1st Five Year Plan
[ Home ]
<< Back to Index

Introduction || APPENDIX (CH-4) || APPENDIX (CH-9) || ANNEXURE (CH-12) || APPENDIX (CH-14) || APPENDIX (CH-24) || APPENDIX (CH-29) || Conclusion
1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || 36 || 37 || 38 || 39

Chapter -2:

In defining the objectives, priorities and techniques of planning in India, it is necessary to bear in mind the scale and dimensions of the problem as outlined in the preceding chapter as well as the basic values which must find expression in the economic and social pattern to be evolved. It is no longer possible to think of development as a process merely of increasing the available supplies of material goods ; it is necessary to ensure that simultaneously a steady advance is made towards the realisation of wider objectives such as full employment and the removal of economic inequalities. Maximum production, full employment, the attainment of economic equality and social justice which constitute the accepted objectives of planning under present-day conditions are not really so many different ideas but a series of related aims which the country must work for. None of these objectives can be pursued to the exclusion of others ; a plan of development must place balanced emphasis on all of these. For instance, even the limited objective of increased production cannot be attained unless the wider objectives of social policy are constantly kept in mind and steadily pursued. On the other hand, equality and social justice will have little content unless the production potential of the community is substantially raised. Development, thus conceived, is a process which calls for effort and sacrifice on the part of the entire body of citizens. For such effort and sacrifice to come forth psychological conditions have to be created which provide an incentive for all to give of their best.

Institutional And Structural Factors In Development

2. Reference has been made in the previous chapter to the limited and partial development which the Indian economy has registered during the last few decades. Judged in terms of per capita incomes and standards of well-being, the economy has, on the whole, remained more or less stagnant. This is primarily because the basic conditions under which an economy can continuously expand have been lacking. The impact of modern industrialism in the latter half of the 19th century was felt in this country initially through imports of machine-made goods from abroad which reacted adversely on the traditional patterns of economic life, but did not create the impulse for development along new lines. The transition that followed was characterised not by expansion of industry and a diversification of the economic structure but by a decay of India's traditional arts, crafts and industries, and by an increasing pressure of population on the land. This retrogression led to a decline in productivity per person engaged in agriculture, the adverse effects of which were perhaps softened to some extent by the shock-absorbing capacity of the old institution of the joint family. The result was a continuous increase in under-employment and the growth of an attitude of "pathetic contentmen " on the part of the people. In such an environment there could be little economic or social progress. Whatever surpluses might have been available in the system under these conditions were directed to the purchase of imports, partly of better finished products from abroad and partly of equipment for the new transportation system designed primarily in the interests of foreign commerce. The responsibility for promoting modern commerce and industry came to be concentrated in the hands of certain classes in the urban areas, and up to the end of the nineteenth century the only major large-scale industries which had taken root in the country were cotton and jute textiles. Little attention was paid to improvement of agriculture or to the needs of the rural areas. After the turn of the century and especially after World War I, it came to be recognised that without rapid industrialisation significant economic advance was not possible. The inter-war period witnessed the establishment and growth of several industries in the country. A more positive policy on the part of the Government and a change in the terms of trade in favour of the producers of manufactured goods and against the primary producer in the period of the depression materially assisted capital formation in the industrial sector. There was, however, little overall economic improvement as conditions in the agricultural sector deteriorated sharply.

3. The backwardness of the Indian economy is reflected in its unbalanced occupational structure. About 68 per cent of the working population is engaged in agriculture, about 14 per cent in industry (large and small scale), some 8 per cent in trade and transport and the remaining 10 per cent in professions and services including domestic service. Even with this large proportion of the population engaged in agriculture, the country is not self-sufficient in food and raw materials for industry. Productivity per worker in organised industry, commerce and transport is about three times that in agriculture, but this sector of the economy has not been expanding rapidly enough to absorb the surplus population on the land. The large-scale underemployment in the rural areas which these conditions have given rise to constitutes a big economic and social problem. A change in the occupational pattern in the direction of greater employment in the industrial sector and in services is clearly necessary if the associated phenomena of mass poverty and unemployment are to be tackled effectively.

4. It follows from all this that the problem is not merely one of making the existing economic institutions work more efficiently, or making small adjustments in them. What is needed is a transformation of the system so as to secure greater efficiency as well as equality and justice. The central objective of planning is to create conditions in which living standards are reasonably high and all citizens, men and women have full and equal opportunity for growth and service. We have not only to build up a big productive machine—though this is no doubt a necessary condition of development—we have at the same time to improve health, sanitation and education and create social conditions for vigorous cultural advance. Planning must mean coordinated development in all these fields.

5. In this task of securing simultaneous advance along several fronts, it would be unrealistic to hold out the hope that rapid and spectacular progress can be made in the initial period of planning. Within a limited period, there is always a measure of conflict betweenone objective and another and, in the formulation of a Plan for a given period, it is necessary to proceed in terms of priorities as between these objectives themselves laying more stress on some and less on others. This problem of balancing competing objectives is implicit in all planning and the quality of a plan depends upon the soundness of its judgments regarding the relative emphasis on the various objectives. Only to the extent that the Plan succeeds in striking a right balance can consistent policies be formulated and pursued. There is, to begin with, the problem of choosing, on the one hand, between a moderate increase in the standard of life in the near future with relatively small additions to capital equipment and, on the other, a substantially higher standard of life perhaps for the next generation at the cost of continued austerity and privation to the present generation in the interests of rapid capital formation. The implications of this choice have already been discussed in the previous chapter.

