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THE FI NANCI AL SYSTEMI N I NDI A

The I nsti tute of Asi an Edonomi c Af f ai rs : I ndo no Ki n' yi Sei do (The Fi nanci al
Systemi n I ndi a), Tokyo, 1962. 516 pp. -
Thi s i s a j oi nt study by Hi ro- o Hi rota, Mi noru Fukazawa, Toshi o Murai ,
Fumi o Okesha, Shi geyoshi Kamatani , and Yuki o Ki hara.
So f ar, J apan' s i nterest i n the I ndi an economy has been centred on economi c
devel opment programmes and f orei gn trade, and, there has been l i ttl e comprehen-
si ve research on thei r f i nanci al system. The j oi nt research proj ect on I ndi a' s f i nan-
ci al structure conducted recentl y by f i ve researchers under the sponsorshi p of the
I nsti tute of Asi an Economi c Af f ai rs i s the f i rst undertaki ng of any magni tude
on thi s probl em.
The word " f i nanci al system" bears vari ous meani ngs, both broad and res-
tri cti ve. Thi s research proj ect di d not conf i ne i tsel f to f i nance i n a narrow
sense, i . e. , the structure of capi tal ci rcul ati on or tq f i nanci al i nsti tuti ons. Rather,
the emphasi s was pl aced on cl ari f yi ng the enti re structure of i ndustri al and
f l nanci al ci rcul ati on of f unds i n I ndi a. As there i s a scarci ty of ori gi nal data
avai l abl e, the preparati on by the researchers was, of necessi ty, restri cted. Ac-
cordi ngl y, thi s report i s, i n some cases, an i ntroducti on or summary of the data
on I ndi a, whi l e some porti ons consti tute an experi mental type of report not
based on extensi ve research. Theref ore, the connecti on and coordi anti on between
chapters are not cl ai med to be perf ect; yet, thi s report i s wi thout doubt an i m-
portant i ntroducti on to research on thi s type of probl emi n our country.
The theme f or thi s j oi nt research report coul d al so be enti tl ed " The source
of f unds f or economi c devel opment and the structure of f unds demand and
suppl y. " At present, the f unds f or economi c devel opment of I ndi a are mai nl y
acqui red f romthree sources : I ) tax revenue; 2) domesti c l oans, and 3) f orei gn
l oans. These three sources wi l l be di scussed i n the f ol l owi ng chapters: tax
revenue i n chapter one " Structure of Publ i c Fi nance and Capi tal Formati on ";
domesti c l oans i n chapter two " Fi nanci al ' I nsti tuti on "; and f orei gn l oans i n
chapter f i ve " Forei gn I nvestments. " The structure of money demand and
suppl y wi l l be exami ned cl osel y i n chapter two and chapter three " Agri cul tural
Fi nanci ng " and chapter f our " Forei gn Exchange Banks. " Especi al l y i n chapter
f our the hi stori es and the present condi ti ons of the l eadi ng domesti c and f ore. i gn
banks nowi n operati on i n I ndi a have been thoroughl y di scussed. Next, the
contents of the vari ous chapters wi l l be revi ewed.
Chapter I . Publ i c Fi nance and Capi tal F9rmati on
As i s the case wi th al most every country, the rol e of the Government i n
the economi c devel opment of I ndi a, and i n consequence, the rol e of publ i c
f i nance, especi al l y of tax revenue has substanti al l y i ncreased i n recent years.
