The approach paper to the 12th Five-year Plan aims for gross domestic product (GDP) growth of 9-9.5%, but qualifies this by pointing out that even 9% growth will be difficult given the constraints. The Planning Commission is probably mindful of the fact that the only reason we had good growth during the financial crisis was because of the fiscal and monetary stimulus. The approach paper, however, is committed to reduce the Central government’s fiscal deficit from an average 4.9% in the 11th Plan to 3.3%. Nor do we have a supportive global environment. In its mid-term appraisal of the 11th Plan, the Planning Commission had said that 9% growth has in the past been achieved only when growth in the industrialized world has been around 3%. Yet, Morgan Stanley currently forecasts growth in 2012 of 0.5% for Europe and 2.1% for the US. Economists are saying it will take years before the process of de-leveraging is completed in the affected countries. Given these problems, it’s likely that the Indian economy, too, will face a period of slower growth in the short term. The Planning Commission document, in fact, says most of the increase in the gross budgetary support for the Plan will be in the last two years of the 12th Plan, as the fiscal deficit will have to be reduced from 4.6% in 2011-12 to 3% by 2014-15.
Growth will also be slower because the challenges are assuming alarming proportions. For instance, the targeted growth in manufacturing is 11-12%, simply because that’s the minimum needed to create jobs to transfer the surplus population out of agriculture. But manufacturing growth has been a mere 8% or so in the 11th Plan. A critical need for higher manufacturing growth is increased power supply. The 12th Plan has an ambitious target for additional capacity, but it candidly says that the ability to create new capacity is seriously undermined by losses of an estimated Rs.70,000 crore per year in power distribution companies (discoms). Disquietingly, the paper says that “these losses are being sustained only because banks continue to lend to what are effectively bankrupt discoms”. What it will do to bank bad debts is anybody’s guess. Coal imports, needed for the power plants, will increase from the current 80 million tonnes (mt) to 250 mt by the end of the 12th Plan. Port and transport capacity will have to be increased manifold to take care of these import needs. There are many other instances of such supply-side limitations.
In short, it is now crystal clear that the Indian economy is bumping up against the structural constraints to its growth. Rapid and substantial economic reform can no longer be put off.
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