6. Secondly, while a fuller utilisation of the idle manpower in the country must be a major objective, and every effort must be made to create opportunities for work in the rural areas through improvements in agriculture, development of cottage and small-scale industries and extensive programmes of public works, especially in the slack season, the lack of the necessary equipment and other materials needed for improving labour productivity limits the rate at which idle manpower can be'absorbed. There is, under these conditions, the risk of creating or perpetuating pseudo-employment, which might result in a rise in money incomes without a corresponding increase in the supply of the goods needed for sustaining the newly employed. The problem, as has been shown earlier, cannot be solved satisfactorily without a substantia. increase in the productive equipment of the community, which, in turn, means more investment. While planning for fuller employment, it is also necessary to keep in mind the distinction between a pattern of employment which can be sustained after the development process has gone some way and a pattern that has to serve for the transitional stage. Rigidity of the occupational pattern is incompatible with rapid economic development. Steps must, undoubtedly, be taken to ensure the fullest possible utilisation, in furtherance of development programmes, of labour power now running to waste, but the long-run objective must be to encourage rather than discourage the mobility of labour, geographical and occupational.

7. The problem of unemployment among the educated middle classes in the urban areas is an instance of a failure of coordination between the system of education and the needs of the economic system. As a proportion of the total population, the number of educated men and women in the country is very small, and there is dearth of trained personnel of the requisite quality in business and industry as well as in public administration. Unemployment among the educated classes is to some extent a consequence of the excessive bias in the present educational system towards general literary education to the neglect of specialised, technical and vocational training. To some extent, the difficulties experienced by educated young men in finding employment are traceable to a certain reluctance on their part to take on occupations which involve hard manual work or work in somewhat uncongenial surroundings either in cities or in rural areas. The problem has many facets. Unemployment amongst highly qualified and trained personnel may, to some extent, be frictional or transitional in character, but it may also be due to a lack of adjustment between demand and supply of such specialised personnel. Employment exchanges, closer contacts between educational institutions and employers, private or government, and other devices to encourage a better adjustment between demand and supply can alleviate the problem of middle class unemployment upto a point. But a large and continued increase in the demand for educated men and women can come only from a quickened tempo of development in the economy. As planning proceeds, there will be demands for personnel with various types of qualifications and training and meanwhile it is necessary to take steps to diversify and reorientate the educational system in keeping with the needs of a developing economy.

8. The decisions that have to be taken in regard to the reduction of economic inequalities within a given period also involve a weighing of diverse considerations. While it would be wrong in this sphere to think in static terms and to condone the existence or accentuation of sectional privileges, it is no less important to ensure a continuity of development without which, in fact, whatever measures, fiscal or other, might be adopted for promoting economic equality might only end up in dislocating production and even jeopardizing the prospects of ordered growth.

9. There are risks in going too far or too fast in these matters, but the risks of not moving fast enough are no less serious. The decision as to the measure of risk to be undertaken must turn primarily on an appraisal of the capacity of the community to hold together under the stress of major structural changes and of its various sections to maintain a high standard of discipline and restraint while the necessary adjustments are taking place.

Democratic Planning And The Role Of The State

10. The question of the techniques to be adopted for planning is linked up with the basic approach that a community decides to adopt for the realisation of its objectives. It is possible to have a plan based on regime.itation and on immediate measures for levelling down in the hope ultimately of being able to level up. It is possible to take the view that mass enthusiasm cannot be created except on the basis of reprisals against those classes which have come to be associated in the public mind with the inequities and deficiencies of the old order. But the basic premise of democratic planning is that society can develop as an integral whole and that the position which particular classes occupy at any given time—a product of various historical forces for which no individual or class as such can be held responsible—can be altered without reliance on class hatreds or the use of violence. The need is to secure that the change is effected quickly and it is the positive duty of the State to promote this through all the measures at its command. The success of such planning no doubt depends on the classes in positions of power and privilege respecting the democratic system and appreciating the rapid changes it calls for It is clear that in the transformation of the economy that is called for the State will have to play the crucial role. Whether one thinks of the problem of capital formation or of the introduction of new techniques or of the extension of social services or of the over-all re-alignment of the productive forces and class relationships within society, one comes inevitably to the conclusion that a rapid expansion of the economic and social responsibilities of the State will alone be capable of satisfying the legitimate expectations of the people. This need not involve complete nationalisation of the means of production or elimination of private agencies in agriculture or business and industry. It does mean, however, a progressive widening of the public sector and a re-orientation of the private sector to the needs of a planned economy.

Relative Shares Of The Public And Private Sectors In Ownership Of Productive Capital

12. We should like to emphasise here that, as far as the ownership of productive capital assets (other than in agriculture, small-scale industry and transport, and in residential housing) is concerned, the share of the public sector is already large. The book value of gross fixed assets owned by the Central and State Governments, together with the working capital in the enterprises concerned, amounted to over Rs. 1,200 crores at the end of 1950-51 (as compared to about Rs. 875 crores at the end of 1947-48). The distribution of these was roughly as follows :—

(Rs. crores)

Railways 837
Irrigation works (including multi-purpose river valley projects) 230
Communications and broadcasting 53
electricity undertakings 40
Industries 44
Civil Aviation 10
Ports 8
Central Tractor Organisation 5
total 123

The above estimate excludes the investment in motor transport. Strictly speaking, account should also be taken of the productive capital assets owned by port trusts, municipalities and other semi-public agencies which probably amounted to well over Rs. 1000 crores.

