THE
ECONOMIC
WEEKLY
ANNUAL NUMBER FEBRUARY 1964
Allocative Efficiency of Controls in Indian Planning
G K
Mukerji
Economic planning is not undertaken in any country, and it was not undertaken in India, out of
either pure
cussedness
or academic adventurism. This is important because, by and large, the implications
of some of the arguments that are going round in general and among economists in particular seem to indicate something of the kind.
There can be little doubt that a very considerable part of sheet steel released at controlled rates is being diverted to manufacture of luxury items. Similarly, stainless steel,
imported
at a low price through allo
cation of scarce foreign exchange, is providing large unearned profits for the initial quota-holders.
of
the
It is obviously desirable, in
ultimate high price paid by
both cases, to raise the prices at the first round so that the benefit
the consumer accrues to the State rather than to favoured individuals.
There cannot be any doubt that a considerable
misuse of capital
is taking place through
the
undertaking of low priority projects which is
made
possible by the low rates of interest.
It follows that
there is a strong case for raising the rates of interest in order to ensure economic use of capital.
system
without
of
Arguments
controls
These examples of misallocation of
adequate control of
incomes and
The
precisely
boxed- on such
examples
should be scrapped.
point.
Allocation
to meet
however,
is
of scarce
the need
that
the
are
frequently advanced to
support
the thesis
that
the entire
resources are,
however, the
classical results of price
rationing of the scarce commodities at a physical level.
Indian
economy
resources, whether it
of physical allocation
does
not
lack
physical controls
is foreign exchange or sheet steel, has
corresponding to the controlled prices.
control
entirely.
been
undertaken
Provided,
therefore,that
this
allocation through licensing is done adequately and done all along
the way there is no reason why the shifts in prices arising from price control and rationing would be
wholly
unsatisfactory.
The
diagnosis,
therefore, should relate not to whether some distortion in relation
to intended allocations have taken place but whether the allocation effort has been
fundamentally
undermined.
This
is
of
course,
quite
IT
is i m p o r t a n t to examine some
of the assumptions under w h i c h
the system of controls in I n d i a has
been b u i l t up, in so far as they are
deducible f r o m the frame of their
operation.
The r e g u l a t o r y system
on w h i c h I n d i a n p l a n n i n g has so
far depended is made up l a r g e l y of
three basic controls, and t w o distinct paths of direct interference.
The r e g u l a t o r y mechanism consists
of:
separate
from
what
could have been done to secure a satisfactory allocation.
The question to be answered is
whether the m a c h i n e r y is adequate
for achieving an appropriate allocation of goods and services outside the price mechanism as envisaged in the plans. The a l l o c a t i o n
problem
has t w o b r o a d aspects.
One is the prevention of resources
f r o m flowing into channels that are
undesirable from the standpoint of
the p l a n . The other is the direction of
resources into the purposes of p l a n .
i) C o n t r o l of capital issues.
Outcome Entirely Foreseeable
i i ) Exchange control and allocat i o n of f o r e i g n exchange, t h r o u g h
i m p o r t licensing, and
i i i ) A l l o c a t i o n of scarce raw
materials t h r o u g h a process of
licensing, at regulated prices. The
three r e g u l a t o r y tools are supposed
t o operate w i t h i n the l i m i t s o f :
i) the
d i s t r i b u t i v e and regulative effects of government income
a n d expenditure process, and
i i ) d i r e c t government entry h i t "
c r u c i a l p r o d u c t i v e activities, i n
terms of the i n d u s t r i a l p o l i c y resolutions.
It is obvious
that there is no
mechanism by w h i c h certain resources can be directed towards any
specific use except by direct state
p a r t i c i p a t i o n in the p a r t i c u l a r activ i t y , in so far as it conforms to the
terms of the i n d u s t r i a l p o l i c y resolutions. A l l the other means at the
disposal of the government are negative and can only be used to channelise
resources seeking to get
directed. Under these circumstances
the regulative m a c h i n e r y can o n l y
choose between
applications based
on
calculations of private gains.
No machinery has been created by
w h i c h certain types of co-ordinating
a c t i v i t y c o u l d be proposed and
brought into being. I n p r i n c i p l e ,
the technique of permissive licensi n g can o n l y succeed if the a p p l i cations are exhaustive in their
coverage of possible economic activities.
In an atmosphere of short
age of entrepreneurship such a machinery is h a r d l y l i k e l y to be effective, and it is l i k e l y to be even
less so when entrepreircurship consists very largely of w o r k i n g r o u n d
the government r e g u l a t o r y mechanisms.
The outcome, in terms of plan
achievements, have
thus been ent i r e l y foreseeable. A certain amount
of costly industrialization by direct
p u b l i c sector participation, and
some i n d i r e c t effects of persistent
excess of expenditure
have undoubtedly been achieved over the
past twelve to thirteen years. As
for the rest, it is not so much trial
the achievements have been h a i l i n g
and uncertain, but what has been
achieved is very largely unrelated
to w h a t was sought to be achieved.
