Shrikrishna A.

Pandit

The author outlines the principal

objectives of the nationalization
of major commercial banks
in India, discusses its progress
Nationalization
of Banks
to date and the various
supporting steps, and visualizes
the economic and political
implications of this important
socialistic measure. in India

32

©International Monetary Fund. Not for Redistribution

 o n July 19, 1969, the Government of
India nationalized 14 large commercial
banks. This was not the first nationalization
measure aimed at the banking system or
the financial institutions of India, for in
1949 the partly private and partly govern-
ment-owned. Reserve Bank was fully na-
tionalized, followed by the nationalization
in July 1955 of the Imperial Bank, the
largest commercial bank in India, and of
245 life insurance companies in September
1956. Certain other sectors of the economy
had also been nationalized, such as railway
transport, air transport, and intercity bus
transport in many States.
The nationalization of the 14 banks in
1969 was, however, far more important
than any previous acts of nationalization
in that it has had considerable sociopolitical
consequences and signaled a definite turn
in the Government's economic policies.
This is primarily because, unlike the Re-
serve Bank and the former Imperial Bank
that were partly state-owned prior to their
full nationalization, the newly nationalized
banks were formerly fully privately owned,
and there was a long-standing public de-
mand for their nationalization; the ruling
political party in India had for many years
been promising action in this field. Con-
sequently, when these banks were finally
nationalized, the move was widely ac-
claimed as offering convincing proof to the
people of the Government's commitment
to its pledge of following a socialistic pro-
gram of economic development. Keeping
to this pledge, in May 1971 the Govern-
ment nationalized the general insurance
business and a part of the import trade,
and since then the copper industry and
one of the two largest iron and steel
enterprises in the country. Further, the
Finance Minister of India has announced
that before long several key industries in
India will also be added to the public
sector. In particular, in July 1972, the
Minister for Foreign Trade said that within
two years the entire jute trade and about
95 per cent of the import trade would be
nationalized.
Legal Challenge
Unlike the previous nationalization
measures, the nationalization of the major
commercial banks in 1969 did not have a
smooth passage in its early stages. Thus,
within six months after the nationalization,
the Supreme Court of India declared the
Nationalization Act unconstitutional on
two grounds. First, the Court held that the
prohibition imposed by the act on the
former owners of the nationalized banks
from engaging in banking business but not
on the banking companies that were not
©International Monetary Fund. Not for Redistribution
nationalized was discriminatory and, there-
fore, unconstitutional. The Court also de-
clared invalid the principle and method
prescribed for compensation payment to
the nationalized banks, namely, a sum
equal to the total assets of each banking
company minus its total liabilities. Follow-
ing this decision, however, the Government
enacted a new Nationalization Law without
the previous clauses which the Court had
found objectionable. The new law per-
mitted the former banking companies con-
cerned to engage in new banking business
again, and instead of laying down any new
compensation formula prescribed specific
compensation payments to each of the
nationalized banks.
Banks Covered by the Act
The 14 banks that were nationalized
were selected on the basis that each of
them had a total deposit business in ex-
cess of Rs 500 million (i.e., about US$67
million, at the then prevailing exchange
rate of US$1 = Rs 7.5) as of the last
Friday of June 1969; the largest of these
banks had a deposit business of Rs 4.33
billion. Their aggregate volume of deposits
on the eve of nationalization totaled
Rs 26.26 billion, which was equivalent to
56 per cent of the total deposit business of
all the commercial banks in India. Together
with the previously nationalized Imperial
Bank, renamed the State Bank of India,
which with its seven subsidiaries had a
network of 2,509 bank offices and total
deposits of Rs 12.48 billion, these 14
banks accounted for about 85 per cent
of the commercial bank deposit business
in the country. The banks that still re-
mained in the private sector numbered 76
with total deposits of Rs 8.09 billion, in-
cluding 15 foreign banks with a business
of Rs 4.82 billion and 61 Indian banks
with a business of Rs 3.27 billion. The
foreign banks were not nationalized on
the grounds that they were engaged in the
specialized business of facilitating foreign
trade and tourism, and constituted a part
of international banking facilities, and that
their nationalization could have created
an unfavorable climate for the continued
inflow of the much needed foreign capital
(loans and investments) into India.
