Macro-Economic dimensions and Policy framework
Growth and Investment Targets || Domestic Resources for the Plan || Sustainable Current Account Deficit and External Resources || Structure of Growth and the ICOR || Fiscal Balance, Inflation and the Monetary Stance || Issues in Aggregate Demand Management || Sectoral and Investment Pattern || Strategy for agricultural Development || Infrastructure and Basic Industries || The External Sector and International Dimensions || Issues in Finance Intermediation

Growth and Investment Targets

2.1 Accelerating the growth rate of the economy with stable prices is central to the attainment of a number of objectives discussed in the previous chapter. There is by now enough evidence to show that rapid growth has strong poverty reducing effects especially when it is complemented by a public policy stance which is sensitive to the needs of the poor. Accelerated growth will also help in realising the objectives of increasing employment and, through that, spread of income generation and poverty eradication. However, the linkage between growth, employment and poverty reduction depends crucially upon the sectoral pattern of growth and on the degree to which the disadvantaged segments of the population and the backward regions of the country are successfully integrated into the wider growth process.

2.2 The growth objective also subsumes a number of subsidiary objectives which have, at one time or another, been explicitly identified as objectives in earlier Five Year Plans. Industrialisation, productivity growth, infrastructural development, are examples of such subsidiary objectives. The logic of economic growth and the requirements of structural consistency demand that most of these subsidiary objectives are met in order to attain the primary objective of accelerating the over-all growth rate. It is therefore usually unnecessary to spell out each component of growth as a distinct objective unless it has direct bearing on the implementation of the over-all growth objective as possible alternative paths of development. It is in this context that agricultural growth has been specifically given the highest priority, as it determines a pattern of development that accelerates GDP growth with a rapid reduction in unemployment and poverty.

2.3 Economic growth is the outcome of numerous factors interacting with each other. For resource-constrained developing countries, capital accumulation or investment is the most important factor for increasing the productive capacity of the economy as well as for improving the productivity of the other factors of production. The Indian planning methodology has therefore traditionally focused on the relationship linking growth to the investment rate and the incremental capital-output ratio (ICOR), and the Indian Plans have been essentially investment plans, dealing with the allocation of investible resources among different sectors, maintaining inter-sectoral consistency towards attaining the targetted rates of growth. In a broad sense the results of such plans have not been unsatisfactory. As can be seen in Table 2-1, except for the Third and the Fourth Plans, the actual performance of the economy has usually been at or above the planned or targetted level. During these two Plans, the shortfalls were largely due to exogenous shocks that could not possibly be predicted. The Third Plan witnessed the drought years of 1965 and 1966, and the Indo-Pakistan War of 1965. The Fourth Plan experienced three consecutive years of drought (1971-1973) and the first oil-price shock of 1973.

    Table 2-1 : Growth Performance in the Five Year Plans
                                    (per cent per annum)
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                                Target          Actual 
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1. First Plan (1951-56)           2.1            3.61
2. Second Plan (1956-61)          4.5            4.27
3. Third Plan (1961-66)           5.6            2.84
4. Fourth Plan (1969-74)          5.7            3.30
5. Fifth Plan (1974-79)           4.4            4.80
6. Sixth Plan (1980-85)           5.2            5.66
7. Seventh Plan (1985-90)         5.0            6.01
8. Eighth Plan (1992-97)          5.6            6.78 
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2.4 Even today this approach remains useful as a starting point for assessing the limits of the possible alternative paths of development and the steps required for accelerating the growth rate of the economy. However, with the economic reforms of the last few years, some of the traditional instruments of implementing the Plans are no longer available. In particular, for determining the over-all rate of investment or its sectoral distribution, market forces, relative prices and incentives now play much more important roles than direct allocation of resources by public authorities. With the steady reduction in the share of public investment, both planned and actual, in total investment, as shown in Table 2-2, the ability of the Government to determine the structure of the economy through its own investment behaviour has eroded significantly. With the greater importance of private investment and the movement towards a more market based system, planning has to move away from direct intervention strategies to planning for policies. These issues will be addressed in this chapter.

