Economic Development in India: The First and the Second Five Year Plans

INDIA’S FIRST FIVE YEAR PLAN covered the period from April 1951 through March 1956; the Second Five Year Plan covers the period from April 1956 through March 1961. The main objectives of planning in India are, broadly, to double real national income in less than 20 years and to double the per capita income in 25 years.


INDIA’S FIRST FIVE YEAR PLAN covered the period from April 1951 through March 1956; the Second Five Year Plan covers the period from April 1956 through March 1961. The main objectives of planning in India are, broadly, to double real national income in less than 20 years and to double the per capita income in 25 years.

INDIA’S FIRST FIVE YEAR PLAN covered the period from April 1951 through March 1956; the Second Five Year Plan covers the period from April 1956 through March 1961. The main objectives of planning in India are, broadly, to double real national income in less than 20 years and to double the per capita income in 25 years.

During the First Plan period, national income was expected to rise by 11–12 per cent; the actual increase was over 18 per cent, despite a shortfall in Plan outlays. The success of the First Plan, under conditions of economic and financial stability, prompted more ambitious goals and a bolder approach in formulating the Second Plan. The main objectives of the Second Plan are an increase of 25 per cent in real national income over the five-year period 1956–57 to 1960–61; a large expansion of employment opportunities; rapid industrialization; and reduction of economic inequalities. The emphasis on the development of industry and transport is greater than in the First Plan. The main problem is to step up the rate of investment in the economy. The total cost of the Plan has increased considerably since the estimates were presented, mainly because of two factors: the original costs were underestimated and prices have generally risen, especially prices of imported capital goods. But while difficulties have arisen currently in financing the Plan, particularly in regard to foreign exchange, it is important to stress the progress achieved so far. The technical and administrative tasks have been faced competently, by and large; major projects in steel, irrigation, and power are developing; and there is an unmistakable determination on the part of the Indian authorities to maximize tax resources, limit deficit financing, and take all possible measures to maintain the core of the Plan.

The Background of Economic Development in India

Natural resources

Of India’s total land area of 811 million acres, 89 million acres were unclassified in 1954–55 mainly because they were inaccessible or desert. Of the 722 million acres for which data on utilization are available, 467 million acres were classified as cultivable, but 95 million acres were not cultivated. Excluding fallow, actual sown area in 1954–55 was 315 million acres. With the provision of transport, health, and other facilities, there is some scope for gradual extension of the area under cultivation. In addition to bringing new areas under cultivation, land reclamation prevents loss of land through erosion and regains for use land already thus lost. Nearly 70 per cent of both the total population and the working force are dependent on agriculture. Holdings are small, 70 per cent of all farms being less than 5 acres each. Though about four fifths of the cultivated area is under food crops, large imports of rice and wheat have been necessary in some years. Since dependence on rainfall renders agricultural production unstable, and since 90 per cent of the rainfall in India is concentrated in certain months, covering one third of the year, the provision of irrigation facilities is of prime importance. Only 20 per cent of the cultivated area was irrigated at the end of the First Plan period; during that period, the net addition to irrigated area was about 14 million acres. Larger areas will be irrigated when the projects that were started during the period are completed. Other projects are being undertaken during the Second Plan period. The further addition to irrigated area is placed at 21 million acres, so that total irrigated area in 1960 would be 88 million acres, or about 25 per cent of the cultivated area, against 51 million acres in 1951, or 17 per cent of the cultivated area. The extension of irrigation facilities, through major as well as minor works, is one of the important factors that makes the agricultural prospect brighter. There are ample water resources available. Of the total river water resources, it has been estimated that one third could be turned to beneficial use but that only 30 per cent of this amount was used in 1956.

The minimum estimate of India’s firm hydroelectric power potential, according to the Central Water and Power Commission, is of the order of 35 million kw. at 60 per cent load factor; in 1956 installed capacity was only 3.4 million kw. Even with a 20 per cent expansion each year, the installed capacity would reach only 15 million kw. by 1965, or a little over 40 per cent of the estimated firm capacity. At present, there is a deficiency of oil resources in India, the current annual output being one tenth of consumption. The available resources are being supplemented through the use of power alcohol, wherever possible. Exploration for new oil resources is being undertaken over wide regions by the Government, directly as well as in cooperation with major foreign companies; and substantial provision has been made under the Second Plan for the development of the resources. The Indo-Stanvac project is engaged in exploration for oil in West Bengal. A new company was formed in January 1958 to prospect for oil and to exploit the large known resources in upper Assam. India also has fairly large uranium, thorium, and beryl supplies and, when a longer view is taken, it is possible to supplement the coal, oil, and water power resources by atomic energy. Modest beginnings have already been made in this direction. Metallurgical coal reserves are adequate, though not abundant. Considerably large reserves of steam and noncoking varieties are available for power generation. Large deposits of lignite that have recently been discovered would usefully supplement coal resources. The Geological Survey of India, the Indian Bureau of Mines, and the newly established National Laboratories are pressing forward with detailed surveys and investigation of mineral resources. A substantial stepping up of coal production, together with the conservation of metallurigcal coal, proper assessment of the more important deposits of various minerals, the beneficial use of low-grade ores, and the exploration and development of the oil resources are among the main lines of investigation. The country is richly endowed with other important minerals, especially iron ore, gypsum, mica, limestone, and manganese; such minerals as sulphur, zinc, lead, and petroleum are conspicuously deficient and have largely to be imported. India’s iron ore deposits are among the world’s largest and best, with a 60–70 per cent iron content, and they are almost inexhaustible; the other minerals necessary for large-scale iron and steel metallurgy are also plentiful.

Industrialization and savings

With such resources as these it was natural that various industries would be set up in India. In the interwar period, such important industries as cotton and jute textiles, sugar, soap, iron and steel, cement, and light engineering were established, partly as a result of the stimulus provided by the policy of discriminating protection adopted from 1922. The Swadeshi movement, in which the desire of the people to use domestically produced articles found expression, as well as the circumstances created by World War II, also fostered industrial growth. During the planning phase since 1950, considerable progress has been made by established industries and new industries have been promoted. Among the new industries established in recent years are petroleum refining, fertilizers, locomotives, telephones, newsprint, machine tools, and penicillin. Even so, India remains primarily an agricultural economy: the agricultural sector (including animal husbandry and ancillary activities) accounts for almost one half of aggregate national output and absorbs 70 per cent of the total working force, whereas industry (including mining and small enterprises) contributes but 16–17 per cent of output and absorbs 11 per cent of the working force.

Estimates of India’s national income by industrial origin are available on a systematic and comparable basis since 1948–49; and for certain earlier years, less precise estimates have been made. The aggregate national income (Table 1) in 1956–57 is placed at Rs 114.1 billion, at current prices, giving an average per capita income of Rs 294. At 1948–49 prices (Table 2), the 1956–57 income is estimated at Rs 110.1 billion, or an average per capita income of Rs 284. The rise in national income during the First Five Year Plan period, 1951–52 to 1955–56, is estimated at 18.4 per cent, and that in per capita income at 11.1 per cent. For the large numbers of people who have only subsistence living standards, there is little capacity or inclination to save. Moreover, data on consumer expenditures collected by the National Sample Survey indicate that the nonmonetary sector covers more than one third of the whole economy; as is to be expected, it is much larger (45 per cent) in the rural sector than in the urban sector (10 per cent). In the nonmonetary sector, what little is saved out of current incomes does not take a monetary form and is, therefore, not available as investible funds. Again, particularly in the rural sector, a part of the savings is immobilized in hoards (especially jewelry), and the savings available for productive investment are further attenuated by the preference of certain classes for investment in land and other forms of real estate. For many years, therefore, net investment as a proportion of national income remained low and stationary, at about 5–6 per cent. In these conditions, a stepping up of savings/investment is an essential requisite if development is to proceed apace.

Table 1.

India’s National Income, at Current Prices, Classified by Origin

(In billions of rupees)

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Source: Central Statistical Organization, Estimates of National Income, 1948–49 to 1955–56 (New Delhi, 1957).

Preliminary; revised total is Rs 100 billion (details not available).

Table 2.

India’s National Income, at 1948–49 Prices, Classified by Origin

(In billions of rupees)

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Source: Central Statistical Organization, Estimates of National Income, 1948–49 to 1955–56 (New Delhi, 1957).

Preliminary; the revised total is Rs 104.8 billion.

Crop farming, animal husbandry, and ancillary activities, and forestry and fisheries.

Professions and liberal arts, government services (administration), domestic service, and house property.

Defense requirements

While investible resources are thus very limited, not all the additional resources that are raised become available for development; there is a certain unavoidable increase in nondevelopment expenditures of government, i.e., on administrative and security services. Expenditures on defense (revenue and capital combined) amounted to Rs 1.86 billion in 1952–53 and Rs 1.90 billion in 1955–56; they are estimated at Rs 2.91 billion in 1957–58 and Rs 3.05 billion in 1958–59, the estimate for 1958–59 being less than 20 per cent of central, and 13 per cent of total public, expenditures. India, through its democratically elected government, follows a policy of nonalignment and has to meet its defense bill wholly from its own resources. This diversion of resources, limited and necessary as it is, imposes a certain strain on the resources budget for development.

Foreign trade

Until recently, the imports and exports of India each formed about 5 per cent of national income, and there was little external economic assistance that helped to maintain or improve the standard of living. Until the thirties, imports consisted mostly of finished consumer goods, and exports were chiefly tea, jute goods, and raw materials. The trade pattern has undergone a change in recent years, however, with industrial raw materials and capital goods figuring more prominently in imports and manufactures in exports. In some years, marginal imports of foodgrains have helped to maintain food consumption, especially in urban areas, and imports of capital goods have become essential to the country’s development program; part of these imports has been financed through loan and grant assistance. Thus, at the present stage, not only has foreign trade increased quantitatively in relation to the size of the economy (imports constituted about 10 per cent of national income in 1956–57), but it has also become a significant factor in determining the pace of development.

Development and employment

Attempts are being made to limit, through family planning, the rate of population growth in India, but there is need for comprehensive research into population problems, with a view to evolving an appropriate population policy. However, as the mortality rate gradually declines with improved medical facilities and health services, and as population control is bound to be slow in becoming effective on any substantial scale, it has to be assumed that the population will grow more or less at the observed rate. Correspondingly, with the rise in population there is a continuing addition to the working force. According to the census of 1951, 40 per cent of the total population are workers; and, of the total working force, more than 70 per cent are engaged in agriculture and ancillary occupations, 11 per cent in mining, manufacturing, and hand trades, and the rest in commerce, transport, and other services (Table 3). In 1955, the total working population was estimated at 153 million, of whom 110 million were in the agricultural sector; it is expected that by 1960 the total working force will rise to 164 million, of whom 116 million will be in agriculture; only subsequently will there be a slight decline in the agricultural proportion, so that by 1970 agriculture will account for about 65 per cent of the total working population.

Table 3.

Distribution of Working Force in India, According to Census Data

(In hundred thousands)

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Source: Final Report of the National Income Committee (New Delhi, 1954).

The structural and seasonal character of unemployment in the Indian economy is as follows: there is substantial unemployment, of about 4 million in the urban sector (according to a preliminary estimate by the National Sample Survey) and of about 3 million in the rural sector (on the basis of the results of the Agricultural Labor Enquiry, and the likely impact of the First Plan on rural employment); the large labor force engaged in agriculture is employed for only part of the year so that there is a serious degree of underemployment; nor does any major shift from agriculture to other gainful occupations seem practicable. Superimposed on this unemployment and underemployment is an addition to the labor force of about 2 million a year, which is likely to involve a worsening of disguised unemployment, that is, an increase in underemployment. Under the circumstances, it is appropriate, in devising techniques to deal with the problem, to view it not only in its aggregate magnitude but also in its distinct rural and urban aspects.

From the standpoint of employment in India, and especially of rural employment, some deliberate decentralization of economic activity is desirable in order to provide increased employment opportunities in supplementary fields for those who are dependent on agriculture. This decentralization will be less costly if it is based on cooperative forms of organization. Decentralization, by and large, in the conditions of the Indian economy, implies the development of small-scale, household industries, requiring little capital. Being labor intensive, such industries provide more employment at the same time that output is increased, but small-scale production is more costly than factory production. On the other hand, aside from the important political and moral considerations involved in preventing the emergence of unemployment, the case for decentralized production to provide greater employment to labor that would otherwise remain unemployed or grossly underemployed appears in better perspective when social costs and returns are considered. When there is a serious shortage of capital, it is necessary not only to increase the supply of capital but also to use capital-conserving techniques; the emphasis should be as much on better as on more tools. This is the rationale of using improved but fairly simple tools, which do not make undue demands on limited capital resources, in certain lines of industry that are well suited to decentralization and can be carried on in close proximity to agriculture. In agriculture and related hand trades, perceptible improvements in productivity are possible with only small additions to capital, if they are made coordinately with more effective organizational and marketing methods and improved techniques.

