 MACRO DIMENSIONS OF THE PLAN

Constraints to Growth

2.1 There are four principal constraints to acceleration of growth in India at present. These are : (a) availability of investible resources, or savings; (b) availability of resources to the Government, both Centre and States, for meeting the development objectives; (C) availability of foreign exchange for ensuring balance of payments sustainability; and (d) adequate availability of infrastructure for supporting high level of capacity utilisation and sustained growth. These constraints are not entirely independent of each other.

2.2 The total volume of investable resources available in the economy is determined both by the level of domestic savings and by the inflow of foreign savings to finance the current account deficit. Domestic savings originates from three principal sectors, namely, (a) the Government including the public sector; (b) the private corporate sector; and (c) households. The inflow of foreign savings can be either in the form of debt, both public and private, or foreign investment, both direct and portfolio.

2.3 In the Eighth Plan, total domestic savings is likely to average 23.75 per cent of GDP, with the private sector savings being 22.15 per cent and public savings about 1.6 per cent. In addition, the current account deficit may be 1.27 per cent of GDP. Thus total investable resources available are likely to be about 25 per cent of GDP. This level of investment has supported a growth rate of GDP of about 5.9 per cent, thereby implying an incremental Capital Output Ratio (ICOR) of about 4.23. The possibility of increasing the rate of growth in the economy would depend upon increasing the total level of investable resources and/or reducing the ICOR.

2.4 The total tax receipts of the Government amount to about 15.3 per cent of GDP during the Eighth Plan, but after taking into account direct subsidies of about 2.6 per cent of GDP, the net tax receipts were of the order of 12. 7 per cent. This is roughly divided between indirect taxes less subsidies of 9.8 per cent and direct taxes of 2.9 per cent. Direct consumption expenditure of Government works out to about 10.9 per cent of GDP. Therefore, in order to achieve a public investment level of even 9. 1 per cent as compared to the target of 9. 9 per cent, the Government has had to borrow 7.3 per cent of GDP from the rest of the economy and from abroad. Although some progress has been made in reducing the over-all fiscal deficit of the Government, public borrowings continue to be too high for sustainability. Any effort to increase the growth rate of

the economy has to take into account two important facets of the role of public investment and public borrowings. On one hand, efforts to increase public expenditures through enhanced borrowings tends to reduce private investment by preempting investable funds and causing what is known as "crowding out". On the other hand, it has also been found that private investments tend to be positively correlated to public investment, especially in infrastructure. The reason for this is that in the absence of adequate infrastructural facilities and. the increase in aggregate demand caused by public investment, the efficiency and capacity utilisation of private investment tend to suffer. The influence of these two factors have to be explicitly taken into account while framing public investment plans. By and large, there is a certain level of public investment which is essential for private investment demand to be generated and to be productive. Public investment above this level may crowd out private investment unless the public sector generates sufficient additional savings of its own.

2.5 In so far as foreign exchange balances are concerned, the current account deficit during the Eighth Plan would amount to about 1.27 per cent of GDP, which is well below the flow of' external funds into the economy. This has enabled the country to build up its foreign change reserves to over US $ 18 billion at present However, any effort at increasing the rate of growth is likely to lead to a substantial increase in the demand for imports and, unless the rate of growth of exports also picks up adequately, the balance of payments may come under pressure. This may be obviated to some extent by external capital flows, which would have to be appraised in the light of their implications for future repayment and servicing requirements. If the country is not confident of being able to increase its domestic savings rate sufficiently and on a sustained basis, it would be imprudent to plan for faster growth on the basis of external capital flows.

2.6 At any given point in time, the availability and efficiency of economic infrastructure determines more or less the level of production in the economy and the extent to which trade transactions cart take place both within the country and abroad. Since most infrastructural investment have fairly Long gestation periods, the availability of infrastructure can be augmented in the short run only to a limited extent. In a planning framework, however, unless infrastructural investments are made to a sufficient extent in the current plan, it can have negative effects on the growth of the economy in the post-Plan period. In the Eighth Plan, investment in most of the infrastructure sectors has fallen well below target. consequently, the total availability of infrastructural facilities places a restriction on the achievable rate of growth.

Assumptions for the Base Year

2.7 Keeping in view the above constraints, the broad quantitative dimensions of the Ninth Five Year Plan have been worked out. Since the Plan will commence from April 1, 1997 and will cover the five year period of 1997-98 to 200102, the base year for the exercises is 1996- 97. All the calculations are presented at prices that are assumed to prevail in 1996-97. Since the full National Accounts data are not available for the year 1996-97, certain projections have been made on the basis of the data available upto this point of -time (i.e., November, 1996). it has been assumed that the average growth rate of GDP during 1996-97 will be 6.6 per cent with an inflation rate of 7 per cent. It is also assumed that the current account deficit will be 1.7 per cent of GDP, with exports growing at about 15 per cent in dollar terms and imports growing somewhat faster at about 17 per cent. As indicated later, active policy initiative is necessary to achieve this.

