THE ECONOMIC WEEKLY

T HE report o f the Shroff Com­mittee on finance for the private

sector purports to th row l ight on measures wh ich wou ld make increas­ed funds and, in part icular, larger bank finance available for develop­ing the private industr ial sector, envisaged in the first Five-Year Plan.

M ixed economy being the fo rm of our industr ial structure, a signi­ficant role must necessarily be assigned to private enterprise for securing the planned targets in the field of industry. Indeed, the scope of the private sector was visualised as early as 1948, when the Indus­t r ia l Policy Resolution laid down the essentials of the country's future in ­dustr ial programme.

The Industries (Development and Regulat ion) Act of 1951 has been assisting and regulating the private sector in the creation and main­tenance of conditions favourable to the attainment of the investment targets proposed. A shortfall in such targets provided the raison d'etre for setting up the Shroff Committee whose recommendations are cal­culated to bolster up the private sector.

PRIVATE ENTERPRISE

The labours of the Committee would have been more f ru i t fu l if it had borne in m ind that " i n a p lan­ned economy, the justi f ication of pr ivate enterprise is that , w i th in the frame-work of national policy it is capable of contr ibut ing to the fu l -i i lment of the objectives defined in the P l a n " , In the Five-Year Plan, the rate of investment in the indus­t r ia l sector hinges pr imar i ly on the completion of quotas by private i n ­dustries. Instead, the Commit tee bewails the " substantial increase in public investment envisaged in the P l a n " . T h e underly ing hypothesis, namely, that public investment depletes savings available for p r i ­vate investment lacks verif icat ion.

As against a total provision of Rs 2,244 crores for the public sec­tor, the projected out lay on private industr ial expansion is of the order of Rs 233 crores. Some 80 per cent of this investment wou ld be in res­pect of the capital goods and pro­ducer goods industries, eg, i ron and steel, petroleum refining and a lu­m i n i u m industries. Th is is exclu-give of the estimated expenditure of

Rs 150 crores on replacement and modernisation in industries w i th a l a r g e backlog o f depreciation. Another Rs 150 crores are required for addit ional work ing capital dur­i n g the Plan period and Rs 80 crores on account of current depreciation not covered by normal income-tax allowances.

T h e Plan contemplates that the necessary funds for the private see-tor "would be available through (1) undisbursed profits of corporate en­terprises, Rs 200 crores; (2) new issues of shares and securities, Rs 90 crores; (3) Industr ia l Finance Cor­porations,, Rs 20 crores; (4) assist­ance f rom the public sector, Rs 5 crores; (5) refunds of excess profits tax deposits, Rs 60 crores; (6) fo­reign investments, Rs 80 crores; and (7) banks and other sources of short-term finance, Rs 158 crores.

ACADEMIC ISSUES

It was expected of the Shroff Committee that it would suggest measures which would ensure the availabil i ty of the necessary finance so as to prevent a slackening of activity in the private industr ial sec­tor and consequent dislocation of the Plan. But the members of the Com­mittee never t r ied to come to grips w i th the main problem. They were lost in the backwaters of academic polemics concerning the merits of a widening public sector.

They ought to have borne in m ind the fact that " the sphere of the State ", as Woodrow Wilson has put i t , " is l imi ted only by its own wis­dom ". Shri A D Shroff and his colleagues seem to be impatient of governmental regulations. T h e y w a n t an unquali f ied assurance against nationalisation and would make this a prerequisite for any ad­vance in the private industr ial f ield. But the view that private enterprise should be unfettered is already an anachronism. ,

The members of the Committee were very keen on changing the pol i t ica l , social and psychological environment in the country in order to create an " economic c l ima te " helpfu l to the growth of private in­vestment. But the suggestion is vague; for it is dif f icult to see what precisely the talk of such a trans­format ion means.

T h e Committee has held the recent labour legislation and labour

The Shroff Committee Report — A Review B K Singh

policy of Government responsible for the slow rate of investment. It is surprising that the Committee should take exception to legislation meant for social security and wel­fare which would ult imately increase product iv i ty and ensure a peaceful atmosphere. Almost all the indus­tr ial ly-advanced countries of the wor ld have tr ied to give a fair deal to their work ing popula t ion; and there is still considerable leeway to he made up before we in India could expect to promote l iv ing standards to any significant extent.

