(Sample Materials) Economic Survey & Government’s Plan, Programme & Policies - "Twelfth Plan : An Overview"

Contents of the Chapter:

• Introduction
• Managing Natural Resources and the Environment
• Vision and Aspirations
• Enagement with the World
• Developing Capabilities
• Key Policy Initiatives Needed

INTRODUCTION

India’s 1.25 billion citizens have higher expectations about their future today, than they have ever had before. They have seen the economy grow much faster in the past 10 years than it did earlier, and deliver visible benefits to a large number of people. This has understandably raised the expectations of all sections, especially those who have benefited less. Our people are now much more aware of what is possible, and they will settle for no less. The Twelfth Five Year Plan must rise to the challenge of meeting these high expectations.

The Initial Conditions

Though expectations have mounted, the circumstances in which the Twelfth Plan has commenced are less favourable than at the start of the Eleventh Plan in 2007–08. At that time, the economy was growing robustly, the macroeconomic balance was improving and global economic developments were supportive. The situation today is much more difficult. The global economy is going through what looks like a prolonged slowdown. The domestic economy has also run up against several internal constraints. Macro-economic imbalances have surfaced following the fiscal expansion undertaken after 2008 to give a fiscal stimulus to the economy. Inflationary pressures have built up. Major investment projects in energy and transport have slowed down because of a variety of implementation problems. Some changes in tax treatment in the 2012–13 have caused uncertainty among investors.

These developments have produced a reduction in the rate of investment, and a slowing down of economic growth to 6.5 per cent in 2011–12, which was the last year of the Eleventh Plan. The growth rate in the first half of 2012–13, which is the first year of the Twelfth Plan, is even lower. The downturn clearly requires urgent corrective action but it should not lead to unwarranted pessimism about the medium term. India’s economic fundamentals have been improving in many dimensions, and this is reflected in the fact that despite the slowdown in 2011–12, the growth rate of the economy averaged 7.9 per cent in the Eleventh Plan period. This was lower than the Plan target of 9 per cent, but it was marginally higher than the achievement of 7.6 per cent in the Tenth Plan. The fact that this growth occurred in a period which saw two global crises, one in 2008 and another in 2011, is indicative of the resilience which the economy has developed.

The Policy Challenge

The policy challenge in the Twelfth Plan is, therefore, two-fold. The immediate challenge is to reverse the observed deceleration in growth by reviving investment as quickly as possible. This calls for urgent action to tackle implementation constraints in infrastructure which are holding up large projects, combined with action to deal with tax related issues which have created uncertainty in the investment climate. From a longer term perspective, the Plan must put in place policies that can leverage the many strengths of the economy to bring it back to its real growth potential. This will take time but the aim should be to get back to 9 per cent growth by the end of the Twelfth Plan period.

The preparation of a Five Year Plan for the country is an opportunity to step back, take stock of the ‘big picture’, identify the strengths that can be leveraged to enable the country to move forward, and the constraints that could hold it back, and on this basis develop a strategic agenda. In developing such an agenda, the Planning Commission has relied on four key elements.

• First, the strategy must be firmly grounded in an understanding of the complexities of the development challenges that India faces, recognising the transformation that is taking place in the economy and in the world. This understanding of the ground reality must be used to identify the critical leverage points where government action could have the maximum impact. The focus must be on identifying the strategic leverage points where successful action could trigger many supportive reactions rather than fixing everything everywhere.

• Second, progress will be achieved through a combination of government action in both policies and public programmes, and the efforts of many private actors that are important in the economy. Much of the inclusive growth we hope to achieve depends on investment in the private sector which accounts for over 70 per cent of total investment. This includes not only the organised corporate sector, but also Micro, Small and Medium Enterprises (MSMEs), individual farmers and myriads of small businessmen who add to Gross Domestic Product (GDP) and create jobs. The dynamism of this segment, and its ability to seize economic opportunities, is critical for inclusive growth and the Plan must address the constraints faced by all these private actors in achieving better results.

