FILEC7PY RESTRICTED Report No. AS-83a This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION AND PROSPECTS OF INDIA March 17, 1961 Department of Operations South Asia and Middle East CURRENCY EQUIVALENTS 1 Indian Rupee = U. S. $0. 21 1 U.S. Dollar = Rs. 4.762 Rs. 1 billion = $210 million CONTENTS Page FOREWORD i SUIMARY AND CONCLUSIONS ii CHAPTER I. CURRENT ECONOMIC SITUATION Balance of Payments and Exchange Reserves 1 National Income 3 Agricultural Production 3 Industrial Production 5 Price Movements 8 Money Supply and Credit 10 Second Plan Outlays and Financing 12 CHAPTER II. THE THIRD PLAN Overall Outlays and Sector Allocations 13 Foreign Exchange Component 17 Financing the Plan 18 Industrial Policy and the Plan 21 Key Programs - Agriculture 22 Fertilisers 23 The Industrial Program 26 Steel 26 Coal Production 29 Oil Supplies 31 Electric Power 32 The Transport Program 33 Railways 34 Calcutta 35 CHAPTER III. FOREIGN EXCHANGE PROSPECTS Balance of Payments Forecasts 37 Import and Export Prospects 37 Private Foreign Investment 42 External Assistance 42 Conclusion 45 APPENDIK Capacity and Production of Major 46 Industries: Second Plan Targets, Expected 1960/61 Levels and Third Plan Targets. F OREWORD This report was prepared by the Bankts office in New Delhi. It is designed to provide information on recent economic developments in India and to bring up to date in- formation contained in the comprehensive Bank mission report on India's Third Five-Year Plan (No. AS-80a), which was prepared in the summer of 1960. Throughout, references to the "previous economic report" are to that report. No attempt has been made in the present report to go over all the ground covered by the mission last year, and the dis- cussion of the Third Plan concentrates mainly on the changes that have taken place since the draft Outline was published by the Government of India in June 1960. - 11 - SUPMARY AND CONCLUSIONS 1. The last year of India's Second Five-Year Plan, which ends on March 31, 1961, is expected to be Indiats best year in terms of production. Both agricultural and industrial production are expected to reach record levels, and also to show a record expansion over the preceding year. The burgeoning industrial growth is the more impressive for having occurred despite con- tinuing shortages of raw materials, transport and power and rigorous import restrictions. The prospects for an even quicker pace of expansion are favor- able, and are reflected in a feeling of buoyancy on the part of private in- vestors. The outlook is clouded, however, by the uncertain external finan- cial prospects. The production achievements have been accompanied by a further fall in the already depleted foreign exchange reserves and continued stagnation in Indiats export trade, which has failed throughout the Second Plan period to attain the level reached at the end of the First Plan. 2. National income is expected to rise this year by more than 6 per cent in real terms, bringing the total increase to 19 per cent over the Second Plan period, as compared with the Plan target of 25 per cent. Total food- grain production this year is expected to exceed 76 million tons, as compared to the revised Second Plan target of 80 million tons. Industrial production is running 12 per cent higher than last year. However, production of both steel and coal is below the Second Plan targets. 3. The coal and transport bottlenecks developed serious proportions during the last year. The railways have increased their workload by 50 per cent during the Second Plan, but the economys transport requirements are not being adequately met - a situation by no means entirely the railwaysl fault, but one calling for urgent measures, including the expansion of road trans- port, to resolve. The power shortage, which has also tended to hold produc- tion back, appears likely in the light of new load surveys to worsen over the next several years. 4. The average of wholesale prices rose by 6 per cent during 1960. The rise in the overall index has been small in recent months as a result of the decline in prices of cereals. Prices of raw materials and of manufactures are continuing to climb, however. The price movements reflect the record expansion of money supply in 1959/60. Particular supply factors played an important part, however - mainly the drop in domestic production of raw cotton, jute and oilseeds in 1959/60. Continued pressure on prices can be expected. However, with an improved supply situation, assisted by a more active monetary policy involving a definite shift toward dearer money, and with the determination evidenced by the Central Government in its Budget for 1961/62 to mobilise domestic resources in a non-inflationary manner, the present outlook is more reassuring. 5. Public sector outlays for the Third Plan have, on the basis of a new assessment of resources, been revised upwards from Rs. 72.5 billion to Rs. 75 billion, of which Rs. 63 billion is investment expenditure. The pro- vision for investment by the private sector has been raised from Rs. 4O bil- lion to Rs. 41 billion. The overall Plan thus now amounts to Rs. 116 billion - iii - ($24.4 billion). Total public and private investment will amount to Rs. 10 billion ($21.8 billion), as compared with Rs. 102 billion envisaged in the Draft Outline of the Plan published in June 1260. 6. Not all questions regarding the competing claims on resources have been settled. Decisions are still to be made regarding the specific content of some programs to be taken up by the Central Ministries in the fields particularly of industry, transport and power. Planning in the pufolic sector is meanwhile proceeding on the basis of projects whose total cost is estimated at Rs. 80 billion, although it is intended to keep expenditures within the financial limit of Rs. 75 billion. 7. The Government as a matter of policy has not changed its stated re- quest for external assistance for the Third Plan. It thus stands at Rs. 32 billion, including aid under PL 480, or Rs. 26 billion excluding PL 480, both figures relating to actual disbursements during the Plan. The import requirements of programs and projects included in the Plan are now estimated, however, at Rs. 20.30 billion as compared with Rs. 19.15 billion estimated earlier. Requirements for non-project imports are also estimated to be sub- stantially higher than envisaged, though the figures have not yet been officially revised. It is thus clear that the Third Plan cannot be carried out in full - even if India receives the full amount of external assistance requested - unless substantial additional foreign exchange resources can be found from export earnings. Prospects for the latter are under review, and it appears that the estimates for the Plan period as a whole may be raised by Rs. 3-4 billion, but at best only modest improvement can be expected during the first two years of the Plan. 8. The proposed pattern of Plan outlays has undergone some modification. The allocation for power has been substantially increased, as well as that for road development. The allocation for agriculture has been raised some- what, as have those for industry and social services. A somewhat larger proportion of the Plan will now be undertaken by the State Governments, on the understanding that they will find most of the extra resources themselves without diverting resources from the Centre. 9. The overall proposals for the financing of public expenditures under the Plan are on lines very similar to those set out in the Draft Outline. The target for additional taxation has been raised, and the estimates of the balance from current revenues, of the proceeds from small savings and of other capital receipts are also higher. No change is proposed in the amount of deficit financing. 10. The Finance Hinister has given a vigorous lead in the mobilisation of resources for the Third Plan by introducing a Budget for 1961/62 which provides for the levying of additional taxes estimated to yield an extra Rs. 0.61 billion a year to the Central Exchequer. So far, however, the State Governments have failed to take equally vigorous action. - iv - 11. The Government has taken a number of steps in recent months to deal with some of the outstanding weaknesses in the economy to which attention was dratc in the previous economic report. The larger allocations for power and road development are two examples. Greater opportunities and induce- ments have been offered to private enterprise to invest in industries such as coal and fertilisers where formerly the accent was mainly on the expansion of the public sector. In the steel industry special attention has been given to the critical problems of the organisation and management of the public plants; the Board of Hindustan Steel has been reorganised, consultants have been brought in to advise on various aspects of operations, and the numbers of foreign technicians employed at the plants are being increased. Addi- tional funds have been allocated for the redevelopment of Calcutta, and arrangements have been made for a master plan for the city to be prepared by a group of experts organised by the Ford Foundation. 12. The Third Plan still includes provision for the construction of a fourth steel plant in the public sector and for a nuclear power plant to be established near Bombay. There has been no change in the policy that con- struction of new oil refineries should be reserved to the public sector. A number of foreign companies have responded to the Governmentts invitation to join in the search for oil in India, but up to the end of February 1961 none of the negotiations with these companies had been brought to a successful conclusion. 13. Detailed balance of payments forecasts prepared by the Government for the first two years of the Third Plan indicate expected deficits, for which fresh external assistance is needed, of Rs. 3.04 billion ()638 million) in 1961/62 and Rs. 4.21 billion ('!884 million) in 1962/63. No account is taken in these forecasts of aid committed since the middle of Jamary 1961. The forecasts are subject to a considerable margin of error in detail, but on the whole they appear to portray correctly the order of magnitude of the additional external assistance required if the development program is to proceed as now envisaged. 14. Exports are forecast fairly conservatively to rise by roughly 3 per cent in each of the next two years (1961/62 and 1962/63), while imports are expected to rise much more sharply. Percentage increases in private foreign investment are expected to be substantial, but the amounts still represent a small contribution in absolute terms to meeting Indiats external payments problem. Measures to promote exports and to encourage private foreign in- vestment are included in the 1961/62 Budget. 15. The problem of external assistance lies not only in the amounts needed, but also in matching the terms on which aid is offered with the re- quirements of the economy. Of the projected deficit in the first year of the Plan, only a minor proportion is accounted for by payments against new project orders still to be placed. The Government'of India therefore con- siders it essential that a substantial portion of any new assistance extended to India should be provided in a form which will enable it to cover non- project imports required for the operation of the economy, or to cover proj- ect imports for which orders have already been placed. At the same time, - v - however, the Government also needs long-term assurances of aid to enable it to proceed with the placing of orders for projects which have to be started in the first two years of the Plan if development is to proceed smoothly. 160 If additional external assistance is forthcoming in the amounts, at the time and in the form required, the outlook for the Indian economy during the next two years appears on the whole to be favorable. The upturn in agri- cultural production and the continued dynamic expansion of industry afford solid grounds for confidence, though there are still dangerous weaknesses in fuel and power and, to a lesser extent, in transport. "While it would be un- realistic not to expect some further rise in prices, the increases should continue to be kept within manageable limits. The Budget for the first year of the Plan demonstrates the Government's readiness to take unpopular measures to mobilise additional internal resources, and the buoyancy of domestic revenues in the past two years tends to support the view that rupee finance as such is unlikely to prove a major limitation on the execution of the presently proposed investment program. CHAPTER I CURRENT ECONOMIC SITUATION Balance of Payments and Exchange Reserves 1. The Government has revised its balance of payments forecast for the current Indian fiscal year and has worked out detailed forecasts for each of the next two years. These are shown in Table 1, along with the actuals for the first four years of the Second Plan. Imports in the current year are ex- pected to be substantially higher than in 1959/60, while receipts of external aid are also higher. Exports, however, are now forecast to be only marginally above last yearts level, while net invisible receipts have declined sharply, owing in part to the further loss of interest-earning foreign assets, in part to the rise in interest payments on external loans. Gross private foreign in- vestment inflow is expected to show a substantial percentage increase this year, but it remains small in absolute terms. The resulting deficit this year is expected to lead to a further reduction of Rs. 0.55 billion in the Reserve Bank1s foreign assets, which would bring the loss in these reserves over the Second Plan period to slightly more than Rs. 6 billion (01,260 million). The reduction this year occurred almost entiiely in the first six months (i.e., April-September 1960); very little further loss is expected in the latter half of the year. The reserves amounted on March 3, 1961, to Rs. 2.75 billion, little more than three months? imports. If the full reduction forecast this year actually takes place, the reserves would fall to about Rs. 2.51 billion by the end of March, which at this stage seems a somewhat pessimistic assump- tion. 2. The monetary authorities consider the present reserves entirely in- adequate as a cushion for the launching of the Third Plan. The reserves are unquestionably below the level where they can be considered as resources for development; they must be regarded as working balances to meet seasonal and unforeseen fluctuations, and the authorities feel, with reason, that they should be built up to Rs. 3.00-3.20 billion. This is recognised to be impos- sible in the present situation, however, and in fact the immediate outlook for the slack season in India's export earnings beginning in April is for some further reduction in the reserves. It is likely that, in the absence of prompt and substantial new assistance, the reserves would fall significantly by mid- summer unless further cuts are made in the import licenses issued for the period April-September 1961. Imports cannot be substantially reduced without cuts in maintenance imports, particularly industrial raw materials, required for full utilisation of domestic productive capacity. To some extent this situation already exists, and - since most aid already committed is available for specific projects - the outcome, both in the immediate future and in the next two years, will depend largely upon India's success in obtaining new non-project assistance. (This problem is discussed more fully in Chapter III.) Table 1. India's Balance of Payments: Actuals for 1956/57-1959/60 and Forecasts for 1960/61-1962/63 (Rs. billion) Actuals Forecasts '1956/57 1957/58 1958/59 1959/60 '1960/61 1961/62_ 1962/63 Imports c.i.f. Commercial a/ 10.60 11.33 9.38 8.26 9.57 l1.47 12.31 P.L. 48o O.0 1.01 0.92 0.97 2.21 1.46 1.52 Total 11.00 12.37 10.30 9.23 11.7 12.93 1- 73 Exports and re-exports. f.o.b. 6.35 5.94 5.76 6.23 6.30 6.51 6.70 Visible trade balance -67 T -3.00 -6--U2 -7.13 Invisibles net (exc. official grants) +1.11 +1.02 +0.81 +0.65 +o.4o +0.28 +0.21 Current balance (exc. official grants) 73.-9 --.-7 -3.73 -2.-3 T-T .2 Private foreign investment (gross inflow, exc. retained earnings) +0.12 b/ +0.16 b/ +0.16 b/ +0.16 b/ +0.19 +0.22 +0.25 (Odher capital transactions net (inco errors and omissions) -0.45 -0-37 -0.38 -0.77 0.37 -0.37 0.51 Deficit to be covered by aid or use of foreign exchange reserves -3.87 -5.59 -3.95 -2.96 -5.26 -6.29 -7.18 TFinitced (or to be financed) by: Net IIF drawings 0.55 0.34 - -0.24 -0.11 -0.61 - P.L. 48o c/ 0.40 1.01 0.92 0.97 2.21 1.46 1.52 Other foreign aid already committed c/ 0.73 1.64 2.49 1.98 2.61 2.40 1.45 Use of reserves d/ 2.19 2.60 0.5 0.25 e/ 0.55 - - Additional aid required - - - - - 3.0 14.21 a/ Includes that proportion of the P.L. 480 freight charges (50 per cent) which is financed out of India's own resources. Payments for goods financed by suppliers' credits are recorded in the year in which the payments are made, not dven the goods are imported. b7 Figures for 1956/57-1959/60 relate to calendar years. o Figures for 1956/57-1959/60 based on Reserve Bank compilations, which differ slightly from the estimates of the Ministry of Finance. The table shows only aid committed before January 15, 1961. I/ Reserve Bank of India's gold and foreign assets only; excludes changes in government balances abroad, which are included under "Other capital transactions (inc. errors and omissions)". e/ Relates to April 1, 1960, when the Reserve Bank's holdings of gold and foreign assets amounted to Rs. 3.06 billion. - 3 - 3. Export earnings in 1960/61 are now estimated at Rs. 6.30 billion, as compared with an estimate of Rs. 6.46 billion at the time of the previous economic report. Indiats tea crop in 1960/61 was hit by drought in Assam and other parts of North India, and the loss in the crop is estimated at about 25 million pounds, though some rise in prices has helped partly to offset the fall in volume. Price rises also helped swell receipts from India's exports of jute manufactures, though jute price advances usually carry with them the seeds of future reverses as substitutes are made more attractive. Despite the fall in domestic jute and cotton crops, with resultant cost increases as the industriest raw material needs had to be covered through greatly increased imports, exports of cotton textiles are expected to reach, and of jute to ex- ceed, the values forecast a year ago. Of the "big three", therefore, only tea exports are down substantially from last year. Among the "growth" exports, iron ore disappointed expectations. 