2.8 The average growth rate that is likely to be achieved in the Eighth Plan in terms of the GDP market" prices is 5. 9 per cent. This has been supported by an average investment rate of 25 per cent of GDP, thereby yielding an ICOR of 4.23, which is higher than 4.1 which was assumed in the Eighth Plan calculations. This increase in ICOR has occurred despite perceptible improvement in the growth rate. 'The principal factors behind this increase in ICOR appears to be the significant increases that have taken place in the ICORs of some of the infrastructural sectors. This, however, should not be a matter of serious concern as the aims of development are more than merely increasing the levels of income measured in conventional terms.

2.9 A more serious problem however is that because of fiscal difficulties, a total public investment has slipped quite sharply from the Eighth Plan targets. During Plan formulation it had been assumed that public investment would form 43 per cent of total investments in the country. In actuality however it is unlikely to be greater than 36.5 poor cent. On the Other hand, total investment cat 25 per cent of GDP has significantly exceeded the Eighth Plan target of 2 per cent. Taking this into account, the slippage in public investment as a percentage of GDP has been from the target Of 9.9 per cent to 9.1 per cent. On the positive side, there appears to be some buoyancy in private investment which has increased from the target of 13.1 percent of GDP to 15.9 per cent.

The Base-line Scenario

2.10 Keeping these factors in mind, the macro-economic performance of the economy that is likely during the Ninth Five Year Plan has been worked out on the basis of a model that has been developed specifically for this purpose. In

calculating the parameters of the model for the Ninth Plan period, a number of, specific assumptions have been made which need to be noted. First, it has been assumed that the trend towards improvement in public savings and total domestic savings, witnessed in the last couple of years, will continue during the Ninth Plan. It is felt however, that the bulk of the improvement in public savings will have to come about in the savings performance of the Government, and that the savings performance of the public sector undertakings as a percentage of GDP cannot be expected to improve very substantially without substantial improvements in efficiency and productivity. The improvement in Government savings will have to arise essentially from combined improvement in taxes net of subsidies, with public consumption expenditure more or less maintaining its share of GDP. Total public investment, which includes the Centre, the States and all public sector enterprises, has been determined with a view to achieving a fiscal deficit target of 4.0 per cent for the Centre during the Plan period. In view of the emphasis that is being placed on investment in Infrastructure, the ICOR will tend to rise from 4.24 during the Eighth Plan to 4.34 during the Ninth Plan. This assumption is necessary to ensure that the growth rate of the economy does not suffer in the post-Plan period due to infrastructural bottlenecks. While it is necessary to protect the investment in infrastructure in the interest of sustaining growth in the longer-run, this emphasises the need for taking measures and adopting policies which induce efficiency and reduce ICORs.

2.11 The detailed quantitative projections of the baseline growth scenario for the Ninth Five Year Plan are presented in the tables contained in Annex-I. As may be seen, in the base-line scenario, based on recent trends, growth rate is projected to be average about 6.2 per cent per annum. This projected growth rate assumes a step-up in both private and public savings, and a current account deficit of about 1.7 per cent of GDP. If the current account deficit can be permitted to rise upto 2 per cent, some minor slippage in private savings may not be difficult to manage. As far as public savings is concerned, however, any slippage from the targets would lead either to an increase in public borrowings or reductions in the level of public investment, particularly in infrastructure. Neither is desirable.

2.12 As far as government revenues are concerned, it has been assumed that indirect tax receipts of the Central government as a percentage of GDP cannot increase significantly, and may indeed decline marginally. Indirect tax receipts of the State governments, however, can be .increased quite substantially, and efforts would have to be made in this direction. More importantly, the growth rate of direct subsidies, by both the Centre and States, which account for about 3 per cent of GDP, need to be contained.

This scenario permits subsidies to grow at a rate about 4 per cent, per annum in constant, prices. In this scenario, the share of direct taxes, in GDP is assumed to grow slowly over the share that is likely to be achieved in, 1996-97, reflecting a lower buoyancy than has been observed over the last three years.

2.13 Exports are assumed to grow at an average annual rate of 12 per cent in teal terms, which translates to about 15.5 to 16 per cent in dollar terms. This rate of growth of exports is derived under the assumption, that the share. of exports in incremental output' of the manufacturing sector rises from the present level of 22 per cent to above 35 per cent. If the domestic savings targets are attained, imports are likely to grow at a somewhat lower pace of 11.4 per cent in real terms. There is a possibility that if the dollar price of imports rises faster than the dollar price of exports, the current account deficit may widen, but there is some slack available to absorb this possibility.

2.14 In this scenario, public investment as a whole would be about 33 per cent of total investment in the economy, which is considerably lower than the 43 per cent that was assumed during the Eighth Plan and the 36.5 per cent that is likely to be attained. This is primarily the outcome of attempts at achieving a more sustainable fiscal balance. It is necessary therefore to prioritise public investment carefully in order to ensure that the objectives of growth and welfare are met within the limited resources that would be available to the government.

