INDIA'S ECONOMY UNDER THE THIRD FIVE YEAR PLAN

Created: 8/16/1963

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INDIA'S ECONOMY UNDER THE THIRD FIVE YEAR PLAN

CENTRAL INTELLIGENCE AGENCY

OFFICE OF CURRENT INTELLIGENCE

FOR

LIBRARY MANDATORY REVIEWDOCUMENT *

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INDIA'S ECONOMY UNDER THE THIRD FIVE TEAR PLAN

As the Indian Third Five Yearpproaches midterm, lt is Increasingly apparent that many of its goals will cot be attained. defense spending has had little effect so far, but agricultural stagnation and long-standing industrial stumbling blocks have retarded progress. While encouraging advances have beenew important Industrial undertakings, the overall growth of the economy remains sluggish.lanned yearly increase inercent, actual growth waaercentercent. If current trends persist, key elements of the plan will be far behind schedule byhe end of tbe third year of tbe plan. Meanwhile, agrowth now estimated by tbe Indian Government to beercentthanercent upon which the plan ishave offset much of the progress made during tho first two years.

of the Plan

In drafting the Third Plan, the government deliberately aimed high. opulationby more thanillionannually, planners realizedassive effort would be required in order to novo the nation toward the goal of self-sustaining growth.rowth inincome ofo 30 Self-sufficiency inwas to be attainedpercent increase inoutput, and industrial capacity was to be expanded by overercent. An even higher rate of development was expected in power and transportation.

The Third Plan has been beset from tbe beginning by serious difficulties, many of which are legacies of failures

encountered in the earlier plans. Many Industrialdid not reach lovels prescribed in tho Second Plan until the end of the Third Plan's second year. Deficiencies in certain areas of the complex plan, such as cementhave retarded progress in scores of related programs.

Faced with almost certain shortfalls, Indian planners will meet in September to review the plan's progress, and are likely to recommend that many of its targets be reduced.

Agriculture

Failure to boost theof foodstuffs continues toajor factor Inthe pace of economic Eighty percent of thc Indian labor force la engaged in

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agricultural activities* in most cases using ancient and inefficient methods which keep yields per acre among thein tbe world, ultitude of state and centralagencies sharesfor the massivedevelopment program. has been chaotic, and most projects are farschedule.

Food-grain harvests have been particularly disappointing. Encouragedramatic upturn in productivity, Indian plannersise in grain outputercent annually, leading to self-sufficiency byroduction actually dropped in the first year of the Third Plan, however, and the output bys likely to be little higher than

The production of rice, which constitutesf India's food-grainhas continued to decline for the second straight year,odest gainin the production of other grains. Adverse weather conditions in two of the largest rice-producing states account primarily for the rice

Although there have been severe rice shortagesew remote areas, agriculturedo notajor food crisis to develop. Imports of food grain, primarily from the OS under theurplus food program, are expected to

meet consumption requirements andufficientto enlarge the government's stocks. Food prices, which have jumped byver the past year, have caused more serious concern. Since the largest part of the Indian family budget is devoted to food purchases, any major rise in food prices seriously depresses living standards.

Industry

Industrial development continues to be hampered by now familiar problems--short-ages of foreign exchange, raw materials, and power. the estimated rise in industrial production wasercent during theise ofercent in theyear. This increase was well below the planned growth rate ofercent annually, however.

Several major gains were recorded during the past year in key areas. Crude-steel production rose sharply innd estimates of outputigh degree of plant utilization. For the first time, all major plants appeared to beproperly. The manufacture of industrial machineryto advanceate substantially above that of the general industrial index, and managed to keep pace with the increase in demand for machine tools, thusump in imports.

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theses, in-dustrial prospects for thetwo years of the Third Plan are less thanonfidential memorandumln May by the planning Commission at Prime Minister Nehru's requestleak picture of widespread under-fulflllment of industrial The prediction that fertilizer production would beercent below plan6 was particularly distressing to Nehru, and he directed his planners to place renewedin this vital area.

Even those enterprises in which progress to date has been relatively satisfactory, such as steel and machine tools, will be hard put to meet the ambitious goals of the plan. Industrial expansion projects are behind schedule, with few major additions to capacity expected to be completed until late in the plan. Pending the Installation of new facilities, growth in some industries will level off as production comes up to the limits of capacity.