Research Reports 145
I ndi a, whi ch has been carryi ng out f l ve- year pl ans f or over ten y ars, i s suf -
f eri ng f romthe i nadequacy of domesti c f unds avai l abl e f or publ i c devel opment
proj cts, and i s nowthe worl d' s l argest reci pi ent of f orei gn ai d. The rati o of ta
revenue to nati onal i ncome f or the past several decades has been about 7 pei r cent, the
l owest rati o i n the worl d. Theref ore, two of the m: ost urgent probl ems f or
I ndi a are : I ) to nl arge the source of f unds f or publ i c i nvestments through
a tax ref ormand the col l ecti on of addi ti on. al taxes; and 2) to recti f y the i nequi ty
of weal th, i ncome, and tax di stri buti on whi ch prevai l s i n I ndi a today. From
thi s vi ewpoi nt, Chapter I makes an i nqui ry i nto the present condi ti ons of phbl i c
f i nance and i nvestments i n I ndi a, centrei ng on the probl erd of tax ref orm.
The two bi g movements towards tax ref ormwere the Taxati on Enqui ry
Commi ss, i on i n 1953 and the proposed tax ref ormby Ni chol as Kal dor. Froi n
the standpoi nt of soci al j usti ce, the I ndi an Government took the pol i cy of i n-
creasi ng di rect taxes and decreasi ng i ndi rect taxes, whi l e, contrary to thei r i nten-
ti on, the di rect taxes had to be decreased i n order to promote the i nvestment
acti vi ti es of the pri vate enterpri ses. But, n 195 l , they reverted to the 6asi er
method of rel yi ng on i ndi rect taxes to rai se f unds f or the Fi rst Fi ve- Yeai Pl an.
The Taxati on nqui ry Commi ssi on was gi ven the task of draf ti ng a tax
ref ormbi l l , havi ng the obj ecti ves of both recti f yi ng th af orementi oned i nequi -
ti es and rai si ng f unds f or devel opment. Of course, the tr ss was on the l atter,
and the Commi ssi on came tb the concl usi oh that vari ous present i ndi rect taxes,
especi al l y, the Federal exci se duti es and sal es taxes shoul d be extended to l ower
' i ncome brackets i n order to rai se needed f unds f or publ i c i nvestments, even i f
i t woul d necesSari l y restrai n consi l mpti on by the publ i c.
The i ncrease of revenue by thi s scheme, however, was f ar short of the
amount requi red f or the Second Fi ve- Year Pl an. Besi des, the ef f ects of a posi ti ve
tax ref ormcoul d not be obtai ned thereby. Because, the general consumpti on
l evel was very l owi t coul d not be l owered anymore. Tax- col l ecti on, i n cash, was
di f i i cul t i n i tsel f . And the poor tax col l ecti ng techni ques permi tted tax eva-
si on. Thus, i t became necessary to seek addi ti onal revenue sources whi ch had
escaped the recommendati on of the Enqui ry Commi ssi on, and Mr. Kal dor was
engaged by the I ndi an Government to draf t another ref ormpl an.
The tax ref ormpl an set up by Kal dor was ai med at overal l revi si on of the
di rect taxati on system, vhereas the obj ecti ve of the Taxati on Enqui ry Commi s-
si on had been to i ncrease i ndi rect tax revenues. He, Kal dor, bel i eved that the
di rect taxati on systemi n I ndi a was very unj ust and i nef f ecti ve; that enough
f unds f or the f i ve- year pl an coul d be deri ved f romef f ecti ve taxati on on the
mi nori ty of the weal thy cl ass. The mai n poi nt of Kal dor' s ref ormpl an was, besi des
a revi si on of the present i ncome tax, to cr ate anewa Tax on Weal th, a
Capi tal Gai ns Tax, a General Gi f t Tax, and an Expendi ture Tax, and to l evy
these taxes at the same ti me the Comprehensi ve Return was to be f i l ed to prevent
tax evasi on. By establ i shi ng the maxi mumtax rate by vari ous taxes, he tri ed
to hol d down the i nterf eri ng i nf l eunces of taxati on on the economi c devel op-
ment.
The Kal d9r proposal was put i nto ef f ect duri ng the 1957*1958 f i scal year.
