FM says ‘no’ to Plan approach paper

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New Delhi, Aug 27: Finance minister P Chidambaram and Planning Commission deputy chairman Montek Singh Ahluwalia seem to differ strongly on what needs to be done to catapult the economy to an 8-9% growth orbit over the next five years.

On August 14, Chidambaram wrote to Ahluwalia (a copy of the letter is with FE, see Page 9 for full contents of the letter along with the Reserve Bank of India’s objections to the Approach Paper’s argument on fiscal responsibility and budget management or FRBM), questioning fundamental assumptions of the approach to the 11th Five-Year Plan (2007-12).

First, the finance ministry does not accept the Planning Commission’s view that the burgeoning current account deficit (CAD) will hinder economic growth. Chidambaram argues that CAD is not a problem, it’s the government’s inability to provide a supportive investment climate.

According to the Plan panel, the CAD as a percentage of the GDP is likely to grow from 2% to 2.8% as the GDP itself grows 9% from 7% over the five-year period. To contain the risks posed by a higher CAD to balance of payments, it seems to have settled for a GDP growth rate of 8.5%. But the finance ministry thinks insufficient private investment due to a lack of a reforms push, is the main obstacle to growth.

In his letter, Chidambaram does not mince words. He questions the logic that poor demand will inhibit farm growth. “It is more supply-side bottlenecks, such as in the case of wheat, pulses, sugar and edible oils, which is dragging down agriculture growth,” he points out to Ahluwalia.

Reacting to the Plan panel taking a dig at North Block by highlighting the persistent problem of lack of credit at reasonable rates to agriculture and the “failure of the organised credit system” - an area directly part of the finance ministry, Chidambaram writes: “It may be useful for the commission to come out with some suggestions about how to strike a balance between adequate credit and ‘cheap’ credit”. In other words, please don’t preach.

The finance minister does not hesitate to resort to sarcasm to drive home his point. On the perennial debate of essential public services delivery to poor, the Plan panel pitched hard for a substantial hike in government expenditure on services like health and education. It simultaneously sought to fix accountability where, though service providers existed, the quality of delivery was poor.