FZ C)FZ-TS Report No. SA-32a This report is for of ficial use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ECONOMIC SITUATION AND PROSPECTS OF INDIA (in three volumes) VOLUME I THE MAIN REPORT May 10, 1972 South Asia Department CURRENCY EQUIVALENT 1 U.S. dollar Rs. 7.2793 1 Rupee - U.S. $ 0.1374 1 Million Rupees U.S. $ 137,400 1 lakh of Rupees 100 thousand Rupees (U.S. $13,740.00 equivalent) 1 crore of Rupees = 10 million (U.S. $ 1,374,000 equivalent) The Indian fiscal ye.ar runs from April 1 through March 31. This report was prepared in the Bank's New Delhi Office by O.J. Mcjuiarmid (Resident Representative); Marinus van der Mel (Chief Economist); Wolf- Ladejinsky and Peter Naylor (Agriculture); Timothy Lankester and Allan Barry (Balance of Payments and Foreign Assistance); William Humphrey, Bernard Decaux, Christian 'adonne, Arthur House and Jack Derrick (Industry); Timothy King (Human Resources) ana Sunanda Sengupta (Political Developments, Statistics). ECONOMIC SITUATION AND PROSPECTS OF INDIA Table of Contents Page No. BASIC DATA ................................................... SUMMARY AND CONCLUSIONS ................................... i-xx 1. PRINCIPAL DEVELOPMENTS IN 1971/72 Refugees, War and Bangladesh ............................ 1 Other Principal Economic Developments in 1971/72 3 Emphasis of this Report.. 5 Highlights of the Fourth Plan to Date. 5 Plan Targets . . 9 Recent Political Developments . .11 2. HUMAN RESOURCES Population Growth ..13 The Outlook ..14 The Environment ..15 Family Planning .............. ........................ 16 Vasectomy Camps ..17 Program Inputs. . 19 Nutrition ..23 Nutrition Programs ..26 Other Health Measures ..28 Education ..29 Primary Education ..30 Higher E,ducation ................ , . .......... 32 Voat'ibhalj'Education and Training . .33 Funtitb-hl Literacy ...................... 36 Higher Agricultural Education ..37 OtheJ Pirfessional Traainin ..37 Emplym-enUtand Unemployment ..39 UrbfiAition ..47 Pl&a-ixg,Orghnizations and Development Authorities: The ,E'x-am,p.le§&of Calcutta and Bombay ..50 Urban Transport .. ............ 51 1lousinJ. I ................ . .. .. 52 -Wat.er'-Sjpply and Sanitation . .56 Soeial;Pfi6rities ..57 'I'able of Contents (Continued) Page No. 3. AGRICULTURE - PRODUCTION Af,riculture Growth in the Fourth Plan .... ............... 59 Foodgrains ........... .................................... 60 Commercial Crops ........................................ 66 Plantation Crops ........................................ .70 Inputs . ................................................. 74 Irrigation ........... ................................... 80 Dairv . ................................................... 82 4. AGRICULTURE - ISSUES AND PROGRAMS The Agricultural Scene .................................. 84 Cooperative Credit . ........................................ 101 Ceilings on Landownership ............................... 110 Farm Taxation ......... .................................. 113 5. INDUSTRIAL PRODUCTION Past and Present Trends ................................. 121 Future Prospects for Industrial Growth .... .............. 124 Productivity Trends in Medium and Large Scale Industry .. 125 Industrial Relations .................................... 127 6. INDUSTRIAL POLICY, SMALL SCALE AND PUBLIC ENTERPRISES AND INDUSTRIAL FINANCE ......................................... 129 Small-Scale Industry ..................................... 133 Structure and Performance of Public Sector Enterprises .. 136 Industrial Finance ....................................... 140 Foreign Private Investment ................................ 143 7. POWER, TRANSPORT AND TOURISM Power . ................................................... 148 Transport ............ ................................... 153 Railways .. ................................................ 153 Roads . ................................................... 155 Ports . ..................................................... 156 Shipping . ................................................ 157 Air Transport .......... ................................. 157 l'ourism . ................................................. 158 8. DOMESTIC FINANCE Ceneral Trends of Investment and Savings .... ............ 162 Public Sector Plan Expenditure and Its Financing .... .... 165 Prospects for Realization of Revised Fourth Plan Public Sector Expenditure and Finance Projections .... ...... 169 Center-State Financial Relations ........................ 173 Money, Credit and Prices ................................ 177 Table of Contents (Continued) Page No. 9. FOREIGN TRADE Exports 1969/70 Through 1971/72 ......................... 189 Export Prospects ................... . ..................... 195 Imports 1969/70 Through 1971/72 ......................... 200 Import Policies and the Use of India's Foreign Exchange Resources . ................ ...................... 203 The Trade Gap for the Remainder of the Plan .... ......... 207 10. BALANCE OF,PAYMENTS AND AID REQUIREMENTS Balance of Payments 1969/70 Through 1971/72 .... ......... 212 Foreign Exchange Reserves ............................... 214 Use of Aid ..................... .......................... 216 Aid Requirements for 1972/73 and 1973/74 .... ............ 219 Commitment Requirements, 1972/73 and 1973/74 .... ........ 225 Importance and Effectiveness of Foreign Assistance ...... 227 COUNTRY DATA COUNTRY: India 2 AREA: 3,268,580 km2 POPULATION: 560 million 1972 (mid-year) DENSITY: 172 persons/km Rate of growth 2.23% 1961 - 1971 POPULATION CHARACTERISTICS: Crude birth rate (per 1,000) (est.) 38 1971 HEALTH: Crude death rate (per 1,000) (est.) 16 1971 Population per physician (est.) 4,000 1971 Infant mortality (per 1,000 (est.) 100-120 1971 Population per hospital bed 1,826 1968/69 live births) NUTRITION: EDUCATION: Caloric intake as % of requirements 83 1960 - 1969 Adult literacy rate (%) (est.) 4la/ Per capita protein intake (grammes per day) 55 1960 - 1969 Primary school enrolment (%) 79- 1969/70 GROSS NATIONAL PRODIUCT, 1970/71: US $ mln % Rate of growth (7, volume) GNP at market prices 52,770 100.0 1961/62 - 1965/66 1965/66 - 1969/70 1970/71 Gross investment 7,520 14.3 Gross national 'savings 6,480 12.3 2. 5 2. 9 4. 7 Resource Gap 680 1.3 OUTPUT, LABOR FORCE AND Value AddedC/ Labor Force Production per Worker PRODUCTIVITY, 1969/70: US $ mln Z millions % US $ % of national average Agriculture 21,370 48.2 128 71.9 167 67 Industry 9,260 20.9 21 11.8 441 177 Services 13,740 30.9 29 16.3 474 190 Total/Average 44.370 100.0 178 100.0 249 PUBLIC FINANCES, 1970/71: Center and States Center Rs billion % of GDP % of GDP, average Rs billion % of GDP % of GDP, average 1968/69-1970/71 1968/69-1970/71 Current receipts 59.96 15.0 14.8 37.85 9.5 9.3 Current expenditures (incl. transfers) 58.48 14.7 14.5 25.74 6.5 6.5 Current surplus 1.48 0.3 0.3 12.11 3.0 2.8 Capital expenditures 15.50 3.9 3.4 9.69 2.4 1.8 Exte nal assistance (net) 3.44 0.9 1.2 3.44 0.9 1.2 PRICES AND CREDIT: Wholesale Price Index (1961/62 - 100) Net Bank Credit to Commercial Sector index 7. of change Rs billion 7. of change End of 1969 172.0 - 14.53 End of 1970 181.1 5.2 18.72 28.8 End of 1971 186.0 2.7 17.80 (-)4.9 February 1971 181.4 - February 1972 190.1 4.7 BALANCE OF PAYMENTS-/: (US $ million) MERCHANDISE EXPORTS ( Average 1968/69 - 1970/71 1968/69 1969/70 1970/71 US $ mln % Exports of goods 1,810 1,884 1,950 Jute manufactures 270 14 Imports of goods 2,545 2,109 2,225 Tea 188 10 Trade balartce - 735 - 225 - 275 Cotton textiles 151 8 NFS (net)eI 25 13 - 8 Iron ore 131 7 Resource gap (deficit = -) - 710 - 212 - 283 Engineering goods 119 6 Others 1,022 55 Interest payments (net) - 185 - 192 - 214 Total 1,881 100 Other factor payments (net) - 21 - 40 - 20 Net transfers + 81 + 79 + 83 EXTERNAL DEBT ON MARCH 31, 1971-/: Balance on current account - 835 -365 -434 US $ mln Official aid (incl. grants) Repayable in foreign currency 7.371 Disbursements + 1,259 + 1,188 + 1,096 Repayable through export of goods 663 Amortization - 315 - 357 - 387 Total outstanding 8,034 Direct foreign investment ) Other capital (net) ) - 58 - 263 - 512 DEBT SERVICE RATIO, 1970/71: 30.8 per cent& All other items) IBRD/IDA LENDING, DECEMBER 31, 1971 US $ mln Increase in official reserves IBRD IDA (increase = -) - 51 - 203 + 237 Outstanding and disbursed 461.6 1,157.0 Undisbursed 129.7 408.7 March March March March 591.3 1,565.7 1969 1970 1971 1972 Gross reserves (end of year) 769 1,095 1,052 1,265 Net reserves (end of year) 429 912 1,052 1,265 Rate of Exchange NET AID TRANSFERS: (US $ million) ~~~~~~~Prior to December 1971: US $ 1.00 - Rs 7.5 NET AID TRANSFERS: (US $ million) Rs 1.00 - US 0. 133333 1967/68 1968/69 1969/70 1970/71 1971/72 Gross disbursements 1,598 1,259 1,188 1,096 1,123 After December 1971: US $ 1.00 = Rs 7.27927 Debt service 444 500 550 600 626 Rs 1.00 = US $ 0.137376 Net transfer 1,154 759 638 496 497 a/ Population of 10 years and over. b/ official estimate; probably overestimates actual enrolment of age group 6 - 11 by one-fifth. c/ Gross domestic product at factor cost. d/ For details see Appendix Tables 3.12, 3.13, 3.14 and 4.1 of IBRD Economic Report, 1972. e/ The figures for non-factor service payments, which are taken from the Reserve Bank's balance of payments estimates, appear to be substantially incomplete. f/ Provided by Government of India, Ministry of Finance. / Amortization and interest payments as a percentage of merchandise exports. SUMMARY AND CONCLUSIONS The Economy and the Plan i. The main economic events of the past year are summarized in Chapter I. On the economic front the principal achievements in 1971/72 1/ were first to maintain the pace of public sector development in financial terms, at about the planned level, despite the fiscal burden of the refugees and the war, and this with only a moderate degree-of inflation; and second, to accomplish a substantially higher rate of export growth than in previous years. The former was made possible by a substantial increase in taxes aggregating about Rs. 5 billion (on a full year basis) and by a sharp increase in deficit financing for the public sector as a whole. The suspension of the export of jute goods from East Bengal was probably responsible for about half the increase in Indian exports last year. Satisfaction over both of these achievements has to be tempered, since the first was accompanied by a continuing low level of investment in the private industrial sector, and the second was due to a fortuitous development that everyone hopes will not be repeated. ii. The main areas for disappointment with the 1971/72 economic performance were a decline in the growth of industrial production even as compared with the indifferent record of 1970/71, and the relatively slow start made on new programs designed to alleviate the unemployment and poverty problems of India's rural masses. The fact that foodgrain production continued its upward course, albeit at a somewhat slower pace than the sharp increase of 1970/71 plus some improvement in commercial crops, notably cotton, were not enough to offset the poor showing of industry, so that the overall rate of economic growth was probably 3 - 4 per cent in 1971/72 as compared with 4.8 per cent in 1970/71, and 5.3 per cent in 1969/70. In short the progress of the Indian economy last year may be viewed as favorable only in the light of the disruptions overcome, rather than by the Plan targets achieved. The accomplishment of the 5-year growth rate of 5.5 per cent per annum projected in the Fourth Plan became more unlikely. As is evident from the figures cited above, the spread between goal and accomplishment by this broad measure of progress has been widening in the last three years. iii. There was a general expectation at this time last year that the public sector expenditure patterns envisaged in the Fourth Plan might be altered significantly by the new Planning Commission which had just been appointed. This has not occurred though some technical adjustments have been made in physical targets owing principally to improved base year (1968/69) data. It now appears likely that the main thrust towards the amelioration of the situation of the rural underprivileged will be made in the Fifth Plan starting in 1974/75, although the 1972/73 budget provides substantial additional financial resources for rural programs. An important achievement of the Planning Commission in 1971/72 was the Fourth Plan Mid-Term Appraisal which makes a major contribution to our awareness of what has been happening in the Indian economy since 1968/69, and provides - ii - useful assessments of the macro-economic targets necessary to achieve the financial (and to some extent the real) targets for the public sector development effort. iv. Savings and Investment. An important contribution of the Appraisal is a reassessment of savings performance during the first two years of the Plan and for the base year 1968/69. In last year's report, on the basis of savings estimates then available, we concluded (apparently over- optimistically) that the increase in savings was fairly well on target towards reaching the 13.2 per cent of national income envisaged for-1973/74 as compared with 'the 8.8 per cent estimated for 1968/69. The Appraisal's data, while not strictly comparable with those we used last year (as they are based on net domestic product rather than national income) bring out two significant facts (1) that domestic savings were somewhat higher in the base year than reckoned in the Plan (8.4 per cent compared with 8 per cent of NDP) and (2) the rate of savijigs in the first two years of the Plan remained at about the base year level and in fact may have been marginally lower in 1970/71 than in 1968/69. This disapppinting performance is entirely attributable to the poor savings performance of the public sector. The Appraisal properly concludes that a major task of Indian public finance during the remaining years of the Fourth Plan and thereafter is to increase public savings both in relation to domestic product and to the disposable income of the public sector. v. The Appraisal provides a new estimate of private savings over the Plan period. The Plan as originally prepared estimated private savings at Rs. 142 billion ($19.4 billion). The estimate in the Appraisal is for Rs. 162.4 billion (about $22.3 billion) at current prices or Rs. 146.9 billion ($20.1 billion) at 1968/69 prices. Thus the present estimate of private savings even at constant prices is over 3 per cent higher than in the original Plan document. vi. The disposition of the Rs. 162.4 billion of private savings that is now projected is that Rs. 67.3 billion will be transferred to the public sector and Rs. 92.5 billion used for private,investment. The remaining Rs. 2.6 billion 1/ ($356 million) will be transferred abroad. This latter estimate compares with the negligible net capital inflow for the private sector (Rs. 0.3 billion) in the original Plan projections. The draft of the public sector on private savings as now foreseen is about Rs. 7.25 billion (14 per cent) higher at 1968/69 prices than in the original Plan estimates, and Rs. 15 billion (29 per cent) higher at current prices. In last year's report we expressed concern about the extent of the public sector's draft on private savings but this process is expected to accelerate during the last three years of the Plan. 1/ This negative draft on foreign savings by the private sector is mainly because repayments to the IMF are treated as a draft on private domestic savings. - iii - vii. We have noted the slight decline in the rate of overall savings to NDP during the first three years of the Plan. In 1971/72 the average savings rate is estimated at 8.2 per cent. In the last two years of the Plan however, this rate is expected to increase to 9.5 per cent and 10.2 per cent respectively. However, this increase is entirely due to what would appear as optimistic expectations regarding public savings which are expected to increase from 0.8 per cent of NDP in 1971/72 to 2.9 per cent in 1973/74. The factors underlying this estimate are discussed in Chapter 8. Sufficient here to say that it assumes that net public disposable income will be increased from 11.8 per cent of NDP in 1970/71 to 13.6 per cent in 1973/74 and that 74 per cent of the increment will be saved. This means that public consumption will have to increase less rapidly than NDP whereas it increased from 9.9 per cent of NDP in 1968/69 to 11.2 per cent in 1971/72. It also assumes that NDP will increase during the last two years of the Plan by nearly 7 per cent a year, a significant factor in the Appraisal's projections. viii. Meanwhile the Appraisal assumes that the rate of private savings will remain about constant at around 7.5 per cent of NDP and after taking care of the requirements of the public sector the investable resources re- maining for the private sector will decrease marginally from a stable 4 per cent of NDP during the first two years of the Plan to between 3.7 per cent and 3.9 per cent in 1971/72 through 1973/74. During this period public .sector investment is expected to rise from 5.9 per cent to 7.1 per cent of NDP. Thus in the terminal year of the Plan total investment would be about 11 per cent of NDP as compared to about 13 per cent postulated when the Plan was drawn up. ix. The bias of the Plan projections towards public sector invest- ment despite declining expectations regarding net foreign aid (which accrues almost entirely to the public sector) is pronounced. If they materialize investment in the public sector would be Rs. 86.2 billion in the last three years of the Plan as compared