146 The Devel opi ng Economi es
But, hi s pl an was onl y parti al l y i mpl emented, and the anti ci pated resul ts were
never real i zed. Theref ore, most of the burden of the suppl ementary tax vi as
i mposed on the resi dents of the urban areas. Ari d the tax revenue potenti al of
the rural areas has sti l l to be devel oped. Moreover, preventi ve measures f or
tax evasi on seemto be i nadequate. The publ i c i nvestment, the bul k of whi ch
i s created by i ncreased taxes, has, i n spi te of the af orer l enti oned di f B: cul ti es, i n-
creased consi derabl y i n recent years. I t has expanded f i ve ti mes i ts ori gi nal si ze,
whi l e pri vate i nvestments expanded l ess than two ti mes. Correspondi ngl y, I ndi a' s
tradi ti onal dormant tax structure has f i nal l y begun to change. Thi s i s not true
i n al l casesi f or the l atent tax source (pre- modern and f eudal i sti c i ncome) has
not yet been grasped a f act that i s gradual l y commandi ng the strong atten-
ti on of i ntel l ectual s.
Chapter I I . Banki ng I nsti tuti ons
Chapter 11 gi ves a general despri pti on of the f i nanci al i nsti tuti ons of I ndi a,
cl assi f yi ng themi nto si x parts; and attenti on i s di rected especi al l y to the ef f i ci ency
of thei r acti vi ti es. The coexi stence of nati ve banki ng f aci l i ti es or the bazaar
markets and modern banki ng f aci l i ti es wi thout any cl ose rel ati onshi p between the
two i s the mai n characteri sti c of the f i nanci al structure of I ndi a. An excerpt
f romthe Report f ol l ows, def i ni ng each group of f i nanci al i nsti tuti ons.
l . The nati ve banki ng f aci l i ti es compri se i ndi genous bankers i n one
group and money l enders i n another. The mai n di f f erences are that the
i ndi genous bankers conduct busi ness accepti ng deposi ts and negoti ati ng hundi sl
cheques, deal i ng pri mari l y i n commerci al l oans ; whi l e thq money l enders deal
more i n rural consumer l oans. The rates of i nterest on l oans made by the l atter
are by f ar hi gher than those charged by the f ormer. They have one thi ng i n
common. Both banki ng f aci l i ti es are unorgani zed heredi tary f ami l y trades based
on the caste system. The nati ve banki ng f aci l i ti es handl e i host of the conutry' s
f i nanci al busi ness.
2. Pri vate commerci al banks i n I ndi a consi st of 400 j oi nt stock banks es-
tabl i shed under the Banki ng Compani es Act of 1949. Of thi s number there are
l ess than 80 comparati vel y l arger banks and 16 or 1 7 f orei gn banks whi ch con-
sti tute the so- cal l ed schedul ed (desi gnated) banks. To exami ne the condi ti ons of
the assets and l i abi l i ti es of the j oi nt stock banks, we noti ce that the percentage
rati o of f i xed deposi ts to l i abi l i ti es on deposi ts has made a rapi d i ncrease i n
recent years. Thi s wi l l natural l y i ncrease the depsoi t cost, and i t may be a
probl emthat l ong and short terml oans have not i ncreased to date. Banki ng
compani es i n I ndi a have tradi ti onal l y carri ed on short- termcommerci al l oans as
a mai n f uncti on. But, I ndi a suf f ers f romthe shortage of l ong- termdevel op-
ment f unds. I t i s hoped that the present poor connecti on between i ndustry and
the banks i s qui ckl y remedi ed, and the desperatel y needed l ong- terml oans wi l l
be f orthcomi ng.
3. Among the corporate banks, the State Bank of I ndi a, the f ormer I m-
1 ' darshani ' hundi a demand draf t
Research Reports 147
peri al Bank of I ndi eL, operates on an extraordi nari l y l arge scal e. I t i s a govern-
ment bank establ i shed by the speci al l aw. Besi des routi ne commerci al banki ng
busi ness, i t i s speci f i cal l y charged wi th f i nanci ng medi umand smal l enterpri ses
and the remi ttance of the government' s f oyei gn exchange.
