| 9th Five Year Plan (Vol-1) |
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Macro-Economic
dimensions and Policy framework |
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Structure of Growth and the ICOR 2.48 The growth performance of the economy, even when it is savings constrained, depends not only on the quantum of investible resources available, but also on its pattern of deployment and the resulting sectoral structure of the growth path. As has already been mentioned, the ICOR, which is a summary measure of the productivity of investment in the economy, is determined by a number of factors not the least of which is the pattern of growth. Although, by and large, the sectoral structure of growth is determined by the pattern of demand, both direct and indirect, for different goods and services, it can be influenced through policy measures. The decision as to whether or not such policy-induced changes in the pattern of investment need to be undertaken depends primarily on an appraisal of the different objectives of the Plan and of the possibility of emerging distortions which may adversely affect the long-term sustainability of the growth process. 2.49 The first sector which needs to be distinguished for special consideration is agriculture. The objectives of the Ninth Plan have singled out agriculture as an area of priority in view of its potential to generate substantially greater employment per unit of investment than most other sectors of the economy. It has also been shown that agricultural growth tends to reduce poverty much faster than growth in other sectors, partly through its employment effect and partly through ensuring that prices of basic food products remain relatively stable. Agricultural growth is also central to another objective of the Ninth Plan namely ensuring food and nutritional security for all, particularly the vulnerable sections of society. In addition, all available evidence suggests that reduction in regional disparities, particularly in average standards of living, may be better achieved through greater focus on agriculture and other rural activities than through the development of other sectors. The issue of backwardness and regional balance has always been a central concern of state policy. Traditionally, it was felt that the attainment of this objective was best served by a focus on industrialisation and dispersion of industries, which was sought to be implemented by various methods such as locational specificity in the grant of industrial licences and tax concessions. This view is undergoing a change and, with industrial deregulation, it is being increasingly realised that the choice of industrial location is difficult to influence and is best left to the discretion of the investors. A thrust on agricultural development, however, would necessarily imply accelerated growth of the relatively backward regions. 2.50 The second major area of concern relates to the availability of adequate infrastructural facilities not only for supporting the target growth rate of 6.5 per cent, but also for providing sufficient pipe-line investments for sustaining growth in the post-Plan period. The Eighth Plan has witnessed a serious distortion in the pattern of investment, with considerably higher increase in the capacities of non-infrastructural sectors than warranted by the investment made in infrastructure. The resulting shortage of infrastructure gets reflected both in increasing costs and in lower levels of capacity utilisation of the user sectors. Unless this distortion is corrected expeditiously, not only will it be difficult to sustain the desired rate growth but it may also affect future private investment behaviour. Although investment in basic infrastructure sectors that are in the pipe-line are barely adequate for sustaining a growth rate of around 6 per cent during the Ninth Plan at current levels of efficiency and capacity utilisation, there does exist some possibility of increasing the availability through shorter gestation projects and sharper increases in efficiency and capacity utilisation of the existing assets than have taken place in the past. In the Ninth Plan, 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 attractiveness of infrastructural investment by the private sector. In addition, the pace of investment in these sectors will have to be stepped up in order to provide the pipeline investment for supporting future growth. 2.51 Keeping the above considerations in mind, the sectoral pattern of growth envisaged for the Ninth Plan and the associated ICORs are presented in Table 2-14. These figures have been generated from the Plan model by imposing exogenously determined growth targets for agriculture and certain infrastructure sectors and taking into account all the relevant leads and lags. It will be seen that although the sectoral ICORs assumed for the Ninth Plan are either equal to or less than the corresponding ICORs prevailing during the Eighth Plan, the aggregate ICOR of 4.3 is significantly higher than the Eighth Plan average of 3.7. This arises from the fact that considerable investment in meeting the past shortfalls have to be made in three major infrastructure sectors, namely mining and quarrying, electricity, gas and water, and rail transport, all of which have fairly high ICORs. In addition, both the targetted growth rates and the future ICORs embody a number of assumptions and policy measures which need to be taken note of. Table 2-14 : Structure of Growth
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Eighth Plan Ninth Plan
------------ ------------- Share of GDP(%)
Growth Growth ---------------
Sector Rate(%) ICOR Rate(%) ICOR 1996-97 2001-02
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1. Agriculture and
Allied Sectors 4.0 2.3 3.9 2.2 27.0 23.9
2. Mining and
Quarrying 3.5 6.3 7.2 5.9 1.8 1.8
3. Manufacturing 9.2 4.7 8.2 4.4 19.4 20.9
4. Electricity, Gas
and Water 7.4 16.3 9.3 16.3 2.9 3.3
5. Construction 5.2 3.3 4.9 2.7 6.0 5.5
6. Trade 10.0 0.8 6.7 0.8 13.5 13.8
7. Rail Transport 2.2 14.0 3.9 12.9 1.1 1.0
8. Other Transport 6.8 7.5 7.4 6.5 5.1 5.3
9. Communications 14.9 7.3 9.5 7.1 1.4 1.6
10. Financial Services 12.1 0.8 9.9 0.7 6.6 7.7
11. Public
Administration 4.5 8.1 6.6 5.6 5.3 5.3
12. Other Services 5.6 6.0 6.6 5.8 9.9 9.9
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Total 6.8 3.7 6.5 4.3 100.0 100.0