13. The value of productive capital assets in the private sector (again excluding agriculture, small-scale industry and transport, and residential housing) in 1950 was not perhaps more than about Rs. 1500 crores. According to the Census of Manufactures for 1949 the net productive capital employed in twenty-nine groups of factory industries amounted to only about Rs. 510 crores ; for the factory industries not covered by the Census, as well as to allow for depreciation (so as to make the estimates comparable with those for the public sector which give the gross value), an additional provision of Rs. 600 crores might be made. The break down of the estimate of the value of total productive capital in the private sector, referred to above, would thus roughly be as follows :—

(Rs. crores)

Factory establishments 110
Plantations 100
Electricity undertakings 70
Mines . 30
Shipping and Aviation 32
Motor transport 130
total 1472

14. These estimates are necessarily rough, and relate to historical and not replacement value, which will be considerably higher in both cases, but they show that in the building up and maintenance of basic services essential for organised industry, and to some extent in industrial development itself, the State has already been playing a not insignificant part. It also suggests that the productive capital in industry and in services essential to it is so small compared to the needs of the country that, in the furthe. accumulation of it, the two sectors can well supplement each other and need not necessarily expand at the expense of the one or the other.

Relations Between The Public And The Private Sector

15. In the industrial sphere, the respective roles of the State and of private enterprise have been enunciated in the Industrial Policy Statement of 1948. In terms of this Resolution, the principle of Government ownership and control has been accepted in regard to a segment of the economy comprising arms and ammunition, atomic energy and railways. It has also been stated that in regard to certain key industries like coal, iron and steel, aircraft manufacture, ship-building, manufacture of telephone, telegraph and wireless apparatus, etc., the State is to be responsible for further expansion except to the extent that it considers the cooperation of private enterprise necessary for the purpose. In the rest of the industrial field the initiative for development and the responsibility for management will rest on private enterprise. Government have, however, the right to acquire any undertaking in the public interest and to intervene in cases where the conduct of industry under private enterprise is not satisfactory.

16. The distinction between the public and the private sector is, it will be observed, one of relative emphasis ; private enterprise should have a public purpose and there is no such thing under present conditions as completely unregulated and free private enterprise. Private enterprise functions within the conditions created largely by the State. Apart from the general protection that the State gives by way of the maintenance of law and order and the preservation of the sanctity of contracts, there are various devices by which private enterprise derives support from the Government through general or special assistance by way of tariffs, fiscal concessions, and other direct assistance, the incidence of which is on the community at large. In fact, as the experience of recent years has shown, major extensions of private enterprise can rarely be undertaken except through the assistance of the State in one form or another. The concept of private enterprise, as, indeed, of private property, is undergoing rapid change, and the view that private enterprise can function only on the basis of unregulated profits is already an anachronism. The process of reorientation should and is certain to continue and gather speed, and the problem is to see that the transition is smooth and orderly. Already, in certain spheres of industry, units owned publicly and units under private enterprise are functioning side by side. The points of interaction between private and public enterprise are multiplying rapidly. In the maintenance of industrial peace and the promotion of a cooperative outlook between capital and labour, the State has necessarily to play a vital role. All these are indications that the private and the public sectors cannot be looked upon as anything like two separate entities ; they are and must function as parts of a single organism.

17. Agriculture is traditionally a sphere in which the organisation of economic activity centres around the individual, backed by the cooperation of the members of the family. In a static subsistence economy this form of organisation was probably adequate to the limited purposes then in view. Under modern conditions, it is proving more and more inadequate. Here, again, whether we regard agriculture—and associated industries—as falling within the private sector or the public sector is more a matter of nomenclature than of substance ; for it is almost impossible to secure the desired development in these fields without a great deal of initiative and active assistance on the part of the State. Not only must the State assume the responsibility for providing the basic services such as irrigation, pov/er, roads and communications ; it must also undertake direct promotional work by providing finance, marketing, technical advice and other assistance to agriculture through appropriate agencies. If the State undertakes these responsibilites, this will mean certain obligations which the agriculturist will have to undertake.

18. For the State to be in a position to discharge efficiently the varied responsibilities that it undertakes, it is necessary that all producers, agricultural as well as non-agricultural, accept certain obligations. For instance, since the State has to guarantee a fair distribution of the limited supplies of food, the farming community has to make available to it on reasonable terms the necessary supplies for distribution to non-producers. For similar reasons controls might be necessary on essential consumer goods like cloth and basic producer goods like steel. In a planned economy, thus, the private producer has to work, in essence, as an agent for utilising economically and to the best advantage of the community the productive resources at his disposal.

Organisational Aspects Of Economic Change

19. Our conception of the public and the private sectors and the direction in which they ought to move is closely related to the problem of competing objectives we referred to earlier. This problem arises in an acute form in the early stages of planning mainly on account of deficiencies in organisation. The necessity for making a choice between reducing inequalities of income and raising the level of capital formation would not, for instance, be so serious if there' were available at hand alternative channels for efficient mobilisation of resources. The limitations to a policy of full employment are similarly to a great extent on account of deficiencies in organisation in regard, on the one hand, to the supply and distribution of essential commodities, and, on the other, to the possibilities of directly mobilising manpower. The institutional changes that are now initiated have to be framed with two aims in view : first, to progress as far as possible even within the period of the Plan towards the social objectives in view, and, second, to remove deficiencies in organisation which will make possible faster progress in the future.

