79862 CONFIDENTIAL IND 64-4 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRESS OF ECONOMIC DEVELOPMENT IN INDIA MEMORANDUM FOR NINTH MEETING OF INDIAN CONSORTIUM Febr uary 14, 1964 c ,:, Department of Operations S~uth Asia and Middle Ea st CURRENCY EQUIVALENTS 1 Indian Rupee m u.s. $0.21 1 U.S. Dollar • Rs8 4.762 Rs. 1 crore • $2.1 million FISCAL YEARS AND FIVE-YEAR PLAN PERIODS The Indian fiscal year begins on April 1. The periods covered by the different five- year plans are as follows: FIRST PLAN April 1 1 1951 - March 31, 1956 SECOND PLAN April 1 1 1956 - March 31, 1961 THIRD PLAN April 1, 1961 - March 31 1 1966 FOURTH PLAN April 1 1 1966 - March 31, 1971 PROGRESS OF ECON011IC DEVELOPHENT IN INDIA - Io INTRODUCTION lo India is seeking the equivalent of $1,100-1,1.50 million :Ln new pledges of aid from the consortium for the fiscal year beginning April 1, 1964, which vJill be the fourth year of her Third Five-Year Plan. This compares with last yearts request for $1,2.5.5 million, against which the consortium actually pledged $1,052 million. 2. After the eighth meeting of the consortium, which took place in Paris in June 1963, the President of the \rJorld Bank wrote to the India.n Finance Hinister drawing attention to the concern expressed by members of the consor- tium over the disappointing progress of the economy during the first two years of the Third Plan and suggesting the need for a reappraisal of India's development program. Copies of Hr. Woods' letter and of the Finance Hinister 1 s reply are annexed to this memorandumo The document now presented to the consortium by the Indian Government has been prepared in response to the proposals made by Hr .. Woods.,. It contains a review of India's economic programs and policies and explains the basis of the 1964/6.5 aid request. 3. Economic developments during the first half of the Third Plan have been reviewed by the Government of India in their 11 Nid-Term Appraisal", copies of which have been made available to members of the consortium. There is also the report of the mission from the International l'1onetary Fund 1'1Thich visited India in December 1963 for annual consultations. No separate eco- nomic report has been prepared by the Bank. However, the present memorandum starts with a brief review of the current economic situation and goes on to discuss in general terms some of the policy choices which India faces in undertru(ing the further development of her resources. l[. It should be made clear that the Bank is not in a position to evaluate the individual projects put forvrard by the Government of India for consortium financing, except for projects in which the Bank or IDA is directly concerned., Certain observations are, however, made in this memorandum on the way in which planning decisions are reached and on the policies related to the development of particular sectors of the economy. 5. It should also be emphasised that estimates of the costs and phasing of projects and forecasts of the balance of payments are inevitably subject to a considerable margin of error. Little useful purpose is therefore served by trying to make a precise estimate of the amount of external assist- ance 11 needed 11 for a period as short as one year. The case for continuing - 2- external assistance to India must rest rather on a broad assessment of deve- lopment needs and possibilities over the long haul. It is on this basis that future aid requirements are examined here. 6. The Central Government Budget for the fourth year of the Third Plan will be introduced on February 29. This is traditionally the occasion for announcing important changes in economic and financial policies. The Government of India will arrange for copies of the Finance 11inister 1 s budget speech and the annual Economic Survey to be circulated to the members of the consortium at the beginning of Harch, and a senior official of the Hinistry of Finance will make an oral report on the Budget at the consortium meeting in Paris. II. CURRENT ECONOMIC SITUATION Production 7. As the ~1id-Term Appraisal points out, the growth of national income in the first two years of the Third Plan was at an average rate of 2~ per cent a year, or less than half the rate envisaged in the Plan. The slow rate of growth was largely attributable to the lag in agricultural production, which increased by less than 1! per cent in the first year and fell by over 3 per cent in the second. Industrial production increased by 6~ per cent in the first year and by another 8 per cent in the second. 8.. In the third year of the Plan, which is now almost at an end, some recovery in agriculture can reasonably be expected after the exceptionally poor harvest of the previous year. The only crop for which official estimates are already available is jute, and here the figures shmv an increase in production of about 8 per cent. There is believed to have been a fairly substantial increase in rice production, but some fears are expresser for the wheat crop, which is harvested in the spring, on account of unusually cold weather in northwest India. It will be April or Hay before the first overall estimates of agricultural production in 1963/64 are produced. 9. Estimates of industrial production are available for the first seven months of 1963/64, and these show an increase of 9 per cent over the corres- ponding period of the previous year. Host of the principal ix1dustries participated in varying degrees in this expansion. Notable increases occur- red in outputs of coal, aluminium, sulphuric acid, caustic soda, chemical fertilisers, paper and board, electrical equipment and rail~.;ray vJagons. On the other hand, production of sugar and motor vehicles declined. In tex- tiles activity in the cotton industry increased only slightly, but more rapid advances took place in jute and woollen goods. 10. Coal production, though it increased sharply towards the end of 1962 follo"lPring the introduction of seven-day working in the mines, has since levelled off as supply has caught up with demande There is still a shortage - 3- of the better quality coals, but inferior grades are now in surplus and out- put has been cut back as pithead stocks have accumulated.. Present expecta- tions are that in the full year 1963/64 total production ':-Jill reach about 66 million tons, as compared with jnst under 64 million tons in 1962/63 .. 11., Output of finished steel in 1963/64 is expected to be around 4.. 3 million tons, as against 4.,0 million tons in 1962/63. All the main plants are now working at or close to full capacity, and little furthec::> increase can be looked for in the quantities produced until the expansion schemes at the public sector plants are completed. The Bhilai expansion is the furthest advanced and should contribute most of the additional output expected dudng the next two years., Total production of finished steel is forecast as rising to 4-'~9 million tons in 1964/6) and Sc3 million tons in l9.S)/66., 12~ A marked improvement has taken place during the past ei.g~1teen months with respect to supplies or electric power a~d transport, and neither is at the moment considered by the Govern.onent a serious obstacle to increasing industrial production, although local power shortages create difficulties from time to time.. Po1,rer generation is expected to be about l) per cent higher in 1963/64 than in the previous year and r
Nevertheless, physical production targets laid down in the five-year plans continue to exercise a strong hold over the minds of the Plann:ng Commission and the government departments responsible for investment, even though circumstances may have changed completely since the targets were seto Projects may be added to the Plan from time to tline, but once a project has been included, it is difficult to get it dropped.;. All this contributes to rigidity and lack of realism in economic thinking, and it is to be hoped that the Fourth Plan will be more flexible in conception and spelt out in less detailo 30,. Criticism of Indian planning methods must be tempered by an apprecia- tion not only of the enormous difficulties of organising development in such a vast country, but also of the limits of the federal power in relation to the sixteen States., Huch of the time - probably too much of the time - of the Planning Commission is taken up 1rJith negotiations ·with State Governments., and one of the principal functions of the five-year plans is to provide an agreed basis for the allocation of investment resources between the Centre and the States. State and regional interests have continually to be weighed against. the economic interests of India as a whole, and it is inevitable tha·t; some concessions should be made to the former at the expense of the latter when it comes to deciding such matters as the location of industry and the development of transport. Nevertheless, before these concessions are made, the cost of making them should be objectively assessed, and this is not always done., 31. Another criticism of Indian planning both at the Centre and in the States concerns what is sometimes considered to be the excessive influence of the general administrator. tfuile the regular civil service has a fine tradition, it does not always seem to be aware of its own limitations., There tends to be too little delegation of authority down the line, and insufficient use is made of expert advice in arriving at important decisionse The problem is aggravated by the difficulty of attracting competent special- ists into the public service v.rhen their status in the service is so lou-r and - 8- when they c~~ earn much more outside. The Government recognises the need to build up in the departments responsible for investment a staff of economists and technicians capable of preparing and evaluating projects and advising on policies. But little has so far been achieved, and the Planning Commission itself is still quite inadequately equipped with this sort of talent~ In the long run, a solution to this problem may have to be sought in a reform of the civil service based on a reassessment of the relative values of different qualifications.. The more the Government tries to plan at the Centre, the more important this reform becomes. ~1eanwhile, greater use is being made of outside experts to help with particular aspects of economic planningo The Power and Energy Survey Committees and the Coal Transport Study Group afford examples of the way in which this can be doneo Consulting firms in India and the technical staffs of some of the public corporations are also making a useful contribution to the country's planning resources. 