2.15 The size of national investment (public and private sectors taken together) under this scenario will be about Rs. 2004 thousand crores for the entire Plan period, of which public investment will be Rs. 663 thousand crores. This implies a step-up in public investment of about 20 per cent over the Eighth Plan in real terms. In view of the increased emphasis on social sectors, and the higher, revenue to capital component of these expenditures, the current outlay component of the plan will be 18 per cent. This would yield a total outlay for the Ninth Plan of Rs. 780 thousand crores.

2.16 The standard of living of the people is determined by the growth in private consumption. In this scenario private consumption is likely to grow by 5.9 per cent per annum, which amounts to a growth in per capita consumption of 4.2 per cent assuming a growth rate of population of 1.7 per cent over the Plan period. This compares very favourably with the 2.9 per cent and 3.5 per cent growth that were recorded during the Seventh and Eighth Plan periods.

2.17 On the negative side, under this scenario, the pattern of growth and the likely employment elasticities are

such that the employment potential created will barely absorb the additions to the labour force during the Plan period. However, because of increase in infrastructure investment, the conditions are created for sharp reduction in the unemployment rate during the post- Plan period. Even during the Plan, the quality of employment is likely to be Considerably better than earlier in view of the rapid increases in income.

The Accelerated Growth Scenario

2.18 The Common Minimum Programme announced by the Government envisages a growth rate of 7 per cent during the Ninth Plan. In order to reduce unemployment and alleviate poverty, this order of growth rate is desirable, and it should constitute the objective of Ninth Plan. However, in order to achieve a growth rate of this order, a great deal of effort would be required to further step up the rate of savings and investment. in the economy, in addition to substantial improvement in productivity of a few key sector's leading to a drop in the capital-output ratios. Efforts will need to be made to achieve an agricultural growth rate of 4.5 per cent per annum through regionally differentiated Strategies in order to make a visible impact on poverty. The quantitative projections for this accelerated growth scenario are presented in the tables given in Annex-II. it needs to be noted that in working out this scenario it has been assumed that the public investments in social infrastructure are maintained at the same level as have been assumed in the base-line scenario.

2.19 Although investment in basic infrastucture sectors that are in the pipe line are barely adequate for sustaining a growth rate of around 6 per cent as projected in the base-line scenario, there does exist some possibility of increasing the availability through sharper increases in efficiency and capacity utilisation than has been assumed. In the accelerated scenario therefore, it is assumed that the public sector particularly in the infrastructure sectors, will improve its efficiency and financial performance to a substantial extent. This will not only generate the necessary resources for public investment but it will also enhance the attractivenes of infrastructural investment by the private sector.

2.20 The investment rate required to attain a growth rate of 7 per cent would be 28.6 per cent of GDP as compared to 26.9 per cent of GDP in the base-line. This is despite a drop in the ICOR occurs form 4.34 in the base-line scenario to 4.08, which is significantly lower than the Eighth Plan average. This drop in ICOR occurs from two influences. First, it would be assumed that the process of economic reforms would continue. This would lead to phased elimination of outdated technologies and therefore higher energy and material efficiency in the industrial sectors.

Second, the efficiency and productivity of five infrastructural sectors, namely Irrigation, Mining, Power, Railways and Communications, are assumed to go up significantly. This has two positive effects. First, the increase in efficiency and capacity utilisation provides the supply from these sectors necessary to maintain the 7 per cent growth rate. Secondly, the increase in the average price realisation, through rationalisation of tariffs, leads to increases in both the savings originating from these sectors and the measured value-additions, which is the instrumentality for reducing the ICORs.

2.21 Since prudent management of external liabilities do not permit an increase in the current account deficit to more than 2.5 per cent of GDP, it becomes necessary for the domestic savings rates to rise by 1 percentage points over the base-line, that is from 25.2 per cent of GDP to 26.2 per cent. Since private savings are not likely to go up significantly, public savings will need to increase from 2 per cent of GDP in the base line to 2.8 per cent. This increase in the savings rate would have to come partly from higher internal resource generation of the public sector enterprises, particularly the public infrastructural sectors mentioned above, and partly from the government. In particular, the revenue raising potential of the government should increase through greater tax effort and local efforts, consequent on decentralisation, at revenue raising by Panchayati Raj Institutions. Effective decentralisation and people's participation should certainly lead to better local efforts to mobilise local resources. Therefore, by the end of the Ninth Plan period, the government as a whole, including both the Centre and the States, would have to reach a position of revenue neutrality as compared to the large revenue deficits that exist at present. This is no easy task, particularly in view of the Ninth Plan focus on Basic minimum services, which have large revenue components in expenditure.

2.22 Since much of the additional. growth occurs due to an increase in the growth rate of the industrial sector, it permits a higher target level of export growth, which rises to 14.5 per cent in real terms. However, as is to be expected, import growth is much faster at 15.3 per cent. Although this leads to an increase in the current account deficit, it is within a manageable range. To the extent that domestic savings, public and private can be increased further, there will be scope for current account deficit to be lower than projected.

2.23 The size of national investment in this scenario rises substantially to Rs. 2190 thousand crores. Public investment rises even faster to Rs. 760 thousand crore, so that the share of public investment to total investment rises to 34.7 per cent from 33 per cent in the baseline The total, size of the Ninth Plan therefore works out to Rs.