At the same time, the role of decentralized small-scale industries in India should not be unduly stressed; care should be taken to see that an inferior technology does not become firmly entrenched in the economy. Although the unemployment-underemployment problem is no doubt serious, it is only as urgent as economic development itself. Therefore, while in certain well-defined sectors development programs may properly be elaborated with employment as a main objective, in the sense of maximizing employment opportunities in the short run, the employment problem as a whole has to be viewed as a longer term one which can be resolved only through a development program that raises the productive efficiency of the entire economy. In the circumstances of India, therefore, highly capital-intensive schemes of industrial development (steel mills) and highly labor-intensive units (hand-loom industry) may go together; this combination is made easier by the fairly sharp division between the urban and the rural sectors of the economy.1 The Plan document stresses decentralization of industry from the employment angle, and provision is made in the Second Plan for promoting small-scale production in certain lines; but, as rapid industrialization is a basic goal of planning in India, the content of the Plan actually places greater emphasis on organized industry.2 By 1960, the relative share of factory establishments in aggregate output vis-à-vis that of small enterprises is expected to be greater than in either 1951 or 1955.

The decentralization of certain lines of industry, related primarily to the rural sector, might also serve to some extent to mobilize “the saving potential” that exists in disguised unemployment. Part of the labor surplus in the agricultural sector may be employed in constructing irrigation works and communications. It would be unrealistic, however, to assume that this saving potential could become an important source of capital formation. Although in recent years the traditional immobility of labor has diminished somewhat with the development of transport and communications and of large urban centers of industry and trade, it is still an important feature of rural life; decades of common living and family ties make it difficult to change this traditional immobility. Present consumption levels are very low and, when some of the surplus labor is diverted to construction projects, those productive workers who are left on the farm are likely to consume more, so that, consequently, aggregate consumption may rise. This is particularly likely in a peasant economy in which nearly 65 per cent of rural consumer expenditure is represented by food items of which, in turn, the proportion of own produce (imputed value) is as high as 60 per cent.

Availability of trained personnel: the priority of education

An important factor underlying low productivity in India is the inadequacy of educational facilities—general as well as technical. In the initial stages of development, the inadequate supply of competent and experienced personnel creates a bottleneck, as training facilities and educational standards cannot be stepped up suddenly. The shortfall in attaining targets under the First Plan was due as much, if not more, to this factor as to lack of other resources or inadequacy of finance. Moreover, as voluntary cooperation and a favorable public response constitute the principal sanction and driving force behind planning in India, improved standards of education must have a high priority if cooperation is to be forthcoming in full measure.

The proportion of school-going children in the age group 6–11 years rose from 30 per cent in 1947 to 40 per cent in 1951 and 50 per cent in 1955–56. At the higher, secondary, stage (age group 14–17 years), even in 1955–56 only 10 per cent of the total were at school. The Indian Constitution directs the State to provide by 1961 for free and compulsory education for all children up to 14 years of age. On the basis of progress attained so far, and with the provision made for further facilities under the Second Plan, the actual results by 1961 would fall markedly short of the goal set under the Constitution.

As far as technical and professional education are concerned, the annual new enrollment in engineering institutions is currently 5,000 for degree courses and 8,000 for diploma courses, compared with 4,000 and 5,000, respectively, in 1951, and 2,500 and 3,000, respectively, in 1947. At present, about 8,000 persons obtain degrees or diplomas in engineering each year; this number is expected to rise to 11,000 by 1960. The number of persons graduating from engineering and technological institutions increased during the First Plan period from 2,200 per year to 3,700. The existing higher institutes of technology are being expanded and new regional institutes are being set up. Various other recommendations of the Engineering Personnel Committee constituted by the Planning Commission are being implemented. The Committee had concluded that, even with the expansion provided for under the Second Plan, it would be necessary to provide for additional training facilities for nearly 2,300 graduates in engineering, including mining and metallurgy; yet another 6,000 persons would need to be trained for posts at lower levels. A National Training Council has been set up to direct an extensive program of technical training for various industries; for the steel industry in particular, a considerable number of persons are being trained both at home and abroad. In agriculture and other fields, down to the village worker, and also in social services, especially in health and medical care, there is a similar shortage.

Technical change, so essential for rapid economic development, cannot be accomplished in isolation; the progress of technology depends on the growth of scientific education and, indeed, on general education itself. Therefore, while the provision of facilities for technical education can proceed somewhat ahead of general education, in the longer run the two must go hand in hand; a rounded program of expanding all educational facilities is called for, which is necessarily costly. This raises the important question of the priority to be given to education, general and technical, in a development program; in the Indian context, it is undoubtedly a high priority.

A high priority for education is also necessary because the spread of education is one of the surest means of effecting those changes in social attitudes and in institutions which are essential for quickening the pace of development. There are, no doubt, certain beliefs, ingrained by religion and tradition over the centuries, which inhibit development. While legislative measures help in rectifying these attitudes, education also has an important role to play. Even so, as in relation to the problem of population, these attitudes constitute a complex which can be expected to change only slowly. Social relationships cannot be ordered about; they have to grow. However, legislative and institutional reforms can help forward the process of change.

Land reform

With the Zamindari system of intermediary land tenures prevailing in large parts of the country and with the fragmentation and subdivision of holdings produced by the increasing pressure of population, the condition of the peasantry in general and of tenant farmers in particular had been unsatisfactory for decades; nearly 45 per cent of total cultivated land was in the hands of intermediaries. The ameliorative measures taken in some Provinces before the war had little effect. In the last few years, there has been considerable progress in the abolition, with provision for compensation, of the Zamindari system; and, in 1956, intermediary tenures represented but 8 per cent of the total cultivated area. The total compensation involved has been estimated at over Rs 4.5 billion and is largely paid in marketable bonds or annuity certificates. The program is at various stages of completion in different areas. With the abolition of intermediaries, land tenures are now in the hands of owners who cultivate the land and of tenants who hold land leased from owners. There has also been considerable progress in tenancy reform: the maximum rents payable by tenants have been generally fixed at between one third and one fifth of the produce of the land or its equivalent value, and eviction is permissible only on prescribed grounds. There have been proposals for fixing ceilings on the area cultivated by owners, in terms of a multiple of economic or family holdings, subject to the overriding consideration of maximization of agricultural output.

While the actual implementation of the provisions of the law is not uniformly effective everywhere because of the weak economic position of tenants in certain areas, and the abolition of the Zamindari system and other land reform measures have themselves given rise to certain problems, particularly in relation to agricultural finance, there has, by and large, been a perceptible change in rural relationships. Measures are to be taken during the Second Plan period in relation to production, marketing, and credit which “will lay the foundations for cooperative reorganization of the rural economy.” Rapid growth of education and organized cooperation among peasants are essential if land reform is not itself to result in lower production and smaller marketable surpluses and savings. Bhoodan, a movement for voluntary gifts of land for distribution among landless cultivators, conceived by Acharya Vinoba Bhave early in 1951, is now extended all over India. This movement, as it gathers momentum, supplements agrarian reforms and other measures for reshaping the structure of agriculture and of rural relationships.

Community development

The Community Development Projects, an integral part of India’s Plans, were inaugurated in October 1952, and the National Extension Service, which is less comprehensive in scope, a year later. In each project area the contributions of the people themselves, in cash or in kind, are pooled with the assistance provided by the Government for financing schemes of local development; the people themselves have a large voice in determining the form that local development is to take. By January 1958 the program covered 276,000 villages, with a population of nearly 150 million; over one third of these villages have Community Development Projects and the rest are under the National Extension Service. The objective was to cover the entire rural sector by 1961; it appears that the target date may be put forward two or three years. While, with the help of trained village workers, the dissemination of knowledge of better techniques of production is an important aspect of community development, basically the program aims at releasing the latent energies of the people in a rounded cooperative effort to improve standards of living; the emphasis is on self-help. The tasks of the community development program are thus summed up in the Plan document: “As the program grows in size and the range of activities which it encompasses or influences increases, a great deal of the initiative in implementing it must pass to the people of each local area.… It is necessary to stress that, while the material conditions have to be assured, transformation of the social and economic life of rural areas is essentially a human problem. It is a problem, briefly, of changing the outlook of 70 million families living in the countryside, arousing in them enthusiasm for new knowledge and new ways of life and filling them with the ambition and the will to live and work for a better life. Extension services and community organizations are among the principal sources of vitality in democratic planning, and rural development projects are the means by which, through cooperative self-help and local effort, villages and groups of villages can achieve in increasing measure both social change and economic progress and become partners in the national Plan.”

Such are the ambitious sights set for community development. What has been the record so far? The financial provision made in the First Plan and the increased provision in the Second Plan, as well as the administrative and training arrangements that have been evolved, seem adequate. Generally, the voluntary contributions of the people have amounted to one half of the expenditures involved, and the people are becoming increasingly conscious of the Plan and its objectives. Although success has not been uniform, some of the project areas are bristling with effort. A Program Evaluation Organization was set up in 1952 to assess progress periodically. The Program Evaluation Board, which was set up in 1956 with a nonofficial chairman to plan and guide the work of the Evaluation Organization, has observed in its review of the progress so far: “While there has been considerable increase in rural consciousness of economic, and to a smaller extent of social, needs, the objective of stimulating continuing and positive effort based on self-help for promoting social or economic development has been comparatively unsuccessful.” As for the results in specific directions, the Report points out that aspects of the program involving physical changes—e.g., constructional and irrigational work, attitudes toward improved means in agricultural production and primary education—have been successful. On the other hand, changes involving social attitudes and organization—e.g., readiness to participate in community centers and to use cooperative forms of organization and panchayats for economic and political advancement—have not been so successful. The first series of projects, which were started in 1952–53, have been completed and, after intensive development for three to four years, are now being normalized and placed on a basis which, according to the scheme, should be self-sustaining; in such areas, too, there seems still to be dependence on government initiative and assistance. While such shortcomings need to be carefully examined and corrected, the Board affirms that on the whole community development is perhaps “the most significant development in India.” The Study Team, appointed by the Committee on Plan Projects of the National Development Council, recommended in November 1957 that emphasis in priorities be shifted from welfare activities to economic development aspects and that the target date for covering the whole country be extended by at least three years.

Price mechanism and controls

At the time of devaluation, during the Korean war period, and again in 1957, the main anti-inflationary policies adopted when there was a threat of inflation were general and indirect. The bank rate was raised and other measures taken to curtail private credit, and additional taxes were levied to limit the deficit financing of government outlays. While physical controls, including rationing and extensive price control, were used, as in many other countries, during the war and the early postwar years, there has been greater reliance in recent years on more general monetary and fiscal measures. No doubt some direct controls, including the licensing of new investment and allocation and price regulation in respect of a few commodities (coal, steel, and cement), are operative. With a view to stabilizing food prices, measures were also taken in June 1957 under the Essential Commodities Act to prevent hoarding of certain foodgrains. The choice of techniques of control in the Second Plan indicates, however, that no breaking away from the competitive price system as it operates at present is envisaged; as stated in the Plan document, “A democratic system of planning eschews direct commandeering of resources and it operates mainly through the price mechanism.” As and when needed, both over-all fiscal and monetary disciplines, for regulating economic activity generally and channeling resources in desired directions, as well as specific controls and allocations to regulate activity in particular sectors or subsectors and to limit consumption of individual commodities, would be used.

Role of Private Enterprise

Agriculture, the larger part of industry (both organized and unorganized), and trade are now in the private sector of the Indian economy. Aggregate public expenditures formed less than 15 per cent of national income even in 1956–57, i.e., after the First Plan was completed and the Second Plan commenced. Although the public sector is to be expanded in the coming years, through a larger share in the new investment activity formulated under the Plan, an important role is assigned to the private sector. The extension of the public sector is dictated mainly by the requirements of rapid economic development and the need to build very large power, transport, and industrial projects. The share of public undertakings in the estimated net output of factories is about 3 per cent, and by 1960–61, the end of the Second Plan period, it is expected to rise to only 7 per cent. The Plan document sums up the attitude toward the private sector as follows: “The public sector has to grow—and rapidly—and the private sector has to conform to the requirements of the Plan. There has necessarily to be a great deal of dovetailing between the two sectors, and it is recognized that the private sector has to be given the opportunity and facilities to function effectively within the field allotted to it.” Data on company finances published by the Taxation Enquiry Commission and by the Reserve Bank show a rate of return in private industry averaging about 8 per cent in postwar years, as measured by net profits (after company taxation) in relation to net worth (paid-up capital plus reserves).

