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Are the Plan targets realistic?

B B Bhattacharya and Sabyasachi Kar

If the per capita income for India is to double over the next decade, the economy has to grow at more than 8 per cent per year.

Armed with this dictum, the Tenth Five-Year Plan (starting from April 2002) hopes to fulfil this objective (or get as close to it as possible) by fixing an ambitious target of 8 per cent growth rate for the planned period.

Is it possible to achieve such a high rate of growth? The Planning Commission has itself noted in its approach plan document, that if the current macroeconomic trends continue, the domestic investment rate would be around 27.8 per cent, which, along with the current incremental capital output ratio of about 4.28, will generate a growth rate of about 6.5 per cent.

Clearly, this is much lower than the targeted rate of 8 per cent growth.

How then does the plan hope to achieve its objective? To do this, the plan has also set ambitious targets for resource mobilisation and its efficient use. Thus, the investment rate for the planned period is targeted to be 32.6 per cent, while the ICOR is targeted to be 4.08.

The high investment rate will also necessitate a high savings rate. Hence, the plan targets a domestic saving rate of 29.8 per cent, which will be augmented by a foreign savings rate of 2.8 per cent. Compared to these values, the current investment rate is less than 23 per cent and the current ICOR is about 4.28.

The upshot of all this is that to achieve the targeted rates for these variables, there has to be a quantum jump in terms of achievement in comparison to the past. The question is: are these quantum jumps realistic?

It may be pointed out at this juncture that in a market economy, most macro variables, including the investment rate and the ICOR, are determined through a complex process that involves the interaction between various sectors of the economy. They also depend on exogenous factors like rainfall, etc.

Thus, it is natural to ask whether the quantum jumps necessary to reach the targeted rates are achievable, given the interlinked structure of the Indian economy and the expected values of the exogenous factors.

An answer to this question can be provided only by a macro modeling exercise that explicitly incorporates the interlinkages of the economy.

At the Institute of Economic Growth, we have constructed such a macro model that incorporates the important interlinkages between the production, fiscal, monetary and the external sector and generates the sectoral and aggregate growth rates of the economy.

As a preliminary exercise, we try to assess the feasibility of the targeted rates in a scenario based on current trends.

This is done by simulating the model under the assumption that during the Tenth Plan period, the exogenous factors will continue to behave according to current trends.

We call this the "business as usual" scenario and assume that during this period, there will be no new structural changes apart from the ongoing reform process. Normal rainfall is assumed for all the years and there is no new oil shock destablising the system.

The Monetary Policy variables are calibrated on the basis of the latest policy and budget estimates.

In particular, the public investment rate is fixed at 7.4 per cent of gross domestic product at market prices, for the plan period. The world trade growth, which dipped to 2 per cent in 2001-2002, is assumed to slowly recover and reach 5 per cent in 2006-07.

Finally, we assume that there will be no new external borrowing schemes in the future.

Under these assumptions, the model forecasts that the average investment rate for the Tenth Plan period will be 24.5 per cent, which is financed mostly by domestic savings (23.6 per cent) and the rest by net capital inflow (0.9 per cent).

Together with the forecasted ICOR that is 4.08, this generates a growth rate of 6 per cent. Clearly, if the current macroeconomic trends continue, the investment and growth rates will be nowhere near the targeted rates.

Of course, the Planning Commission has itself noted that the current macroeconomic trends are not sufficient, and a much better performance in terms of both investment and productivity is necessary to attain an 8 per cent growth rate. As a first step, it has to increase the public investment.

Assuming an increase in public investment to GDP ratio by 2 per cent, together with the current levels of productivity, our model forecasts an investment rate of 25.6 per cent and a growth rate of 6.6 per cent. This is again well below the targeted growth rate.

The same increase in investment, together with alternatively, 5 per cent, 10 per cent and 20 per cent increases in average productivity, gives 25.6 per cent, 25.8 per cent and 25.9 per cent as the respective investment rates, and 6.9 per cent, 7.1 per cent and 7.6 per cent as the respective growth rates. It is a striking fact that even with such optimistic assumptions, the target cannot be achieved.

There are a number of conclusions to be drawn from these results. First, the "business as usual" forecasts indicate that not only are the targeted rates unattainable under current conditions, they are so by a long way. The alternative scenarios show that both investment and productivity have to be increased substantially to attain a growth rate of even 7.6 per cent.

In particular, it would need a 20 per cent increase in productivity - a very rapid increase over a short span of five years. That is extremely difficult and very few nations have achieved such results. This implies that very significant changes are necessary in order to achieve the targeted rates.

Of course, increasing public investment has to be the primary measure, although a careful inspection of the forecasts above indicates that the increase in total investment is less than proportional to the increase in public investment.

In order to increase productivity, significant institutional reforms are also necessary and this will possibly be the toughest task.

In the absence of these measures, it is prudent to expect much lower rates of growth. It may be noted here that even if the growth rate is around 6 per cent, it results in an average growth of 5.5-6 per cent for more than a quarter of a century and very few nations have achieved this.

A related point has to do with the stability of such high rates of growth. From our model, we find that higher growth rates are also associated with higher fiscal and external deficits, leading to economic instability. Thus, high rates of growth that are also stable will need some form of intervention in these sectors.

Coming back to the issue of policy and institutional reforms, the current political situation, with divergent interest groups, makes it that much tougher to attain a consensus for such reforms.

In any case, the first budget for the plan period that was presented in February this year, gives no indication of any such reforms.

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