TAX RATES

The tax rates have also been sub­jected to crit icism. According to the Committee, the burden of direct taxation acts as an effective check on further private enterprise. In fact, it has been the standing grie­vance of business circles that the tax structure is cr ippl ing private investment and the growth of Ind ian industries. An examination of this viewpoint would show that it is untenable and unjustif ied by actual facts.

Financing the growth of under­developed countries is the greatest problem of the present time. Taxa­t ion is one of the recognised methods for meeting the expenditure involv­ed in such development. The taxa­t ion policy of Government has been anything but bold. The total tax revenues of the Central and State Governments in Ind ia at present amount only to seven per cent of the national income, one of the lowest percentages in the wor ld .

Tak ing the revenues of the Cen­tral Government alone, this propor­t ion is as h igh as 35 per cent in U K , 23 per cent in USA, 25 per cent in New Zealand and 20 per cent in Ceylon. There is a possibi­l i ty of raising addit ional revenue through increased taxation. Social welfare considerations must be given due weight in schemes of taxat ion; and the higher income groups must bear a large share of the burden of planned development.

CONCEALED MONEY

Moreover, there is considerable tax evasion in the higher income ranges which deprives the State of its legitimate revenue. ' the ' repor ts of the Income-tax Investigation Commission, coupled w i t h the fact

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that subscriptions to the National Plan Loan, which already amount to more than Rs 100 crores, do not reflect a marked change in the de-mand deposits of the scheduled banks, make out a prima facie case of tax evasion.

It cannot be denied that there is a sizable amount of concealed money in the hands of profiteers and other sections of the community which is sought to be saved f rom taxation. A Committee, which is anxious to secure a square deal for private enterprise, should have been candid enough to acknowledge this fact.

We should not lose sight of an important fact in this context. Public investment financed through addit ional taxation of the private sector increases the social f und , a part of which ult imately accrues to private enterprise itself in the shape of " external economies". More­over, Government disbursements to private contractors of public pro­jects swell the deposits of commer­cial banks and thus make available larger bank advances and invest­ments to the private sector.

The Committee also does not feel happy about the borrowing programme of the Central and State Governments. It is the con­tention of the Committee that State loans divert a considerable amount of voluntary savings f rom invest­ment in industrial shares and deben-uues into Government securities.

On the contrary, the borrowing programme of Government has, hi therto, been l imited in its scope, in spite of the fact that this method of public finance is self- l iquidating, for the extra money pumped into circulation by way of developmental expenditure, w i t h considerable bene­fits to certain sections of the com­muni ty , can be easily mopped up. Hence it obviates the risk of gene­rating inflationary piessures. It would also l imi t the scope of deficit financing.

Apart f rom this, in a country where an ambitious programme of development is being undertaken, techniques of borrowing should be so adjusted as to offer opportunities to the people for direct part ic ipat ion in the financing and implementa­t ion of the Plan. This would en­sure people's co-operation, and is likely to br ing home to them the larger purposes for which the loans are required. Recent experience suggests that raising the interest rate of loans is sure to facil i tate increas­ed borrowing in Ind ia.

IDLE BALANCE

A significant revelation of the 3½ per cent Nat ional Plan Loan issue is that there was an idle balance of at least Rs 35 crores in the hands of the public. The State Loan has meant an activisation of l iqu id cash hoards which are part icular ly i n ­terest-elastic. This invisible idle balance w i th the publ ic had been left alone by the private sector. Subscription to the Nat ional Plan Loan are due to its attractiveness and short-dated matur i ty . Hence there does not arise any clash be­tween the public and private sources of investment so far as idle hoards are concerned.

The significance of an idle balance of this size becomes greater when the fact is borne in m ind that there has been a simultaneous issue of a new series of 4 ½ per cent ten-year Treasury Certificates for petty in ­vestors. Government would have failed in its duty if it had refrained f rom mobil ising this shy capital. In the circumstances, the attempt of the Committee to f ind faul t w i t h the borrowing programme of Govern­ment smacks of the dog-in-the-manger att i tude.

