MACRO-ECONOMIC DIMENSIONS
3.1.1 As a result of planned development over the last forty years and the consequent modernisation of the economy and the emergence of a large organised sector, the capacity of the economy to mobilise resources for further development is now well established. A reason- able stock of technological skills in men and machines and proven reserves of minerals and other resources are available. A diversified industrial and infrastructural base has been built up. We now have a robust and resilent agricultural economy. The Sixth and the Seventh Plans also paid particuar attention to the strengthening and modernisation of infrastructure. More incentives to private sector investments were provided through progressive deregulation of industry and more liberalised imports of capital goods and components. There has been atleast a five year period (1986-91) of good export performance. Corporate sector has generally welcomed and responded well to the market oriented shifts in industrial, trade and fiscal policies. At the same time capabilities exist in the economy to safeguard the interest of the small entrepreneurs and the small farmers. These achievements have given us strength to push forward and keep up the pace of development in the coming years. The task now is to utilise the human, material and financial resources for a pattern of growth which leads towards the goal of full employment and fulfilment of social aspirations and needs. Emphasis has also to be laid on a more efficient use of the available resources and the necessary environment for the same must be created.
Growth, Investment and Public Sector Outlay 3.2.1 The growth target for the next five years is based on an analysis of the recent growth experience, a careful assessment of the resources which could be mobilised and imperatives of meeting certain minimum of social needs and aspirations. The Seventh Plan achieved a growth rate of 5.8 per cent per annum against a target of 5 per cent. This was a good showing. However due to the setback in the expected growth performance during 1991-92 the average growth for the seven year period i.e. 1985-86 to 1991-92, would be 5.3 per cent per annum. The growth in this seven year period was supported by an investment rate of 23.1 per cent of GDP and this investment in turn was financed by domestic saving of 20.7 per cent of GDP and foreign savings (i.e., current account deficit) of 2.4 per cent. Looking to the good performance in the Seventh Plan and also keeping in view the requirement of generating employment at a certain minimum rate, there was a view that the Eighth Plan should aim at a higher growth rate. However, in view of the impact of structural adjustment programme, the resource crunch which the public sector is facing, and the need for correcting the fiscal imbalances, it would be prudent to plan more or less for the growth rate achieved during the decade and lay down foundations for higher growth in the future. Planning for a higher level of investment and cutting it as the plan proceeds because of inadequate resources will result in a less than optimal utilisation of resources.
3.2.2 Macro-economic and sectoral implications of alternative rates of growth in the Eighth Five Year Plan were considered by the National Development Council (NDC). The NDC approved, in December 1991, a growth target of 5.6 per cent per annum for the GDP. More detailed exercises and availability of further
Table 3.1 : Implications of Target Rate of Growth during the Eighth
Plan (1992 - 97)
GDP ICOR Average Current Average
Growth Rate of Account Rate of
Rate Domestic Deficit Investment
Savings
(% per (Per cent of GDP at market price )
annum)
5.6 4.1 21.6 1.6 23.2
Abbreviations:
ICOR - Incremental Capital Output Ratio
GDP - Gross Domestic Product
41
information since their indicate that this growth is feasible. Some of the macro implications of the target rate of growth are set out in Table 3.1
3.2.3 The incremental capital-output ratio (ICOR) is a summary expression for the existing technical conditions in the economy which determine the relationship between and additional output. Though, the ICOR is expressed as a relationship between investments and additional output of the same period (i.e., the plan period), it in fact depends on the pace of investment in the past creating additional output in the plan period and also takes into account the investment which will create capacities for growth in future. Capacity utilisation improved during the Seventh Plan and also there were good gains in operational efficiencies in a number of sectors. The average ICOR for the Seventh Plan period turned out to be 3.9. However, due to a dip in the growth rate during the subsequent two year period, the ICOR for the seven year period, 1985-86 to 1991-92, is estimatedtobe 4.3. While there is a much scope for improving operational efficiencies, gains in output from better utilisation of existing capacities may not be available in the Eighth Plan to the same extent as during the Seventh Plan. This holds particularly in the power generation, rail transport, agriculture (in the north-west regions), oil production and mining. Moreover the stock of investments in pipeline today is less than what it was at the commencement of the Seventh Plan. Investments for "Human Capital", which is a priority area in the Eighth Plan, show up in improved performance in terms of output with a longer time lag than the industrial and infrastructure projects. Project costs in the energy and transport sectors are at present increasing as the more easily available natural resources have been exploited first and the more difficult ones remain to be harnessed. The efforts that are required to curb the ecological damage will also add to the costs. Expectations of productivity gains (and its consequent impact on ICOR) mainly rest on the extension of the best available technology to the underdeveloped regions and sectors of the economy, say, for example, to agriculture in the eastern region, to large segments of services in public sector and to the traditional (decentralised ) sectors in industry. Though the immediate impact of measures for structural adjustments will lead to some fall in output, in the medium term the industrial sector is expected to respond well to the liberalised policies. On balance of assessment it appears to be reasonable to assume an ICOR of 4.1 for the period of the Eight Plan.