20. In a country which is primarily agricultural and in which the pace of development in other sectors depends to a great extent on progress in agriculture, the system of ownership and management of land within which agricultural producers have to function is obviously of the highest significance. Large areas of the country have emerged only recently from forms of feudal organisation. Though a fair measure of progress has been made in protecting the cultivator against intermediaries in land, money-lenders and traders, a great deal has still to be done in order to enable the cultivators to function as an efficient agent of production in command of a reasonable size of holding and with access to productive credit and other facilities such as supply of seeds and manures. The question of ownership of land has also a wider social aspect which makes the reorganisation of the agrarian system a matter of prime national importance. Our detailed recommendations in respect of land policy to be followed in the period of the Plan have been set forth later in this Report. The organisational changes necessary in this sector do not relate merely to land ownership but cover a wider field including agricultural marketing and rural credit. The problem here is one of making a simultaneous advance along several lines and this, as we have emphasised elsewhere, involves a strengthening of the co-operative form of organisation for purposes of marketing, credit and production.

21. In the development of countries like the United Kingdom, trade and banking played a great part in mobilising resources for development. Mercantile profits, in fact, were the main source of funds for industrial expansion, while the growth of commercial banks provided the necessary working capital. Apart from the fact that there were special historical circumstances which favoured the accumulation of large profits from commerce in the initial stages of economic development in many of these countries, these means of promoting capital formation are not consistent with our other objectives. The expansion of trade has, under our conditions, to be regarded as ancillary to agricultural and industrial development rather than as an initiating impulse in itself. In fact, in view of the urgent needs for investment in basic development, diversion of investment on any large scale to trade must be viewed as a misdirection of resources. Similarly, banking development and provision of credit facilities in an under-developed country raise special problems. To these we shall return presently.

22. The distributive- system needs special attention under planning. In an economy subsisting on small commodity surpluses scattered widely, there is a tendency for capital to flow into trade in preference to production. Apart from the opportunities which a loosely-knit economic organisation gives for small trading establishments to spread themselves over extended lines of distribution, investment of capital in speculative trade gives better returns than in almost any other sector. The former may be regarded as another manifestation of under-employment but the latter is apt to become an obstacle to development. From the larger point of view of controlling relative prices and profitability as also for gaining control over the economy at strategic points, state trading at the wholesale level in respect of selected commodities could be used as a potent instrument of planning. In a system in which profits from production are closely linked to marketability of the product government operation of the distributive system at selected points is, prima facie, capable of producing even better results than direct control over production. The cost of living of the large majority of the people depends, for instance, on a relatively few commodities like foodgrains, cloth, sugar, kerosene and salt. Through state trading in these commodities, it would be possible to operate directly on the cost of living and to aim at a rate of development which would otherwise be difficult. Public enterprise in the field of distributive trades, is however, likely to raise complex organisational problems. Our knowledge of the present distributive mechanism, its composition and structure and the way the various links in the system are related is atpresent inadequate, and it is therefore difficult to visualise fully the administrative problems involved. But the direction in which we have to move is clear, and a beginning has to be made during the period of the Plan. Before decisions can be taken, there is need for clearing up the factual position regarding the amount of capital-involved, the profit margins, costs of operation, the number of people employed, and related aspects of the question. A Census of Distribution designed to throw light on these crucial aspects and covering a few selected commodities in the first instance would be of value in this context.

23. The limitations and deficiencies of organisational structure from the point of view of economic change can be made good, not necessarily by displacing private agencies but through supplementing them. Our conception of the private sector comprises not only individual and corporate but also co-operative forms of organisation with special emphasis on the last. It includes the vast fields of primary production, of cottage and small scale industries, of marketing of agricultural produce, of residential housing and of wholesale and retail trade in which there is scope for rapid expansion of cooperative enterprise. The extension of the cooperative form-of organisation to these varied activities has hardly been initiated in this country, but it appears certain that such extension holds out promise of securing the best results by way of increased production, the reduction of rent and profit margins, and the building up of investible surpluses in the economy. If planning is to avoid excessive centralisation and bureaucratic control and is, at the same time, to hold in check the self-centered, acquisitive instincts of the individual producer or trader working for himself, the encouragement of cooperative enterprise must be given the highest priority. We should like to stress in particular the importance we attach to the progressive socialisation of agricultural marketing and of processing industries in the rural areas through the agency of cooperatives. The problems arising in this connection and the ways and means by which the State is to foster such development are referred to in appropriate contexts in the later chapters of this Report.

Allocation Of Resources And Price Policy

24. The raison d'etre of a planned economy is the fullest mobilisation of available resources and their allocation so as to secure optimum results. The problem of how this has to be brought about when the economy functions partly through private enterprise motivated by profit expectations and partly through Government ownership and direction deserves careful consideration. For the private sector, the prevailing price relationships are the prime factor in determining resource allocations. In the public sector, the direction of investment need not always and necessarily be guided by the profit-and-loss calculus. Nevertheless, the relation between costs and returns even in the public sector has to be judged, at least as a first approximation, in terms of market prices. It follows that the maintenance of a structure of prices which brings about an allocation of resources in conformity with the targets defined in the Plan must be the consistent aim of .economic policy.

25. Over a longer period, and particularly in a period of rapid development, the structure of prices is bound to change. Even the level of prices is likely to go up. But such changes must as far as possible keep in step with improvement in the level of incomes as well as with shifts in their distribution ; if they move in advance, they are likely to cause considerable hardships and lead to results which are the negation of our objectives.