32. Preparatory work is new proceeding on the Fourth Plan. A prellininary outline assessing the resources that may be available and indicating some of the policy choices that have to be made is expected to be completed by the Planning Commission this summer for consideration by the National Development Council. There appears to be a danger in the meantime that the authorities responsible for putting forward investment proposals will continue to plan on the basis of rather unrealistic assumptions about the availability of capital and about attainable rates of economic growth. Very large numbers have already been mentioned in public in connection with programs for the expansion of some of the basic industries, and the wider currency these gain, the more difficult it becomes for the Government to get away from them~ The sooner a hard look is taken at the limitations likely to be imposed by such factors as foreign exchange resources, domestic savings and the lag in agricultural production, the easier it will be to impress on the planning authorities the need to find the most economical solutions to their problems. Private Foreign Investment 33o The respective roles of the private and public sectors in India's mixed economy have by now been fairly clearly demarcated. This demarcation follows the line laid down in the 1956 Industrial Policy Resolution, and although there have been occasional deviations from it, the Government apparently has no intention of introducing any radical changes. At the same time, there is growing recognition in India that shortages of foreign capital and trained management are the principal factors limiting the progress of industrialisation, and the Government is looking to private foreign investment as an important source of both. In spite of high taxation and other deter- rents, many foreign firms have found that investment in Indian industry can be highly profitable. The Government's attitude tovJards private foreign investment seems to be more welcoming today than at any time in the recent past. Special efforts are being made to secure the participation of private foreign capital on a minority basis in public sector enterprises. This is something of a new departure and is being tried out to begin with in the petroleum industry (see paragraphs 5L-5;: below). The idea is that the foreign investor should take a share of the equity and also help in providing management and technical services. - 9 - 34., Part III of the Indian consortium submission contains a statement on government policies in respect of private foreign investment and assesses the role which such investment can play in the development of industry o There is, however, a lack of reliable and up-to-date statistical information on the actual inflow of private long-term capital, and it is time that better arrangements were made for collecti.'1g the data,. The off3..cial estimate is that, excluding reinvestment of retained earnings, the present gross inflow is at the rate of around $50-60 million a year, but this could be an under- estimate. 35e Private foreign investment is no substitute for official aid. Indeed, the continuance of aid to India is essential if foreign enterprises are to be persuaded to invest their own mo~1ey in the country.. As the Indian sub- mission points out, it vwuld be unrealistic to expect privu.te foreign capital to make more than a marginal contribution j_n the foreseeable future to covering India's balance of pa;yments deficit., Nor ca.'1 it always be assumed that servicing of an equity investment 1vill be less onerous from a balance of paJ~ents point of view than servicing of conventional lom1s. 36., The coming Budget should provide a clearer indication of the Govern- mentt s intentions with regard to private foreign investment"' The petroleurn industry remains a special case and is discussed in paragraphs 50-56 belm..r., 37. The Governr;lent is novJ glvlng more careful attention to the problem of management in public sector enterprises, As an initial ex-periment in greater decentralisation of control, the Minister of Steel, Hines and Heavy Engineering has introduced important changes in the ma.c'1.agement of the Sindri fertiliser factory and the Durgapur steel plant (see Appendix III of the Indian submission)., The Government t s intention is that similar changes should be made at other plants;, several of "rhich are admitted to be in serious difficulties., 11ajor obstacles to more efficient management are still the insistence of the l'iinistry of Finance on outside financial control &'1d continual interference by the Comptroller and Auditor-Genera1, whose officers are stationed in every plant. No enterprise can be expected to operate efficiently under these conditionso 38. Too many of the top posts in the nevr public sector enterprises are still occupied by persons drawn from the civil service or from long- established organisations such as the Railway Board where the qualifications required are quite different. Efforts are, however, being made to encourage promotion from "'rithin and to give more irJ"eight to technical skills and specia1ised know-how and less to seniority,. Ha11y of the younger men -who have 1vorked their way up in the enterprises are reported to show great promise. A recent study carried out by the Indian Institute of Public Administration at the Government! s reo.uest has some eminently sensible thiEgs to say on this subject., y As the author remarks;) 11 the idea that age and 1/ The Flight of Technical Personnel in Public Underta1dngs 3 by - H.K;""":Paran"Jape.,-Indian' Institute ofPU'biiC Admin.istratfon, New Delhi, 1964. - 10 - seniority should -vmigh more than talent is normally prevalent in all traditional societies., But it has to be given up by a society which 1vants to bring about a technical and economic revolution.o••••The fact that at this stage of our economic growth some persons, especially specialists, rise to important posi- tions at a comparatively young age need not be considered alarming•o• ••• The tendency to insist on a certain rigid relationship between the age of a person and the grade that is to be given to him needs to be firmly resisted. 11 39. The same study focusses attention on the controversial subject of pay scales in public sector enterprises and concludes that substantial increases in pay will be required to attract and retain qualified technical personnel., ~1ore specifically, the recommendation is made that the top salaries in public under- takings should be raised to Rs. 5,000 a month, as against the present maximum of RsG 2,750, and that the lowest salaries in these undertakings should be at least about 90 per cent of those in good private firms. The problem is seen as one of competing for talent not merely with private enterprise in India, but also with employers abroad. Thousands of Indian technicians, as well as many economists and scientists, are at present working overseas because the rewards there are higher than in their o-vm countryo India cannot afford to lose these people, and ways have to be found of encouraging them to come back. 40. Genuine competition between public and private undertakings can often be of benefit to both. There are cases in India where public undertakings have provided a useful and necessary stimulus to greater efficiency and enter- prise in the private sector. Equally, without private competition, it will be difficult to ensure the long-run efficiency of the public plants. From this point of view, it seems desirable to avoid any hard and fast demarcation of spheres of activity between the two sectors. Iron and Steel 41. The five main steel plants are working close to capacity, and three of them are in process of expansion. Domestic production of many categories of steel is now more or less adequate to meet demand, but there are large deficits in flat products and special steels; there is also a shortage of pig iron for saJ.e to foundries. Highest priority in the further expansion of the industry -v;rill be given to the creation of additional capacity for flat products and to the installation of two more blast furnaces, one at Bhilai and the other at Durgapur., L2. The project for a continuous strip mill at Bokaro, where steel-making would be based on the LD process, has now been worked out in detail, and it is proposed that tenders for the different parts of the plant should be invited from firms in consortium countries. A separate company has been established to run the plant, and design and engineering services are being provided by a firm of Indian consultants who have been responsible for the project report~ The Government has indicated that there will be no objection to the employment of foreign consultants, where necessary, to advise on special problems related to the design and construction of the plant and ancillary facilities., The - 11 - Government also recognises that foreign assistance will be needed in running the plant() According to the timetable set out in the Indian subm:ission, it is hoped that orders can be placed for Bokaro before the n:iddle of 1965e This is probably optimistic. 