4. As pointed out in the last report, at the root of the export problem lie three factors: the relatively static demand for India's major traditional exports; continued restrictions on India's exports to foreign countries, parti- cularly in Western Europe; and the need for an aggressive drive on the part of the Indian Government and business community to find or develop export markets. During the last year, restrictions on exports from India to the industrially advanced countries have not been appreciably liberalised. Proposals to in- crease physical availabilities for export are under consideration, including fiscal measures to restrain domestic consumption or requirements that a pro- portion of production of various industries be set aside for export. It is true that in some cases the problem is one of supply, but in general the problem appears to be more on the side of demand and of export sales promotion. National Income 5. India's national income in 199/60, according to "quick" estimates pre- pared by the Central Statistical Organisation, rose by only 0.5 per cent in real terms over the 1958/59 level. This represents an actual decline in per capita terms. Movements in Indiats national inco-ae are dominated by changes in agricultural production. There was a fall of about 4 per cent in agricul- ture proper, the contribution of which accounted for 38.7 per cent of the total national income in 1959/60 compared to 4O.5 per cent in 1958/59. The fall in agriculture offset increases in other sectors which, taken together, registered a rise of 3.4 per cent. Organised industry and mining rose 8 per cent. Over the first four years of the Second Plan the increase in real national income has been about 12 per cent. At present the increase during the current year is expected to be roughly 6 per cent; this would bring the total increase to approximately 19 per cent as compared to the target of 25 per cent. Agricultural Production 6. Latest estimates of 1960/61 agricultural production indicate an excep- tionally good crop year, with production exceeding even the record levels of 1958/59. The agricultural production index in that year was 132 (1949/50=100); -4 - it fell to 127 in 1959/60, but this year it is anticipated to reach 135. Rice prospects are particularly good, and total foodgrain production is expected to exceed 76 million tons, as compared with the previous peak of 75.5 million tons in 1958/59. Production of oilseeds will be better than in 1958/59, while sugarcane will substantially exceed even the revised Second Plan target level. Among the major crops, only jute is expected to show a drop in production this year as compared with previous years. The latest estimates for the current year and the figures for earlier years, along with the Second Plan targets, are shown in Table 2. Table 2. Production of Major Crops Second Plan 1958/59 1959/60 1960/61 Targets (Revised (Final (Antici- Origi- Revi- Crop 1955/56 estimate) estimate) pated) nal sed Foodgrains (mn. tons) 65.8 75.5 71.7 76.0 75.o 80.5 Oilseeds (mn. tons) 5.6 6.9 6.3 7.1 7.0 7.6 sugarcane (gur) (mn.tons) 6.0 7.1 7.6 8.0 7.1 7.8 Cotton (mn. bales) 3.3 4.7 3.8 5.1 5.5 6.5 Jute (nn. bales) 4.2 5.1 4.5 4.3 5.0 5.5 7. Significantly, the increase in agricultural production was achieved with a notably less favorable distribution of rainfall than in the previous record crop year of 1958/9. It thus appears to reflect an underlying upward trend in agricultural production to which the various agricultural programs of recent years have contributed. There is no breakthrough yet on the agricultural front; current production is only marginally better than that of 1958/89. This level of production has, however, now been established as definitely within the capacity of Indian agriculture even without especially favorable weather. 8. The increase was achieved also with appreciably lower quantities of nitrogenous fertiliser than originally envisaged. Domestic production in 1960/61 is now expected to be only 110,000 tons, as compared with the estimate in the Draft Outline of 210,000 tons (and the original Second Plan target of 290,000 tons). Including imports of 120,000 tons, total supplies will thus amount only to 230,000 tons this year, as compared with consumption of 370,000 tons originally envisaged by the end of the Second Plan. 9. The estimates available at this time of year usually underestimate production, and the final figures may show a somewhat higher level, foodgrains production amounting perhaps to more than 77 million tons. As to the market- able surplus of foodgrains, recent official studies show that market arrivals have improved with the removal of price control, and sales have also increased in anticipation of the good crop. The marketable surplus of rice is estimated at around 31 per cent and of wheat around 33 per cent for the 1960/61 crop. Somewhat increased availabilities of consumer goods are believed to account for some of the increase in the marketable surplus, but the pattern of con- sumption in the rural areas is also changing; the money earned by the farmer appears to be going not only into consumer goods, but also increasin3ly into producer items such as fertilisers and farm implements, though evidence on this score is not conclusive. 10. The intensive agricultural district program being carried out with the assistance of the Ford Foundation has now been inaugurated in one district in each of seven States. It has been decided that the program will be extended to the other States; work will be taken up in each of these States in the course of the next two sowing seasons. Owing to the time taken to resolve the many organisational problems involved, the program has been rather slow in getting under way, and it is too early to judge how successful it will turn out to be. Industrial Production 11. Industrial production has shown a dramatic gain in 1960. Data available for the first ten months show a rise in the overall index of 12 per cent in 1960 over 1959, and indications are that this trend is continuing. In the two years 1959 and 1960 together, industrial production has risen by almost one fifth. The movements of the index of industrial production over the last three years are shown in Table 3. Table 3. Index Numbers of Industrial Production in India (1951 = 100) a October October 1958 1959 1960-1 1959 1960 General Index Crude 139.7 151.9 166.9 147.1 164.7 Seasonally adjusted 167.5 155.o 173.5 Mining and Quarrying 133.7 12.0 156.5 133.7 157.7 Coal 132.2 137.1 147.4 126.2 145.0 b/ Manufacturing 138.5 150.4 165.4 145.5 162.2 Textiles 112.6 114.9 118.3 116.6 118.6 b/ Basic metal industries 121.1 159.2 204.3 167.9 237.8 5/ Engineering 254.1 287.8 335.8 249.0 346.2 U/ Chemicals and chemical products 206.2 227.5 252.5 235.9 2h4.0 U/ Electricity generated 209.0 248.5 275.7 259.4 282.8 S/ Source: Central Statistical Organisation a/ Average of seasonally adjusted figures for first ten months for general index; of first nine months for other indices. b/ Figure for September 1960. - 6 - 12. The index definitely understates the progress made. Hany new industries are given low weights in the index as compared to the traditional industries, or are not included at all because they came into existence since 1951, and it is precisely these industries which have over the past year recorded the most spectacular increases. 1/ Production gains have been particularly impressive in machine tools, diesel engines, electrical equipment and various other metal- working and light engineering industries, as well as heavy chemicals and chemical intermediates; the level of production in several of these industries has already exceeded the Second Plan targets. Pig iron production has risen sharply, as well as that of finished steel, though the latter is still far below the existing capacity and below the Second Plan targets. Only moderate expansion has occurred in production of mill-made cotton cloth, but production of consumer durable goods such as sewing machines, bicycles and electric fans has risen sharply, while refrigerators, automobiles, notor cycles and scooters have shown phenomenal increases. The Appendix gives data on anticipated ca- pacity and production of major industries in 1960/61, along with the Second Plan and Third Plan targets. 13. The increase in industrial production has been achieved despite import restrictions, acute shortages of raw materials, transport and power bottle- necks, and continued rigorous licensing and other controls. There are grounds for believing that the import content of domestic production has declined, in view of the fact that maintenance imports have continued to be drastically restricted during the last year, while industrial production was rising more rapidly than at any time since the beginning of the First Five-Year Plan. 14. Coal - and its transport - have become an acute bottleneck in the Indian economy over the last year. The effects upon steel production have been widely publicised, but coal supplies for other industrial uses have also been inadequate, and there have been widespread local shortages. Both commercial and domestic users of coal in various areas, including Bombay and Kanpur, have been virtually rationed. Moreover, as a result primarily of delays in the con- struction of coal washeries, now several years behind schedule, the steel plants are being forced to take coal with an ash content sometimes as high as 30 per cent or more, severely handicapping production. With the demands of steel production continuing to rise, metallurgical coal is increasingly scarce. Total coal production is expected to reach a rate of 54-55 million tons a year by March 1961, as against actual production of 38 million tons in 1955 and a target of about 60 million tons for production in 1960/61. 15. Output of finished steel at 2.2 million tons in 1960 could have been substantially higher but for the difficulties which developed in mid-1960 over supply and transport of raw materials, especially coal. Nevertheless, in the current year for the first time there has been a distinct improvement in the supply position of iron and steel, though this was accomplished with relatively 1/ An official revision of the index is now under way to portray more adequately the growth of the economy, but it is not yet available. high imports of roughly 1.1 million tons as compared with about 840,000 tons in 1959. Though iron and steel are still subject to allocation, distribution controls have been relaxed in recent months. Production in 1961 is expected to be about 3.5 million tons of finished steel. 16. With the commissioning of the bar mill at IISCO, all the new and ex- panded units in the two private steel plants have now been put into operation, though neither is yet producing at full capacity. A number of new units were commissioned in the three public sector plants during the year. Imports are expected to taper off in the coming years to Rs. 0.46 billion in 1962/63, as compared with Rs. 0.75 billion in 1960/61, and to decline further thereafter, being confined to certain special items. Imports of certain types of steel will probably continue during most of the Third Plan, though there will be surpluses of some types of steel, permitting some exports. By the end of 1961 India will achieve complete self-sufficiency in the railways' requirements of rails, wheels and axles. 17. Faced with the coal-steel-transport crisis last summer, the railways increased the number of wagons supplied for coal movements from the Bengal and Bihar coalfields from about 4,000 to 5,000 per day, enabling an increase in the number of wagons for movement of coal to the steel plants from 800 to 1,100 per day, and stocks of coal at the steel plants have doibled since September 1960. A raw materials committee, with representatives of the railways, the public and private steel plants and other private interests, has been set up at the Centre, with the power to make decisions regarding raw materials production and movement to the steel plants. Railway transport remains a major bottleneck, however. Higher priority for the steel plants' requirements has not yet solved the steelmakers' problems - including the movenent of finished products - and has involved also greater delays in delivery of coal to lower-priority users. Shippers of general goods traffic throughout the economy often encounter delays of one to three weeks for wagons. 18. The railways are by no means entirely to blame for this state of affairs. There are no doubt shortcomings in their operations, perhaps too much centralisation, and instances of insufficient coordination with other Ministries. Nevertheless, though the originating traffic expected to be car- ried by the railways this year is 154 million tons instead of the 162 million tons envisaged in the Second Plan, the net ton-miles of traffic - the real index of performance - will have increased by more than 50 per cent over the Second Plan period - a phenomenal increase by any standards. The traffic pattern envisaged for the Second Plan did not materialise, and the railways were forced to haul over much longer leads than anticipated. Wagon require- ments in the steel plants area were planned on the assumption that coal wagons would be loaded mechanically from bunkers at the coal washeries, enabling the movement of coal in block loads to the steel plants, but the washeries are much behind schedule, having been delayed by the foreign exchange restrictions imposed in the middle of the Second Plan, The partial strike of central government employees in the summer of 19b0 caused a loss of almost 100,000 wagon loadings; the attempt to overcome these arrears meant that there was, in effect, no slack season for the railways in the summer of 1960 - a time - 8 - when in past years the railways have been able to catch up with the movement of bulk commodities such as coal. The spurt in overall economic activity which has coincided with these difficulties has added to the stresses. 19. Regardless of the reasons, it remains true that the economy's transport requirements are not being adequately met. Various new works recently com- pleted, including the north-south meter guage link, end various line capacity works now nearing completion should help to relieve the pressure on the rail- way system as a whole and increase its cariring capacity. Originating traffic by the end of the Third Plan is estimated to increase more than 50 per cent over the current year's level and net ton-miles by 76 per cent. A massive effort on the part of the railways, as well as a major expansion of road trans- port, will be required during the Third Plan period if the rapidly growing transport needs are to be met. 20. No less serious in its effect upon production is the continuing shortage of power. Installed capacity by the end of 1960/61 is now expected to be 5.7 million kw, as against 3.4 million kw at the beginning of the Second Plan and a Second Plan target of 6.9 million kw. Firm capacity is estimated to amount to 3.3 million kw by the end of March 1961, while peak demand is estimated at 4.2 million kw. The shortages vary in intensity from State to State, but only in a few cases does capacity approach the local demand. The growth of the economy and particularly of industrial production has substantially increased the demand, while some of the Second Plan projects have been held back prima- rily because of the shortage of foreign exchange. A sizeable "shelf" of power projects is ready to be undertaken in the Third Plan as rapidly as external financing can be arranged for them. Because of the time taken to construct a new plant, however, it appears likely that the situation will worsen over the next several years. Price Movements 21. Wholesale prices in India rose on the average a further 6 per cent during the twelve-month period January 1960 to January 1961 - roughly the same as during the preceding year. The price movements were dominated by the rise in prices of raw cotton and jute and their manufactures, owing to the serious fall in the domestic crop in 1959/60 and the necessity for greatly increased reliance on more expensive import supplies. This led to a sharp rise in the indices for industrial raw materials and for manufactures, which are continuing to climb, The food index has declined slightly over the year, however - in contrast to the trend in previous years when this group accounted for a major part of price increases - and is responsible for the fact that the overall index has stabilised in recent months. The general index rose from 118.8 in January 1960 (1952/53 = 100) to 126.3 in October, but fell slightly thereafter, standing at 125.6 in January 1961. The trend of wholesale prices in the last three years is shown in Table 4. -9- a/ Table h. Index Numbers of Wholesale Prices in India (1952/53 = 100) Jan. Jan. Jan. 1958 1959 1960 1959 1960 1961 General Index 111.0 115,5 123.0 112.4 118.8 125.6 Food articles 112.0 11.2 120.3 T1.7. l17Z 116.h Liquor and tobacco 93.7 100.7 106.4 103.6 100.9 111.2 Fuel, power, light 114.9 116.0 119.0 115.1 116.8 120.2 Industrial raw materials l14.7 119.7 138.8 114. 