Compensation to Nationalized
Banks
The bank nationalization law required
that the compensation to each bank be
paid within two months of the date the
banking company asked for it. The com-
panies were given a choice of receiving the
Compensation either fully in cash, or partly
in cash and partly in 10-year central gov-
ernment securities at 4J/2 per cent interest
per annum and/or 30-year securities at
5Y2 per cent. Two banks chose to receive
the payment in cash, and the others partly
in cash and partly in securities. The entire
compensation has already been paid, and
it totaled about Rs 0.87 billion, equivalent
to slightly more than three times their
aggregate paid-up capital of Rs 0.28 bil-
lion. The ratios of compensation payments
to the paid-up capital of the 14 banks
varied from 154 per cent to 510 per cent.
The compensation was paid to the banks
and not directly to the individual share-
holders of each bank.
OBJECTIVES AND PROGRESS
The avowed objectives of the bank
nationalization legislation were to "control
the heights of the economy and to meet
progressively, and serve better, the needs
of development of the economy in con-
formity with national policy and objec-
tives." These objectives did not in them-
selves represent any new radicalism in the
Government's thinking in this field, for,
toward the end of 1967, the Government
had already introduced a more or less
similarly motivated scheme of social con-
trol over the banks which was later given
a legal framework under the Banking
Laws Amendment Act, 1968. That scheme
envisaged a purposive distribution of avail-
able credit and more effective mobilization
of savings. For this purpose, a high-level
body, the National Credit Council, was
set up in February 1968 to assess the
demand for bank credit and determine pri-
orities in its allocations, and to coordinate
the lending and investment policies of the
commercial banks with those of other
financial institutions. Further, under the
amended Bank Law, the Boards of Direc-
tors of various banks were reconstituted
so as to improve the efficiency of bank
operations and reduce the power exercised
by the directors representing large trading
and industrial interests in formulating bank
policies.
The social control scheme was, how-
ever, judged by the authorities to be inade-
quate to achieve the desired results with
sufficient promptitude. The Government
came to the conclusion that, in the words
of Indian Prime Minister, Indira Gandhi,
"it is widely recognized that the operations
of the banking system should be informed
by a larger social purpose and be subject
to close public regulation . . . (and) that
the desired regulation and rate of progress
(of banking business) consistent with the
urgency iof our problems could be secured
only through nationalization." The notion
of a "larger social purpose" injected in the
33
motivation for bank nationalization was
aimed principally at ensuring that the
banks would play an increasingly impor-
tant role in promoting productive activities
on the part of vast masses of the people
that would be conducive to a substantial
growth of employment opportunities. This
is very important in view of the gravity of
India's unemployment and underemploy-
ment situation. The "social purpose" also
involved preventing excessive channeling
of bank funds to large borrowers and the
possible use of credit for speculative and
other unproductive purposes.
The Government intends to achieve the
broad aims of bank nationalization through
a two-pronged approach: one, expanding
the banking network in all parts of the
country with special emphasis on setting
up adequate banking facilities in the hith-
erto unbanked or underbanked areas; and
two, making bank credit available to all
segments of the economy and regions of
the country. It is, of course, too early as
yet to evaluate the success achieved in both
these respects. However, it is clear that
considerable progress has already been
made. Thus, in the three-year period ended
June 1972, the newly nationalized banks
set up 3056 new bank offices (Table A).
In addition, the State Bank group and the
nonnationalized banks have also opened
during the same period a large number of
offices, primarily at the urging of the
Government, in different parts of the coun-
try. The total number of new bank offices
opened by all banks during the three years
ended June 1972 was 5,358, compared
with only about 4,000 offices established
in the 22 years prior to bank nationaliza-
tion. Of the total number of new bank
offices, as many as 3,416 have been located
in previously unbanked areas, so that by
now only a few areas with populations in
excess of 10,000 remain without any bank-
ing facilities. Further, as a result of the
deliberate policy of spreading the banking
facilities to the rural areas, the ratio of
bank offices in such areas to the total num-
ber of offices in the whole country rose
from 22 per cent in June 1969 to 39 per
cent in June 1972. The expansion in the
banking network resulted in a sharp reduc-
tion, during the three-year period under re-
view, in the ratio of population served by
the banks from one bank office per 65,000
persons to one office per 40,000 persons.
Further, in addition to the new regular
bank offices opened, many banks, mainly
the newly nationalized banks, have orga-
nized a large number of mobile banking
units to serve mainly the rural areas, and
set up banking facilities in various fac-
tories, offices, schools, and colleges to help
spread the banking habit.
