Financing of Five Year Plans - Fiscal Policy, Public Finance | Public Finance - B Com PDF Download

Financing Of Five Year Plans

The most important aspect of preparing a plan is the identification of the source of financial resources. Different sources of financing a plan will have varied implication on growth and other related issues like income distribution, inflation etc. Table-3.1 exhibits the various sources and their contributions towards the financing at various plans.

Financing the First Plan

The resource mobilization scheme at the First Five Year Plan is shown in Table-3.1. The pattern of financing of the public sector shows that 73.4 per cent of the financial resources come from budgetaiy sources, 17 per cent through deficit financing and 9.6 per cent from external resources. Among the various sources of domestic budgetary resources the contribution of capital receipts, covering market borrowings, small savings, provident funds and loans from financial institutions among others was the maximum being 35.0 per cent of the aggregate financial resources. About Rs.296 crores were received by the public sector as assistance from foreign countries over the 5 years period out o f which only Rs.189 crores could be utilized. The remaining sum of Rs.107 crores were left unutilized, to be used during the second plan period. The non-utilization o f the total external assistance during the First Plan period were attributed to delays in the execution of plan projects, shortage of equipment and materials, and lack of trained personnel. On the whole, the First Five Y p r Plan did not face any financial difficulties and was mainly financed through internal sources, the contribution of external assistance being only 9.6 per cent of the total aggregate resources for the plan.

Financing the Second Plan

The original Second Five Year Plan proposed an outlay of Rs.4800 crores for its financing. However, subsequently the plan had to be pruned and the actual resources for financing the plan stood at Rs.4672 crores. The detailed break up of this aggregate amount of resources are shown in Table-3.1.

During this plan, more emphasis had been laid on deficit financing as well as external resources. The actual amount of foreign assistance was of worth Rs.1049 crores whereas it was proposed up to Rs.800 crores only. Though deficit financing constituted 20.4 per cent of the total resources available for the plan as against 17 per cent during the First Plan yet deficit financing had been within proper limits as it amounted to Rs.954 crores as against Rs.1200 crores set originally. But the volume of deficit financing increased from 17 per cent in the First Plan to 20.4 per cent in the Second Plan and this much of deficit financing, it is argued, was instrumental in raising prices and indicated the limitations of this method of financing.

The amount of deficit financing as estimated by the Planning Commission was much in excess keeping in view Indian economic conditions and compared to the estimates made by some prominent economists and statisticians. Thus the Commission of the International Monetary Fund in 1963 expressed that the scale of deficit financing should be related to the availability of Sterling balance and regarded Rs.333 million per annum or about Rs. 1650 million over the five years as a feasible maximum. Dr. B.R. Shenoy (1956) recommended Rs. 1800-2000 million for the five year period. In his report on Tax Reforms in India, Prof. Kaldor stated that the amount of deficit financing which the economy could bear was not likely to exceed Rs.1500 million a year or Rs.7500-8000 million over the five year period. The ECAFE considered Rs. 12000 million as the upper limit to deficit financing in tire Second Plan period and stressed the fact that to raise the sum further it might leave a large quantity of excess purchasing power without any corresponding cover.

In the Second Five Year Plan, external assistance exceeded the original target of Rs.800 crores by Rs.249 crores. This volume of external assistance accounted for 22.5 per cent of the aggregate financial resources during the Second Plan as against 9.6 per cent in the First Plan.

Financing the Third Plan

The Third Five Year Plan proposed an outlay of Rs.7500 crores in the public sector whereas the actual amount spent was Rs.8577 crores. Table-3.1 shows the resource mobilization scheme of the Third Plan.

The Third Plan mobilized 58.5 per cent of the financial resources from domestic budgetary resources and 13.2 percent from the unconventional method of deficit financing. The external assistance, increased from 22.5 per cent of the total financial resources in the Second Plan to 28.3 per cent in the Third Plan. In the original estimate, external assistance had been placed at Rs.2200 crores but the actual amount of net foreign aid utilization was Rs.2423 crores, being 28.3 per cent of the total outlay. Balance from current revenues, including additional resources mobilization was Rs.2473 crores. But net balance from current revenues (excluding ARM) became minus Rs.419 crores, mainly following the declaration of the emergency arising out of Indo-Pak war and the consequent increase in defence and other non-plan expenditures.

At the time of formulating the Third Five Year Plan, the Planning Commission observed that “in view of the rise in prices that occurred during the second Plan and the fact that unlike the Second Plan there is no cushion of foreign exchange reserves, it is proposed to limit deficit financing in the Third Plan to the minimum warranted by the genuine monetary needs of the country” [Planning Commission, 1961, p.99]. But deficit financing of Rs. 1133 crores was more than double the original estimate of Rs.550 crores. The inflationary pressure resulting out of the shortfalls in national products was aggravated by this heavy dose o f deficit financing.