130.9 154.7 Manufactures 108.2 109.7 120.8 108.4 116.0 127.6 Intermediate products 109.4 111.0 127.1 110.5 121.6 133.9 Finished products 108.0 109.5 119.8 108.1 115.1 126.6 Source: Office of the Economic Adviser, Ministry of Commerce and Industry a/ Annual figures are averages of months, which are averages of weeks ended Saturdays. 22. The rise in raw material prices is accounted for partly by growing industrial demand, but reflects primarily the significant decline in agricul- tural output in 1959/60. Output of raw jute in 1959/60 was lower by 12 per cent, of raw cotton by 18 per cent and of oilseeds by 8 per cent as compared to the previous season. 1/ The output of foodgrains was also lower by 5 per cent in 1959/60 as compared to the previous season; this led to a rise in cereal prices between December 1959 and July 1960, but with the increased foodgrain crop this year there has been a subsequent decline which has brought the index lower than a year ago. 23. The consumer price index reflects these changes with some time-lag. In view of the heavy weight given to food in the index, the index has risen less than that for wholesale prices. It stood at 122 in December 1959, and thought it rose to 126 in August, it levelled off to 125 in November 1960, the fall reflecting mainly the decline in prices of cereals. 24. The food position, of key importance in India's efforts to maintain reasonable price stability, is improved not only by the higher domestic crop, but also by increased availability of foodgrains under PL 480. Of India's current consumption of 78-79 million tons of foodgrains per year, about three million tons are normally imported. Imports in 1960/61 have shown a substan- tial increase, owing to both the poor harvest in 1959/60 and the beginning of a build-up of buffer stocks under the 17 million ton PL 480 foodgrain agree- ment with the United States signed in May 1960. Total imports in 1960/61 are expected to amount to 5.7 million tons, of which imports under PL 480 account 1/ Fibres and oilseeds between them account for 80 per cent of the weighting of the wholesale price index for industrial raw materials. Textiles account for 50 per cent of the weighting of the wholesale price index for manu- factures. A new index is at present being worked out with revised weights that reflect the changing structure of the economy. - 10 - for 4.9 million tons. Of the total, 1.2 million tons will go into buffer stocks, which are to be built up to a level of 5 million tons. Data on stocks of foodgrains in the hands of private traders are not available, but stocks in Central and State Government warehouses at the end of October 1960 amounted to 2.5 million tons. Substantial progress has been achieved in removing the zonal barriers to trade in foodgrains, mainly by widening the zones, but despite improved supplies and the "insurance" offered by PL 480 imports the barriers have not yet been entirely dismantled. 25. The upward pressure on prices, especially during the first three quarters of 1960, reflected the fact that a record increase in the money supply occurred in 1959/60, while national income rose by only 0.5 per cent in that year. This combination of circumstances could be expected to influence prices over the last year. But several points should be noted in this connection. The overall supply situation has varied so markedly over the past year that measures to bring about corresponding changes in the money supply would probably have had to be so restrictive in character as to lead to damaging instability, with losses in production and possible destruction of business confidence. The authorities have in fact adopted a more active monetary policy during the last year with a view to exercising greater re- straint over monetary expansion. 26, Secondly, the rebounding of agricultural production to record levels this year and the continued expansion of industrial production have already led to a substantial improvement in the overall supply position, and there is thus some reassurance that the relative stability of the wholesale price index in recent months may be continued. Thirdly, particular supply factors, not appropriate to treatment by general monetary measures, have played a sig- nificant part in the price increases, and their position is now somewhat improved. Though the outlook for jute is not encouraging, the domestic pro- duction of cotton in 1960/61 is anticipated to reach 5.1 million bales as compared to 3.8 million bales in 1959/60, and oilseeds production is also expected to recover sharply, to more than 12 per cent above last year's level, with some easing effects on both the food and raw materials indices. Fourthly, the contribution of India's external transactions in offsetting domestic in- flationary pressures was less in 1959/60 than in any other year of the Second Plan (see Table 1). 27. Despite the somewhat more encouraging outlook at present, continued pressure on internal resources can be expected. A more active monetary policy, discussed below, may help to mitigate the strain, but much more depends, of course, upon fiscal policy. The Central Government in the Budget for 1961/62, presented in February, has determinedly set about the task of obtaining ad- ditional tax revenues for the Third Plan, despite the shadow of the general elections less than a year away. The State Governments, however, have failed by and large to take equally vigorous action. Money Supply and Credit 28. The money supply in the hands of the public has expanded during 1960/61 to Rs. 27.92 billion at the end of January 1961, from Rs. 27.00 billion at - 11 - the end of March 1960. The increase reflects a rise in bank credit to both Government and the private sector, though the expansion of credit to the Government was substantially less than during the corresponding period of the preceding year. The increase also reflects the very small contraction in the money supply during the 1960 slack season (April-November), which was the busiest slack season in India's history, owing both to general boom conditions and to greater diversification in the output of the economy reducing the im- pact of the seasonal agricultural cycle. As noted above, a major expansion in money supply occurred at the same time that Indian agricultural production fell in the crop year 1959/60. The monetary authorities took determined and fairly effective steps over the past year to restrict further monetary ex- pansion, though the degree to which these measures will restrain expansion during the current busy season ending in April is not yet clear. 29. The Reserve Bank has used selective controls to restrict advances against foodgrains, oilseeds and other commodities in short supply. In March 1960, to curb speculative tendencies on the stock exchanges, selective con- trols were also extended to advances against equity shares. The selective controls have, however, been reinforced in the last year by general quantita- tive measures of restraint. The Bank had hitherto relied largely on open market operations to mop up excess liquidity. In March 1960 the Bank for the first time exercised its power to vary the required cash reserves of the scheduled banks and asked them to deposit with the Reserve Bank additional balances equal to 25 per cent of the increase in their deposit liabilities. In May the requirement was raised to 50 per cent. Subsequently, to assist banks to meet credit requirements during the busy season, the requirement was lowered again to 25 per cent in November, and in January was dropped entirely. 30. In October the Reserve Bank also imposed penalty rates, up to 2 per cent above Bank rate, on borrowing by scheduled banks in excess of quotas assigned to each bank. This course was adopted in order to moderate any ad- verse impact on government securities and also on the grounds that steeply rising penalty rates would more effectively check resort to the Reserve Bank than an ordinary small increase in Bank rate. At the same time the Reserve Bank also required the banks to charge a minimum of 5 per cent on normal ad- vances and to raise their average lending rate by at least one half per cent. These credit restraints had a definite impact. Scheduled bank borrowings from the Reserve Bank as well as bank credit outstanding fell sharply. The banks' lending rates, as well as the inter-bank call rate, rose generally in accordance with the directive. 31. The Reserve Bank's credit actions over the last year, representing what it calls a "monetary policy of flexibility", have been infused with a new and desirable flexibility of approach to changing conditions. They also add up to a definite shift toward dearer money and an apparent determination that interest rate policy should play a larger part in moderating inflationary pressures. The rising short-term rates have had a general effect on the mar- ket; rates on preference shares and debentures have gone up to between 624 and 6-3/h per cent compared with 6 per cent a year ago. - 12 - 32. A policy of gradualness in raising interest rates to avoid upsetting the government securities market is understandable. The Bank's actions have thus far been attended with an encouraging degree of stability in the bond market. Though commercial bank holdings of government securities have fallen over the past year, there is no evidence of any sizeable unloading in excess of what could reasonably be expected in view of the requirements of the busy season and the additional credit restraints imposed. Yields on government securities have risen less than those of other long-term debt. 33. Capital issues and trends in security prices reflected boom conditions in the Indian economy in 1960. The period until mid-1960 was characterised by a sharp rise in share values and turn-over and in the amount of new issues, as well as by large premia on some new issues even before their allotment. This situation reflected the quickening pace of industrial expansion, favor- able growth prospects of industry generally and wider investor interest at a time of relative scarcity of first class shares. The rise in prices also reflected some speculative activity, however. The break in share prices since July 1960 is partly a technical reaction to the earlier prolonged boom phase and partly a response to the Reserve Bank's raising of margins on loans for trading in stocks and the imposition of higher margins by the stock exchange authorities themselves. Share values today, though below the July 1960 peak, are well above the level a year ago. Second Plan Outlays and Financing 34. Public sector outlay for the Second Plan is still expected to be roughly Rs. 46 billion. The data on sources of finance for these expenditures have not been officially revised since the publication of the Draft Outline. The revised budget estimates for 1960/61 for the Centre and the State Governments show some improvement in the final result; tax receipts - both the balance from current revenues and additional taxation - and miscellaneous capital receipts are expected to be higher. Data on borrowings during the current year suggest that the five-year total of loans from the public may be lower than anticipated. Small savings on the other hand have done better than ex- pected, with net collections during the current year estimated at over Rs. 1 billion, as compared with Rs. 0.84 billion in 19$9/60. However, these changes are marginal in relation to the previous estimates, and no signifi- cant alteration is anticipated in the overall pattern of financing of the Second Plan from internal resources. With regard to external resources for the Plan, a larger reduction in the exchange reserves - Rs. 6.1 billion instead of Rs. 5.6 billion - is now forecast. Since this is a further offset to deficit financing (in accordance with concepts employed in the previous report), the total of inflationary deficit financing is now estimated to amount only to Rs. 7.2 billion as compared with Rs. 7.7 billion foreseen earlier. This change is reflected in the figures on financing of the Second Plan given in Table 7 in Chapter II. External aid receipts are also expected to be larger than foreseen at the time the previous economic report was pre- pared, but much of the increase is due to larger receipts of PL 480 foodgrain imports which will go into buffer stocks and thus do not add immediately to the Government's financial resources. CHAPTER II THE THIRD PLAN Overall Outlays and Sector Allocations 35. Since the Draft Outline was published last June the Plan has undergone considerable change and development in detail, as well as some change in over- all magnitudes, though these are not of an order representing fundam-vrbal changes in the nature or scope of the Plan. The major revisions in outlays are as follows: On the basis of a new assessment of internal financial re- sources, total public sector Plan outlays have been raised from Rs. 72.5 bil- lion to Rs. 75 billion, of which Rs. 63 billion is investment and the remain- der is current developmental outlay. The provision for investment by the private sector has been raised from Rs. 40 billion to Es. Ll billion. The overall Plan thus amounts now to Rs. 116 billion ('24.4 billion). Total public and private investment will amount to Rs. 104 billion (I321.8 billion), a marginal increase over the level of Rs. 102 billion envisaged in the Draft Outline, and the proportion of public and private investment - about 60 and h0 per cent respectively - remains basically unchanged. The revised provi- sions for the major heads of development, and the foreign exchange cost of each, are shown in Table 5. 36. The Draft Outline had noted that, in the case of industries and minerals, the cost of projects included in the public sector Plan was known to be larger than the outlays provided; revised cost estimates now show the total to be Rs. 2.07 billion higher than the amount allocated. In addition, in- dustrial and petroleum projects not included in the Draft Out-Line, either because further preparatory work was necessary or because they are of a con- tingent nature, are together estimated to cost another Rs. 1.85 billion. In the field of transport, the provision did not cover a railway line for the proposed new port at Haldia; in addition, it has now been decided to establish a diesel locomotive plant in the public sector. Substantial additional al- locations were considered necessary also for power and agriculture. Total demands at the Centre for which no provision was made in the Draft Outline amount to Rs. 8.17 billion. The claims of the State Governments for larger central assistance also exceeded the previous estimates. 37. The Planning Commissionts new assessment of internal financial resources, which led to an increase of Rs. 2.5 billion in the expenditure ceiling for the Plan, went a little way toward accommodating the additional demands. But the National Development Council, meeting in mid-January, instead of resolving the problem by eliminating or reducing items on the basis of priority, ap- proved a "planning figure" for the public sector Rs. 5 billion higher than - 13 - - l4 - the estimate of available resources. The distinction thus introduced between a "planning limit" of Rs. 80 billion and a "financial limit" of Rs. 7' billion tends to blur the outlines of the Plan, especially as regards the programs of the Centre, and makes it difficult to determine what is and what is not in the Plan in certain sectors. a/ Table 5. Outlays in the Third Plan (Rs. billion) Public sector Private Total Foreign Current Invest- Invest- Invest- exchange Total Outlays ment ment ment component Agriculture 10.72 4.12 6.60 B.00 14.60 0.35 Major and medium irrigation 6.56 0.10 6.46 - 6.46 O.N5 Village and small industries 2.56 0.94 1.62 2.75 4.37 ( Organised industry ( 12.25 and minerals 15.26 - 15.26 11.00 26.26 ( Transport and communications 14.75 - 14.75 2.00 16.75 3.20 Power 10.19 - 10.19 0.0 10.69 3.15 Social services and miscellaneous 12.96 6.84 6.12 10.75 16.87 0.90 Inventories 2.00 - 2.00 6.00 8oo - c/ Total 75.00 12.00 63.00- 41.00 104.00 20.30 a/ The additional provision of Rs. 5 billion under the "planning figure" of Rs. 80 billion includes Rs. 2.7 billion for industry, transport, communications and power, and Rs, 2.3 billion for social services and miscellaneous. b/ Includes community development and minor irrigation. c/ Includes Rs. 2 billion of loans to private sector to finance private investment. 38. One consideration underlying this procedure is that there will almost inevitably be some shortfall in actual implementation of some of the indivi- dual Plan projects, so that if the targeted level of resoarces materialises, then a Plan no larger than the financial ceiling would resmit in a lower rate of development than could otherwise be achieved. The olannrs rightly point out that the resources position cannot be accurately forecast two or three years hence, and that the "planning figure" affords desirable fleyibility. This approach would, however, seen to provide only for flexibility upwards. The Indian authorities emphasise therefore that expenditure will be limited - 15 - to the resources mobilised, and that, if these fall below the present expecta- tion, further cuts will have to be faced. The planners see this not so much as a question of having alternative smaller plans based on lower availabili- ties of resources, including foreign exchange, as primarily one of allowing for some extension of the period over which some of the projects in the Plan are implemented, especially those calling for expenditure of foreign exchange. 