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THE
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ANNUAL NUMBER FEBRUARY 1964
I n other words, the p l a n administr a t i o n appears to have f a i l e d to a
very large extent in d i r e c t i n g resources to areas that
w o u l d not
have attracted
resources under the
operation of free m a r k e t economy,
but where for the purposes of sustained g r o w t h , it was necessary that
adequate resources be directed.
This has not been because the
theory of adjusting relative profita b i l i t y t h r o u g h selective l o w e r i n g
of i n p u t prices is by itself f a u l t ) ,
b u t because in an atmosphere dom i n a t e d by tack of varied entrepreneurship, the negative machinery
alone that was available for a l l o cation purposes was
not adequate
for achieving the desired end.
In
a d d i t i o n , the input-output relationships were not
adequately studied
or understood, to enable the Government m a c h i n e r y to interfere w i t h
the input allocations a l l a l o n g the
line in the manner
necessary for
achieving the desired end. A n d
finally, the government was u n w i l l i n g to interfere w i t h the o v e r a l l
income d i s t r i b u t i o n in an effort to
make its l i m i t e d regulatory a c t i v i ties effective.
Achievement Not by Design
P a r a d o x i c a l l y , therefore, the p l a n n i n g effort has been as successful
as expected not because it was badly administered,
b u t because the
essential m i n i m u m that is necessary
to achieve a planned allocation of
strategic resources in supercession of
the free p r i c i n g system was never
r e a l l y t r i e d out at a l l . In consequence, a whole set of activities that
w o u l d have co-ordinated the a c t i v i ties actually licensed and increased
their p r o f i t a b i l i t y never came up at
a l l , for want of sponsoring, resulti n g in a l l - r o u n d poor performance
of the p e r m i t t e d activities and upsetting various expectations.
W h a t makes the M i d - t e r m A p p r a i sal of the T h i r d P l a n pathetic is
not that the achievements are being
now found
inadequate, but
that
it is not yet
being acknowledged
that what has been achieved is not
on account of what was conceived
as p l a n n i n g at a l l , but is v e r y largely an accidental resultant of a w h o l e
complex of uncoordinated activities
that gave the
government merely
enough brashness to r u n down the
foreign balances and
persist w i t h
excess income generation.
Barring
the r e a l m of p u b l i c sector undertakings in the field of i r o n and steel
p r o d u c t i o n in a general way, the
essential mechanism by w h i c h the
missing complementarities that m i g h t
have lead to sustained development
has not been visualized and created at a l l , except in isolated eases
and that more by accident than by
design. One c r i t e r i o n of successful
p l a n n i n g that emerges f r o m the discussion is that the sectoral and overa l l output-capital ratios must be
larger t h a n output-capital ratio at
the enterprise and i n d u s t r y level on
account of complementarities affected by p l a n n e d a l l o c a t i o n . It is a test
that can be m e a n i n g f u l l y applied to
check p l a n achievement.
Differential Profitability
Economies of
allocation
and
control depend on p r o d u c i n g differential p r o f i t a b i l i t y by l o w e r i n g the
prices of selected controlled inputs.
The process involves w o r k i n g back
i n t o inputs i n v o l v e d in the production of the inputs, on to the u l t i mate factor incomes. It fellows that
p r o v i d e d the input-output relations
are adequately understood and the
process of controlled allocation of
inputs is carried out a l l along the
line, there is no reason why there
should be any b u i l t - i n - d i s t o r t i o n s in
the economy. In other words, there
is no reason w h y such an economy
w o u l d not be in a t e m p o r a r y equil i b r i u m . It follows also that since
the process does not i n v o l v e price
control and r a t i o n i n g of a l l the
items, but of selected items o n l y ,
existence of a free market in w h i c h
demand and supply
w i l l have to
w o r k themselves out through differential price changes, is not inconsistent w i t h the existence of such an
equilibrium.
Thus, if sheet steel is p r i m a r i l y
needed for m a n u f a c t u r i n g r a i l w a y
wagons or ships, and if the lowered sheet steel prices enable wagon
m a n u f a c t u r i n g , or ship b u i l d i n g
companies to have differential profit rates that make them acceptable
f o r investment a l l o c a t i o n purposes,
it does not matter a great deal if
a s m a l l part of the sheet steel is
used for m a k i n g refrigerators and
the low price of the sheet steel leads
to enormous profits in the refrigerator i n d u s t r y because of the unrequited demand in the refrigerat i o n market on account of uncontr o l l e d incomes. S i m i l a r l y , i f chrom i u m steel is p r i m a r i l y needed for
machine tools and surgical instruments and if these industries can be
carried on w i t h o u t raising prices a l l
along the l i n e at reasonable profits
because of the low input prices of
c h r o m i u m steel, it does not matter
a great deal if there is a large price
premium
in the c h r o m i u m steel
market, in so far as it is used for
domestic- utensil manufacture. The
p r e m i u m arises because there is obv i o u s l y a large unrequited purchasi n g power in the domestic utensil
m a r k e t . As a matter of fact, the
existence of a l i m i t e d free market
in respect of a rationed input item
is not in the least an argument
against price control and in favour
of free p r i c i n g , except to people who
are
already convinced
about the
superiority of free p r i c i n g on other
grounds.