 Table 2-2 : Share of Public Sector in Total Investment 
                                             (per cent)
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                                    Planned      Realised
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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          34.3
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2.5 The incremental capital-output ratio (ICOR) is a summary expression for the existing technical conditions and structural configuration of the economy which captures the relationship between investment and additional output. The ICOR is usually expressed as a relationship between investment and output in the same Plan period. However, there are gestation lags which are present in any investment activity, and the ICOR depends in fact on the pace of investment in the past creating additional output during the Plan period and also takes into account the investment which will create capacities for sustained growth in the future. In addition, different sectors of the economy have very different ICORs, and the aggregate ICOR for the whole economy is a weighted average of these sectoral ICORs. It depends crucially on the sectoral composition of investment and growth. The sectoral structure of growth, in turn, depends on a number of factors such as the pattern of demand, the nature of inter-sectoral linkages, and the possibilities of trade. Attempts are made to capture these complexities by using an input-output matrix based planning model. It needs to be kept in mind that the aggregate ICOR which has been used for discursive purposes in formulating this Plan is derived from a model which tries to capture the gamut of complexities which are inherent in any economy.

2.6 Since its inception, the planning methodology in India has been based on the assumption that the economy is savings constrained. In other words, it is assumed that the demand for investible resources always exceeds the supply, and hence the total level of investment is determined uniquely by the available level of savings. While this assumption was more true in the past than at present, with increased opportunities of borrowing from abroad and of foreign savings supplementing domestic savings, it is true that investment cannot exceed the total availability of savings for any length of time without incurring the risk of unsustainability. Indeed, the availability of total savings over a period determines the maximum sustainable level of investment, and hence of growth.

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

2.8 The growth prospects for the future need to be based on an analysis of the recent growth experience, a careful assessment of the resources which could be mobilised and the imperatives of meeting certain minimum social needs and aspirations. Care also has to be taken to ensure that the growth process is sustainable both in terms of external indebtedness of the country and the fiscal viability of the Government not only in the current Plan period but in the future as well. Since the Plan has commenced from April 1, 1997 and cover the five-year period from 1997-98 to 2001-02, the base year for the exercises is 1996-97. All the calculations are presented at prices that are assumed to prevail in 1996-97.

2.9 The average growth rate that has been achieved in the Eighth Plan in terms of the GDP at market prices is 6.8 per cent. This has been supported by an average investment rate of 25 per cent of GDP, thereby yielding an ICOR of 3.7, which is significantly less than the figure of 4.1 that was assumed in the Eighth Plan calculations. There has been a significant step-up in the domestic savings rate during the Eighth Plan period to 24 per cent of GDP as compared not only to the long period of stagnation experienced during the 1980s, but also in relation to the savings target assumed for the Eighth Plan, which was placed at 21.6 per cent. This is a positive development and augurs well for the future. On the other hand, the reduction in the over-all ICOR should have been sharper in view of the perceptible improvement in the growth rate, particularly in agriculture, and hides certain adverse developments. The principal cause of concern relates to significant increases that have taken place in the ICORs of some of the infrastructural sectors.

2.10 A more serious problem, however, is that because of fiscal difficulties, total public investment has slipped quite sharply from the Eighth Plan targets. During Plan formulation it had been assumed that public investment would form about 45 per cent of total investments in the country. In actuality, however, it is unlikely to be greater than 34 per cent, dipping to below 30 per cent in the closing years of the Plan as shown in Table 2-3. On the other hand, total investment at 25 per cent of GDP has significantly exceeded the Eighth Plan target of 23 per cent. Taking this into account, the slippage in public investment as a percentage of GDP has been from the target of 10.4 per cent to 8.3 per cent. This slippage of 2 percentage points has fallen disproportionately on infrastructure, both economic and social. On the positive side, there appears to be some buoyancy in private investment which has increased from the target of 12.6 percent of GDP to 16.6 per cent.

        Table 2-3 : Investment Shares in the Eighth Plan
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                          92-93  93-94  94-95 95-96  96-97   Plan
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1. Total Investment       22.4   22.7   25.6   27.1   27.3   25.0
   (% of GDP)
2. Public Investment      36.2   38.8   35.5   29.0   29.3   34.3
   (% of Total Investment)
3. Public Investment       8.1    8.8    9.1    7.9.   7.4   8.3
   (% of GDP)
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 Note: These shares are at current prices

