9th Five Year Plan (Vol-1)
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Macro-Economic dimensions and Policy framework
Growth and Investment Targets || Domestic Resources for the Plan || Sustainable Current Account Deficit and External Resources || Structure of Growth and the ICOR || Fiscal Balance, Inflation and the Monetary Stance || Issues in Aggregate Demand Management || Sectoral and Investment Pattern || Strategy for agricultural Development || Infrastructure and Basic Industries || The External Sector and International Dimensions || Issues in Finance Intermediation

Domestic Resources for the Plan

2.16 One of the most significant features of the Eighth Plan period has been the sharp increase in domestic private savings that has occurred. The Eighth Plan had been based on a projected domestic private savings rate of 19.6 per cent of GDP, which was in itself a significant step-up over the Seventh Plan achievement of 18 per cent. In actuality, however, the private savings rate has averaged 22.4 per cent during the Eighth Plan period. This has reversed the earlier trend of a slow growth in private savings during the decade of the eighties as compared to the fairly rapid growth that was experienced in the preceding decades. Expectations about the future need to be based on an appraisal of the likelihood of the recent trends being continued in the future.

2.17 Domestic private savings can be divided into two main components : (a) savings by households; and (b) savings by private corporate sector. These are determined by very different factors and need to be appraised separately. As far as household savings are concerned, these are theoretically driven by the level of personal disposable income, its expected growth in the future, its distribution between different income classes and categories, and the interest rate. In the Indian context, however, the definition of household as used by the statistical authority includes all unincorporated enterprises as well. Therefore, two additional factors - namely the profitability of unregistered enterprises and their share in GDP - also have to be taken into account. An analysis of the savings behaviour of households indicates that the sharp increase from 16.1 per cent of GDP in the Seventh Plan to 18.6 per cent during the Eighth Plan has more or less brought the household savings rate back to the long-term trend of savings behaviour, which would have come to about 18.4 per cent in the terminal year of the Eighth Plan. In the last three years of the Plan, it has actually exceeded the trend value. This has been enabled principally by the sharp increase in the share of personal disposable income in GDP arising out of a reduction in the share of taxes. However, since the average savings rate is now quite close to the marginal propensity to save, and there is a strong possibility that the share of the unregistered sector in GDP may not increase by very much in the future, it may be prudent to assume that during the Ninth Plan the household savings rate will be only somewhat higher than the level that has been attained in the terminal year of the Eighth Plan, which is 19.2 per cent of GDP. Indeed, although the share of taxes in GDP is targeted to rise, and thereby reduce the share of personal disposable income, the household savings rate has been assumed at 19.8 per cent for the Ninth Plan, which leaves little cushion for slippages in the savings behaviour of other sectors.

2.18 Household savings are divided into two categories in the Indian National Accounts : (a) financial savings; and (b) savings in physical assets. This nomenclature has been the source of some degree of popular misconception. It is believed, for instance, the supply of savings available to the Government and the private corporate sector is given by the level of financial savings, which in turn is determined solely by the portfolio decision of households, while savings in physical assets are either made directly by the investors or are mediated by the informal credit market which the corporate sector does not access. This view is, however, only partly correct. Financial savings of the ‘households’ are computed ‘net’ of advances made by the banks to the unincorporated sector. The financial savings component of total household savings is shown in Table 2-6. Sharp increases in the share of financial savings were observed during the mid-1970s and early 1980s. The expansion of commercial banks across the country, particularly in rural areas, following the nationalisation of banks in 1969, and a range of instruments for encouraging small savings by the Government played an important role in mobilising financial savings. Thereafter, the share of financial savings appears to have stagnated despite the considerable development of the financial sector in the country.

Table 2-6 : Share of Financial Savings in Total Household Savings
Period	                                                       Share (per cent)
1966-72	                                                               25.1
1972-82	                                                               37.5
1982-89	                                                               50.3
1989-96	                                                               51.7

2.19 The gross savings of the private corporate sector primarily comprises of the depreciation reserve and the retained earnings of corporate entities. The savings rate of this sector, therefore, depends upon the share of this sector in GDP, its profit rate, and its capital intensity. This rate has registered a steady and sustained increase since the mid-1970s to average 3.8 per cent of GDP during the Eighth Plan and 4.1 per cent in the terminal year. There is every reason to believe that the share of the corporate sector will tend to rise somewhat faster during the Ninth Plan period, which will tend to lead to a higher increase in the savings rate. On the other hand, due to the increased competition consequent on liberalisation, both the profit rate and the average capital intensity of this sector may fall somewhat. On balance, therefore, the savings rate of this sector will increase, but perhaps not quite as rapidly as during the Eighth Plan. The figure assumed in this regard for the Ninth Plan is deliberately on the conservative side in order to provide some room for slippage.