Degree of Distortion
The p r o b l e m really starts when
the residual free purchasing powerassumes so large a p r o p o r t i o n in
relation to the c o n t r o l l e d pares of
the economy that it can d i r e c t l y or
i n d i r e c t l y tamper w i t h the allocation
m a c h i n e r y and thereby cause licensed low-priced inputs to be diverted
f r o m the regulated to the unregulated
parts of the economy. In other words,
if the income that the c o m m u n i t y
w o u l d like to spend on refrigerators
or stainless steel utensils is so large
that profits in these industries are
high enough to divert sheet steel or
c h r o m i u m steel f r o m wagon b u i l d ing or machine tool industry', then
the p r o b l e m becomes ominous and
threatens to frustrate the purposes
of planned a l l o c a t i o n . This sort of
diversion of scarce resources f r o m
c o n t r o l l e d or essential to uncontrolled or non-essential industries can
be effected either by s i m p l e corruption or by distortions in the policy
of licensing and c o n t r o l . As a
matter of fact, s m a l l distortions of
b o t h the types may be there a l l
along but the magnitude of the prob l e m and the
resulting economic
strain w o u l d depend upon the level
of social m o r a l i t y on the one hand
and a d m i n i s t r a t i v e efficiency on the
other.
The essential point
is not that
such a tendency towards d i s t o r t i o n
exists but that the degree of distortion that m a y arise in any particular situation is so large as to v i t i ate the allocation process. The evidence on the basis of which policy
changes m a y be argued is.
therefore, the relative magnitude of
scarce commodities allocated to one
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regulated purpose that have m o v e d
out or been a c t u a l l y used in an unregulated one. The c r i t e r i o n is one
of specific misuse and n o t the gener a l appearance of intermediate products in the unregulated markets at
some stage of the other.
The question, therefore, is not that
of free p r i c i n g versus controls, hut
one of the actual efficiency of the
licensing system consciously adopted for allocation of resources under
p l a n n i n g . As the m a t t e r now stands,
o n l y if it can be shown that the method of a l l o c a t i o n chosen was either
faulty or has been found to he i n effective, does the question of abandoning the system arise.
It does
not follow, however,
that
the
abandonment has to be in favour of
comparatively greater use of free
p r i c i n g . The case can be made out
for a more closely regulated allocat i o n than has been attempted so far.
The final decision must emerge out
of the understanding of the l i m i t a tions of the system of control and
licensing a c t u a l l y in operation.
Since the system of licensing and
control replaces to a large extent
the price system and since the suc-
264
cess of the p l a n is l i n k e d in a b i g
w a y w i t h the success of the system,
it is i m p o r t a n t to consider the m a n ner in w h i c h the efficiency of the
system c o u l d be j u d g e d . U n f o r t u nately, one looks in v a i n f o r an
adequate consideration, or even for
an awareness of the p r o b l e m and
that, after more than twelve years
of p l a n n i n g !
The Success Assumption
The idea that if something is entrusted to the administration it w i l l
be efficiently performed is so naive
that it does not even m e r i t serious
consideration. B u t this naive assumpt i o n seems to be at the b o t t o m of
a l l the discussions on the subject.
The extent of the lack of awareness
is indicated by the f a i l u r e to use
the obvious indicators of unauthorised
use of scarce commodities.
The necessary
i n f o r m a t i o n can be
gathered f r o m the i n d u s t r i a l statistics already collected, if they c o u l d
be linked up specifically w i t h the
use of scarce commodities by the
various i n d u s t r i a l units, f u l l records
of w h i c h are available w i t h the government. S i m i l a r l y , no attempt has
been made to find out the relation
between the q u a l i t y and value of
ECONOMIC
WEEKLY
scarce c o m m o d i t y a l l o c a t i o n a n d the
final chain of activities dependent
thereon. Estimates of unauthorised
use of essential scarce commodities
can likewise be attempted w i t h o u t
any great difficulty, as m a n y of the
items i n v o l v e o n l y the large productive units.
Since, however, the
government
has proceeded on the assumption
that it is in a position to attain absolute success, it has not cared to
evolve a m a c h i n e r y by w h i c h its relative success c o u l d be effectively
measured. The success assumption,
therefore, is itself a measure of the
failure of the operation of the cont r o l l i n g system. On the other hand,
however, no case has been actually
made out of the f a i l u r e of the system, though there is prima facie
evidence of partial misuse and breakd o w n . It is i m p o r t a n t that the system be carefully examined before
it is scrapped. The r i g h t remedy may
s t i l l be to tighten the controls and
to regulate income d i s t r i b u t i o n more
specifically in order to give the cont r o l l e d activities a chance to produce
the results that they have been designed to produce, rather than to
break up the system that has been
so far b u i l t .