The cause of the failure of the private sector to attract sufficient resources must lie elsewhere. As the Fiscal Commission has pointed out, the malpractices of managing agents have discouraged capital for­mation. Mismanagement and mis­application of funds have shaken the confidence of the investor, wi th grave repercussions on the national economy.

ANTI-SOCIAL PRACTICES

Regular traff icking has taken place in managing agency and manage­ment rights regardless of the inter­ests of shareholders. T h e violent fluctuations in the prices of indus­tr ial securities in recent years have further undermined confidence in industrial management. Bona fide investors have suffered substantial losses, and they are chary of en­trust ing their savings to the private sector, where anti-social and un­healthy practices have become en­demic. The Shroff Committee, no doubt, has a few words to say against such practices, but it does not like the imposition of " onerous " and " i n h i b i t i n g " restrictions on private1

enterprise, as " i t is unjust to pena­lise the business community as a whole for the malpractices of a few ". They plead for unbridled private enterprise, and their scale of sympathy is heavily t ipped in favour

of business men who want to eat the cake and have it too!

The foregoing analysis would make it clear that the shroff Com­mittee was misjudging the position when it lamented the adverse effects of public investment and borrowing on the expansion of pr ivate indus­try. It has put fo rward a thesis which is contrary to the main assumptions of a planned economy. The thesis also involves a few con­tradictions. On the one hand, the Committee pleads for a restricted programme of public investment to prevent investible funds f rom being diverted f rom the private sector and, on the other hand; it has averred that difficulties in raising finance by private industry are not merely due to " an over-all shortage of capital " but to various extraneous factors.

It has also been pointed out by the Committee that there is no shortage of working capital for large-scale industries. Again, the Committee has expressed the view that the textile and ju te industries have not undertaken measures of rationalisation and modernisation despite the availabil i ty of consider­able f inancial resources for the pur­pose. It is curious, therefore, that the Committee should have joined issue w i th the Planning Commission in respect of the borrowing and development programmes of Gov­ernment.

" A RED RAG "

The Committee feels that the constant threat of nationalisation overhanging undertakings in the private sector wou ld scare away foreign capital and act as a red rag to the foreign investor. Apart f rom the diff iculty one wou ld experience in appreciating the anxiety of the Committee to attract private capital f rom abroad and its sudden fond­ness for foreign investment, it is very unlikely that we wou ld be able to procure sufficient foreign capital in the near future. Though Govern­ment has taken special pains to make its foreign economic policy extreme­ly l iberal and non-discrimnatory., the inf low of foreign capital has not been adequate enough to supple­ment indigenous resources and to accelerate the country's economic development.

This is due to a variety of reasons, eg, the tax policy of foreign coun­tries which neutralises any benefits which the foreign investor could expect to get outside and a higher expected rate of return in his own

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country Most of the foreign direct investment has been made not in under-developed, but in economical­ly-advanced countries. A study of the international flow of foreign capital would reveal that the growth of direct investment does not result pr incipal ly f rom the transfer of fresh funds from the capital-exporting countries but from the reinvestment of a large proportion of the profits earned w i t h i n the country.

There is no flow of private capi­tal to countries w i t h centrally-planned economies in Eastern E u r o p e and Asia. For ex­ample, American business men were generally apathetic about investing in India . They had more lucrative opportunities in the U S A , Canada and La t in America. Foreign capi­tal could be made available to under-developed countries only through direct and special negotia­tions for specific projects like the steel and oil-refining industries in Ind ia .

ONLY AN APOLOGIA

It would be evident that the Shroff Committee was offering only an economic apologia for its desire to see the industrial system left severely alone. Foreign capital has been used as a smoke-screen to get an assurance of immuni ty from nationalisation. As has been already pointed out, any such assurance would defeat the objectives of the Five-Year Plan. Government has already left a vast segment of the industrial field free for private enter­prise. The public sector would develop only those industries in which private enterprise was un­w i l l i n g or unable to put up the re­sources required. T h e Plan has accorded only low prior i ty to the nationalisation of existing enter­prises.