with Rs. 50.6 billion in the private sector. Comparing the first two with the last three years of the Plan, the bias in favor of the public sector becomes even more apparent. In the case of the latter average annual investment is expected to increase by 46 per cent as compared with only about 16 per cent in the private sector. x. It may be contended that this is required to carry out the public sector plan as originally conceived and, if achieved, success will be largely because of the restraint of the public sector in keeping public consumption in line with the growth of the economy. It is true that public disposable income is to increase only from 12.1 per cent to 13.6 per cent of NDP as between 1971/72 and 1973/74, and, at the same time public savings are to increase by 2.1 percent of NDP. This increase in public income would be a considerable achievement since over the decade of the 1960s the ratio of public disposable income to NDP rose only 1.7 per cent as compared with the rise of 1.5 per cent now contemplated within two years. However, the point to be made here is not that the revenue goal is too ambitious, since India has a large untapped revenue potential in the rural sector, but rather that, given the need for reviving private investment, a somewhat lesser draft on private savings by the public sector would be in order particularly in view - iv - of the heavy burden of corporate and other direct taxation on the private sector. What India needs most now is investment that will yield a relatively fast return if the physical growth targets of the Plan are to be approached if not achieved. Long gestation public sector projects will not be as effective in accomplishing this as quicker yielding investments in the private or Joint sector, though we do not question the need for completing public sector projects in key areas such as power, transport and fertilizer pro- duction. xi. The Two Gaps. A significant point that emerges from the macro- economic analysis in the Appraisal is that the balance of payments deficit (external gap) during the last three years of the Plan is considerably larger than the foreign resources (draft on foreign savings) assumed in the portion of the document dealing with the mobilization of domestic resources. This appears to arise out of the methodology used in estimating these two magnitudes ex ante which of course must be equal ex post. In the domestic resources analysis the net foreign assistance input is taken as given and the domestic resources to be mobilized amount to the difference between the financial expenditure targets of the Plan and such foreign assistance. On the other hand, in the Appraisal's balance of payments analysis exports and imports are calculated as exogenous variables-and foreign aid requirements emerge as a residual. xii. It is of course to be expected that the-two gaps would differ when estimated ex-ante. The question is whether the-difference will be properly translated into appropriate national policies. In our view, this would require that (a) the larger external gap be construed as a challenge to reduce it by increasing exports and/or (b) the smaller internal gap prompts another look at the effect on private investment of the draft contemplated on private savings by the public sector. Human Resources xiii. Not enough data from the 1971 Census is yet available to explain why the total population of India was about 13 million less than had been projected, but it is probable that the main reason is that the projections assumed a faster decline in the death rate than actually occurred. The death rate remains very high, and it is likely that population growth will continue to accelerate as the death rate falls in future. The ecological, not to speak of'the'socioeconomic implications of this are disturbing. A new committee to serve as a watchdog on environmental matters has recently been set up. xiv. 1971-72 has been an improving year for the family planning program, with a marked rise in the acceptance of all contraceptive methods except the IUD. The main innovation has been intensive district-wide vasec'tomy camps, many with much higher than usual incentives, which have had remarkable success. Compared with the magnitude of the task, however, the program's achievements are still small. Although many commentators have expressed rather convincing doubts about whether the program could ever be adequate without fundamental health, economic and social improvements, there is evidence that the results do improve with additional expenditure, and that the return to this expenditure compares well with alternative investments. xv. Nutritional standards are very low in India. For most classes of people, the main deficiency is of calories rather than protein. However, for some important groups, such apvery young children and pregnant women, who are especially vulnerable to malnutrition, it may be important for any food supplement to have also a high protein content. Education about health care and weaning practice is also important. India's biggest nutrition program to date has been a lunch program for school children, but increasing attention is being given to the more difficult problem of children aged 6 months to 2 years. Such programs need better follow up, including regular home visits, which are not attempted at present. xvi. India remains a relatively unhealthy place by international standards, especially for those under five. A number of centrally- sponsored programs to tackle communicable diseases are in operation. Much the largest is malaria control. This disease has been having a rather disturbing recurrence during the past few years, though the incidence remains little more than 1 per cent of what it was 20 years ago. xvii. This report repeats, what last year's stressed, that primary education deserves higher priority than higher education, although there is also evidence that low rates of enrollment in primary education are largely the result of rural poverty, instead of simply a shortage of facilities. With growing unemployment among secondary school-leavers, the report discusses the possibilities of making secondary education oriented more towards vocational training. It would probably be unwise to set up new vocational secondary schools, as distinct from making the general curriculum provide a better backgrpund for making occupational choices. The long-standing problem of an excess output of professionally- trained manpower, both in agriculture and nonagriculture is discussed. Existing schemes to provide jobs have not been very successful so far, but the effort should not be abandoned. In general, higher education should improve the quality rather than increase the quantity of its output. xviii. Both because the 1971 Census changed its definition of the work force and because its full results are not available, it is difficult to say much about changes in the occupational structure of the labor force since 1961. Employment growth in the "organized sector" - the public sector plus private firms of 10 workers and over - has been growing very slowly in recent years. The magnitude of open unemployment remains uncertain; but it is clear that employment for very many people, is spasmodic and very poorly paid, and that quantitatively the worst problem is in rural areas. As described in Chapter 4, rural works programs have recently been initiated. The rural poverty problem is of such magnitude as to require a much larger shift of resources into the low rural incomes. This poses some difficult economic choices in the area of national growth, savings and investment. xix. The rate of growth in India's urban population has been far from explosive by international standards, but in absolute terms the numbers involved are very large indeed. There is no evidence that it - vi - would be either desirable or feasible to prevent further growth of the large metropoli. Fragmentation of authority is a problem in very large cities; this has been tackled with some success in Calcutta, in contrast for example to Bombay. The main priority in urban transport, in India as elsewhere, is mass transportation rather than facilities for the private car. This may mean improvements to existing services rather than under- ground railways, even in the largest cities. In housing, priority should be given to slum improvement rather than slum clearance, which tends to be too expensive. The housing situation is not helped by rent controls, which discourage the maintenance of existing property. xx. The many obviously desirable programs compete for resources. Nevertheless, there may be considerable complementaries among programs that improve the health of mother and child, that tackle rural unemploy- ment and that promote family planning. It might be worth testing whether a package approach to improving the social environment in a particular area did not' do better than the same expenditure on widely diffused social programs. Agriculture xxi. Agricultural production increased at just over 5 per cent per annum in each of the first two years of the Plan and in 1971/72 by prob- ably 4-4.5 per cent. It is premature, however, to say that a firm trend of up to 5 per cent per annum has been established since part of the past three years' growth is due to favorable weather and is largely confined to foodgrains, notably wheat. There can be little doubt, however, that the growth in foodgrain production is firmly based and likely to continue. In addition to wheat, there are also signs that the long period of stag- nation in rice production is over. Despite the relatively slow growth of the remaining cereal crops and the stagnation of pulses, given a fair break from the weather, we expect foodgrain production to go from 108 million tons in 1970/71 to at least 120 million in 1973/74, or by 3.7 per cent per annum. This compares with the terminal year Fourth Plan target of 129 million tons. xxii. The 8 per cent jump in,foodgrain production in 1970/71 has enabled India to fulfill the promise that concessional foodgrain imports would be terminated from the end of 1971. Demand and supply now appear to be more or less in balance (each growing at about 3.5 per cent - 4.0 per cent per year). It would take two bad years in a row to make the resumption of imports necessary. xxiii. The good supply situation has put severe strains on the marketing and transportation systems. It has also necessitated a massive program for storage. Almost all of the increase in publicly-owned stocks has had to be stored in. the open. xxiv. As for commercial crops, the most favorable outlook is for cotton, despite the fact that cotton production in 1970/71 was the lowest for 10 years. The combination of several promising new cotton varieties, an in- tensive program of cotton development and some attempt to improve the mar- keting system, give us hope that a decade of stagnation is at an end. The - vii - prospects are much less promising for jute. Production of jute and mesta in 1970/71 was at the average level of the past five years; and while it is likely to rise about 15 per cent in 1971/72, it will still be below the starting level assumed for the Fourth Plan. There seems little reason to expect any change. India will probably look to Bangladesh for more raw jute, a welcome development. xxv. The oilseed crop was a record in 1970/71 but we do not see this as the end of a decade of stagnant production. It was mainly the effect of favorable weather and production is down again in 1971/72. Some increase is coming from the spread of groundnuts as a second crop in South India, but the main official hopes for production increases are now pinned on soya- beans and sunflower - neither of which have been grown on a large scale here before. xxvi. Sugarcane production fell slightly in 1970/71 and 1971/72 as a result of lower prices for gur and sugar. This caused a sharp fall in the production of milled sugar, and the decontrol of sugar distribution that was introduced in mid-1971 had to be hastily abandoned. The present shortage of sugar, however, appears to be temporary as the cane area is now expanding again. xxvii. Some of the fastest growing commercial items are the plantation crops, coffee and rubber. Tea is the major plantation crop but its pro- duction is increasing at only about 2.2 per cent per year, considerably less than the growth in domestic demand. Coffee and rubber production on the other hand, is increasing at over 5 per cent per year and both are now running into lack of demand. Exports account for about 45 per cent of coffee production but exports are limited by the international quota agree- ment. Internal demand for coffee is not growing much faster than population. Rubber on the other hand is not competitive externally, and internal require- ments are constrained by the slow growth of industrial output. xxviii. Cropwise, the "narrow base" of the Green Revolution may be broadened by research now underway in rice, but greater attention is needed to pulses and the cash crops, particularly cotton. xxix. Consumption of the main agricultural inputs is rising fast. After two years of comparatively slow growth, fertilizer consumption in- creased 22 per cent in 1971/72. It seems likely that this can now be sustained for the next several years. Similarly with pesticides; after three years of virtually no growth, coinciding with the withdrawal of subsidies by most of the states at the start of the Fourth Plan, con- sumption picked up in 1970 and in 1971 grew about 25-30 per cent in value terms. Pesticide use, however, is still extremely low. Certified seed consumption is also increasing. This is mainly the result of the expan- sion of the area under hybrid millet. The consumption of certified wheat and rice seed is restricted by lack of systematic production programs. xxx. Unexpectedly, sales of tractors appear to have declined during the year, not for lack of supplies, but as a result of price increases, which range from 50 per cent to 65 per cent for imported tractors and from 23 per - viii - cent to 42 per cent for locally-manufactured ones. New taxes levied in the 1971 budget are the main cause. Annual demand is now estimated at some 40,000 tractors per year (as compared with previous estimates of 100,000). Local production is expected to rise to about 25,000 in 1972, as a result of several new plants coming into production. While production could go to 40,000 in 1973, it is probable that imports will still be required up to the end of the Fourth Plan. xxxi. The effect of mechanization on the demand for labor continues. As of now, the answer seems to be that while the status of the weaker ele- ments in the rural communityqamay be worsened or at least not-,improved by the complex of changes occuring, most forms of mechanization (such as tractors) are displacing animal rather than human power. xxxii. The development of surface irrigation facilities continues to lag. Against a Fourth Plan target of an increased irrigated area of 4.3 per cent per annum, actual achievement in the first three years of the Plan will only be 1.8 per cent per annum. While physical achievements are below target, expenditures are not. The cost of completing on-going schemes has increased by 37 per cent since the plan started. The number of new schemes it was planned to start have had to be reduced. xxxiii. The fact that 75 per cent of India's cultivated area is'under unirrigated "dry" farming places definite limits on:-the extension of the Green Revolution. Nevertheless, from 1968/69 to 1971172, the area under the new practices increased from 9 to 18 million hectares or to 15 per cent of the cultivated foodgrain area. xxxiv. The amount of additional water being made available each year at the field level from groundwater is about three times as large as that from surface irrigation development. This development has been largely spontaneous and uncontrolled so far. It is now realized, not least by the financial institutions which are supporting it, that a greater degree of regulation is needed to prevent over-exploitation and wasted investment. This is being introduced in a few places, but is hampered by inadequate knowledge of groundwater resources. xxxv. The chief beneficiaries of the success achieved thus far in the agricultutal sector are the large farmers, but the small farmers are also benefiting to a lesser degree through a mixture of traditional and modern practices. Increasing the price of current inputs such as fertilizer, as is proposed in the 1972/73 budget is not a good way to spread the advantages of the new technology. The introduction of a practical and progressive levy on incomes generated in the agricultural sector is the proper approach to the problem of resource mobilization at the State level. We discuss the subject in Chapter 4. xxxvi. Amelioration of rural poverty is a-moat important economic goal for India. How the problem should be tackled (directly or obliquely by economic growth) has been debated extensively. The government's direct attack is through four or five different programs, partly rural works and - ix - partly the primary credit institutions. The former seem to be making more headway than the latter. xxxvii. The stress on these programs must be viewed against serious problems of unfulfillment partly raised by the Green Revolution and partly of long standing. In the main, they relate to the great unevenness in agri- cultural development between different regions and within regions; to tenurial arrangements; to lack of taxation of the well-to-do rural sec- tor, and above all to growing income disparities. In one way or another, they converge on the question