43.. Other possibilities of increasing output of flat produc-:.s are also to be exploited., The Government attaches particula,r importance to the projects for the further expansion of the TISCO and Rourkela plants, since both Hill produce mainly this type of steel. Allowing for further expansion to be undertaken at the IISCO plant and at Bhilai and Durgapur, the five existing pla~ts could have a combined capacity of around 14 million tons of ingot steel by the end of the Fourth Plan or shortly thereafter& Adding another 1! million tons for the first stage of Bokaro, total steel-making cap 6oo-650 per ton for bars and structurals to over Rso 800 per ton for sheets.., Black market prices for the scarcer categories have in some cases been over Rsol,OOO per ton .. Iron Ore 46. The way in which India's iron ore resources are being developed for local consumption and export exhibits many weaknesses in plru1ning and execu- tion. Major investments have been undertaken on the basis of quite inade- quate technical studies, one result of this being that few of the mines have succeeded in producing ore of the qualities envisaged, A number of the publ:i.c sector mines appear to have been heavily over-capitalised by compari- son with similar ventures in the private sector, or in other parts of the world.., The result is that costs of production at some mines (e.g,. Kiriburu - 12 - in Orissa) are quite uncompetitive. The various export p~ojects have been taken up without detailed cost comparisons, without adequate attention to economics of scale and without an expert study of marketing possibilities and requirements. Nor have the related investments in mining, rail transport and ports been properly coordinated. The capacity planned to handle iron ore exports at Goa, Vishakapatnam, Paradip, ~1adras and possibly Haldia appears to be greatly in excess of possible requirements. Serious delays have occurred in the installation of the necessary port facilities at Vishakapatnam with the result that deliveries of ore to Japan under a long- term contract for the export of 2 million tons a year will be delayed by at least six months and possibly longer. 47. The fact that many different authorities are involved in the iron ore export business and that nobody can be held responsible for things going wrong is perhaps in itself significant. Whatever the reasons for what is happening, the situation appears serious enough to warrant radical changes in planning methods, in arrangements for the exploration and mining of iron ore and in the handling of exports. A proposal to set up a small conu~ittee of officials to supervise the progress of the various export schemes hardly seems to meet the case. Coal L1.8. The present situation with respect to the supply and demand for coal illustrates the distortions that can be caused by rigid price controlse Too much appears to have been invested in developing production of inferior grades particularly in the outlying fields, and too little in the mining and mechani- cal washing of the higher grades. The narrovJ differential between prices of the superior and inferior grades has given the mines little incentive to concentrate on producing what the consumer wants, and the low average return on capital invested in the industry has made it difficult for the private sector to secure the finance needed for expansion. The Government has recognised these problems and is now giving fresh thought to the whole system of controls and prices. A decision is expected shortly. 49. Plans for the expansion of production are based on the assumption that consumption of coal in India will rise as high as 85-88 million tons in 1965/66, and that output of around 90 million tons will be needed to provide for this. Some preliminary calculations made by the Energy Survey Committee suggest that consumption may rise rather more slowly. At the margin, much will depend on the extent to which oil continues to be substituted for coal in areas distant from the coalfields, and this in turn will depend on the relative prices at which alternative fuels are available. There are still restrictions on private companies extending their activities into new areas. If these restrictions were removed and prices de-controlled, the need for additional public investment in the industry could be reduced. - 13 - Petroleum 50. Relations between the Government and the private oil companies in India have improved considerably during the past year~ At the same time the Government r s policies tmlfards private investment in the industry continue to be based on the Industrial Policy Resolution of 1956. Broadly speaking, the majority ownership and control of all ne1rJ ventures is reserved to the public sector. Private participation is welcomed on a minority basis~ Units established in the private sector prior to 1956 continue to operate, but their expansion is controlled by the GovernmentG .51& As far back as November 1959 private companies 1.vere invited to put forvmrd proposals for participating in the exploration and production of oil in specified areas of India and a nm,ilier of companies expressed interest in doing soe ~1ore recently, in June 1963, it was announced that the Government would welcome private participation in e~¥lcration in Kerala, the Cauvery Basin and the Andaman Islands., Three oil companies showed interest in the announcement., As yet, however, no nei.v agreements have been negotiated., 52., The Burmah Oil Company, through :2.ts .50 per cent participation with the Government in Oil India Limited, is still the only private company with an equity investment in exploration and production. Oil India has recently been granted new concessions in Assa'11,.. All other exploratory work is being carried out by the Government t s Oil and Natural Gas Commissj_on, which is receiving technical assistance from the Soviet Union, Italy and France., The foreign exchange costs of the ONGC t s operations during the Third Plan have been largely covered by credits from the Soviet Union, Rumania, France and Italy (ENI).. ENI and the French Petrole1.un Institute have both concluded agreements for contract drilling, the former in the Ganges Valley and the latter in the Jaisalmer area o: Rajasthan,. .53" On the basis of discoveries made so far, production of crude uil in India c&~ be expected to rise from roughly 2 million tons in 1963 to 6-7 million tons a year early in t,he Fourth Plan.. This would be more or less equally divided between Assam nnd Gujarato 5Lo All the new refineries built in India since 19.56 have been in the public sector. The first three - at Nunmati, Barauni and Koyali - are wholly mmed by the Government and their foreign exchange costs have been covered out of credits from the Soviet Bloco A new patte:..~n has been set by the agreement reached last year ~rJith the Phillips Petroleum Company for the construction of a 2~ million ton refinery at Cochin. The Central Governrnent has subscribed .51 per cent of the equity, the State Government 7 per cent, Phillips 2.5 per cent and their Indian partners 2 per cent. The remaining 15 per cent is being offered for public subscription in India& The foreign exchange costs of the refinery are to be covered mainly by loans of up to $18 million from banks in the United States.. The effective rat,e of interest payable by L'"ldia on these loans will be 5-3/L per cent, lirith repay- ments comrr,encing in 1967 and extending up to 1980,. ~1anagement and technical services are to be provided by Phillips. - 14 - 55. Invitations have been extended to other oil companies to participate on a minority basis in additional refineries to be established at Hadras and Haldia (outside Calcutta), and a number of offers have been received which are at present under study. The Government is also interested in attracting private capital and technical know-how into the petrochemical industries .. Two complexes are contemplated, one in Bombay and the other in Gujarat or possibly at Haldia. The intention is that the Government should have a majority interest in the main units (e.g., refineries and naphtha crackers), but that the peripheral plants should be wholly private. 56. Arrangements which provide for the greater participation of private capital and management in the development of India's oil resources mark an important step forward. Of course, the Government's adherence to the principles embodied in the Industrial Policy Resolution continue to some extent to restrict the scope for such participation. This is true not only of exploration, production and refining, but also of distribution, in which the government-owned Indian Oil Company is investing substantial sums ~rrith the object eventually of taking over the greater part of the domestic market., The existing private refineries are not being allowed to expand any further for the time being. The Government maintains that the regional pattern of demand for petroleum products in India does not yet justify ~•Y further expansion of refining in Bombay, where the t1r10 largest private refineries are located. Against this must be set the fact that the per-ton cost of expanding these refineries would be very much lower than the cost of establishing new capacity elsewhere. The basis on which the so-called "economic supply areas" for the different refineries are demarcated is also open to question. Costs of transport from the refinery to the point of consumption are assumed to be equal to the prevailing raih,ray freight rate, and no account is taken of the fact that actual costs of transport by pipe- line may be very different. Power 57'S The work done by the Power and Energy Survey Committees should provide a useful basis for the more systematic planning of povrer facilities in India in future, and when the Committees have completed their work 3 the list of power projects already drawn up for the Fourth Plan should be reviewed in the light of their findings. There appears to be some tendency on the part of the power authorities to assume that very few changes will be needed, but this assumption should not be allowed to pass unchallenged., Few of the Fourth Plan projects have yet been committed beyond the stage where major changes can be made. S8a The Government has accepted the need to put more emphasis in future on investment in transmission and distribution facilities and is looking into the practical possibilities of extra high voltage transmission of power generated in large thermal stations burning by-product coal. The concept of regional planning of power facilities has also been accepted by the Centre, and as noted in the Indian submission, tvm regional Electricity Boards have already been established to assist in forming interstate power grids, one in - 15- the north and the other in the southo The State Electricity Boards will; however, continue to be responsible for 11 planning, construction and operation of power stations and transmission syste111s 11 , and it is not clear how far the State Governments will be ready to cooperate in putting the new policies into practiceu Consideration is meanwhile being given to the possibility of strengthening the C.sntral Blect:d.city Authority, so that it can play a more effective role in future in the development of India's power resources., 59o The 1-J"ork done by the Energy Survey Committee appears among other things to support the view tl1at if realistic prices are charged for capital, nuclear energy is not in present circumstances competitive in India with thermal or hydro pm..rer.., The ar&;ument is;. however.,. advanced by the Indian Atom:Lc Energy Commission that in the long run nuclear energy will have to be developed in certain regions of India for lack of adequate alternatives, and that a start must be made nmv in building up experience in the operation of nuclear plantsc Two such plants have accord:Lngly been included in the power program for the next five ;rears, one at Tarapore on the coast north of Bombay (being ass:i_sted by the 7Jnit8d States) and the other in Rajasthan (to be built with Canadian assistan::::e) ,. 