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
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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
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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
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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
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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.
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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.
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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
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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.city
would be in the region of 15! million tons of ingots or 11 million tons of
finished steel, This may be compared with the estimates of demand set out
in the Indian submission.. The lmvest of these estimates, which was made a
year ago by the UoS., Steel Corporation, puts demand for finished steel in
1970/71 at 11"2 million tons.,
44.. A committee of economists appointed by the r'Iinister of Steel, lhnes 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
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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.
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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.
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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
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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.
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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
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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.)