4: The Co- operati ve Banks and the Land Mortgage Banks are tgri cul tural
f i nanci ng organi zati ons under the cooperati ve uni on systemestabl i shed 50- 60
years ago. The f ormer, Co- operati ve Banks, made short- terml oans and the l atter
l ong- terml oans. The descri pti on of the structure of these banks has been
omi tted, but i t i s wel l to note that l oans to f armers by the Co- operati ve Banks
account f or onl y about 3 per cent of the agri cul tural f l nance. I t i s cl ear f romthi s
tbat the Co- operati ve Banks cannot compete wi th the f i nanci al strength of the
f armmoney l enders.
5. Recentl y, semi - governmental or government- owned i ndustri al f i nance
i nsti tuti ons have been establ i shed as the ordi nary banks l ack the capabi l i ty to
suppl y l ong- termi ndustri al f unds. The f ol l owi ng si x corporati ons have been estab-
l i shed to suppl y these f unds: l ) I ndustri al Fi nance Corporati on of I ndi a; 2) State
Fi nanci al Corporati ons; 3) Nati onal I ndustri al Devel opment Corporati on; 4) I n-
dustri al Credi t and I nvestment Corporati on of I ndi a; 5) Ref l n. ance Corporati on
f or I ndustry; and 6) Nati onal Smal l I ndustri es Corporati on. Many of these have
been establ i shed by f unds recei ved through f orei gn ai d and none of these banks
have yet started f ul l operati on.
6. As f or Reserve Bank of I ndi a, whi ch i s the nati onal central bank, the
Report descri bes i n detai l i ts organi zati on, duti es, f uncti ons, etc. , ref erri ng to the
Reserve Bank of I ndi a Act and other sources. I t i s noted that the assets to
back the i ssuance of bank notes are mostl y the rupee certi f i cate (the Fi nanc
Mi ni stry' s notes havi ng the character of " red i nk " bonds) wi th very l i ttl e gol d
or f orei gn reserve f unds. Whi l e, on the other hand, the suppl y of f unds to the
banki ng f aci l i ti es f or l oans are l i mi ted. Such a f ormul a f or suppl yi ng currency
can be sai d to be ef f ecti ve f or I ndi a' s economi c devel opment, centred on the
publ i c sector, but, at the same ti me i t i s not i n l i ne wi th sound currency and
accepted banki ng practi ces.
Summi ng up the f i gures of al l the vari ous f i nanci al i nsti tuti ons, the total of
bank dep. osi ts i n I ndi a i s onl y 20- 30 per cent of the total currency. Theref ore,
i t can be sai d that f i nanci al pol i cy by the Government or the central bank does
not have much i nf l uence on I ndi a' s economy, nor do the i nterest rates accuratel y
ref l ect the economi c acti vi ti es. The f i xed deposi ts have recentl y surpassed the
demand deposi ts i n the schedul ed banks and the gap i s i ncreasi ng. The banks
al so mai ntai n a hi gh reserve rate of cash. These are the i ndi cators, whi ch re-
l ate the soundness of the bank admi ni strati on to the f i nanci al market. However,
they onl y denote the soundnes of the f i nanci al market i tsel f and cannot be
consi dered roof that I ndi a' s f i nanci al i nsti tuti ons are parti ci pati ng ef f ecti vel y as
f i nanci al medi ators i n the overal l economy. Al l the f i nanci al i nsti tuti ons i n
I ndi a cannot be sai d to be contri buti ri g ef f ecti vel y to the economi c devel op-
ment of I ndi a especi al l y i n the l ong- termi ndustri al i nvestments.
