A grandiose plan

The draft of the Approach Paper to the 10th Five Year Plan strikes an optimistic note, but are the targets and projections realistic?

THE script is right, the tabulations and calculations are correct: what is sorely needed now to convert the optimistic targets into reality is a small dose of magic. This indeed could be the postscript to the Approach Paper to the 10th Five Year Plan which has unfurled a grandiose plan for accelerating the annual growth rate of the economy to 8 per cent and more during the Plan period, 2002-07.

The draft paper to the ambitious Plan was approved with minimum changes by the Planning Commission which met under the chairmanship of Prime Minister Atal Behari Vajpayee on on June 27. After approval by the Union Cabinet, the Approach Paper would be placed before the National Development Council (NDC) for final clearance. The NDC meeting is likely to be held in August.

While the Planning Commission is known to set optimistic targets, what made the situation particularly sticky was that the Central Statistical Organisation (CSO) - which had made certain extremely optimistic early projections - came up with a dismal GDP (Gross Domestic Product) growth rate of 5.2 per cent for 2000-01. The advance estimates put out in February had projected the growth rate to be 6 per cent.

According to the CSO, the sectors which have brought down the revised rate as compared to the advance estimates are agriculture, forestry and fishing which grew at the rate of only 0.2 per cent against the earlier estimate of 0.9 per cent; mining and quarrying which actually grew at 3.7 per cent and not 4.5 per cent as estimated earlier, and electricity, gas and water supply at 4.7 per cent against 5.6 per cent expected earlier. These figures did not come as a surprise to observers. In the face of plunging consumer demand, a global economic slowdown and investments showing no signs of picking up, the slowdown was not unexpected. The situation holds little scope for improvement. Dr. Pradeep Srivastava, Chief Economist, National Council of Applied Economic Research (NCAER), said: "I do not see too much of an improvement this year or at least for the next 12-month period."

Srivastava further explains how the 8-9 per cent target is not a realistic one. Dividing the 9 per cent growth to sectoral levels, he explains that agriculture would have to grow at the rate of slightly less than 5 per cent and industry at 11 per cent. Since these two sectors each roughly account for a quarter of the GDP, these numbers would average an 8 per cent growth rate for half of the GDP. If the remaining half, being the service sector, grows at 10 per cent, the country would have an overall growth rate of 9 per cent.

The weakest link in such a case would be agriculture, which grew only at 3.1 per cent through the 1990s, notwithstanding a series of good monsoons. For 9 per cent growth, agricultural growth would need to be stepped up by 40-50 per cent. The gap between expectation and performance would only be a little less in the case of industry and services: industrial growth, for example, was only 7-8 per cent during the 1990s.

Second, to have the national output grow by 9 per cent, a growth of factors of production, specially capital, would be needed. Then how much would savings need to grow? A rough and ready method to answer this question uses the (average) capital-output ratio with a value in the range of 4-4.3. Given this capital-output ratio, the required national saving for 9 per cent growth comes to 36-39 per cent of GDP. This would necessitate a major step-up in domestic savings rate.

THE picture holds little optimism here. In 1995-96, the maximum national savings rate attained was less than 26 per cent. Since then it has only declined. Amongst the three main constituents of domestic savings, savings by households have stagnated around 19 per cent of GDP for a while. Savings by the corporate sector have shown some growth but not enough to offset the decline in public savings during the same period. Public savings consist of savings by public sector enterprises and the different levels of the government - Central, State and local. Government deficits have been increasing during the 1990s at all levels, and it would be foolhardy to expect a reversal anytime soon.

Raising the domestic savings rate by a whopping 50 per cent alone will not do. Even if the required savings materialises by some miracle, there would be left a final step to convert these savings into investment. This would require investment demand almost to double. Indeed, even if by another set of miracles, public investment were to triple over the next few years, private sector investment would still have to double in order to generate enough demand to soak up the enhanced savings. "Clearly, there is a high dose of fantasy underlying any claims of our GDP growing at 8-9 per cent," Srivastava said.

Indeed, "fantasy" and "hope" are the bywords in the Finance Ministry's plans. This is obvious from the calculations presented by the Deputy Chairman of the Planning Commission, K.C. Pant, justifying the 8 per cent growth rate.

According to Pant, one of the principal causes for the low growth last year was the poor performance of 0.2 per cent growth in the agricultural sector. He said: "If this sector grows even at the long term average of 2.8 per cent to 3 per cent in the coming year, it will add 0.7 percentage points to the GDP growth performance. Since the progress of the monsoon and its regional dispersion have been good, there is every prospect of a significantly higher growth in agriculture, which would directly boost GDP growth even further." On an optimistic note, Pant continued that agriculture would cause a rebound in the industry and services sectors. He hoped that at the same time, the global economy would also do a turnaround. This could lead exports to go up and ease pressure on the industrial sector by generating demand. Additionally, public investment would then pick up which, in turn, could boost private investment activity as well and all this could contribute to higher GDP growth in the current year.

