CHAPTER

74
Controls Controls Under Planning
NEED FOR CONTROLS
Controls are an integral part of a planned economy. But the nature, extent and measure of controls depend upon the type of planning in the country. A centrally planned economy has full control over all economic activities, i.e., production, consumption, exchange, and distribution, internal and external trade, saving, investment, etc. On the other hand, a mixed economy has partial controls with the main purpose of allocating scarce resources in a proper way. Underdeveloped countries are mostly mixed economies where public and private sectors coexist. Planning involves the control and regulation of the private sector for the fulfilment of the objectives of the plan. Left to market forces planning becomes a farce. For in such economies, scarcities and bottlenecks arising from structural changes retard economic development in the absence of controls. To allocate scarce resources among competing ends, the Planning Authority controls the production of goods by deciding what to produce, how to produce and how much to produce? This is tantamount to controlling investment for the purpose of utilizing it in right direction. In underdeveloped countries the Planning Authority controls the use of income also for the purpose of augmenting savings. This is done by controlling consumption of non-essential
1. Based on an extension lecture delivered to Post-Graduate Economic Faculty of Government College.. Hoshiarpur in January, 1972.

goods and even by forcing people to save more. The distribution of essential commodities is also controlled and regulated. Since there are adverse balance of payments and acute shortage of foreign exchange, import, export and exchange controls are introduced. Besides, the State controls particular sectors of the economy by taking them over as public enterprises if a high priority has been accorded to them in the plans. They are generally transport, power, basic and heavy industries, basic raw materials, etc. TYPE OF CONTROLS Controls may be direct or indirect. Direct controls, better known as physical controls, effect particular producers and consumers choices in the economy. Such controls are in the form of licensing, rationing, price controls, export duties, import-export and exchange controls, quotas, authorisation, rationing of foreign exchange, anti-hoarding control, monopoly control etc. Indirect controls, on the other hand, are known as general controls which affect prices and hence the incomes and transactions within the economy. In fact, they affect the overall aggregate demand of the economy and include fiscal and monetary measures. Thus general controls refer to the taxation, expenditure and borrowing measures of the State and to the monetary policy of the central bank in the form of variations in the bank rate, open market operations and reserve requirements, selective credit controls, etc. We discuss below the nature and problems of physical controls in the light of Indian conditions, general controls in the form of fiscal and monetary measures having already been discussed in two earlier chapters. AIMS OF PHYSICAL CONTROLS The aim of physical controls is to ensure proper allocation of scarce resources for the purpose of price stabilisation. An underdeveloped economy is a scarce economy where food, raw materials, consumer goods, capital equipment, basic facilities, foreign exchange, etc. are all in short supply. When it launches a development plan, the aggregate demand for the various resources increases and leads to a rise in the price level. The rise in prices becomes inflationary when bottlenecks and shortages increase as incomes and investment rise more with development. In such a situation, fiscal and monetary measures alone are ineffective in controlling aggregate demand and prices. Thus the need arises for adopting physical controls which tend to affect the strategic points of the economy. Unlike general controls which affect the entire economy, physical controls are discriminatory in nature. They are, therefore, more effective in overcoming bottlenecks and shortages arising in the course of development planning. 1. Control Over Consumption. Consumption may be regulated and controlled in two ways: (i) by limiting the production of consumer goods directly through allocation of raw materials, labour and output quotas; and (ii) by limiting the physical demand for goods through price control and rationing. Price control and rationing are the legacy of the Second World War when they were resorted to for directing the supplies of essential consumer goods for war purposes. Price controls are less drastic and more comprehensive than rationing and therefore are more useful in distributing the means of production and the supplies of available goods equitably among the people of under developed countries. But in a competitive market for price controls to become successful, rationing is essential. Because prices fixed are at a low level and supplies of commodities at controlled prices are also less than demand. Thus unless there is rationing, price controls lead to queues, unequal distribution and black marketing, and thus defeat the very purpose for