There is no discrimination within the private sector in tax or other matters between domestic enterprise and foreign enterprise. Foreign capital investment has been fairly important in certain lines, such as tea plantations, mineral oils and products, cigarettes, jute manufactures, and utilities. According to the Reserve Bank’s Survey of India’s Foreign Liabilities and Assets, aggregate foreign business investment in India, in terms of book value, was Rs 4.8 billion at the end of December 1955; of this total, more than 80 per cent was direct investment, most of it from the United Kingdom. During 1948–55 there was an increase of Rs 1.9 billion in foreign private capital, including reinvested profits of branches and subsidiaries of foreign companies. The conditions governing foreign investments in India, old and new, were broadly set out in the Prime Minister’s statement in Parliament in April 1949, and recently reaffirmed: “Government would expect all undertakings, Indian or foreign, to conform to the general requirements of their industrial policy. Government do not intend to place any restrictions or impose any conditions which are not applicable to similar Indian enterprise. . . . Foreign interests would be permitted to earn profits, subject only to regulations common to all. . . . Government have no intention to place any restriction on withdrawal of foreign capital investments, but remittance facilities would naturally depend on foreign exchange considerations. . . . If and when foreign enterprises are compulsorily acquired, compensation will be paid on a fair and equitable basis.” In pursuance of this basic policy, even when exchange reserves have been run down, the existing facilities for remittance of profits by foreign interests have been maintained. Again, when life insurance business, most of which was in the hands of Indian insurers, was nationalized, the basis of compensation payable to the affected foreign interests was determined in separate consultations with their spokesmen.

The manner in which controls over industry are being administered and the climate in India for private enterprise, especially for foreign enterprise, were summed up in June 1956, i.e., after the Second Plan had commenced, by a British observer, Mr. Stephen Garvin, in a survey for the Federation of British Industries: “The Industries Act, taken together with the control of capital issues, gives the Government the power to regulate the investment of capital in the private sector and ensure the development of private industry along lines desired. Industrialists are brought into close relationship with the official machine and, as in similar circumstances in the United Kingdom, familiar complaints are heard of delay, frustration, and the rest. It must be said, however, that . . . the officials concerned are extremely able and pleasant to deal with, genuinely anxious to help forward any promising venture, and will work hard to see it succeed. . . . The Government of India’s relationship with private enterprise industry, however, is by no means confined to the negative function of control. It has taken a number of important positive steps to stimulate industry in the private sector and to aid private industrial concerns … it is difficult to accuse the Government of India of any neglect of measures to encourage and promote private enterprise in industry. . . . India is prepared to welcome foreign investment on terms which are not unreasonable, have been conscientiously adhered to, and compare well with those enforced by other underdeveloped countries. . . . India has a good record as far as concerns capital repatriation and remittance of profits. There is no rigid insistence on a majority Indian holding in foreign-initiated enterprises; some one hundred per cent subsidiaries of British firms have been welcomed. The employment of Indian personnel in all possible positions is insisted upon, but not at the expense of managerial experience or technical skill, which it is well understood necessarily accompany foreign capital.”3

The main lines of industrial policy were set out by the Government of India in a resolution in April 1948, with particular reference to the relative spheres of the public and private sectors. On the eve of the Second Plan, in April 1956, the policy was restated in a second industrial policy resolution, broadly maintaining continuity of approach. Industries are divided into three categories: those of which the further development is to be the exclusive responsibility of the State; industries which are to be progressively state-owned, and in which the State will take the initiative in setting up new units, but from which private enterprise is not excluded; and industries whose development is left largely to private effort. Even in regard to some of the industries included in the first schedule, e.g., iron and steel, under the Plan, considerable expansion of the existing private units is allowed and is in fact financially and otherwise assisted by the State. Again, nondiscriminatory treatment is assured: “When there exist in the same industry both privately owned and publicly owned units, it would continue to be the policy of the State to give fair and nondiscriminatory treatment to both of them.” Estimates of private investment in organized industry since the inception of the Second Plan, imports of machinery and equipment on private account for replacement as well as for new investment, the relatively large new capital market issues, and the number of licenses granted for the establishment of new undertakings and the expansion of existing undertakings, show that, in the actual implementation of policy, more favorable treatment has been accorded to private industry than was originally envisaged.

Monetary and price trends

The monetary and price history of India has been one of stability. Since India is a member of the sterling area, the value of the rupee vis-à-vis sterling has, with but occasional minor variations, remained stable since before the beginning of the present century. India has always honored its internal and external debt obligations, in regard to principal as well as interest. It is estimated that, at the end of March 1958, the total internal interest-bearing obligations of the Government of India amounted to Rs 40.0 billion, or less than two fifths of the national income, and that total external obligations were Rs 2.1 billion; interest-yielding assets are valued at Rs 34.0 billion, or 80 per cent of aggregate obligations, domestic and foreign. Repayments, in conversion loans and cash, have been made promptly on due dates, and no forced loan has been issued. If government-guaranteed obligations, the sizable authorizations that have been made but have not yet been actually received, and the obligations to the International Monetary Fund are included, but loans repayable in rupees are excluded, India’s total external debt as of March 1958 may be placed at about Rs 6 billion (about US$1.26 billion). The annual charge for servicing this debt is moderate and well within the country’s capacity to pay.

Before the war, India raised considerable sums in London; during the war, mainly because of the large recoverable war expenditures incurred by India, it was possible to repatriate the sterling debt and also to accumulate large balances in sterling. Correspondingly, there was a very large expansion of the money supply, inflationary pressures built up, and prices rose. The general index of wholesale prices averaged 308 for 1947–48 (year ended August 1939 = 100). Industrial machinery and railway rolling stock were depleted during the war, as a result of lack of adequate repairs, maintenance, and replacement; and a considerable backlog of replacement had to be made good after the war. On the whole, the economy emerged from the war weaker than before, with shortages of food and other articles and a multiplicity of controls, and there was probably some decline in real per capita income. The partition of the subcontinent between India and Pakistan at the moment of Independence further disrupted the economy and increased India’s food deficiencies. The relief and rehabilitation of large numbers of displaced persons, the defense of Kashmir, the political and financial integration of the former Indian States, many of which were largely feudal in character, imposed a severe strain on the administrative and financial resources of the country in the years immediately following the attainment of Independence, even before the aftermath of war could be fully dealt with.

By about 1950, these transitional problems had, on the whole, been solved, and latent inflation had also been largely worked off. Meanwhile, in September 1949, when sterling was devalued, the Indian rupee, together with the currencies of many other countries, was at the same time devalued by 30.5 per cent in terms of gold and the U.S. dollar. With a view to cushioning the impact of devaluation, various anti-inflationary measures were taken. By about mid-1950 there were indications that the inflationary stimulus of devaluation had spent itself, but before stability could be consolidated, the Korean war had broken out in June 1950, and the inflationary upsurge associated with this outbreak raised the general index of prices from 396 in June 1950 to a peak of 458 in April 1951. These developments again gave rise to speculative activity, and there was a sharp increase in the demand for funds during the busy season of 1950–51; the increase in the money supply in 1950–51 (when Plan outlays had not yet commenced) was Rs 1.04 billion. Among the policy measures taken to subdue inflationary trends was the raising of the bank rate in November 1951 from 3 per cent to 3½ per cent, together with a change in open market policy, according to which the Reserve Bank was to refrain, save in exceptional circumstances, from buying government securities to meet the seasonal requirements of banks. The new monetary policy and the steps taken by the Government in the fiscal and other fields strengthened the disinflationary forces that were in operation internally and abroad and, after the break in February 1952 in the prices of certain commodities that were the object of speculative interest, there was by mid-March 1952 a sudden and marked fall in the price index to 365, 8 per cent below the pre-Korean level. Some measures were taken to arrest the decline in prices, lest recessionary trends should set in.

This was the general economic and political background at the time the First Five Year Plan was undertaken. The adoption of the Constitution and the political and financial integration of the different parts of the country afforded the political stability that was a prerequisite; the administrative framework had stood the strain of partition and its aftermath; the problem of relief and rehabilitation of displaced persons was reduced to manageable proportions, and the distortions caused by war and partition had in the main been corrected; devaluation, on the whole, proved a corrective to the imbalance in foreign trade; the Korean boom turned out to be short-lived. Once the major problems of transition were out of the way, it was necessary to concentrate efforts on speeding up economic development. There have been vicissitudes from time to time, but, on the whole, since the attainment of Independence the monetary and price situation has caused little concern until recently, and India has been able to combine development with economic stability. As pointed out above, national income in real terms is estimated to have risen by 18.4 per cent during the period of the First Plan. While the money supply with the public rose during this period by 10.4 per cent, to Rs 20.4 billion as at the end of March 1956, the general index of prices declined somewhat. In contrast to a large balance of payments deficit in 1951–52, which was due mainly to emergency food imports, there was an addition to reserves in the next four years.

Developments in 1956 and 1957

With the accelerated tempo of the Plan after 1953–54, substantial and increasing deficits appeared in government accounts. The over-all budgetary deficit of the Government of India (i.e., decline in cash balances plus borrowing from the Reserve Bank) amounted to Rs 1.6 billion in 1955–56 and to Rs 1.9 billion in 1956–57; for 1957–58, the deficit was estimated at Rs 2.8 billion, after taking into account additional tax receipts of Rs 880 million. The revised estimates for 1957–58 place the over-all deficit higher, at Rs 3.8 billion, mainly because of a short-fall in receipts from market loans and small savings and a larger transfer of revenues to State Governments pursuant to the recommendations of the Second Finance Commission; the holdings of treasury bills by the Reserve Bank increased by Rs 4.0 billion between March 29, 1957 and March 28,1958. These deficits, together with the expansion of bank credit to the private sector, had an expansionist effect on the money supply, which increased by Rs 1.23 billion in 1954, Rs 2.15 billion in 1955, and Rs 1.31 billion in 1956. At the end of December 1957, the money supply with the public aggregated Rs 22.75 billion—Rs 15.26 billion in currency and Rs 7.49 billion in deposit money—which was Rs 970 million, or 4.4 per cent, more than at the end of December 1956. Thus within two years the index of money supply (1953 = 100) rose to 120; it rose further to 127 at the end of December 1956 and to 133 in December 1957. The comparatively moderate rise in 1956 and 1957, at a time when deficits in government finances were growing and bank credit was expanding, is attributable to the contractionist influence of the large balance of payments deficits.

Commercial bank credit to the private sector increased in 1956 by 26 per cent. The total credit extended by the scheduled banks, which account for most of India’s banking business, reached Rs 9.33 billion in May 1957 (an amount equal to 76.1 per cent of their net liabilities), against Rs 6.36 billion at the end of 1955 and Rs 7.86 billion at the end of 1956. Thus, in spite of the considerable expansion of deposits, the position of the banks came to be increasingly overextended, and the pressures on their liquidity and monetary stringency in general were intensified. Therefore, while the higher levels of banking activity largely reflected the growth of economic activity and increased imports under the impetus of the Plan, the credit trends were disquieting and had to be corrected. As the strain upon the liquidity of the banks increased, they were obliged to liquidate some of their investments and to resort to increased borrowing from the Reserve Bank. Various measures were taken to deal with the speculative part of the expansion and also generally to restrain bank credit.

Selective credit controls have been systematically applied through Reserve Bank directives to the banks to limit their advances against foodgrains and other commodities, the latest such directive being issued on March 22, 1958. The interest rate mechanism also has been applied to some extent. Under the so-called Bill Market Scheme, the Reserve Bank’s lending rate against the security of eligible commercial paper was raised from 3 per cent to 3¼ per cent on March 1, 1956 and then to 3½ per cent in November 1956; the effective rate was raised to 4 per cent from February 1, 1957, when the stamp duty on usance bills was increased. At the same time, the Reserve Bank increased its lending rate on advances against government securities from 3½ per cent to 4 per cent. The bank rate itself was raised from 3½ per cent to 4 per cent on May 16, 1957. With the simultaneous lowering of the stamp duty on usance bills to ⅕ of 1 per cent, the effective rate for borrowing under the Bill Market Scheme thus became 4⅕ per cent. At the end of June 1957, the Governor of the Reserve Bank drew the attention of banks to certain features of the credit situation and urged cautious lending policies. In August 1957, the banks were requested to reduce aggregate bank credit from the level at that time of Rs 8.8 billion to Rs 8 billion by mid-October 1957.4 The policies of the Reserve Bank of India were directed to what has been termed “controlled expansion,” but gradually emphasis shifted to positive restriction. Credit policy seems to have been effective in controlling credit expansion. On March 28, 1958, scheduled bank credit was Rs 9.6 billion (66.4 per cent of net liabilities), against Rs 9.0 billion (76.6 per cent of net liabilities) a year earlier. Bank credit, which had expanded by 26 per cent in 1956, rose by 9 per cent in 1957. The rise in bank credit during the 1957–58 busy season up to the end of March 1958 was Rs 951 million, compared with a rise of Rs 1,394 million in the corresponding period of the previous busy season.

