COMMENT / Stalled reform, plus capped planning equals policy muddle

R K Roy

The finance ministry has locked horns with the Planning Commission: Yojana Bhavan wants budget support of Rs 518,000 crore at 1996-97 prices for the Tenth Plan (2002-07) while North Block insists on capping Plan support at Rs 519,000 crore at current prices (or less than Rs 450,000 crore at base-year prices).

The finance ministry has reportedly argued that its reckoning is based on the historical average revenue growth of 10 per cent a year. This appeal to the past regularises the fact that the tax-GDP ratio has slipped under reform. So the finance ministry wants to continue the squeeze on public investment in pursuit of a sharp reduction in the fiscal deficit in a short time frame.

Public investment minus, means private investment plus: that is a dogma of reform. In the initial years of reform, private investment did rise smartly as public investment was rolled back. No longer; especially corporate investment has lost drive. Low tax rates, declining lending interest, plenitude of credit supply, easy availability of forex for import—nothing enthuses corporates.

Aggregate investment is weak, and this, in turn, has dampened private investment initiative. Yojana Bhavan’s corrective strategy is to raise public investment in the Tenth Plan. That would generate demand for cement, steel, construction and transport and thus catalyse private investment. The consequent rise in GDP growth would boost tax, including excise, revenues.

It may appear that the planners are taking the slack in private investment as irreversible to push public investment to the fore.But to wait for private investment till reform hurdles are crossed will grievously drag down growth in the interregnum. In any case, public investment as proposed by Yojana Bhavan does not pre-empt private investment but supplements it. Actually, in many sectors public investment will make headway only under reform.

The opposition to enhanced public investment smacks of bad faith. The Budget for 2001-02 earmarks Rs 5,000 crore out of receipts from PSU (public sector undertakings) disinvestment to additional Plan spending. Such allocation from disinvestment proceeds will add up to a pretty packet in the Tenth Plan. This is sought to be siphoned out of public investment to fill the hole in the revenue budget.

The ambitious Tenth Plan seems slated to start on the wrong foot. With the fisc squeezing out public investment, aggregate investment will remain weak. This is hardly propitious for a Plan targeting an annual GDP growth of 8 per cent.The Ninth Plan average has been barely 6 per cent.

The targeted growth will require investment (savings) of 28 per cent of GDP (the prevailing domestic savings rate is less than 24 per cent), assuming an incremental capital output ration (ICOR) of 3.5: 1. (The ICOR will be higher than assumed if investment in power, roads and transport zooms as required). The point will not be missed that domestic savings fall short of required investment.

This glaring shortfall will need to be made good by foreign savings, comprising capital and borrowings raised by Indian corporates abroad as also foreign direct investment. Unless aggregate domestic investment zooms, inflows will be tepid; and foreign direct investment (FDI), in search of a win-win growth environment, will remain on the sidelines. Targets, whether of fiscal consolidation or economic growth, require a vision.