34
©International Monetary Fund. Not for Redistribution
Concerning the objective of promoting
a wider dispersal of credit, the banks,
both in the public sector and the private
sector, were especially instructed to cater
to the needs of the so-called priority sec-
tors that had been generally neglected:
agriculture, small industries, retail trade
and small businessmen, small local road
transport operators, professional and self-
employed persons, and persons desirous
of receiving higher education. The appre-
ciable success achieved in realizing this
goal is evidenced by the growth of about
138 per cent in public sector bank credit
to these priority sectors during the 3-year
period ended June 1972, compared with
an expansion of 54 per cent in total bank
credit (Table B). As a result, the share of
credit to the priority sectors in total bank
credit rose from 15 per cent to 23 per cent
during this period.
SUPPORTING MEASURES
The success of the banking system in
India during the past three years in ex-
panding the branch network and in effect-
ing a wider dispersion of credit activities
could not have been achieved by mere
nationalization of the major banks in the
absence of several concerted and purpose-
ful supporting steps taken by the Govern-
ment and the Reserve Bank. In a sense the
objectives of bank nationalization could be
said to have made the introduction of
these steps (described below) imperative.
Lead Bank Scheme
One of the most important supporting
measures was the introduction of a Lead
Bank Scheme (LBS) by the Reserve Bank
in December 1969. This was a sequel to
the recommendation by a study group
appointed by the National Credit Council
to the effect that the development of credit
Shrikrishna A. Panditit.
who is a Ph.D. of Bombay University, joined the
staff of the Fund in 1949 and is now in the
Asian Department.
and banking in the country could best be
achieved by taking into account the differ-
ing local conditions in various parts of the
country. That study group, under the
chairmanship of the late Professor D. R.
Gadgil, a former Deputy Chairman of
India's Planning Commission and an emi-
nent economist with keen insight into
India's rural economic problems, urged an
"area approach" in this context, with the
further suggestion that the administrative
unit "district" be taken as the nucleus of
this approach, especially since most sta-
tistical data in India were collected on
a district basis. After a further examina-
tion of these proposals and similar recom-
mendations of a special committee of
bankers, the Reserve Bank formulated the
LBS. Under this scheme, all the adminis-
trative districts in India (335), excluding
only such urban centers as Bombay, Delhi,
Calcutta, Madras, Chandigarh, and Goa,
have been allotted for banking develop-
ment to the State Bank group (89 dis-
tricts), 14 other nationalized banks (250
districts), and three private banks (9 dis-
tricts). The banking development in cer-
tain districts has been entrusted to two
Lead Banks working together. In allotting
these districts, the size and existing re-
gional orientation of each bank was taken
into account. Also, care was taken to
ensure that banking development in every
state of India would be entrusted to more
than one Lead Bank, and that every Lead
Bank would operate in more than one
state. The Lead Bank does not have a
monopoly over banking business in the
districts allotted to it. However, it acts as
the leader of all the other banks in those
districts, works closely with them and the
other financial institutions in the area and
area government authorities, and jointly
sponsors the banking development of those
districts so as to help in their overall eco-
nomic development. In connection with
 the latter objective, the Lead Bank, in
cooperation with other institutions and Table a.
local authorities, is required to integrate Growth of Bank Brandies Since July 1969
the credit business in each district with
oher economic activities in that district, Number of Bank Offices Increases During
such as production and marketing. One as of July 1969-
of the immediate tasks given to all the June 1969 June 1972 June 1972
Lead Banks was to make initial surveys
of the credit needs and potential of the Scheduled banks 8,045 13.515 5.470
14 newly nationalized banks 4,1. 7.189 3.505
districts allotted to them. At the same State Bank group 2,462 9.358 1.496
time, however, the Lead Banks were also Other banks 1,4. 2.368 9188
to be active from the very beginning in Nonscheduled banks 217 105 918-112
Total 8,262 13.620 5.3538
their other assignments, especially in estab-
lishing new bank offices. The success of Of which:
the LBS can be seen from the completion in rural centers 1,8. 5.267 3.435
semiurban centers 3,322 4.351 1.02999
of the initial credit surveys in some 260 urban areas 1,4. 1.916. 469.4
districts by the end of June 1972 and by metropolitan/port towns 1,6. 2.0866 4255
the large number of new bank offices
established and the wider credit distribu- table B.
tion achieved, as mentioned above. ' Growft of Public ^tor tank Credit Since July 1969

Credit Guarantee for Small Loans Outstanding Amount Percentage Increase

While the authorities instructed the
banks to step up credit extension to bor-
rowers in the hitherto neglected sectors,
they realized that such activities involved
considerable credit risks which the banks
could not readily undertake without seri-
ous financial implications. The national-
ized banks as well as the banks left in the
private sector had therefore to be provided
adequate cover against such credit risks.