148 The Devel opi ng Ecol eomi es
Chapter 111. Agri cul tural Fi nance
One chapter has been devoted to the f i nanci al probl ems of agri cul ture, the
l argest i ndustry i n I ndi a (70 of the total popul ti on; 50 of gross nati onal produc-
ti on). The actual condi ti ons of agri cul tural f i nances i n I ndi a have not been grasped
i n detai l even by I ndi an researchers. The actual condi ti ons of agri cul tural
f i nanci ng are expl ai ned, i n the report, based mai nl y on the 1955 Report of the
Reserve Bank of I ndi a, " Al l - I ndi a Rural Credi t Survey ", whi ch i s the onl y
comprehensi ve research data concerni ng thi s probl em. I t i s f i tti ng to say, how-
ever, that the Report deal s more wi th probl ems of rural f i nanci ng or f arm
debts than wi th agri cul tural f i nanci ng.
The total l oans by al l the f armers i n I ndi a i s about 7, 500, 000, 000 rupees
annual l y and the amount outstandi ng i s bel i eved to be several ti mes more. I t
i s esti mated that the average annual l oan i s 160 rupees per rural f ami l y; and
309 rupees per borrowi ng f ami l y. The average amount of f unds l oaned to the
f armer vari es f romI to 10. ti mes dependi ng upon the state. Loans al so vary
wi th the si ze of the f ami l y' s f armi ng operati on ; that i s, the l arger the scal e,
the l arge the l oan.
Of the money borrowed by the f armer about 50 per cent i s f or f ami l y consump-
ti on, and then 28 per cent i s f or capi tal expendi ture and 9 per cent normal f arm
operati on. Thi s i s more a debt on f armers than agri cul tural f i nance, ref l ect-
i ng the true f eature of I ndi an agri cul ture. By exami ni ng the sources of these
f unds thi s si tuati on wi l l be made more cl ear. About 76 per cent of the l oans to the
cul ti vators are made by prof essi onal or si de- busi ness (i ncl udi ng l andowners and
mer!chants) I enders; 14 per cent i s borrowed f romrel ati ves; and l oans f romthe
governments, cooperati ve associ ati ons and commerci al banks are 3. 3 per cent,
3. 1 per cent and 0. 9 per cent respecti vel y; wi th 92 per cent of the l oans b i ng
" pre- modern l oans. " I n order to crack down on these evi l practi ces and
the expol i tati on of f armers by f arm- l oan sharks, vari ous l egi sl ati ve measures
have al ready been i ntroduced i n the l ast century and speci al l aws have been
establ i shed by the vari ous states, to control these acti vi ti es, but the si tuati on has
not i mproved.
On he other hand, the banki ng i nsti tuti ons that are concerned wi th agri cul -
tural f i nance are, as menti oned i n the separate chapter, the Co- operati ve Bank, the
Land Mortgage Bank and the Reserve Bank of I ndi a. Al l of themhave been
maki ng ef f orts f or many years to i mprove the f i nanci al posi ti on of rural com-
muni ti es. However, thi s type of agri cul tural f i nanci ng havi ng the character of
mutual ai d or, the rel i ef of f armers to promote agri cul ture i s too weak to
exerci se i ts i nf l uence on rural communi ti es I nder the establ i shed pre- modern
system. Of course, the savi ngs of a mi nori ty group i n the rural area i s by no
means smal l , but as capi tal most- of i t f l ows to the ci ti es and f orei gn countri es,
and i n present ci rcumstances i t i s i mpossi bl e to channel these f unds i nto di rect
agri cul tural i nvestments.
Chapter I V. Exchange Banks
Among the banks that are operati ng i n I ndi a, the comparati vel y l arge cor-
Research Reports 1 49
porate banks of I ndi a and the branches of f orei gn banks whi ch, i n al l , number
about 90 are cal l ed schedul ed banks.
