The operational relevance of the Planning Commission has declined over several decades. Certainly, in my 15 years in the finance ministry up to 2001, we did not pay much attention to the Planning Commission, except for the squabble over the scale of “gross budget support to the plan” in each year’s Budget. Nevertheless, it is the only organisation within the government charged with crafting a medium- and long-term vision of India’s economic and social development and securing some degree of semi-formal co-ordination, or at least acceptance, of that view. If the Planning Commission didn’t exist, we would have to invent it, though probably not in its present form.
Last week the Planning Commission put its draft Approach to the 12th Plan (henceforth A12P) on its website for comment. So here goes. To begin with compliments, it’s a fairly well-written document (especially the Overview chapter), which recognises most of the major challenges that India has to grapple with to sustain high growth over the next five years: uncertain global economic conditions, high energy prices, “limited energy supplies, increase in water scarcity, shortages in infrastructure, problems of land acquisition for industrial development and infrastructure, … the complex problem of managing the urban transition … greater efforts in agriculture, health and education”, governance weaknesses in public service delivery and so on. The A12P is forthright in proposing serious policy efforts and reforms in most of these areas.
Nevertheless, there are some clear weaknesses. Here I will focus on just four of them: the context and realism of the overall nine per cent economic growth target, the downplaying of the enormous employment challenge ahead, an inadequate appreciation of the policy impediments to manufacturing and a disappointingly old-fashioned approach towards the social sectors.
Broadly, A12P’s approach to setting the nine per cent growth target is to say that the country has achieved 8.2 per cent growth in the 11th Plan (assuming, optimistically, eight per cent in 2011-12) and, therefore, nine per cent seems a reasonable target if we make serious efforts to deal with the various identified challenges. This approach hides more than it reveals. The truth is that the Indian economy already grew at nine (8.9 to be precise) per cent for the five consecutive years, 2003-04 to 2007-08. Since then (and the global crisis) average growth has dropped below eight per cent. What were the ingredients of the 2003-08 growth acceleration and can they be recreated? I suggest they included: a buoyant world economy expanding at four per cent (at market exchange rates), with advanced economies growing at nearly three per cent; moderately benign energy and food prices; the cumulative impact of fairly strong economic reforms undertaken (in spurts) between 1991 and 2003; a surge in gross savings and investment by around 10 percentage points of GDP between 2002-03 and 2007-08, led by a boom in corporate investment, profits and savings and a major improvement in government savings; a serious reduction in the combined fiscal deficit (from over eight per cent of GDP to four per cent), which ushered in low nominal and real interest rates; and a reasonably competitive exchange rate policy.
Recreating these growth-supporting ingredients looks difficult. The advanced economies of America, Europe and Japan (accounting for over half of world GDP) are teetering on the edge of a “second dip” recession. Even if they don’t tip over (and that unfortunate outcome appears increasingly likely), most respected analysts expect a prolonged period of slow and halting expansion. Energy and food prices are much higher now and not expected to decline appreciably. In India, the last seven years have seen very little reform to spur competition and productivity. Instead, impediments to land acquisition, environmental clearances and mining access have increased, as have corruption and crony capitalism. Aggregate savings and investment are still fairly high but they have dropped significantly from their 2007-08 peak. The combined fiscal deficit is still around seven to eight per cent of GDP, helping to buttress high interest rates. Exchange rate policy has become conspicuously inactive. Adding these unfavourable “initial conditions” to the challenges outlined by the A12P makes the nine per cent growth target look a lot tougher and perhaps unrealistic.
In fairness, the overview chapter does devote a page to employment/livelihood issues. It recognises that despite the very low increase in total employment (only 18 million in five years on the current daily status basis) between the NSSO large sample surveys of 2004-05 and 2009-10, the unemployment rate dropped a bit because of an unusually low increase in labour force due to a substantial rise in working-age youth enrolled in education. It also appreciates that labour force growth will revert to much larger increases in the 12th Plan and beyond, posing huge challenges for job creation. However, this early attention does not resonate in the chapters on the “Macroeconomic Framework” and “Education and Skill Development”. Surprisingly, there is no separate chapter on this crucially important subject, which could have profound effects on the nation’s society and polity.
The chapter on “Manufacturing” mentions the enormous importance of this sector for generating job opportunities: “Unless manufacturing becomes an engine of growth providing 100 million additional decent jobs (in the next 15 years), it will be difficult for India’s growth to be inclusive”. If by “decent” jobs the reference is to those in the organised sector, the chapter sheds little light on how the present total of organised manufacturing jobs of a paltry 6 million (out of a labour force of about 500 million) is to be increased 17-fold in the next 15 years! There is only a brief and muted discussion of the critical constraint of our current job-destroying labour laws. The chapter advances “a new policy paradigm” for manufacturing growth, which seems to boil down to an unconvincing plea for “improving processes for consultation and coordination”. A sort of “industrial policy lite”? Regrettably, there is no discussion on important issues such as an appropriate exchange rate policy and fiscal/monetary policies which nurture low interest rates, without which rapid industrial growth will remain a chimera.
Finally, the chapters on the social sectors seem to be rather along traditional lines. They do not outline compelling remedies to the well-known failings of pervasive inefficiency, poor quality, rampant “leakages”, lack of accountability and voice (to and of the beneficiaries). In particular, I missed a serious discussion of possible synergies between the roll out of the unique identification programme (Aadhar) and reform of social programmes.
I trust these comments on the approach will not arouse grave reproach from friends in the Planning Commission.
The author is honorary professor at Indian Council for Research on International Economic Relations and former chief economic adviser to the Government of India