For bank credit to small-scale industries,
a guarantee scheme providing some cover
had already been initiated as far back as
July 1960, and the Reserve Bank, desig-
nated as the "Guarantee Organization,"
had been operating this scheme as the
agent of the Government of India. Fol-
lowing the nationalization of banks; this
scheme was amended and enlarged effec-
tive February 1, 1970.
While the need for guaranteeing the
credits extended to small-scale industries
had thus been met, it was considered nec-
essary to initiate a separate guarantee
scheme for credits of even smaller individ-
ual denominations to be given to borrow-
ers in the hitherto neglected sectors. For
this purpose, the Government set up a
new public limited company, the Credit
Guarantee Corporation of India, Ltd., with
an authorized capital of Rs 100 million,
of which Rs 20 million has already been
paid up (60 per cent by the Reserve Bank,
and the rest by the scheduled banks in
both the public and private sectors). This
scheme, which came into operation on
April 1, 1971, covers small loans and
other credit facilities extended by the
scheduled commercial banks to transport
operators, retail traders, dealers in fer-
tilizers, professional and self-employed
persons, other business enterprises, and
farmers.
(billions of rupees) as of
June 1969 June 1972
Credit to priority sectors
Agriculture
Small-scale industries
Other priority sectors
Credit to otter sectors
Total bank credit
Source: Reserve Bank of India, Annual Report and Trend and Progress of Banking in
»«««, 1971 MNfcflttHk.
New Guidelines for the Banks
In order to facilitate the implementa-
tion by the commercial banks, particularly
the public sector banks, of the principal
objectives of the nationalization of banks,
the Government and the Reserve Bank
have, after a careful study, prescribed for
the banks several useful guidelines for
conducting their activities. In connection
with one of these objectives, namely, the
expansion and wide diffusion of the bank-
ing network, the guidelines have consisted
primarily of the setting up of annual tar-
gets for the establishment of new branch
bank offices and their distribution by
regions and according to an economic
geographical scatter pattern (rural, semi-
urban, urban, etc., and banked, centers and
underbanked or unbanked centers). With
regard to the banks' credit activities, the
guidelines have been more important and
more numerous, and also in many cases
quite specific. Most of these relate to the
more active role that the banks are now
required to play in supplying credit to the
hitherto neglected geographical areas and
economic sectors.
The two most important guidelines in
this connection are that the banks have
been asked, first, to estimate the credit
During
July 1969- June 1972
4.3 10.47 138
1.7 3.80 122
2.3 5.23 119
0.2 1.44 397
25.. 34.99 39
29.54 45.46 54
needs of the hitherto neglected areas and
sectors and actively to solicit credit de-
mand from them, and, second, to shift
the emphasis in bank lending from pri-
marily the creditworthiness of the bor-
rowers to the creditworthiness of the proj-
ects for which credit is sought. Previously
under the pattern evolved over several
decades, only the economically better-off
and well-organized trading and industrial
interests in urban areas, especially metro-
politan centers, in relatively more pros-
perous regions of the country had secured
the bulk of bank credit, which was also in
excess of their share in total deposit busi-
ness of the banks. The new guidelines are
aimed at bringing about an almost revolu-
tionary change in this pattern, though in
a well-regulated manner. Hence, the main
thrust of these guidelines was to ask the
banks to provide credit for all activities
with considerable employment potential
regardless of the meager collateral that the
would-be borrowers wanting to undertake
such activities could put up.
Among the more specific guidelines,
those spelled out in considerable detail
relate to the credit for agriculture. The
banks have been asked to consider that
their main objective in lending to agricul-
ture should be to encourage the farmers
35

©International Monetary Fund. Not for Redistribution

to adopt improved farming practices and
"thus to move to a higher technological
plane of activity." They have also been
instructed to make adequate amounts of
credit available to the cultivators at the
right time, to keep in close touch with the
borrowers in order to facilitate loan recov-
ery and to inculcate in them the habit of
making timely debt repayment, and to
promote savings habits among the bor-
rowers through developing a mechanism
linking credit given to the farmers with
their deposits with the banks. Finally, the
banks have been urged to move into some
of the even more remote rural areas,
although there may be few or no appropri-
ate intermediaries in those areas on which
the banks could lean.