I n I ndi a, the " f orei gn exchange bank " or " exchange bank " of ten means
a bank of f orei gn nati onal i ty, but i n thi s chapter, the terms wi l l be used to
denote banks doi ng f orei gn exchange busi ness. That i s, i n thi s chapter, the
f orei gn trade f i nanci ng probl emwi l l be taken up as f ol l ows: (1) the devel op-
ment of the exchange banks si nce the era of the East I ndi a Company i n the
17th century; (2) cl ari f i cati on of the f orei gn trade f i nanci al structure, compari ng
the bussi ness and f i n nci al strength of f orei gn banks wi th that of I ndi an banks;
and (3) the hi story al d the present condi ti ons of each exchange bank i s des-
cri bed. Thi s chapter i s not conf i ned to f orei gn trade f i nanci ng as such, but
provi des a concrete survey of the pri nci pal domesti c and f orei gn banks i n I ndi a.
Let us next outl i ne the contents of the Report centrei ng on i temabove 2.
I ndi a was a Bri ti sh col ony f or the past two hundred years, so i n the earl y stage
of i ts col oni al rul e the advance of f orei gn banks i nto the I ndi an economy denoted
the devel opment of Bri ti sh col oni al banks. But, i n the 19th century, European,
Ameri can, J apanese, and other vari ous countri es establ i shed exchange banks and
j oi ned i n the competi ti on. Today, besi des ei ght Engl i sh banks, ni ne banks f rom
Ameri ca, J apan, Paki stan, Hol l and, France, and Chi na make a total of 77 f orei gn
banks conducti ng busi ness i n I ndi a.
Duri ng the peri od when these f orei gn banks were bei ng establ i shed and
devel oped, I ndi an banks, wi th l i ttl e f unds and i l l - prepared f or i nternati onal f i nance,
were unabl e to enter the f orei gn exchange market. Because of the Swadeshi
movement, si nce the begi nni ng of the 20th century and through Worl d War I ,
banks operated by I ndi ans have enj oyed remarkabl e success. But the f orei gn
exchange busi ness was not f reed f romthe monopol y by the f orei gn banks
and the Bri ti sh I ndi an Government, unti l af ter the i ndependence of I ndi a i n
1947. At present, 20 I ndi an banks are deal i ng i n f orei gn exchange i ncl udi ng
tbc 9 I arge schedul ed banks.
When compared wi th the f orei gn banks, these I ndi an exchange banks are
much weaker i n respect of capi tal , and accordi ngl y, the f orei gn trade f i nanci ng
i s sti l l l argel y dependent upon the f orei gn banks. I n recent years, however, the
advantages enj oyed by the f orei gn banks are gradual l y di sappeari ng and as a
resul t, an epochal si tuati on has been created. The total vol ume of f orei gn ex-
change busi ness conducted by the f orei gn banks i s l ess than that of the I ndi an
exchange banks. Thi s i s due to the f ol l o vi ng reasons; the recent shortage of
of f unds i n the f orei gn banks (di mi ni shi ng i ncrease rate of deposi ts), the decl i ne
i n the vol ume of trade handl ed by the f orei gn f i rms, and the pol i cy of the
I ndi an government to promote home banks (custoday of publ i c f unds _and
. f avourabl e tax treatment).
However, i n respect to the vol ume of busi ness, the f orei gn banks re 5 to
l Oti mes l arger than the I ndi an bank, i ndi cati ng that the advantageous posi ti on
of the f orei gn banks i s sti l l i ntact. I t i s to be noted however that the rel ati ve
posi ti ons of f orei gn banks i n I ndi a among hemsel ves has been shi f ti ng
recentl y. That i s, the posi ti on of Engl i sh banks has decl i ned, whi l e the Ameri can
150
The Devel opi , eg Economi es
banks are enj oyi ng a busi ness upswi ng and a rapi d i ncrease i n prof i ts.