of how the output is distributed, or "who gets what." xxxviii. The search for a congenial co-existence between growth and better distribution of output continues, and if pronouncements at the highest levels are translated into action, should be speeded up. The agricul- tural transformation taking place now is indeed a welcome development, but if it continues only selectively, even food self-sufficiency will not mitigate the disaffection with greater inequality. Industry xxxix. Industrial production was not one of the success stories of 1971/72. In the first seven months of calendar 1971, output only in- creased by about 2 per cent over the same period in 1970 and estimates for the fiscal year are for a rise of only 2-3 per cent as compared with 1970/71 when industrial production rose about 4.8 per cent. The Plan target is over 9 per cent. Since this is definitely the lagging sector of the economy, we have devoted Volume 3 of this report to its more important components. Also in Chapter 6, we summarize a report on the small scale industry sector by the Bank in cooperation with the Swedish International Development Authority. xL. A variety of factors have contributed to the deceleration in the growth of industrial production; inadequate imports of raw materials, sluggish demand in certain sectors and shortages of capacity in some others. These three constraints have had interrelated effects. The fol- lowing sub-paragraphs summarize our main findings in respect of the medium and larger units analyzed in Volume 3. (a) 1971 was one of the most difficult years in the long history of India's largest industry, cotton textiles. Shortage of raw cotton was the primary cause. The short domestic crop was not compensated by timely imports. Raw cotton prices rose sharply and consumer resistance to higher prices for cloth and yarn prevented the mills from passing on the full amount of cost increases, so profits fell from already low levels. During the first nine months of 1971, the output of cotton yarn fell by 10.5 per cent and that of mill-made cloth by 7.3 per cent from the same period in 1970. Exports of yarn dropped by two-thirds and exports of mill-made cloth by 8.per cent in 1971. Given expected higher cotton availability and lower prices this year, output and profitability of the industry should improve. But more important for the longer run are the difficult structural problems which beset it. Government policy is employment rather than efficiency oriented. A part of the domestic market, with assured outlets, has been reserved for the decentralized weaving sector and the weaving capacity of the organized mill sector has been frozen to protect this de- centralized sector. The Government has, however, favored the exporting mills by allowing them to expand and to import sophisticated machinery. However, many mills are obsolete. Out of the 52 mills which have closed down since 1965, 31 closed during the past two years. The poor profitability of the textile industry raises doubt as regards its capability and/or willingness to undertake a modernization program, as long as the price of raw cotton which makes up-about 50 per cent of manufacturing costs, remains twice as high as international prices. Rehabilitation of the industry would become more economic, when prices of raw cotton are re- duced by higher productivity in cotton cultivation. (b) In contrast to cotton, 1971 was a good year for the Jute industry. Jute goods production increased by 14 per cent compared with the previous year. India benefited from the disruption of jute goods exports from Bangladesh, and obtained some imports of raw jute from that area. The industry was able to increase its profitability substantially, despite higher export taxes. Domestic consumption is continuing to grow rather rapidly and now absorbs about 45 per cent of production and this growth is expected to be sustained during the present decade. As far as exports are concerned, the industry is at a cross-roads. Export capacities for manufactured goods of India and Bangladesh exceed present world demand. Whether they will be able to work out some arrangement to share the world market and to plan investment in an orderly manner, remains to be seen. Efforts in that direction are being made. (c) 1971 has again been a disappointing year for the major steel producers and production rose only marginally if at all. Capacity utilization has continued its downward trend: 70 per cent in 1969/70, 67 per cent in 1970/71 and 64 per cent in 1971/72. Very serious maintenance problems, plus labor unrest in some units, are mostly responsible. However, during the current year, management of all three public sector steel plants has been improved and other organizational reforms are in the offing. At current prices and capacity utilization, Indian steel companies are making losses or very small profits. Well endowed with locally available raw materials, Indian plants could produce the cheapest steel in the world if they could be worked at 80 per cent of their capacity. Despite projects in hand, Indian mills will not be able to satisfy the expected demand for steel in the 1970's and perhaps even at the beginning of the 1980's. (d) At present, domestic production meets only about 56 per cent of total consumption for nitrogen and 42 per cent for phosphatic fertilizers. Nitrogenous fertilizer production capacity now stands- at about 1.5 million tons of nutrients, a remarkable increase since 1967/68, when it was 0.6 million tons. Phosphatic fertilizers capacity is 0.5 million tons. Every year additional capacities are being built, but at a much slower pa&e than anticipated in the Fourth Plan. Of special concern is the low utilization of capacity due to technical and management problems in existing plants, and - xi - the increasing number of new plants which cannot be run at full capacity for several years after completion. In 1970/71, utilization of capacity for nitrogenous fertilizers was 61 per cent and phosphatic fertilizers 53 per cent. Present anticipations are that capacity may be around 2.4 million tons and production between 1.6 and 1.8 million tons for nitrogenous fertilizers in 1973/74, against an initial Plan target of 3.0 million tons and 2.5 million tons, respectively. Capacity and production of phosphatic fertilizers are ex- pected to be between 0.6 and 0.8 million tons respectively, well below the initial Plan target of 1.4 million tons. (e) Aluminum production has increased rapidly over the past five years and is now about 170,000 tons. Aluminum is now produced entirely in the private sector, where 4 units are working at near full capacity. Unfortunately, the public sector program (150,000 tons additional capacities) has not proceeded according to original assumptions and an increasing gap between supply and demand will develop during the remaining years of the Fourth Plan. This gap should be closed during the initial years of the Fifth Plan. Due to delays in finalizing the details of the Khetri proj- ect in the public sector the production targets of 47,500 tons of copper for 1973/74 will remain mostly unfulfilled. Actual production is about 13,000 tons and India remains heavily dependent on imports. Plan targets for zinc smelting capacity, based on local ore or imported concentrates will also fall short. (f) For the last four years, coal and lignite production has averaged 70 million tons a year. Production capacity is about 96 million tons. Demand for coal has been lower than expected due to the slowdown in industrial activity, particularly in the steel plants, to the dieselization of the railways, and to the increasing use of furnace oil instead of coal in certain industrial units at a distance from the coal fields. On the other hand, trans- port bottlenecks have resulted in coal shortages especially in the eastern parts of the country. The decline in the output and consumption of coal is particularly disturbing at a time when petroleum-based fuels, which need to be imported, are becoming more and more expensive. (g) In 1971, iron ore production rose to 33.5 million tons, a 2 million tons increase compared with the previous year. Exports reached 22 million tons in 1971, a million increase over 1970. The Fourth Plan envisaged that the production of iron ore would be stepped up from about 28 million tons in 1968/69 to over 51 million in 1973/74. Of this, 31 million was planned for export. On present reckoning, production is not expected to exceed 42 million tons in 1973/74, out of which 25 million may be exported. The deceleration of the growth of iron ore production, and therefore of exports, is due mainly to the lag in production in the mining sector and to the delay in provision of complementary transport facilities. (h) About a third of petroleum requirement is met by domestic production of crude oil, which is at present growing slowly. In 1971, crude oil production was 7.18 million tons and is not expected to exceed 8.5 million at the end of the Fourth Plan. Crude oil imports have increased from 6.8 million tons in 1965 to 12.7 million in 1971; in value terms the - xii - increase has been from $54 million to about $187 million. By 1975, imports are likely to increase to 18 million tons. In 1971, imports of refined products more than doubled as compared with 1970 (from 0.97 million tons to about 2 million tons). Such imports may reach 5 million tons in 1975. xLi. For several years the number of man-days lost through industrial disputes has been about three times higher, in proportion to the number employed, than in western countries. There was an improvement in 1971, but it is too early to predict that the corner has been turned on this serious problem. The trend in recent years has been largely set by move- ments in the figures for West Bengal, where a decided improvement has occurred recently. xLii. Each industry has its own problems but two run through most of the industrial sector, namely, improvement in the supply of inputs and in technical management. The first should ease considerably in 1972, and some, including the authors of this report, are expecting a rise in the tempo of industrial activity this year. This will be altogether likely if some key bottlenecks such .as the coke problem in steel making can be eliminated. Much will depend on the supply of imported inputs and thus on a combination of foreign assistance with a less restrained use of India's foreign exchange earnings. xLiii. More serious is the secular decline that seems to be occurring in the productivity and profitability of-many important large and medium-scale plants. This is particularly true of cotton textiles as noted above. Capital output ratios for most industries have been rising and value added per rupee of labor cost has been declining. The ratio of total costs (including imputed capital costs) to value added increased 12.4 per cent in the 1960s. Inadequate use of capacity and the tendency of labor costs to outrun labor productivity are important causes. xLiv. Lack of adequate use of capacity remains particularly important in public sector industrial enterprises as does low profitability, which at about 3 per cent on capital employed is well below private sector performance. The steel plants have improved'slightly in this regard, but they, together with the major capital goods units continue to draw down the average. This raises financing difficulties for public sector industrial development. The Planning Commission is putting greater emphasis on getting units up to higher levels of technical efficiency-and capacity utilization. xLv. Our conclusions in respect of 'small scale industry which, if liberally defined, produces about 50 per cent of industrial GNP in India, are generally favorable. Although as for the large units, lack of adequate inputs is a problem and average capacity utilization is unsatisfactory, profitability appears to be distinctly higher than for the rest of industry and capital/output ratios are lower. This latter factor may be partly because of the type of product reserved for the small scale sector under present policies though small scale units often do well with unreserved items also. The sector receives favored treatment in respect of institu- tional finance but the allocation of materials to it needs improvement. - xiii - It merits external financing for materials and components, and for capital equipment. But the sector's capacity to absorb imported capital equipment is relatively small. xLvi. In respect of industrial finance, while the profitability of private sector companies may have improved marginally in the last year or so, their ability to generate internal resources for expansion is limited and their reliance on institutional finance remains heavy. The major sources of external funds are the term lending institutions. They have played an increasingly important role and in 1971/72 they financed over one-quarter of fixed investment in the private corporate sector. The commercial banks are expanding their operations in the small scale sector. Developments in the capital market in the past year have not been conducive to stimulating the flow of resources for private investment through this channel. xLvii. There have been no major changes in investment licensing and monopolies policy in the last year. The minor changes made have been in the direction of liberalization and clarification of existing regulations. 54 priority industries can now increase their output up to 100 per cent in excess of licensed capacity provided that no substantial additional investment is required. However, this freedom does not apply automatically to the larger industrial houses or to foreign firms which are handled on a case-by-case basis. The firms that undertake to increase production will be accorded better treatment in the allocation of imported materials. Judging from the speed-up in industrial licensing operations there should be a considerable boom in industrial investment in the offing, but this remains to be seen. However, the larger houses are not participating in the starting of new ventures to any great extent. The favorable recommendations of the Monopolies Commission on some projects controlled by the larger houses has been accompanied by increased pressure to separate some enterprises from control by the family groups. The "joint sector" approach is becoming more prominent in the thinking of both Government and industry though its efficacy remains to be tested. The "Indianization" of foreign controlled enterprises (which own about 13 per cent of industrial assets in the medium and large scale manufacturing sector) remains a firm policy, though the rules have been clarified so that foreign companies now know, in event they need to raise capital for expansion, what proportion of the new equity must be sold to Indians. There have been hints that foreign firms with high export potential may be treated liberally in respect of both foreign ownership of equity and freedom to import equipment but no new regulations on this score have yet emerged. Power xLviii. Progress in the power sector has fallen well short of the Fourth Plan's expectations. Installed capacity and power generation have grown much more slowly than in earlier years. Substantial shortages have emerged, and are expected to continue in the coming year. Current plans call for raising capacity from its current level of 17.2 million KW to about 50 mil- lion KW by 1980/81. The cost of such a program would be formidable, and - xiv - for it to be carried out project execution would have to be very much im- proved. Additional capacity has to be complemented by integration of the various state power systems; while fully-integrated operation within each state has been nearly achieved, on a regional basis, it is only just be- ginning. As with the generation program, the transmission program too has been lagging. Rural electrification (RE), however, has made very good progress, and the Plan targets of energizing 1.5 million pumps and electri- fying 75,000 villages over the five years maybe reached. The less satisfactory aspect is the financial losses incurred by the State Electricity Boards in making RF investments, though improvements may be on the way. The Rural Electrical Corporation, which is now providing a third of the funds for RE, has developed a project approach to RE schemes, and is insisting that the schemes it finances meet minimum financial criteria. Transportation xLix. A significant development in the past year has been the initiation of a general review of transport policy, with a strengthening of the Planning Commission's central coordinating role. The review is intended, as a first step, to reexamine existing criteria for intermodal investment decisions as part of the preparations for the Fifth Plan. A further development during the year has been the decision to restore half of the cut previously an- nounced in the Fourth Plan investment program for the railways. The internal financial position of the railways has been strengthened considerably, by reducing its dividend payments to the general revenQes by Rs. 1,000 mil- lion over the Fourth Plan. The other Fourth Plan investment programs in the transport sector have made reasonable progress, except in the case of roads, where less than 30 per cent of the central government program has been carried out thus far. Although expenditures- in the State sector are well ahead of expectations. Tourism L. This year we have included a short piece on tourism. The number of tourists coming to India has doubled in the last six years to about 300,000 annually. Even after leakage to the black market tourism may be earning