• Third, the outlay on government programmes has to increase in many areas but this must be accompanied by improved implementation. For this, it is necessary to focus on capacity building and governance reforms, including system change that will increase accountability in the public sector. The Twelfth Plan must back this focus by making specific allocations to improve the ability of government to work better.

• Finally, the planning process must serve as a way of getting different stakeholders to work together to achieve broad consensus on key issues. These stakeholders include (i) different levels of the government sector: Centre, States and Panchayati Raj Institutions (PRIs)/Urban Local Bodies (ULBs); (ii) the private sector, both big companies and small businesses, whose investments will drive our growth and (iii) citizens’ groups and the voluntary sector, who bring the key element of people’s participation and can greatly help improve the quality of government action.

VISION AND ASPIRATIONS

The broad vision and aspirations which the Twelfth Plan seeks to fulfil are reflected in the subtitle: ‘Faster, Sustainable, and More Inclusive Growth’. The simultaneous achievement of each of these elements is critical for the success of the Plan.

The Need for Faster Growth

Planners are sometimes criticised for focusing too much on GDP growth, when the real objective should be to achieve an improved quality of life of the people across both economic and non-economic dimensions. The Twelfth Plan fully recognises that the objective of development is broad-based improvement in the economic and social conditions of our people. However, rapid growth of GDP is an essential requirement for achieving this objective.

There are two reasons why GDP growth is important for the inclusiveness objective. First, rapid growth of GDP produces a larger expansion in total income and production which, if the growth process is sufficiently inclusive, will directly raise living standards of a large section of our people by providing them with employment and other income enhancing activities. Our focus should not be just on GDP growth itself, but on achieving a growth process that is as inclusive as possible. For example, rapid growth which involves faster growth in agriculture, and especially in rain-fed areas where most of the poor live, will be much more inclusive than a GDP growth that is driven entirely by mining or extraction of minerals for exports. Similarly, rapid growth which is based on faster growth for the manufacturing sector as a whole, including MSME, will generate a much broader spread of employment and income earning opportunities and is therefore more inclusive than a growth which is largely driven by extractive industries.

The second reason why rapid growth is important for inclusiveness is that it generates higher revenues, which help to finance critical programmes of inclusiveness. There are many such programmes which either deliver benefits directly to the poor and the excluded groups, or increase their ability to access employment and income opportunities generated by the growth process. Examples of such programmes are the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Sarva Siksha Abhiyan (SSA), Mid Day Meals (MDMs), Pradhan Mantri Gram Sadak Yojana (PMGSY), Integrated Child Development Services (ICDS), National Rural Health Mission (NRHM), and so on. This is also relevant for the sustainability objective since programmes aimed at making development more sustainable also involve additional costs.

Growth Prospects

The Approach Paper to the Twelfth Plan, approved by the National Development Council (NDC) in 2011, had set a target of 9 per cent average growth of GDP over the Plan period. That was before the Eurozone crisis in that year triggered a sharp downturn in global economic prospects, and also before the extent of the slowdown in the domestic economy was known. A realistic assessment of the growth prospects of the economy in the Twelfth Plan is that it concludes that the current slowdown in GDP growth can be reversed through strong corrective action, including especially an expansion in investment with a corresponding increase in savings to keep inflationary pressures under control. However, while our full growth potential remains around 9 per cent, acceleration to this level can only occur in a phased manner, especially since the global economy is expected to remain weak for the first half of the Plan period. Taking account of all these factors, the Twelfth Plan should work towards bringing GDP growth back to an inclusive 9 per cent in the last two years of the Plan, which will yield an average growth rate of about 8.2 per cent in the Plan period. The outcome is conditional on many policy actions as is described in scenario one.

Within the aggregate GDP growth target, two sub-targets are especially important for inclusiveness. These are a growth rate of 4 per cent for the agricultural sector over the Twelfth Plan period and around 10 per cent in the last two years of the Plan for the manufacturing sector.