2.20 The overall picture regarding the magnitude and pattern of domestic savings during the Ninth Plan is presented in Table 2-7. As can be seen, in order to meet the domestic savings rate target of 26.1 per cent, public sector savings have to rise to 1.6 per cent of GDP as compared to the 1.4 per cent which is obtained in the Eighth Plan. This increase in the public sector savings rate will have to come entirely from higher internal resource generation of the public sector enterprises, particularly the public infrastructural sectors, in order to offset a projected increase in the dissavings of the Government.

                                           Table 2-7 : Composition of Domestic Savings  	
					(% of GDP at market prices)
                                VII Plan  VIII Plan IX Plan  Post Plan
----------------------------  --------  --------  -------- ---------
  1. Public  Sector                2.3       1.4       1.6       2.0
     (of which)
     1.1  Government Sector       -1.6      -1.8      -2.2      -1.7
     1.2  Public   Enterprises     3.9       3.2       3.8       3.7
  2. Private  Corporate  Sector    1.9       3.8       4.7       5.0
  3. Household   Sector           16.1      18.6      19.8      20.3
  4. Gross  Domestic  Savings     20.3      23.8      26.1      27.3

2.21 The need to increase public savings has dimensions beyond merely meeting the target of domestic savings for attaining 6.5 per cent growth during the Ninth Plan. Sustainability of the fiscal balance demands that the fiscal deficit, and more particularly the revenue deficit, be reduced gradually. As will be discussed later, a target of 4.1 per cent of GDP in respect of the fiscal deficit of the Central Government in the terminal year and an average of 7.8 per cent for overall public sector borrowing requirement (PSBR) have been taken for the Ninth Plan, which automatically limits the level of public investment to 7.8 per cent of GDP plus the rate of public savings. In view of the developmental needs of the country, public investment cannot yet be determined residually, but has to be specifically targetted.

2.22 The total tax receipts of the Government, at the Centre and in the States, amounted to about 16.4 per cent of GDP during the Eighth Plan, but after taking into account the direct subsidies of about 2.6 per cent of GDP, the net tax receipts were of the order of 13.8 per cent. This is roughly divided between indirect taxes less subsidies of 10.1 per cent and direct taxes of 3.7 per cent. The direct consumption expenditure of Government during the same period works out to about 10.9 per cent of GDP. Therefore, in order to achieve a public investment level of even 8.3 per cent, as compared to the target of 9.9 per cent, the Government has had to borrow 6.9 per cent of GDP from the rest of the economy and from abroad. Although some progress has been made in reducing the overall fiscal deficit of the Government, public borrowings at the rate of 6.9 per cent of GDP during the Eighth Plan would appear to be too high for sustainability.

2.23 Any effort to increase the growth rate of the economy has to take into account two important facets of the role of public investment and public borrowings. On the one hand, efforts to increase the share of public expenditures in GDP through enhanced borrowings tend to reduce private investment by pre-empting investible funds and causing what is known as "crowding out". On the other hand, it has also been found that private investments tend to be positively correlated to public investment, especially in infrastructure. The reason for this is that in the absence of adequate infrastructural facilities and the increase in aggregate demand caused by public investment, the efficiency and capacity utilisation of private investment tend to suffer. In addition, lack of infrastructure raises costs and thereby tends to reduce both profitability and export competitiveness. The influence of these two factors has to be explicitly taken into account while framing public investment plans. By and large, there is a certain level of public investment share which is essential for adequate private investment demand to be generated and to be productive both through the "crowding in" effect of complementary investment in infrastructure and through providing the necessary component of aggregate demand. Public investment above this level may crowd out private investment unless the public sector generates sufficient additional savings of its own, but on the other hand lower public investment may be associated with insufficient private investment and hence lower growth.