the country about $95 million (gross) in foreign exchange. Accom- modations are in short supply and despite some 80 new hotel projects are likely to remain so. Other investment in tourist facilities is also needed, but India should give more study to the things tourists come to India to see and do, and form its investment program accordingly. Cultural objects and transport rather than golf courses and beaches may be better foci for investment. - Public Sector Plan Expenditure and its Financing Li. In the original Fourth Plan, public sector Plan expenditure for five years was placed-at Rs. 159 billion. Actual expenditure in the first three years may have amounted to Rs. 79.8 billion (50 per cent). Shortfalls at the-Center in comparison to Annual Plan targets were com- pensated by overages in the States. The major reasons why Plan expenditures did not rise faster have been delays in project preparation and execution; - xv - the latter in part related to the shortfall in production in capital goods industries. The States benefitted from larger than expected availability of finance, but mostly this affluence was not due to their own efforts; they received larger amounts from the Center and most States ran up increased unauthorized overdrafts with the Reserve Bank. The refugees and the war had little effect on Plan spending for the country as a whole. The total shortfall in three years in public sector Plan spending in real terms probably came to about ten per cent of the total of the annual targets for those years. Lii. There were major deviations during the first three years in the pattern of public sector Plan finance from that projected. The public sector revenue surplus, including enterprises, was much lower than tar- geted and so was, to a lesser extent, external assistance. On the other hand, domestic borrowing by the public from the private sector and deficit financing were substantially larger. Liii. In the mid-term Appraisal the Five-Year Plan spending target for the public sector has been retained. The pattern of finance for the last two years has been projected to change by a steep increase of the revenue surplus and a further rise in domestic borrowing, together with some re- duction of external assistance and a sharp fall in deficit financing. Liv. The Central Government budget for 1972/73 projects a rise in Plan spending by the Center of 26.4 per cent to Rs. 23.69 billion. Also, Plan expenditure of the States is estimated to rise by 15.4 per cent to Rs. 16.04 billion. Total Plan expenditure therefore is estimated to go up from Rs. 31.57 billion in 1971/72 to Rs. 39.73 billion in 1972/73, or by about 21.8 per cent. In view of the steep increases, some continued shortfall would not be surprising, but prospects for reaching the 5-year target of Rs. 159 billion at current prices now look good. If this would happen, the total shortfall over the five years in real terms would come to about 12 per cent. Lv. The Central Government budget for 1972/73 estimates a rise in tax revenue by almost 10 per cent over the revised estimates for 1971/72, largely because of the measures taken in that year, which should produce about Rs. 5 billion a year. In addition, fresh taxation is proposed of Rs. 1.83 billion. On the expenditure side, the rise for civil non-development outlays has been held down to 4.2 per cent over 1971/72 (revised estimates) and defense expenditure would not rise at all. Altogether, despite the efforts in the 1972/73 budget, public savings and domestic non-inflationary borrowings are likely to fall short of the Appraisal's targets. Lvi. Role of Foreign Aid. The progressive diminution of the assigned role of foreign aid over the Plan period is clear from the following facts. During the first three years of the Plan, 65 per cent of the net foreign aid projected for the five years was used. In 1969/70 and 1970/71, foreign aid financed over 22 per cent of Public Sector Plan expenditure as compared with the 16 percent contemplated for the Plan as a whole. In 1971/72, foreign aid was expected to finance 17 per cent of public Plan expenditure. Even if the original estimate of net aid receipts for the Plan period materializes, it - xvi - will only finance 12 per cent of public Plan expenditures in the last two years of the Plan. However, a shortfall of about 3 per cent of the net foreign aid originally projected is now (before US aid suspension) expected. This means that foreign aid may only finance about 10-11 per cent of public Plan expenditures in the last two years of the Plan. Lvii. To meet the public sector expenditure target for the Plan period domestic resource mobilization for the Public Sector Plan will have to increase from an annual average of Rs. 19.3 billion in 1969/70 and 1970/71 to over Rs. 34 billion a year in the last two years of the Plan. As compared with domestic resource mobilization in 1971/72, this would involve an increase of 19 per cent each year in 1972/73 and 1973/74. Lviii. Center-State Financial Relations. The biggest fiscal problem has remained the continuing lack of financial discipline in a substantial number of States, reflected in the persistence in their running up of sub- stantial unauthorized overdrafts with the Reserve Bank. The system of special accommodation by the Center to States for covering non-Plan deficits is not calculated to give a reward for good performance. Another difficulty is the large service payments by States to the Center on past loans. The Center has announced its intention to apply effective curbs on fresh overdrafts from the start of 1972/73. Altogether, present financial arrangements between Center and States are very complex. Their simplification should be done in a way to provide incentive to States to improve their financial performance and administration. The Planning Commission is studying the matter. Money, Credit and Prices Lix. Inflationary pressures, as manifested by monetary and price trends, have been mild in 1971/72, despite the special burdens of refugees and war. Wholesale prices (monthly average) rose by less than 4 per cent, against 5.5 per cent in 1970/71 and 3.7 per cent in 1969/70. Credit to the government sector (net) by the banking system in 1971 increased sharply, by Rs. 11.36 billion, whereas net credit to the commercial sector declined by Rs. 1.25 billion. The money supply increased 11.3 per cent in 1971, the same as in 1970. The liquidity position of the commercial banks improved markedly. The nationalized banks in the past year have continued to step up credit to the priority (agriculture, small-scale industry and exports) and neglected sectors, but the rate of growth has come down of late. During July 1969 - December 1971, the number of branches increased 60 per cent. FTrade Lx. After adjusting for some distortion in the official figures, export growth in 1969/70 and 1970/71 was about 4 per cent in each year - marginally higher than the 3.4 per cent average growth achieved in the 1960's. In 1971/72, there has been a substantial improvement, with exports probably about 10 per cent higher than in 1970/71. At least half of the increase in 1971/72 has been due to the recovery of jute manufactures, which resulted very largely from the disruption of Bangladesh exports. Tea, the next largest export item, also improved after declining in previous - xvii- years. Exports of engineering producto have continued to expand impres- sively, and they are now the third largest export; however, es in 1970/71, they could have grown faster still but for inadequate supplies of steel. Exports of steel (and low value added engineering goods) ha-ve fal'len con- siderably - a desirable development in view of the large need for steel imports. Lxi. The Fourth Plan anticipates an average annual export growth of 7 per cent over the five years. It seems very unlikely that this will be achieved. Exports of jute manufactures are bcund to fall once Bangladesh's trade is resumed, and other important items such As tea, cotton piecegoods and iron ore may be substantially lower than projected. We forecast an annual export growth of 4-1/2 per cent over the coming two years, and even achieving this could be a difficult task. Thi3 will mean a growth of 30 per cent for the Fourth Plan period or 5.4 per cent a year compounded. Lxii. As regards imports, the outstanding feature in recent years has been the decline in imports of foodgrains from a peak of 10 million tons in 1966/67 to about 2 million tons in 1971/72. Barring two bad monsoons, hardly any foodgrain imports will be necessary in the next two years. Im- ports other than foodgrains fell by 16 per cent in 1969/70 and although increasing in 1970/71, they remained below their ,968/69 level. Demand factors were to some extent responsible, but inadequate licensing of imports played a large part. Lxiii. Imports in 1971/72 have been inflated to the extent of about $170 million by direct and indirect imports for the Bangladesh refugees. Excluding these, non-foodgrain imports have nevertheless risen sharply (probably by about 17 per cent). An approximate 40 per cent increase in steel imports (in volume terms) considerably eased the steel supply situ- ation. There were also substantial increases in imports of nonferrous metals and fertilizers. Imports of P.O.L. were considerably higher in volume terms, but were very much more so in terms of value owing to last year's price hikes. Lxiv. The Mid-Term Appraisal estimated import requirements at $2,890 million in 1972/73 and $3,177 million in 1973/74 - compared with an esti- mated total, excluding imports for the refugees, of $2,430 million in 1971/72. We share the Appraisal's view that a considerable step-up in imports, largely in the maintenance category, is required but as large an increase as envisaged does not seem necessary. In our view, a desirable level of imports would be about $2,740 million in 1972/73 and $3,125 mil- lion in 1973/74 - taking the two years together about $200 million lower than the Appraisal's estimate. Unfortunately, however, even our estimate of import requirements does not appear sustainable - unless there were to be a very marked increase in new non-project aid and/or debt relief. Lxv. Balance of Payments and Aid Requirements. India's trade deficit was abnormally low in the first two years of the Plan because of a very sharp and, as it turned out, excessive contraction of imports. In fact, the deficit of $225 million in 1969/70 was the lowest since 1955/56. To- gether with the deficit on "other capital and invisibles" it only amounted - xviii - to about 42 per cent of the net aid flow in that year. $370 million of India's foreign exchange was used to pay off $167 million of her debt to the IMF and foreign exchange reserves rose by $203 million. In 1970/71, the trade deficit increased to $275 million and together with a sharply increased deficit on other capital and invisibles amounted to $480 million, just short of the net aid receipts of $496 million. While India completed her repayment to the IMF and reconstituted $76 million of her gold tranche in that year, all but $16 million of the $253 million required for this purpose from the balance of payments was reflected in a drawdown of reserves. Lxvi. In 1971/72, the trade deficit was probably about $450 million, but as noted above, $170 million of this is attributable to the refugees, so that this factor aside the trade deficit, would have increased to $280 million or only $5 million above 1970/71. In short, the increase of 9 per cent in normal imports in 1971/72 was about compensated by a better export performance. Net aid was $727 million in all, but we estimate that $230 million of this was for refugee account, leaving the rest of net aid at $497 million or almost exactly the 1970/71 amount. Since total refugee assistance received in 1971/72 was about $60 million more than refugee imports ($230 less $170 million) and the increase in reserves from the balance of payments for that year was $39 million, it is clear that net aid disbursements on non-refugee account fell short of covering the normal (non-refugee) deficit. Lxvii. Gross disbursements of development assistance are estimated at $1,123 million in 1971/72, or about $26 million hifgher than in the previous year. Most of the small increase was the effect of exchange rate changes on the dollar value of aid disbursements. Non-project aid commitments of $338 million, however, fell nearly 50 per cent below the recommendation in last year's Bank report so that the maintenance of the level of aid disbursements was almost entirely the result of an acceleration in the drawdown of the non-project pipeline, from $580 million to an estimated $339 million 1/ over the course of the year. There was a significant recovery in commitments of project aid, to $672 million (including advance commitments against future years). The effect of the pipeline changes in 1971/72 is that aid disburse- ments in 1972/73 can be expected to fall substantially, unless there is an early recovery in commitments of non-project aid. Aid commitments of the same level and composition as in 1971/72 would result in a fall in the net aid transfer, to perhaps $210 million in 1972/73 or to the lowest level in nearly twenty years. Lxviii. The recommendations in Chapter 10 are designed to reduce substan- tially the decline in the net transfer. We propose that the Consortium under- take to provide sufficient new commitments to permit aid disbursements of $1,100 million in 1972/73 and $1,200 million in 1973/74. The former would be a little below the 1971/72 level. Even with a considerable planned use of 1/ This includes about $87 million of US aid on which disbursements have been suspended. - xix - reserves over the two years, this would still fall short of providing either the Mid-Term Appraisal's or our own estimates of a desirable amount of imports. The level of new aid commitments which will be required even to achieve this level of aid disbursements, however, is such that we cannot recommend that the Government should reasonably plan on a higher import level than what we have described (in Chapter 10, table 4) as our "low series". Lxix. Since we are postulating some drawdown of reserves in the last two years of the Plan a word on the reserve position is in order. India had foreign exchange assets of all types on March 31, 1972 of $1,265 million, equal to about 39 per cent of imports plus foreign debt service obligations in 1971/72. As noted in Chapter 10, para. 10.7, India's reserves (net of IMF credit) have improved by $836 million over the Plan period but only half of this was from overall balance of payments surpluses. 1/ Also, $340 million had to be used to liquidate India's credit position with the Fund at the beginning of the Plan. Thus, had it not been for the use of SDRs, non-monetary gold, and the effect on the dollar value of foreign exchange assets of currency adjustments, India's free foreign exchange and gold holdings, plus her gold tranche with the Fund might have improved by only $78 million over this period. This does not alter the fact that India's reserve position is a fairly substantial one at present and even assuming no further allocation of SDRs for the remainder of the Plan period her net useable reserves might still be over $900 million at the end of the Plan, if she receives about the amount of foreign assistance that we are suggesting. This would be about 25 per cent of our estimate of her imports and debt service in 1973/74. Lxx. Our recommendations, therefore, are that the Government should plan on an overall import level of $2,700 million in 1972/73 and $2,860 million in 1973/74. These amounts are likely to result in balance of payments deficits of $1,230 and $1,300 million respectively in these two years, $230 million of which would be met from a drawdown of reserves. Thus, gross aid disbursements would be about $1,000 million in 1972/73, with an increase to $1,200 million in 1973/74. The level of new commit- ments which will be required will depend on the level of debt relief, and on the composition of new commitments as between project and non- project aid. If debt relief can be provided at the level of $200 million per year, and if overall non-project commitments (including debt relief) can be restored to a level of $7e0 zillion and with project aid at $550 million, then total aid commitments would need to be $1,250 million in 1972/73 and about $1,350 million in 1973/74. Lxxi. With a lower level of debt relief, the needed commitments of new aid would, of course, be substantially higher. With the same level of 1/ The difference of $418 million was made up from SDR allocations of $334 million, confiscation of smuggled gold of $17.5 million, and the increase in the dollar valte of exchange assets as a result of the December 1971 parity changes and the March 1972 change in the gold value of the U.S. dollar of $66 million. - xx - project commitments ($550 million), and with no further debt relief, the needed commitments of nu :oject aid would rise to $900 million in 1972/73 or a total of $1,450 million of new commitments. If debt relief could be provided only at the level of $100 million in 1972/73 and with the same level of project aid commitments ($550 million), the total re- quirement for new non-project commitments (including debt relief) would need to rise to $800 million or $1,350 million in all. Lxxii. Our projections and recommendations would-mean a further decline in the net aid transfer from the level of $497 million in 1971/72 to about $414 million in 1972/73, with some recovery to perhaps $515 million in 1973/74. Even this would still be much lower than thei$738 million in the first year of the Fourth Plan. The decline in the net transfer between the opening and terminal years of the Fourth Plan would be almost entirely the result of the rise in debt service payments. CHAPTER I PRINCIPAL DEVELOPMENTS IN 1971/72 1.1 In a land where economic growth is constrained by limited resources of all kinds except manpower, one would have expected the influx within a few months of 9 to 10 million destitute persons and a short but hard fought war, to have had a serious impact on India's 1971/72 development effort. The fact that this did not happen speaks well for the resilience and reserve potential of the Indian economy, though the bill for the tragic events of 1971 is by no means fully in at this time of writing in March 1971. Though 1971/72 was not a dynamic year on the development front, no shortfalls in Plan outlays appear to have occurred as a result of refugees, war or the partial suspension of foreign aid. Refugees, W4ar and Bangla Desh 1.2 Before getting to the main business at hand - the development pro- gress in 1971/72 and the outlook for the future - a short resume of the events of 1971 is in order. Happily the problem of refugee support is now almost en- tirely in the past (at time of writing less than one million are still in In- dia) and its cost to the Indian economy, though far from negligible, was con- siderably less than it would have been if all the refugees had remained on Indian soil as long or longer than the time horizon of March 31, 1972, used in our refugee report submitted to the Consortium on October 5, 1971. That report estimated the possible total cost of refugee support under alternative assumptions in respect of their numbers and the duration of their stay in India. The maximum cost envisaged for FY 1971/72 was about Rs. 5.3 billion ($700 million equivalent). 