Time to change the ap­proach

The NDC is par­ing the 12th plan growth tar­get. We must al­low mar­kets to get on with their job

Hindustan Times (Patna) - - NATION -

The Na­tional Devel­op­ment Coun­cil (NDC) may have been un­duly op­ti­mistic in par­ing the econ­omy’s medium-term eco­nomic growth ex­pec­ta­tion to 8%. With growth in the first year of the Twelfth Plan at be­low 6%, the climb back to the 7.9% av­er­age growth of the Eleventh Plan will be steep: the econ­omy will need to grow at up­wards of 9% in the ter­mi­nal two years of 2012-17. Prime Min­is­ter Man­mo­han Singh warned as­sem­bled chief min­is­ters of this even­tu­al­ity at the coun­cil’s meet­ing last month to ap­prove the lat­est five-year plan. This is quite a climb­down from a year ago when Mr Singh was seek­ing a wider con­sen­sus on a sec­ond gen­er­a­tion of re­forms de­signed to keep the econ­omy on a 9% growth path over the Twelfth Plan. Th­ese are changes in how the mar­kets for en­ergy and re­sources op­er­ate and in the po­lit­i­cal forces that don’t per­mit them to clear.

Some of the In­dia’s rapidly de­clin­ing eco­nomic po­ten­tial is cap­tured by a Plan­ning Com­mis­sion work­ing pa­per on di­min­ish­ing pro­duc­tiv­ity gains. To­tal fac­tor pro­duc­tiv­ity, which is driven among other things by tech­no­log­i­cal change, the pol­icy en­vi­ron­ment and in­fra­struc­ture, peaked in 2006-07 and to­day con­trib­utes a per­cent­age point less to over­all growth. The econ­omy is now rel­a­tively cap­i­tal-scarce and there is lit­tle in­cen­tive to in­no­vate and adopt new tech­nolo­gies at low lev­els of cap­i­tal ac­cu­mu­la­tion. A slow­down in the re­forms mo­men­tum and in­creased pol­icy un­cer­tain­ties like­wise dis­cour­age in­no­va­tion and in­vest­ments. The study con­cludes a busi­ness as usual ap­proach will de­liver 7% av­er­age growth over the Twelfth Plan, a con­sid­er­able re­gres­sion from the pre­ced­ing five years when the global econ­omy faced its fiercest tur­bu­lence since the Great De­pres­sion.

This would be a pity. In­dia needs 20 years of rapid growth to bring it to mid­dle-in­come level. The coun­try could have weighed in as a $4 tril­lion econ­omy by 2017 with five years of 10% growth. That would have made it the fifth largest econ­omy in the world trail­ing the US, China, Ja­pan and Ger­many. Mr Singh also de­liv­ered in his char­ac­ter­is­tic un­der­stated style an as­sess­ment of the big­gest chal­lenges con­fronting the econ­omy: en­ergy and water. The government can­not end­lessly keep sub­si­dis­ing im­ported fuel; prices at home must, in phases, align with those across the world. And un­less we watch how we use water, we could run short. Our pol­icy-mak­ers would be well ad­vised to heed the prime min­is­ter’s cau­tion on how we al­lo­cate nat­u­ral re­sources. De­lib­er­ately ob­scured price sig­nals have played havoc with the econ­omy’s de­mand and sup­ply re­sponses. It’s time mar­kets were al­lowed to get on with their job.

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