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which they are resorted to. In India where agricultural production may fall below the targets laid down in the plan due to bad monsoon, drought, etc., food control and rationing are a must. Since a major part of our economy is dependent upon agriculture, price controls over essential consumer goods are also necessary. For instance, shortages in output of cotton, oilseeds, jute and sugarcane are fully reflected in the increased price of textile products, edible oils, jute, and sugar. Except jute products, all other products are essential goods. In India, foodgrain prices are controlled at three levelsproducer, wholesaler and retailer. There is statutory rationing in big cities like Mumbai, Kolkata, Chennai and Delhi; at other towns in the country foodgrains and sugar are distributed in fixed quantities and at controlled prices through fair price shops. Prices and supplies of other essential commodities are controlled and regulated through consumers co-operatives, super bazars, etc. Such commodities are cloth, soaps, vegetable ghee, kerosene oil, baby foods, tyres, tubes, etc. 2. Control Over Investments. In an underdeveloped country, there is shortage of investible funds of right type for investment. Industrial raw materials, food, skilled personnel and foreign exchange are all scarce. Physical controls help in rational allocation and utilisation of these strategic resources. The usual methods of control over investment are fixation of quotas, issue of licences and authorisation on the basis of priorities. Some direct control of investment is inevitable in such economies due to market imperfections. If private investment is directed towards residential buildings, building permits can be issued. Similarly, to keep factories out of residential areas or to prevent excessive concentration of factories in certain towns for implementing a policy of decentralisation, issuing of building licences on a priority basis are essential. In the case of certain scarce materials produced indigenously like cement, their supplies can be regulated by anti-hoarding controls or quantitative inventory. In those fields of investment where imported machinery, components and raw materials are required, physical controls in the form of import quotas, duties and rationing of foreign exchange are exercised. Private investible funds flowing to joint stock companies may be controlled by restricting capital issues and securities. Thus control over investment by concentrating at strategic points can result in a better use of available resources. 3. Control Over Production. Control over production is closely linked to control over investment. In fact, there is little difference between the two. For instance, it may be necessary to control investment in those industries that tend to displace handicraft workers without affecting the material output substantially. Under development planning, production of certain essential commodities may be accorded a higher priority than non-essential consumer goods. Similarly, higher targets may be laid down for the production of basic raw materials and components like coal, iron ore, iron and steel, chemicals, small tools, cement, etc. They necessitate not only control over investment but also over production in the form of fixation of quotas, authorisations, and licences. Prices of indigenous and imported raw materials and components may be fixed and their quantities allocated according to the requirements of the planned economy. In India control over investment and production go together. Large scale industry is subject to some specific price and allocation controls and to general capital issue and licensing controls. This has become necessary for the balanced development of different sectors of economy. In India since independence controlled commodities have been sugar, cotton textiles, steel, coal, aluminium, chemicals, cement, paper, paper board, etc. During the last few years in pursuance of the policy of rationalising controls over prices and distribution of these intermediate and manufactured articles, gradual decontrol has been introduced. There exists in India a comprehensive system of controls over investment and production to

