In fact, the combined proportion of the agricultural land tax and the agricultural income tax in central and state government revenues rapidly declined from 7% in the 1960s, reaching about 2% in the 1970s, and further dropped to below 1% in the 1980s.
Due to the bitter experience under colonialism, India also rejected direct investment from abroad. Industrialization strategy under such circumstances brought severe budget constraints on the country's development strategies. Those constraints consist of external restrictions on foreign-reserves and internal restrictions on budget. As a result, serious problems occurred due to the former during the period following the independence, and serious problems have occurred due to the latter up till now. Deeply involved in those problems is the agricultural policy the Government employed to feed the expanding population.
1-2 Scarce Development Funds
Increased import of capital goods to implement import-substitution industrialization forces the national economy to the limits in balancing international payments, as we experienced in Japan in the 1960s. India applied a policy that prefers heavy industry, in particular to substitute for imports, not to foster the export industries. Consequently, in India with a few established export industries, the increase in imports of capital goods induced by the import-substitution industrialization further pushed up the trade deficit, and depleted foreign currencies in no time. This can be observed from the fact, for example, that the ratio of trade deficit to GNP (Figure 1-1) was at a peak in 1957, and at the same time, the ratio of foreign exchange reserves to imports (Figure 1-2), which used to be above one, sharply dropped. Thereafter the trade deficit-GNP ratio remained high, and led to the economic crisis of the mid-60s, to be mentioned later. Internally, on the other hand, the budget deficit deteriorated in-hand with progress of the 5-year Plan. Government expenditure, that is not fed by ordinary annual revenue, is paid for by foreign and domestic capital borrowings including loans and donations.