The re-emergence of inflationary pressures was reflected in a continued rise in prices after the middle of 1955, at first moderate, but substantial in 1956. The general index of wholesale prices (1952–53 = 100) was 112.1 in August 1957, the highest since the upsurge of prices at the time of the outbreak of hostilities in Korea, against 93.5 in December 1955 and 107.9 in December 1956. The food group showed the largest rise, partly as a result of the decline in output of foodgrains after 1953–54. The authorities have taken various specific steps to curb the rise in prices, in addition to the more general disinflationary measures. These steps have included arrangements for larger imports of wheat and rice, especially under the agreements concluded with the United States under U.S. Public Law 480 and with Burma, the establishment of a network of fair price shops for the distribution of food-grains released from stocks, the formation of certain wheat and rice zones, and restrictions on interzonal movements of rice and wheat. As stated above, the Reserve Bank also curtailed bank advances against specified commodities, including foodgrains and cloth. After August 1957, prices declined; this movement, which was in part seasonal and related to the movement of new crops to the market, was also in part a result of the measures taken to check price increases. In December 1957, the general price index averaged 107, and in March 1958 it was 105.4.

Since the inception of the Second Five Year Plan, India’s balance of payments has shown a substantial deficit. The sterling balances of the Reserve Bank of India, the principal part of India’s foreign exchange reserves, declined from Rs 7.46 billion ($1.57 billion) at the end of March 1956 to Rs 2.98 billion ($626 million) at the end of December 1957. The problems which thus arose for the implementation of the Plan are examined in detail in a later part of this paper. With a view to correcting the serious imbalance in the payments position, import policy was made more restrictive from January 1957. At the same time, despite a large reduction in foreign exchange reserves, the money supply continued to rise.

Faced with a serious decline in foreign exchange reserves and rising domestic prices, as well as with the prospect of larger Plan outlays and an increased measure of deficit financing in 1957–58, determined and effective steps had to be taken immediately if the recrudescence of serious inflationary pressures was to be curbed. The policies adopted included the credit measures referred to above; a substantial increase in taxation; measures to stabilize food prices and to prevent speculative hoarding of stocks; various steps to conserve foreign exchange; and, above all, readjustment of Plan outlays. On the whole, it appears that by the end of 1957 inflationary pressures in the Indian economy were contained. The current trends in the economy are indicated in Table 4. However, as stated in the economic survey presented with the 1958–59 budget, despite the recent decline in prices and the relative improvement in monetary and credit trends, “the economic situation is basically one in which there is a continuous pull, on balance, in the direction of inflation. There also remains a sizable gap in the foreign exchange resources required for the Plan. For maintaining price stability as well as for achieving a better balance in external account, an increase in savings, a continuance of fiscal and monetary discipline and of the efforts to secure external assistance, and an adjustment of developmental programs so as to bring them into a more even relationship with available resources are called for.”

Table 4.

Selected Economic Indicators in India

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Sources: Reserve Bank of India, Report on Currency and Finance, 1956–57. Bulletin, December 1957, January 1958, and March 1958, and Weekly Statistical Supplement to the Bulletin, April 5, 1958 (Bombay); International Financial Statistics (Washington), April 1958; Government of India, Budget of the Central Government for 1958–59 (New Delhi); and IMF staff estimates.

Dollar balances of the Government of India and banks amount to about $75 million.

Budget data are for fiscal years (beginning April 1) 1953–54, 1955–56, 1956–57, 1957–58, and 1958–59.

Excludes receipts from sales of treasury bills.

The Five Year Plans: Formulation and Progress

Planning procedures

Pioneering work in the discussion of planning was done by the National Planning Committee set up by the Indian National Congress before World War II. Immediately after the war, a Planning Department was set up at the Centre, and postwar reconstruction schemes began to be drawn up by the Centre and the Provinces. What came to be known as the Bombay Plan was advanced by a small group of prominent industrialists in the private sector; this envisaged a development outlay of Rs 100 billion over a period of 15 years, and it evoked wide interest. Even before the First Five Year Plan was inaugurated, blueprints of various major projects, including multipurpose schemes and steel plants, were under study, and some important projects had been commenced. The Planning Commission was set up in March 1950, by a resolution of the Government, to “make an assessment of the material, capital, and human resources of the country, including technical personnel, and investigate the possibilities of augmenting such of these resources as are found to be deficient in relation to the nation’s requirements; formulate a Plan for the most effective and balanced utilization of the country’s resources; on a determination of priorities, define the stages in which the Plan should be carried out and propose the allocation of resources for the due completion of each stage; indicate the factors which are tending to retard economic development, and determine the conditions which, in view of the current social and political situation, should be established for the successful execution of the Plan; determine the nature of the machinery which will be necessary for securing the successful implementation of each stage of the Plan in all its aspects; appraise from time to time the progress achieved in the execution of each stage of the Plan and recommend the adjustments of policy and measures that such appraisal may show to be necessary; and make such interim or ancillary recommendations as appear to it to be appropriate either for facilitating the discharge of the duties assigned to it, or on a consideration of the prevailing economic conditions, current policies, measures, and development programs, or on an examination of such specific problems as may be referred to it for advice by Central or State Governments.”

A draft outline of the First Five Year Plan was presented to the country in July 1951, as a document “for the widest possible public discussion.” The views expressed by various interests—industry, commerce, labor, farmers, municipal committees, and other local authorities—were taken into account, and, after further examination in Parliament, state legislatures, and elsewhere, the First Plan, covering the period April 1951-March 1956, was finalized in December 1952. Preliminary work on the Second Five Year Plan commenced after April 1954, when the Planning Commission had requested state governments to arrange for the preparation of district and village programs, especially in agriculture, rural industries, and cooperation, as “the district is still the pivot of the whole structure of planning [and] . . . local planning is the essential means for securing the maximum possible participation and voluntary effort.” By March 1955 a “plan-frame” was available, which, together with the suggestions by the Planning Commission’s panel of economists, was generally approved by the National Development Council in May 1955. A Draft Outline of the Plan was published in February 1956 for general information, and the Second Plan, covering the period April 1956-March 1961, was finalized in May 1956.

The authorities and the public at the state and local levels have been given a considerable measure of initiative in formulating regional and local schemes of development. The various schemes are coordinated by the Planning Commission and dovetailed into a broad framework which also incorporates the major national schemes, relating to the development of power, transport, and industry, which are formulated largely by central ministries; in the process, the whole program is pruned to a magnitude which can be accommodated broadly within the estimated resources. At various stages, public discussion of the Plan—of resources and outlays, structure, and the order of priorities—is facilitated. Finally, while the central departments and agencies are responsible for the execution of those projects which are in the central sphere, each State has its part in the Plan, and local bodies actively participate in the implementation of local schemes. The whole program of community development is in the local sphere, and its success depends mainly on the enthusiasm and response of the people. Thus, Indian planning is not too centralized and is not imposed from above, but seeks to release the dynamic energies of the people by stressing regional and local development. The National Development Council, which was set up in August 1952, and which includes the Prime Minister of India, the Chief Ministers of all the States, and members of the Central Cabinet and of the Planning Commission, is the apex body that makes major policy changes in regard to the Plan and ensures that the Plan is implemented throughout the country as a single, coordinated whole.

Objectives of planning

The main long-term objectives of planning in India are to double real national output in less than 20 years (between 1950 and 1968), and to double per capita real income in less than 25 years (between 1950 and 1974). The broad assumptions underlying these projections are that the population will increase at the rate of 12–14 per cent per decade; that the incremental capital-output ratio will be about 2:1 in the initial years and rise to 3.5:1 in the later stages, as a shift toward a more capital-intensive pattern takes place, with a time lag of about 2 years between investment and output; that the investment rate (the proportion of total net investment to national income) will rise steadily from an estimated 5 per cent in 1950 to 7 per cent in 1955, 11 per cent in 1960, 14 per cent in 1965, and 16–17 per cent by 1970, and remain at that level thereafter. When the First Plan was drawn up, the objectives for the five-year period 1951–52 to 1955–56 were set at modest levels, so as to minimize hardships in the initial stage of planning; in addition, although the consequences of war and partition had already been largely dealt with, conditions were still somewhat unsettled. National income was expected to rise by 11–12 per cent during this five-year period. In the event, though actual outlays fell short of estimated Plan outlays, national income is estimated to have risen by 18.4 per cent, per capita income by 11.1 per cent, and per capita consumer expenditure by 9 per cent.

The success of the First Plan, under conditions of economic and financial stability, prompted the adoption of more ambitious goals and a bolder approach for the Second Five Year Plan. The main objectives of the Second Plan are a sizable increase, of the order of 25 per cent, in national income so as to raise living standards; rapid industrialization with emphasis on the development of basic and heavy industries; a large expansion of employment opportunities; and reduction of inequalities in income and wealth and a more even distribution of economic power. In more general terms, the Plan seeks to rebuild rural India, to lay the foundations of industrial progress on a wide front, and to advance toward a socialist pattern of society. The socialist pattern is not conceived in a rigid or dogmatic way; its core lies essentially in rapid development and greater equality proceeding side by side. It is postulated that social gain, rather than private profit, should be the determining criterion, with the emphasis on the attainment of positive goals rather than on negative restrictions. The reduction of inequalities should be attained by raising incomes at the lower levels rather than by cutting down other incomes; this objective can be attained only as the end-result of the totality of measures and institutional changes envisaged in the Plan. This includes the changed pattern of investment, the direction given to economic activity by government action, expansion of social services, institutional changes in land ownership and management, regulation of corporations, growth of the cooperative sector, and fiscal measures; a ceiling on incomes is the end-product of all these measures rather than the beginning of a process to be effected through legislation.

With the assumed increase in population of 12.5 per cent during the decade 1951–60, a rise in national income of 25 per cent over five years gives an annual growth rate of 4.5 per cent, and an increase of 18 per cent in per capita income over the five years. These rates of growth require that the proportion of current income devoted to capital formation should rise from 7 per cent in 1955–56 to 10 per cent at the end of the Plan period (1960–61); this, together with the projected inflow of resources from abroad, would raise net investment as a proportion of national income from 7.3 per cent in 1955–56 to 10.7 per cent in 1960–61; the capital-output ratio itself works out at 2.3:1. As for the employment objectives of the Plan, the increase and diversification of employment opportunities are to be of such an order and character as would at least arrest further deterioration in the unemployment situation. Investment programs under the Second Plan are expected to provide additional employment for about 8 million workers, including 2.1 million in construction, 0.8 million in industry and mining, 0.5 million in cottage and small-scale industry,5 and 2.7 million in trade, commerce, and professions. In agriculture, with increased irrigation and other facilities, additional employment for about 2 million persons is expected, as well as some relief in the conditions of underemployment. However, in spite of the considerable increase in total investment in the Second Plan period and attempts to promote labor-intensive schemes, the additional employment potential of the Second Plan is not much larger than that of the First. A partial explanation of this fact is to be found in the addition of some employment-oriented programs to the First Plan as it proceeded. Furthermore, while the role of small-scale industries has been much discussed and an attempt has been made to foster labor-intensive schemes, the assumption that industrialization should now be the core of development in India means that, on the whole, the Second Plan is more capital-intensive than the First. The output of factory establishments is expected to rise by 64 per cent during 1956–61, but that of small enterprises by only 30 per cent. While the share of small enterprises in the national product is to be almost the same in 1960–61 (8 per cent) as in 1955–56, that of large-scale industry is to increase from 7.8 per cent to 10 per cent. A main part of the expected increase in employment under the Second Plan is in construction, which is of a temporary character. While such activity continues to expand, its temporary character presents no problem; but after construction work has ceased, some time will elapse before the working force is absorbed in other sectors and employment becomes stabilized—all of which only underlines the difficult nature of the employment problem in the Indian economy.6