1.3 In the event, the actual costs of refugee relief and repatriation to the Indian budget was about Rs. 325 billion (about $445 million equivalent) of which perhaps Rs. 12.0 billion ($165 million equivalent) was met from for- eign assistance earmarked for refugee account. 1/ Thus the net fiscal burden was probably about Rs. 2 billion. Although the two are not in any real sense substitutable, the budgetary cost to India of the refugees was about 55 per cent of the net (development) foreign aid received in 1971/72. 1/ As of February 14, 1972, arrivals of foreign financed refugee goods plus foreign exchange expenditures for the refugees in India and passing through the budget is estimated at $160 million. Aid promised at that date was about $110 million more than this. Part of this has arrived but has not passed through the budget being receipts from voluntary agen- cies and the like. Another portion of the $110 million has not yet ar- rived and we assume this will be largely transferred to Bangla Desh. -2- 1.4 Since most of the commodities required for refugee support, not fur- nished- as foreign assistance, were foodgrains, the impact on scarce develop- ment resources was not too substantial. From the standpoint of the financial impact, special revenue measures taken by the Government to meet the refugee burden probably yielded about Rs. 300 million in 1971/72 (and will yield about Rs. 1.8 billion on a full year basis). Thus the net budgetary cost which con- tribtited either to deficit financing or required a cut-back in other expendi- tures was about Rs. 1.7 billion or 42 per cent of the Center's budget deficit for 1971/72. 'I'he fiscal aspects of the'problem are discussed in Chapter 8. Inasmuclh as some expenditures for refugee procurement were made in India with foreign exchange made available by foreign donors, Indian foreign exchange earnings were augmented. The net foreign exchange receiptst(after deducting the imported components of such procurement) was probably about $60 million. 1.5 The 14 day war of December 1971 also has had less effect on the re- source position of India in 1971/72 than seemed likely last December, although the stimulus to inflation which it helped to engender, the future cost of re- placing lost military equipment and the need for caring for war casualties will be with India for some time to come. Considerable excess capacity in in- dustries producing both military equipment and goods for the refugees reduced the impact on supplies required for the development program or for consumption. Ilowever the use of certain items in short supply such as steel for military purposes reduced supplies (such as heavy electricals, engineering goods and mechanical equipment) for development projects and thus may have extended their completion dates. The direct budgetary costs of the war have been es- timated by GOI at about Rs. 1.7 billion. Special revenue measures were taken in December to meet part of this cost and were expected to yield about Rs. 475 million in 1971/72. Thus the residual budgetary cos-t of the war in 1971/72 was about Rs. 1.225 billion or 32 per cent of the Center's budget deficit for that year. The refugees and the war together appear to have accounted for about 75 per cent of the 1971/72 budget deficit at the Center. 1.6 As with the refugees, the effect of war-induced budgetary expendi- tures whether financed by new revenue measures or by deficit financing had repercussions on private savings and investments that cannot be readily traced. It should not be dismissed as inconsequential however. Its burden falls largely on the already quite heavily taxed urban middle-class, to which India must look for the largest portion of her private savings. 1.7 Two issues arising from politico-military developments on the sub- continent in 1971 will have to be resolved by political decisions rather than economic analysis. Nevertheless the manner and timing of their resolution will have far-reaching consequences for the subject matter of this Report. The first is the suspension of US aid. Uncertainties already present sur- rounding both the availability of foreign assistance and the Indian Govern- ment policy towards it were greatly exacerbated by the suspension of US as- sistance which provided over 50 per cent of India's net foreign assistance inflow in 1971/72. This occurred even as the Planning Commission was pre- paring its Mid-Term Appraisal which, while setting very high goals for do- mestic resource mobilization during the last two years of the Plan, also makes clear the need for continuing substantail external support for India's - 3 - development effort during the Fourth Plan. This is also reflected in the 1972/73 budget which anticipates about a 9 per cent increase in gross for- eign borrowings for budgetary purposes in 1972/73 from sources other than PL 480. At the same time the elimination of poverty, inequalities and greater self-reliance have been designated as major national objectives. 1/ 1.8 The second is the economic relations between India and Bangla Desh particularly on the trade-aid front. The new trade agreement is described in Chapter 9. India is providing relief and rehabilitation assistance to Bangla ])esh in various forms. A foreign exchange loan of f 5 million has been given to provide the new government with minimum balances required to resume for- eign trade. This would not have any near term developmental impact on India. In addition a rupee grant of .Rs. 250 million has been made, principally for the procurement of essential commodities required for sustaining the economy and to revive industries - e.g. fertilizers, cotton oil and oil products, me- dicines, sugar, and salt. India has also undertaken the rehabilitation of the damaged railway system; the cost may be of the order of Rs. 80 million and would be part of a rehabilitation loan. 2/ India has estimated the assistance to Bangla D)esh to be given during the fiscal year 1971/72 and 1972/73 as Rs. 2000 million, partly as a grant and partly as loans. It would be principally in the form of commodities and services available in India, except for the for- eign exchange loan of E 5 million and the foreign exchange component of certain supplies. 1.9 Decisions on such subjects as the reorientation of the Fourth Plan, a more forthright attack on the twin problems of rural poverty and unemploy- mient, the establishment of a better climate for domestic and foreign private investment, and the mobilization of more resources for public sector investment remain on the agenda, but up to now, decisive action has been deferred. Somne liberalization of foreign investment policy has been discussed. The distrac- tions to policy makers produced by the events of 1971 have taken their toll. Other Principal Economic Developments in 1971/72 1.10 At its inception 1971/72 gave promise of being quite a good year for the Indian economy. Wlhile economic growth had declined as between 1969/70 and 1970/71, this was because of a lagging manufacturing sector where growth of output by the 11iedium and larger units recorded in the industrial production in- 1/ Economiic Suirvey 1971/72. Government of India. p. 69, para 211. 2/ Terms of three loans granted thus far are (1) Rs. 130 million, 25 years including 5 years grace at no interest (2) Rs. 175 million, 20 years in- cluding 5 years grace at 2-1/2 per cent (3) Rs. 81 million, 5 years at 6-1/4 per cent. A grant of Rs. 967.5 million lhas been provided as di- rect aid to refugees, emergency food supplies etc. -4- dex was only 4.3 per cent in 1970 as compared with 7.1 per cent in the previous year; both well below the Fourth Plan target of 9.3 per cent per annum. How- ever at the start of 1971 the view was that the industrial lag would soon be rectified by a more abundant supply of imported materials, notably steel, non- ferrous metals and raw cotton, and by a recovery of industrial investment as business and government learned to accomodate themselves to the changes in in- vestment controls introduced in 1970. Rising demand associated with the more rapid income growth in the rural sector was also expected to stimulate indus- trial production. The prospects for rural progress also appeared more promis- ing than they had for a long time. Thanks to the continuing success of the green revolution capped by an 8.6 per cent increase in foodgrain production in 1970/71 and despite a spotty to poor performance for commercial crops, agri- cultural output (at 5.2 per cent and 5.3 per cent respectively) was ahead of the Plan target of 5 per cent, in both of the first two years of the Plan. 1.11 On the external front as well the portents for 1971/72 appeared fa- vorable. Exports seemed to have performed excellently in 1970/71, which made the export outlook rather better than before. Thus even with a much needed increase in imports the trade deficit in 1971/72 appeared likely to be quite manageable given India's comfortable reserve position and her foreign aid prospects. The goal of dispensing with concessionary foodgrain imports by the end of 1971 has indeed proven to be realistic. 1.12 In the event, 1971/72 while by no means disastrous, has not been a success story either. The anticipated industrial revival did not occur on schedule and in fact industrial output may have grown by only about 3 per cent or marginally less than in 1970/71. The reasons fQr this provide a topic of endless polemics and some serious debate in New Delhi to which we will add a small contribution in this report. Since, despite a considerable upturn in some commercial crops such as cotton, and lesser (than in 1970/71) but still substantial gains in food, agricultural production is likely to show a smaller growth than in 1970/71,the likelihood is that national income expanded only by 3-4 per cent in 1971/72, thus falling even further short of the Plan target of 5.5 per cent a year than the 5 per cent average growth achieved in the fi-rst two years of the Plan. On the external front it has now become evident that much of the apparently good export performance in 1970/71 was statistical rather than real; but notwithstanding, export growth in 1971/72 showed con- siderable improvement over earlier years, thanks to the success of the jute industry in filling part of the gap in supplies to foreign markets created by the developments in East Bengal. Imports however will rise even more, so that the trade gap, after deducting the foreign aid financed import re- quirements of the refugees, is likely to increase slightly this year to about $280 million. The increase in imports, partly reflecting under-importa- tion last year should inspire satisfaction rather than alarm since it consists largely of materials necessary to increase India's lagging rate of industrial expansion. India's foreign exchange reserve position has improved even above the satisfactory level of a year ago and should provide a buffer for a consid- erable time against the impact that the continuation,of the present foreign aid situation would otherwise have on development and growth prospects. -5- Emphasis of this Report 1.13 Last year's economic report (SA - 25a May 11, 1971) made an assess- ment of some of India's principal longer range development problems, including the supply and use of her human resources, suggested a minimum program for ac- complishing a better distribution of the fruits of the technological break- through in agriculture, and examined the related problem of agricultural cred- it and mechanization and the allocation of resources for education. In re- spect of shorter range problems such as foreign trade and public sector re- source mobilization, the report used the end of the Fourth Plan (March 31, 1974) as its time horizon and the economic and investment growth targets of the Plan as its benchmarks against which to measure Fourth Plan accomplish- ments and future prospects and requirements. It concluded that performance during the first two years of the Plan (1969/70 and 1970/71) were generally close to Plan targets with the important exceptions of industrial production, exports and real public sector investment particularly in heavy industry. 1.14 In the private industrial field the report reviewed the changes made during the first two years of the Plan in the regulation of investments and trade practices, and the attempt to establish a nexus between the two in the Monopolies and Restrictive Trade Practices Act of 1969. In this connection it underlined the problems that might arise in raising the lagging rate of indus- trial investment if the objectives of the new measures, such as broadening the geographical area and range of affluence of participants in industrial oppor- tunities, were applied in a manner to impede industrial growth. In the non- institutional aspects of rural development the report reviewed the progress and problems related to improved inputs of seed, fertilizer and pesticides and proposed a better coordinated approach to land development and major irriga- tion undertakings. 1.15 This report will not again essay an assessment of the more basic problems of Indian economic development which presumably are well known to our readers. Nor will it review again in detail the vicissitudes and achieve- ments of the first two years of the Fourth Plan. However since the Mid-Term Appraisal of the Fourth Plan and the 1972/73 budget envisage a rather sharp turn around in several aspects of economic performance, particularly in the mobilization of domestic financial resources for development in the public sector, we must express our views on the realism of the targets, particularly that of achieving the original public sector development program in financial terms to which the Appraisal and the budget still substantially adhere. Sharply increased public savings, a continuing substantial draft of the public sector on private savings and a small shortfall in net foreign aid receipts are the principal assumptions to be considered, both from the standpoint of their realism, and consistency with Plan objectives. Highlights of the Fourth Plan to Date 1.16 As the pivotal year in the Fourth Plan, 1971/72 provided a vantage point from which to view progress achieved or shortcomings encountered during -6- the first half of the Plan period, and a position from which to appraise the prospects for achieving the major Plan objectives by March 31, 1974. 1.17 First a summary of the overall magnitudes envisaged in the original Plan. The Fourth Plan frame called for total investment of about $30 billion equivalent 1/ plus an additional $3.2 billion of planned public sector out- lays for non-investment purposes. Of this $33.2 billion, about $21.8 billion or roughly two-thirds was to be expended in or channelled through the public sector. Of public sector Plan expenditures, about $3.5 billion (16 per cent) was to come from foreign assistance. 2/ Taking the Plan as a whole, the planners contemplated that 11 per cent of total Plan expenditures and 12 per cent of investment would be met from net foreign aid (gross aid less amorti- zation but not interest payments). 