The Twelfth Plan’s strategy for growth depends crucially on productivity gains as one of the key drivers of growth. Productivity is the additional contribution to growth after taking account of the effect of capital accumulation and growth in labour. These traditional sources of growth are not likely to be enough for India in the coming years and we must therefore focus much more on productivity improvements among all constituents: big businesses, MSMEs, farmers and even government. This can be done by improving the business regulatory environment, strengthening the governance capacity of States, investing more in infrastructure rather than subsidies, and by using Science and Technology (S&T) to drive innovation.

Alternative Scenarios

The projection of 8.2 per cent growth in the Twelfth Plan period should not be viewed as a ‘business as usual’ outcome that can be realised with relatively little effort. It is in fact a projection of what is possible if we take early steps to reverse the current slowdown and also take other policy actions needed to address other key constraints that will otherwise prevent the economy from returning to a higher growth path. Failure to act firmly on these policies will lead to lower growth and also poorer outcomes on inclusiveness.

To illustrate the consequences of inaction on key growth promoting policies, the Planning Commission has undertaken a systematic process of ‘scenario planning’ based on diverse views and disciplines to understand the interplay of the principal forces, internal and external, shaping India’s progress. This analysis suggests three alternative scenarios of how India’s economy might develop titled, ‘Strong Inclusive Growth’, ‘Insufficient Action’ and ‘Policy Logjam’.

The first scenario ‘Strong Inclusive Growth’, describes the conditions that will emerge if a well-designed strategy is implemented, intervening at the key leverage points in the system. This in effect is the scenario underpinning the Twelfth Plan growth projections of 8.2 per cent, starting from 6.7 per cent in the first year to reach 9 per cent in the last year and the second scenario ‘Insufficient Action’ describes the consequences of half hearted action in which the direction of policy is endorsed, but sufficient action is not taken. The growth in this scenario declines to around 6 per cent to 6.5 per cent. The third scenario ‘Policy Logjam’, projects the consequences of Policy Inaction persisting too long. The growth rate in this scenario can drift down to 5 per cent to 5.5 per cent.

The Meaning of Inclusiveness

Inclusiveness means many different things and each aspect of inclusiveness poses its own challenges for policy.

Inclusiveness as Poverty Reduction

Distributional concerns have traditionally been viewed as ensuring an adequate flow of benefits to the poor and the most marginalised. This must remain an important policy focus in the Twelfth Plan. It is worth noting that the record in this dimension of inclusiveness is encouraging. The percentage of the population below the official poverty line has been falling but even as that happens, the numbers below the poverty line remain large. According to the latest official estimates of poverty based on the Tendulkar Committee poverty line, as many as 29.8 per cent of the population, that is, 350 million people were below the poverty line in 2009–10. Questions have been raised about the appropriateness of the Tendulkar poverty line which corresponds to a family consumption level of `3900 per month in rural areas and `4800 per month in urban areas (in both cases for a family of five). There is no doubt that the Tendulkar Committee poverty line represents a very low level of consumption and the scale of poverty even on this basis is substantial. An Expert committee under Dr. C. Rangarajan has been set up to review all issues related to the poverty line keeping in view international practices.

It is well established that the percentage of the population in poverty has been falling consistently but the rate of decline was too slow. The rate of decline in poverty in the period 2004–05 to 2009–10 was 1.5 percentage points per year, which is twice the rate of decline of 0.74 percentage points per year observed between 1993–94 and 2004–05. Normally, large sample surveys used for official estimates of poverty are conducted every five years, but because 2009–10 was a drought year, the National Sample Survey Office (NSSO) felt that it would tend to overstate poverty and it was therefore decided to advance the next large sample survey to 2011–12. The results of this survey will yield an official estimate of the extent of poverty in 2011–12, that is, the position at the end of the Eleventh Plan period, but this will be available only in mid-2013. However, preliminary results from the survey have been published and they suggest that the percentage of the population in poverty will decline significantly compared to 2009–10. According to some non-official estimates, the rate of decline in poverty between 2004–05 and 2011–12 will be close to 2 per cent per year, which was the Eleventh Plan target. If this turns out to be the case, it can be claimed that the Eleventh Plan has indeed delivered on inclusiveness.