Investment and output: restraint on consumption

Table 5, which shows the trends in national income and investment between 1950–51 and 1955–56, the estimates for the Second Plan period, and projections for a longer perspective, makes possible a closer investigation of the targets of the Second Plan, and especially of the savings rates and capital-output ratios postulated in the Plan. The two objectives, viz., the rate of increase in investment and the growth of national income, cannot both be targets; the latter is but an estimate of the average rise in national product based on the magnitude and pattern of the proposed investment. Investment alone constitutes the target. Moreover, proposed outlays and estimates of resources have to be considered in financial as well as real terms and, therefore, at (assumed) constant prices. If prices should rise, both would have to be revised. In considering the (financial) resources budget, estimates of receipts from taxes and borrowings are made without regard to the impact of deficit financing and price increases. Briefly, the problem is to step up the rate of investment in the economy, i.e., to direct a larger proportion of national income into investment, the static position of which largely explains the prolonged economic stagnation in the past. If the ratio of investment to national income is to rise, the ratio of consumption to income must fall; as long as national income is rising, this can be effected by diverting a significant and increasing proportion of additional income to investment. There would then be no actual reduction in consumption but only restraint on the increase in consumption for the community as a whole; it is contemplated that for particular groups there should be some decline, and superfluous (or conspicuous) consumption has to be eliminated. The problem is somewhat analogous to that of financing the war effort; latent inflation can be the means in both cases. However, while war effort is once-for-all, development effort is a continuous process extending over 15–20 years. On the other hand, in contrast to war conditions, real national income expands as development effort is being made, and there is a definite prospect of a subsequent rise in consumption. But in the initial phase, when the basic investments are being built, the effort involves considerable strain. The restraint of consumption could be orderly and equitable—or haphazard and inequitable; it would be the former if a plan for resources is adopted ex ante, corresponding to the plan of expenditures, and it would be the latter if the easy but slippery road of inflation is followed. Therefore, as the Plan proceeds, rigorous control measures for the restriction of consumption may be necessary. As set forth in the Plan document, however, the degree of restraint on consumption envisaged under the Plan is not very onerous, given the rate of growth in national income and the savings ratio to be attained. The marginal rate of savings is about 22 per cent, which would raise the domestic savings rate from 7 per cent of national income to 9.7 per cent. In a community where current consumption is low relative to consumption needs, the choice between current consumption and future consumption, which capital formation involves, presents great difficulties, but it cannot be evaded.

Table 5.

Actual and Projected National Income, Investment, and Consumption in India, at 1952–53 Prices

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Source: Planning Commission, Second Five Year Plan (New Delhi, 1956).

In the Indian Plan, simplified aggregate growth models are used in projecting rates of growth; some preliminary work has also been done with input-output tables, and a few commodity balances have been set up in the Plan frame. However, these were not applied extensively in the formulation of the Plan, and the capital-output ratios used—admittedly a rough way of expressing average productivity of new capital, taking the various sectors together—are rather conjectural. The available data pertaining to actual new investment and value added in organized industry in India and in other countries suggest, when account is taken of the emphasis on heavy and basic industries in the Indian Plan, that the capital-output ratio in the sector of organized industry may actually be less favorable than is assumed in the Plan. When the First Plan was presented, a capital-output ratio of 3:1 was assumed for the economy as a whole; it actually turned out to be 1.8:1. The bias of both the economy and the Plan in favor of agriculture—a sector in which better but simple tools, combined with improved methods and attitudes in cultivation, yield substantial returns—and the sizable nonmonetary investment in the rural economy which takes place all the time but is not included in Plan estimates of investment,7 are two factors that render the capital-output ratio favorable in India and in other, similarly situated countries, compared with the more generally observed ratios of 3:1 or 4:1 in industrialized countries. During the First Plan period, two additional factors also influenced the outcome: a part of the rise in industrial output was attributable to utilization of the idle capacity available in several industries at the commencement of the Plan, and the succession of good monsoons partly accounted for the record agricultural crops of 1953–54. These were special and temporary factors. Especially if the agricultural sector should not again show a ratio something like 1:1, the shift in the pattern of investment in the Second Plan suggests that the assumption of a 2.3:1 ratio for the whole economy may prove to be somewhat optimistic.

Size and Structure of the Plans

The total outlay proposed in the public sector under the First Plan was Rs 23.56 billion; actual outlay was about Rs 19.60 billion. Total outlay in the public sector proposed under the Second Plan is estimated at Rs 48 billion.8 This does not include direct improvements made by farmers in agriculture or other forms of nonmonetary investment, such as contributions in kind (labor and materials) for executing local development schemes. But in addition to net investment (for building up productive assets), it includes what may be termed current developmental expenditure. Of the actual outlays in the public sector under the First Plan, about Rs 16 billion represented net investment; net investment during the Second Plan period is placed at Rs 38 billion. Total monetary investment during 1951–52 to 1955–56 was approximately Rs 31 billion, divided more or less equally between the public and private sectors; during 1956–57 to 1960–61, it is expected to aggregate Rs 62 billion, of which about 60 per cent would be in the public sector. The distribution of the Plan outlay in the public sector, by categories (Table 6), shows the shift in priorities under the Second Plan, with greater emphasis on industry and transport. The public investment program is concentrated largely on the provision of overhead capital, or the economic infrastructure, such as transport, power and irrigation, and basic industry, which is necessary for further sustained growth in production and cannot be adequately undertaken by the private sector. The proposed Plan outlay of Rs 48 billion in the public sector under the Second Plan is divided between investment and current outlay as shown in Table 7.

Table 6.

Distribution of India’s Plan Outlay in the Public Sector, by Categories

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Sources: Planning Commission, Second Five Year Plan (New Delhi, 1956), and Review of the First Five Year Plan (New Delhi, 1957).
Table 7.

Distribution of Investment and Current Outlay in the Public Sector Under India’s Second Five Year Plan

(In billions of rupees)

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Source: Planning Commission, Second Five Year Plan (New Delhi, 1956).

For industry and mining, the outlay proposed under the Second Plan is eight or nine times the actual outlay of the First Plan. The development of coal resources is assigned a high priority. The target for coal output in 1960 is 60 million tons, an increase of 22 million tons over 1955, of which 12 million tons is to be from collieries in the public sector. The industrial priorities laid down in the Second Plan (for both public and private sectors) are increased production of iron and steel and of heavy chemicals; development of heavy engineering and machine-building industries; expansion of capacity in respect of other producer goods; modernization and re-equipment of existing large-scale industries, such as cotton and jute textiles and sugar; fuller utilization of existing capacity; expansion of capacity for consumer goods, with the requirements of common production programs and the production targets for the decentralized sector of industry being kept in view. The expansion of the steel industry has the highest priority, and heavy engineering industries (including structural fabrication and machine tools) have a priority second only to steel. Three new steel plants, each with a finished steel capacity of about 0.7–0.8 million tons and costing in all Rs 3.5 billion (since revised to Rs 5 billion), are to be set up in the public sector; simultaneously, the existing steel mills in the private sector are to be expanded.9

The figures on proposed investment in large-scale industries (Table 8) indicate that the private sector has an equal share with the public sector, that public sector investment is confined largely to heavy and basic industries, but that even there the private sector has no small part.

Table 8.

Proposed Investment in Large-Scale Industries Under India’s Second Five Year Plan

(In billions of rupees)

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Source: Planning Commission, Second Five Year Plan (New Delhi, 1956).

Including new investments of the National Industrial Development Corporation.

Partly because of the distribution of raw materials and other resources, organized industry in India is unevenly dispersed. On the basis of employment figures, it may be stated broadly that 25–30 per cent of aggregate industrial activity is concentrated in the State of Bombay, over 20 per cent in the State of Bengal, and 10–12 per cent in the State of Madras; the other 40 per cent is distributed over the rest of the country, which accounts for 67 per cent of the population and 78 per cent of the area. The program of industrialization envisages more balanced regional development. This is being assisted through such devices as uniform prices of steel, pig iron, and cement at all railheads, made possible by freight pool arrangements, and the establishment of industrial estates which enable medium-sized and small-scale industrial units to have the advantages of common services and facilities. The increasing availability of hydroelectric power for industrial purposes also makes the dispersion of industry easier. The proposed large-scale development of lignite deposits in South India is another important project for the same purpose.

The allocation of capital for transport and communications has been increased from 24 per cent of the total in the First Plan to 29 per cent in the Second; in both Plans, railways account for the larger part of this allocation, i.e., 11 per cent of the total in the First Plan and 19 per cent in the Second. The Indian railway system is the fourth largest in the world, comprising nearly 36,000 route miles. The railway program under the First Plan was carried out as scheduled, but at the end of the Plan period there were still arrears of replacement; of a total stock on the line in 1956 of 9,260 locomotives, 24,780 coaches, and 266,000 wagons, as many as 2,810 locomotives, 6,300 coaches, and 49,570 wagons were over age. Of the broad gauge stock in 1956, 32 per cent of the locomotives and 16.5 per cent of the wagons were over age, and these percentages were higher than in 1951. After taking into account the physical targets set in agriculture and industry, particularly in regard to coal and steel, additional goods traffic originating during the Second Plan period is estimated at over 60 million tons, raising the total goods traffic to be handled by 1960–61 to 181 million tons; but, in view of the limited resources that are available, provision is made in the Plan for additional carrying capacity of only 42 million tons. The cost of the net investment program of the railways is placed at Rs 9 billion, of which the railways themselves are expected to provide Rs 1.50 billion. Including the rehabilitation costs (Rs 2.25 billion) to be met from railway earnings, the total railway program is placed at Rs 11.25 billion, of which Rs 4.25 billion is the estimated foreign exchange component.

While the outlay on agriculture and irrigation, like that on every other category, is larger under the Second Plan, its share in the total has been reduced from 26.5 per cent in the First Plan to 15.0 per cent in the Second Plan. In the Plan frame, it may be recalled, emphasis was placed almost exclusively on rapid industrialization, particularly on the development of basic industries. The final version of the Plan stresses also the rebuilding of rural India, which is not, however, correspondingly reflected in the allocations. Agricultural targets have been revised since the Plan was formulated; aggregate agricultural output is to show a 27 per cent rise, and foodgrain production a rise of 24 per cent, against 18 per cent and 16 per cent, respectively, envisaged in the Plan estimates. However, these increases are to be effected within the original financial allocation, through greater use of manures and fertilizers, widespread distribution of quality seed, extension of the Japanese method of paddy cultivation—on the whole, through improved techniques and better irrigation facilities. For instance, the Japanese method of rice cultivation is to be extended considerably, to cover over 8 million acres by 1960.10 If the rising demand resulting from development expenditures, especially from rapid industrialization, is not to lead to inflationary conditions, such an increase in food supplies is essential. But it is doubtful that these enlarged output targets can be attained in the agricultural sector under the present scheme of allocation. To some extent, their attainment may be rendered possible by the fact that industrialization itself gradually changes the technical coefficients in agriculture.

Progress under First Plan and output targets under Second Plan

Of the actual development outlay of Rs 19.60 billion under the First Plan, 15 per cent was spent on agriculture and community development, 29 per cent on irrigation and power, 5 per cent on industry and mining, 27 per cent on transport and communications, 21 per cent on social services, and 3 per cent for other purposes. The resources pattern for this outlay was as follows: revenue surpluses and internal borrowing Rs 12.6 billion (taxation and surpluses of railways Rs 7.51 billion, market loans Rs 2.05 billion, small savings and other unfunded debt Rs 3.04 billion), external assistance Rs 1.9 billion, other capital receipts Rs 0.9 billion, and deficit finance Rs 4.2 billion. The over-all result of a rise of 18 per cent in national product, or a growth rate of 3.4 per cent per annum, has already been mentioned; the rise in 1953–54 was as high as 6 per cent, mainly because of good agricultural crops; in 1955–56 the increase was less than 2 per cent. The outlays on the development of economic overhead proposed in the First Plan were modest; in physical terms, actual achievement was 85–90 per cent of the targets postulated.

The general index of industrial production (1951 = 100) increased steadily to 104 in 1952, 106 in 1953, 113 in 1954, 122 in 1955, and 133 in 1956; the rise in industrial output during the five years of the Plan was about 30 per cent. On the basis of data available for January-November, the industrial index appears to have risen in 1957 by about 3 per cent. The general index of agricultural production rose by 20 per cent during the First Plan period; the index (1949–50 = 100) fell to 95.6 in 1950–51, rose moderately in the next two years, increased sharply to 114 in 1953–54, and in the next two years showed only a small increase to 116. However, total production of foodgrains, which had reached the record level of 68.7 million tons in 1953–54, declined in the following two years. But in 1956–57, a good crop year, foodgrain production rose again to 68.7 million tons, and the general index of agricultural production was 123. Because of drought conditions in certain parts of the country, a shortfall is expected in 1957–58, particularly in production of rice.

