EIGHTH FIVE YEAR PLAN 1992-97, VOL.-I

 OBJECTIVES AND ORIENTATION

1.1.1 The launching of the First Five Year Plan in April 1951 initiated a process of development aimed not only at raising the standard of living of the people but also opening out to them new opportunities for a richer and more varied life. This was sought to be achieved by planning for growth, modernisation, self-reliance and social justice. We have come a long way over the past forty years. A largely agrarian feudal economy at the time of independence has been transformed into one based on a well developed and a highly diversified infrastructure with immense potential for industrialisation. Income and consumption levels have significantly risen. Consumption basket has diversified. Incidence of poverty has visibly declined. The average life expectancy has gone up. The death and the birth rates have declined. Literacy has improved and the educational base has widened.

1.1.2 We now have a robust and resilient agricultural economy with near self-sufficiency in food production. We have built a diversified industrial and service structure. We have a large pool of skilled manpower and ample entrepreneurial capabilities. The growth performance of atleast a decade preceeding the Eighth Plan has been impressive. We have the wherewithal for further progress. Hence, the task before the Eighth Plan is to use these advantages for further growth and lay strong foundations for even higher growth in the future.

1.1.3 The economy has passed through difficult circumstances during the last couple of years. The growing fiscal gap and the sudden depletion of foreign exchange resources created a situation which put severe strains on the economic system leading to drastic import curbs, high rate of inflation and recession in industry. This in turn has led to the projection of very low growth in 1991-92, which happens to be the base year of the Eighth Plan. Corrective measures have, al- ready been initiated by way of planned fiscal reforms and policy changes. The Eighth Plan will thus have to reorient some of the development paradigms, since its objective is to lay a sound foundation for higher growth and to achieve the most significant goals, namely, improvement in the levels of living, health and education of the people, full employment, elimination of poverty and a planned growth in population.

1. 1.4 The public sector was assigned a place of commanding height in the Indian economic scene. It was expected to create the basic infrastructure for development, be a pace setter in taking risk and nurturing entrepreneurship, take care of the social needs, help the poor and the weak and create an environment of equal opportunities and social justice. The public sector has expanded considerably. Its expanse and its influence may not be measured Just by the size of its contribution to GDP or its share in investment, but by the fact that it touches every aspect of life. In the process, it has made the people take the public sector for granted, oblivious of certain crucial factors like efficiency, productivity and competitive ability. This has eroded the public sector's own sense of responsibility and initiative. Many of the public sector enterprises have turned into slow moving, inefficient giants. A certain amount of complacency has set in which is not conducive to growth. While there are several social and infrastructural sectors where only the public sector can deliver the goods, it has to be made efficient and surplus generating. It must also give up activities which are not essential to its role. The Eighth Plan has to undertake this task of reorientation.

1.1.5 The Eighth Plan will have to under- take re-examination and reorientation of the role of the Government as well as the process of planning. It will have to work out the ways and means of involving people in the developmental task and social evolution. It will have to strengthen the people's participatory institutions. In keeping with these objectives, the process of planning will have to be re- oriented so as to make planning largely indicative. This, in turn, will imply a somewhat changed role for the Planning Commission. The Planning Commission will have to concentrate on anticipating future trends and evolve integrated strategies for achieving the highest possible level of development of the country in keeping with the interna-

tionally competitive standards. In place of the resource allocation role which very largely characterised the working of the Planning Commission in the past, it will have to concentrate on optimal utilization of the limited available resources. This will call for the creation of a culture of high productivity and cost efficiency in the Government both at the Centre and the States and the Planning Commission will have to play the role of a change agent. At the same time, it must provide the broad blue-print for achieving the essential social and economic objectives and indicate the directions in which the economy and the various sub-sectors should be moving. It should pin-point areas in which advance action should be taken to avoid serious bottlenecks. Planning must thus proceed from a vision of the society to be created, and through an appropriate mix of policy instruments influence the decisions of the various economic agencies to achieve the desired goals. In this sense, indicative planning is a more difficult exercise.

1.1.6 The Eighth Plan is being launched at a time which marks a turning point in both international and domestic economic environment. All over the world centralised economies are disintegrating. On the other hand, economies of several regions are getting integrated under a common philosophy of growth, guided by the market forces and liberal policies. The emphasis is on autonomy and efficiency induced by competition. We cannot remain untouched by these trends. We have to draw lessons from the development experience of other nations during the last four decades. Development economics was largely theoretical when India started her planning in 1951. It has now acquired consider- able empirical knowledge based on the rich applied experience of many nations, among whom there are success stories as also failures. Indian planning needs to draw on some of these lessons. It also needs to be guided by its own experience, gained during the last four decades. If planning has to retain its relevance, it must be willing to make appropriate mid-course corrections and adjustments. In that process, it may be necessary to shed off some of the practices and precepts of the past which have outlived their utility and to adopt new practices and precepts, in the light of the experience gained by us and by other nations.