26. Price policy, being partly a problem of allocation of resources and partly a question of ensuring reasonable equality of sacrifice among the different sections of the people, requires financial as well as physical controls. In the early stages, a development plan necessarily increases money incomes more rapidly than production. If these incomes are allowed to raise current consumption expenditures, they act immediately on prices, especially of articles like food which are in short supply. Such price inflation distorts the relationship between sectional price levels and encourages a diversion of productive resources to purposes which militate against the requirements of development. If continued for a long time, it generates economic instability and social unrest. To the extent that idle manpower and other resources can be used productively without any significant generation of additional money incomes, the inflation potential of a development programme can be minimised at the very start. But, to the extent that money incomes rise, the problem of holding inflationary pressures in check has to be faced.

27. Monetary and credit policy is a powerful instrument for securing the desired result. using the war and in the years immediately following, credit policy as an instrument of over • all economic control had fallen into the background, but in recent years there has been a general tendency to revive its use. That credit control can exercise a healthy restraining influence on speculation and can assist in bringing about a better balance between aggregate demand and aggregate supply has been demonstrated by the distinct improvement in the price situation in the country since the raising of the bank rate and the adoption of a tighter credit policy by the Reserve Bank in November, 1951. The downward trend in prices in India had started before the announcement of this new policy, and it is evident that international factors have also greatly influenced the course of domestic prices. Nevertheless the credit and financial policy of the Government have been a significant factor in the situation. About the middle of 1951, the index of wholesale prices was around 450 ; it went down to 367 in May, 1952, and has, of late, been around 390. The cost-of-living indices have not shown a comparable fall, and it cannot be said that the fall in wholesale prices warrants any relaxation of vigilance and caution in the matter of overall price policy. Effective credit control must therefore remain an essential instrument for regulation of investment and business activity.

Working Capital Requirements And Organisation Of The Credit System

28. Having emphasized the role of credit policy in keeping the economy on an even level we should like to refer also to another, somewhat different and more long-range, aspect of the matter in relation to developmental planning. A persistent upward trend in production and trade cannot be sustained without an expansion in the supply of money and credit. Over a period, therefore, it will be found necessary to expand money supply in the country in response to the increased volume of transactions in the economy. This must come about through extension of credit institutions which will impart the necessary elasticity to money supply without generating inflationary pressures. The large credit needs of agriculture and of industry, especially of cottage and small scale industries, cannot be met except through a network of credit institutions which will mobilise savings in the rural areas and disburse credit on a large scale to productive enterprises, individual, cooperative or joint-stock. In this process of development, the encouragement of larger savings from current income and of a productive use of them in place of mere hoarding will have to play the major part. But, at the same time, judicious credit creation somewhat in anticipation of the increase in production and the availability of genuine savings has also a part to play, for it is conceivable that without this kind of an initial push, the upward process may not start at all or may fail to gather momentum. The overall credit policy to be followed by the central bank in an under developed country launching upon a process of development has, therefore, to be adapted to these requirements.

29. There is no doubt that the Reserve Bank of India, which is a nationalised institution, will play its appropriate part in furthering economic development along agreed lines. The Bank has succeeded in bringing the organised sector of the money market well under its control. It has recently initiated measures for the development of a bill market in India which will impart greater elasticity to the credit system. The Bank is also playing a more active role in the provision of rural finance and is devoting special attention to the problem of promoting banking development in parts of the country in which it has hitherto been lacking. These developments will strengthen the credit system materially. Under the Banking Companies Act, the Reserve Bank has wide powers for regulation and supervision of the credit policy of banks. More than these legal powers, it is, we feel, the moral prestige of the Reserve Bank and the close understanding between its management and the management of private banks that is of special importance in the alignment of the banking system to the needs of a planned economy.

30. The process of economic development, once started, will make new dei-lands on the banking system, and this may necessitate changes in organisation and structure. Central banking in a planned economy can hardly be confined to the regulation of the overall supply of credit or to a somewhat negative regulation of the flow of bank credit. It would have to take on a direct and active role, firstly, in creating or helping to create the machinery needed for financing developmental activities all over the country and, secondly, in ensuring that the finance available flows in the directions intended. For the successful fulfilment of the Plan it may become necessary to direct special credit facilities to certain lines of high priority; Banking development, through the normal incentives of private banking, is apt to be a slow process, particularly in a country in which deposit banking and the use of cheques is likely to take root only slowly among the masses of the people.* In this field, the profit motive may stand Since the profit earnings of banks are related to the ratio between their cash holdings and their loans and advances, thereisaninherentbiasinfavourofsectionsofthepopulationwhoarefamiliar with the use of cheques and will enable a reasonably high proportion of loans and advances to be maintained on the same cash base. On account of this, the motive-force behind extension of banking to less developed areas also tends to be in the first instance collection of deposits rather than distribution of credit for productive purposes. Wherethere is a fairly significant supply of pre-existing savings to be tapped, thisprocess will soon lead to the normal cumulative growth of bank .deposits and bankcredit;in backward areas, however, the initial start may have to be given through a more active loans policy in respect of productive credit. in the way of the extension of credit facilities to sections of the population which need them for rapid development. The proper discharge of its functions by the banking system will necessitate its operation more and more in the light of the priorities for development indicated in the Plan and less and less in terms of returns on capital. The banking system—and in fact the whole mechanism of finance including insurance, the stock exchanges and other institutions concerned with investment—will thus have to be fitted increasingly into the scheme of development visualised for the economy as a whole ; for, it is only thus that the process of mobilising savings and of utilising them to the best advantage becomes socially purposive.