60e The Central Government has long been pressing State Governments to increase their po;,rer rates to levels which would generate more adequate resources for the financing of future expansion., As noted in the Indian sub- mission, a proposal has been put forward that electricity tm.~iffs should generally be framed so as to produce a retu.rn of about 10 per cent on capital investedo t1any of the States~ however, continue to resist this idea on the grounds that cheap power is necessary to attract neirJ industries and to develop agriculture., No major changes in tariffs have been made during t.he past twelve months, but three States are understocd to be revising their tariffs at the present time., These are Kerala, Hadras and Punjab., 61~ Considerable differences of opinion exist as to the likely trend of demand for power during the period of the fourth Plan& Load fore0asts prepared in the past by the Central 1l'iater and Power Commission, in consulta- tion with the State Governments, have tended to over-estimate demand, and the forecasts included in the First Electricity Power Survey of India, vJhich was ~~dert~~en in 1963, may be on the high side6 There can be no question, hoirJever, of the importance of planning new facilities vJell in advance as part of a properly phased program, and the Government is rightly concerned to avoid a repetition of the bunching of projects which occurred at the start of the Third Plan,. Some new schemes should be started every year if there is to be an even development of power supplies, and the list of projects suggested this year for consortium fir.ancing, which includes additional facilities for transmission and distribution, does not seem unreasonably large., However, as already noted, the World Bank is not in a position to comment on the merits of individual projects .. ... 16 - Transport 62. The adoption of more r~tional taxation, pr1c1ng and regulatory policies could help to secure a better allocation of resources as between alternative modes of transport in India. The present very heavy taxation of road transport, for example, has been one of the factors inhibiting bal- anced development in this sector. The fact that gasoline is much more heavily taxed than diesel oil has induced road transport operators to con- centrate on diesel vehicles to the point where substantial quantities of diesel fuel have to be imported, while gasoline is in grmving surplus. The fact that coal prices have been kept artificially low, while diesel fuel bears a heavy duty (which more than compensates for the scarcity of foreign exch~~ge), has tended to obscure the possible economic benefits of converting the railroads in some parts of India from steam to diesel traction. Un- economic use of transport resources has also been encouraged by the structure of railway freight rates, which has not always been closely related to the costs of different traffic movements. These and related questions are now receiving increasing attention in India. Some of them are being examined by the Coal Transport Study Group, which is expected to complete its report in a few months. 63. This year's Railway Budget, introduced on February 12, provides for a supplementary charge of 2 per cent on freight rates, a downward adjustment in rates charged for certain high-rated commodities and an increase in the rate for coal carried over 500 kilometers. These changes are very much in line with recommendations made by last year's Bank economic mission. 64. The railways are now able to move all the freight offered and even have some surplus capacity. This is a welcome change from the situation a year or two ago and reflects credit on the rail'lrray management. Past experience in India supports the viewr that rail capacity should always be some way ahead of demand. Neve1~heless, plans for future expansion need to be kept under close scrutiny in view of the continuing scarcity of capital in general and foreign exchange in particular. Earlier estimates, which suggested that originating freight traffic on the railw~ys might rise from the present level of around 195 million tons a year to well over 4oo million tons in 1970/71, are now recognised to have been greatly exaggerated. If thermal power plants are in future located mainly on the coalfields, and if the possibilities of EHV transmission over long distances can be fully exploited, substantial economies should be achieved in rail movement of coal. The progressive dieselisation and electrification of the railways will have similar consequences. At the same time, there is still scope for reducing the need for additional investment in the railways by further improvements in operational performance (e.g. measures to speed up the marshalling, move- ment and turn-round of freight trains, more efficient inspection and maintenance of rolling stock, etc.). 65. Indian roads have been planned in the past with insufficient regard to the economic justification of the investments proposed. As the Indian sub- mission points out, efforts are now being made to rectify this situation, but - 17 - there is still evidence that projects are being undertaken without any serious attempt to evaluate their costs and benefits.. A conspicuous example is the proposal to spend an additional Rs .. 20 crores ($h2 million) on roads in the West Bengal/Bihar region during the Third Plan mainly for the purpose of moving coal9 Out of this 3 Rs .. 8 crores are to be spent on improvements to the Grand Trunk Road between Calcutta and the coalfields and another Rs., 8 crores on what are described as feeder roads to the collierieso Now that congestion on the railways has been eased, it is difficult to see how the demand for moving coal by road could possibly justify investments on anything approaching this scale., There is the further consideratior. that the lrJest Bengal Goverr~ent still intends to build (and has already started work on) a new nexpresm,ray11 from Calcutta to Durgapur which is designed to bypass the Grand Trunk R.oad over much of the distance to the coalfields,. 66., Plans for the development of ports and coastal shipping in the Fourth Plan ho.ve to be based on a careful assessment of the demand for these facilities, and tl'rls assessment is still to be made.. It seems rather doubt- ful whether there is likely to be nny continuing demand for the coastal shipment of railway coal:; and as already noted, there is already a danger of over-investment in po~t facilities for iron ore eA~ortse Pressures from regional interests for the creation of new ports are difficult to resist, but equally India cannot afford to waste capital and foreign exchange by invest- ing in facilities that are not really needed. ~ricultu,E~ 67o Agriculture is beginning to receive from the Indian planners the attention which its importance demands<) A more businesslil:e and scientific approach to the task of raising agricultural p~oduction is long overdue,. The effectiveness of govenrrnent action in this field has hitherto been limited by the diffusion of effort over too wide a field, the confusion of production and welf'a::::e objectives and insufficient attention to the technical factors involved., Host schemes for cornmunity development and agricultural extension services in many parts of the country betray a lack of expert knmvledge of farming conditions and an incomplete understanding of the kind of incentives needed to stimulate farmers to increase their production .. 68. The Planning Commission is now examining the implications for agricul- ture of alternative rates of income growth and is considering how lm-Jer rates of growth in agriculture would affect the development of the economy as a whole~ 111[ith the population growing at the rate of 2! per cent a year, nothing less than a 5 per cent rate of growth in agricultural output can be regarded as a tolerable long-run objective. Some doubt exists as to the actual rate of expansion achieved during the past ten years. Some estimates put it as low as 3 per cent a year, others as high as 4 per cent, depending on the base period and the method of calculation adop-ted., There must anyhow be considerable uncertainty about the reliability of estimates vJhich have to be based on samples collected over such a huge area from widely diffe~li1g types of farm. The achievement of a 5 per cent growth rate should be techni- cally feasible if available resources of finance and expertise are concentrate' - 18- on helping the larger and more efficient farmers to produce more and giving them the incentive to do so. The necessary expansion certainly cannot be achieved so long as so much effort continues to be directed to looking after the less viable sections of the agricultural community, who consist mainly of very small farmers and agricultural labourers. Politically and in human terms, this is an extremely difficult choice to make. But policies aimed primarily at assisting the lowest income groups must inevitably conflict with the objective of maximising output. 