For the public and private sectors taken together, actual gains in output of some of the more important products under the First Plan (compared with original targets), and the targets of output to be attained by 1960–61, under the Second Plan, are shown in Table 9. Since the Second Plan was formulated, the targets for certain agricultural commodities have been revised upward. For foodgrains, the new target is 80.5 million tons, an increase of 24 per cent over output in 1955–56; for cotton, 6.5 million bales; and for jute, 5.5 million bales. For all commodities, the revised target indicates an increase of 27 per cent, instead of the original 18 per cent, over 1955–56 output. In November 1957, however, the Foodgrains Enquiry Committee stated that the record at that time suggested that actual achievement might be only 67 per cent of the revised targets, and recommended continued imports of food-grains on the substantial scale of 2–3 million tons a year. In these circumstances, the expansion of food production obviously has a high priority and the Indian authorities are giving considerable attention to this problem.

Table 9.

Main Targets of Production and Development in India Under the Five Year Plans

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Sources: Planning Commission, The First Year Plan, Second Five Year Plan, and Review of the First Five Year Plan (New Delhi, 1952, 1956, and 1957).

Dots indicate that data are not available.

Relates to the year 1949–50.

Figures relate to calendar years.

Includes handloom cloth.

Rated capacity to be reached by 1956–57 when the two new refineries were expected to be in full operation.

Approximate; the figure for 1954–55 was 136,000.

Investment in the private sector

The industrial investment program in the private sector for the period of the Second Plan is estimated on the basis of the schemes formulated for the main categories of private industry. The estimates for construction, agriculture, and rural industries are only broad approximations. A sizable increase in stocks is to be expected, especially with the growth in industrial activity, and substantial provision is therefore made for investment in working capital. Residential construction is included in investment, but only in the urban sector, as rural housing falls largely in the nonmonetary sector. The probable level of net investment in the private sector during the period 1956–57 to 1960–61 is placed at Rs 24 billion; this includes organized industry and mining, Rs 5.75 billion; construction, Rs 10 billion; plantations, electricity, and transport, Rs 1.25 billion; agriculture and small-scale rural industries, Rs 3 billion; and stocks, Rs 4 billion.

It is difficult to enumerate all the sources of savings for the private sector, since only a part of the total savings utilized in this sector passes through institutional agencies, and savings which may be termed “direct,” i.e., savings of the persons undertaking the investment or the savings of their friends and relatives, play a prominent part. However, if certain assumptions are made, an estimate is possible of the resources for the organized sector of private industry. In view of the fairly high rate of investment already achieved in organized industries and the increasing strength of the capital market, it should not be difficult to raise the resources required for fixed investment. The Government can assist in the fulfillment of the programs in this sector partly by eliminating unplanned investment through control of capital issues and licensing of industries, and partly through tax concessions and adjustments and financial assistance through the corporations set up for the purpose.

A total outlay of Rs 7.20 billion is envisaged for industrial development in the private sector (including the National Industrial Development Corporation program and excluding mining, electricity generation and distribution, plantations, and small-scale industries); this total includes Rs 5.70 billion for new investments and Rs 1.50 billion for replacements and modernization. After the exclusion of Rs 550 million to be provided by the National Industrial Development Corporation, financial requirements amount to Rs 6.65 billion; estimates of resources available for the private sector amount to Rs 6.20 billion (Table 10).

Table 10.

Estimates of Resources Available for Industrial Development in the PrivateSector Under India’s Five Year Plans

(In millions of rupees)

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Source: Planning Commission, Second Five Year Plan (New Delhi, 1956).

Revised costs of the Plan

While no precise revision of the financial costs of the Plan has been made, and no official estimate of the total outlay involved is available, it became evident during 1957 that the total cost of the Plan in the public sector was likely to exceed Rs 55 billion, if the physical targets postulated under the Plan were to be realized. The main items for which costs will particularly exceed the original estimates are railways, the three steel plants, other industries, power schemes, and other projects in respect of which the import content is large. If current trends in production are maintained and transport is not to become a serious bottleneck, additional freight-carrying capacity of 60 million tons is the minimum that has to be provided for; the actual allocation for railway development would secure a smaller addition than this. The cost of adding further to freight capacity is placed at over Rs 1 billion, while the general increase in costs amounts to another Rs 1 billion. Even at the time the Plan was finalized, the inadequacy of allocations for transport in relation to production targets was underlined. The revised estimate of the total cost of the steel plants (including the cost of townships and training programs) is reported to be Rs 4.95 billion, against an original provision of Rs 3.50 billion, which itself was an underestimate to the extent of Rs 500 million. Of the rise in the total costs of the Plan, a large part reflects the increases in foreign exchange requirements. The main factors responsible for the substantial rise are that the original cost figures, particularly in respect of major schemes like steel plants and power and irrigation projects, have proved to be underestimates; and prices in general, and particularly of imports of capital goods and intermediate goods, have risen. Some physical additions have been made to the Plan by enlarging schemes already accepted, with a view to making them more rounded, or by including new schemes like heavy machine-building; such increases have, however, been few and are only a contributing factor to the increases in costs.

Estimates for financing the Plan

According to the original estimates for financing the Plan, shown in Table 11, the budgetary resources to be raised through taxation, borrowing, and other receipts amounted to Rs 28.0 billion; this includes the gap of Rs 4 billion which, it was decided, should be met mostly by additional taxation. The estimate of the surplus of ordinary revenues over expenditures outside the Plan is based on the assumption that total revenue maintains a uniform proportion to a rising national income; however, this cannot be expected to happen automatically. As the Taxation Enquiry Commission observed, it has been the experience for years that additional tax effort on the part of the Central and State Governments has been necessary merely to maintain the ratio of public revenue to national income. The ratio of tax revenue to national income in India has remained virtually stationary at about 7.5 per cent until recently. This is because collections from certain taxes (e.g., taxes on land and specific indirect taxes) have remained rather inelastic; there is a lag between the rise in incomes (in real or money terms) and the consequent rise in tax yields, even of direct taxes related to income; and there is leakage of part of the revenue through evasion. The far-reaching tax changes in 1956 and 1957 have resulted in an increase in the ratio of tax revenue to national income from 7.4 per cent in 1955–56 to an estimated 8.3 per cent in 1957–58. The ratio of total public revenue to national income rose from 9.7 per cent to an estimated 10.7 per cent. Moreover, in estimating the current surplus, provision was made for only minimum increases in expenditures under nondevelopment headings, such as defense and administration; revised estimates for 1957–58 and budget estimates for 1958–59 show sizable increases in non-Plan expenditures. Administrative costs, including the costs of reorganizing the States broadly on a linguistic basis, as well as expenditure on relief and rehabilitation of displaced persons coming into West Bengal from East Pakistan, have been higher than expected. Defense costs, as noted earlier, have risen; the rise of Rs 600 million in the defense budget in 1957–58 and of another Rs 120 million in 1958–59 would correspond to a total addition of Rs 2.8 billion to non-Plan expenditure over the Plan period. Thus, at 1955–56 rates of taxation, the current revenue surplus available for Plan expenditures would be considerably less than was estimated.

Table 11.

Original Estimates for Financing India’s Second Five Year Plan

(In billions of rupees)

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Source: Planning Commission, Second Five Year Plan (New Delhi, 1956).

fresh taxation

In estimating the yield from additional taxation at Rs 4.5 billion (Table 11), the recommendations of the Taxation Enquiry Commission were taken into account, and it was assumed that steps would be taken to implement them as expeditiously as possible; the Central and State Governments were expected to raise this sum between them in equal amounts. Keeping in view the objective that “the maximum practicable rate of investment in the public sector should be attained, consistent with maintaining and strengthening the incentives to the private sector to step up its own rate of investment,” the Taxation Enquiry Commission had made detailed recommendations in the central, state, and local spheres of taxation which involved a deepening and widening of the tax system, as well as certain incentive tax reliefs. Broadly, their conclusion was that a substantial increase in total tax revenue was both necessary and feasible, mainly through higher excise duties, a net increase in income taxation, surcharges on land revenue, betterment levies, and wider coverage of sales taxation. With a view to covering the financial requirements of the Second Plan, which are much larger than was assumed by the Taxation Enquiry Commission, and to avoiding the dangers of excessive deficit financing, the target for additional taxation in the Plan estimates was in fact raised to Rs 8.5 billion, so as to cover the gap of Rs 4 billion also. Taxation has to be supplemented by other devices, such as appropriate pricing policies for certain public enterprises or fiscal monopolies and economies in both Plan and non-Plan expenditures. But it is unlikely that any substantial resources can be obtained from these other sources.

The low ratio of taxation to national product in India is an indicator of both the difficulties and the possibilities of tax increases. Despite the low per capita income in the agricultural sector, a significant contribution to any development program must come from agriculture, which accounts for over 45 per cent of the national product, and indeed generally from the lower income groups. Such imposts become more acceptable when the higher income groups and propertied classes are required at the same time to assume a large share of the increased tax burden. Such additional taxation reduces the scale of deficit financing. It is necessary, therefore, to step up taxation to the limits of tolerance. In adopting such a positive role for taxation, the basis of policy in a country such as India, with a federal government structure, has to be laid by the federal government. It therefore devolves mainly on the Central Government to give effect to taxation policy, although some adaptation by the state and local governments is also necessary. Of the tax measures taken in 1956, the reintroduction of the capital gains tax and an increase in the excise duty on cloth were the most important. In 1957, far-reaching tax changes were made, estimated to yield over Rs 1 billion a year and Rs 880 million in fiscal 1957–58. For the whole Plan period, the aggregate revenue from the tax changes made in 1956 and 1957 may be placed at about Rs 8.0–8.5 billion. Together with the normal increase in revenue as incomes rise, the tax effort expected of the States, and further taxation that may be levied by the Centre, total revenue surpluses available for Plan purposes may be placed at about Rs 13 billion.

The substantial tax changes introduced in 1957 cover both direct and indirect taxes under almost every major heading, and include two new levies—on wealth and on expenditure. In announcing these changes, the Finance Minister said that he was in effect outlining the tax structure for the period of the Second Plan, and that for the rest of the period there would be only relatively small adjustments. Certain structural changes have been made in the direct tax sector which are expected, in the course of time, to make possible a progressive increase in the ratio of public revenue to national income. The Finance Minister stated that the main objectives of tax policy are a sizable addition to public revenue, provision of incentives for higher earnings and savings, restraint of consumption over a fairly wide field so as to keep domestic inflationary pressures in check and release larger resources for investment, and initiation of such changes in the tax structure as would render tax receipts increasingly responsive to rising incomes. The tax changes proposed for 1958–59 are modest and include the levy of a gift tax, reduction in the excise duty on cotton textiles, abolition of the company compulsory deposits scheme, and exemption of foreign nationals residing in India from payment of the wealth tax on their foreign assets. Thus, the major reorientation of the tax structure that was effected in 1956 and 1957 remains. When taxation is thus decisively stepped up, and the tax net is widened to cover sectors which hitherto have not been reached or have been only lightly affected, and when new levies related to the valuation of assets on a current basis and scrutiny of savings in all forms are introduced, administration becomes the crux of the effectiveness of the tax system, especially as the personnel resources of the machinery for assessing and collecting taxes are already under strain. While there are administrative and other problems both in operating the new taxes and in effectively enforcing the old taxes whose incidence has been substantially increased, this major tax effort reflects the determination of the Indian authorities to subdue the emerging inflationary pressures in the economy and to raise resources for the Plan.

Loans and Small Savings

The estimate of Rs 7 billion for loans from the public implies that average annual receipts from this source will be about 40 per cent higher than they have been recently. Especially in the context of the brisk demand for funds in the private sector, the task of mobilizing a net amount of Rs 7 billion (i.e., allowing for loans of Rs 4.30 billion due for repayment) cannot be regarded as easy. A substantial increase in small savings will also be required if the target of Rs 1 billion a year is to be realized. On the whole, on all the available evidence, it seems prudent not to revise upward the original Plan estimates of borrowing; in fact, there may be a shortfall.