Fiscal Policy As An. Instrument Of Planning

31. Allied to the problem of credit policy is the question of fiscal policy in relation to planning. With the continuous expansion of Government functions and the increase in public expenditure this necessitates, fiscal policy may be said to be of even greater significance for influencing the volume^and direction of economic activity. In the U. K., for instance, Government's total expenditure amounts to about 40 per cent of aggregate national expenditure ; in the U. S. A. and in Canada, it works out at about 25 per cent ; and, in Australia it is about 30 per cent. These high proportions are, of course, a reflection of the large transfers from the public to the private sector through social insurance schemes and servicing of public debt. In India, the corresponding figure is at present of the order of 7 or 8 per cent, and this will inevitably rise rapidly as development proceeds. The process of development has always inflationary possibilities, and it is necessary, if development is to be orderly and its incidence not unfair to those classes whose incomes are relatively fixed, that the accent of fiscal policy must throughout be on minimising inflationary pressures.

32. This ''vital consideration has been given due weight in determining the over-all target of development expenditure in the first Five Year Plan. At this level of expenditure, it has not been possible to provide finance for several projects which, on a longer view, must be taken up for execution. There is , of course, no way of expanding the size of the Plan except by increasing the resources available to the public sector. It is necessary also at the same time to see that the level of expenditure in the public sector and the devices used for finding the needed resourcess are not such as to react too adversely on the private sector, the development plans of which are of equal significance from the point of view of the community's interests. To mention this limitation on our present effort is, however, only to underline the need for a bolder policy in the future. The investment expenditure which, in the last analysis, a community can undertake depends, apart from whatever external resources may become available, upon the rate at which it can step up its savings; for, the problem is not just one of diverting investment from the private to the public sector, but of increasing the total.

33. An increase in aggregate investment implies, as stated earlier, a postponement in increases in the standard of living to the maximum extent possible, and fiscal policy is a major device for bringing about this result. Fiscal policy has at the same time to aim at a reduction in inequalities of income and wealth. There is clearly far more scope for cutting down consumption expenditure in the higher income groups than for tightening of the belt in the lower income ranges. The common man has, undoubtedly, to play his part in financing development, but, on grounds of economic as well as social policy, the more well-to-do classes have to contribute in proportion to their capacity to pay. The question is how this result is to be secured. Direct taxation of the rich is likely to impinge more on their savings than on their consumption. There is need for balancing the advantages of a greater equality of incomes and wealth against the disadvantage of a possible fall in private savings and capital formation. This consideration has special reference to the problem of the immediate future but granted the basic assumptions of a planned economy, it cannot, over a period, be allowed to come in the way either of a progressive reduction of inequalities of income and wealth or of rapid capital formation.

34. The reasoning that direct taxes are apt to reduce savings rather than consumption expenditure and hence detrimental to capital formation is also valid only upto a point. In a system in which public investment has to play an active role, it is of secondary importance whether resources are transferred to the State in the form of taxes (in which case it would add to the savings of the State available for investment) or in the form of loans out of private savings provided there is agreement on the priorities attached to the investment on public account. The real issue which affects both direct and indirect taxes equally is whether taxation is so high as to affect adversely the incentive to produce. Indirect taxation which increases costs of living could also be a disincentive. In this respect, an economy geared to rapid development calls for changes in the traditional attitude to reward for work. It is not without significance that forms of direct taxation which are today considered as the minimum essential in a modern society were in the initial stages regarded as inimical to progress. Similarly, though indirect taxation is generally regarded as regressive and somewhat unfair, the trend in countries which have moved rapidly towards greater equality of incomes has been for the share of indirect taxation to grow. In part, therefore, the problem is^one of psychological adaptation to the changing needs of the times and in part a question of whether alternative institutional arrangements can be made quickly enough to compensate for loss of incentive in certain strata of society.

35. The link-up between inequalities of income and capital formation in the early stages of modern economic development in countries like_Britain was due to a combination of circumstances in which the promotional and managerial abilities of a particular class had a direct part to play in initiating innovations, evolving new techniques of production and applying them on a commercial scale. The pioneers in the field of development had relatively few avenues open to them for luxurious living. A large proportion of the high incomes they received was thus ploughed back into industry thereby providing the basis for further expansion of the economy. Conspicuous consumption is a later phenomenon, and while it may have a place in rich countries where rapid expansion of consumption in all directions is in a way essential to the maintenance of a high level of economic activity, it is seriously detrimental in the conditions of an underdeveloped country. Though the resources which such consumption directly diverts away from capital formation may be small, it not only creates discontent in the community but also indirectly discourages saving in the economy as a whole by initiating a process of wasteful emulation. It is evident that in a planned economy in which the public sector takes over progressively the promotional and managerial functions necessary for development, neither large inequalities of income nor higher consumption standards for particular classes can be justified.

36. Death duties are an important equaliser of incomes and wealth. They are a levy on capital which does not have the same adverse psychological effects as other capital levies. They are capable, over a period, of reducing inequalities to an extent that only a violent upset of the system can achieve if the elimination of inequalities of income and wealth is made an immediate objective. Death duties are now an integral part of the system of taxation in advanced countries and they are levied in several underdeveloped countries as well. The rates of death duty in the U. K. are as high as 50 per cent and over on estates above /j 00,000 and they go up to 80 per cent on estates valued at over 1,000,000. The efficacy of death duties for correcting inequalities will depend, apart from the rates charged, the limit of exemption, the extent of evasion, etc., on the extent to which checks are placed on individuals earning large incomes and accumulating wealth between successive capital transfers. With a high rate of progression in income tax rates and a structure of controls to regulate relative prices and profits, death duties can make a significant contribution towards reduction of inequalities.