Many of the oldthat have held backfor years are likely to continue to be major problems. The massiveness of theprogram has overloaded the government's administrative machinery, and lengthydelays are encountered in virtually every phase of the plan. The central government ls highly effective indetailed economic programs, but delegates the supervision

of their execution to aconstellation of central and state bodies with oo clear lines of authority. Planhas lagged most seriously whore projects have been left ln the hands of the states, which have often been chary of imposing new taxes to pay their share of the costs.

A chronic shortage of power continues to cause under-utilization of industrial Thermal andgenerating capacity roaoillion kilowatts1 illion kilowattsut the growing demand for power has kept well ahead of supply. The delay ln the onset of this year's monsoon rainsartialof hydroelectric generation in several eastern areas. Id the power grid prevent emergency transfers of electrical energy from reaching temporarily deficient areas.

The transportation problom eased somewhat during tbe past year, owing largely to moreoperation of therailroad system, whichforercent of the ton-miles carried. During the Chinese invasion ofnd throughout the winter as well, theresponded adequately to the demands placed upon them. However, it is likely thattransportation demands, particularly for deliveries ofmajor source ofonce againavailable resources. requirements will

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SHORTFALLS IN THE THIRD PLAN (selected industries)

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illion tons, while for the same period capacity isatillion tons.

Financing the Plao

Obtaining foreign exchange for new undertakings has not been the problem it once was estimated to be. The hard-currency requirements of tbe Third Plan are estimated at more5 billion of theillion total plan outlay. With India's reservesinimum, tbe foreignrequirements of the plan must be met largely through intergovernmental loans.

Prior to and during the first two years of the plan, the consortium of Westernproviding aid to Indiaillion, while the Soviet bloc agreed to pro-vido0 million. Pledgts made this year by theamountringing the total bard currency committed to the plan thus far to more than $4 This year's commitment will fall short ofillion requested by the Indians, but Indian planners appear to be satisfied that this amount generally meets their needs.

However, most of the aid pledges have been tied to specific projects, and offers of funds withoutie were substantially lower than0 million requested for the third year of the plan. The scarcity of hard currency

with which to import spare parts has led to theof capital equipment and has contributed significantly to industry's inability to fully utilize its installed capacity. Furthermore, the general pressure on foreign exchange reserves has limited the availability of rawthus alsopotential output.

Tho Indians have long recognized the importance of boosting export trade to help meet foreign currency costs. Bowever, their efforts toexparts have met with only limited success. The rising domestic demand for manufactured goods has discouraged the sale abroad of finished products, while world requirements for India's traditional exports-Jute, tea, andrelatively inelastic.

Effects of Defense Build-up

Since last Septemberdefense spending has been doubled and now amountsercent of the grossproduct. The dlroct effects of the defenseon general development have' thus fax been slight, however. Determined to press ahead with major development programs, the government reduced its education and welfare outlay and cut Investment in consumer industries. Most of tbe Initial increases in defense costs have gone to support the manpower costs of enlarging the armyen. With humangenerally underemployed,

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of this miolsculeof the nation's population to the military has had aimpact on tbe economy.materiel has been alnost entirely financed by foreign grants or rupee purchases, and has not aggravated the tight foreign exchange situation.

In tbe longer run, however, the heightened emphasis onwill inevitably strain the already overburdened As defense production facilities come into operation, the demand for scarce rawwill intensify. can also be expected in transportation and,esser extent, in power.

The recent heavy increase in taxes, aimed primarily at corporate income andconsumer spending, has resultedharp reduction in the rate of rupee capital investment. New stock issues since the Chinese invasion have declined by as muchnd many offerings have been fully subscribed only with groat difficulty. While the capital market is likely to improve with time, tbe depres-ant effects of the government's fiscal policies will further reduce the likelihood that growth in privatemajor bright spot ln the Secondwill reach the levels envisaged ln the Third Plan.

Political Effects

Shortfalls ln tbe plan and difficulties ln the planning are producing more political heat than in previous plan periods. The generally acceptable progress under the first two planslittle in the way oftargets, but both right- and left-wing opposition parties have recently homed in on econoaic

Within the government, ainla-ters involved in tbe execution of various phases of tho plan have become unusually sensitive toas tho jockeying forto Nehru has become more intense. They have seemed eager at times to lay the blame for failure at the doors of other ministers, thereby confirming the opposition's criticism tnat responsibility is too diffused. At the state level, there isdisgruntlement in tbe ranks of Nehru's Congress Party over the central government's "wartime" austerity measures and the impact they are having on the electorate.

As all these pressuresand popular support for the defense effort wanes,in the economic sector axe likely to take on asolitical significance for Nehru's government and party as they have far India's develi men C. ET

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