T h e crux of the problem before the members of the Shroff Com­mittee was to suggest measures which would change the essentially commercial nature of the current investment pattern of Ind ian banks. On June 30, 1953, the investment of scheduled and non-scheduled b a n t s in shares and debentures of joint-stock companies amounted to Rs 12.23 crores only. On Decem­ber 3 1 , 1953, the total of a l l sche­duled and non-scheduled banks in I n d i a was Rs 33 crores only in Ind i an securities ther than Gov­ernment bonds. This was eight per

. cent of the banks' total investment portfolio.

T h e suggestions of the Commit­tee for widening the operational base

of the I n d i a n banking system re­veal a text-book approach to the problem. For the suggested mea­sures would not galvanise commer­cial banks into playing a more de­finite role in the industrial develop­ment of the country.

Integration of indigenous bankers w i t h the banking system, mobile banks and a rural savings drive are measures which have been tried since the publication of the reports of the Central and Provincial Bank­ing Enquiry Committees (1929-31). There is nothing to commend them in the absence of a fundamental reorientation in the banking struc­ture of the country. Even additional resources in the banks would not release adequate funds for the private industrial sector so long as the pre­sent notions of l iquidi ty remain un­changed.

India is faced w i t h the problem of adjusting banking standards to the needs of the country. In the absence of sufficient savings out of business profits to finance industrial expansion even on a modest scale, adequate institutional arrangements for the purpose, and an effective capital market, adequate long-term credit is not easily available to private industries for acquiring machinery and related facilities.

In the opinion of the I M F Mis ­sion which visited India in 1953, " the commercial banking system of Ind ia has a conservative t radi t ion based on the concept that deposit banks should remain exceptionally l i qu id and their lending operations confined pr imari ly to short-period credit for commercial purposes". But a well-balanced portfolio of loans does not necessarily mean that an excessive proport ion of short-period loans should be maintained for commercial purposes. I t wou ld " merely indicate that the banking system is not providing loans to in ­dustry for the modernisation and expansion of the economy".

BANKING PRACTICE

H i g h banking standards should not be encouraged at the cost of national development. In the U n i t e d States, the commercial banks regard two-year and three-year loans for equipment consistent w i th good banking practice, provided the ag­gregate of such loans is not excessive and the borrowers are good credit risks. In India , however, the pre­ference for short-dated commercial loans sends the bulk of the available bank credit into the hands of traders,

and very l i t t le is made available for financing industrial production. The Reserve Bank of Ind ia should alter the . banking structure in order to make more adequate provision- for industrial credit.

The Committee's recommenda­t ion regarding the formation of a consortium of leading banks for underwri t ing the issue of industrial shares and debentures might solve the problem of long-term finance to some extent and would supple­ment the funds available from I n ­dustrial Finance Corporations, the proposed Special Development Cor­poration and Industrial Trusts.

The Committee has also studied the special problems of small-scale industries, which employed about 11.5 mi l l ion workers in 1950-51 as against three millions working in factory establishments. The net out­put of small enterprises in 1950-51 was Rs 910 crores while that of factory establishments was around Rs 550 crores. Despite the greater share and importance of small-scale industries in the national economy, scant attention has been paid to­wards their development by way of financial assistance and expert advice.

These industries obtain their working capital from indigenous money-lenders at high rates of i n ­terest which renders them unprofit­able. State Governments have never made a conceited effort to revive these industries in their respective regions; and budgetary allocations have been insufficient. In the absence of a sound organi­sation, marketing facilities and tech­nical " know-how ", co-operative credit societies have proved ineffec­tive. The development of these industries would require specialised agencies for particular zones in the country.

BOLD LEADERSHIP

The suggestions of the Shroff Com­mittee would be of l i t t le use if the drive for industrialisation is not spear-headed by an appropriate basic organisation and bold leader­ship.

Essentially, the problem of plan­ned industrialisation is not only a problem of finance, but also one of an ex ante co-ordination of the con­stituent elements in the scheme of development and the adoption of economic strategies which w o u l d yoke the constellation of economic forces to some given canon of social policy.

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