3.2.4 The projections of macro-aggregates and financial parameters are made at the prices prevailing in the base year of the plan, i.e., 1991-92. The plan model works with the input-output tables adjusted to the levels and structure of prices in 1991-92. Thus, the projections of savings, investments, balance of payments, etc., are all in terms of prices prevailing in 1991-92. No projection is made for the rate of inflation. It does not mean that there will be no inflation, however, it implies that there will be no erosion in resources in real terms. When actual financial allocations for the public sector plan are made through the annual budgets, prevailing rates of inflation are taken into account. Through prudent fiscal and monetary policies and management 'of production and distribution, the Plan would, however, attempt to keep the inflation at the lowest possible levels.
3.2.5 Maintaining a reasonable degree of price stability is essential for the smooth functioning of the economic system, protecting the interests of the poor and preventing any deterioration in the mobilisation of resources. In the past it has been found that while any increase in prices leads to corresponding increases in government expenditure, a corresponding increase in revenues does not occur. As a consequence, the resource gap widens. Price stability is essential in order to reverse the trend of dissavings in the government sector and to preserve the developmental content of public expenditure. The financing pattern of the Plan, therefore, relies on a much lower level of "fiscal deficit" and "deficit financing" with the objective of maintaining a reasonable degree of price stability.
3.2.6 The macro-economic aggregates and macro-parameters for the Eighth Plan are presented in tables 3.2 and 3.3. It will be seen that an improvement in the rate of saving is expected. The marginal rate of savings over the Eighth Plan would be 23.7 per cent. Investment rate would be only marginally higher than the average of the last seven years. The current account deficit as a proportion of GDP is projected to decline. This will have a more favourable impact on foreign debt accumulation and debt
42
Table 3.2 Macro Aggregates for the Eight Plan (1991-92)
(Rs.Crores at 1991-92 prices)
1991-92 1996-97 Total 8th
(Target) Plan
(0) (1) (2) (3) (4)
1. GDP at Factor Cost 519716 682473 3069138
2. GDP at Market Prices 582356 764730 3439053
3. Gross Domestic Savings 125789 165182 742835
4. Private Consumption 389211 504000 2266530
5. Gross Domestic Capital
Formation 140348 172295 797698
6. Foreign Savings + 14559 7113 54863
7. Exports of Goods ** 44292 83869 330153
8. Exports of Goods and
Non Factor Services 55762 102366 408342
9. Imports of Goods ** 62345 93314 399650
10.Imports of Goods and
Non Factor Services 72848 112797 477128
Note: Foreign Trade figures for 1991-92 are estimated as
normalied base for projection during the
projections during the Eighth Plan.
+ The abnormaly low imports in 1991-92 compared to 1990-
91 resulted in lower foreign savings than the normal
base which is shown here. Preliminary RBI data
indicates foreign savings of Rs.9000 Cr. but the
national accounts, data is not yet available for the
year.
**Exports and Imports projections for 1991-92 are the
normalised projections, since the actuals are expected
to be exceptionally low in this year.
service ratio. The Eight Plan is expected to bring about a significant improvement in Export performance.
3.2.7 Private final consumption expenditure is projected to grow at the, rate of 5.3 per cent per annum which amounts to a growth of 3.5 per cent per annum in per capita consumption (assuming a population growth of 1.8 per cent per annum). This is greater than the growth in per capita private consumption of 2.8 per cent per annum during the Seventh Plan. Since income distribution is also expected to improve because of various social welfare measures, a higher weightage has to be- given to food consumption. This implies a better management of food economy with relative price stability than has been the case in the recent years.
3.2.8 Given the feasible level of domestic savings and resources from abroad, an investment level of Rs. 798000 crores is possible during the Eighth Plan. This implies an investment rate of 23.2 per cent of GDP. Given the stipualated incremental capital output ratio (ICOR), this investment will generate a growth of 5.6 per cent in GDP. The investment rates in the Sixth and the Seventh Plans were 21.1 per cent and 22.7 per cent respectively.