69. One important advance that has been made in the last few years, as described in the Indian submission, is the establishment of support prices for cereals as well as for jute. Admittedly, the prices so far fixed for cereals have generally been well below the prices prevailing in the market and have therefore had rather a limited impact. Indeed, except possibly for jute, where the buffer stock scheme is operated by the industry, the Government does not yet have the organisation needed to enforce an effective price support policy for these corrLmodities. The number of procurement points will have to be greatly increased and additional storage facilities created. The whole question of how far the Government can intervene more effectively in the distribution and marketing of agricultural connnodities is one deserving of careful study. Attention must also be given to the problem of the relative prices of different crops. A conscious effort should be made to bring about through appropriate pricing policies the changes in cropping patterns that will be required to match the expected pattern of demand for agricultural products. For example, data on demand elasticities derived from national sample surveys, admittedly rather sketchy and out of date, suggest that special efforts will have to be made to stimu- late production of wheat, cotton and oilseeds at the expense particularly of inferior grains. 70. The Indian submission contains a general account of the progress of irrigation in the Third Plan. Present arrangements at the Centre for the follow up of projects leave much to be desired. This is partly the result of the unsatisfactory division of functions between the Hinistry of Irriga- tion and PovJer, which is responsible for supplying water for irrigation, and the 11inistry of Agriculture, which is concerned -vdth its use 0 There has long been talk of the need to secure closer working cooperation at all levels between these two Departments, both at the Centre and in the States, but nothing very much has been done about it. The answer is not to be found simply in having officials from both Departments sitting together in commit- tees. Insufficient attention has been given to economic criteria in the selection of irrigation projects, and there has been a general tendency for water to be spread too widely so that as many farmers as possible can bene- fit, regardless of whether they can use the water effectively. Far too many projects have been started in relation to the resources of money and talent available and much capital is locked up unproductively for long periods~ Not enough study has been given by the agricultural research and extension services to the practical problems involved in making full and efficient use of the water supplied. Financial returns as a rule are extremely low. - 18 - on helping the larger and more efficient farmers to produce more and g2v2ng them the incentive to do so. The necessary expansion certainly cannot be achieved so long as so much effort continues to be directed to looking after the less viable sections of the agricultural community, who consist mainly of very small farmers and agricultural labourers. Politically and in human terms, this is an extremely difficult choice to make. But policies aimed primarily at assisting the lowest income groups must inevitably conflict with the objective of maximising output. 69. One important advance that has been made in the last few years, as described in the Indian submission, is the establishment of support prices for cereals as well as for jute. Admittedly, the prices so far fixed for cereals have generally been well below the prices prevailing in the market and have therefore had rather a limited impact. Indeed, except possibly for jute, where the buffer stock scheme is operated by the industry~ the Government does not yet have the organisation needed to enforce an effective price support policy for these commodities. The number of procurement points will have to be greatly increased and additional storage facilities created. The whole question of how far the Government can intervene more effectively in the distribution and marketing of agricultt~al co~nodities is one deserving of careful study. Attention must also be given to the problem of the relative prices of different crops. A conscious effort should be made to bring about through appropriate pricing policies the changes in cropping patterns that will be required to match the expected pattern of demand for agricultural products. For example, data on demand elasticities derived from national sample surveys, admittedly rather sketchy and out of date, suggest that special efforts will have to be made to stimu- late production of wheat, cotton and oilseeds at the expense particularly of inferior grains. 70. The Indian submission contains a general account of the progress of irrigation in the Third Plan. Present arrangements at the Centre for the follow up of projects leave much to be desired. This is partly the result of the unsatisfactory division of functions between the J1inistry of Irriga- tion and Povmr, which is responsible for supplying water for irrigation, and the ~1inistry o:f Agriculture, which is concerned vJith its use., There has long been talk of the need to secure closer working cooperation at all levels between these two Departments, both at the Centre and in the States, but nothing very much has been done about it$ The anmNer is not to be found simply in having officials from both Departments sitting together in commit- tees. Insufficient attention has been given to economic criteria in the selection of irrigation projects, and there has been a general tendency for water to be spread too widely so that as many farmers as possible can bene- fit, regardless of whether they can use the water effectively. Far too many projects have been started in relation to the resources of money and talent available and much capital is locked up unproductively for long periods., Not enough study has been given by the agricultural research and extension services to the practical problems involved in making full and efficient use of the water supplied. Financial returns as a rule are extremely low. - 19 - 71. \.~Jhile something like Rs.., 850 crores ($1, 785 million) have been allo- cated for investment in irrigation during the Third Plan (ll per cent of the Plan total), some other agricultural inpnts have been comparatively neglected .. Schemes for soil conservation and improvement, including reafforestation and measures to control waterlogging and salinity, do not appear to have received as much attention as they should, particularly in vieH of the opportunities for using under-employed rural labour on this type of work. A lot of emphasis has been placed on land reform and the imposition of ceilings on land holdings, but less thought has been given to the possibilities of increasing production through the consolidation of holdli1gso 72a Larger supplies of fertilisers are properly regarded as one of the principal requirements of Indian agriculture, and the serious delays that have occurred in the program for the domestic manufacture of chemical ferti- lisers are particularly unfortunate. They illustrate the inherent difficul- ties of working out mutually satisfactory arrangements for the collaboration of Indian and foreign firms in undertaking large industr:i.al projects - dif~iculties which in this case have been aggravated by uncertainties about governmen·b pdcing and distribution policies.. Pending completion of the fertiliser plants now under construction,; one of the most effective forms of external assistance to India would be to provide additional fertiliser imports to help in developing the market and building up knowledge of fertiliser use. At the same time, as supplies are increased, commerciP~ methods of distribu- tion should be encouraged, The present system under which most nitrogenous fertilisers are distributed by the Government to the farmers through coopera- tives appears to be cur.1bersome and inefficient~ 73 o The reform of agricultural administration in India is coming to be recognised as a necessary condition of more rapid advance. Farmers have suffered in the past from too much interference by government. officials knowing very liUle about farming., The move should be in the direct:i.on of reducing the influence of the general administrator and the revenue officer and enhancing the status of the agricultural specialist., A proposal for the creation of an All-India Agrj_cultural Service 1cms discussed with Sta·l:,e Governments two years ago and met uith a negative responsee Recently, hovJever, there have been signs of greater willingness to accept the idea .. IV" EXTERFAL FIJ'Tf.J,JCE General Outlook 7L.. The official balance of payments forecasts for the rema1.n1.ng years of the Third Plan are shmm in the table on the next page alongside the actuals for the first two years of the Plano The figures show the sharp worsening of the current account position from year to year~ The trend is disquieting., If the prospective current account deficit in the last year of the Plan is compared with the estimate of net domestic investment given on page 25 of the Indian submission, it would appear that over one quarter of this investment - 20 - India 1 s Balance of Payments ($ million) Actuals Forecasts Current Account 1961/62 1962/63 1963/64 l96LJ/65 1965/66 ~mports (c.iof.) Commercial a/ 1,940 2,075 2,297 2,622 2,820 PL 480 - 185 258 384 260 "E/ Total 2,125 2,333 - 2,681 2,882 2,820 E~ports and re-exports (f.o.,b.) 1,401 1,432 1,554 1,617 1,680 Visible trade balance -724 -901 -1,127 -1,265 -1,140 Invisibles net (excluding official grants) -17 -11 -27 -52 -82 Current balance (excluding official grants) -741 -912 -1,154 -1,317 -1,222 Capital Account Private foreign investment (gross inflow, excluding