3/ 1.18 Before giving a suumary of the broader aspects of developments to date, it is well to look again at the background against which the Plan was drafted. Its growth and savings/investment targets are substantially higher in almost all categories than Indian experience over the last two decades. In part this reflected the hopes of the planners for revival from the gener- al recession that accompanied the two severe drought years of 1965/66 and 1966/67 when cereal production fell off by about 18 per cent. It also re- flected confidence in the green revolution, in stronger incentives for ex- ports particularly of non-traditional items, and in the combined effect of these two factors on industrial production. The growth in real national in- come of 5.5 per cent a year envisaged in the Plan was about 2 per cent higher than that achieved from 1955/56 to 1968/69. Although the Plan frame contem- plated a decline in net foreign aid of about 50 per cent over the Plan pe- riod, because of a postulated marginal rate of domestic savings of 28 per cent the ratio of net investment to net domestic product was expected to in- crease by about 25 per cent during the five year period reaching about 13.1 per cent by 1973/74. If achieved this would have been higher than at any time during the 1960s with the possible exception of 1965/66 when net invest- ment may have been about 13.9 per cent of net domestic product. The net re- sources provided by foreign assistance (gross assistance less total debt serv- ice) were expected to decline to about 8 per cent of investment in the Fourth Plan as compared with the nearly 20 per cent which it had contributed in 1965/66. Exports and non-food imports were expected to rise at about the same rate, 7 per cent per annum. This would represent an approximate dou- bling of the rate of export growt-h that was achieved from 1960/61 to 1968/69 1/ At the new central exchange rate of about Rs. 7.28 = one US dollar. 2/ Of the Rs. 90 billion of investment reserved for the private sector only Rs. 0.3 billion was to be generated externally. 3/ The differences between this 12 per cent and the 8.2 per cent of invest- ment resources expected from net resource inflows referred to in the Fourth Plan document is the interest on external debt which is treated as a non-Plan expenditure. -7- and an even more precipitious increase in imports. As can be seen from the relative economic growth and investment rates referred to above the framers of the Fourth Plan (perhaps in expectation of the success of the relatively non-capital intensive green revolution) expected a much more favorable rela- tionship between investment and growth than India has experienced heretofore with a net investment-output ratio of a little over 2:1 as compared with close to 3:1 in previous five year plans. 1.19 By the mid-point of the Fourth Plan the rate of investment in real terms and the growth in physical production in most sectors, with the impor- tant exception of foodgrains, have fallen short of the Plan targets. Latest estimates indicate that real national income grew by 5.3 per cent in 1969/70 and 4.8 per cent in 1970/71. The Appraisal indicates that the rate of invest- ment was lower at the inception of the Fourth Plan that was thought when the Plan was formulated and declined as between 1968/69 and 1969/70, and only re- gained the 1968/69 level in 1970/71. 1.20 About 30 per cent of the 5-year target for public plan outlay was spent in the first two years (as compared with a little over 32 per cent originally planned) and 20 per cent is estimated for 1971/72. Thus 50 per cent remains to be spent in the last two years of the Plan of which over one half is included in the 1972/73 budget. In monetary terms the public sector portion of the Plan is now probably within about 2-3 per cent of its expenditure target for the period 1969/70 - 1971/72. However the Plan was drawn up on the assumption of constant 1968/69 prices and taking account of price increases the shortfall in real public sector planned expenditures thus far is probably in the order of 10 per cent. While public plan expendi- ture is not far off target in financial terms, internal resource mobilization and particularly its source, leaves a good deal to be desired as far as the overall investment health of the economy is concerned. The current surplus at the Center and States has fallen substantially short of expectations as have the savings of public enterprises. In financial terms this has been made up by a greater draft by government on private sector savings than the Plan anticipated and together with some concommittant credit contraction ap- pears to be a factor in the shortfall in investment and production occurring in the private industrial sector. 1.21 During the first two years of the Plan the sectoral disbursement of public sector plan finance was roughly in accordance with the Plan allo- cations. Overages occurred for agriculture, irrigation and power and small industry. Where shortfalls occurred in the fields of heavy public industry (23-25 per cent) transport and family planning absorptive capacity played an important role and there seems to be considerable correlation between Plan expenditures and the rate of growth of current production in the different sectors. 1.22 Since the Plan postulated a population increase of 2.5 per cent per annum whereas the last census (1971) indicates that the population of India may be growing at 2.25 per cent this would seem to support the conclusion that the growth in per capita income may have about reached the Plan objective of -8- 3 per cent in 1969/70 but only about 2.5 per cent in 1970/71. Despite this moderately encouraging development, when the aggregate figure for economic growth is broken down by sectors and sub-sectors any feeling of complacency about ultimate achievement of the Fourth Plan targets disappears. For exam- ple, the annual gross increase in foodgrain production of about 6 and 8 per cent in 1969/70 and 1970/71 (as compared with the target of 5.6 per cent) re- flects various factors which may not be repeated at least on an equivalent scale (such as favorable weather, the technological break-through particular- ly in wheat and the extension of the irrigation and cultivated area) in future years. The rest of the agricultural sector has done much less well with the principal fibre crops of jute and cotton showing very little progress towards achieving the 9.3 per cent and 5.5 per cent annual growth objectives indicated in the Plan. However, by far the most disappointing sector has been manufac- turing industry where growth achieved is only about half the envisaged 8-10 per cent projected over the Plan period. In contrast the industrial (mining and manufacturing) production index showed a growth of 5 per cent in 1969/70 but of only 3.2 per cent in 1970/71. The showing thus far in 1971/72 is still less impressive. The Fourth Plan has thus had a reversal of the normal relation for developing countries where industry is usually the leading sec- tor. This more orthodox relationship did in fact prevail in India during the first two plans with agriculture growing at about 4 per cent a year as com- pared to industry's 7-8 per cent, and a similar relationship was expected to repeat itself in the Fourth Plan. 1.23 While the largely non-economic (technology and weather) impetus to agricultural growth are fairly self-evident, the poor showing of industry is more complex. Labor problems, the semi-paralysis that had afflicted West Bengal which normally produces nearly 15 per cent of India's industrial pro- duction, shortages of imported and domestic materials and components asso- ciated with lack of capacity in some key industries, the shortfall in invest- ment in the public sector and some innovations in industrial policy have all played a part. 1.24 Export growth over the two year period 1969/70 - 1970/71 appears to, have averaged about 4 per cent per annum compared with the Plan target of 7 per cent. This was combined with a sharp contraction of imports in the first year of the Plan in which the desire to achieve a more comfortable foreign re- serve position even in the face of precipitious decline in net foreign aid, appears to have played an important part. It resulted in a quite favorable evolution of the trade balance with-the deficit declining from $735 million in 1968/69 to only $275 million in 1970/71. Only part of the lower level of imports is attributable to reduced dependency on foodgrain supplies. Non- food imports were cut by 17 per cent in 1969/70 and less than two-thirds of this decline was compensated by the growth in non-food imports permitted in 1970/71. India has been able to increase her foreign exchange reserves from $429 million (net of IMF credit) at the start of the Plan to about $1,265 million at the end of March 1972 or roughly from 20 per cent-to over 50 per -9- cent of her 1971/72 normal (non-refugee) non-food imports. 1/ 2/ At the same time, net aid (gross aid less interest and amortization) declined from $1.154 million in 1967/68 and $759 million in 1968/69 to $496 million in 1970/71. Despite a sharp reduction in non-project aid commitments it is estimated at $497 million in 1971/72 because of a more rapid than expected drawdown of the pipeline. The improvement in the trade balance is striking though there is little doubt that an overly restrictive import policy (at least as far as the timing of raw material imports is concerned) has played a significant part in the poor showing of industrial production. Critics of Indian economic plan- ning should welcome the anticipated sharp rise in imports of industrial ma- terials expected during the current year even though a portion was made neces- sary by managerial problems in the Indian steel industry. Plan Targets 1.25 When the Prime Minister appointed a new Planning Commission shortly after the last election, there was much talk in government circles about re- vising the Plan to give more emphasis to schemes which would increase employ- ment and deal with social problems. This has not been done in any comprehen- sive fashion but the staff of the Planning Commission and the different min- istries in the last few months have been giving more thought to integrated rural works programs, measures to improve the performance of public sector enterprises, a national resource survey and a review of center-state finan- cial relations. Commission members have also focused on better economic evaluation of projects and monitoring Plan targets. 1.26 It became obvious as 1971 wore on that the refugee problem, the war and the uncertain future of foreign aid made a definitive forecast of the last three years of the Plan very difficult. It also became clear that the weight of continuing schemes in total plan expenditures combined with the time it would take to work out new employment-creating projects ruled out any major changes in the investment pattern for the balance of the Fourth Plan. 1/ Only $418 million of this increase of $836 million came from balance of payments surpluses. The remainder was from the allocation of SDR's, changes in the dollar value of India's reserve assets owing to recent currency realignments, and the use of non-monetary gold. 2/ If debt service payments are added to non-food imports and only 70 per cent of SDR's counted as usable reserves the percentage of usable re- serves to import and debt payments would be about 40 per cent on the basis of 1971/72 imports (excluding refugee and food imports) and debt service. - 10 - Thus the increased concern about employment and other questions will be re- flected in the Fifth Plan rather than in any major changes in the Fourth. 1.27 In the Mid-Term Appraisal, the Planning Commission has made a series of adjustments to the 1973/74 physical production targets. This was necessary because of differences between base year (1968/69) levels of production as- sumed when the Plan was drawn up and those indicated by subsequent data. Ap- plying the Plan's implied sectoral rates of growth to the adjusted base gives us the new targets. The original and adjusted sectoral targets, togetlher with rates of growth during each of the first two years of the Plan and those required for the last three years to achieve the adjusted Plan targets are in Appendix Table 2.3. In most cases the adjustments in targets are comparative- ly minor and are generally downward, since 1968/69 output was less than pre- viously assumed. Comparing the original implied annual rates of growth with those necessary to achieve the adjusted Plan targets of course the most striking feature is the fact that, because of its dismal showing to date, output in large scale manufacturing will have to grow about a third faster than even the high Plan growth projection if it is to make the grade, a hiigh- ly unlikely outcome. With the very important exception of agriculture, other sectors particularly mining, construction and transport are also well behind schedule. 1.28 The Appraisal recognizes that even most of the Fourth Plan agricul- tural production targets will not be met. The outturn of all foodgrains in 1973/74 is now officially expected to be 122 - 125 million tons agai-nst a target of 129 million tons. This is a much more realistic figure, though it still assumes a degree of improvement in rice production which is scarcely warranted on present evidence. The target for wheat is likely to be substan- tially exceeded. In the case of commercial crops despite the allocation of additional Plan resources for research, extension and subsidization of pesti- cides, even the new targets may well not be reached. 1.29 Progress has been much slower than expected in building a number of major public sector industrial projects. This together with difficulties in operating existing plants has led to a downward revision of production targets for 1973/74 in some major industries while a lower level of private investment, combined with sluggish demand for some products,-has led to lower targets in others. The targets for ingot steel production in 1973/74 has been revised downwards from 10.8 million tons to 8.2 million tons and even this will be hard to achieve. Production of nitrogenous fertilizers (N) is now optimistic- ally projected at 1.8 instead of 2.5 million tons while the phosphate (P205) target is down to 0.46 from 0.9 million tons. Production of non-ferrous me- tals, refined oil, newsprint, machine tools, cotton textiles, and commercial vehicles all will be substantially below the original targets. On the other hand original production targets may well be achieved in cement, paper, elec- tronic items, power driven pumps and electric motors. - 11 - 1.30 In other sectors physical progress has been disappointing. The Mid- Term Appraisal now puts total electricity generating capacity in 1973/74 at 21.2 million kw instead of 23 million kw in the Plan. It is doubtful whether even this lower figure will be achieved since capacity is only likely to be 17.6 million kw at the end of 1971/72. However, targets for rural electrifi- cation and the installation of rural pump sets are likely to be reached. Railway freight traffic will fall well short of original targets mainly due to the slow growtlh of steel, coal, cement, iron ore and fertilizer production. Recent Political Developments 1.31 The single biggest factor in Indian politics today is of course the personial pre-eminence of ltrs. Indira Gandhi. The political scene has shifted back to the carly 50s, with the popular verdict clearly expressed in favor of the control of the Central Parliament and of the great majority of the State Legislatures by one party and within that party by one leader. By the spec- tacular victory of the Congress in the elections to the Parliament in March 1971, and the equally sweeping victory in the elections to the Assemblies in 14 out of 16 States which went to the polls in March 1972, she has overcome the powerful right wing Jana Sangh bid for control in the Hindi speaking North, the left wing CPI Marxists' aspiration to form a government in the critical state of West Bengal and the powerful regional parties suchi as the Silh Alcalis in the Punjab. As for the once powerful Organization (or old) Congress, even 'in Gujarat, Mysore and Bihar, where it was formerly in power, it lhas been reduced to a precarious parliamentary position. 1.32 This is in striking contrast to the situation of a few years ago. In the walce of the 1967 elections, the Congress was not only reduced to a position of bare m,ajority in the Parliament, but had to surrender control over a majority of the States. The political stability which had been taken for granted was no longer assured and in some states in particular West Bengal, this had unfortunate consequences for the administrative machinery and for the law and order situation. The return to political stability is therefore the return to a degree of national unity as against the regional pulls whichl hiave -been sffecting India for the last few years. Apart from the DMK, in Madras, whicih came back to power in 1971 in partnership with M4rs. Gandhi's party, and a local party in Meghalaya no local or regional party controls any State Legislature. 1.33 The factors of a non-personal character responsible for the Prime M-linister's successes liave of course been various and are generally well known. On the economic front the nationalization of the 14 large commercial banks and more recently of ;eneral insurance, the abolition of the Privy Purses and privileges of the former Princes of India, and the declared policy to broaden economic opportunities and curb alleged concentration of economic power had great appeal to the mnasses who responded overwhelmingly to her Banish Poverty (garibi-hatao) Slogan at the Parliamentary elections of M4arch last year. Iler - 12 - handling of the refugee problem and the military victory in the 14 day war, confirmed the trust of the people. This was acknowledged by the even greater political victory in the elections to the state legislatures. 