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fulfil the objectives and targets laid down in the Plans with regard to the industrial sector. The Industries (Development and Regulation) Act, 1951 enables the State to implement its policies for the planned development and regulation of industries. Under this act, any industrialist who wants to establish a new undertaking or to expand substantially an existing concern or to manufacture a new product is required to take a licence. But it is not that all industries are issued licences. In the government nomenclature there is a banned list which is of course reviewed every year. There is another category of industries known as the merit list where licences are given on merit. But the most important category is that of key industries which are essential for the fulfilment of Plan targets and where the creation of additional capacity is considered essential. Priority is given in issuing licences to such industries as also in permitting them to raise capital internally or externally to import raw materials, equipment, etc. It is not that licensing is a permanent feature and that all industries must be licensed. Rather, for increasing the capacity of certain priority industries not needing foreign raw materials and components any more, delicensing is done. Besides, undertakings employing less than 50 workers and using no power or employing 100 workers and using power and those having fixed assets not exceeding Rs. 25 lakhs are exempted from the provisions of this Act, provided they do not come in the categories enumerated above. A licence issued to an industrial concern includes besides the name of the concern and articles to be manufactured, the annual output of the undertaking, its location and the capital issued. Another feature of physical controls in India is that production in the basic and strategic sectors, included in Schedule A of the Industrial Policy of 1956 is under complete control of the State. Such industries are arms and ammunitions, atomic energy, heavy plant and machinery, heavy electrical plant mineral oil, aircraft, railway transport, telephones and telephone cables, etc. 4. Import Controls. Import controls in the context of an underdeveloped country aim at shifting imports from non-essential consumer goods to capital goods, raw materials and components for augmenting the rate of industrial growth. Development planning requires that import of certain non-essential and luxury goods prohibited by imposing heavy import duties, while those of essential consumer goods like food, industrial raw materials, components and capital goods are regulated by import licensing and import quotas. Thus import control in an underdeveloped country have two main features. First, prohibition of the import of certain non-essential commodities. Second, general or individual licensing which is based on one or more of the following criteria: (a) country of origin; (b) degree of essentiality; (c) quotas and monetary ceilings for individual imports; (d) special commitments or obligations; and (e) international allocations. India follows both the prohibitive and licensing policies. The licensing policy in India is primarily based on essentiality, special commitments and international allocations. Before Devaluation, foreign aid was mainly tied to specific projects. But since the middle of 1966-67 emphasis has shifted to non-project form of aid. From time to time import controls have been liberalised to meet the input requirements of certain priority industries in full and to help maintain the price level particularly in respect of mass consumption goods. Further, the scope of the Open General Licence (OGL) has also been widened by placing a number of essential commodities like leather machinery, garment making machinery, a large number of drugs, medicines, chemicals, electronic items, iron and steel items, and scientific and technical books under OGL. The system of automatic licensing has also been introduced whereby licences are issued on the basis of actual consumption of imported raw materials without reference to the value of such licences in the previous year. But certain items categorised as absolutely non-permissible are not allowed to

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be imported in view of their indigenous availability. Thus the main aim of the import-control policy in India has been to achieve faster economic development by providing essential imported inputs for enlarging the production base for exports. 5. Export Controls. Control over the export of various products in underdeveloped countries depends upon internal supply conditions, variations in the demand for products internally and internationally and the need for conserving stocks of essential raw materials. However, the principal objectives of exchange controls in such countries are: (a) to earn large foreign exchange from exports; (b) to conserve sufficient quantities of products for domestic consumption; (c) to enforce standards of quality and grading; (d) to fulful commitments under international allocations; and (e) to fulfil export commitments in accordance with trade agreements; and (f); to increase exports to hard currency areas. Control over exports in India aim at achieving all these objectives. Upto 1957-58 Indian exports were almost stagnant. In that year export duties were adjusted downward to earn large foreign exchange. Arrangements were also made to introduce quality control and grading. Exports again received a setback in 1965-66. After the devaluation of the Rupee in June 1966, export duties were levied on a number of traditional export items which faced either inelastic foreign demand or lack of elasticity of supply or both. The main purpose behind the levy of export duties was to avoid loss of foreign exchange through a fall in the foreign prices. However, reductions, rationalisations or abolition of export duties are made from time to time in the light of international demand conditions and the competitive position of Indian export products in the world market. In India, two-thirds of exports are subject to controls. Keeping in view the trend in domestic availability of commodities and prices, some items are banned and others are regulated for export purposes every year. Many of the items are also placed under the OGL. 6. Exchange Control. Exchange control is a method by which efforts are made to influence the balance of payments directly. Under-developed countries suffer from balance of payments difficulties. Their export earnings are low as they mainly export raw materials and other cheap products which are subject to international price fluctuations and hence variations in demand. On the other hand, they import heavy capital equipment, machinery and a number of manufactured articles so that they are required to make large payments to foreign countries. This necessitates the imposition of direct control on payments to other countries. In its most comprehensive form, exchange control requires exporters to deposit all their foreign exchange with the exchange control authorities in exchange for domestic currency. In a system of exchange control foreign exchange is not fully convertible. Importers and other persons needing foreign currencies are not given freely. They are required to satisfy certain conditions laid down by the authorities to obtain foreign exchange for making payments to foreigners. Even restrictions are placed on foreign travels and education. Exchange controls are used also to discriminate against imports from certain countries. It leads to rationing of a scarce currency to reduce imports from that country while people are left free to buy from those countries whose currencies are plentiful. Another form of exchange control is the system of multiple exchange rates. The exchange control authorities may prescribe two or more exchange rates for different kinds of international transactions. Normal exchange rate may be used for essential imports and penalty exchange rate for non-essential imports. In India the system of exchange control exists in its exhaustive form in order to control exports and imports in the context of a developing economy. Exchange controls were introduced in India during the Second World War to conserve foreign exchange. An Exchange Control Department was opened by the Reserve Bank of India in 1939 for this purpose. Thus the Reserve