2.11 Keeping these factors in mind, the macro-economic performance of the economy, that is likely to occur during the Ninth Five Year Plan, had been projected on the basis of a model that had been developed specifically for this purpose. In calculating the parameters of the model for the Ninth Plan period, a number of specific assumptions had been made which need to be noted. First, it had been assumed that the trend towards improvement in total domestic savings, as well as in public savings, witnessed in the last couple of years would continue during the Ninth Plan. The improvement in Government savings would have to arise essentially from combined improvement in taxes net of subsidies, with public consumption expenditure more or less maintaining its share of GDP. This assumption explicitly takes into account the impact arising from the adoption of the Fifth Pay Commission recommendations both by the Centre and the States. As a consequence, although public consumption increases sharply during the first two years of the Plan, it reduces equally dramatically in the last three years. Total public investment, which includes investment by the Centre, the States and all public sector enterprises, had 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 would tend to rise from 3.7 during the Eighth Plan to 4.3 during the Ninth Plan. This parameter was generated by the model in order to ensure that the growth rate of the economy would not suffer in the post-Plan period due to infrastructural bottlenecks which could arise from the shortfalls in pipe-line investment that occurred during the Eighth Plan period.

2.12 On the basis of the parameters described above, the likely growth rate of GDP during the Ninth Plan in the base-line scenario following the recent trends was projected to average about 6.2 per cent per annum, despite a step-up in both private and public savings, and a current account deficit of about 1.7 per cent of GDP. Public investment as a whole would be about 33 per cent of total investment in the economy, which would be considerably lower than 45.2 per cent that was assumed during the Eighth Plan and about the same as 34.3 per cent that is likely to be attained. The standard of living of the people, as determined by the growth in private consumption, would be likely to grow by 5.7 per cent per annum, which amounts to a growth in per capita consumption of 4.0 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 annual growth in per capita consumption that were recorded during the Seventh and the Eighth Plan periods, and arises from the lower rate of population growth on the one hand and greater availability of public and foreign savings for financing the required investment, on the other. On the negative side, the pattern of growth and the likely employment elasticities are such that the employment potential created in the base-line scenario would barely absorb the additions to the labour force during the Plan period. However, because of the increase in infrastructure investment, the conditions are created for an acceleration in the growth rate and consequently a sharp reduction in the unemployment rate during the post-Plan period.

2.13 An alternative growth scenario envisaging an accelerated growth rate of 7 per cent during the Ninth Plan was also examined. A preliminary assessment of the macro-economic and sectoral implications and the necessary policy measures which would need to be taken by both the Centre and State governments for attaining such a growth rate were worked out and presented to the National Development Council (NDC). In January 1997, the NDC approved a GDP growth target of 7 per cent per annum for the Ninth Plan. Detailed exercises were carried out to ascertain the feasibility of this growth target and the manner in which it may be attained. It was found that the growth target is feasible, provided that there is a shift in the development emphasis and certain policy decisions are taken. The configuration of the macro-economic parameters which would make the target achievable are presented in Table 2-4. Subsequent events, however, have raised doubts regarding the attainment of the growth target mandated by the NDC for the Ninth Plan period. The first year, i.e., 1997-98 of the Ninth Five Year Plan (1997-2002) is already over. The performance of the economy has not been encouraging during this year. According to the latest data available for the year 1997-98, the Gross Domestic Product at factor cost (GDPfc) has grown at a rate of about 5.25 per cent, with the agricultural sector showing a negative growth rate. Due to a variety of reasons, although the economy is expected to pick up momentum during the second year of the Plan, it is unlikely to entirely recover the ground lost in the first year. As a result, the growth trajectory is likely to be adversely affected for the entire Plan period since the absolute level of investible resources will stand revised downwards. In addition, the ICOR is also likely to increase significantly due to the temporary reduction in the level of capacity utilisation. Given these considerations, the growth target of the Ninth Five Year Plan has been revised downward to 6.5 per cent per annum on an average. Although this may appear to be a deviation from the NDC approval, it needs to be noted that the average growth rate of GDP projected for the last three years of the Plan is about 7 per cent. A higher target for this period may not be feasible. In order to attain the growth target for the perspective period, suitable adjustments have been incorporated into the post-Plan scenario. The revised macro parameters consistent with this revised target growth rate are presented in Table 2-4(a).