Sources Of Savings In The Economy

37. There are at present three main sources of savings: savings by private individuals (that is, personal savings), savings by corporations, and public savings (or surpluses in the public sector). In countries like the U. K. and U. S. A., the role of personal savings as a source of finance for development is no longer as important as it was in the early stages of development. Corporate savings provide in these countries a considerable part of the finance needed; in the U.K. public savings, i.e., surpluses from taxation and from the receipts of commercial enterprises owned by Government, are an important source for financing investment. Corporate savings come ultimately from profits; they represent a ploughing back of the funds that would otherwise have gone into the hands of the shareholders. To a certain extent, this is a desirable line of development, and it is proper to encourage capital formation in the private sector through differential taxation of distributed and undistributed profits. The limitation of this approach, however, is that it leads in the long run to a concentration.of economic power in the hands of these corporations,'and, through them, in the hands of a few people v/ho happen to have a controlling interest in them. In a country like the United States, a country of corporations par excellence, it has been found difficult in practice to curb the monopoly pov/er of these corporations in spite of anti-trust laws. In the pattern of development we envisage for India, it will, therefore, be necessary to lay more stress on cooperative rather than corporate savings. The cooperative form of organisation is capable of yielding the advantages of corporate enterprise without some of its disadvantages. It is a form of organisation capable of attracting the small man, and members of cooperatives are likely to see easily the benefits that would accrue to them by devoting a substantial part of their current surpluses to investment. The encouragement of the cooperative form of enterprise in all fields of activity, in agriculture, in trade, in finance, in marketing and in industry must, therefore, become a prime objective of Government policy.

38. And, finally, the State must itself raise, to the extent possible, through taxation, through loans and through surpluses earned on State enterprises a considerable proportion of the savings needed. In other words, public savings, as distinguished from private savings,personal or corporate, must be developed steadily. The financing of investment through public savings would help to ensure a pattern of development in consonance with accepted social criteria.

Prices, Production And Controls

39. Prices are a resultant of all the varied forces acting on the economy from within as well as from without, and there is almost no aspect of governmental policy which does not, in one way or another react on prices. Export-and-import policy, for instance, has a direct bearing on relative prices and profitability. Control and regulation of exports and imports, and in the case of certain select commodities state trading, are necessary not only from the point of view of utilising to the best advantage the limited foreign exchange resources available but also for securing an allocation of the productive resources of the country in line with the targets defined in the Plan.

40. Increase in output, through fuller utilisation of capacity, through improvement in technical and managerial efficiency or through harder and more sustained work all round is basically the answer to inflationary pressures, and this would be a far better way of bringing supply and demand into equilibrium than some of the other devices which, while doing good, have also a somewhat depressing effect on the economy. But since, in the short period, there are limits to the increase in output that can be secured, there is need for making appropriate use of the other devices also.

41. A major problem in this connection is the role of controls in a planned economy. This is a subject which has many aspects and it is possible in this field to fall into a doctrinaire approach which, however sound on abstract theoretical considerations, may prove unworkable in practice. On the other hand, an excessive elasticity of approach to this question may lead to a negation of planning itself. To some extent, over-all controls through fiscal, monetary and commercial policy can influence the allocation of resources, but physical controls are also necessary. Given the fact that, in the initial stages of development it is the excessive pressure on a few commodities which tend to limit the rate of progress, the extent to which physical controls are needed to supplement financial controls may even be regarded as a measure of the utilisation that is being made of surplus resources (like manpower) in the system. The targets of production defined in a plan cannot also be achieved unless a structure of relative prices favouring the desired allocation of resources is maintained. The working of controls during and since the war has demonstrated clearly that if production in a particular line, say, foodgrains, has to be increased, the necessary incentive for the producer cannot be created unless the prices of alternative crops are controlled. In an economy which starts from a low level of output, increases in several lines of production will be found necessary. A simultaneous increase in production in all lines is not possible by merely raising the money reward for work. In the case of certain key commodities, it may be necessary to keep down their prices in order to obviate the need for price rises in several industries which use these commodities. To make this policy effective, controls on production and on movement and physical allocations to consumers become inescapable.

42. Controls in a word are the means by which Government maintains a balance between various sectional interests. Under certain circumstances the accent may be on the maintenance of certain price ceilings, and through these of the real purchasing power of the incomes accruing to certain classes. Under other conditions, the enforcement of minimum prices might be a necessary corollary to a policy of ensuring a reasonable rate of return on effort in certain lines of economic activity. Viewed in the proper perspective, controls are but another aspect of the problem of incentives, for to the extent that controls limit the freedom of action on the part of certain classes, they provide correspondingly an incentive to certain others and the practical problem is always to balance the loss of satisfaction in one case against the gain in the other. For one to ask for fuller employment and more rapid development and at the same time to object to controls is obviously to support two contradictory objectives.