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Bank of India is the exchange control authority in the country. All export earnings are required to be deposited with the Reserve Bank of India or its authorised dealers, and they are exchanged for the Indian Rupee at a fixed rate. All importers are required to seek permission of the authorities for importing commodities, then only foreign exchange is released by the Reserve Bank. Similarly, any person desirous of going abroad for purposes of business, higher education, etc., is released only a limited amount of foreign exchange for a specified period of time. LIMITATIONS OF PHYSICAL CONTROLS Physical controls, as discussed above, are not so successful in matching the demand and supplies of commodities and services in a country like India. They have their difficulties which prevent them from controlling inflationary and balance of payments pressures and in allocating goods and services equitably. They, therefore, bring in a certain amount of black marketing, corruption. Control over consumption in the form of price controls and rationing is successful in countries where administration is efficient. Controls require the fixation of prices of various goods not only at different stages of production but also at different places. Controls cannot be rigid. They have to be reviewed and relaxed when the supply situation improves. Controls also necessitate complete co-ordination between the Centre and the States. The failure on the part of the Government of India after Independence to follow such measures due to an inefficient administrative machinery led to corruption and black marketing. However, in recent years the Government have learnt much from past experiences and have tried to rationalize the system of controls. But still certain snags are visible in the policy of price controls. In India controls exist in the case of essential consumer goods like wheat, rice, vegetable ghee, sugar, etc. When prices of controlled commodities are fixed upward, prices of uncontrolled and related goods also rise but more in proportion to the rise in the former. No efforts are made to control the prices of the latter goods like pulses, oils, confectionary, etc. Moreover, prices of other consumer goods such as milk, tea, coffee, etc., also tend to rise since they happen to be uncontrolled articles. Thus partial controls have been ineffective in controlling inflationary pressures in India. They, therefore, need to be supplemented by fiscal and monetary measures. Certain problems also arise in the case of those commodities which are rationed alongwith controls. To avoid black marketing and corruption, the quantity of ration allotted should be high enough to meet the minimum requirements of a family. In India the rationed articles of various qualities are sold to consumers in fixed quantities according to the number of family members. This results in a large unsold surplus of the superior quality and shortage of the inferior quality in predominantly labour areas in the case of wheat and rice, whereas the opposite happens in areas resided by the white collar classes. The Governments policy of selling the same commodity in the open market, as also through fair price shops at controlled prices, creates difficulties when consumers do not draw full ration allotted to them. It encourages ration shops to sell surplus quantities in the black market at higher prices. Moreover, the supply of essential articles at controlled prices and in fixed quantities have tended to increase the demand for uncontrolled semi-luxury and luxury goods with increase in the savings of the people. This has resulted in diverting resources from essential to non-essential articles of consumption. 1. In the Field of Production. India has the most comprehensive system of physical controls in the form of licences, quotas, authorisation, etc. There is such a maze of regulations and elaborate procedures that there is inordinate delay in taking decisions on the part of government departments. For instance, to start a firm, a licence is required which is not an easy affair. The