Inclusiveness as Group Equality

Inclusiveness is not just about bringing those below an official fixed poverty line to a level above it. It is also about a growth process which is seen to be ‘fair’ by different socio-economic groups that constitute our society. The poor are certainly one target group, but inclusiveness must also embrace the concern of other groups such as the Scheduled Castes (SCs), Scheduled Tribes (STs), Other Backward Classes (OBCs), Minorities, the differently abled and other marginalised groups. Women can also be viewed as a disadvantaged group for this purpose. These distinct ‘identity groups’ are sometimes correlated with income slabs—the SCs and STs, for example, are in the lower income category—and all poverty alleviation strategies help them directly. Women on the other hand span the entire income spectrum, but there are gender-based issues of inclusiveness that are relevant all along the spectrum.

Inclusiveness from a group perspective obviously goes beyond a poverty reduction perspective and includes consideration of the status of the group as a whole relative to the general population. For example, narrowing the gap between the SCs or STs and the general population must be part of any reasonable definition of inclusiveness, and this is quite distinct from the concern with poverty, or inequality. For example, it is perfectly possible for anti-poverty strategies to be reducing income poverty among SCs and STs without reducing the income gap between these groups and the general population.

Inclusiveness as Regional Balance

Another aspect of inclusiveness relates to whether all States, and indeed all regions, are seen to benefit from the growth process. The regional dimension has grown in importance in recent years. On the positive side, many of the erstwhile backward States have begun to show significant improvement in growth performance and the variation in growth rates across States has narrowed. However, both the better performing and other States are increasingly concerned about their backward regions, or districts, which may not share the general improvement in living standards experienced elsewhere. Many of these districts have unique characteristics including high concentration of tribal population in forested areas, or Minorities in urban areas. Some districts are also affected by left wing extremism, making the task of development much more difficult.

In the Twelfth Plan, we must pay special attention to the scope for accelerating growth in the States that are lagging behind. This will require strengthening of States’ own capacities to plan, to implement and to bring greater synergies within their own administration and with the Central Government. As a first step, the Planning Commission is working with it’s counterpart Planning Boards and Planning Departments in all State Governments to improve their capabilities. An important constraint on the growth of backward regions in the country is the poor state of infrastructure, especially road connectivity, schools and health facilities and the availability of electricity, all of which combine to hold back development. Improvement in infrastructure must therefore be an important component of any regionally inclusive development strategy.

Inclusiveness and Inequality

Inclusiveness also means greater attention to income inequality. The extent of inequality is measured by indices such as the Gini coefficient, which provide a measure of the inequality in the distribution on a whole, or by measures that focus on particular segments such as the ratio of consumption of the top 10 per cent or 20 per cent of the population to that of the bottom 10 per cent or 20 per cent of the population, or in terms of rural–urban, such as the ratio of mean consumption in urban versus rural areas. An aspect of inequality that has come sharply into focus in industrialised countries, in the wake of the financial crisis, is the problem of extreme concentration of income at the very top, that is, the top 1 per cent and this concern is also reflected in the public debate in India.

Perfect equality is not found anywhere and there are many reasons why it may not even be a feasible objective. However, there can be no two opinions on the fact that inequality must be kept within tolerable limits. Some increase in inequality in a developing country during a period of rapid growth and transformation may be unavoidable and it may even be tolerated if it is accompanied by sufficiently rapid improvement in the living standards of the poor. However, an increase in inequality with little or no improvement in the living standards of the poor is a recipe for social tensions. Static measures of inequality do not capture the phenomenon of equality of opportunity which needs special attention. Any given level of inequality of outcomes is much more socially acceptable if it results from a system which provides greater equality of opportunity. As a society, we therefore need to move as rapidly as possible to the ideal of giving every child in India a fair opportunity in life, which means assuring every child access to good health and quality education. While this may not be possible to achieve in one Plan period, the Twelfth Plan should aim at making substantial progress in this dimension.