The Development Performance

1.2.1 The Indian economy, which was stagnant during the first half of this century, started growing after the Five Year Plans were launched. However, the growth rate in Gross Domestic Product (GDP) remained lower than expected and hovered around 3.5 per cent per annum for the first three decades of the developmental phase. It was only in the eighties that a clear break from this was observed. The growth rate in the eighties was nearly 5.5 per cent per annum. This change was accompanied by a perceptible rise in the growth in agricultural income, a significant increase in the rate of growth of per capita consumption and a decline in capital output ratio indicating more efficient use of capital (Table 1.1). These are mutually reinforcing trends.

1.2.2 The finances needed for development were raised mainly through domestic savings which contributed between 90 and 95 per cent of investment in different periods. The rate of savings increased from an average of 10.3 per cent of GDP during 1951-56 to 21.7 per cent during 1976-81 (Table 1.2). It, however, declined in the eighties, averaging around 20 per cent. In the last two to three years again, the savings increased to levels ranging between 21 and 22 per cent of GDP. Household sector was the largest contributor to domestic savings, with its share rising over the years. On the whole, performance of the Indian economy in the area of savings has been good as compared to many other developing countries. There have, however, been certain disturbing trends in this sphere in recent years. The public sector saving was declining, and in the Government sector, particularly, the savings turned negative in 1983-84. Since then, the gap has been widening.

1.2.3 A rising saving rate sustained a rising rate of investment. The rate of investment increased from about 10.7 per cent of GDP in the period 1951-56 to about 23 per cent in 1985-92. The biggest increase in the rate of investment occured in the public sector. The share of public sector increased from 27 per cent of total investment in 1950-51 to a little over 46 per cent in the Seventh Plan. However, the growth rate of the economy was not commensurate with the rising levels of investment in the first three decades of planning. The capital output ratio was increasing. The deterioration in the incre-

mental capital-output ratio (ICOR) could be attributed to a variety of factors. Some of them were the consequences of the very process of development, like changes in the composition of investment (e.g., from engineering to chemical industries) and rising real costs in certain sectors like irrigation and mineral development where the easier opportunities had been exhausted first. The changes in the composition of output do not, however, fully explain the rise in ICOR. There were other avoidable factors and most of these could be grouped together under the expression "inefficiency in resource use". There were substantial time and cost overruns in execution of several projects. Also, the low level of capital utilisation was due to lack of adequate synchronisation in the implementation of inter-linked projects. However, the growth performance of the economy improved significantly in the decade of the eighties and correspondingly the ICOR also declined. The build-up of the infrastructures and other capabilities over the earlier three decades certainly was used to advantage in sustaining the growth in the eighties. There is yet scope for improving the resource use in the economy in order to bring down the ICOR further and the all-round cost of production.

1.2.4 Given the structure of Indian economy, the growth in the national income has largely been determined by the trends in agricultural production. The reason is that agriculture is the largest component of GDP and has overall impact on other sectors via input linkages, employment and incomes. The average performance of the agriculture sector has shown some improvement in the eighties as compared to the earlier decades (table 1.3). As other sectors have come up, the share of agriculture in GDP has now stabilised at about 33 per cent as compared to about 55 per cent in the early fifties (table 1.4). It is still quite large. Agriculture has been subject to wide year-to-year fluctuations due to the weather factor. Wherever irrigation and power are available on an assured basis, agriculture has performed remarkably well in terms of its response to the high- yielding varieties, intensity and diversification. These trends need to be strengthened particularly in the Eastern region and in the dry belt. Combination of agri-busi-

ness, with farming, has to be encouraged in order to raise the average level of agricultural incomes, to increase the export possibilities and raise value-added component in exports. The Eighth Plan will devote itself to these tasks.

1.2.5 Manufacturing will occupy a crucial position in future economic development. The nation's ability to grow fast, export, be competitive and create an expanding base for direct and indirect growth of productive employment will depend upon the growth and efficiency of the manufacturing sector. This sector needs the support of the best of technology. In turn, it will help create a wider technological base in the country. After a good start in the Second and the Third Plans, the growth performance of the manufacturing sector declined during the late sixties and the seventies, but picked up again during the eighties (table 1.3). The performance during the eighties was supported by initiation of steps towards liberalisation in import and industrial policies, besides relatively better per- formance of the infrastructure sectors, particularly energy and transport. Due to the foreign exchange crisis and curbs on imports and general resource crunch constraining demand, the manufacturing sector experienced a recession in 1991-92. But, given the efficacy of corrective steps already under implementation, the industrial growth is expected to pick up again. The Eighth Plan will concentrate on building a sound foundation for industrial growth, modernisation and productivity improvements. To do this effectively, the areas of comparative advantage must be clearly identified.

