The draft approach paper to the Twelfth Five Year Plan does well to recognise some hard realities that face India?s political economy in the 12th plan period (2012-17). The well-crafted chapter on ?Macroeconomic Framework? admits at the very outset that the global crisis of 2008-09, and its aftershocks, has created conditions which are less benign and more uncertain than the macroeconomic environment that prevailed during the Eleventh Five Year Plan.
Rather than being gung ho about achieving 9%-plus growth over the 12th plan period, the approach paper carefully examines the feasibility of accelerating GDP growth beyond what was achieved in the 11th plan period?about 8.2%. Given the uncertain global economic environment, India cannot take consistently high growth for granted, even though we did get over 8% GDP growth in 2009-10 when the developed world experienced near negative growth rates.
However, this should not create a delusion that India could continue growing at 9%-plus even as the OECD economies (the US, the EU and Japan) fall into a long-term low-growth trap, a prospect that seems real today. Still, the approach paper does give hope of getting a GDP growth of 9% if key sectoral constraints are overcome. There are domestic drivers of growth that need to be nurtured to keep India?s growth chugging even if the global environment remains unhelpful.
The Planning Commission document warns of certain conditions that could act as a constraint on higher growth. There are the growing aspirations of a young population to improve its economic condition. These aspirations, if not adequately fulfilled, could lead to ?frustration and cynicism?. A major challenge, therefore, is to ensure that the performance of the economy remains ahead of the rising aspirations of the youth. It is perhaps this class that also rallied behind Anna Hazare. The campaign against corruption is partly a proxy for India?s youth seeking a better life.
The Planning Commission has identified critical constraints arising on the supply side that might come in the way of achieving 9%-plus growth during the 12th plan period. These are (a) availability of energy, (b) growing evidence of a problem with water availability, (c) difficulties relating to land acquisition for industry and infrastructure development, and (d) the lack of a credible and fair system of exploitation of mineral resources. One may recall that even RBI had pointed to some of these constraints, especially the lack of a consistent policy for mineral exploitation, as a reason for the slowing down of foreign investment in 2010.
Well, all these problems are in the realm of political economy and involve the active participation of state governments, as land and minerals are state subjects. The minister for rural development Jairam Ramesh made a telling comment on TV after releasing the new draft land acquisition Bill. He said there was no point aiming at 9% GDP growth without social and ecological sustainability. The approach paper also recognises this reality and seeks a credible policy to overcome critical supply constraints with regard to land, minerals, energy and water supply.
The Planning Commission has, therefore, prepared models for two alternative GDP growth targets?one for 9% and another for 9.5% average?during the 12th plan period. Both models assume a substantial pick-up in growth in manufacturing, electricity, gas and water supply, and construction. The average manufacturing growth in the 11th plan period was 7.7% and the 12th plan projects this category to grow by 11% to produce an overall GDP growth of 9.5%.
Similarly, the most critical supply constraints?electricity, gas and water supply?grew at 6.4 % in the 11th plan. This is assumed to grow at 9% in the 12th plan period to achieve a projected 9.5% GDP growth. Mining and quarrying, another big supply constraint, is projected to grow at over 8% in the 12th plan period, compared with just 4.7% in the 11th plan. However, it is difficult to imagine how growth in mining will double when the political economy is currently grappling with a massive backlash against illegal mining, whether in Bellary, Orissa or Jharkhand.
There is a massive churn in the political economy over lack of governance and corruption in these areas. The 12th plan target, linked to the supply constraints with regard to mining, electricity and gas supply, can be achieved only if new institutions of governance emerge from the political churn that is currently going on. There is no knowing how long this political churn will continue. If there is disruptive politics until the next Lok Sabha elections in 2014, then two years of the 12th plan period would already have been lost. The ongoing Lokpal debate can also be seen as an attempt to come up with new institutional structures of governance to ensure a fair and equitable growth process.
So, the 12th plan target of 9-9.5% GDP growth has too many critical assumptions built into it. In the face of an uncertain global economic environment, the only chance India has is to get its domestic reforms on track through a broader political consensus among national and regional parties at the state level. Removing domestic supply bottlenecks, especially with regard to inputs such as land, minerals, energy etc, is the key to achieving higher growth. The approach paper also suggests that the sustained inflationary pressures seen at the end of the 11th plan period could become a risk to growth if domestic supply bottlenecks are not eased in the medium term. Fixing this requires a broad consensus among various political parties and other stakeholders (civil society) in the country. The current atmosphere of confrontation at various levels does not bode well for creating the right conditions for growth in the medium term.
mk.venu@expressindia.com