Financing the Annual Plans (1966-69)

The Annual Plans, 1966-69 spent an outlay of Rs.6625 crores. Out o f this amount Rs.3539 crores were mobilized by domestic budgetary resources Rs.2410 crores by external assistance and Rs.676 crores by deficit financing. The share of domestic budgetary resources was 53.4 per cent in the Annual Plans as against 58.5 per cent in the Third Plan. The share of external assistance increased from 28.3 per cent in the Third Plan to 36.4 per cent in the Annual Plans and the share o f deficit financing went down from 13.2 per cent in the Third Plan to 10.2 per cent in the Annual Plans. But the actual amount of deficit financing was more than double die estimated amount of Rs.335 crores.

Financing the Fourth Plan

The Fourth Plan proposed to mobilize Rs.4044 crores from balance from current revenues including ARM, Rs.1431 crores from surplus of public undertakings, Rs.2087 crores from external resources and Rs.2060 crores by deficit financing. Net balance from current revenues excluding ARM was (-)236 during the Fourth Plan. Large defence expenditure, relief to Bangladesh reugees, larger outlays on drought and Hood relief were the main reasons behind it. In regards to external assistance the actual amount of Rs.2087 crores was much less than die estimated amount o f Rs.3198 crores.

In the context of severe inflationary experience in the past, since the commencement of die Second Five Year Plan up to 1967-68, (lie Fourth Plan stressed the need for accelerating the tempo of development under conditions of stability. Therefore, the target for deficit financing during the Fourth Plan was set at Rs.850 crores at the time of plan formulation. Later on, estimates of deficit financing were revised to Rs.2750 crores during the Fourth Plan while the actual amount was Rs.2060 crores.

Financing the Fifth Plan

The original Fifth Five Year Plan proposed an outlay of Rs39303 erores for its financing, but the actual outlay had been Rs.40712 erores during the periods. Out of this amount Rs.31943 erores were mobilized by domestic budgetary resources, Rs.5209 erores by external assistance and Rs.3560 erores by deficit financing (Table-3.1).

In view of the severe inflationary pressures in the economy since 1972-73 the Draft Fifth Plan Period laid utmost stress on non-inflationary development which was regarded as the central point of the scheme of financing. It specifically recommended that there should be no deficit financing in the first two years and for the remaining plan period “deficit financing will have to be kept down to the level at which the consequential increase in money supply does not exert any autonomous inflationary pressure on the economy” [The Draft Fifth Five Year Plan, Government of India, p.53]. The presentation ofthe Draft Fifth Plan in 197374 had unfortunately coincided with major upheaval in the International economic scene, namely the oil crisis which profoundly effected the developed as well as the developing countries. In India inflationary pressures were felt as a result of severe drought conditions in 1972-73 followed by shortages of various essential consumer goods and critical raw materials and other inputs. In 1973-74 conditions worsened due to power shortage, industrial stagnation and steep rise in prices of imports of oil, foodgrains and fertilizers. The price situation was aggravated by continued expansion in money supply partly due to large and continuous deficit financing and partly due to excessive expansion of bank credit to the commercial sector.

Thus, under these unfavourable conditions all the assumptions and calculations of the Draft Fifth Plan had to be reframed in the final Fifth Five Year Plan. Measures had to be devised urgently for containing inflation at home and for keeping the economy in proper alignment with the fast changing international developments. It was stated in the Fifth Plan that “in view of the paramount need to promote growth with stability the plan has to be financed in a non-inflationary manner. This will call for strict fiscal discipline. Monetary policy will have to be synchronized with fiscal policy in order to check undue expansion of the aggregate monetary demand” [Fifth Year Plan, Government of India, pp.30-31 ]. Accordingly die target of deficit financing was set at Rs.1354 crores for the Fifth Plan. It amounted to only 3.4 per cent of die total public sector outlay of Rs.39303 crores. However, the amount of actual deficit financing estimated was Rs.3560 crores, which came to nearly 9 per cent of the revised total outlay of Rs.40712 crores for the Fifth Plan.

Financing the Annual Plan (1979-80)

Out of die total outlay of Rs.12601 crores for 1979-80 plan, Rs.10160 crores were mobilized by domestic budgetary resources, Rs.1086 crores by external assistance and Rs.l 355 crores by deficit financing. The share of domestic budgetaiy resources was 80.6 per cent in the Annual Plan as against 78.5 per cent in die Fifth Plan. The share of external assistance went down from 12.8 per cent in die Fifth Plan to 8.6 per cent in the Annual Plan and the share of deficit financing increased from 8.7 per cent in die Fifth Plan to 10.8 per cent in the Annual Plan.