Management
In the initial stages, the Boards of Direc-
tors of the 14 nationalized banks were
abolished and in their place the Govern-
ment appointed new Custodians of the
banks who, incidentally, in all instances
were the former Chairmen of those Boards.
These Custodians were, however, in-
structed by the Government to follow
strictly the guidelines laid down by the
Government and/or the Reserve Bank for
conducting their operations. Subsequently,
in July 1970, in addition to the Custo-
dians, the Government appointed special
Management Committees for all these
banks composed of the nominees of the
Reserve Bank, and several other directors
Papier mache worker: "credit extension to neglected small centers will have a
considerable impact on the employment problem."
36
©International Monetary Fund. Not for Redistribution
to look after various interests. These spe-
cial Committees and the Custodians are
expected to be replaced soon by new
boards under a scheme that was enacted
in December 1970. The scheme provides
for a 15-member Board of Directors, to
consist of two full-time directors to be
appointed by the Government, one of
whom will be the Managing Director, and
13 part-time members including two rep-
resentatives of bank employees, one repre-
sentative each of the Government of India
and the Reserve Bank, one director each
to represent the interests of agriculturists,
the working class, artisans, and bank
depositors, and five other members, with
specialized knowledge in the banking field.
Financial Position
The nationalization of the major banks
has not apparently had any adverse im-
pact on their financial efficiency as some
critics had feared. In fact, during 1970
and 1971, the financial position of the
banks showed some improvement despite
the heavy initial expenses involved in the
opening of numerous new bank offices
and the substantial increase in credit to
the small sectors. Aggregate net profits of
these banks in 1970 and 1971 were Rs
69 million and Rs 85 million—appreciably
higher than the 1969 figure of Rs 58 mil-
lion.
Concluding Observations
The substantial expansion in the num-
ber of bank branches throughout the
country and the sizable increase in credit
to various hitherto neglected sectors of
the economy indicate that appreciable
progress has been made in implementing
the main objectives of the nationalization
of the major banks in India, despite some
important constitutional obstacles in the
initial stages, and without impairing the
financial efficiency of the banks. These
achievements are a reflection of the de-
termination of the authorities to pursue
steadfastly the objectives of bank nation-
alization, and of the several supporting
measures that have been adopted.
The success achieved so far by the
nationalized banks and the good prospects
for further progress will have some impor-
tant economic and social implications. In
the first place, there is expected to develop
a close coordination at many different
levels between the public sector banks and
the other credit and financial institutions
in the country which is so important for
the success of overall credit planning in
India. Second, bank branch expansion
should help considerably in mobilizing
savings, compensating to some extent for
the relatively low rates of interest on sav-
ings deposits in India. It is also likely to
help expedite the monetization of the still
nonmonetized segments of the economy,
and reduce the present heavy dependence
of these sectors on the moneylenders in
the unorganized money market. Further,
the increasing flow of substantial amounts
of credits to borrowers in the hitherto neg-
lected small sectors is expected to boost
production; this, in turn, will have a con-
siderable impact on the employment prob-
lem, since it is generally recognized that
the productive activities in the small sec-
tors have a large employment potential
while their individual capital needs are rel-
atively small. As a large proportion of this
employment-creating new productive activ-
ity is likely to be located in areas other
than those of heavy urban concentration,
there will probably be some check on the
excessively rapid pace of urbanization with
all its attendant evils. Credit extension to
small borrowers should also help promote
initiative, confidence, and entrepreneurship
among a growing number of people in all
parts of the country, which is so essential
for the success of the development plans.
Finally, the very fact that, at the express
instructions of the Government, the public
sector banks will be extending the banking
facilities all over the country and advanc-
ing credit to even the small man will help
forge a closer bond between the people
and the Government, which would be an
added factor promoting political and social
stability. ED
DILEMMAS OF
THE DEVELOPING
COUNTRIES:
THE SWORD
OF DAMOCLES
(continued from page 15)
criteria in investment decisions. Without
this acceptability, investments which
might be attractive on other grounds
(e.g., the usual cost/benefit grounds)
run the risk of being pursued either
poorly or not at all. Similarly, certain
projects are hard to interrupt because
of the large investments involved and
the resulting loss of substantial sunken
capital if not completed. Governments
must, of course, be free to make some
changes in public expenditures, but too
much flexibility can be costly to the
development process.
5. International positions and pros-
pects must also be clearly understood
and be reflected in the development
strategy. Thus, side by side with the
evolution of new approaches to domestic
problems suited to changing conditions,
INCOME DISTRIBUTION less severe income inequalities and more
uniform distribution.