retained earning~ 46 55 55 63 71 Hepayment of loans to IBRD -29 -33 -38 -44 -44 Hepa;yment of other foreign loans -97 -78 -69 -95 -143 Other capital transactions net (including errors and omissions) -18 + 7 -so -42 -49 Capital transactions (net) -98 -49 -102 -118 -165 Deficit covered or to be covered by foreign aid/use of reserves -839 -961 -1,256 -1,435 -1,387 Financed by: • PL 48o aid 185 258 384 260 E.! Disbursement of other foreign assistance already pledged 5'19 674 918 1,063 1;082 Transactions with IMF (drawings +) 122 25 -50 -100 -100 Use of reserves c/ 13 4 4 Gap to be covered by disbursements of additional aid requested 212 405 Source: Government of India, Hinistry of Finance a/ Includes that portion of PL 480 freight charges (50 per cent) which is financed - out of India's own resources. b/ Nothing has been included in the import forecast for 1965/66 for commodities financed in previous years under PL L180. Whether or not a neH PL 480 agree- ment is concluded, the need for these imports will presumably continue. Both the total import bill and the current account deficit in 1965/66 are therefore likely to be considerably larger than shown in this table. c/ Including government balances held abroad, in addition to the gold and foreign - exchange holdings of the Reserve Bank of India. - 21 - vrill be financed from external sources., 1/ This is much the same proportion as at the end of the Second Plan and casts so~e doubt on the suggestion made in the Indian submission that the gap between investment and savL~gs is being narrmveda 75.. It is true that, because of the bunchi.ng of starts of new pro,j ects in the early part of the Third Plan, there will be a corresponding bunching of deliveries of ilnported equipment towards the end of the Plan, and this could mean that the high level of imports ex:pected in 196b/65 and 1965/66 turns out to be a hump rather than part of a continuous rise" It is also true that, 1,-rhile domestic savings may not have been increased much during the past two years 3 ta."<:ation has been raised to a nmv plane, so that if defence expendi- tures can be levelled off or reduced there might be a margin of additional savings to finance investment., However, there is no assurance that this ;..rill happen. 76,. If attention is s;ATitched from the savings gap to specific foreign exchange requirements, the outlook is equally disturbing., On the basis ol".ly of loans committed up to the end of 1963, external debt service pa;yments d;1e during the period of the Fourth Plan are estimated by the Indian Government at over $1,800 million or an average of $360 million a year (including repa~lffient of supplierst credits)., If India goes on borrowing abroad on the same scale and pattern as in recent years, service payments due during the Fourth Plan could reach about $3 3 000 million" The corresponding figure for the Third Plan is likely to be about $1,300 million<, Thus debt service alone can be expected on the ass1.unption stated to cost India roughly $1,700 million more during the Fourth Plan than during the Third& If it is further assu~ed~ (a) that visible exports rise during the Fourth Plan at the rate of 5 per cent a year (a considerably higher rate of increase than has been achi.eved over a.'Yly long period in the past); (b) that there is no significant change in net invisible receipts (other than debt service); and (c) th2t gross receipts of external assistance, including PL 480, are about the same in the Fourth Plan as in the Third - then the in~lication would be that foreign exchange available for financing mercha.'l.dise imports other than imports under PL 480 during the Fourth Plan vmuld average about $2,400 million a year., This :':..s somewhat above the 1963/64 level, but less than forecast for next year and about 15 per cent below the forecast for 1965/66o 1/ This is on the assumption that PL 480 imports, or equivalent ~nports - financed in other ways, will continue in 1965/66 at about the same level as in l96L/65>) - 22 - 77. Import requirements for investment are likely to remain high in spite of efforts to develop domestic production of capital goods. The foreign exchange component of the minimum steel expansion program envisaged for the period of the Fourth Plan can hardly be less than $200-2$0 million a year. Foreign exchange requirements for investment in energy over the same period have been tentatively assessed by the Energy Survey Committee at around $400 million a year. The railways still require imports of over $100 million a year. On top of all this, large amounts of foreign exchange will be needed to develop capacity in such import-intensive fields of investment as heavy engineering, fertilisers and petrochemicals. So far as maintenance irr~orts are concerned, there is reason to believe that, if the present pattern of industrial growth is maintained, there will be increasing rather than decreas- ing demand during the Fourth Plan for imports of petroleum, steel and non- ferrous metals, notvdthstanding the steps being taken to develop indigenous production. The possibilities of reducing imports of cereals and cotton must be regarded at best as highly uncertain. Imports of these five groups of commodities alone are already costing over $1,000 million a year. 78. Hhile it is too early to come to any definitive conclusion, it looks as if it may be necessary to reconsider the pattern of investment envisaged for the Fourth Plan in the light of the balance of payments situation. The con- tinuing prospect of acute foreign exchange shortage underlines the importance for planning purposes of using prices for capital and foreign exchange which reflect their true scarcities. It is equally important that every effort should be made, in planning investments, to find "minimum cost solutions" for expanding production. An appreciable amount of capital and foreign exchange has been misdirected in the past as a result of bad planning - for example, in the development of iron ore and certain sections of the heavy engineering industry. 11any other countries waste capital too, but India can afford to do so less than most. 79. Two other conclusions can be drawn from a cursory examination of the balance of payments outlook. The first is that an increase in foreign equity investment is badly needed to assist in financing the further expansion of Indian industry. The second is that everything possible should be done to improve the terms of aid extended to India by members of the consortium. Otherwise it looks as if external debt service during the Fourth Plan will absorb at least one fifth of the country's total foreign exchange receipts on current account, and probably more, depending on how fast exports grow. Export§. 80. An excellent review of exports is given in Part III of the Indian sub- mission. The Government has done a lot in recent years to make Indian industry more export-conscious and it has taken a number of useful steps to promote exports. The benefits of these measures will be felt only gradually. Neamrhile, it is evident that export markets generally are insufficiently attractive by comparison with the home market, and costs and prices of many actual and potential Indian exports are uncompetitive. Various subsidies and incentive schemes have been introduced to deal with this situation$ - 23 - 81. Iron ore exports were originally intended to contribute one third of the total expansion of India's export earnings during the Third Plan., This v.ras without Goa~ Now, even including Goa, their contribution is likely to be much less, In fact, export receipts from iron ore have risen very little during the past tvm years, and the prospect of a major increase during the coming year has been disappointed by the unforeseen technical delays encoun- tered at the port of Vishakapatnamo Unless drastic changes are made in the arrangements for developing iron ore exports (see paragraphs 46·~47 above), India appears to be in serious da.nger of losing her chance of establishing herself as a major world supplier. Other countries such as Australia and Halaysia are also building up facilities to serve the Japanese steel industry, which is the most promising outlet for Ind:i.at s exports, and a buyer's market is rapidly emergingo India is handicapped in competing in the Western European market for iron ore by the long sea haul and the heavy incidence of Suez Canal dues .. 82. The growth of India's total exports durli1g the past two years has been encouraginglll The trend is il1ustrated in the table on page 102 of the Indian submission which is based on the trade figures., 1/ To some extent the buoyancy of exports in 1963/6L\ may be explained by temporary factors, affecting parti- cularly jute and sugar, and the forecasts for the next two years are quite possibly on the optimistic side. But there are also other factors not yet reflected in the figures 111hich may work to Indiats advantage in the longer run .. For example, a mission from the jute industry which recently visited Eastern Europe vias very favourably impressed by the possibilities for expanding con- sumption of jute goods in this region. 