43. Most of the opposition to controls comes, however, from dissatisfaction with the working of particular controls. It must be recognised that controls ineffectively or inefficiently administered may do harm rather than good. It is also true that so long as the public regards controls as so many hindrances to be circumvented if possible, to be put up with otherwise, there will be resentment against controls. To a great exent this is a question of creating the right atmosphere by explaining to the public the relationship between controls and the rate of economic progress that the country can achieve. From this point of view it is an essential condition that the rationale of each control is made clear to the public and the rights and obligations of the parties affected defined in a manner which leaves little scope for doubt as to what is expected of the public and where redress can be had in case of any grievance. It is also vital to the success of controls to make the necessary adjustments in their working from time to time as the conditions governing the supply and demand of the commodities in question change. But, here again, whatever changes are made must accord with the objectives in view and should not throw in doubt the basis of the entire policy.

44. The difficulties of administering an extensive system of controls in an economy organised by and large in small units cannot be under-rated. Methods adopted successfully in other countries are not directly applicable to India. Effectiveness of controls under these conditions can be ensured only through control at strategic points and through encouraging producers' and consumers' organisations which will help to make the actual operation of controls smoother, less irksome and more efficient.

The Pattern Of Priorities

45. It will be seen from the above that the priorities in planning and the relative emphasis as between objectives are conditioned to a great extent by the techniques that can be used within a given period for attaining the objectives, and the techniques to be chosen are, in turn, influenced by the objectives in view. Once the decisions in regard to these are taken, the question arises as to priorities as between the different lines of expenditure to be undertaken. Given, in other words, the investment outlay to be undertaken on a consideration of the relative weights to be attached to the various competing objectives and of the techniques to be employed, the task before the planning authority is to determine the pattern of investment for the period in view. The demands of the economy for development are so large and so pressing that great care has to be taken in allocating the limited resources available. When one views development as a process over a period of years, there is no sector of the economy in which a large increase in investment would not be justified, in fact, it would be inescapable. Within a limited time horizon, however, the problem assumes a different aspect; first things have to come first. It follows that the conception of priorities over a period has to be a dynamic one, the emphasis as between different sectors shifting as development in those taken up initially prepares the ground for development in others.

46. por the immediate five year period, agriculture, including irrigation and power, must in our view have the topmost priority. For one thing, this emphasis is indicated by the need to complete projects in hand. But, further, we are convinced that without a substantial increase in the production of food and of raw materials needed for industry, it would be impossible to sustain a higher tempo of industrial development. In an under developed economy with low yields in agriculture, there is of course no real conflict between agricultural and industrial development. One cannot go far without the other ; the two are complementary. It is necessary, however, on economic as well as on other grovnds, first of all to strengthen the economy at the base and to create conditions of sufficiency and even plenitude in respect of food and raw materials. These are the wherewithals for further development. Japan, for instance, increased its agricultural production by -80 per cent in a generation and still required large scale imports of food and raw materials. Britain, which in the earlier stages of development was in a strong position because of the earlier revolution that had taken place in farming practices and techniques, also emerged at the end of the process an importer of food and raw materials. Countries which start the process of development at this stage must as far as possible look for sources of supply of the necessary food and raw materials within their own borders. In India, with its varied resources, conditions are favourable for securing a balanced pattern of development. The creation of a sizeable surplus in the agricultural sector and mobilization of the same for sustaining increased employment in other sectors is fundamental to development as the experience of the U.S.S.R. in the twenties and thirties shows.

47. The high priority given in the investment programme of the public sector to the improvement of agriculture limits inevitably the investment which the State can itself undertake in industries, especially large scale industries. Progress in this field would, therefore, at this stage depend to a great extent on effort in the private sector. The State in this initial period has to concentrate on the provision of basic services like power and transportation. The State has also special responsibility for developing key industries like iron and steel, heavy chemicals, manufacture of electrical equipment and the like, without which in the modern world continued development is impossible. In these fields it is necessary to anticipate to some extent the nature of the demands that will be made on them over a fairly long period ; in fact, in these cases supply must come first for demand itself to develop at the required rate. The initial investment necessary for the development of such enterprises is large and the period of construction fairly long. A beginning in these directions has therefore to be made from the very 'art.

48. To the extent that the accent of the plan is on increasing production, the limitation of resources available would restrict the scope for expanding social services. And yet, it is obvious that no plan can succeed unless it "invests" in the improvement of the human material. Even from the point of view of increasing production, social services like education, technical training and health bring in significant returns. Considerable advance in these directions can be made if the necessary urge to improvement is created among the people. The problem is partly psychological. There is also large scope in this field for direct community effort. The spread of literacy among the rural people, for example, can be secured by the literates in the community volunteering their services for carrying through a mass campaign for liquidation of illiteracy. The improvement of public health is often a matter of imparting elementary knowledge regarding sanitation and hygiene. Technical training is vital not only for the process of development itself but also for correcting the present bias in education which is responsible for unemployment in certain sections. In this respect, adequate provision for the finance needed must be made in the plan. At the same time, means must be found for stimulating among the people widespread interest in the application of modern technology to the many small problems familiar to them in ordinary life.

49. In viev of the large unutilised and under-utilized resources in the system, schemes for mobilising local effort for local development have to receive high priority. It is schemes of this type spread all over the country, more than major development projects, which are likely to activise these resources. Their contribution to ths improvement of living conditions, small though it might appear at first, would in the aggregate and in terms of their cumulative psychological effects be more than proportionate to the initial investment involved. Programmes of community development based on this principle and aiming at an intensive all-round development of selected areas are of special value from this point of view.

[ Home ]
^^ Top
<< Back to Index