Out of the total plan outlay of Rs. 12601 crores in 1979-80, deficit financing was estimated at Rs.l355 crores which proved to be an under estimation because the revised estimates of budgetary deficits were Rs.2655 crores. While formulating die plan, deficit financing was less than 11 per cent of the total resources whereas die revised estimates o f budgetaiy deficit w as nearly 21 per cent o r nearly double the original estimates. This increase in budgetaiy deficit had been necessitated

because of lower revenue collections lroin other sources due to severe drought conditions in the country. Despite the monetary and fiscal anti-inflationary measures deficit financing of Rs.2655 crores resulted in 15.6 per cent increase in money supply and 17.1 per cent increase in price level.

Financing the Sixth Plan

The financial resources coming from the budgetary sources stood at Rs.86608 crores being nearly 78 per cent of the total resources for the plan, out of which Rs.22039 crores coming from balance from current revenues (including ARM), Rs 18634 crores from surplus of public undertakings and Rs.45935 crores from capital receipts, covering market borrowings, small savings, provident funds and loans from financial institutions among others. The financial resources stood at Rs.8529 crores and deficit financing stood at Rs. 15684 crores. Total outlay at the prices of 1979-80 was Rs.97500 crores which comes to be Rs. 110821 crores at current prices.

Financing the Seventh Plan

The Seventh Plan mobilized Rs.l 67385 crores (73.9 per cent) of the financial resources from domestic budgetary resources, Rs.38545 crores (17.0 per cent) from the unconventional method o f deficit financing an d Rs.20708 crores (9.1 per cent) from external resources. The external assistance increased from 7.7 per cent of the total financial resources in the Sixth Plan to 9.1 per cent in the Seventh Plan. The aggregate resources for financing the public sector outlay in the plan amounts to Rs.226638 crores. The details of the estimate are given in Table- 3.1.

Financing the Annual Plans (1990-92)

The aggregate resources for financing the public sector outlay were Rs.61137 crores in 1990-91 and Rs.64698 crores in 1991-92. In 1990-91, the budgetary resources were Rs.43306 crores, external resources were Rs.6320 crores and deficit financing was Rs.11347 croes. In 1991-92, the budgetaiy resources were Rs.47664 crores, the external resources were Rs.7892 crores and the deficit financing was Rs.7032 crores. The balance from current revenues were negative in both the years. It was (-) 10997 crores in 1990-91 and (-)9000 crores in 1991-92. Surplus of public undertakings was Rs. 10961 crores and capital receipts was 43453 crores in 1990-91. In 1991-92 these were Rs. 13227 crores and Rs.43117 crores respectively.

Financing the Eighth Plan

The Eighth Five Year Plan was formulated with an approved public sector outlay of Rs.434100 crores at 1991 -92 pricesl.lContrary to projections, the BCR of both the Centre and the States turned out to be negative during each of the five years of the Eighth Plan. Thus, the combined BCR of Centre and States turned out to be (-) Rs.39563 crores as against the positive BCR of Rs.35005 crores projected for the Eighth Plan’;(NABHI's compilation of Ninth Five Year Plan, p. 184). The deterioration in the BCR of the Centre was due to (i) decline in indirect tax revenue and (ii) increased interest burden. Excise revenue dropped from 4.4 per cent of GDP in 1992-93 to 3 J per cent in 1996-97. Improvement in direct tax revenue from 2.6 per cent to 3.1 per cent of GDP during the plan period consequent on direct tax refonn, however, only partly compensated the decline in indirect tax revenue. The Centre's dependence on borrowings for financing the plan increased by 40 per cent over the projections. The deficit financing increased by Rs.33037 crores vis-a-vis the projection of Rs.20000 crores for the plan period.

Aggregate resources for public sector outlay was Rs.380524 crores in the Eighth Five Year Plan.

Financing the Ninth Plan

The Ninth Plan (1997-2002) envisages GDP growth rate of 6.5 per cent per annum. The public sector plan outlay is placed at Rs.859200 crores at 1996-97 prices. The share of the Centre’s plan and that of the States, including U.T.s would be 57 per cent and 43 per cent respectively. The balance from current revenues (BCR) is anticipated to be negative (-) 1406 cores. The surpluses from public enterprises is placed at Rs.340409 crores; capital receipts is placed at Rs.460179 crores. The Ninth Plan has proposed to mobilize Rs.60018 crores from external assistance.

It is seen from Table-3.1 that the financing pattern for the Ninth Plan is marked by different from the earlier pattern in as much as deficit financing has been kept at zero level and balance from current revenues has turned negatives. This has necessitated considerably higher percentage of borrowings and other liabilities.