The Report al so descri bes i n detai l the busi ness and the earni ng posi ti ons
of vari ous i mportant f orei gn banks and I ndi an banks. I t exami nes the basi s of
the operati ons of the exchange bank, that i s, the i nvestment i n I ndi a by vari ous
f orei gn countri es. And i t del ves i nto the trade si tuati on handl ed by the domes-
ti c and f orei gn f i rms. Al though the sel f - rel i ant growth of capi tal and enterpri se
of I ndi a i s nowan acknowl edged matter of record, the ai d and i nvestments by
vari ous f orei gn countri es are acti ng as an outsi e pressure i n a newf orm. Thi s
may suggest that the real economi c i ndependence of I ndi a i s sti l l f ar i n the f utute.
Chapter V. Forei gn I nvestments
I n the l ast chapter, the l oans and i nvestments to I ndi a by f orei gn countri es
f or both publ i c and pri vate sectors wi l l be taken up. Li ke publ i c f i nance, deal t
wi th i n Chapter I f orei gn capi tal i s not a f i nanci al probl emi n i tsel f , but the
probl emof i ts presence cannot be i gnored, as i t f orms an i mportant source of
I ndi a' s devel opment f unds.
The i nvesti gati on of f orei gn i nvestment i n I ndi a i s too compl ex a task to .
be undertaken by i ndi vi dual s or smal l i nsti tuti ons. But f ortunatel y, i n I ndi a,
the Reserve Bank of I ndi a makes i t an annual task to eval uate I ndi a' s i nterna-
ti onal i nvestment posi ti on. And i t has al ready publ i shed i n report f ormthe
resul ts of the three l arge- scal e speci al surveys and annual surveys conducted to
date. I n thi s chapter, the contents of the Reports by the Reserve Bank of I ndi a
are f l rst of al l i ntroduced and then anal yzed i n detai l .
Accordi ng to the report, the overal l i nternati onal i nvestment posi ti on of I ndi a
grewworse i n the 12 years ( 1948- 60) covered by the surveys. Froma credi t
bal ance of 15 bi l l i on rupee reserves dwi ndl ed to a debi t bal ance of 9 bi l l i on
rupees. Thi s was due pri mari l y to the Second Fi veLYear Pl an i n whi ch the
expansi on of publ i c i nvestments reduced the f orei gn reserve and i ncreased f orei gn
l oans. At present 70 per cent of the debts i n the publ i c sector i s l oans f rom
Ameri ca and the Worl d Bank. Other maj or credi tor countri es are Engl and,
West Germany, and the USSR. The cumul ati ve total of l oans authori zed up to
the present amounts to 20 thousand mi l l i on rupees, qver hal f of whi ch sti l l
remai ned unuti l i zed at the end of the Second Fi ve- Year Pl an. Of the 7 thou-
sand mi l l i on rupees of pri vate f orei gn i nvestment i n I ndi a, over 80 pef cent i s
" f orei gn busi ness i nvestments. " The Reserve Bank of I ndi a' s survey reveal s
each year the di stri buti on of i nvestments by i ndustry and by the f ormof
i nvestment, Engl and suppl i es 70- 80 per cent of the total i nvestments, hol di ng
al most a monopol i sti c posi ti on, but, of l ate, the i nvestments by Ameri ca and
the Worl d Bank are gradual l y i ncreasi ng.
Seen i ndustry wi se, the three l argest f i el ds of i nvestments are the manuf ac-
turi ng i ndustry, the oi l i ndustry, and the pl antati ons whi ch combi ned i s cl ose
to 80 per cent of the total i nvestments. As f or the f ormof i nvestments, di rect
i nvestment i n. f orei gn compani es and f orei gn- control l ed I ndi an j oi nt- stock com-
pani es accounts f or 80 per cent ; whi l e the share of portf ol i o i nvestments i s very
smal l . As to the proceeds of the f orei gn i nves. tments, the prof i ts, or di vi dends
Research Reports 151
on f orei gn capi tal i n the pri vate sector reached 3 to 4 ti mes that of the proceeds
f romi nterest on f orei gn capi tal i n the publ i c sector. The pri vate i nvestments
by Ameri ca and Engl and has the hi ghest rate - of return and capi tal gai n i s
hi gher i n I ndi a than i n those countri es.