39. It is not a bad thing in itself that the planners should admit at the outset to considerable uncertainty with regard to the investments to be taken up two or three years hence and should allow more projects to be prepared than can be accommodated within the present ceiling on expenditure. A Five- Year Plan sets out broad objectives for the country and charts a course by which these objectives can be attained. But the course is not inflexible. All sorts of things can happen as the Plan proceeds which may require changes to be made in the investment program. Internal or external resources may turn out to be larger or smaller than at present assumed. New discoveries may be made (of oil, for example) or there may be changes in overseas mar- kets (for iron ore, for example) which call for a pattern of investment rather different from the one at present envisaged. 40. In any case, the overall Plan total, whether it is the "planning figure" or the "financial limit", includes a substantial spill-over of expenditure in respect of programs and projects started during the Second Plan and covers only part of the expenditure on new projects to be started during the Third Plan, since some of this in turn will spill over into the Fourth. Very likely some of the projects that will actually be started towards the end of the Third Plan have not yet even be conceived, and others now included in the Plan will have to be deferred or eliminated to make way for them. Development is a continuous process, and the practice of planning in five- year periods carries with it the danger - only too apparent in some sectors of the Indian economy - that there will be a hiatus in the start of new proj- ects towards the end of one plan and a bunching of new starts at the begin- ning of the next, resulting in the uneven growth of production. To the ex- tent that the approach adopted by the National Development Council is based on a more realistic assessment of the inherent limitations and uncertainties of five-year planning, it is certainly to be welcomed. On the other hand, these uncertainties afford no excuse for trying to avoid taking difficult decisions as to priorities. 41. Where the Third Plan is still weak is in the detailed phasing of pro- grams and projects over time. More careful attention needs to be given at the technical level to the systematic mapping out, for each major project and program, of the various steps that have to be taken to translate the decision to proceed with an investment into the physical output which will ultimately emerge. The time taken to complete this process has usually been under- estimated in the past, and lack of adequate technical planning and preparation has sometimes resulted in much less than the optimum benefits being obtained from the capital invested - particularly in such industries as iron and steel, petroleum and fertilisers, in which Indian experience is still necessarily very limited. It is equally important that there should be close and contin- uous coordination of the investment programs of the different IMinistries; the - 16 - present machinery for such coordination is not as effective as it should be, as shown, for example, by the difficulties over c.oal transport. 42. The detailed content of certain programs and their costs are still under consideration. (These are further discussed in the following sections on major sectors of the Plan.) The planners also wish to reflect in the Plan document the broad findings of the 1961 census, preliminary results of which are expected to be available in the latter part of March. The Planning Com- mission hopes to complete the final draft of the Plan for presentation to the National Development Council in April. The document is to be published in May. The officials state that sufficient clearances will have been ob- tained on the content of the Plan projects so that essential actions to implement the Plan (which begins officially on April 1) will not be delayed under this timetable. 43. Per capita income projections in the Plan will be revised in the light of the new census data. The overall income targets in the Plan, and the rate of investment as a proportion of national income, are now being restudied. There has been no change in the estimates of new employment which the Plan will provide. 4. Most of the Rs. 2.5 billion increase in the expenditure ceiling for the Plan has gone into the States' sector. The provision in the Draft Outline for the plans of the State Governments (excluding the Union Territories ad- ministered by the Centre) amounted to Rs. 35,25 billion; it has now been increased to Rs. 37.25 billion. The increase reflects the pressures brought to bear by the State Governments, but is also justified as a deliberate move to broaden the scope of State plans and facilitate decentralisation of authority to the States for both planning and execution of projects. A major factor in the recent higher assessment of internal financial resources was the relatively more optimistic appraisal by the State Governments of their own prospects for raising resources; it has been agreed that they will raise an additional Rs. 1.5 billion (see paragraph 49 under Financing the Plan) and the Centre agreed to increase its assistance to the States by Rs. 0.5 billion. The States were told, in effect, that their plans could be larger if they themselves found most of the increased resources required without diverting resources from the Centre. This appears on the whole to be a useful approach, constituting a strong inducement to the State Governments to mobilise greater local resources - particularly from the agricultural sector, where there ap- pears to be substantial scope for increased revenues - for carrying out local projects whose foreign exchange component is relatively low,. 45. The proposed pattern of outlay under the Plan has undergone some modi- fication. Some of the doubts and suggestions regarding the ordering of priorities in the Plan expressed in the previous economic report and by other outside observers have been taken account of in the revision of alloca- tions to the various sectors. Within the financial limit of Rs. 75 billion, the largest relative increase (10 per cent) has been in the field of power, mainly as a result of recent load surveys showing a serious gap between demand and capacity by 1965/66. The provision for development of roads and road transport has been significantly increased. The allocation for agri- culture has been raised somewhat, as well as those for industry and social - 17 - services. Within the miscellaneous category, Rs. 100 million has been ear- marked for central assistance for the redevelopment of Calcutta. The dif- ference of Rs, 5 billion between the financial limit and the planning figure is concentrated in the fields of industry, transport and power, as well as "social services" - i.e. education, scientific research, health, housing etc. - and, within these fields, mainly for programs at the Centre. The distribution of public sector outlays in the Second and Third Plans is shown in Table 6, Table 6. Public Outlays in Second and Third Plans (Rs. billion) Second Plan Third Plan Latest Percent Draft Now Percent Estimates of Total'Outline proposed of Total Agriculture b/ 3.20 7 6.25 6.67 9 Community Development 2.10 5 4,00 4.05 5 Major and medium irrigation 46.50 10 6050 6.56 9 Total agriculture and 7.0 71 1775 T7.26 7i irrigation - -" -- Power 4.10 9 9.25 10.19 14 Village and small industries 1.80 4 2.50 2.56 3 Organised industry and minerals 8.80 19 15.00 15.26 20 Transport and communications 12.90 28 1650 14.75 20 Total power, industry and 27.60 60 41.25 12.76 57 transport - - - Social services and miscella- 8.60 19 12.50 12.96 17 neous Inventories - - 2.00 2.00 3 Grand total ___0T_ 77 0 757.0 0 a/ Including minor irrigation. / Including cooperation. Foreign Exchange Component 46. The foreign exchange requirements of Plan projects, which were estimated in the Draft Outline to amount to Rs. 19.15 billion, have been revised upward to Rs. 20.30 billion. The increase reflects the inclusion of certain addi- tional projects and revision of earlier cost estimates, mainly in industry and minerals development and the power and transport sectors. The Government has decided as a matter of policyj however, that the stated requirement of ex- ternal assistance for the Third Plan should not be changed. It thus stands at Rs. 26 billion, including provision for external debt service - or Rs. 32 billion when PL 480 food imports are also included - as envisaged in the Draft - 18 - Outline. Actually, not only have the estimates for project imports risen, but also the demand for non-project imports appears likely to be a good deal higher than the earlier estimates; the figures for the latter are now being reworked in detail. The Government thus recognises that the Third Plan as now envisaged cannot be carried out in full, even if India should receive the total aid requested, unless it can also find substantial additional foreign exchange resources out of its oun export earnings. The Government is now re- exarining its export forecasts; officials believe that, with appropriate changes in policy, an additional Rs. 3-h billion might be found over the five years as a whole, but this is still only a very tentative assessment. 47. The Government has been following generally the principle that no project recuiring foreign exchange will be undertaken unless external financ- ing is assured, and this helps to explain the large build-up of projects waiting for the signal to go which is reflected in a bunching of new orders in the first two years of the Third Plan, particularly in power and industry. The total of new overseas orders for projects to be placed during the Plan period (including projects spilling over into the Fourth Plan) is tentatively estimated by the Government at just under Rs. 22 billion, of which orders to the value of Rs. 8.35 billion (nearly h0 per cent) fall in 1961/62 and orders to the value of Rs. 5.78 billion (over 25 per cent) fall in 1962/63. Many of these projects could have been started already if it had not been for foreign exchange restrictions, and the delays incurred on this account have in some instances had unfortunate repercussions on the growth of the economy as a whole (for example, in the case of certain coal washeries and power plants). If development is to proceed smoothly, it is essential that a repetition of this situation should be avoided, and that, within the framework of the Third Plan, India should receive adequate long-term assurances of external assist- ance to enable the Government to proceed with the placing of orders in advance of the firm commitment of aid to finance them (see paragraphs 119-122 below). Financing the Plan h8. The increase in the financial ceiling for the Plan from Rs. 72.5 bil- lion to Rs. 75 billion reflects new estimates of internal financial resources made in the latter part of 1960. The estimate of resources in nearly every category has been increased. The major exception is the railways' contri- bution, which is now expected to be Rs. 0.42 billion lower as a result of higher estimates of working exDenses, principally as a result of the Pay Com- missionIs recommendations. The target for revenues to be obtained from ad- ditional taxation has been raised from Rs. 1h.9 billion to Rs. 15.5 billion, and the estimates of small savings, of the balance from current revenues and of miscellaneous capital receipts are also higher, the latter considerably more so (in part because of the more optimistic view now taken of prospective increases in provident funds). The proposed sources of finance for the Third Plan, along with the estimates for the Second Plan, are shown in Table 7. - 19 - Table 7. Financing of Public Expenditures under the Plan (Rs. billion) Second Plan Third Estimated % of Plan of Results :b/ Total Estimates Total Total Plan expenditure financed by: 46.0 100 75.0 100 Foreign assistance 13.1 c/ 29 22.0 d/ 29 Use of external reserves 6.1 bS/ 13 - - Total external resources 19.2 2 22.0 29 Balance from current revenues at existing rates of taxation -1,0 -2 h.13 6 Railwayst contribution 1.5 3 2.7 e/ 4 Surpluses of other public enterprises f/ f/ .5 6 Additional taxation 10.0 22 15.5 g/ 21 Public loans (net) 3.0 7 6.5 9 Small savings 3.8 8 5.9 8 Unfunded debt and miscellaneous 2.3 5 6.2 8 Deficit financing 7.2 b/ 15 7.5 10 Total internal resources =2.3 .0 71 a/ These figures are presented according to definitions adopted in the Main Report of the previous Bank mission. b/ Figures are unchanged from those given in the previous economic report, with the exception of the figure for use of external reserves, the esti- mate for which has been revised upwards, and the figure for deficit financ- ing, which has been correspondingly reduced. As before, the entire reduction in the reserves is treated as an offset to deficit financing. c/ Includes aid under PL 480 (except a portion going into foodgrain stocks in 1960/61), but excludes foreign assistance to the private sector. d/ Includes aid under PL 480, except that portion to be used for building up buffer stocks of foodgrains; excludes foreign assistance to private sector and aid required for repayment of external obligations. e/ Includes Rs. 1.08 billion on existing basis, and an allowance of Rs. 1.60 billion for increases in fares and freights. f/ Included under "balance from current revenues". ./ Including measures to increase surpluses of public enterprises other than railways (see footnote e/). 49. The overall increase in the assessment of resources is less than 4 per cent and is unlikely alone to vitiate the estimates or lead to measures in- volving significantly greater strain upon the econormy. The internal resources targets, examined in detail in the previous economic report, appezr capable of achievement if a sufficiently vigorous and sustained effort is made over the five-year period. There will be major difficulties, however. The reassessment - 20 - of resources appears to have been informed with the need to accommodate pressing demands for inclusion of additional projects within the Plan, and is no doubt optimistic for that reason. The major part of the difference in estimates involves resources to be raised by the State Governments - now Rs. 13.5 billion, as compared with Rs. 12 billion envisaged in the Draft Outline. Only seven States have made any provision for an increase in pay and emoluments of government Employees, and several other States may in fact have to find resources for this purpose. The target for additional taxation of Rs. 6.1 billion to be raised by the States is more than two and a half times the achievement during the Second Plan, and detailed work on the means by which this level of taxation is to be realised is still in process. The resources estimates for both the Centre and the States are based on the as- sumption of steady increases in production over the Plan period and more or less proportionate increases in receipts. 50. Increases in railway fares and freights during the Third Plan are still expected to account for an additional Rs,, 1,60 billion, bringing the total railway contribution to the financing of the Plan to Rs 2.68 billion. The railway budget for 1961/62 presented in February fails, however, to provide for any significant increase in fares and freights. This means that if the target is to be achieved, subsequent increases - presumably after the general elections - will have to be higher. As an official comiittee has recently pointed out, the increase in railway earnings over the past ten years has not been commensurate with the increase in their capital at charge, and this dis- parity may well be accentuated in future unless rates are raised further. Although it represents a comparatively modest return on the capital invested, the estimate for the surpluses of other public enterprises seems unlikely to be realised in full unless there are important changes in pricing policies (e.g. for electricity) and unless the efficiency of some of the undertakings concerned shows a marked improvement. 51. The proposed amount of deficit financing during the Plan period remains unchanged. The contribution of external assistance to the financing of the Plan also remains unchanged since, as noted above, the Government has decided as a matter of policy not to increase its earlier request for aid, though it is now clear that the foreign exchange component of the Plan is larger than envisaged earlier. While the stepping up of the export drive may help in meeting the foreign exchange problem, it will not of itself add to the total resources available for financing the Plan. These resources can only be found by mobilising additional savings at home. 52. The Finance Iinister has given a vigorous lead in the mobilisation of resources for the Third Plan by introducing a Budget for 1961/62 which provides for the levying of additional taxes estimated to bring in an extra Rs. 0.61 billion a year to the Central Exchequer. Of this amount Rs. 0.29 billion will come from customs duties, another Rs. 0.29 billion from excise duties and the remaining Rs. 0.03 billion from minor changes in income tax and corporation tax. As a result, it is proposed that the overall deficit in the Central Budget in 1961/62 should be reduced from Rs. 1.25 billion to Rs. 0.64 billion, the latter figure representing the intended expansion of - 21 - Treasury Bills. If the Budget proposals are approved by Parliament, the Central Government will have taken a major step towards fulfilling the target for additional taxation in the Third Plan, since the yield from the new taxes over the five years should considerably exceed Rs. 3 billion. 