CRITERIA FOR The weights based on the first two meas-
THE ANALYSIS OF ures increase as one goes down the income
scale and the weights based on the third
DEVELOPMENT and fourth increase the further a country
PROJECTS departs from the uniform income distribu-
tion. Without understating the complexity
(continued from page 19)
down the income scale, because we attach
highest priority (weighting) to improving
the incomes of the poor. Other possible
measures of income inequality on which
a weighting procedure could be based are:
• The income level below which vari-
ous percentages of a country's agricul-
tural families are to be found.
• The share of a country's gross domes-
tic product going to various groups of
the population.
• The "concentration coefficient" (an
index based on the Pareto formula or
its derivative, the Lorenz curve) which
measures the extent of departure of
actual income distribution from an egali-
tarian income distribution.
• The extent of dualism in the country,
ranging from a largely agrarian econ-
omy with an almost negligible monetary
sector to one with a large modern wage
economy. Various intermediate levels
can be identified. Countries with a pre-
dominantly modern sector tend to have
©International Monetary Fund. Not for Redistribution
will be the need for evolution in inter-
national relations—including trade, for-
eign investment, international develop-
ment assistance, and so forth. For
example, more international assistance
may be given to projects which create
employment, improve the income of the
poorest groups, or which ameliorate
urban conditions.
To many these suggestions will sound
like counsels of perfection, but they are
based on actual conditions and the urgent
need for solutions. Our generation has
already achieved many things which a
generation ago would have been regarded
as unreal and romantic. Indeed, there are
signs already that countries, if only out of
sheer necessity, are moving in the direction
advocated herein. We can reduce the num-
ber and magnitude of future problems by a
willingness to be bold in bringing quali-
tative factors into our decision-making
process, combined with an eagerness to
assess past decisions objectively and take
new paths as quickly as possible when old
decisions prove to be faulty. This requires
mechanisms for constantly reviewing de-
cision. This can take place within the
of the task, I should assume that it is
possible to obtain a set of weights that can
be applicable to projects in most of the
developing countries. Furthermore, these
income-based weights can be modified to
take into account other social circum-
stances such as regional differences which
may not be reflected in income disparities.
The defect of these regional or income-
based weights is that they assume con-
stant levels of percentage income shares
throughout the life of the project. This
problem can be taken care of by further
modification of the weights.
Formulation
The next step is to multiply the set of
weights by the set of (allocated) costs and
benefits (the highest weights against the
costs and benefits allocated to the lowest
income groups). The result is a measure
of the income distributional effect or
equity costs/benefits of the project. This
is then added to the other stream of
(unweighted) costs and benefits of the
framework of national development stra-
tegies or programs, providing such strate-
gies and programs are realistically designed
and implemented.
Another clear lesson to be drawn from
experience is that the advocacy of interna-
tional development assistance must be
based on the realities of the development
process and conditions in the developing
countries. We cannot expect that develop-
ment successes will bring with them social
harmony or political stability. We cannot
expect that all or even most judgments
on development will prove with hindsight
to be the optimal ones. By recognizing
these facts we can avoid future disillu-
sionment with current activities and loss of
credibility in efforts being made. We can
promise to do most of what we set out to
do, because experience has indicated that
development decisions can be implemented
effectively. We can point to repeated suc-
cesses and promise success in the future if
such promises are made with full recogni-
tion that success does not mean the elimi-
nation of problems or the achievement of
stability, but rather the generation of new
problems requiring new solutions. HD
project. From that stage on, the socio-
economic rate of return or benefit-cost
ratio can be obtained in the usual way.
It can be deduced from my discussion of
weighting procedures for developing coun-
tries that the number of projects to which
the method suggested in this paper can be
applied will depend on the circumstances
of the country and the nature of the proj-
ect itself. The method is suitable for test-
ing the sensitivity of the project to alter-
native locations in accordance with re-
gional policies. It is also suitable for test-
ing the sensitivity of public expenditure
programs to various degrees of emphasis
in response to certain' social problems. In
the first case, for most agricultural and
irrigation projects which have clearly iden-
tifiable groups of beneficiaries the method
is easily applicable. With respect to public
expenditure programs, these are usually
allocated to various regions on the basis
of unspecified criteria. The method sug-
gested here can form a basis for deciding
the amounts of public expenditure pro-
grams to be allocated to various regions or
sectors depending on the income groups
largely represented in that region or sector.
HD
In a future article the author proposes
to illustrate the application of the method
outlined in this article to a study on the
location of a major international airport.
37