1.34 In a bid to infuse new blood in the ruling Congress, a large num- ber of new legislators from the backward and less privileged classes were inducted in preference to the existing legislators from the dominant castes who generally had vested agricultural interests. This should make it easier for her to implement some of the urgently needed agrarian legislation, and in general orient economic development programs in the states in more pro- gressive directions. - 13 - CHAPTER 2 HUMAN RESOURCES Population Growth 2.1 The decennial census of March - April 1971 gave a provisional population total of 547.4 million, which, as noted in last year's Report, was 13 million lower than had been projected by an Expert Committee some seven years before. We are not much farther than we were last year in our ability to explain this shortfall, and the reason is likely to remain elusive at least until the results of post-enumeration checks and details of the age distribution are released. This will not be before late 1972, but both the post-enumeration checks and a 1 per cent census sample should be ready this Spring. 2.2 It is possible that under-enumeration was greater in 1971 than in 1961. Political disturbances made enumeration difficult in Calcutta. Postponement of the census due to the election may have disturbed the machinery in some instances. But there is no evidence that these events were large enough to make more than a local impact on the population enumerated. 2.3 The bulk of demographic opinion regards it as unlikely that much of the shortfall reflects a more rapid than expected fall in fertility. The precensus projection itself was based on an assumed drop in fertility of some 5 per cent in the second half of the decade, which was expected to give an average crude birth rate of 38.6 per 1000 in the years 1966-70 and of 35.1 in 1971-75, in contrast to the estimated 41.0 prevailing in 1961-65. Unfortunately there has until recently been no way of estimating vital statistics for the country as a whole apart from the census and occasional rounds of the National Sample Survey. In 1964, however, work started on a scheme to register all births and deaths in a sample of villages. By 1970 this had been extended to virtually the entire country. This contains too many fluctuations from period to period to be regarded yet as completely reliable but appears to show that India's birth rate in rural areas, where 80 per cent of the population lives, is about 33-39, and its death rate about 17; in urban areas the birth rate is about 30-32 and the death rate, 10-11. Changing age structure would account for a small drop in the birth rate, but it appears quite possible that there has been some decline in fertility over the past decade, though not a large one. The family planning program has probably contributed to this in some measure. Estimates made by the Department of Family Planning are that up to the date of the Census, about 7.4 million births had been prevented as a result of acceptance of contraceptive methods under the program, with some 2-2 1/2 million per year being currently prevented. This would be about 10 per cent of the existing birth rate. It is however very difficult to make such estimates and some other demographers have argued that the figures should be only about 60 per cent of the Department's estimate. In any case, the order of magnitude of the estimates is such as to make it extremely unlikely that the shortfall in total population has been caused by the program's making an upredicted impact on the birth rate. - 14 - 2.4 It is much more likely that mortality was under-estimated in the projections for two reasons. First, the life tables for 1951-60, which underlay the projections, may have understated infant mortality and so exaggerated the expectation of life at birth; and secondly, mortality did not decline to the predicted level (a death rate of 14 per 1000 in 1968), as evidenced by the sample registration scheme. An implication of this is that the death rate is still very high by international standards. Ceylon's death rate, for example, is about half that of India. It is to be expected therefore that mortality will continue to fall for some time to come - per- haps to a level that could add (temporarily) nearly a percentage point to India's population growth rate unless accompanied by a decline in fertility. A good deal of expert opinion believes that this decline in the death rate may be a necessary precondition of a significant fall in fertility. Deaths of children under age five account for about two-fifths of all deaths. The prevalence of child mortality is likely to be a strong deterrent to the adoption of family planning, particularly where sterilization appears to be one of the most acceptable methods, until a family has more children than the minimum whose survival is desired. So many of those most anxious to see the rate of population growth reduced are among those most enthu- siastically pressing for health and nutrition improvements, whose short run effects, at least, would be to raise the population growth rate. The Outlook 2.5 In the short run, therefore, the population growth rate is likely to continue to accelerate, unless something dramatic and totally unexpected happens to fertility. The age structure is also likely to become younger and the costs of supporting those too young to join the labor force is likely to rise. In 1961, 41.1 per cent of the population was under the age of 15; this will have risen by about 0.5 per cent. 2.6 The prospect of a billion Indians by the turn of the century and the addition of a great many more in the decades that follow is a very real, perhaps unavoidable one - unless, as more gloomy prophets predict, population pressures themselves lead to a Malthusian rise in mortality. In most developing countries the increasing ratio of population to fixed supplies of land and natutal resources is a comparatively minor reason for anxiety about population growth. In most cases, the economist focuses instead on the costs that new members of the population'cause the existing population, as they require sustenance, education and eventually capital equipment, and he is therefore much more concerned with the rate of population growth than with the absolute numbers involved. Although these costs are as relevant to population growth in India as anywhere else, in the Indian case, the dimensions of the human avalanche are so enormous that they simply cannot be ignored. Five years ago, the most significant question overhanging India's population growth appeared to be her ability to increase food supply as fast as population growth, let alone to raise has miserable nutritional levels or replace imports. The ability of the rest of the world to supply India's food needs at a price that India could afford was also in doubt. The successes in wheat pro- duction since 1968 invite optimism, though not complacency, on this score. It is often pointed out that India's population density is still less than - 15 - 60 per cent of Japan's and only about 70 per cent of the U.K.'s; even with a billion inhabitants India will have a density only about 10 per cent greater than Japan has now. But density figures by themselves are not very revealing. It should also be noted that little more than half of India's land area is classified as cultivable, and, if the precedent of countries at similar stages of development can be accepted in an unprecedented situation, the bulk of India's population will still be rural and her labor force agricultural at the turn of the century. 2.7 Population pressure will manifest itself not only in reduced land per head and increasing incentive to migrate to the towns, but may also reduce the opportunities for work for landless individuals. The effect of this would be to worsen the rural poverty problem and exacerbate inequalities in the distribution of income, and ensuing migration may have a similar effect in the cities. This is not, of course, to argue that things will necessarily be worse in future than at present, but rather that things will not improve as quickly with rapid population growth as they would if growth were slow or absent. This would be true whether or not full employment existed. As it is, India is very far indeed from having full employment; labor force growth can only postpone the happy day, already far off, when India finds itself with a "labor shortage" and market forces begin to exert some upward pressure on wages.1/ The Environment 2.8 One nagging worry is the ecological effect of the economic growth required to provide upwards of a billion Indians with a tolerable standard of living. It is not useful to try to predict what turn techno- logical developments may take but at present it seems very likely that Indian food problems will be met by the spread of the Green Revolution; and this will entail not only new varieties but also an extensive rise in the use of inorganic fertilizer and pesticides, with polluting effects in rivers, and possible deterioration of soil structure. The disposal of industrial and domestic wastes is already posing problems in certain rivers and major cities already suffer air pollution from industry, traffic and some domestic fuels. Pollution is not of course primarily caused by population growth but by output growth - it has been estimated, for example, that an American currently has 25 times the impact on the environment as an Indian.2/ But this is not much compensation considering that the principal object of economic development is to provide each Indian with a greatly improved standard of life. In addition a richer country is more easily able to devote the necessary resources or absorb the needed 1/ This is not of course to argue that there is no upward pressure on wages in any industry. There are many instances where unions are strong and have had considerable success. 2/ Wayne Davis. "Four Billion Americans." The Ecologist, July 1970. - 16 - change in consumption patterns in order to tackle or prevent pollution. If growing global pollution proves to be a constraint on global economic development, it will be the poor countries which are the principal sufferers. 2.9 Speculation about long-term difficulties is not, however, likely to be very useful. India is not at present in a position to select one pattern of development rather than another on the grounds that it is less polluting. A search for ways to alleviate current pollution problems would probably be more fruitful. Most important of all would be the adoption of measures that would minimize the harmful environmental impact of future economic development, which seems certain to continue following the lines it has already followed in India and elsewhere. In recognition of this, a National Committee on Environmental Planning & Coordination with a small full-time staff in the Department of Science & Technology has recently been set up. This agency will serve as a watchdog over the way that new projects and legislation can affect the environment, and will also try to consolidate, where needed, the activities of the multi- plicity of agencies whose work has a significant environmental impact. Family Planning 2.10 At present, India relies on her family planning program to reduce population growth to tolerable levels. Last year's Report dis- cussed the progress of the program at some length. The program had considerable achievements to its credit in setting up and staffing a huge network of facilities, in creating a widespread awareness of the existence of family planning and of inducing several million people to accept family planning. Nevertheless, the current state of progress, with expenditure rising and the numbers of acceptors falling, was disheartening. There was some sign that the steady fall in the rate of IUD insertions, which had reached 900,000 in 1966/67, had levelled off at about half that rate, that the acceptance of conventional contraceptives was increasing, and that female sterilization was continuing to rise. Nevertheless, vasectomies (male sterilization) which had been the mainstay of the program, had continued to fall; in 1970/71 they too were roughly half the peak that they had reached in 1967/68. 2.11 This year the picture is different and more cheerful. The IUD program has been at much the same level as in the past two years. For the first six months of 1971/72, however, it was below the 1970/71 level; by December 1971 it had caught up and at the time of this writing is expected to finish about 2 per cent higher than in 1970/71, so the current trend is moderately encouraging. The use of conventional contraceptives, especially condoms, has continued to rise. The estimated average number of users in the period April-November 1971 was 29.2 per cent above the equivalent period in 1970. Users of condoms purchased through commercial outlets accounted for 41.9 per cent of the total, compared with 39.7 per cent the previous year. Female sterilizations are also substantially higher; they were up by 33 per cent during April-November 1971 compared with the same period in 1970. The biggest increase, however, has been in vasectomies. The April-November 1971 figures show a 22.7 per cent gain over the previous year - which is itself encouraging for a program - 17 - that had.been declining steadily for three years; the really big improvements, however, have largely come during the last 4 months of the fiscal year. Compared with 1.3 million total sterilizations in 1970/71 this year's figure is expected to exceed 1.9 million and perhaps reach 2.0 million. It will certainly be higher than the previous best - 1.8 million sterilizations in 1967/68. Vasectomy Camps 2.12 The chief source of this improved performance has been a number of vasectomy camps. (Some of these also carried out female sterilizations as well, but they are primarily directed at men). The forerunner of these was the Ernakulam, Kerala; camp which in December 1970 performed 15,000 sterilizations, a feat which at that time seemed remarkable, but by current standards would seem modest. This was followed by a camp in the same district in June-July which got 63,000 acceptors. Camps have recent- ly been held in several other States. The organization and method of operation of the camps have differed from state to state. They differ from previous family planning drives, however, in that in each district they have extensively involved government workers from other departments in addition to health and family planning workers, and are spearheaded by the chief district officials. The original camps were a month long; in some states these were later extended to six weeks. In Gujarat a state- wide drive was spread over two months. Although this included the war period, and Gujarat is a border state, nevertheless some 223,000 ster- ilizations were performed, about 200,000 more than would normally be expected. Camps in Tamil Nadu have sterilized 170,000. Both these States have had fairly good family planning performances in the past. U.P. and Bihar, however, have also held camps, and though among the poorest performers in the regular program, they have also had good camp results. 2.13 A feature of the camps in most states has been higher than normal incentives for those vasectomized and those (the "motivators") who bring them to the camp, and sometimes also for camp personnel. In many cases the increase in incentives has been very substantial. The pattern of normal incentives varies considerably among states, but a man vasectomized gets between Rs. 10 and Rs. 30 and his motivator Rs. 2 - Rs. 10. These are usually intended to compensate for out-of-pocket expenses and time lost from work, rather than to be a major influence on motivation.1/ In the camps in some states a vasectomized man received incentives both in 1/ This is less true in states that pay normal incentives at the upper end of these ranges. Madras (not Tamil Nadu) was a pioneer in this. There is an interesting analysis of the effects of incentives in Madras during 1959-66 in Robert C. Repetto, Time In India's Devel- opment Programs (Cambridge, Mass. Harvard University Press, 1971) pp. 127-163. - 18 - cash and kind of a total value of Rs. 80 - Rs. 100, excluding free transport to and from the camps. A motivator received Rs. 10. Incentives of this size provoke many questions, and some opposition. There is a particular worry that many men will have a vasectomy for the money, and then regret it; there might then be a backlash that would damage the rest of the program. Secondly, incentives which frequently exceed a month's income may lead men to lie about the age of their wives in order to qualify for a vasectomy. On the other hand, high incentives force individuals at least to consider whether to be sterilized, and to make a choice which they might othenrise simply postpone. Follow-up studies of the effects of high incentives, and of the camp acceptors themselves are in progress, in order to decide whether to continue this approach. Having had high incentives in a camp, the subsequent regular program may suffer if these are not given there too; this however, remains to be seen. 2.14 Other things being equal, high incentives raise the cost of the program. But preliminary results suggest that the effect of the camps will be to lower the costs in terms of its output this year (i.e. the number of acceptors or births averted) rather than the reverse. For the most part, these cost estimates do not take into account the opportunity cost of the time devoted by personnel of the other government departments involved. On the Family Planning Department's method of calculating "'equivalent sterilizations" the cost is expected to be Rs. 254 per "equivalent sterilization", compared with Rs. 296 in 1970/71 and Rs. 218 in 1969/70.1/ 1/ This is calculated on the assumption that 3 IUD insertions and 12 annual users of conventional contraceptives are equivalent to 1 sterilization. 