53. Throughout, the Budget is responsive to the needs of development. The new tax measures not only restrict consumption, but also include specific concessions to encourage investment and to stimulate exports. Most of the tax increases are in indirect taxes over a wide range of articles affecting all income groups, including kerosene, cloth, tobacco, tea and sugar. Efforts have been made to mitigate the impact on the lower income groups, but even there the Government has not hesitated to impose some additional burden. The development rebate on investment in new industrial plant has been reduced, but other concessions to the private investor, both domestic and foreign, on balance represent substantial encouragement to investment; these include a reduction in the tax on issues of bonus shares as well as more favorable tax treatment of foreign minority shareholdings in companies in India and of foreign technicians' salaries. (The latter concessions are described more fully in Chapter III.) A reduction in the export duty on tea is matched by an increase in the excise duty in order to restrict the growth of domestic consumption; the excise duty on coffee has been raised for the same reason. Industrial Policy and the Plan 54. Though there has been no avowed change in the policies embodied in the Industrial Policy Resolution, there has been in its application in the last year increasingly "pragmatic" use of the flexibility provisions which allow private enterprise, where national interests dictate, to enter or expand into fields otherwise reserved for the public sector. Some of these changes in application, which affect programs in the Third Plan, have been quite signi- ficant. In the case of coal, for example, the industry considers that the removal of restrictions limiting establishment of new private coal mines to areas contiguous to existing workings, as well as the explicit assurance that there will be no ceiling on private coal production during the Third Plan, amounts to a major modification of government policies. In iron and steel production, though no provision for private expansion in basic steel is contemplated, the provision for alloy steel capacity in the private sector during the Third Plan has been increased, and proposals for additional private pig iron capacity have recently been approved. 55. In the case of fertilisers, the Government has announced that the figure of 200,000 tons of nitrogenous fertilisers (in terms of N) hitherto reserved for the private sector out of the one million ton target can be exceeded if additional private investment proposals are forthcoming. At present the majority of the more favorable sites studied for development during the Third Plan are reserved for the public sector, though presumably the private sector is welcome to put forward proposals for plants at additional sites. Private production undertaken during the Third Plan may in fact exceed the 200,000 ton figure, but the effectiveness of inducements to the private sector in this - 22 - area remains to be seen. Expansion of the nitrogenous fertiliser industry in the Second Plan was in effect confined to the public sector. The officials state that virtually no private sector proposals were received during the Second Plan - not even for the attractive Trombay project until after the Government had called for tenders. It is difficult to sort out the various arguments in this area. It appears that the Government has in fact been inhospitable to private sector proposals in this field, apparently feeling that the urgency of increasing agricultural production in the country invests fertiliser with a public interest calling for it to be produced in the public sector. Private investors, on the other hand, have been shy about entering this field because they would have to operate under various direct government controls, including the requirements to sell the product at a fixed price to the central pool. It is understood that the Government is con- sidering relaxation of the pooling requirements after the supply situation has substantially eased; this would presumably take several years. 56. On the other hand, at the beginning of March - more than a year after the announcement welcoming foreign private participation in the search for oil in India - no agreements had been concluded. Public sector efforts in this field have been attended with some encouraging results, but the indica- tions are still that petroleum will remain a major foreign exchange drain in India's international payments unlessa much larger effort in oil exploration and development is undertaken, which India can hardly afford to do from her own resources and the external governmental assistance now in sight. In the manufacturing field, the misnamed and almost certainly uneconomic project for the manufacture of a "people's car" continues to be pushed with unabated en- thusiasm on the political level as a public sector project. Key Programs - Agriculture 57. The program for agriculture in the Third Plan is substantially unchanged from the Draft Outline. The total financial allocation for agriculture and community development has been raised from Rs. 10.25 billion to Rs. 10.72 billion, representing, as before, l per cent of proposed public sector out- lays. (In absolute terms, it is more than double the Second Plan allocation.) Including major and medium irrigation and the provision for domestic ferti- liser production, the total allocation related to the agricultural sector amounts to more than one quarter of public sector outlays. Overall agricul- tural production by the end of the Third Plan is to be increased by 30 per cent, as compared with slightly more than 15 per cent expected to be achieved during the Second Plan. Individual crop production targets have been altered somewhat and more precisely specified in certain cases; the new targets, along with latest 1960/61 production estimates, are given in Table 8. - 23 - Table 8. Crop Production Expected Target Percentage Increase 1960/61 1965/66 Third Plan (Index numbers 1949/50 = 100) Foodgrains 130 171 32 Other crops 144 185 28 All crops 135 176 30 (Quantities) Foodgrains (nn. tons) 76.1 100 31 Dilseeds (mn. tons) 7.0 9.7 39 Sugarcane (mn. tons of gur) 8.0 10.0 25 Cotton (mn. bales of 392 lbs.) 5.1 7.0 37 Jute (mn. bales of 400 lbs.) 4.3 6.5 51 Tea (mn. lbs.) 725 850 17 Coffee (mn. lbs.) 105 179 70 58. Officials are considerably encouraged by the favorable out-turn of agri- cultural production in the current year. For reasons described in the previ- ous report, however, both the overall target and that for foodgrains appear optimistic - especially so now in view of the continuing delays in the program for domestic fertiliser production (see paragraphs 60-66 ). Targets of the other major agricultural programs through which the increase in production is to be obtained are largely unchanged except for soil conservation, the target for which has been reduced from 13 to 10 million additional acres. This and minor irrigation are fields in which a greater effort on the part of most State Governments is called for. A redistribution of expenditure within the Community Development budgets in order to make the programs more production-oriented than at present might result in larger allocations for minor irrigation. 59. Despite considerable discussion of the need for assurance of some degree of price stability to the cultivator if the projected increases in production are to be achieved, no definite program for stabilisation of agri- cultural commodity prices has been announced. Fertilisers 60. The Draft Outline called for an increase in production of nitrogenous fertilisers from an anticipated 210,000 tons in terms of nitrogen in 1960/61 to one million tons in 1965/66. Production this year is now expected to amount only to about 110,000 tons, however, and though the Third Plan target for installed capacity is still one million tons, production in 1965/66 is - 24 - now more realistically estimated at 300,000 tons. The target for production of phosphatic fertilisers is unchanged. Supplies of fertilisers in India anticipated this year and proposed for each year of the Third Plan are shown in Table 9. Table 9. Supplies of Fertiliser Nitrogenous (000 tons of N) Phosphatic a Internal Total (000 tons o Year Production Imports Supplies P205) 1960/61 110 120 230 70 1961/62 165 235 400 100 1962/63 210 315 525 150 1963/64 320 330 650 225 1964/65 570 230 800 300 1965/66 Bo 200 1,000 400 a! All phosphatic fertiliser is produced in India, although based on imported phosphate rock. 61. The program for expansion of nitrogenous fertiliser production is still being developed. As now envisaged it appears to have certain shortcomings. Specifically, the program includes some coal-based plants despite expected availability of feedstocks such as naphtha and gas in sufficient quantities to enable the Third Plan recuirements to be met in plants iith a lower capi- tal cost. M:oreover, the location of some of the proposed plants would appear to be less than optimum from the standpoint of the burden on the transport system. The Government has recently stated that it will pay a differential price which would in fact reflect varying costs of production. This pricing formula, designed to assure private investors of a profit even on a coal-based plant, is resulting in a situation in which positive encouragement is given to such plants, even though there now appears to be sufficient naphtha for all needs. 62. Projects undertaken during the Second Plan (including Trombay) to-ether with existing capacity are expected to account for a total installed capacity of about 500,000 tons of nitrogen per year, to be reached by 1963/64. Seven new plants now planned will provide additional capacity of 422,000 tons; ad- ditional private plants may be undertaken during the Plan period. The plants on 7hich a definite decision to proceed has been taken include three in the public sector, at Gorakhpur in Uttar Pradesh, based on naphtha; Nahorkatiya in Assam, based on natural gas; and Durgapur in West 3engal, based on coke oven gas (probably with substantial private participation). All three would have a relatively low cost of production, and all are located in areas of large fertiliser demand. Already licensed to the private sector are the - 25 - highly attractive site at Vizagapatam in Andhra Pradesh, based on naphtha, and two plants, one each in Rajasthan and Madhya Pradesh - areas of low fertiliser consumption - which under present plans would be based on lignite and coal respectively. Officials point out that fertiliser consumption in these areas can be expected to expand more rapidly with greater supplies available, but for the time being the major part of the production would be transported over fairly long distances. A fourth site available to the private sector is at Kothagudam in Andhra Pradesh, which would also be based on coal, but the extent of private investor interest in this site is not yet clear. 63. Estimates by the Ministry of Mines and Fuel indicate an availability of free naphtha of the order of 700,000 tons from domestic oil refineries by 1965/66, on the conservative assumption of refinery crude throughput of 8 million tons in that year. If domestic refining capacity is expanded to 10 million tons or more of crude throughput, as is very likely, the avail- ability of naphtha would approach one million tons, which should be more than sufficient for the fertiliser production contemplated during the Third Plan (along with existing plants and those based on coke oven gas at Durgapur and natural gas at Nahorkatiya). A recently submitted report by a Ford Foundation consultant on "India's Fertilizer Industry during the Next Decade" argues con- vincingly on the basis of detailed technical and cost analysis that coal and lignite based plants be given a lower priority while naphtha supplies are adequate. If this is done, the present surplus of naphtha resulting from the imbalance in the pattern of consumption in India can be changed from a large potential economic loss into an important contribution toward self-sufficiency in Indian agriculture. Coastal movement of the naphtha to new nitrogen plants located at seaports (such as Mangalore and Tuticorin) in the four southern States, the area of greatest fertiliser consumption, would minimize trans- port demands - especially if, as the Ford Foundation report recommends, each nitrogen plant produces mixed fertilisers also, which would require imports of phosphate rock, sulphur and potash. Standardisation of new nitrogen plants might also have some advantages for India. 64. The present program would result in a total of nine major plants in the public sector, accounting for two thirds of the million-ton capacity target. In view of the delays already experienced and the acute shortage of technical personnel to operate the plants, it would appear that production of 800,000 tons of nitrogen by 1965/66 can be reached only with greater private partici- pation. It is clear that a speed-up in planning and implementation of both public and private projects is necessary to prevent a serious shortfall below the Third Plan target. 65. Total estimated outlay, both public and private, on fertiliser plants during the Third Plan period (including the spillover from the Second Plan) is Rs. 1.94 billion, of which Rs. 0.98 billion represents foreign exchange. Private sector outlay included in these totals amounts to Rs. 1.07 billion, of which Rs. 0.58 billion represents foreign exchange. The allocation for the private sector, still tentative, leaves room for the licensing of addi- tional private plants for the production of nitrogenous fertilisers apart - 26 - from those mentioned above, as well as for the expansion of production of phosphatic fertilisers. 66. The proposed allocations of foreign exchange for imports of fertilisers during the Third Plan period are not substantially changed from those en- visaged at the time of the previous report, They still show a rise toward a peak in the middle of the Plan period, whereas the further shortfall below the Second Plan target of production strergthens the case for moving immedi- ately to a higher level of imports. Besides the short-term effects in in- creasing agricultural production, including commercial crops which could add to India's export earnings, considerable advantages would be derived also from saturating the market in the next two or three years in order to deter- mine actual demand and its growth, as a basis for future planning of ferti- liser production in India. The Industrial Program 67. The allocation for public sector outlays in organised industry and minerals has been increased from Rs. 15.00 billion to Rs. 15.26 billion. The Draft Outline did not indicate precisely how the total was to be divided between different industries, and there is still a good deal of uncertainty surrounding its make-up, The fertiliser program has been described in the preceding section, and the programs for steel, coal and oil are discussed in separate sections below. Apart from the changes noted there, the content of the public sector industrial program is much the same as envisaged in the Draft Outline. Emphasis is still given to a large expansion and diversifica- tion of capacity of the heavy engineering and machine-building industries. Certain projects on which the Draft Dutline indicated that preparatory work should continue with a view to decisions in due course are now definitely incorporated in the Plan; these include plants for production of heavy com- pressors and pumps, basic refractories and ball and roller bearings. 68. The provision for private investment in organised industry and minerals has been raised from the Rs. 10 billion envisaged in the Draft Outline to Rs. 11 billion. The increase is attributable in part to the higher estimates of the cost of investment required to achieve the ta.gets of production and capacity in specific industries; in part, to the raising of targets in cer- tain fields, notably in the case of aluminum, the production target for which in 1965/66 has been increased from 75,000 to 80,000 tons; and in part to in- creased participation by the private sector in certain industries such as fertilisers and alloy steel. Steel 69. The steel program continues to provide for expansion of the three public sector plants at Bhilai, Rourkela and Durgapur from one million to 2.5, 1.8 and 1.6 million ingot tons respectively, and for additional capacity of one million tons to be established in a new public sector plant at Bokaro. The target for installed capacity remains at 10.2 million ingot tons (7.5 million tons of finished steel). The production target still stands at 9.5 million ingot tons, though it seems most unlikely that this will be achieved. - 27 - The targets for capacity and production of alloy steels have been raised from 200,000 tons to 250,000 and 225,000 tons respectively, on the basis of more detailed studies of expected demand. The estimated cost of the public sector program has been raised from Rs. 6.06 billion in the Draft Outline to Rs. 6.21 billion. 1/ The new figure includes Rs. 5.83 billion for mild steel and Rs. 0.38 billion for alloy steels. The foreign exchange component is esti- mated at Rs. 2.72 billion, including Rs. 1.00 billion for the Bokaro steel plant. 