Financing Under Planned Economy

Summary

M. A. Master’s 1964 Forum of Free Enterprise booklet is a tightly argued audit of how India proposes to pay for the Third Five-Year Plan. Master opens by faulting the Planning Commission for headlining a ‘Rs. 10,400 crores’ plan when the real outlay, public and private together, comes to Rs. 11,600 crores; the deduction of current outlay and the inclusion of inventories, he argues, obscure rather than clarify the financing problem. He then walks systematically through the four sources of finance the Commission claims it will tap — additional taxation, foreign exchange, borrowings from within the country, and surpluses from public enterprises — and shows that the Commission has consistently overestimated each one. Additional taxation has had to jump from a budgeted Rs. 2,400 crores to Rs. 2,750 crores and is squeezing a population already ‘paying nearly 200%’ more in central interest charges than at the start of Plan-era India.

The second half of the pamphlet turns from arithmetic to political economy. Master draws what he calls the ‘vital distinction’ between the financing of the Public and Private Sectors: 30% of public-sector capital comes out of tax revenue and never has to be serviced, whereas every rupee of private capital must earn a dividend or vanish. From this asymmetry he argues that the Private Sector is being squeezed out of a single national pool of savings already drained by deficit financing, compulsory deposits, small savings schemes, and direct state borrowing from the Reserve Bank. Public enterprises that were meant to throw off surpluses (Hindustan Steel especially) are instead running losses while enjoying tax holidays the private sector is denied. Quoting Sir A. Ramaswami Mudaliar and Eugene Black on the exhaustion of the capital market and the mortgaging of future export earnings, Master closes with a warning that the nationalisation of banks would leave ‘the Private Sector and democracy’ both in danger, and calls for fiscal, taxation and credit policies that free private enterprise to play its role in building ‘a strong and prosperous India of tomorrow.‘

Key points

• The Third Plan’s real outlay is Rs. 11,600 crores (Rs. 7,500 public + Rs. 4,100 private), not the Rs. 10,400 crores publicly headlined; Master finds the Planning Commission’s accounting opaque and misleading.

• Additional taxation budgeted at Rs. 2,400 crores for the Plan period has already overshot to Rs. 2,750 crores, with central interest charges by 1960-61 standing at nearly 200% of their 1951-52 level.

• The country must finance not only the Rs. 11,600 crores of the Third Plan but also Rs. 3,000 crores of committed expenditure carried over from the Second Plan — a structural cost of ‘planned economy’ rarely acknowledged.

• Foreign exchange estimates have been wrong by almost 100%: India had to borrow Rs. 2,059 crores instead of the projected Rs. 1,100 crores during the Second Plan, and external debt servicing now consumes a fast-rising share of export earnings.

• There is only one pool of national savings; deficit financing, compulsory deposits, small savings drives and direct RBI borrowing siphon it toward the Public Sector and crowd the Private Sector out of legitimate finance.

• Public-Sector capital enjoys a hidden subsidy — 30% of it comes from tax revenue and requires no dividend, while every rupee raised by private companies must be serviced or it dries up.

• Public enterprises promised as surplus-generators (notably Hindustan Steel) are instead booking losses and enjoy interest holidays that the Reserve Bank Report itself flags as ‘not sufficiently firm’.

• Nationalisation of banks would cut off the Private Sector’s ‘real sheet-anchor’ — at peak season, industry takes 54% of scheduled bank advances — and would, Master warns, endanger both private enterprise and democracy.