83. An official cow111ittee has investigated the problems involved in increas- ing India's tourist earnings and has put fon.:rard a number of recom.mendationsi a few of which have already been acted upon. The expansion of the Indian Airlines Corporation's fleet by the purchase of three Caravelles will do some- thing to improve facilities for internal transport: the new aircraft came into service at the beginning of February.. Hotel accommodation is still the main bottleneck, but a few new hotels have been opened recently, and others are planned,. lrJork is even being resumed again on the international hotel started some years ago in New Delhi, and the hope is that it will be rea&y for occupation early in 1965~ Immediate Import Requirements 8L. Unless production in agriculture and industry can be stepped up quickly~ plans for mobilising larger domestic resources for investment during the Fourth Plan have little :prospect of success.. It is essential that larger outputs 1/ The payments figures reproduced on page 20 of this memorandum give a - rather misleading impression of export trends in 1962/63 and 1963/64 because there was an unusual hump in export shipments towards the end of 1962/63, after the hold-up caused by the Chinese invasion, and this was not reflected in receipts until the following year. - 24 - should be secured from the capital already invested in these sectors. Now that supplies of power and transport are more freely available, larger imports of fertilisers, industrial materials, components and balancing items of equip- ment would be of the greatest value to the economy. It is not possible to say exactly what the requirements of this or that item are. But there is no doubt at all that production is being held back for lack of maintenance imports~ including particularly chemical fertilisers, many types of steel, non-ferrous metals and miscellaneous chemicals. Hany of the inefficiencies created by existing licensing controls could be reduced, if not entirely eliminated, if imports of these things could be more easily obtained. Larger steel imports would also make it easier for the Government to relax controls over prices and distribution by reducing the risks of excessive price increases. External Assistance 85. The position with regard to commitments (or pledges) and disbursements of foreign aid, as estimated in the Indian submission, is summarised in the table on the following page. As this table shows, aid of just under $5,000 million has been promised to India from all sources for financing the Third Plan, including a carry-over of about $800 million from com~itments made during the Second Plan. Not far short of $3,000 of this will still remain to be disbursed at the end of ~1arch, but practically the whole of this undisbursed ~nount will have been comnitted to specific projects and programs. 1/ Nearly $750 million of the aid pledged or committed to date is expected to-be carried over into the Fourth Plan. Whereas the proportion of consortium aid as8umed to be carried over is just over one tenth, the corresponding proportion for non-consortium aid is nearly one third (line 12 as a proportion of line 3). This reflects the comparatively slow disbursement of credits from Eastern Europe which are mostly tied to industrial projects with long gestation periods., 86o Against the aid so far pledged or committed from all sources, the Indian Government is assuming that disbursements during the Third Plan 1rJill amount to $4,252 million. It estimates that an additional $617 million might be dis- bursed within the Plan period from aid to be pledged during the next two years. Even then, total aid disbursements during the Third Plan at $4,869 million would be lower than the aid requirement as originally stated, which was $5,460 million.~/ However, the rate of disbursement would be rising rapidly towards the end of the Plan, largely because of the bunching of deliveries of equipment for aid-financed projects. The Indian estimates also provide for the repay- ment of $200 million to the International Honetary Fund during the last two years of the Plan., The drawings made by India from the Fund in the first two years of the Plan ($147 million net) helped to bridge over the gap between the commitment and disbursement of consortium aid. 1/ It i.s indicated in the introduction to Part I of the Indian submission that .... at the end of last September agreements had still to be signed in respect of more than $1,000 million of the ai.d pledged by the consortium at previous meetingsQ It is likely that all but a small part of this amount will be covered by agreements or will be under negotiation by the end of Harch 1964, ~This was after allowing for private foreign investment which was assumed by the Indian Government to contribute $300 million during the Plan. - 25 - Third Plan Aid Pledges and Disbursements ::.1 ($-million equivalent) - £/ Consortium Non-Consortium ---, ..-,.- Total 1 .. Carry-over to Third Plan of aid pledged during SecOl1d Plan 560 (265) (825) 2. Third Plan pledges to date 3,417 (750) ( h,l6?) ':l· Total aid available so far 3,977 l,OJ.5 4,992 .-'• of :rrhich: - i~. Disbursed in 1961/62 422 95 517 5. Disbursed in 1962/63 573 101 6?4 6o Disbursed in 1963/64 (estimate) 766 151 918 7-. Total disbursements in first three -- - years of Third Plan 1,761 347 2_,108 Be. Still to be disbursed after 11arch 31, 1964 (3 - 7) 2_,216 668 2,B84 of which: 9, Expected disbursements in 1964/65 891 172 1,063 10., Expected disbursements in 196)/66 906 175 1,082 llo Total expected disbursements in Third Plan of aid listed above 3,558 694 4,252 12e. Assumed carry-over to Fourth Plan of aid listed above iW-9 321 ?hO Source: Government of India, Hinistry of Finance a/ The table relates only to aid pledged up to the end of December 1963., ·- Aid under PL h80 is excluded,. b/ Non-consortium aid is tru{en here to include all loans from the Soviet Union, ·- Czechoslovakia, Poland, Yugoslavia, Switzerland and Denmark; grants from Australia, New Zealand, Norway and the United Kingdom under the Colombo Plan; grants from Germany, the Ford Foundation and the Rockefeller Founda~· tion; wheat grants from Canada; assistance from the United States and Japan for the mining of iron ore in Orissa; loans for Air India Inter- national from private banks in the United States; and grants extended by the u.s .. Government prior to the formation of the consortium. The amounts of aid pledged or comrnitted by countries which are not members of the con- sortiurn are as follmvs (in million dollars) : Soviet Union 648, Czechoslovakia 99, Poland 60, Yugoslavia 40, Switzerland 32, Australia 8, Denmark 2, Norway 2 and New Zealand 2o 'I"he breakdo1r1n of non-consortium aid bet1rreen lines 1 and 2 is uncertain,. ... 26 - 87.. If the consortium continues to pledge aid to India during the next two years at approximately the same level as during the last three, the carry-over of aid from the Third to the Fourth Plans will probably be over $2,300 million or nearly three times the carry-over from the Second Plan to the Third. This would not necessarily be an abnormal amount to have in the "pipeline" in relation to a steady flow of aid commitments averaging about $1,250 million a year, which is approximately the rate at which aid has been committed during the past few years (including aid from outside the consortium). The relation- ship between the pipeline and the rate of commitment depends, of course, on the average period of disbursement. Generally speaking, the larger the proportion of project aid to the total, the longer the period of disbursement and the larger the amount of aid in the pipeline at any given time. A pipe- line of $2,300 million related to level annual commitments of $1,250 million would imply that on average aid was being disbursed over a period of between 4 and 5 years from the time of commitment (assuming for purposes of illustra- tion that disbursements start in the year of commitment, and that the amount disbursed in each year is the same). V. CONCLUSIONS 88. India needs all the aid she can get, and on the easiest possible terms, if she is to succeed in carrying on with the development of her economy along the course charted in the Second and Third Plans. The policies which the Government has follovJed so far have not proved adequate to produce the results expected from the foreign capital invested. A new approach must be adopted if the great talents of the Indian people are to be effectively deployed in a single-minded drive to increase production. 89.. The starting point has to be .:m all-out effort to raise agricultural production and to capture a larger proportion of the additional income generated in the agricultural sector for reinvestment in industry. Simul- taneously, both agricultural and industrial development must be geared more closely to the promotion of exports. And the growth of population must be checked somehow. 90. A consideration of the policy action required to achieve this re- direction of effort, while economising as much as possible in the use of capital and foreign exchange, should be a major preoccupation of the planning authorities in working out the Fourth Plan. Difficult choices Hill have to be made if aggregate domestic savings are to be raised progressively to the point 1..rhere they match the investment needed to reach and maintain a satis- factory rate of economic growth. 9la During the present period of adjustment, the most valuable form of aid which India can receive is aid which can be used quickly to finance additional imports of materials and components for agriculture and industry. The amount of such aid requested in the Indian submission for 1964/65 is about $560 million, but this should not necessarily be regarded as an upper limitm The more aid that is available in this form, the easier it will be for the Govern- ment to liberalise maintenance imports and relax controls over internal prices and distribution, particularly in the case of steel. - 27 - 9:2. Project aid will be needed during the coming year to enable a start to h9 made on a number of new power schemes, including improved facilities for transmission and distribution, to provide continuing support for such programs a:s raihrays and telecormnunications and to fina.YJ.ce selected projects for industrial expansion.. None of the major Fourth Plan steel expansion schemes will be ready for the placing of orders until 1965/66 - except for additional blast furnaces at Durgapur and Bhilai, on which work could be started in l96b/65. Efforts should be made to see whether any new and well-planned fertiliser projects can be got ready in 196h/65; if so, they may be partic- ularly deserving of consortium support., 93. An assessment of Indials aid requirements for the coming year makes sense only as part of a continuous exercise in cooperation bet"t..reen India and the members of the consortium.. Indiat s population in three years r time >..rill pass the 500 million mark - an increase of 160 million during the twenty years that will have elapsed since Independence. The fact that, in spite of this increase, the Government has succeeded in bringing about a significant improve- ment in average living standards without sacrifice of essential political freedoms is perhaps more remarkable than all the shortcomings to which atten- tion has been drawn in this memorandu.rn. 9,~~ India must be given time to reassess her problems and policies and to effect the improvements in the planning and execution of economic de'relopment w:Lthout which no amount of external aid can see the country through. As the Indian submission to the consortium points out, llit is now necessary to con- ceive of further development in terms of an efficient and economic choice between a number of complicated alternatives", and this choice can only be made 11 after the most careful consideration of the costs and benefits of different, alt,ernativesn. If this approach is adopted,~ there w:i.ll be every justification for continued support from the consortium at the levels established in recent yearst three yeaTS" Yet in sp.i te of the fact thflt aid pledgss fro:m the conu• sor'"':.::_u1'11 have ex:seded vJhat wa.s orig~.nalJ:y conte;-q_:,laterl;,; the growth of the economy has fallen far s~1ort of Plan expectations, and there is no sign that India's dependence on external support is being reduced., A further cause of concern for the future arises from the fact that the conso::'t.ium does not have any clear idea of your Goveri'1.