70. The planned expansion of the existing public sector plants will leave no room for further economic expansion in the case of Bhilai and Rourkela. It is intended, however, that capacity at Durgapur should eventually be ex- panded by another million tons (i.e. up to a total of 21 million ingot tons). The proposed new plant at Bokaro has been designed for 2- million ingot tons capacity, against which present plans envisage production of 1 million ingot tons in the last year of the Third Plan. This production will consist mainly of flat products. 71. Expansion of the three existing plants alone will impose heavy demands on transport facilities, raw material supplies and available managerial and technical personnel. In view of these problems, doubts were expressed in the previous economic report about the wisdom of proceeding at this stage with the project for a fourth steel plant in the public sector. The Government has stated that it will make certain that requirements of raw materials, espe- cially coal, and of transport can be met before Bokaro is undertaken. The construction of additional coal washing capacity to augment the supplies of metallurgical coal will be an important determinant of the Bokaro phasing. Moreover, the plant is not to be undertaken until foreign exchange financing is assured. So far, it appears that no offers have been made. The plant is estimated to cost Rs. 2.35 billion, including costs of a captive ore mne, railway and power facilities. In the meantime, the Government intends to go ahead with preparatory work on the development of coal and ore supplies, with the training of necessary personnel and with some preliminary work on the township. The project in any case rcquires considerable further technical study before the detailed design and layout of the plant can be determined. 72. There is no question as to the eventual need for new steel plants in India; the question is only one of phasing. Apart from raw material supplies, the major question involved in establishment of a new public sector plant at Bokaro is the problem of finding additional qualified personnel to operate and manage a fourth plant. These difficulties were commented upon in the previous economic report. There is still reason for serious concern on this score, but the Steel Ministry is making efforts to overcome the problem. Hindustan Steel, the government corporation responsible for the public sector 1/ The financial provision made for public sector iron and steel plants in the Draft Outline was only Rs. 5.41 billion, but it was recognised that this would not be enough to cover the full cost of the program. - 28 - steel plants, has hired a foreign engineering consulting firm and is engaged in reorganising its own Board with a view to improving the efficiency of operations. A firm of consulting engineers has also been engaged, under a contract financed by the Colombo Plan, to advise on the operations of the Durgapur plant. A German expert is to be brought in as general superintendent for the Rourkela plant, and a management expert is also being obtained for Bhilai. At the technical level, the Government has decided to expand sharply the number of foreign technicians employed in each public sector plant. There are now some 130 foreign technicians engaged in operations at Bhilai, 110 at Durgapur and 50 to 60 at Rourkela, and an agreed phasing has been worked out to reach a level of 175-200 in each plant. 73. The Government, in negotiating foreign assistance for the Bokaro plant, would hope to obtain, as part of the basic agreement, the necessary technical and top level managerial personnel to operate the plant. Government officials point out that the expansion envisaged in the Third Plan is much smaller, relatively, than that undertaken in the Second Plan. This argument would have more weight if the Second Plan targets of production had been more close- ly approached. It is true, however, that the pool of trained personnel is much larger and India is in a position now to train technicians and managers in five major steel plants, as compared with only two at the beginning of the Second Plan. In the last six months India has stopped sending overseas for training newly-graduated and inexperienced engineers; she is now able to be more selective in sending abroad for special training engineers with ex- perience in the various steel plants. 74. The production target of 225,000 tons of alloy steel will be met partly through a new public sector plant to be established at Durgapur, initial capacity of which will be 48,000 tons of saleable steel. This plant is esti- mated to cost Rs. 0.38 billion, including foreign exchange of Rs. 0.20 billion. Additional alloy steel will be produced in public sector ordinance factories. The target for alloy steel capacity in the private sector has been raised from the 70,000 tons envisaged in the Draft Outline to 120,000 tons, and the estimated foreign exchange cost has risen by Rs. 0.10 billion to a total of Rs. 0.37 billion. One private sector proposal for a plant with a capacity of approximately 50,000 tons of saleable steel has been approved by the Government in principle; other private proposals are under consideration. 75. The Third Plan target of pig iron production for sale is 1.5 million tons. This will be difficult of achievement from the production of the existing and planned steel plants. Consequently, a "contingent" project for the Third Plan now under examination is that for an iron and steel plant based on lignite at Neyveli in Madras, using iron ore from Salem or elsewhere . in the south, which would produce initially about 250,000 tons of pig iron and would cost roughly Rs, 0.25 billion. The project would employ the uncon- ventional low-shaft furnace process, however, and large-scale testing is necessary before a decision can be taken to proceed. - 29 - Coal Production 76. The target for coal production by the end of the Third Plan remains un- changed at 97 million tons. This is still an optimistic estimate, but the prospects for approaching it have brightened as a result of recent changes in government policy and attitude towards the private coal industry, growing largely out.of the crisis in coal, transport and steel of last summer and the widespread criticism of the failure of coal production - especially in the public sector - to meet the targets. The Ministry maintains there has been no change, but the industry has been offered concessions which in its view amount to a major modification of policy. The Government announced that no ceiling will be placed on private sector production in the Third Plan, and relaxed the restriction limiting new private mining to areas contiguous to existing workings. Assurance was given of prompt payment to the colliery operators of the subsidy for "difficult" (i.e. costly) mining, and the sub- sidy for sand stowing has been increased (both subsidies are paid from a special cess added to the price of coal to the consumer). In addition, the price differential for the higher quality coals has been somewhat increased; coal consumers will pay a bonus for coal with an ash content lower than the permitted level for specified grades. 77. On this basis, the industry has undertaken to produce 17 million tons of additional coal during the Third Plan. The public sector is expected to produce 20 million additional tons. These figures are related to the Second Plan production target of 60 million tons in 1960/61; actual production achieved this year is likely to be only about 53.5 million tons, but the productive capacity for a level of 60 million tons is largely in place, and production is expected to reach 60 million tons during the first year of the Third Plan on the basis of the Second Plan investment program. The level of production in relation to targets is shown in the following table: (million tons) Public Sector Private Sector Total 1955/56 actual 4.3 33.9 38.2 1960/61 estimated 10.0 43.5 53.5 1960/61 target 16.0 44.o 60.0 1965/66 target 36.0 61.0 97.0 78. The Government states that this allocation of production as between the public and private sectors is not rigid, and that a shortfall in either sector would lead to an increase in the otherts target if it appeared that the latter was in a position to achieve it. The position is to be reviewed from time to time. 79. Private sector investment during the Third Plan is estimated at Rs. 0.60 billion, of which Rs. 0.30 billion would be in foreign exchange. Tentative allocations for the public sector program are as follows: - 30 - (Rs. billion) Total Foreign Exchange Coal production 1.24 0.7 Coal washeries 0.26 0.11 Central ropeways 0.16 0.08 1.66 -5.7 These figures, which include a spillover of about Rs. 0.08 billion from the Second Plan, represent a sizeable increase over the figures given in the Draft Outline. 80. Of the additional production of 20 million tons to be raised by the public sector, 3 million tons are to come from the Singareni collieries in Andhra Pradesh, a State Government enterprise, and the balance of 17 million tons will be raised by the National Coal Development Corporation of the Central Government. The likelihood that the public sector will reach its target of 3. times the 1960/61 level of production is remote. A large part of the new production must come from new mines to be developed in entirely virgin areas, including a much larger proportion of deep mines, and under more difficult mining conditions, than in the Second Plan. It is certain that substantial foreign technical as well as capital assistance will be needed, and the Government is now considering offers of technical assistance from several countries, particularly for the development of new deep mines and the organisation of central workshops. 81. An important feature of the public sector program is the provision for a system of seven central ropeways to transport sand for private collieries, particularly small collieries which cannot afford such facilities. Sand stowing is of increasing importance not only for conservation and safety, but also for increasing output, in view of the limited reserves of high-grade coals and the thickness of seams which precludes full extraction by the con- ventional caving method. Unless much greater sand stowing is done, large quantities of coal will continue to be locked up in pillars and may in course of time be lost altogether. Sand transported to the collieries, as well as costs of underground stowing, would be subsidised by the Goverm.ent. The seven ropeways are to be completed by Harch 1963. 82. The delay in the progran for construction of coal washeries, caused partly by foreign exchange restrictions, was one of the outstanding weak- nesses of the Second Plan. Four new public sector washeries were planned of which only one will go into operation during the Second Plan period; the other three are expected to be completed in October 1961, June 1962 and April 1963 respectively. The expansion of the steel production in the Third Plan will require substantial additional washing capacity. By 1965/66 total washing capacity (in million tons of raw coal) is expected to exceed 25 mil- lion tons. As of the end of the Second Plan period, capacity is only 6 mil- lion tons, while another 6 million tons is under construction. The Third Plan program provides for new capacity of almost 14 million tons, to be ob- tained in part from new washeries and in part from expansions of washeries now under construction. - 31 - Oil Supplies 83. Provision in the Third Plan for public expenditure on the development of oil supplies has been raised from Rs. 1.55 billion to Rs. 1.77 billion, including a foreign exchange component of Rs. 0.81 billion (170 million). This is still a tentative allocation and might be raised later on to include additional refineries and distribution facilities. At present only the following expenditures are covered: (Rs. billion) Total Third Foreign E.change Plan outlay Component a/ Barauni refinery 0.23 0.11 Gujerat refinery 0.24 0.12 Indian Oil Company (distri- 0.05 neg. bution) Assam pipeline a/ 0.10 0.10 Oil exploration 1.15 o.54 Total 1.77 0.71 a/ Projects continuing from Second Plan. 84. Indigenous production of crude oil is still about half a million tons a year, all in Assam. With the completion of the Gauhati refinery (750,000 tons), now well advanced, and the Barauni refinery (2,000,000 tons), which will probably come on stream in 1963, production in Assam should be raised by stages to around 3 million tons. Whether it can be increased above this level will depend on the progress of exploration in Assam. The Oil and Natural Gas Commission is presently exploring in the area and has recently found oil at Rudrasagar. Applications from private oil comDanies for new exploratory concessions in Assam are understood to be under consideration by the Government. 85. Elsewhere in India, the only significant oil discoveries made so far are in the Cambay and Ankleswar districts of Gujerat, where exploration is being carried on by the Oil and Natural Gas Comission. The discoveries at Cambay have been rather disappointing, but the Government is placing consider- able hopes on the commercial exploitation of the oil found at Ankleswar, and plans are being made for construction of a refinery in Gujerat with a capacity of 2 million tons. The foreign exchange costs of this refinery are to be financed out of the 500 million rouble credit negotiated in February 1961. 86. A number of foreign companies have responded to the invitations issued by the Government towards the end of 1959 that interested parties should join in the search for oil in India. Up to the end of February 1961, however, none of the negotiations had been brought to a successful conclusion. - 32 - 87. There has been no change in the policy that the construction of new refineries should be reserved to the public sector, and the -private companies have not been allowed to make any major additions to their existing refineries, though at least one of these companies has applied for permission to do so. However, as a result of various technical modifications the combined through- put of the four private refineries has been increased slightly and is now around 6 million tons a year. The three government refineries now under con- struction or projected in Assam and Gujerat should contribute nearly another 5 million tons, raising total refinery capacity in India to between 10- and 11 million tons by the end of the Third Plan. Against this, the latest estimates made by the Government's Oil Advisory Coriittee suggest that demand for petroleum products in India by the end of the Third Plan may be as high as 14 million tons - a considerable advance on the earlier estimate of 10 million tons, which was mentioned in the Draft Outline of the Third Five-Year Plan. The Government is considering various ways of bridging this gap, including the expansion of the Gauhati and Barauni refineries and the construction of another new refinery in the public sector, but no financial provision has been made for these projects in the Third Plan. Additional capacity could, of course, be provided at a much lower capital cost by the expansion of the existing private refineries than by construction of a new refinery. 88. Little attention has yet been given to the problems that will be in- volved in adjusting the pattern of oil distribution in India to the new sources of supply in Assam and Gujerat. The Government apparently intends to take over an increasing share of the marketing of petroleum products through the state-owmed Indian Oil Company, but as yet this company has neither the organisation nor the technical nor the financial resources re- quired for the job. The funds so far allocated to it in the Third Plan are Rs. 5O million, whereas it would probably require an investment of several times this amount to provide complete facilities for the marketing of 1 mil- lion tons of products. Meanwhile, an official committee has been set up to review the prices charged for petroleum products in India, and this has in- troduced a further element of uncertainty at a time when the closest coopera- tion is called for between the public and private sectors in the planning of new distribution facilities. 89. As pointed out in the previous economic report, the increasingly com- petitive situation in world oil markets has enabled the Government of India to secure substantial reductions in prices paid to suppliers for crude oil and petroleum products. These benefits are reflected in the lower payments now forecast for imports of petroleum in 1961/62 and 1962/63. Previously these payments were estimated at over Rs. 1 billion in each year. The new figures are Rs. 0.95 billion in 1961/62 and Rs. 0.98 billion in 1962/63 (see Table 11 on page 4l). Electric Power 90. The Third Plan allocation for investment in power has been increased from Rs. 9.75 billion to Rs. 10.69 billion and the foreign exchange component from Rs. 2.70 billion to Rs. 3.15 billion. These figures include Rs. 0.51 billion for an atomic power plant and Rs. 0.50 billion for power investment - 33 - in the private sector; they exclude the provision made for uranium mining (Rs. 0. 24 billion), which comes under minerals. 91. The physical target for installed generating capacity at the end of the Third Plan has been raised from 11.8 million kw to 13.4 million kw. It is expected that capacity installed at the end of the Second Plan will be about 5.7 million kr, so that the planned rate of expansion during the next five years is almost 19 per cent a year. 92. Even if this target is achieved - a distinctly optimistic assumption - the supply of power is likely to fall short of what would be required to support the proposed expansion of industrial production. Load surveys carried out during the past two years indicate a peak demand of 9.8 million kw in 1965/66, excluding the demand met by industrial units generating their own power. Against this, firm capacity installed by public utilities would be only about 9.3 million kw. Regional forecasts suggest that the shortage would be spread over all parts of the country. Indeed, there are only two or three States in which there appears to be any proscct that firm capacity at the end of the Third Plan will match the forecast of peak demand. 