Planning Commission, India’s planning think tank, member Dr Saumitra Chaudhuri thinks in time spans of five years. It is not difficult to figure why he does so. “We make Five Year Plans and the habit is hard to shrug off,” he says during his keynote address at the VCCircle 2nd Limited Partners Summit 2011 in Mumbai today, which is one of the largest and most influential gathering of private investors.
Chaudhuri emphasises that the five-year horizon also acts as a useful time frame to examine change. For instance, in the Ninth Plan period (1997–2002) the average growth rate of the Indian economy was 5.5% — somewhat lower than that recorded in the previous Ninth Plan period of 6.5%. The Tenth Plan period (2002–2007) saw a breakout in the rate of growth and the average for the five years was 7.8%. In the Eleventh Plan (2007–12), we expected to average 9% growth. That, however, did not happen on account of the intervening global economic crisis and the worst drought in 28 years occurring in 2009. Despite these unexpected setbacks, the average growth rate in the Eleventh Plan is likely to be around 8.3%. This is short of the target, but actually quite remarkable considering the things had happened in 2008. Chaudhuri says, the Indian economy was resilient thanks to strong macro fundamentals, robust corporate and bank balance sheets, sustained fiscal consolidation and a new generation of empowered consumers who have seen a gain in their incomes and have a positive outlook towards their own futures. He shares a prospective view of the economy at the conference. Excerpts from his keynote address:-
The Twelfth Plan (2012-–2017) is set in a most important period in the transition of India’s economy. At the start of the Eleventh Plan (2006–2007), India’s GDP was less than $1 trillion. By the end of this Plan, (2011–2012) India’s GDP is likely to be close to $2 trillion. Just as GDP has doubled, per capita GDP has increased by almost the same magnitude from $846 to little over $1,600.
This will be a point of inflection — a most momentous period of change in the past three centuries.
India Growth Potential
By 2020, the Indian economy is likely to approach $6 trillion with a per capita income of $4,500. By 2025, it may grow to become a $10 trillion economy with per capita income of $7,500 and may become the third largest economy after the US and China.
At this point, one must sound a most important note of caution. This remarkable transition is not a given. It is neither foretold nor is it an entitlement. It is in the nature of a potential. In order to seize that potential and make it into a reality, it requires imagination and sustained effort. That is where we shall either succeed or not. The experience of the past twenty years suggests that the probability of success is significantly stronger than the opposite, but as for so many things, the past is not necessarily a guide to the future.
Keeping in view these factors how do we look at the next five years of for that matter the next decade?
The experience for the past several years points to one immutable fact. That is, the very rapid pace of domestic demand growth has consistently surprised on the upside — not just Government, but also the private sector. The second learning is that domestic supply expansion, especially in the infrastructure and farm output has consistently surprised us on the downside. This is, of course, in a stylistic fashion, what underlies the inflation story and the particular vulnerability of our economy to this phenomenon.
Therefore, going to the future, we have to focus our efforts on loosening the supply and logistics bottlenecks in order to sustain high growth.
Improving farm productivity must be high on the list of priorities. In addition, we do know that the supply chains that governs marketing and distribution, particularly of perishable food products, needs to be greatly modernized. It is this weakness that largely lay behind the sharp increase in inflation this winter. Urgent steps need to be taken to enable the modernization of the supply network. We also must take a time bound plan for improving farm productivity where there is considerable potential in almost every area.
In social infrastructure, measures have to be taken to improve health outcomes, particularly those in adolescent girls, expectant mothers and children. The experiences over the past few years in many of our programmes offer learnings that can help make this effort more productive. While most children now go to school, the quality of education in most of these schools need drastic improvement.
Simultaneously, we have to make great efforts to ensure that children passing out of school and who do not proceed for higher learning have access to training institutes that give them marketable skills. The combination of growth in the farm sector, improved health and educational outcomes and better training together provide the ingredients in a context, where overall economic growth is high, new infrastructure is being laid out and consumer demand is strong, for rapid enlargement of income opportunities. This is not just about wage employment but also self-employment, including farm and associated activity. The combined impact of this will be widespread improvement in income and living standards and it is this which will make for truly inclusive and sustained growth.