72 condoms distributed are deemed equivalent to 1 year's use. Other demographers dispute particularly the latter statistic. It has been argued that because of loss of condoms in storage, and other patterns of domestic use and non-use, the figure should be 160. To measure the demographic impact of the program "equivalent sterilizations" have to be turned into "births averted," which involves a good deal of conjecture since nobody can know how acceptors would have behaved if the program were not there. Much demographic controversy surrounds these calculations. Given the recent age distribution of acceptors and their wives, one estimate is that one sterilization is equivalent to a stream of births averted that, if summed, comes to 2.5 and if the stream of births is dis- counted by 10 per cent (with a rationale similar to discounting future returns from an investment) this is reduced to 1.4. The "cost per birth averted" has thus recently been in the range of Rs. 100-200. There is no generally agreed way of measuring the economic benefits from averting a birth, but all estimates are higher than twice per capita income and some put it at seven to ten times. Per capita income is about Rs. 700 at present so there is little doubt that still higher expenditures on the family planning program could, if necessary, be economically justified. - 19 - 2.15 Not all the camps have raised incentives substantially above the local norm, and these too, have had considerable success. The crowd psychological effect and the intensive community organization must take a good deal of credit. The publicity that has surrounded the camps may have encouraged acceptance. On the other hand, there is a risk with wide publicity that isolated mishaps, like 9 deaths following vasectomies in Eastern U.P. in February 1972, will receive headline treatment. It is too soon to know whether this particular incident had any harmful effect. 2.16 Though the camps are the most interesting recent innovation, and although there remains plenty of scope to spread them more widely throughout the country, they provide a supplement to the regular program rather than an alternative to it. In the longer run what is sought is the widespread acceptance of family planning as a regular undramatic part of married life, accepted because of a lasting appreciation of its benefits, and not in an emotional moment with the band playing and the motivator egging one on. The increase of condom sales is in this respect heartening. Although the condom is a less effective contraceptive than many others, a willingness to pay for condoms is a welcome sign of genuine demand for family planning services. In addition, mortality levels remain high enough to deter somebody who achieved just his desired number of surviving children, from being sterilized, whereas he would be ready to use a reversible contraceptive. For this reason, it is obviously desirable that everything possible be done to resuscitate the IUD program, and to bring pill trials (which are to be expanded) and tests of the 'copper-T' IUD (for which both greater reliability and fewer side effects are claimed) to what we must hope will be a favorable conclusion. Program Inputs 2.17 Expenditure under the program has continued to rise (Table 2.1). The proportion of expenditure on construction has been rising and is one reason for the steady rise in unit costs, until the camps came along, although not by any means the sole cause of it. - 20 - TABLE 2.1: Expenditure by the Department of Family Planning 1968/69 - 1971/72 Rupees million 1968/69 1969/70 1970/71 1971/72 (provisional) (Budget estimate) 1. Building Construction 10.49 39.33 78.61 121.49 2. Training /a 10.89 12.71 14.02 22.36 3. Vehicles (included in 6) 17.74 27.70 4. Research 6.61 9.68 8.69 17.37 5. Compensation fees 58.33 49.89 56.06 59.70 /b 6. Other 202.69 260.20 302.26 360.43 TOTAL 288.99 371.81 477.38 606.05 /a Other than construction of training centers. -7 The actual figure will be substantially higher because of additional compensation paid for acceptors in vasectomy camps. Source: Department of Family Planning. 2.18 With additional expenditure have come additional facilities. There are now 5,100 family planning centers attached to state rural primary health centers, and over 1,800 urban centers which are run by state gov- ernments, local bodies and voluntary organizations. About 31,200 rural subcenters are in operation, of which 16,600 are financed out of the central family planning budget and 14,600 by state health budgets. Targets for subcenters are still based on a figure of 1 per 10,000 of the rural popu- lation on the basis of the estimated 1968 population - which would mean that there should be 42,142 subcenters altogether. The impression that 74 per cent of required subcenters are functioning, however, is rather mis- leading. There is considerable interstate variation, and some states have more health subcenters than those required to attain the official target level, while a few are still below 60 per cent of the target - and one has apparently less than 40 per cent. The target itself is by no means a satisfactory one. It requires updating to accommodate the recent growth in population, and a proposal to adjust it to the 1971 population census is under consideration. More important, it is also generally agreed that an auxiliary nurse-midwife (ANM), of whom there is at present 1 sanctioned per subcenter, cannot hope to make effective contact with more potential clients than there are in a population of about 3,000. By no means all functioning subcenters have ANMs, though again there are wide interstate variations. In Uttar Pradesh, for example, only 30-40 per cent of the ANM posts that are sanctioned are actually filled by ANMs; trained dai's (indigenous midwives) and family welfare workers (barely-trained matriculates) are used instead. Doctors, too, remain in short supply but the position is improving; about 57 per cent of the PHC doctors due to be financed - 21 - by the Family Planning Department were in position in June 1971 compared with 39 per cent the year before. 1/ Again, the posi-tion varies from state to state, with some states having achieved a full complement, and some with none or virtually none. 2.19 The long awaited abortion bill should come into force on April 1, 1972, though it may be a little time before individual States are ready to provide a large number of abortions. Its aim is not a demographic one, but rather to keep women out of the hands of illegal abortionists, but it nevertheless may turn out to be an important family planning measure. 2.20 Altogether, then, the program looks in better shape than it has looked for some years. But that is faint praise indeed. Set aside the magnitude of its task, the performance appears far from adequate. At the end of 1971, the Family Planning Department estimated that a little over 12 per cent of married couples of reproductive age, of whom there are roughly 100 million, were practising family planning. In contrast, it has been estimated that a reduction of the birth rate to 25 per thousand in 1978/79 (the basis for present family planning targets) would require about one half of reproductive age couples to practice family planning. It was expected that achieving this target would imply a reduction of the birth rate to approximately 32 by 1973/74 and it is clear that this is completely out of reach. A failure to reach a target set before there was any experience of the problem of running a national program may merely indicate a lack of realism on the part of the target setters, rather than defects in the program itself, and not too much weight should be attached to it. But it is a sobering thought that the target itself could at best be an intermediate point on the road to zero population growth. At the time the target was established, it was expected that by 1978/79, the Indian death rate would be 10 per thousand. Reaching the target would still mean population growth of 1.5 per cent a year and would still leae- India adding over nine million people per year to its population at the end of the decade. 2.21 Supply versus demand constraints. For some years expenditure was steadily increasing and performance steadily deteriorating, and it is certainly too soon to predict that this year's improvement will prove to be lasting. Faced with apparently negative marginal returns many people began to wonder whether increasing expenditure made any sense. Was it not possible that the program had reached most of those ready and willing to practice contraception? Was it not likely that the main constraints on the level of program acceptance were the lack of demand for contraceptive services rather than an absence of facilities to supply these services? Was not current capacity utilization so low - averaging little more than one IUD insertion and 3 sterilizations per center per month - as to make it foolish to build more of them? Was it not also likely that this lack 1/ One PHC doctor is financed by the State Health Department. - 22 - of demand was not the result of fear or ignorance - studies show wide- spread awareness of the availability of family planning methods - but of a desire for large families, perhaps for cultural reasons, or perhaps for rational economic ones? 2.22 This issue has not been resolved. There is much that can be said on both sides. Those who emphasize demand constraints point to the fact that fertility has fallen in all predominantly urban and industrial societies, for a complex set of ill-understood reasons, without family planning programs and often in the face of policies designed to maintain fertility levels. It has not fallen to the same degree anywhere else. Apart from a cultural tradition which greatly values fertility and places particular stress on the need for at least one son to survive his father, there are possible economic reasons why, at the present stage of Indian development, many children might be desirable. Quite young children can do useful work, especially in agriculture; and children are the only substitute for insurance against disability and in old age. 2.23 Those who believe that the main problem has been the absence of an efficient and adequate system for delivering contraceptive services point to a number of small schemes in India under which the birth rate has undoubtedly been reduced some 8-15 points. Taiwan and South Korea are other favorable examples. In addition several studies of knowledge, attitude and practice show a gap between the numiber of children people regard as ideal, and the number they have. It can be argued that vasectomy camps demonstrate that considerable demand for family planning services exists if they are delivered in an attractive way. It can also be shown that in spite of an unfavorable time trend in vasectomies and IUD insertions, perhaps as a result of insufficient follow-up to the first wave of popularity - (as discussed in last year's Report), cross section data between states do show that states which spend more get better results. A recent article estimated (on rather different assumptions from those of the Family Planning Department) expenditure end births averted per eligible couple; the two are positively correlated (r - 0.65).1/ The cost per birth averted was not significantly correlated to the level of expenditure, however - i.e. there was no indication of either diminishing returns or economies of scale as program expenditure increased. Another study has 1/ Kum. Dipti Das, "Inter-State Variations in the Cost-Effectiveness of Family Planning During 1969-70." Journal of Family Welfare, December 1971, pp. 55-69. - 23 - also shown, for a longer period, significant positive correlation between expenditure per head and births averted. 1/ 2.24 This is an extremely important subject for research. Not enough attention has been paid to the reasons why some experiments have been so successful - for example, why in one block at Gandhjgram the birth rate could be brought down from 43 to 28 over six years (admittedly against a background of many years of rural health and community development work there). Analysis of district data could yield much more information on program management than it has up to now. Not nearly enough is known about why people want the number of children they say they do, and hence whether there are measures - insurance schemes for example - that might make them want fewer. All these things will, however, take considerable time to study. In the meantime, there is enough evidence to support strongly the view that the Government is right to continue to press ahead with all possible speed. Even if costs rise sharply, the return is suffi- ciently high to justify them. 2.25 It is probably the case that a decline in infant and child mortality is a necessary condition for a very large decline in fertility - although, on Latin American experience, it is unlikely to be a sufficient one. This should give an added impetus to health programs generally, and in particular to measures to improve nutrition and environmental sanita- tion. Desirable as they are in their own right as a way of improving living standards, the possible link of these to the birth rate should give them an added justification. Nutrition 2.26 The probable link between infant and child deaths and fertility bears strongly upon the subject of nutrition. A study in the Punjab 1/ Sagar C. Jain. "Comparative Study of Effective and Non-Effective Family Planning Program in India" (Chapel Hill, N.C. The Carolina Population Center, 1971). This study also examines the relationship between births averted and various indicators of the degree of development, which are positively correlated but not significantly so. Based on data collected by the Bank, this study also examines the relationship between socioeconomic indicators and family planning acceptance for all the districts of India taken together and separately by state. Un- fortunately, district expenditure is available only in the districts themselves. Collected for 9 districts in U.P. and 6 in Mysore, these also show a significant positive relationship between expenditure and output, but the sample is too small to allow firm conclusions to be drawn. - 24 - showed that after the first month of life, diarrheal disease, which is very largely related to malnutrition, was the principal cause of death up to three years; the same study also showed that delay in starting solid food beyond six months was associated with a greatly increased risk of death. 1/ More worrying, however, than what malnutrition does to expectation of life at birth, is what it does to the expectation of the quality of life. It seems probable that there is a connection between the nourishment an infant receives, both before and after birth, and brain development, and hence with intelligence. Since in adult life productivity is related to intelligence, expenditure on improved nutri- tion can be seen as an investment which can be compared with alternative use of the resources. Most people will probably feel, however, that an improvement in nutrition is so self-evidently desirable, as not to re- quire this kind of justification. 2.27 In India, research into the problem goes back several decades. Famines under British rule led to a series of Famine Commissions in the late nineteenth and twentieth centuries and to research into the magnitude of the nutrition problem and into ways of combating it. In consequence, data on this subject are comparatively good, though there is considerable disagreement about the practical implications of some of it. Nutrition statistics in India do not make cheerful reading. For example, a survey in South India showed that 43 per cent of pregnant women had one or more signs of malnutrition. 2/ Thirty per cent of them have nutritional anemia, and this causes 10-20 per cent of maternity deaths. Maternal malnutri- tion is an important factor in premature births which cause 36 per cent of infant deaths. Poorer Indian children weigh significantly less at birth than those of Western and also of well-to-do Indian families; for the first 4-6 months they gain weight at a rate similar to Western chil- dren, but after that their weights diverge. One study showed that 80 per cent of the preschool children in "poor income groups" suffered from moderate or severe malnutrition. The problem is worst in large families. An analysis of hospitalized cases of severe protein-calorie malnutrition showed that 61 per cent were the fourth or later children in their families. Another study showed that 32 per cent of pre-school children from these birth orders (i.e. 4 and above) exhibited signs of malnutrition compared with 17 per cent from earlier birth orders. Improved nutrition may increase acceptance of family planning and cause lower fertility; lower fertility should improve nutrition. 2.28 Because of the immense long-term importance of nutritional problems among preschool children, most attention has been focused here. Nevertheless there is, of course, a direct relationship between calorie 1/ John B. Wyon and John E. Gordon, The Khanna Study (Cambridge, Mass. Harvard University Press, 1971), pp. 185-187. 2/ C. Copalan and K. Vijaya Raghavan, Nutrition Atlas of India, Hyderabad; National Institute of Nutrition, 1971. The other nutrition statistics are also taken from this source. - 25 - intake of workers and their productivity in physical work, although we seem to know relatively little about it. Studies of groups such as coal miners and industrial workers suggest a considerable deficiency in calorie intake,-which increases with family size. 1/ 2.29 Although there'are, of course, various mineral and vitamin deficiencies, the main