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location of the factory, the product to be manufactured, and the amount of capital to be raised must be got approved from the respective government departments. The policy of investment controls has led to corruption and arbitrary decision. It has not helped in removing regional imbalances, preventing concentration and allocating resources equitably. Thus controls have tended to retard progress by eliminating healthy competition and preventing the operation of the price factor. Moreover, these controls have tended to hurt the small businessmen the most because they cannot meet the requirements of a rigid system of licensing. The Planning Commission admits in this connection that the existing industrial structure had led generally to a high level of costs and that the present system does not appear to have prevented concentration. In some cases industry has been inappropriately sited and some desirable adjustments in regional locations have not taken place. ... Sheltered conditions created, in part, by the operation of existing controls appear to have reduced cost consciousness among entrepreneurs. It, therefore, proposes a relaxation of existing controls so as to encourage fully responsible decision making on the part of entrepreneurs and an element of competitiveness in the economy which would keep up cost consciousness.2 Prof. W.A. Lewis observes that the system of licensing was thought to be an inevitable instrument of planned development for a few years after the Second World War, but this was only a passing phase. By the middle of 1950s all the leading social democratic parties of the world had come to realize that licensing was an inefficient and corrupt way of allocating resources and had dropped it from their programmes. Today even in the USSR, powerful authoritative voice, are urging greater reliance on the market and less use of administrative directions. He, therefore, opines that, if licensing is inefficient and corrupt in advanced countries, with first class administrators, it is even more harmful in less developed countries. In most poor countries licensing means inordinate delays and inexplicable decisions. If licensing cannot be administered promptly and efficiently, the country is better off without it.3 2. In the Field of Imports. The policy of import controls through import quotas and import licensing also widens the scope for delay, corruption and arbitrary decisions. Often priority industries are not able to import intermediate inputs in time, due to delay in sanctioning quotas and licences. In certain cases, inadequate quotas are fixed in relation to demand. 3. In the Field of Export. The policy of export controls has been a success in achieving its main objectives of earning larger foreign exchange and thus minimising the balance of payments deficit. 4. In the Field of Exchange Controls. Exchange controls are very rigid in India. They leave no freedom to private enterprise to buy plant, machinery, raw materials from the country of its choice. They can be only imported from that country whose currency is available with the Reserve Bank of India. The exchange control policy of India has created a black market not only of dollar but also of sterling. Further it has tended to breed corruption. Recent exchange control relaxations have been too small to warrant any improvement in the situation. We may quote Prof. Lewis in this connection: Some countries have had exchange control for so long that they have persuaded themselves that it is an inevitable accompaniment of economic development. This is not so, most countries have developed without exchange control; it is rather a sign of failure to allocate sufficient resources for the maintenance of the foreign balance, whether by paying more attention to exports or by investing more in import substitution. Countries which
2. GOI, Fourth Five-Year Plan, 1969-74. 3. W.A. Lewis, Development Planning, 1966

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make adequate plans for exportation and import substitution do not need exchange control (apart from restrictions on exporting capital).4 Conclusion. Despite these weaknesses, direct controls have helped in allocating scarce resources to a considerable extent in India. The main problem has been not one of their success but of their extension and rigid application to almost every sphere of economic activity. The Indian economy is said to suffer from the crisis of controls. No doubt, controls are essential in a planned economy but in India they have been carried so far as to hinder planned progress. The success of the policy of physical controls for economic development depends upon a judicious combination of the various control measures alongwith monetary and fiscal measures. As soon as they fulfil the task of allocating scarce resources and removing scarcities physical controls should be relaxed.

4. Ibid.