SUCH optimistic targets apart, the question remains about the need to target an ambitious growth rate. Why does the government keep on insisting that a high growth rate would bring down poverty levels by leading to employment growth? In doing so, why does it overlook the fact that the rapid economic growth rate (of the earlier reform years) has not translated itself into rapid employment growth? Such questions remain unanswered.

A comparison of the NSS Employment-Unemployment surveys for 1993-94 and 1999-2000 shows that there has been a significant decline in the crude worker population ratios resulting in a slower growth of the workforce relative to the growth in population and an absolute reduction in the number of women workers in rural India which is offset by a rise in the number of urban women workers. The drafts of the Approach Paper as also the report of the task force set up to look into Employment Opportunities sidestep this important question. Even Economic Survey 2000-2001 bypassed a discussion on trends in employment and economic growth by simply stating: "Higher economic growth in the recent past, if it has been more capital-intensive, may have resulted in lower employment intensity. However, there is reason to believe this may be more than compensated by new and expanded opportunities in the service sector, much of which would also be in the unreported unorganised sector." Not surprisingly, the report of the task force also wraps up the discussion with a one-line statement: "The low employment elasticity in the 1990s reflects the fact that employment growth decelerated in this period while GDP growth accelerated."

The government thus seems to be giving out a message that future workforce opportunities would be created in the services sector. In doing this, it clearly ignores the fate of domestic industry. The task force has now come to the conclusion that 70 per cent of future workforce opportunities would be created in the services sector. Montek Singh Ahluwalia, member of the Planning Commission, submitting the task force report to K.C. Pant, said: "Only if the GDP growth rate would touch 8-9 per cent mark would there be any significant improvement in the availability of employment opportunities... If it continues at an average of 6.5 per cent, it will not lead to any significant improvement in the country's employment situation."

Ignoring such basic questions, the draft of the Approach Paper continues to stress on policy initiatives that can reverse the declining trend of growth. While the document admits the existence of abject poverty among the masses, lack of basic amenities for a large section of the population, failure to contain illiteracy and the unavailability of adequate nutrition and health services, it leaves the implementation of the policies that can reverse the decline to non-existent political will. It hopes to push forward a number of politically difficult decisions including higher user charges, downsizing government departments and increasing railway fares. It promises to test the political will of the State governments as well as the Central government in increasing public sector savings by around 2.9 per cent of GDP. The Approach Paper accepts the fact that the economy faces the gigantic task of increasing public sector savings from 2.4 per cent to 4.6 per cent and especially government savings from a negative level to 1.7 per cent of GDP in the target growth scenario.

Dr. Pronab Sen, Adviser, Planning Commission, said: "In the last three years public sector savings have gone down. So in terms of availability of resources the action has to be in the public sector." Keeping in mind the fact that the economy is likely to move more on market-based private sector activities, an increase in the savings rate of private corporate sectors from 4.9 per cent to 5.8 per cent has been regarded as achievable. Household sector savings have been kept at the same percentage level of 19 per cent.

Sen explains that the government would have to cut losses on non-investment expenditure. The Draft Approach Paper cuts government expenditure by focussing on two areas. The first is subsidies, both direct and implicit, which are estimated to form a substantial proportion of GDP. A very large chunk of this goes towards interest payments and subsidies on food, fertilizers, kerosene and diesel. The second is the pension liability of government, which is the fastest growing component of the government expenditure. Besides, the paper proposes to reduce government employment by 2 per cent every year with no recruitment during the 10th Plan period, accelerated disinvestment, widespread imposition of user charges for all non-merit goods, levy of tax at every stage of value addition from production to the sale of goods and services, and appropriate pricing of public services.

Not surprisingly, some of these provisions have been termed anti-poor by the social sector. One such group, the Centre for Alternative Dalit Media, submitted a memorandum to the Prime Minister urging him to direct the Planning Commission to re-work the Approach Paper. The memorandum stated that "only a cruel system can impose user charges and can ask for pricing of public services." It further said: "By suggesting no recruitment and leaving vacant secretarial and clerical posts, the Planning Commission seems to have forgotten its role of generating more and more jobs through better planning."

The reforms in the agricultural sector have also been criticised. Schemes such as the Integrated Rural Development Programme (IRDP) and the generation of funds by the gram panchayat to the extent of 15-25 per cent to get the balance funds from the government have been questioned. "In this reference, if schemes like the IRDP are primarily run by commercial banks working on commercial lines, we are afraid they would need guarantees and securities which these sections do not possess. This kind of arrangement would not help in alleviating poverty," the memorandum said.

Another criticism of the move to "downsize" government originates in the chronic under-provision of public services such as health, education, social security, transportation and the administration of justice. Critics have argued that a refocussing of priorities is what is required.

The government has, however, ignored such pleas and is going ahead with its minimum agenda which includes accelerating tax reforms to move towards full-fledged VAT (Value Added Tax) in a time-bound manner, privatisation of Public Sector Undertakings of both the Centre and the States in a time-bound manner, significant reduction in subsidies, the support to States contingent on specified reforms including governance reforms. Whether it would be able to bring together the unbeatable combination of political will and magic to realise its goals remains to be seen.