On the external payment side, the Current Account Deficit has expanded for reasons described earlier — reasons that are quite understandable. However, in the medium term, it is important to seek a rebalancing of the CAD, such that it is maintained at a level not exceeding 2–2.5% of GDP. This would strengthen the objective of stabilizing the external payments fronts and would require smaller amount of capital flows to finance current account transactions. As a result, it will reduce the risk to the Indian economy from adverse developments in the external environment and the high volatility which the financial markets have become increasingly subject to. In consequence, it will enable us to focus better on domestic bottlenecks that stand in the way of sustaining higher and inclusive economic growth.
What would that require? First export activities must become more competitive. In this the government can help by expanding infrastructure and improving logistics and also greater efficiency in dealing with processes, including tax refunds. For instance, small and medium manufacturer exporters are dependent on an average of 25–30 per cent on captive power generation which is mostly diesel-based and very expensive. By improving grid supply the government can assist manufacturer exporters to draw their needs from the grid, which is much cheaper than that from DG sets.
Second, we must push for greater trade and investment increases with the rest of Asia and Africa. This is where much of the incremental growth is going to happen in this decade, and there are enormous complementarities between the Indian economy and our Asian and African neighbours, the harnessing of which can, not only result in considerable mutual benefit, but also contribute to more efficient and a higher growth path.
Case For Seeking Fuel Assets Overseas
Third, we have to limit our import dependence on fuels. While we will have to necessarily import the bulk of our crude oil and a significant part of our natural gas needs, we must seek to expand domestic coal mining where our resources are quite large. We must mount intensive exploration and production of crude oil, natural gas, coal-bed methane and shale gas. We must aggressively ramp-up our small base of nuclear power generation. Finally, there is merit in seeking fuel assets overseas, especially in oil & gas, uranium and also coal for our coastal power generation stations. These priorities on our fuel supply side must be complemented with sustained improvement in the efficiency of energy use.
FDI Caps Need Routine Review
The Indian economy has benefitted, and must continue to benefit, from global capital inflows. We must continue to manage a relatively open engagement with the global economy, liberalizing both equity and debt flows. For a variety of reasons, it is prudent to retain some control on the magnitude of foreign inflows into fixed income assets but the caps that we have, should be regularly reviewed, as indeed is the case today. It is also desirable to try and bring as many markets onshore as possible, which will help improve regulatory oversight. Finally, India must set out to strengthen its competitive position as a destination for overseas investors.
Taming Inflation Core To Growth
Before concluding, it is important to note that inflation management has to be a critical component of our growth strategy. In order to achieve this, we have to simultaneously move on many fronts. This includes conventional fiscal and monetary tools, as well as several direct policy measures. The latter includes improving farm productivity and logistics of food storage and distribution. Maximizing energy output and improving energy efficiency, will go some distance in offsetting the inevitable increase in prices of crude oil and other fuels. We have to improve the overall efficiency of logistics in industrial and service process in order to reduce production and delivery costs, to both domestic and export markets. This may best be achieved by embedding appropriate incentives in the policy framework which will help us to push economic agents to prioritize efficiency.
What Policies Should Achieve
In summary, let me review the three principal outcomes that policy should seek to achieve. First, to maintain and improve the conditions that governs capital formation, such that investment improves the productive potential of the economy and results in relaxing the operating constraints that we have earlier touched upon.
Second, to ensure that conditions for private corporate investment in infrastructure and in new manufacturing capacity are favourable, such that real private corporate investment grows by 12–15 per cent annually. Third and finally, to specifically address, understand and resolve endemic problems that underlie the several operating constraints, whether it relates to food output & logistics, energy or water management, or other physical and social infrastructure limitations.