Planning Commission member Saumitra Chaudhuri has responded to an emailed questionnaire from KG Narendranath of FE on the mid-term appraisal of the 11th Plan.
What are the key macro-numbers that comes out from the MTA? Do you think private investment in the economy will pick up in the remaining two years of the current Plan and take the GDP growth to the average of 9% projected for the 12th Plan? Could you give us ball park figures on the projected investment rates over the next two years?
Several things, actually. First, that the potential growth rate of the Indian economy may be seen to be certainly above 9% and perhaps 10%. It is not an accident that we fared better than most other economies, restricting the negative impact on account of the global crisis to 2 percentage points in GDP growth. Second, this is the consequence of major shifts in the structural realities of India ? much higher private investment & savings rates, a healthy financial sector, strong & competitive corporates and an empowered consumer. Third, in the years ahead, investment in the infrastructure area will be the key to increasing levels of domestic economic activity. It is important to simultaneously relax the constraint that inadequate infrastructure imposes on the pace of economic growth. This will also offset the possibility that external demand for our exports may remain subdued for some time.
Fixed investment rates have actually remained firm at around 33% of GDP from the year before the crisis, through it, and in the process of the recovery. Overall investment rates declined in 2008-09 on account of a drawdown of inventories which is a natural development in adverse circumstances. We see fixed investment rates increase by about 1 percentage point in each of the next two years, taking the aggregate investment rate to around 39% in the terminal year of the 11th Plan. This will be about 1 percentage point of GDP higher than in 2007-08 and about 2.0-2.5 percentage points of GDP higher than estimated levels for 2009-10.
The savings-investment gap in the private sector has risen to 6.2% of GDP in 2008/09 after falling to 3.8% in the 2007/08. What will be the trend in the last three years of the current Plan? Also, how would the overall savings rate be?
The main reason for the increase in the savings-investment gap of the private sector is the draw-down of inventories on the one hand, and on the other, the valuation losses incurred by corporates, which impacted their profitability. I would expect a build-up of private inventories and improvement of profitability, starting from 2009-10 onwards, and that would underpin the improvement in the overall investment rate discussed earlier. The overall savings rate is expected to improve to over 36% of GDP by the terminal year of the 11th Plan, that is, 2011/12.
The infrastructure deficit is the key issue that the current Plan proposes to address. Will the projected level of investment ($500 billion during 2007-2012) materialise? What are the specific policy/regulatory issues that are hampering infrastructure investments?
Infrastructure deficits are certainly the most powerful constraint to achieving rapid expansion of the Indian economy. In terms of GDP, the 11th Plan document had expected that by the terminal year (2011-12), the investment in infrastructure would rise to 9% of GDP. This it may not do, but it will certainly cross 8% of GDP from the level of about 7% presently. The limiting factors are more structural in nature, than financial. Thus, for instance, the continuation of a situation where “unaccounted-for” or AT&C losses of state power utilities remain unjustifiably high, acts as a powerful roadblock for private corporate investment in the power sector. Notwithstanding this, the contribution of the private corporate sector to new power generating capacity is likely to exceed 20,000 mw in the 11th Plan period, which will be ten times that witnessed in the 10th Plan period. Thus, yes, there are impediments, but also much progress.
The global economic crisis has negatively impacted government revenue in the last couple of years ? both in terms of low economic expansion in the second and third years of the Plan and the fiscal stimulus. How will the scenario be in the next couple of years?
Improvement in government’s fiscal situation is a necessary condition for sustaining high rates of economic growth. One of the important factors behind the sharp improvement in the domestic savings rate in the recent past was indeed the improvement of government’s fiscal balances. The stimulus is being wound down and with a restoration of economic growth, tax revenues should show buoyancy. The other thing is how we manage the large subsidy payouts and the disinvestment programme. The former must be informed by the principles of social merit and efficiency. The latter as an important additional source of financial resources to finance important elements of the development plan.
What about inflationary pressures? Are they linked to weak performance in the agriculture & allied sectors?
This year has seen extremely high food price inflation. In fact, if you look at our inflation track-record over the past two decades, you will find that sharp increase in food price has entirely or largely underpinned episodes of high inflation. So a fundamental element to dealing with inflation is curbing food price inflation. Now, in order to do that, it is necessary to have a multi-pronged approach. We know that the productivity of our agriculture ? both in respect of land and water use ? has much that can be improved upon. This is particularly true for the rain-fed regions of the country, but also for the better watered riverine regions of eastern India. The critical elements seem to be better seed, improvement of soil quality including micro-nutrients and organic content, appropriate fertilisers and perhaps most critical of all, a basic access to some life-saving irrigation for crops, which can be realised through rain water harvesting, farm ponds and efficient & limited water use ? by sprinkler or drip irrigation. Then again, the farm sector appears to have greatly benefited from non-crop activities such as horticulture, animal husbandry and fisheries. These activities are well-suited to small farm holding and require support and further expansion.
Then there is the issue of distribution and storage of farm products. Today, there is unfortunately an unacceptably large degree of inefficiency and wastage, especially in fruit and vegetables. The way we store out foodgrain is also crying out for modernisation which will help reduce spoilage and costs. The post-harvesting set up in the farm and support sector needs extensive modernisation. A welcome offshoot of such modernisation can be a smoother flow of organised finance and credit to the farm sector. Finally, it will help the farmer obtain more for his produce and the consumer pay less for what she purchases.