3.2.9 An important element of the macro-dimension of the plan is the size of the public sector outlay. Public sector outlay has two components: (a) investment and (b) current outlay. The current outlay corresponds to plan expenditure of a recurring and non- investment nature which is needed to initiate the accrual of benefits from the investment. In previous plan periods current outlay has been roughly of the order of 17 per cent of the plan investment. The current outlay is relatively higher in the social sectors which are primarily funded out of the budgets of Central and State Govts and the main among these are health, family welfare, education, welfare of weaker sections, etc. Keeping in view the overall sectoral priorities, a current
43
Table 3.3 Macro - Parameters for the Eighth Plan (1992-97)
Rates/Ratios Seventh Seven Years Eighth Plan
Plan(1985- including (1992-97)
90) Seventh Plan
(1985-92)
0 1 2 3 4
1. Rate of Growth in GDP
(% per annum) 5.8 5.3 5.6
2. Domestic Saving (% of GDP) 20.3 20.7 21.6
3. Investment (% of GDP) 22.7 23.1 23.2
4. Current Account Deficit
(% of GDP) + 2.4 2.4 1.6
5.ICOR 3.9 4.3 4.1
6.Growth Rate in :-
Exports of Goods(% per annum) # 8.1 *8.5 13.6
Imports of Goods(% per annum) 10.0 *7.5 8.4
+ In the Seventh Plan, the interest paid on NRI deposits
was not included as part of Current Account Deficit
(CAD) since RBI released the NRI capital inflow data
after accounting for the interest paid. The CAD
projection for Eighth Plan includes the interest paid on
NRI deposits, as an item of import of non factor
services.
# This is estimated on the basis of for five years of
the Seventh Plan period. As per D.G.C.I& S. quantum
index, the estimates are 7.6% for plan period and 11.6%
during the last four years of the Seventh Plan.
* These represent only six years average since the year 1991-
92 has been an abnormal year in respect of foreign trade.
outlay component at the level of about 20 per cent of public sector investment has been considered necessary for the Eighth Plan.
3.2.10 An outlay of Rs.434,100 crores is planned for public sector. This will have an investment component of Rs.361 thousand crores and a current outlay component of Rs. 73100 crores. The public sector investment, then, will amount to 45.2 per cent of the total domestic investment, allowing for a much larger space for the private sector than has hitherto been given. The share of public sector investment in the total is shown in table 3.4. The sectoral pattern of investment and its financing in the Eighth Plan is presented in table 3.5.
3.2.11 Even accepting the most selective role for public sector, there is the 'requirement' side which has to be looked at. Since the projects have long gestation period in the infrastructure sector, the investments in the immediate
Table 3.4 Share of Public Sector in Total Investment
Public Sector Investment
(as % of total investment)
Projected Realised
Fifth Plan (1974-79) 57.6 43.3
Sixth Plan (1980-85) 52.9 47.8
Seventh Plan (1985-90) 47.8 45.7
Eighth Plan (1992-97) 45.2
future determine the longer term growth possibilities for the economy. In the recent two annual plans (1990-92), the investment in oil, coal, power, railways and irrigation has been confined generally to the already approved ongoing projects, and new projects for the future needs, in general, could not be provided for. Infrastructural bottlenecks can lead to a situation
44
Table 3.5 Sectoral Pattern of Investment and its Financing in the
Eighth Plan (1992-97)
(Rs.Crores at 1991-92 Prices)
Sources of Financing the Investment Investment Current Aggregate
Outlay outlay
S.No. Sector
Own Saving Transfer Rest of the
from World
Household
Sector's
Savings
(0) (1) (2) (3) (4) (5) (6) (7)
1. Public Sector 68900 258400 33700 361000 73100 434100
2.Private Corporate 68930 587770 21300 149000
Sector
3.Household Sector 605170 -317170 - 288000
743000 - 55000 798000
Table 3.6 Share of Centre and States in Public Sector Plan Outlay
(Rs. crores)
Item Annual Plan Annual Plan Eighth Plan
1991-92 1992-93 At 1991-92 prices
At current At current
prices) prices)
1. Central Deptts.
1.1 Outlay 42,969 48,407 247,865
1.2 Budgetary Support 19,015 18,501 103,725
1.3 IEBR 23,954 29,906 144,140
States & UTs outlay 28,107 32,365 186,235
2.Union Territories
2.1 Outlay 1,277* 1,291 6,250
2.2 Budgetary Support 1,277* 1,291 6,250
3. States
3.1 Outlay(1) 26,830* 31,074 179,985
3.2 Central Assistance 13,428 14,820 78,500
3.3 States own Resources 13,402 16,254 101,485
Total Plan outlay- (1.1
+ 2.1 + 3. 1) 71,076* 80,772 434,100
(1) Includes outlay for Area Programmes
* Excludes Rs. 1072 crores Plan Loans to States which were not
finally agreed to by Ministry of Finance and the 'Model Villages"
Scheme and "Equity Base for Cooperatives" which were subsequently
dropped.