Inclusiveness as Empowerment

Finally, inclusiveness is not just about ensuring a broad-based flow of benefits or economic opportunities, it is also about empowerment and participation. It is a measure of the success we have achieved in building a participatory democracy that people are no longer prepared to be passive recipients of benefits doled out by the Government. They are slowly beginning to demand these benefits and opportunities as rights and they also want a say in how they are administered. This brings to the fore issues of governance, accountability and peoples participation to much greater extent than before. This also covers areas like access to information about government schemes, knowledge of the relevant laws and how to access justice. The growing concern with governance has also focused attention on corruption. How to tackle corruption is now at the centre stage of policy debates.

Inclusiveness through Employment Programmes

One of the most important interventions for fostering inclusion during Eleventh Plan was the MGNREGA. While its achievements in ameliorating poverty and preventing acute distress during times of drought have been recorded and appreciated, there are also some complaints against MGNREGA, primarily on the grounds that it is a dole, involving huge expenditures that could have been spent more productively. There are also complaints that it is leading to increase in wages of agricultural labour and construction workers.

The view that rising wages by themselves represent a problem is not credible since this is the only mechanism through which landless agricultural labour can benefit from economic growth. If rising wages squeeze farm profitability, the solution lies in raising farm productivity to accommodate higher wages. In any case, rural labour relations in large parts of the country continue to be feudal, and use of migrant labour for both agriculture and construction continues to be exploitative. These inequities would not get corrected by themselves. We should not be looking to perpetuate a situation where low-cost labour provides the necessary profit margins for farmers, removing incentives to invest in efficiency improvement.

The main point to note is that employment schemes are not new in India, and they have a wellestablished poverty reducing impact. With National Sample Survey showing an eightfold increase in employment in public works after MGNREGA, there is no doubt that its impact on rural wage earnings and poverty has been much larger than all previous rural employment schemes. What is less appreciated is that this has been achieved with a rather modest increase in the share spent on rural employment schemes out of total Central Plan expenditures. It has increased from an average of 11.8 per cent in the three years before MGNREGA (2002–03 to 2004–05) to 13.3 per cent in the last three (2009–10 to 2011–12). This means that although MGNREGA is not free of leakages, these have declined considerably. Thus, far from opening a bottomless pit as some critics still claim, the provision of employment as a legal right, has greatly improved the share of intended beneficiaries in what government spends for development of rural areas.

There is also evidence that wherever land productivity has improved and greater water security been delivered, small and marginal farmers working in MGNREGA sites have reverted back to farming and allied livelihoods. There is also evidence that MGNREGA is enabling crop diversification, particularly into horticulture, wherever it has adequately converged with schemes of Agricultural Departments. An important lesson from this experience is that it is the quality of assets created, which will determine whether MGNREGA can go beyond the safety net to become a springboard for entrepreneurship, even at the lowest income levels.
Each of the dimensions of inclusiveness discussed above is relevant, and public attention often focuses on one or the other at different times. We should aim at achieving steady progress in each of these dimensions. Accelerated growth in recent years has yielded distinct benefits to many and the prosperity which this has generated is visible to all, raising the expectations of all sections of the population, and creating a demand for a fair share of the benefits of growth. Policymaking has to be watchful of developments in each dimension of fairness and be quick to take corrective steps as soon as the need arises. Box 1.1 provides an assessment of trends in some key variables which point to the greater inclusiveness of growth in recent years.

Environmental Sustainability

While striving for faster and more inclusive growth, the Twelfth Plan must also pay attention to the problem of sustainability. No development process can afford to neglect the environmental consequences of economic activity, or allow unsustainable depletion and deterioration of natural resources. Unfortunately, the experience of development in many countries, and our own past experience in some respects, suggests that this can easily happen unless appropriate corrective steps are taken at early stages. The Twelfth Plan must devise a strategy of development which effectively reconciles the objective of development with the objective of protecting the environment.

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