2.24 The acceleration in growth that has occurred during the Eighth Plan has been based primarily on private investment exceeding the targets by considerable magnitudes and the public sector falling well short of its targets. The short-fall in public investment fell mainly on certain infrastructural sectors. The planned and actual sectoral public investment during the Eighth Plan are presented in Table 2-8. As may be seen, three sectors, namely Mining and Quarrying, Communications and Services experienced higher investments than planned, while the rest of the sectors experienced shortfalls of varying degrees. The higher investment in the Mining and Quarrying and Communications sectors is due almost entirely to the higher internal resource generation of the oil and telecommunications sectors respectively.

Table  2-8 : Planned and Actual Sectoral Public Investment during the Eighth Plan 
                         (Rs. '000 crore in 1996-97 prices)
  Sector                  Planned      Actual   % of Planned
1. Agriculture              64.9        38.3         59%
2. Mining  and  Quarrying       40.7        59.5        146%
3. Manufacturing            58.2        33.2         57%
4. Electricity etc:        141.6       122.4         86%
5. Construction              4.4         3.9         89%
6. Transport                69.6        53.0         76%
7. Communication            37.3        43.5        117%
8. Services                 83.3       106.5        128%
    Total                  500.0       460.3         92%

2.25 In order to examine the implications of the shortfalls in public investment on the macroeconomic variables of the economy, a counterfactual simulation has been undertaken in which it is assumed that the public sector investment plan is met for all sectors while keeping public consumption at the absolute levels actually realised. Since the excess investment in the oil and telecommunications sectors arose out of higher internal resources, these have been maintained at the actuals, but the excess investment in services, which is largely dependent upon budgetary support, has been scaled down to the planned level. The results of this counter-factual simulation are shown in Table 2-9. It may be seen that if the planned public investment had materialised, the growth rate of the economy could have increased by 0.2 percentage points arising out of an increase in total investment of 0.5 percentage points of GDP, which is supported by an increase of 0.3 percentage points of GDP in public savings and 0.2 percentage points increase in the CAD. The increase in public savings arises primarily from an increase in the tax/GDP ratio of a similar magnitude. Despite this, public borrowings too would need to increase by 0.3 percentage points in order to finance the higher public investment. There is a slight decline in the share of private investment, which arises partly out of the higher growth rate and partly from a very slight degree of "crowding out".

                                 Table 2-9 : Macro-economic Aggregates for the Eighth Plan
                                            Actual    Counterfactual
1.  GDP at Factor Cost (% growth)             6.8           7.0   
2.  GDP at Market Prices (% growth)           6.6                   
3.  Gross Domestic Savings (% of GDPmp)      23.8          24.1  
         of which :
    3a. Private                              22.4          22.4   
    3b. Public                                1.4           1.7  
4.  Total Consumption (% of GDPmp)           76.2          75.7  
         of which :
    4a. Private                              65.3          65.5   
    4b. Public                               10.9          10.2   
5.  Gross Capital Formation (% of GDPmp)     24.9          25.4   
         of which :
    5a. Private                              16.6          16.5   
    5b. Public                                8.3           8.9   
6.  Public Borrowings (% of GDPmp)            6.9           7.2   
7.  Current Account Deficit (% of GDPmp)      1.1           1.3   

2.26 Although the counterfactual simulation indicates that the planned infrastructural investment could be met with only minor increases in public borrowings, the need to effect fiscal correction during the Eighth Plan has led to inadequate creation of infrastructural capacities. As a result, the sectoral capacities have been severely distorted since private investment as yet has had little role to play in creating capacities in infrastructural sectors. That infrastructural constraints have not retarded the growth impetus during the Eighth Plan is due primarily to the achievements of the Seventh Plan in infrastructure creation and to the significant improvements in the efficiency and productivity of a number of infrastructural sectors during the Eighth Plan period. This is, however, not a sustainable situation, and the distortion between capacities in the infrastructure and non-infrastructure sectors needs to be corrected expeditiously. In addition, the investment required to meet the needs of the social sectors also has to be explicitly taken into account in view of their importance in meeting the social objectives of the Plan.

2.27 Taking into account the above factors, the planning model indicates that there is a need to target public investment at about 9.4 per cent of GDP during the Ninth Plan on the basis of the physical targets that have to be attained. For this investment target to be achieved along with fiscal sustainability, public savings not only need to be raised to the 1.6 per cent level indicated above but also it is necessary to undertake disinvestment in public sector enterprises, while protecting the necessary levels of current outlay for the social sectors.

