XI Plan ? beyond platitudes

Parliament has been too preoccupied with issues like the leakage of the Pathak report to consider our multiple economic challenges. Last week, I had written about some preconditions necessary for a successful XIth Five Year Plan. Not of all these can be met, but there are some on which concerted action can make a difference, like re-classification of the accounts, and a vastly improved design for centrally sponsored schemes. In this piece, I propose to deal with some critical choices which need to be made by the Planning Commission before presenting the Approach Paper to the National Development Council.

First, for an 8% to 9% rate of growth, the domestic rate of savings must increase substantially from 27.1% to 32.3%. This has been predicated on a marginal increase in household savings but substantial increase in government savings, from a negative figure to a positive 2.6%. Where are the anticipated government savings expected to come from, especially as privatisation has come to a halt? There is mention of increasing the tax ratio, but this could adversely impact private savings with an uncertain impact on the overall savings rate. Besides, the assumed elasticity of private savings to net income has not been explained.

Second, there has been considerable discussion and controversy surrounding the Fiscal Responsibility and Budget Management Act (FRBM). What are the assumptions underlying the discussion about timing of priority expenditures vs enforcement of the FRBM?how could we know that delaying the FRBM targets by X years would be enough time to begin accomplishing these goals? What about implementation difficulties? What would be a credible time for resuming attention on the fiscal responsibility targets? What would reassure interna-tional investors that the relaxation was temporary?

Few would argue that India should NOT invest in infrastructure and social services, but some kind of credible plan for implementation, and for a time-bound re-turn to fiscal discipline is essential, especially in light of the investment requirements.

Third, the plan is somewhat va-gue on the macro fundamentals. Some clarification on the feasibility of the targets and assumptions outlined would be helpful. In particular:

a) Where do the investment rates and domestic savings rates required for different growth targets come from? What kind of macroeconomic model and what kind of assumptions?

b} What is the strategy for increasing the private sector?s willingness to invest? Some essential investments are mentioned?infrastructure and education, among them?but what about specific ways to increase the private sector?s willingness? The discussion of enabling programs for PPP in the Plan is relatively vague; recommendations that the process ?be seen to provide services at reasonable cost and in a transparent manner? is easier said than done.

c) What strategy could address the endogenous business cycle? Wouldn?t early re-cognition with fiscal and monetary response further affect expectations? Be-sides, what does ?endogenous? mean? Does it mean politically induced business cycles?

Fourth, the introduction makes the valuable point that ?the private sector, including farming, small scale enterprises, and the corporate sector?, would need to play an even more important role. This is an incomplete point, however, there is no discussion of what might be the comparative advantages of the public vs private sectors, or what might be the complementarities, or, most importantly, given the fiscal situation, what might be the most effective way to use public resources to leverage private resources.

As part of this framework, we also need to be realistic in our expectations of what the private sector will and will not do, and what its advantages are and the negatives. For example, the private sector can be relied upon to finance some infrastructure, but the political risk premium for projects located in lawless areas may be too high for private companies and these might be areas to which public resources need to be directed.

There are other areas where we need more explicit recommendations:

A clearer enunciation of policies to attract FDI. For instance, merely to say that foreign investors have shown strong interest in playing a larger role in multibranded retail stores is not enough. Removal of sector caps, particularly in insurance, banking and some others, enabling legislation in key areas like coal and mines remains critical. Engaging states for greater diversification including market linkage supported by modern marketing process and abolition of the Agriculture Produce Marketing Act needs proactive action. Similarly, merely to say that to retain competitive advantage, we need greater flexibility in labour laws is not enough. Can we at least recommend that the flexibility should be available prospectively or that it would not apply to SPVs, or to empower states to devise policy configurations best suited to their needs?

The Planning Commission must be complimented for putting contentious issues in the domain of public discussion. However, at some point, discussions must be replaced by decisions. Hopefully the final documents will make more categorical recommendations than platitudes. Ambiguity, particularly in coalition polities, may have some advantages, but implementation must go beyond such ambiguities.