The af orementi oned i s a general outl i ne of the survey data rel eased by the
Reserve Bank. Thi s chapter f urther attempts to esti mate what posi ti on and how
much i nf l uence f orei gn i nvestments have on the I ndi an economy. I n vi ewi ng
the economi c structure of I ndi a f romthe standpoi nt of nati onal i ncome by
i ndustri es, the pre- modern f i el ds are overwhel mi ngl y l arge, as the modern or
capi tal i sti c pri vate enterpri se f i el ds empl oy onl y 3. 7 per cent of the worki ng
popul ati on and contri bute onl y 1 1 . 6 per cent of the total i ncome. Three el e-
ments consti tute thi s smal l progressi ve economi c group. They are Government
enterpri se, I ndi an capi tal enterpri se and f orei gn capi tal enterpri se. But, these
three are very i mportant i n that they compri se the core of the I ndi an economy.
Let us ref er to the f orei gn capi tal ai d i n the , publ i c sector. I ndi a' s i ncreas-
i ng dependence upon f orei gn ai d to support her economi c devel opment pl ans i s
f ast approachi ng the cri ti cal poi nt. To cope wi th thi s si tuati on, a pl anned pro-
gramme coordi nati ng domesti c savi ngs, domesti c i nvestments and f orei gn f unds i s
requi r d. Above al l , a more ef f ecti ve mobi l i zati on of the l atent, pri vate sources
of f unds by the government i s bei ng strongl y requested i nsi de and outsi de I ndi a.
Thi s i s a very di f : cul t task f or the I ndi an Government.
I n order to cl ari f y the i mportal ce and i nf l uence of f orei gn capi tal i n the
pri vate corporate sector as compared wi th the hol di ngs of nati ve I ndi an
capi tal , the f ol l owi ng data i s set f orth : The f orei gn capi tal i nvested i n
I ndi a amounts to 25. 8 per cent of the net worth (owned capi tal ) of
al l corporate enterpri ses i n I ndi a. I ts share i n the total combi ned assets i ncl ud-
i ng outsi de capi tal i s onl y 1 7. 6 per cent, but i t control s as much as 36. 8 per cent
of total corporate assets. The percentage share of f orei gn capi tal to prof i ts af ter
tax i s 32. 3 per cent, and i n retai ned prof i ts or rei nvested prof i ts i t stands at 30. 9
per cent. I n the l i ght of these f i gures, i t can be sai d that the f orei gn capi tal
i nvested i n the pri vate sector shoul d not be consi dered a mere i nvestment, but
rather the means by whi ch a strong f oothol d i n the management of enterpri ses
and i n the control of the nati ve capi tal has been establ i shed. Forei gn captal i s
thus conducti ng bussi ness i n a more f avourabl e cl i mate than I ndi a' s capi tal .
The prof l ts earni ng rates of f orei gn and I ndi an capi tal i n the l atest several
years are esti mated at 8. 81 per cent and 6. 66 per cent respecti vel y.
Fromthe af orementi oned report, i t can "saf el y be sai d that as a resul t of
the economi c devel opment, the probl emof f orei gn capi tal i n I ndi a' s economi c
devel opment f i nance i s assumi ng a growi ng i mportance. Thi s i s a ki nd of sel f -
contradi cati on f or the I ndi an economy, and to sol ve thi s probl emthe tax ref orm
as set f orth i n Chapter I , and changes i n the f i nandi al i nsti tuti ons to i ncrease
thei r ef l i ci errcy, are most urgentl y needed. Thi s i s of course not a probl emof
f i nanci al techni ques but i s a probl emdi rectl y connected wi th the pol i ti cal , econo-
mi c, soci al ref ormand devel opment of the enti re I ndi an nati on.
Yuki o Ki hara

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