2.28 Public savings have two principal components : (a) the savings of the Government, both Centre and States; and (b) the savings of public enterprises. The Government savings have shown very discouraging performance during the 1980s and even in the 1990s as shown in Table 2-10. While the Government savings were positive during the Sixth Plan, they turned increasingly negative thereafter. Even during the Eighth Plan, although some efforts were made, they were nowhere near enough. As far as the savings of PSEs are concerned, they increased more or less steadily upto and including the Seventh Plan, but dipped somewhat as a percentage of GDP in the Eighth Plan. In view of the fact that investment in PSEs has declined in recent years in relative terms, their share in GDP is also likely to decline. In addition, the planned programme of divestment of PSEs will also put a downward pressure on the savings emanating from them. Therefore, too much should not be expected in terms of increased PSE savings despite the efforts being made to make them more efficient and profitable. The Ninth Plan target for PSE savings has been placed at 3.8 per cent of GDP, which is only somewhat higher than the Eighth Plan achievement. The strategy for attaining this target is discussed later.

     Table 2-10 : Government Savings Behaviour in Five Years Plans    
                                      (percentage of GDPmp)
                             VIth      VIIth     VIIIth    IXth
			  (1980-85)  (1985-90)  (1992-97) (1997-2002)
1. Receipts :                16.28     18.74     17.74     18.75
1.1 Income from Entrepre-    
    neurship and Property     0.61      1.10      1.17      1.10
1.2 Tax Revenue              15.40     17.21     15.97     16.97
1.2.1 Direct Taxes            2.64      2.55      3.12      3.92
1.2.2 Indirect Taxes         12.76     14.67     12.84     13.03
1.3 Misc. Receipts            0.27      0.42      0.61      0.70
2. Expenditure :             16.44     21.32     21.05     22.09
2.1 Subsidies                 2.60      3.57      2.80      2.75
2.2 Interest on Debt          1.56      2.87      4.52      4.65
2.3 Current Transfers         2.24      2.98      3.06      3.30
2.3.1 Domestic                2.23      2.97      2.99      3.25
2.3.2 Rest of the World       0.01      0.01      0.07      0.05
2.4 Consumption Expenditure  10.04     11.89     10.67     11.39
3. Depreciation               1.73      1.95      1.51      1.15
4. Gross Savings              1.57     -0.63     -1.80     -2.19
NOTE : Government is defined as Centre and State governments and Departmental Enterprises including Railways and Posts.

2.29 Targetting higher levels of PSE savings as a substitute for government savings is not a solution to the governments’ fiscal problems. Although there is some flexibility between the two as far as investments are concerned through budgetary support to PSEs on the one hand and dividend payments by the PSEs on the other, the prospects are fairly limited. Moreover, there are large components of the governments’ investment programme, particularly those in the social sectors, which cannot be performed by the PSEs. These would have to be funded by government savings and borrowings. Therefore, by the end of the Ninth Plan period, the Government as a whole, including both the Centre and the States, would have to reach a position of near revenue neutrality as compared to the large revenue deficits that exist at present. This is no easy task, particularly in view of the Ninth Plan focus on Basic Minimum Services, which have large revenue components in expenditure.

2.30 The detailed strategy to increase both public savings and investment is discussed in the following Chapter. However, there are some aspects of the strategy which have macroeconomic implications, and therefore need to be mentioned at this stage. The broad approach to be followed is that while the rate of growth of revenues must be increased, the rate of growth of revenue expenditure too must be slowed down. The Government will need to mobilise financial resources by utilising all sources which have remained untapped so far. At the same time, the structure and manner of deployment of public expenditure should be altered significantly in order to ensure the maximum positive impact on poverty alleviation and the social sectors. These changes will leave their impact on the distribution of income between the public and private sectors, and hence need to be taken into account.