-:Jr;;ntt s programs and polir:;ies for the continued development of the economy ciuring the next three years and into the F'ourth Plan" A year ago my predecessor, r1r., Black, wrote to you suggesting the need for a thorough~·going reappraisal of the investment program as a basis for reassessing the balance of payments for the next fe-w· years,, i!Jithout such a reassessment, there is no way in which the consortium can arrive at a reliable judgement on the amount of additional aid that Hill be required in the coming years or on the uses to which such aid can be best applied., I realise that the task of economic planning in India has been greatly complicated by the national emergency, but I t]1ink it is essential that, before the conso:;,·tium meets to consider aid requirements for the last t,w() years of the Th1:::·d Plan? your Govern.."'llent should provide some sort of outline plan for the development of tl:.e economy over the next four or five years - that is, well into the period of the Fourth Plan, This should include a revie~\f of economic policy and indicate the steps being taken to improve the organisation for the implE:;mentation of development programs sector by sector. The need for contin,Ious forwm'd planning, as dis"'·,inct from planning at five.myear intervals, seems to me all the r,10re urgent :ln 2:nct:.a bec:atJ.se much of ths aid extended by the conJcrtiltTt, as t~rell CJ,s mos L of tne aid from non- consortium sovrces, is tied to specific investment prog:;,~ams and projects" .As - 30- you know, the consortium has laid particular stress this year on the need for non-project assistance, but it is clear that many members of the con- sortium, including the Bank and IDA, must continue to relate a large part of their aid to projects - and as most of the projects in the Third Plan ha·.re nov-r been committed, it is becoming increasingly difficult to find new projects suitable for external financing. This problem will be even more acute n::;xt:. year unless the present system of five-year planning in India is consid~rably modified, and unless many of the programs and projects due for completion during the period of the Fourth Plan are prepared (and approved by the Planning Commission) well in advance of the time when the Plan is due to start. ~fuen the consortium resumes its meeting in July to consider aid pledges for the current year, it will also discuss the timing of the next round of meetings. In principle, I think we should aim for December 1963/January 1964 or January/February 1964, so that the pledges for 1964/65 can be indicated before the beginning of your next financial year. However, in view of the attitude taken by a number of delegates in Paris, I doubt whether such an early meeting would be fruitful unless your Government is able by then to provide a much clearer indication than we have at present of your plans for the future growth of the economy and of the implications of these plans for the balance of payments. I should be grateful therefore if you could let me have your reactions to this letter before the July meeting, which will probably be held about the middle of the month. I very much look forward to seeing you here in Washington for the Annual Heeting at the end of September. Sincerely yours, (signed) George D. Woods - 31- Finance Hinister New Delhi India lst July 1963 Dear Hr9 Woods, Thank you very nruch for your letter of June 20, 1963. First of all, I would like to express my a.ppreciation and gratitude to you and to the officers of the Bank for all that you have done to make the meetings of the India Consortium a success., I would further assure you that, as L.,K., Jha said at the consortium meeting in Washington, -vm shall give full considera- tion to the suggestions made in the excellent Economic R.eport of the Peter Wright 1'1ission, and to the vie1rrs expressed at the consortium meeting to which you have referred~ 2a We ourselves have been concerned for some time about the low rate of growth during the first two years of the Third Plano In general 3 the increase in industrial production has not been unsatisfactory and the poor performance of the economy is mainly due to the absence of any significant increase in agricultural production. 1·!hile this has something to do w:i.th weather conditions, we are well aware that a great deal has to be done, and done quickly, on the agricultural front. Just at the moment, I feel that there is need also to provide a stimulus to industrial activity in the private sector., V>Jhile I think it would be a mistake to read too much mp:::;;:ing into the figures of national income for the last two years, there eannoc be any difference of opinion regarding the essential point that the perforrrr.a.IJC9 of the economy needs to be improveda 3.. I do not, hmvever, at this stage, wish to dwell on the steps we are taking, or the particular points raised in the Washington me·:;ting of the consortium to wr.cich you have dratm my attention.. 1PJe are, <:rt pre:.:::r:mt, eng2.ged on the mid-term assessment of the Third Five-.-Y:;;ar Plan ancl also t8.king this oppo::_ni:;unity to review our policies and procedureso Th8 accep+,ance b;y·· the leading members of the consortium of our plea, which has also had the full support of the Bank, that credits should not be tied to projects:; should be of great help.. I sh2.ll be 1vriting to you further on the subject at a some- what later stage and shall anyhow take the op;>vrtunity of a personal discus- sion with you when I go to V'Jashington for the annual meeting of the Bank .. 4o Hea11while, I feel I should immediately let you know that we agree with the main points which you have made about what needs to be done before the consoJ."tium meets again.. irve fully share your view that planning is and must be a continuous process.. The Plan >~Thich we formulate every five years covers a multitude of things, education, health, social services, problems of resource mobilisation and the allocation of resources and responsibilities between the Centre and the States.. At the same time, we recognise the importance of continuous forward planning in certain spheres vvhere, having regard to the long period of gestation, it is always desirable to be looking - 32 ... well ahead into the future,. In fact, for quite some time no1-:r_, we have been enge.ged in forvJard planning of power, trc:.nsport, steel and certaj_n other basic facilities and industries and a good deal of preliminary but detailed work has already been done. You may be m,rare that we have been discussing with the Bank some power projects to be financed out of the current year's Bank/IDA programme which are really intended to augment power supply in the early years of the Fourth Plan., It is indeed our hope that project assistance to be com- mitted during the next tvJO years would relate essentially to 1vhat might be called Fourth Plan projects. 5~ We were somewhat unhappy about the reference during the recent consor- tium meetings to the original estimates of the requirements of external assistance during the Third Plan period and the suggestion that only a modest balance remains to be assured in relati.on to these estiraates., Quite clearly, if advance preparation for the Fourth Plan is to take place on an adequate scale and if there is to be no break in the continuity of development, 1r1e must seek, from now on, assistance which would be carried over into the Fourth Plan, and the quantum of such assistance wmJ.ld have to be larger than what v.ras available as a carry-over when the Third Plan began. This is particularly necessary9 because most countrtes allocate funds not on the basis of disburse- ments, but on the basis of commitments., 6., I entirely agree with you about the timing of the next round of consortium meetingso They should be well ahead of the beginning of our next fiscal year in April 1964 and I -;..rould assure you that we would be ready to present the kind of data that you have asked for., I think our pr:L11ary con- cern during the next round of consortium meetings, apart from covering the immediate requirements of non-project assistance, should be to seek commit- ments for fresh development in the basic sectors to 1rrhich I have referred earlier, 1orith the full knowledge that they 1.vould be completed after the Third Plan is over., 7• I hope that the July meeting would produce the results which you a11d your associates are working for" I am looking for·"V~rard to seeing you a..r1d ~1rs .. Woods in your new home in "\IJashington at t}1.e time of the annual meeting .. With kindest regards and best wishes, Yours sincerely, (signed) Horarji Desai I'ifr. George D.. Woods President International Bank for Reconstruction and Development \v.ASI-IINGTO~J 25 D.C. (U.S.A.)