A steady improvement in domestic savings in recent years is shown by the experience of new private issues in the capital market and of government loans. The total of new private issues, in which are included all issues of not less than Rs 10 million, amounted to Rs 200 million in the period July 1955-June 1956, compared with Rs 170 million in July 1954-June 1955 and much less in earlier years; the total in 1956–57 seems to have been still larger, about Rs 400 million. For government borrowings, on the whole, there has been an even greater improvement in net receipts. Planned development has itself established a direct and meaningful link between government borrowings and public investments; fuller coordination has been developed between central and state borrowing programs, in timing as well as in the terms offered; with the subsidence of inflationary conditions and restoration of stability in the money and capital markets, confidence has increasingly revived. For the five years 1946–47 to 1950–51, net repayment of government loans amounted to Rs 210 million. During 1951–52 to 1955–56, net receipts amounted to Rs 1.77 billion. These figures do not accurately measure the improvement, for there was a net repayment of Rs 250 million in 1951–52 and a net receipt of only Rs 130 million in 1952–53. In 1953–54 there was a small net repayment, while in 1954–55 net receipts were Rs 1.11 billion and in 1955–56, Rs 820 million. With adjustments for transactions in the investment accounts of the Reserve Bank of India and of Central and State Governments, the net absorption of securities by the market during this period was even larger, Rs 2.5 billion. The prospect for market loans in the Second Plan period was viewed in the light of this improvement.

Net borrowing by the Central and State Governments of Rs 1.41 billion was apparently equal in 1956–57 to the average expected for the Plan period. However, when allowance is made for the amount taken up by the Reserve Bank of India, there was little rise in 1956–57 over the last two years of the First Plan, despite the entry of as many as 15 State Governments into the market and a reorientation of the Central Government’s borrowing techniques, whereby three loans of differing maturities were bunched together to meet different investor preferences. The budget estimate of net market borrowings by the Central Government in 1957–58 was Rs 680 million. Two loans for a total of Rs 1 billion were first issued: 3¾ per cent National Plan Bonds, Fourth Series, with an issue price of Rs 99.50, and repayable at par on August 1, 1967; and a 4 per cent Loan 1972, issued at Rs 100, and repayable at par on August 1, 1972. Subscriptions were received either in cash or by converting the 3 per cent Victory Loan repayable in 1957, or the 3 per cent Loan repayable in 1958. Total subscriptions amounted to Rs 1.06 billion, including conversions of Rs 0.45 billion. Another loan of Rs 300 million, in 3¼ per cent bonds, 1962, was issued in December 1957. State Governments were dissuaded from entering the market in 1957–58; only two State Governments issued loans, for a total of Rs 90 million. For 1957–58, actual cash subscriptions to central and state loans amounted to Rs 770 million, which was much less than was estimated in the Plan. This was in part the result of stringency in the capital market and the competitive demands from the private sector for investible funds.

The target for small savings under the Second Plan is Rs 5 billion for the five-year period. Net small savings collections in 1956–57, at Rs 594 million, were somewhat less than in 1955–56. The budget estimate for small savings for 1957–58 was Rs 800 million; however, actual collections for the eleven months April 1957-February 1958, at Rs 446 million, were less than the amount collected in the corresponding period of 1956–57. With a view to augmenting receipts, interest rates on the various categories of small savings have been raised by ½—¾ per cent. The State Governments have been allotted a larger share of the receipts from small savings (two thirds, against one half previously), in order to induce them to organize the collection of these savings more efficiently.

Other Budgetary Sources

The railways were expected to contribute Rs 1.50 billion to the financing of the Rs 9 billion provided for them under the Plan outlay (see Table 6); this was to be done partly through selective rate adjustments and partly from the larger earnings expected from the growth in traffic. In addition, the railways have to provide in the Plan period Rs 2.25 billion for depreciation. In the railway budget for 1957–58, freight rates were revised upward, to yield Rs 95 million in 1957–58 and more in later years. The contribution of the railways is now placed at Rs 900 million more than in the original estimates. Together with other nontax items, provident funds, etc., the total from sources other than taxation may be estimated at about Rs 5 billion.

External finance

The foreign exchange requirements of the Second Plan are considerable. The emphasis placed on heavy industry and transport means large imports of capital goods, especially in the initial Plan years, i.e., until steel, machinery, and structural fabrication industries are developed in India. The import component of investments in irrigation, electric power generation, industry, railways, and communications would be of the order of 40 per cent of the total. Increased agricultural production helps to save foreign exchange by limiting, and in due course altogether eliminating, food imports. The growth of industry helps to save foreign exchange by substituting domestic production for some imports, and it also increases foreign exchange earnings through a larger volume of more diversified exports. In particular fields of industry, production targets are formulated specifically with a view to stepping up exports. The main export targets to be reached by 1960–61 are as follows: cotton textiles (cloth), 1,000–1,100 million yards; jute manufactures, 900,000 tons; ferromanganese, 100,000 tons; bicycles, 150,000; vegetable oils, 240,000 tons; salt, 300,000 tons; and iron ore, 2 million tons. A few of these are new export lines; others represent sizable increases over the export levels reached in 1955.

It is extremely difficult to forecast foreign exchange requirements and earnings over a period of five years. Broadly speaking, on certain assumptions (viz., in particular, that average terms of trade in the Plan period will remain as they were in 1955–56 and that inflationary pressures will be held in check), it was estimated that during the Second Plan period there would be an aggregate balance of payments deficit on current account of about Rs 11 billion. It was proposed to cover a part of the deficit by drawing Rs 2 billion from India’s sterling balances. The remaining Rs 9 billion was to be obtained by borrowing from the International Bank for Reconstruction and Development, loans and grants from other international institutions, loans and grants from foreign governments, flotation of loans in foreign markets, or through private foreign investment. An inflow of private foreign capital of the order of Rs 1 billion was assumed for the investment programs in the private sector. For the public sector, therefore, receipts of Rs 8 billion from external resources were assumed.

The balance of payments on current account for the five-year period, as estimated in the Plan document, is shown in Table 12. Annual average imports of machinery, vehicles, and steel and other metals during 1956–61 are estimated at Rs 4.4 billion, against the actual value of Rs 2.25 billion in 1955–56; in effect, these imports account for all of the estimated deficit in the balance of payments on current account during the Second Plan period.

Table 12.

Estimates of India’s Balance of Payments on Current Account During Period of Second Five Year Plan

(In billions of rupees)

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Sources: Reserve Bank of India, India’s Balance of Payments, 1948–49 to 1955–56 (Bombay, 1957) ; Planning Commission, Second Five Year Plan (New Delhi, 1956).

Excludes official donations.

Actually, the current account deficit in 1956–57 amounted to Rs 2.93 billion ($625 million), much larger than had been estimated; and available data indicate that the 1957–58 deficit has been considerably above that in 1956–57. In the First Plan period, when a reduction in exchange reserves of Rs 2.9 billion was expected, the actual decline was Rs 1.2 billion, which was only slightly more than the recorded capital outflow of Rs 1.1 billion. The drawings on sterling balances in 1956–57, the first year in the Second Plan period, were greater than the total drawings of over Rs 2 billion provided for in the Plan for the whole period. The drain on reserves continued in 1957–58. Emergency measures (including drawings of $200 million from the International Monetary Fund in February, March, and June 1957, severe import restrictions, and strict limitations on exchange made available for travel) were taken to conserve foreign exchange resources and to rectify the imbalance to an extent that would make it manageable.

Meanwhile, an effort was also made to promote exports in new lines, such as sugar, by restricting domestic demand, and to increase exports of cotton textiles, iron ore, and other items; a Directorate of Export Promotion was set up, and an export risks insurance corporation was established. On the other side, attention was focused on ways and means to obtain foreign assistance to the maximum possible extent in loans and grants and in suppliers’ credits.

The enlarged deficit was due mainly to greatly increased imports; imports in 1956–57 are estimated at Rs 10.77 billion and exports at Rs 6.37 billion, against Rs 7.51 billion and Rs 6.41 billion, respectively, in 1955–56 (Table 13). Although import prices were approximately 4.5 per cent higher in 1956–57 than in 1955–56, the substantial increase in the total value of imports was due mainly to a rise of 18 per cent in volume. According to a report by the Reserve Bank of India, the main increases were in machinery, vehicles, iron and steel, and other metals (Rs 1,430 million); foodgrains, including surplus U.S. foodgrains purchased against rupees (Rs 730 million);11 oils (Rs 130 million); cutlery, hardware, and electrical goods (Rs 120 million); and chemicals, drugs, and medicines (Rs 90 million). Imports of certain other items, especially government imports, certain raw materials, and some consumer goods, increased by Rs 920 million. On the other hand, imports of raw cotton and raw jute were less in 1956–57 than in 1955–56. In the first half of 1957–58, imports were larger than in the first half of 1956–57; the increase was only on government account.

Table 13.

India’s Balance of Payments

(In millions of rupees)

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Sources: Reserve Bank of India, Report on Currency and Finance, 1955–56 and 1956–57, India’s Balance of Payments, 1948–49 to 1955–56, and Bulletin, October 1957 and January 1958 (Bombay).

Excludes exports of lend-lease silver to the United States, valued at Rs 744 million.

Exports fell slightly in 1956–57 mainly because of a reduction in volume, since prices were higher than in 1955–56. The fall in export earnings was distributed over a number of commodities. Higher domestic consumption reduced the volume of exports of raw cotton and vegetable oils. There were moderate decreases in exports of cotton textiles, hides and skins, and ores, the former owing mainly to the pressure of home demand and increased Japanese competition in foreign markets. Tea exports, however, increased substantially, and there was a moderate improvement in exports of jute textiles. Tea prices subsequently fell somewhat, while ore exports were affected by transport difficulties. On the other hand, sugar exports have been sizable, and exports of light engineering goods are increasing. The fall in exports in the first half of 1957–58, compared with the first half of 1956–57, was mainly in respect of tea, jute manufactures, and vegetable oils.

The buoyancy of private investment seems to have been as important a factor in stimulating import demand as the rising tempo of development outlays in the public sector. Another factor was the indirect impact of inflationary pressures at home, which increased the demand for imports in general. There were other, somewhat special and temporary, contributory factors, like the impact of the Suez crisis, accelerated use of a larger proportion of import licenses than had been customary, and some stockpiling. Yet another contributory factor seems to have been the general feeling of confidence on the eve of the Second Plan, generated by the “comfortable” balance of payments position and the rise in reserves since 1952–53, which led to relaxation of import restrictions. On the other hand, there may have been some leakage of exports; there have been reports of increased gold smuggling. The sharp rise in gold prices since 1955, while it reflects internal conditions, encourages such smuggling.

The Indian authorities were concerned with the magnitude of the external payments deficit and the consequent sharp decline in foreign exchange reserves, and they took a number of steps to cope with the situation. A ban was imposed on new foreign exchange commitments in either the private or the public sector in respect of uncommitted projects; import quotas were reduced; the basic allowance of foreign exchange for travel abroad for pleasure was withdrawn; and restrictions were placed on foreign travel for business, education, and health. Import restrictions were tightened progressively, commencing in January 1957, and a virtual ban was placed on imports of nonessentials. The total value of import licenses issued (excluding jute which is licensed on a quantity basis) was only Rs 358 million in the second half of 1957 and Rs 424 million in the first half, compared with Rs 631 million in the second half of 1956. However, because of heavy import commitments that had already been entered into and the large value of licenses outstanding, the full impact of these measures could not be felt during the first nine or ten months of 1957. Expectations of exchange rate adjustments for some European currencies may also have postponed the full impact of these measures until later in the year. Toward the end of 1957, the impact of the stringent import restrictions began to be felt; during November 1957-March 1958, foreign exchange reserves fell at a monthly rate of about Rs 120 million, against a monthly reduction of Rs 270 million during January-October 1957.

The sterling balances of the Reserve Bank of India, which form the principal part of India’s foreign exchange holdings, fell from Rs 7.46 billion ($1.57 billion) at the end of March 1956 to Rs 2.98 billion ($630 million) at the end of December 1957; this decrease was twice the amount of the total reduction that had been estimated for the entire Second Plan period. Further withdrawal from sterling balances is inescapable, but the extent of these drawings will depend partly on the scale of foreign assistance forthcoming.

The fall in India’s foreign exchange reserves (Table 14) suggested a reconsideration of the question of monetary cover in India. Legal minimum reserve requirements were altered in October 1956—when the Reserve Bank of India Act was amended—from a proportional to a fixed basis; a minimum reserve of Rs 4 billion in foreign securities and of Rs 1.15 billion in gold was required to be maintained. However, the minimum of foreign securities could be lowered temporarily to Rs 3 billion with government approval and without legislative amendment; such approval was given in early August 1957. With the continued decline in sterling balances, the foreign securities held in the Issue Department of the Reserve Bank fell to a level which by October 1957 was barely above the Rs 3 billion minimum. On October 31, 1957, the minimum currency cover requirement was reduced to Rs 2 billion ($420 million), of which not less than Rs 1.15 billion should be in gold coin and bullion. Thus, a working balance of not less than Rs 850 million ($178 million) is now required in respect of foreign securities, but this requirement can be suspended for temporary periods with the prior approval of the Central Government.

