table 40 Loans of Central and State Governments and their Absorption- (Rs. billion) Net market borrowings by the Central and State Governments Net cash re- Net sales in Total net Cash Cash Net ceipts from open market by absorption receipts payments receipts public./ Reserve Bank . by publicZ/!/ (1) (2) (3) (4) (5) (6) Firet Plan 1951/52 243 492 - 249 + 17 - 113 - 96 1952/53 158 29 + 129 + 129 + 205 + 334 1953/54 60h 639 - 35 + 463 + 342 + 805 1954/55 1607 500 +1107 + 672 + 253 + 925 1955/56 986 166 + 820 642 + 289 + 931 Total 3598 1826 +1772 +1923 + 976 +2899 Second Plan 1956/57 1437 30 +1407 + 897 _ 191 + 706 1957/58 997 290 + 707 + 281 + 852 +1133 1958/59 2416 148 +2268 +1056 + 890 +1946 1959/60 2083 336 +1747 + 825 + 606 +143i 1960/61 1794 454 +1340 + 6L -1251 - 637 Total 8727 1258 +7469 +3673 + 906 +4579 Third Plan 1961/625/ 1857 500 +1357 + 730 - 370 + 360 l/ Figures from 1956/57 onwards are inclusive of investment of P.L. 480 funds. Those for 1960/61 and 1961/62 are not strictly comparable to the figures for the earlier years consequent on the change in the arrangements in regard to PL. 480 funds from May 12, 1960 (see text, pp. 13 and l4), - V The term "public" in this table includes all investors other than the Reserve Bank and Central and State Governments. / Including transactions-of the Central Government's Cash Balance Investment Account. / Figures do not-take -into account transactions on the State Governmentst Cash Balance Inve6dtment Accounts, the Reserve Bankts operations in State Government loans and repayment of State loans held by State Governments. 5 Provisional. Source: Reserve Bank of India Bulletin, April 1962.