2.31 It is to be noted that the ratio of total revenues of the Centre and the States to GDP had reached 23.8 per cent in 1989-90, but declined thereafter and came down to 22.6 per cent in 1990-91 and stayed at that level in 1993-94. However, there is a major difference between the behaviour of revenues between the Centre and the States. The gross revenues of the Centre declined steadily from 14.4 per cent in 1989-90 to 12.2 per cent in 1993-94, whereas in the case of the States, they increased steadily from 9.4 per cent in 1989-90 to 10.4 per cent in 1993-94. The ratio of total tax revenues of the government sector to GDP had reached 16.9 per cent in 1989-90 but declined thereafter and reached 15.3 per cent in 1993-94, but revised to have reached around 16 per cent of GDP in 1995-96. In view of this, it would be reasonable to aim at raising the tax ratio by about 1.5 to 2.0 percentage points of GDP so that it reaches the level of 17.5 per cent in the post-Plan period. This would only mean slightly exceeding the ratio that had already been reached in 1989-90.

2.32 In 1995-96, the gross tax revenues of the Centre amounted to 10.24 per cent of GDP. The corresponding figure is 10.70 per cent as per the 1996-97 Budget. With appropriate policy measures and administrative efforts, it should be possible to raise this ratio to 11.50 per cent. In 1995-96, the own tax revenues of the States amounted to 5.72 per cent of GDP of which sales taxes alone brought 3.25 percentage points. Given the potential of the sales tax and the scope for rationalisation and better enforcement of the other State taxes too, it should be possible to raise the ratio of State tax revenues to around 6.5 per cent of GDP.

2.33 With the increased role that is being proposed for the Panchayati Raj Institutions (PRI) in the Ninth Plan, the issue of resources for these bodies assumes paramount importance. Along with the devolution that may be made by the State Finance Commissions, some additional taxation powers may also need to be devolved. In addition, PRIs should be given powers to raise revenues from common properties, such as land and sub-soil water. Although no fixed quantitative targets have been set, and the resources of PRIs are included in the States’ resources, there is considerable potential in this area which, if properly tapped, can both improve the quality of local public services quite substantially and reduce the pressure on State budgets.

2.34 The sectoral pattern of investments and the necessary resource flows arising out of the Ninth Plan target are presented in Table 2-11. The most significant feature of the pattern of investment is that the share of the private corporate sector is projected to rise to 9.1 per cent of GDP as compared to 4.33 per cent that had been planned for the Eighth Plan and the 8 per cent actually achieved. This increase arises essentially from two factors. First, the internal accruals of this sector rises sharply from 2 per cent to 4.5 per cent of GDP in line with the trend that has been noted in recent years. Second, most of the external capital inflows of 1.5 per cent of GDP as compared to only 0.7 per cent achieved for the Eighth Plan are assumed to come into this sector, as is discussed later. This ensures consistency between the savings and the growth projections for this sector. As far as the household sector is concerned, its investment as a percentage of GDP is also projected to rise from 8.6 per cent in the Eighth Plan to 9.7 per cent. However, the sharp increase in the investment share of the private corporate sector as compared to the household sector will imply that the share of the former in GDP arising in the private sector will increase during the Ninth Plan period. The share of the public sector will decrease significantly, and because of an increase in its savings rate, its pre-emption of the financial savings of the households will reduce from 81 per cent in the Eighth Plan to 71 per cent. The actual percentage shares that are likely to occur during the Eighth Plan are also shown in the Table for ease of comparison.

                                    Table 2-11 : Intersectoral Flow of Resources in Ninth Plan
(Rs. thousand crore) 
---------------------------------------------------------- ---------
                               Public    Private   House-     Total
                               Sector    Corporate hold
     Gross  Investment             726       699       746      2171
                                  (9.4)     (9.1)     (9.7)    (28.2)
                                  [8.3]     [8.0]     [8.6]    [24.9]
     Financed by:
     1.   Own   Savings            127       362      1522      2011
                                  (1.6)     (4.7)    (19.8)    (26.1)
                                  [1.4]     [3.9]    [18.5]    [23.8]
     2. Borrowings
        2.1  From Households       550       226      -776        0
                                  (7.2)     (2.9)    (-10.1)
                                  [6.5]     [3.4]    [-9.9]
        2.2  From  External         49       111         0       160
             Sources              (0.6)     (1.5)               (2.1)
                                  [0.4]     [0.7]               [1.1]
1. Figures in bracket () are % of GDP at market prices
2. The figures in the square [] brackets are the actual percentages estimated for the Eighth Plan.
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