Table 14.

India’s Foreign Exchange Reserves, at End of Period Indicated

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Sources: Reserve Bank of India, Report on Currency and Finance, 1956–57, Bulletin, June 1956, December 1957, and March 1958, and Weekly Statistical Supplement to the Bulletin, April 5, 1958 (Bombay) ; International Financial Statistics (Washington), April 1958.

Includes 7.1 million ounces of gold, valued at Rs 62.50 per tola ($35 per ounce), held by the Reserve Bank of India, foreign assets of the Reserve Bank and authorized dealers, and government balances held abroad.

Includes liabilities of the Reserve Bank and authorized dealers to nonresident official institutions and banks. Data include net borrowing of $188 million (Rs 0.89 billion) from the International Monetary Fund between April 1956 and June 1957.

A consideration even more important than the size of the legally required reserves is the adequacy of foreign exchange reserves for trade purposes, with account being taken not only of seasonal requirements but also of the necessity of providing safeguards against crisis pressures. At the present level, gross short-term foreign assets are equal to about 40 per cent of annual imports, a level which appears to be adequate. However, in view of the need for emergency food imports which may arise, more than a working balance needs to be maintained. When account is taken of the foreign exchange commitments under the Second Five Year Plan and the recent trends in the reserve position, it is likely that a substantial part of the existing sterling balances will be utilized in the next 12 to 18 months; however, in view of the considerations mentioned above, an attempt may be made later to rebuild reserves to some extent.

The external assistance received during the First Plan period amounted in all to Rs 2.96 billion ($622 million), of which Rs 1.08 billion remained unutilized and was thus available for the Second Plan (Table 15). If all of this sum had been used for the First Plan, there would have been little reduction in sterling balances during the First Plan years. Some carry-over at the end of the Second Plan period has also to be assumed.

Table 15.

Foreign Aid Received by India During Period of First Five Year Plan (Public Sector)

(In millions of rupees)

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Source: Planning Commission, Review of the First Five Year Plan (New Delhi, 1957).

The foreign exchange requirements of the Second Plan as revised are placed at about Rs 16–17 billion, against the original estimate of Rs 11 billion. Substantial resources, of the order of Rs 6.1 billion ($1.28 billion), have been authorized by other countries and international institutions since the commencement of the Second Plan, i.e., between April 1956 and March 1958. They comprise credits from the United Kingdom and the U.S.S.R. for steel projects, U.S. Public Law 480 assistance, loans from the IBRD, a second loan from the U.S.S.R. for heavy machinery plant and other schemes, $225 million of aid from the Export-Import Bank of Washington and the U.S. Development Loan Fund, other U.S. assistance, Colombo Plan aid, and credits from Japan, Canada, and other countries. Much the larger part of this assistance directly helps to cover the foreign exchange requirements of the Second Plan projects. The saving from import restrictions, curbs on travel, and other measures adopted since the end of 1956 is estimated to be substantial. If the “core” of the Plan is to be adhered to, most of the cuts affecting capital imports will, indeed, have to be restored; neither can other imports be rigidly restricted to the 1955–56 level. However, credit may be taken for a sizable net saving from import restrictions for the whole Plan period. Some provision may also be made for an inflow of foreign capital into the private sector; this is apart from assistance from the International Bank for Reconstruction and Development and the International Finance Corporation to private enterprises, which is included along with IBRD assistance to projects in the public sector. Thus, utilization of sterling balances, external assistance authorized so far, net saving from import cuts, and inflow of private capital, together provide a substantial part of the exchange requirements. Thus, on the whole, there still appears to be a foreign exchange gap of about Rs 5.5 billion (about $1.15 billion) that remains to be covered. The gap relates almost wholly to the implementation of the “core” of the Plan.

The drawing of $200 million from the IMF is regarded as short-term accommodation (three to five years) and is not included in the estimate of resources. In the First Plan period, apart from the wheat loan, aid from the United States under the Indo-U.S. program amounted to Rs 1.4 billion; assistance from other countries (mostly under the Colombo Plan) was Rs 500 million. On present indications, a substantial increase in U.S. assistance may be expected during the Second Plan period. Some relief has been provided by short-term and medium-term credits made available by other countries. As of February 1958, deferred payment commitments amounted to about Rs 1.35 billion ($284 million) for the public sector and private sector together, including the credit of $158 million from the Federal Republic of Germany for the Rourkela Steel Plant. Repayments on these credits commence from April 1961. The IBRD may be expected to continue to provide important assistance. By the end of 1957 it had already provided assistance amounting to $356 million for both public and private enterprises in India. The railways are the main beneficiary in the public sector; and the iron and steel industry has obtained the main share in the private sector. Other loans have been made for developing electric power and agriculture, for purchasing passenger aircrafts and for assisting an investment corporation that has been set up to help private enterprise. Another loan program for the development of parts and power projects is under discussion.

Thus viewed, the foreign exchange prospect for the five-year period does not appear bleak, but it is sufficiently difficult to require from the Indian authorities the utmost caution and effort in husbanding foreign exchange resources and using them to maximum advantage. More than internal finance, the availability of foreign exchange is the determinant of the scale of the Plan. The major aspect of the present situation is that considerable import commitments have been made, estimated at Rs 8.64 billion at the end of March 1958, so that a substantial part of the available foreign exchange resources is already earmarked, and 1958–59 also is likely to show a large payments deficit. The (short-term) foreign assistance received so far may pose a difficult problem later; it is estimated at present that repayments will rise from Rs 350 million in 1959–60 to Rs 1.23 billion in 1961–62 and will taper off subsequently. As for the longer term prospect, once production in the new steel plants gets under way, other import-replacing industries are established, and agricultural production again increases, i.e., from about the fourth year of the Plan, some improvement in the situation may be expected. In fact, from 1960, India expects to export some pig iron and steel.

The large wheat loan of 1951 from the United States contributed to the maintenance of stability during the First Plan years. By an agreement signed in August 1956 for the purchase of U.S. agricultural commodities worth $360 million, the United States also undertook to finance, during the period ending June 30, 1959, the sale for Indian rupees of certain agricultural commodities to the Government of India. Wheat, cotton, rice, dairy products, and tobacco are the commodities to be supplied, wheat sales amounting to $200 million and cotton sales to $70 million. In February 1958, it was agreed to substitute wheat for part of the cotton and other supplies. Negotiations have also been initiated to provide additional wheat supplies in exchange for manganese and other minerals. Of the rupee proceeds, India would receive $234.1 million in long-term loans and $54 million by way of grants for economic development. Under the terms of the agreement, part of the loan is to be reloaned to private enterprise as medium-term credit through the Refinance Corporation being set up. To the extent that these supplies are intended to cover the foodgrain imports provided for in the Plan estimates, they are a direct part of the foreign exchange resources for the Plan. The foodgrain import total for the Plan period has been raised from 6 million tons to about 10 million tons; actually, imports of wheat and rice in the two years 1956–57 and 1957–58 are estimated at 5.7 million tons. Experience in 1956 and 1957 underlines what was only to be expected: that any considerable stepping up of development expenditure means additions to large numbers of small incomes and enhances the demand for and raises the prices of articles of mass consumption, like food and cloth; the pressure will be greater still if deficit financing takes place on a substantial scale. It is for this reason that agricultural targets were revised upward. Under these circumstances, the U.S. supplies of foodgrains have an important role in filling the gap in domestic production and maintaining stable conditions in the economy.

Deficit finance

The Plan document, as well as the budget statements of the Finance Minister, makes it clear that the Indian authorities are aware of the dangers of excessive deficits. The outside limit to deficit financing is placed under the Plan at Rs 12 billion; in assessing its likely impact on the economy, the drawing down of sterling balances must be set against the proposed deficit. The remaining deficit represents the net addition to currency arising from the Government’s budgetary operations, which would also result in some secondary expansion of bank credit, though this would be limited by the fact that people in India have a preference for holding currency rather than bank money. In a developing economy, the basic trend of governmental operations is expansionist. With the many contingent demands on resources and the likelihood of shortages arising in such fields as agricultural supplies and foreign exchange, and with deficit financing of this order, the problem of economic policy is that of containing the emerging inflationary pressures by an increase in domestic production, supplemented by imports, and by appropriate fiscal and monetary policies, physical controls, and allocations. This, broadly, is the view of the authorities in India.

In the circumstances prevailing in India, as development proceeds apace and the bounds of the money economy are gradually extended, it would not be a stable, but a somewhat rising, ratio of money to income that would have to be maintained as incomes rose, provided that money was still held mainly for transaction purposes. Any substantial degree of inflation is, however, the very negation of planning in finance; its most damaging effect is on the poorest and most vulnerable sections of the community. It is likely to distort seriously the allocation of resources and, by misdirecting them into speculative and unproductive channels, to frustrate the program of development itself. There is no way of precisely estimating beforehand the amount of deficit financing which might be deemed useful and which would not result in serious inflation; this is, within limits, a matter of broad judgment.12 Basically, as long as real resources are available and additional government expenditure is conducive to an increase in productive activity and raises real incomes, deficit financing is useful. But there is a limit beyond which deficit financing begins to impair the economy. The extent to which this limit can be pushed depends on the degree of technical, managerial, and administrative coordination and efficiency that is attained and the measure of popular cooperation and willingness to submit to austerity and discipline that is forthcoming, with a view to maximizing the resources available for investment. The limit is real and has to be kept in view, especially when the process of planning is essentially democratic.

The original Second Plan estimates placed a limit to deficit financing13 of Rs 12 billion, in a Plan outlay (public sector) of Rs 48 billion, compared with an over-all deficit of Rs 4 billion in an actual Plan outlay of Rs 19.60 billion during 1951–52 to 1955–56. At the time the estimates were prepared, a certain calculated risk could be taken in placing deficit financing fairly high—agricultural and industrial production was rising remarkably, prices actually had been falling until June 1955 and the price rise in the subsequent months was very moderate and could be construed largely as a corrective to the earlier decline, and there was a cushion in sterling balances. By the second half of 1957 circumstances had changed. Even at the time of the original estimates, it was recognized that the position would have, to be reviewed from time to time, especially since the deficits were likely to be larger in the initial years, as tax and other resources would take time to develop. The actual over-all deficit in 1956–57 was about Rs 2.0 billion, and the estimated deficit in 1957–58, net of a substantial increase in taxes, is Rs 3.8 billion. In view of recent developments in the economy, especially in prices, the Finance Minister has indicated that total deficit financing during 1956–57 to 1960–61 should be limited to about Rs 9–10 billion. An over-all deficit of Rs 2.0 billion is estimated for 1958–59.

Revision of the plan

When account was taken of the internal resources available through taxation, borrowing, and other sources, it became clear in the second half of 1957 that the deficit finance limit that had been envisaged would be exceeded by a substantial amount. The question therefore arose whether some modification of the original Plan might not be advisable. Any such modification was more likely to be carried out in an orderly way if it was well thought out beforehand. The probability of a shortfall in Plan outlays was also indicated by the progress of the Plan up to that time. The total outlay in 1956–57 was originally estimated at Rs 8.3 billion; revised estimates reduced this figure to Rs 7.6 billion; and the actual outlay was probably about Rs 6.7 billion. Similarly, actual outlay in 1957–58 is likely to be less than Rs 8.5 billion, compared with the original estimate of Rs 9.6 billion. Thus, the actual expenditure during the first two years of the period leaves a very large outlay to be made in the next three years if the total Plan outlay is to be realized. The administrative problems which would arise in organizing these increases might be very difficult. A total Plan outlay of Rs 10.0 billion is proposed for 1958–59.

It has been stated that Indian planning has a long-term perspective into which successive (Five Year) Plans are fitted. If planning is to be a continuous process, subject to change and adjustment as experience is gained, there should be a measure of flexibility within each Plan period itself. The Second Plan, therefore, specifically provides for annual review, and the Plan itself is regarded as a broad framework, in terms of which programs for each year are worked out in detail. Thus, in a period when both external and internal resources are under pressure and an inflationary price upsurge threatens the economy, some rephasing of the Plan, involving deferment of schemes not already undertaken or slowing down the tempo of projects already under construction, would be in order.

There are three problems in the current economic picture of India; the most serious from the viewpoint of the Plan is the substantial decline in external reserves and the gap that has to be bridged in the foreign exchange budget of the Plan