1.2.6 A major strength of the economy has been the large base of natural resources. The strategy for self reliance in food and basic industries was pursued through large allocation of investible resources to the development of irrigation, energy and transport sectors. With experience in project execution, the, period of project completion i.e. the time lag between investment and benefits, could be reduced. The shortfalls in Plan targets of power, railways, coal, oil, etc., were sharply reduced during the eighties. This also contributed to a reduction in ICOR. The capabilities to manage the opera-

tions of the projects, in technical as well as in financial terms, however, did not come upto the assumptions made at the time of investment decisions. Since the operation was not in a "free market" situation, the cost consciousness was lacking. The goods and services were provided generally at prices determined on the cost-plus basis. The system of administered prices generally pursued in these sectors was not effective to check inefficiency. The policy of subsidising specific groups of consumers had two effects. First, the subsidy element could not become transparent enough to be reflected clearly in terms of costs and social benefits flowing there from. Secondly,rise in the demand for services of infrastructure from certain sections of the consumers was high, leading to persistent shortages. The net result of the lack of cost consciousness and business outlook in operations was the inability of these sectors to generate the resources required for their own expansion, let alone producing a surplus for the others.

1.2.7 In more recent years these sectors have been mobilising their capital directly from the, market at prices which more closely relfect the scarcity of capital. At the enterprise level, the cost consciousness is building up. Another important development has been the emphasis on modernisation and system improvement in these sectors. An efficient operation of infrastructure sectors is a must for development.

1.2.8 Growth has brought about a structural change in the economy. This has surfaced in the form of a shift in the sectoral composition of production, diversification of activities, advancement of technology and a gradual transformation of a feudal and colonial economy into a modern industrial nation. The composition of national income has changed steadily over the planning era (Table 1.4). While the share of agriculture and allied activities in the GDP has declined, that of the tertiary sector has increased. The expansion of services has not only been conducive for employment generation but also for better efficiency of the system and better quality of life. It should be noted that education, health care, extension work, research and its application are all part of the services sector. They all contribute to the quality of life as well as productivity. As regards the secondary sector, the increase in its share in GDP is due mainly to improved performance of the infrastructure like electricity, gas and water supply and the growth of registered manufacturing sectors. Though the share of agriculture sector in the rate of growth of GDP is still quite large, for the first time, in the Seventh Plan it was less than the contribution of tertiary sector. This is one of the consequences of significant step-up in the pace of growth.

1.2.9 The country has succeeded in creating a good base for scientific and industrial research. In agriculture, an integrated system involving research institutes, agricultural universities and an extension machinery has been set-up. In industry, there is a network of industrial research laboratories. Research and Development divisions have been established in major enterprises and consultancy firms have come up for project consultancy and design engineering. The basis for this advance lies in the rapid expansion of higher and technical education. India now has the third largest scientific and technical work force in the world. However, we still have a long way to go to catch up with the better placed countries of the world. We also have to strengthen considerably the capacity of our system to absorb the modern technology fully and make further advances in it. The ultimate aim of technological progress is improvement in productivity, efficiency in the use of basic resources like land, water and minerals and increase in income and employment.

Imperatives for Change

1.3.1 Starting with a poor base and getting further heated in the process of growth, the Indian economy was beset with scarcities of resources and materials from the very beginning. The scarcity situation was sought to be tackled through a regulatory framework. Licences for production and imports, control of distribution, a regime of administered prices and subsidies were its main features. This regulatory mechanism did manage to save the economy from extreme difficulties like debt trap and the social unrest that arise from the breakdown in supplies of basic consumption goods. The economy could sustain through the wars, the droughts and the oil shocks. Yet, those who got the allocation of resources through the regulatory regime benefited more than the others. Vested interests got established. The regulatory framework was expected to protect the con-

sumer against those who obtained the resources for production through the same mechanism. But, the latter often gained through the system at the cost of the consumer and the common man.

1.3.2 The equity objective was sought to be pursued through redistribution of assets. But, land reforms could not be implemented effectively. The problem of poverty could not be tackled through growth, which itself was slow over a long period of time. Hence, direct intervention through poverty alleviation programmes became necessary. Self-employment and wage-employment programmes were taken up in the Government component of the public sector plan. But the constraints of Government resources permit only a limited role for such programmes. Moreover, the orientation in these programmes has shifted from building assets of durable nature to providing relief jobs, and the programmes are beset with substantial leakages.

1.3.3 A sustained high growth rate has pushed the Indian population to unsupportable numbers. The 1991 Census revealed a population of 844 million. Such dizzying rate of population growth negates whatever gains the nation has been able to achieve in agricultural, industrial and services sectors. Also, this leads to an unbearable burden on health, education and housing sectors. If this trend is not halted, it will never be possible to render social and economic justice to millions of our masses. The current rate of population growth is simply not sustainable.