93. The Government apparently still intends to proceed with the development of nuclear power in spite of the doubts expressed in various quarters, both in India and abroad, as to the economic merits of this progr,m. Tenders have already been invited for the construction of a 300 MF atomic power station at Tarapore near Bombay, though it is not presently expected that orders will be placed for this project until some time in 1962. The target for installed capacity in 1965166 includes one of the two 1"0 1W reactors; the second is not scheduled for completion until early in the Fourth Plan. The Transport Program 94. The overall allocation for transport and communications has been raised slightly from Rs. 14.50 billion in the Draft Outline to Rs. 14.75 billion. The allocation for road development has been increased from Rs. 2,50 billion to Rs. 2.80 billion, for development of major and minor ports from Rs. 0.85 billion to Es. 0.89 billion and for shipping from Rs. 0.55 billion to Rs.0.62 billion. Marginal adjustments have been made in other itens. The railvaysl allocation within the financial limit of Rs. 75 billion for the Plan has been increased only to the extent of Rs. 0.35 billion included under the category of "inventories" to cover increased stores purchases; provision has not yet been made for additional funds estimated to be required to mneet the railways' workload projected in the Third Plan. 95. The increase of Rs. 0.30 billion for road development is entirely with- in the States1 sector and represents a reallocation of expenditure by the State Governments during their discussions with the Planning Commission in the latter part of 1960, on the basis of the States' own assessaent of priorities. The provisions for national highways and for Central assistance to certain inter-State roads (Rs. 0.50 billion and Rs. 0.30 billion respec- tively) remain unchanged. The foreign exchange component of the road program is estimated at Rs. 0.11 billion. - 34 - 96. Provision is made for private investment in the motor vehicle and ancillary industries amounting to Rs. 0.80 billion, of which Rs. 0.35 billion represents foreign exchange costs. Including this, the investment in development of roads and road transport capacity thus amounts to Rs. 3.60 billion. This figure is exclusive of the cost of imports of motor vehicle components and ancillaries, which constitute a substantial foreign exchange expenditure; detailed estimates for the first two years of the Plan indicate that such imports will amount to Rs. 0.35 billion each year in 1961/62 and 1962/63. Railways 97. The railways' Third Plan envisages investment of Rs. 12.98 billion, as compared with Rs. 12.20 billion in the Draft Outline. The approved allocation for the railways at this stage, however, has been raised only to Rs. 12.55 billion, reflecting an adjustment to include in the Plan the railways' in- creased stores purchases. The Railway Ministry is therefore still seeking additional funds of Rs. 0.43 billion to meet new requirements in respect of the inclusion of a diesel locomotive plant in the public sector, a railway link to the new port of Haldia and other items. (These are presumably in- cluded in the "planning figure" of Rs. 80 billion.) The above figures are inclusive of requirements for current replacement to be financed from de- preciation funds, which remain at Rs. 3.30 billion. Consequently the rail- ways' request for funds from the Centre's allocations for the Plan amounts to Rs. 9.68 billion, as against the present allocation of Rs. 9.25 billion. 98. The foreign exchange component of the requested allocation is estimated at Rs. 1.86 billion, as compared with Rs. 1.30 billion envisaged in the Draft Outline. The increase is due mainly to the addition of the diesel loconotive plant. The foreign exchange component of the Third Plan outlay will thus be only about 15 per cent as compared with almost 30 per cent in the Second Plan - a reflection of the railways' continued progress toward self-sufficiency in domestic manufacture. The foreign exchange requirements in the Third Plan are mainly items required for sustaining indigenous production of rail- way equipment and for developing further manufacturing capacity. 99. Total freight in 1965/66 is now estimated at 243.5 million tons, as compared with 235 million tons estimated in the Draft Outline. The total breaks down as follows: (million tons) Steel and raw materials other than coal for steel plants 36.0 Coal a/ 87.5 Cement 12.0 1iscellaneous: b/ Iron ore for export 10.0 Railway material excluding coal 21.0 Other goods 77.0 108,o Total 23 a! This is on the basis of a total production of 97.5 million tons, but allowing for consumption in collieries and movement by road of 10 per cent of the total. b/ Assumes an annual increase of 3.3 per cent, exclusive of iron ore for exoort. - 35 - 100. On this assumption, goods traffic will increase during the Third Plan by 89.5 million tons, or more than 50 per cent over the level of 154 million tons now envisaged in the last year of the Second Plan. Three quarters of the increase is accounted for by increased production of coal, steel, export ore and cement, the great bulk of which must necessarily move by rail. Provision is made for an increase in passenger traffic by about 3 per cent per year, as was done in the Second Plan, though it now appears that the in- crease during the Second Plan was closer to 5 per cent per annum. 101. In terms of ton-miles the freight workload in the Third Plan represents an increase of 76 per cent. The bulk movements of materials to the steel plants and of iron ore for export and their leads have been worked out in considerable detail, and the estimates of the increased workload appear realistic. Planned outlays for rolling stock have accordingly been increased by Rs. 0.23 billion to Rs. 5.05 billion, and the programs for double-tracking and other line-capacity works have been increased marginally. The latter are designed mainly to strengthen the trans-continental trunk routes and the routes leading out of the coalfields. The transport plan for movement of coal to major consuming centres, where dumps are to be established, as well as to steel plants, is based on increasing use of new higher-capacity bogie wagons in heavy trains of up to 3,600 tons, against present loads of no more than 2,250 tons for the heaviest trains. The net average load of all trains is to be raised to 2,000/2,400 tons, reducing the investment otherwise necessary on double and quadruple tracking. 102. The target for new lines has been slightly reduced - from 1,200 to 1,160 miles; the estimated cost, however, has risen by Rs. 60 million to a total of Rs. 1.26 billion. New lines include one for the export of iron ore via the port of Vizagapatam; 200 miles for the development of new coalfields; a line for the new port at Haldia and a 100 miles line from Ranchi to Bondamunda to serve the steel plants. Other lines will aid the development of other mineral resources and serve the operational needs of the railways. 103. About 1,100 miles of track are to be electrified during the Third Plan; priority will be given to projects carried over from the Second Plan except for one new section, between Mogalsarai and Kanpur, urgently required for handling heavy coal and other traffic. The percentage of route miles under electric traction will be only about five per cent at the end of the Third Plan. Calcutta 104. The Planning Commission has earmarked Rs. 100 million as Central assistance for redevelopment projects in Calcutta City in the Third Plan. This compares with total demands of up to Rs. 4,000 million for Calcutta put forward by the West Bengal State Government. The latter figure is clearly impossible within India's available resources and development priorities; on the other hand, the provision of only Rs. 100 million is totally inade- quate to the needs. One justification for this figure is that there is as yet no master plan for Calcutta. A preliminary study of the city's water - 36 - supply and sewage problems has been carried out by a World Health Organiza- tion team, and th- State Government has dra.n up plans for a "satelLite tow,mship" south of Calcutta. Already included in the Statels approved Third Plan is a provision for reclamation of salt marsh land in the city for con- struction of additional housing. These schemes are completely uncoordinated, however, and the Ford Foundation has recently agreed to arrange for a group of experts to undertake an overall city planning project for Calcutta. It is possible that the powers of the greater Calcutta metropolitan authority proposed by the 'I.H.O. team, and already approved in principle by the State legislature, will be extended to cover all aspects of municipal development, and over an area wider than that originally envisaged. In any event, assembly of the planning team, development of a master plan and detailed project blueprints and enactment of requisite legislation will require con- siderable time. Some tasks could possibly be proceeded with earlier - for example, the sanitizing of the present endemic cholera areas by providing a safe water supply - but large-scale expenditures should await the corpletion of the detailed long-term plan. The Ford Foundation hopes to have its personnel on the job in Calcutta by about the middle of 1961, and to draw up preliminary plans so that some developmental work can be initiated early in 1962. The master plan is to be completed by June 1963, CHAPTER III FOREIGN EXCHANGE PROSPECTS Balance of Payments Forecasts . 105. The import requirements of projects and programs included in the Third Plan are now estimated at Rs. 20.30 billion, as compared with Rs. 19.15 billion at the time the Draft Outline was published. The requirements of other imports fmr the operation of the economy over the five-year period are at present being re-examined in detail, and although the study is not yet complete, it is already clear that these requirements will be substantially larger than the estimate of Rs. 35.7 billion given in the Draft Outline. As a matter of principle, however, the Government has decided that there should be no change in its stated request for external assistance, which remains at Rs. 32 billion including aid under PL 480 or Rs. 26 billion excluding PL 480. 106. While the balance of payments forecast for the Plan period as a whole has not yet been revised, the Government has prepared detailed forecasts for each of the first two years of the Plan. These forecasts, which are given in Table 1, indicate the overall deficit expected in each year after taking account of all official external assistance committed up to January 15, 1961. The overall deficit for which fresh external assistance is needed is esti- mated at Rs. 3.04 billion ($638 million) in 1961/62 and Rs. 4.21 billion ($884 million) in 1962/63. These figures represent the deficit after taking credit for expected commodity imports under existing PL 480 agreements with the United States ($307 million in 1961/62 and $319 million in 1962/63) and for estimated disbursements against other foreign assistance negotiated before January 15, 1961 ($503 million in 1961/62 and $306 million in 1962/63). The total aid requirement including PL 480 assistance thus amounts to $1,448 million in the first year and $1,509 million in the second year. 107. Various components in the balance of payments fmrecasts are discussed below. All in all, while the forecasts are, of course, subject to a con- siderable margin of error in detail, there is no reason to believe that they do not portray correctly the order of magnitude of the deficit to be covered by fresh external assistance in each of the next two years, :if India is to carry out the Plan as now formulated. Import and Export Prospects 108. The revised forecasts of export earnings for the next two years, as well as the estimates for 1958/59 through 1960/61, are shown in Table 10. They correspond fairly closely with the estimates set out in the previous economic report. The forecasts assume that exports will increase by Rs. 0.21 billion (312 per cent) in 1961/62 and by a further Rs. 0.19 billion (3 per cent) in 1962/63. Even these relatively modest increases will be difficult of achievement without a more aggressive export promotion effort. - 37 - - 38 - Table 10. Estimated Receipts from Merchandise Exports, 1958/59-1962/63 (Rs. billion) Actuals Forecists f975,59197 - 5169T607.- I62 1962/63 Fish and fish preparations 0.06 0.06 0.05 0.06 0.07 Cashew nuts 0.16 0.16 0.17 0.18 0.20 Other fruits and vegetables 0.06 0.06 0.06 0.06 0.07 Spices 0.08 0.14 0.12 0.10 0.10 Sugar 0.04 0.02 0.03 0.03 0.03 Coffee 0.08 0.06 0.07 0.07 0.07 Tea 1.30 1.30 1.21 1.27 1.31 Tobacco 0,16 O.1h 0.15 0.16 0.17 Total food, drink and tobacco b/ T 97 1.94 T 1 93 2.00 Oilcakes c/ 0.11 0.21 0.18 0.18 0.18 Vegetable7oils 0.08 0.17 0.18 0.19 0.20 Hides and skins 0.08 0.11 009 0.06 0.06 Raw cotton and waste 0,23 0.15 0.10 0.14 0.15 Raw wool and hair 0.09 0.12 d/ 0.11 0.11 0.11 Other textile fibres 0.03 0.06 ~ 0.03 0.03 0.03 Gums, resins and lac 0.07 0.08 010 0.09 0.08 Total other agricultural products b/ = 0.90 079 .0.1 Mica 0.10 0.10 0.10 0.10 0.10 Iron ore 040 0.15 0.18 0.26 0.30 Manganese ore 0o1 0.12 0116 0.17 0.17 Other ores and scrap 0,07 0.11 0.11 0.09 0.09 Coal and coke 0.06 0.05 0.011 0.04 0.04 Petroleum products 0,C3 0.03 0.04 0.04 0.04 Total minerals b/ _0 76 0.70 0.7 Leather and manufactures 0.19 0.31 0.25 0.24 0.24 Footwear 0.02 0.03 0.03 0.04 0.04 Yarns 0,12 011 0,11 0.11 0.12 Cotton fabrics 0,45 0.63 0.63 0.63 0.64 Art silk fabrics 0003 0.02 0.03 0.04 0.04 Woolen manufactures 0,0 0.05 O,06 0.06 0.06 Jute manufactures 1,02 1,12 1,29 1.13 1.13 Coir manufactures b/ 0.03 0,03 0O,0c 0 04 0.05 Total leather and fibre manufactures T 9 2.30 2,39 227 2.32 Iron and steel 0.01 0.02 0.0. 0.07 0.08 Ferro-manganese 0.01 Neg. 0.05 0.07 0.08 Metal manufactures O0O2 0,004 0,02 0.03 0.04 Mlachinery and transport equipment 0.02 0.03 004 0.05 0.06 Other exports 0.50 0.50 0.45 0.48 0.49 Re-exports 0,07 0010 010 0.10 0410 o:653 0769 06.7 1 o;70- U-73 Total exports and re-exports .72 5739 .0 T.1 .70 (customs data) Adjustment to bring into line with balance of payments figures a/ +0.04 -0.16 -0.10 - - Total exports and re-exports (payments data) 5.76 6.23 6.30 6.51 6.70 - 39 - a/ Figures for individual commodities in 1958/59, 1959/60 and the first half of 1960/61 are based on the trade returns and are not therefore exactly comparable with the forecasts for subsequent periods, which are on a payment basis. b/ Excludes certain items which are not identified separately and are included in "other exports". c/ Includes "essential oils". ci Includes exports of raw jute valued at Rs, 0.03 billion. 109. Despite reiterated emphasis on the importance of exports, India's export drive has not yet been given the urgency it deserves nor the imaginative effort it requires. Though concessions and incentives of many kinds are given, especially to the newer industries, the major traditional export industries have received relatively little help from the Government, and the view of them as sources of revenue has conflicted often with their develop- ment as sources of foreign exchange earnings. The decision in the new Central Government Budget for 1961/62 to reduce significantly the export duty on tea is a step in the right direction. 110. In view of the higher import requirements now foreseen, it is clear that the Plan as at present formulated cannot be carried out in full - even if India receives the entire amount of aid requested - unless additional ex- change resources are obtained from export earnings. The Government is now re-examining the possibilities of obtaining additional earnings from exports in the Third Plan. Some preliminary studies point to possibilities of raising the level of exports over the five-year period by perhaps Rs. 3 to 4 billion, provided an all-out effort were made and basic policy decisions were taken according highest priority to development of exportso These studies are continuing. 