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2.52 The drop in sectoral ICORs occur from two primary influences. First, it is assumed that the process of economic reforms would continue, which would lead to phased elimination of outdated technologies and therefore to higher energy and material efficiency in the industrial sectors. Second, the efficiency and productivity of five infrastructural sectors, namely irrigation, mining and quarrying, power, gas and water, railways and communications, are assumed to go up significantly. In addition, it is assumed that the prices, tariffs and user charges of these sectors are rationalised and raised appropriately wherever and whenever required by economic considerations. These measures have two positive effects. First, the increase in efficiency and capacity utilisation provides the supply from these sectors necessary to maintain the 6.5 per cent growth rate during the Ninth Plan. Secondly, the increase in the average price realisation, through rationalisation of tariffs, leads to increases in both the savings originating from these sectors, which have been reflected in the estimates of public resources, and in the measured value-additions relative to the cost of capital, which is the instrumentality for reducing the ICORs. 2.53 The resource constraints being faced by the Government at all levels and the public sector enterprises require that the existing assets be used more productively and efficiently and generate higher savings for future investment. The primary cause of low capacity utilisation of existing public assets is that the maintenance needs have not been met to the extent required for keeping these assets in good condition. This has largely been the outcome of the financial stringency that has been faced by the public authorities, which has led to a situation where, on the one hand, fresh capacities are being added to social and economic infrastructure, while, on the other, the existing capacities are getting rapidly eroded. As a result, the net operational accretion to capacities is far below the gross investment, which would tend to raise the capital-output ratio significantly. 2.54 The Ninth Plan will lay great emphasis on improving the productivity of existing assets. The first step in this process is to improve the financial viability of public authorities through sensible pricing strategies and reduction of non-transparent subsidies. The Planning Commission will closely monitor the maintenance programmes of major public assets in order to ensure that they are kept in good operational condition. In most cases, revamping and modernising of existing assets require considerably less investment than fresh investment in green-field sites for the same effective output. The Ninth Plan will give priority to such investment as compared to proposals for creating green-field capacities. 2.55 In so far as agriculture is concerned, the share of public investment in total investment has been dropping steadily for the last 15 years or so. Since private investment tends to concentrate on less capital intensive projects and have shorter gestation lags, the ICOR in agriculture has been gradually going down. During the Ninth Plan, the shortfall in public investment in irrigation, which has occurred during the Eighth Plan is sought to be made up, which would lead to a higher ICOR by itself. However, the present rate of utilisation of the existing irrigation potential is only about 68 per cent. This will have to be stepped up significantly in order to meet the agricultural growth target. The small decline in the Ninth Plan ICOR for agriculture reflects the net result of these two influences. 2.56 In electricity, although it has been assumed that the average tariff collections will need to be raised during the Ninth Plan period and the efficiency of operations both with respect to the plant load factor (PLF) and raw material usage will also improve, which collectively should have had the effect of reducing the ICOR, the need to invest significant amounts in the transmission network offsets some of the gains from the higher value-addition. In addition, since much of the investment that would have to take place during the Ninth Plan period will contribute to output only during the Tenth Plan and perhaps beyond, it would tend to raise the ICOR for this sector. The situation is similar with the gas and water sectors as well. 2.57 One of the fastest growing sectors during the Eighth Plan period has been trade, which has grown at a rate of 10 per cent per annum. This is quite unusual since the long-term relationship between the trade sector and the sectors producing tradable goods, i.e. agriculture, mining and manufacturing, has been of more or less equal growth. The sharp growth in trade during the Eighth Plan is only marginally related to the growth in exports and imports. The bulk of it has accrued from expansion in domestic trade. One explanation for this phenomenon can be that with the economic reforms the trading margins have gone up significantly. During the Ninth Plan, it is assumed that the historical relationship between trade and its supplying sectors will be re-established. 2.58 The remaining sectors, more or less, continue the pattern of growth that has been experienced in the past and are as reflected in the input-output structure of the economy. The financial sector is expected to continue to grow at a high rate which reflects the greater role of financial intermediation that would be required during the Ninth Plan period in order to achieve the higher levels of investment that has been targetted. The sectoral break-up of the GDP emanating from the above growth rates are given in Table-2.15. Table 2-15 : Sectoral Structure of GDP at Factor Cost
(Rs. '000 crore at 1996-97 prices)
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8th Plan 1996-97 2001-02 9th Plan
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1. Agriculture and Allied 1442.5 310.1 376.1 1692.8
Activities
2. Mining and Quarrying 95.5 20.5 29.1 126.3
3. Manufacturing 922.3 222.6 329.6 1393.5
4. Electricity, Gas 144.9 32.9 51.2 212.1
and Water
5. Construction 304.3 68.7 87.1 392.3
6. Trade 642.6 156.5 216.3 951.6
7. Rail Transport 61.2 13.2 16.0 74.8
8. Other Transport 256.1 58.8 84.1 363.8
9. Communications 58.7 15.7 24.7 101.7
10. Financial Services 301.5 75.9 121.7 507.0
11. Public Administration 274.9 60.6 83.6 380.6
12. Other Services 507.9 113.7 156.5 705.8
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Total 5012.3 1149.2 1576.0 6902.5
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