Table 2-4 : Macro Parameters for the Ninth Plan (1997-2002)
           [for a GDP growth rate of 7 % per annum]
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                               VIII Plan  IX Plan  Post Plan
 -----------------------------------------------------------
  1. Domestic Savings Rate        24.1      26.2      27.2
     (% of GDP at market price)
  2. Current Account Deficit       0.9       2.1       2.4
     (% of GDP at market price)
  3. Investment Rate              25.0      28.3      29.5
     (% of GDP at market price)
  4. ICOR                          3.9       4.0       3.9
  5. GDP Growth Rate               6.5       7.0       7.5
     (% Per Annum)
  6. Export Growth Rate           10.3      14.5      14.5
     (% Per Annum)
  7. Import Growth Rate           14.1      12.2      13.2
     (% Per Annum)
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 Table 2-4(a) : Macro Parameters for the Ninth Plan (1997-2002)
------------------------------------------------------------
                               VIII Plan  IX Plan  Post Plan
 -----------------------------------------------------------
  1. Domestic Savings Rate        23.8      26.1      27.2
     (% of GDP at market price)
  2. Current Account Deficit       1.1       2.1       2.6
     (% of GDP at market price)
  3. Investment Rate              24.9      28.2      29.8
     (% of GDP at market price)
  4. ICOR                          3.7       4.3       3.9
  5. GDP Growth Rate               6.8       6.5       7.7
     (% Per Annum)
  6. Export Growth Rate           11.9      11.8      14.5
     (% Per Annum)
  7. Import Growth Rate           11.7      10.8      15.9
     (% Per Annum)
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2.14 It can be seen that the strategy that has been selected for attaining an accelerated growth rate of 6.5 per cent hinges on a fairly sharp increase in the investment rate of about 3.3 percentage points above the Eighth Plan average, while keeping the aggregate ICOR at a level somewhat higher than in the Eighth Plan. These are deliberate choices which have been made from a range of possible alternatives on the basis of a number of considerations which are discussed later. The increase in investible resources will have to come mainly from domestic sources, 2.3 percentage points of the required 3.3, and the remainder of about 1.0 percentage points from external savings. Although the ICOR target appears to be a relaxation of the level attained in the Eighth Plan, it has to be seen in the context of the projected increase in the ICOR to 4.3 during the Ninth Plan period in the base-line scenario which, as has been mentioned, would be necessary to create sufficient pipe-line investment in infrastructure for sustaining growth in the post-Plan period. A decline of even this magnitude is by no means trivial. Both these parametric requirements for achieving the target growth rate, therefore, are quite formidable and cannot be assumed to be attained without deliberate planning and strategic policy initiatives.

2.15 The macro-economic aggregates arising from the Ninth Plan growth target are presented in Table 2-5. As can be seen, the size of national investment in this scenario rises substantially from Rs. 1399 thousand crore during the Eighth Plan to Rs. 2171 thousand crore at 1996-97 prices. Private consumption expenditure grows at the rate of 6.2 per cent per annum, which implies a per capita consumption growth of 4.5 per cent per annum. At this rate, the per capita consumption level in the country would double in 15 years. More importantly, this scenario sets the stage for even faster growth in the post-Plan period, which could be as high as 7.7 per cent, if not higher, by creating the appropriate level of pipe-line investment in the infrastructure sectors.

       Table 2-5 : Macro-economic Aggregates for the Ninth Plan 
                               (Rs. '000 crore at 1996-97 prices)
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                            8th Plan   1996-97   2001-02   9th Plan
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1.  GDP at Factor Cost       5012.3     1149.2    1576.0    6902.5
2.  GDP at Market Prices     5573.6     1277.0    1759.1    7694.0
3.  Gross Domestic Savings   1337.9      334.0     477.4    2010.8
         of which :
    3a. Private              1255.6      309.7     434.0    1883.7
    3b. Public                 82.2       24.3      43.4     127.1
4.  Total Consumption        4242.1      956.8    1300.0    5761.2
         of which :
    4a. Private              3635.9      824.6    1112.7    4888.7
    4b. Public                606.2      132.2     187.3     872.5
5.  Gross Capital Formation  1398.7      348.5     495.2    2170.6
         of which :
    5a. Private               938.4      251.9     329.0    1444.4
    5b. Public                460.3       96.6     166.2     726.2
6.  Public Borrowings         378.1       72.3     122.9     599.1
7.  Current Account Deficit    60.8       14.4      17.9     159.8
8.  Exports                   470.3      117.4     205.1     800.9
9.  Imports                   505.0      132.2     221.0     936.1
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