111. The Government recognises in principle that it will have to adopt more vigorous and less orthodox export promotion schemes. There is reason to hope that, if the same resourcefulness and energy which have characterised Indials response to many other challenges are brought to bear on this problem, the results will justify the investment. This is not to deny the overriding importance of import-saving investment in an economy such as India's, nor to deprecate the intractability of the export problem, but it seems fairly certain that India cannot reach viability without a very large increase in export earnings, and progress toward that goal is discouragingly small to date. 112 Much depends also upon the easing of trade restrictions imposed on im- ports from India into the industrialised countries, particularly in Western Europe. There has been during the last year only a very minor relaxation of restrictions; some token increases in quotas for Indian products were granted. On the other hand, there have been a number of proposals, official and other- wise, for the imposition of increased duties in Western European countries on such items as light engineering goods, which represent one of India's most promising "growth" exports. - h0 - 113. Import forecasts for the first two years of the Plan, as well as the estimates for 1958/59 through 1960/61, are shown in Table 11. Payments for imports other than PL 480 are forecast to rise sharply from Rs. 9.57 billion in 1960/61 to Rs, 11.47 billion in 1961/62 - roughly the level of the previous peak year of 1957/58. A further rise to Rs. 12.31 billion is forecast in 1962/63. These figures, it should be noted, relate to payments and not necessarily to the arrival of goods in India; substantial amounts of capital equipment have been imported under deferred payment arrangements in recent years, and the payments figures therefore give a somewhat misleading picture of import trends, especially for the latter years of the Second Plan. 114, The import forecasts include both the imports for projects or programs in the Plan and those required for maintenance of the economy. The project imports, which include the bulk of the imports in the machinery and transport equipment categories, are based on a detailed, though still tentative, project-by-project analysis of the phasing of import orders and arrivals. 115. In the Draft Outline maintenance imports, excluding PL 480 but in- cluding so-called "special maintenance imports"l/ of Rs. 2 billion, were estimated to average Rs. 7,51 billion per year over the Plan period. As now envisaged, non-project imports are substantially higher - Rs. 7.97 billion in 1961/62 and Rs. 8.16 billion in 1962/63. The total import estimates for the next two years break down as follows: (Rs. billion) Latest Forecasts Draft Dutline Estimates 1961/62 1962/63 Annual Average Third Plan Project imports 3.50 4.15 3.83 Non-project developmental imports: Machinery and components 0.62 0.66 ) Materials and fuel 0.99 1.13 ) 7.51 Other commercial imports 6.36 6.37 ) PL 480 imports 1.46 1.52 1.20 Total import payments 12.93 13.83 12.54 1/ Components, spares, raw materials, etc., needed to enable an increase in the production of capital goods within the country, but which could not be specifically related to individual projects in the Plan. - 41 - Table 11. Estimated Payments for Imports, 1958/59-1962/63 (Rs. billion) Actuals 2/ Forecasts 1955/59 1959/60 1960/61 1961/62 1962/63 Cereals: PL 480 0.92 0.87 1,80 1.45 1.52 Other 0.60 0M68 0.40 0.47 0.42 Total 1.52 157 2.20 1.92 1.9 Fruits, nuts and vegetables 0.18 0.18 0.18 0.18 0.20 Milk, fish, spices 0.11 0.12 0.11 0.11 0.12 Tobacco 0.02 0.01 0.02 0.02 0.02 Vegetable oils 0.03 0.04 0.04 0.04 0.04 Copra 0.11 0 11 0.11 0.11 0.11 Gums, lacs, resins 0.02 0.02 0.02 0.02 0.03 Hides and skins 0.01 0.02 0.02 0.02 0.03 Rubber 0.04 0.07 0411 0,12 0.14 Wood and cork 0.03 o.o6 oo4 0.05 0.06 Newsprint, paper and board 0.08 0.11 0.12 0.13 0.14 Textile yarn and thread 0.16 0.13 0,15 0.15 0.16 Raw cotton c/ 0.28 0.39 0.87 0.29 0.29 Raw jute 0.03 0.03 0.12 0.02 0.02 Raw wool and wool tops 0.09 0.08 0,10 0.11 0.13 Fertilisers (manufactured) 0.09 0.16 0.18 0.22 0.31 Dyes and colors 0.10 0.10 0.11 0.12 0.13 Drugs and medicines 0.09 0.10 0.11 0.08 0.08 Other chemicals 0.31 0.45 0.43 0.46 0.50 Petroleum and products 0.72 0.86 0.70 0.95 0.98 Iron and steel 0.85 0.47 0.75 0.69 0.46 Non-ferrous metals 0.32 0.39 0.45 0.45 0.55 Machinery 2.94 2.14 2.41 3.57 4.55 Transport equipment: d/ Road transport 0.32 0.32 0.43 0.59 0.53 Railways 0.38 0.16 0.28 0.50 0.41 Shipping 0.09 0.11 0.02 0.09 0.11 Other imports e/ 1.36 1.05 1.68 1.92 1.79 Total 10.30 9.23 11.7 12.93 13. a/ Figures for 1958/59 and 1959/60 are estimates based in part on the trade returns and in part on payments data. They are not strictly comparable with the forecasts for 1960/61-1962/63. b/ Forecast for 1960/61 based on actuals for April-September 1960 and estimates for October 1960 - M:arch 1961. c/ Includes PL 480 imports of Rs. 0.06 billion in 1959/60 and Rs. 0.40 billion in 1960/61. The forecasts for 1961/62 and 1962/63 cover imports at the present normal marketing levels of 420,000 bales a year and do not allow for imports which may be obtained under PL 480. d/ Excludes aircraft. e/ Includes defence equipment and civil aircraft. - 42 - Private Foreign Investment 116. In the Government's balance of payments forecasts (Table 1), gross private foreign investment inflow, excluding retained earnings, is forecast to rise from Rs. 0.19 billion in 1960/61 to Rs. 0.22 billion in 1961/62 and Rs. 0.25 billion in 1962/63. (The presentation in the Draft Outline of the external resources needed to cover the payments deficit during the Plan period made no attempt to calculate the contribution which foreign private investment might be expected to make; the latter was included in official assistance as a means of financing the deficit. The balance of payments forecasts in Table 1, however, take credit for these estimates of private capital inflow before arriving at the deficit.) The forecasts represent increases of 16 and 32 per cent respectively over the 1960/61 level, though the amounts still represent a small contribution in absolute terms to the meeting of India's external payments problem. In addition to a number of projects already under way or approved, the Government assumes that private foreign investors will provide equity or loan capital for a number of important projects to be started during the first two years of the Plan in such industries as fertilisers, chemicals, automobiles, metal manufactures and engineering. 117. The Finance Minister in the Budget for 1961/62 has proposed several measures which should facilitate private foreign investment. Hitherto the tax on dividends from a minority shareholding by a foreign company was sub- stantially higher than on a majority ownership, and also higher than on an In.dian company holding a minority investment. The rate of supertax on inter- corporate dividends, whether the company is Indian or foreign, and whether on a majority or a minority basis, will now be taxed at the same rate as regards companies formed after April 1. Also the present rate of taxation on royalties paid to foreign companies by Indian enterprises, which until now has been higher than in any other country, is to be reduced from 63 to 50 per cent. The period of tax exemption for foreign technicians, now available for two to three years, according to the specific decision in each case, will be made available for a uniform period of three years. In addition, after the initial three-year period, if the technician is retained in India, tax paid by the employer on his salary will not be treated as part of the technician's income (and therefore subject to additional tax) for a further period of two years. These measures remove impediments in the way of certain types of in- vestment and should help to stimulate greater private foreign participation in the development of Indiats economy. 118. Another step toward greater encouragment to foreign capital was the inauguration in February 1961 of the All-India Investment Centre. The Centre will be a focus of information and activity designed to acquaint foreign investors with investment opportunities in India and to facilitate their operations. External Assistance 119. External assistance from all sources to be utilised by India during 1960/61 is now estimated at Rs. 4.82 billion (just over $1 million), which will bring the total utilisation of aid during the Second Plan period to - 143 - Rs. 15.1 billion ($3.2 billion). The sources of this aid and the Government's firecasts of utilisation during the Third Plan of aid committed befcre January 15, 1961, are shown in Table 12. These forecasts underlie the aid figures shown in Table 1. Since aid committed after January 15, 1961, is not included in the tables, they do not reflect the agreement signed in February for an additional credit from the U.S.S.R. equivalent to Rs. 0.60 billion covering the proposed oil refinery in Gujerat, oil exploration and several power generation and industrial projects. Nor has account been taken of the agreement signed early in March for the supply of additional cotton from the United States under PL 480. The value of goods and services to be provided under this agreement is equivalent to just under Rs. 0.17 billion, If these latest agreements with the U.S.S.R. and the U.S.A. are included, total aid already committed which is available for financing the Third Plan amounts to approximately Rs. 11.57 billion ($2,430 million) including PL 480 and to Rs. 6.5 billion ($1,365 million) excluding PL 480. 120. In addition, the United Kingdom has stated that it will make a loan of ; 30 million (Rs. 0.40 billion) as an initial act of assistance for the Third Plan and that it will explore means of providing external finance estimated at L 20 million (Rs. 0.27 billion) for the extension of the Durgapur steel plant. The Federal Republic of Germany has informed the Government of India that it would be ready to make available on a long-term basis a sum of DM 170 million (Rs. 0.20 billion) towards Indials requirements during the first year of the Third Plan. Germany is also assisting India by the renegotiation of the credits extended for the Rourkela steel plant during the Second Plan and has offered to help in financing the expansion of the Rourkela plant during the Third Plan. Japan has offered further credits recently, and the Austrian Government has indicated that it may assist in financing the Rourkela expansion, 121. A further meeting of countries and institutions interested in assist- ing India's development will be held towards the end of April to consider what can be done to provide the additional external finance required to carry out the Third Plan. The previous economic report found no grounds for con- cluding that the Plan could be carried through with less foreign assistance than the Indian Government had indicated, nor did it see any way in which the Plan could be remodelled so as greatly to reduce its dependence on ex- ternal support, and yet to retain its identity. Nothing has happened since to invalidate these judgements. 122. The most urgent problem facing India is how to finance the large pros- pective balance of payments deficits in the first two years of the Plan without drawing further on her already depleted foreign exchange reserves and without restricting maintenance imports below the level needed to maintain the momentum of industrial and agricultural expansion. At the same time, orders have to be placed abroad for a large proportion of the projects included in the Third Plan, particularly in sectors such as power and industry, where new plants generally take several years to establish. Aid that is tied to new projects can contribute very little towards meeting the imediate balance of payments problem. In 1961/62, for example, only one sixth of the estimated deficit of about Rs. 3 billion is attributable to payments - 44 - Table 12. Utilisation of External Assistance Committed up to January 15, 1961 a/ (Rs. million) Actuals' Estimates ' Forecasts ' Total 1956/7* Total I 1963/61t 2nd and 1959/60l960/61 2nd Plan'1961/62 1962/63 1965/66'3rd Plan Totals: P.L. 480 3,320 2,209 5,529 1,460 1,522 1,941 10,452 Loans 5,348 2,276 7,624 2,180 1,441 2,039 13,284 Grants 1,661 335 1,996 215 15 - 2,226 Grand Total 10,329 4520 15,149 8 2,978 3,9 =,92 ($ million equivalent) (2,169) (1,012) (3,181) (810) T97 T737 (132) Of which: Loans U.S.A. (a) Development Loan Fund 435 426 861 640 356 86 1,943 (b) Export-Import Bank 111 268 379 514 125 - 1,018 (c) Other U.S. Government 656 27 583 65 25 - 573 (d) Private U.S. Banks 53 6 59 - - - 59 Total U.S.A. 10 -3 727 7J2 1,219 703 United Kingdom 824 400 1,224 3 - - 1,227 West Germany 754 384 1,138 85 - - 1,223 Canada 157 - 157 - - - 157 Japan 40 78 118 137 20 - 275 IBRD 1,860 564 2,424 321 74 76 2,895 Switzerland - - - 30 50 29 109 Yugoslavia - - - 40 100 51 191 USSR 653 123 781 295 574 1,590 3,240 Poland - - - 40 83 20 143 Czechoslovakia - - - 10 34 187 231 Total Loans ,347 2 276 727 771 JS0 1,4141 2,039 13,54 ($ million equivalent) (1,123) Tt7b) (1,601) T737 (303) (7 77 T7O7) Grants U.S.A. (a) U.S. Government 1,082 148 1,230 40 - - 1,270 (b) Ford Foundation 36 34 70 44 - - 114 Total U.S.A. 1,115 12 1,300 lT - - 1,3 8 Canada 427 145 572 97 - - 669 Others 116 8 124 34 15 - 173 Total Grants 1,661 335 1,996 215 15 - 2,226 ($ million equivalent) (349) (70) (419) (45) (3) (-) (467) a! Figures for past years are based on Ministry of Finance records and differ in minor respects from those given in Table 1, which are based on Reserve Bank data. in respect of new orders which will be placed abroad for projects during the year (excluding projects for which aid has already been committed). Other means have therefore to be devised to support the balance of payments in the immediate future. The Government of India considers it essential that a sub- stantial portion of any new assistance extended to India should be provided in a form which will enable it to cover non-project imports required for the operation of the economy, or to cover project imports for which orders have already been placed. Conclusion 123. If additional external assistance is forthcoming in the amounts, at the time and in the form required, the outlook for the Indian economy during the next two years appears on the whole to be favorable. The upturn in agricultural production and the continued dynamic expansion of industry afford solid grounds for confidence, though there are still dangerous weaknesses in fuel and power and, to a lesser extent, in transport. While it would be unrealistic not to expect some further rise in prices, the increases should continue to be kept within manageable limits. The Budget for the first year of the Plan demonstrates the Government's readiness to take unpopular measures to mobilise additional internal resources, and the buoyancy of domestic revenues in the past two years tends to support the view that rupee finance as such is unlikely to prove a major limitation on the execution of the presently proposed investment program. - 46 - APPENDIX Capacity and Production of Major Industries: Second Plan Targets. Expected 1960/61 Levels and Third Plan Targets 1960/61 1960/61 1965/66 Target Target Esti- Esti- Target Target Industry Unit capa- produ- mated mated capa- produ- city ction capa- produ- city ction city ction (1) (2) (3) () (5) (6) (7) (8) Iron and steel Steel ingots mill.tons - - 6.0 3.5 10.2 9.2 Finished steel " 4.7 4.3 4.5 2.6 7.5 6.5 Pig iron for sale " 0.98 0.75 0.9 0.9 - 1.5 Alloy steels (finished) t000 tons - - 40 40 250 225 Grey iron castings mill.tons - - n.a. n.a. 1,2 1.2 Steel castings " - - 0.10 0.05 0.20 0.20 Steel forgings t000 tons - - 60 35 200 200 Ferro - manganese " 171.8 160 150 100 220 200 Aluminium 30.0 25.0 17.5 17.0 87.5 0.0 Copper " - - 7.2 7.9 18.4 18.4 Industrial machinery Cotton textile Rs.crores - 17.0 10.0 9.0 22.0 20.0 Cement - 2.0 1.1 0.8 4.5 4.5 to 5.0 Sugar " - 2.5 10.5 4.4 11.0 to 10.0 12.0 Paper " 4.0 0.7 - 8.5 6.5 to 7.0 Machine tools 3.0 7.0 5.5 30.0 30.0 Structural fabrication 1000 tons 500 500 5co 250 1,100 1,co Steam locomotives Nos. 400 400 300 295 300 (1,175) a/ Railway wagons (in terms of 4-wheelers) ?1 25,000 25,000 26,000 20,000 33,500 (109,866) a/ Passenger cars 1000 Nos 29 57 ( 20 20 30 30 Commercial vehicles " ) ( 28 28 60 60 Motor cycles & scooters " 11 11 24 16 48 to 50 60 Ball & roller bearings mill.Nos. 0.9 2.4 1.6 2.4 8.0 12.0 b/ Power driven pumps 1000 Nos. 86 86 184 90 184 150 Diesel engines " - 33 62 40 72 66 Tractors 4.8 3.0 7.5 2.0 12.0 10.0 -47- (1) (2) (3) (4) (5) (6) (7) (8) Bicycles mill.Nos. .90 1.25 2.2 l.-05 2.2 2.0 Sewing machines '000 Nos. 85 300 288 300 500 450 Electrical transformers (below 33 kv) mill.kva 2.202/ 1.36 2.2 1.3$ 4.0 3.5 Electric motors (200 h.p. & below) mill.h.p. 1.22/ 0.6 1.25 0 3.CL/ 2.5 Electric fans mill.Nos, 0.6 0.6 2.2 0.9 2.8 2.5 Fertilisers Nitrogenous (in terms of N) '000 tons 382 290 234 110 2,000 750-800 Phosphatic (in terms of P205) 120 120 82 70 500 400 Heavy chemicals Sulphuric acid 500 470 $21 400 1,500 1,250 Soda ash 253 230 304 10 530 450 Caustic soda 150 135 150 loo 400 340 Dyestuffs mill.lbs. 27,0 22.0 19.2 l1.5 22.4 18.0 Insecticides, D.D.T. mill.mega 2,800 2,800 2,800 2,800 2,800 2,800 units tons Plastics (polythelene, P.V.C. polysterene and others) 1000 tons 12.8 10.6 19.2 11.0 85.0 74.0 Soap " 357 300 254 380 254 500 (organised (organised sector only) sector only) Synthetic detergents 7,2 1.5 20.0 20.0 Automobile tyres mill.Nos. 1.46 1.46 1.76 1--5 3.7 3.0 Bicycle tyres 11.8 11.8 16.0 14,0 38.6 31.0 Paper and paper board t000 tons 450 350 363 320 820 700 Newsprint " 60 60 30 28 150 120 Cement milltons 16.0 13.0 10.0 8--0 15.0 13.0 Refractories 1.0 0.8 0.87 o.6 2.0 1.6 Glass & glassware (including opthelmic glass) tOOO tons 338 200 457 240 615 440 Petroleum products mill.tons 4.3 4.3 5.3 4.6 8.0 7.4 (crude oil) (crude oil) Cotton yarn mill. lbs 2,080 1,950 2,100 1,800 2,250 2,250 Cotton cloth (mill) mill. yds 4,950 5,000 5,300 5,000 5,800 5,800 Jute tOCO tons 8,200 12,200 1,200 1,050 1,200 1,100 4 13 - (1) (2) (3) (4) (5) (6) (7) (8) Rayon filament mill. lbs 100.02/ 68.0 52.3 47.0 140.0 140.0 Staple fibre " 32.0 32.0 48.0 42.o 75.0 75.0 Sugar mill, tons 2.50 2.25 2.28 2.25 3.5 3.5 Coal - 60 - 53 - 97 Iron ore - 12.5 - 12 - 32 Note: Capacity for engineering industries is estimated on the basis of double shift operation. a/ Relates to production over five-year period 1961-66. b/ Assumes three-shift working. c/ An additional 0.5 million bicycles are expected to be produced in the small-scale sector. d/ Additional 150,000 sewing machines will be produced in the small-scale sector, e/ Revised. F/ These figures are for 300 h.p. and below.