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

Sectoral Output and Investment Pattern

2.98 The planned sectoral structure of output of the economy during the Ninth Plan as given in Tables 2-14 and 2-15 has been determined in a traditional planning framework in which the principal objective is to ensure sectoral consistency between demand, both direct and indirect, and supply. The main factors, which are taken into account in making these estimates, are final demand, intermediate or inter-sectoral transactional demand, export possibilities, import intensities and the overall availability of investible resources. The achievement of these sectoral output targets is, however, contingent upon the necessary investments being made, not only in total, but also sectorally. The main challenge facing the planning and economic administration system of the country is to devise strategies by which the investment programme envisaged in the Plan is realised. Even in the past, when there was considerable degree of governmental control over the pattern of investment through a high share of public investment on the one hand and industrial licensing on the other, the sectoral pattern of investment tended to be somewhat different from the planned. With the substantial reduction in the share of public investment envisaged for the Ninth Plan and the almost complete deregulation of private investment, the uncertainties involved in determining the likely pattern of investment have increased manifold.

2.99 A central tenet of all planning methodologies is that allowance must first be made for those variables over which the Government has least control, and those which are most controllable should be used in a flexible manner for filling the gap between the desired and the likely. In this approach, the likely sectoral flow of private investment is the least controllable in a market economy, followed by the investment pattern of the States. The Central Sector bears the residual responsibility for meeting the Plan objectives which cannot be realised through private sector initiatives and the State Plans. It would be logical, therefore, to first assess the probable deployment of private investment and the investment plan of the States, and to allocate the Central Plan resources for bridging the shortfalls. This procedure, however, has limitations in its application at the present juncture.

2.100 First, although the projection of aggregate private investment demand can be made with a certain degree of confidence, the same cannot be said of the sectoral pattern. Since projections are necessarily based on certain observed regularities in behaviour, it is difficult to make projections for sectors which have experienced significant structural changes in the recent past. The considerable deregulation in private investment that has taken place since the inception of the economic reforms, particularly those pertaining to sectors which were earlier reserved for public investment, has thrown up a number of such sectors. Moreover, there are certain other sectors, in which the investment behaviour does not display any systematic and stable behavioural pattern even though these sectors may not have undergone any systemic change. As a consequence, using a model of aggregate and sectoral private investment demand in which growth expectations and credit availability are the main explanatory variables, it has been found that only about 77 per cent of the total targetted private investment during the Ninth Plan can be sectorally allocated on the basis of past behaviour. Even these are subject to the normal uncertainties associated with any projection exercise. The sectoral distribution of the remaining 23 per cent has to be entirely conjectural and would need to be decided upon on the basis of the areas in which such investments are required and are feasible. It is hoped that, with greater experience, such projections of private investment behaviour would become more comprehensive and accurate in the future Plans.

2.101 Second, even the sectoral allocation of public investment is not entirely deterministic. In particular, the public investment pattern is determined to a large extent by estimates of the internal resource generation of the various public enterprises, both departmental and non-departmental, and the extent to which these resources are redeployable. These estimates are themselves contingent not only upon the performance of the enterprises, but also upon certain policy decisions being taken by the Government at the appropriate time. Both of these factors are subject to uncertainties arising partly out of market conditions and partly out of political compulsions. The Eighth Plan experience has shown that certain sectors, such as petroleum and telecommunication, have raised greater resources than targetted, while others, such as power, transport and irrigation, have performed well below expectations. As a consequence, the investment pattern was distorted in favour of the former and against the latter. On the whole, however, since these estimates are made on the basis of extensive consultations with the States and the concerned Central Ministries and the necessary commitments have been made, there is a certain degree of assurance that the planned sectoral investments will be forthcoming.

2.102 On the other hand, there are sectors in which either the Government is the sole investor or the process of creating the conditions for private investment participation is yet to be completed. In such cases, public investment has to be determined on the basis of exogenously determined targets for capacity creation which arise out of the non-growth related objectives of the Plan, on the one hand, and the need to maintain sectoral balance, on the other. Since these sectors are sub-sets of the broad sectoral classification of the economy, there is a minimum level of public sector investment which has to be specified at a sectoral level independently of the behaviour of private investment. The sectoral investment profile of the Ninth Plan is therefore based on a combination of estimates of likely private investment, targetted public investment and a subjective assessment of the likelihood of the residual investment gaps being filled by either private or public sector. These estimates are given in Table 2-25.

         Table 2-25 : Sectoral Investment Needs and Sources in  the Ninth Plan  
                                			   (Rs. '000 crores)                   
---------------------------------------------------------------------
    Sector           Investment  Projected  Public    Additional
                      Required    Private   Centre   States Required
---------------------------------------------------------------------
1. Agriculture          245.7      118.0      23.8    59.5     44.3
2. Forestry  and  Logging     4.1                  1.9     2.0      0.2
3. Fishing               22.6       11.4       0.7     7.4      3.1
4. Mining  and  Quarrying    84.5                 48.1     2.4     33.9
5. Manufacturing :                             
    a)   Registered     438.4      379.2      67.8    10.2   - 18.8
    b) Unregistered     173.3      162.2       0.1     1.6      9.4
6. Electricity, etc:    336.7       47.5      73.4    72.0    143.8
7. Construction          39.9       24.4      13.5     8.1   -  6.1
8. Trade                 47.2                  1.6    10.1     35.5
9. Hotels etc:           21.1                  0.4     0.5     20.2
10.Rail Transport        35.0                 45.4           - 10.4
11.Other Transport      129.0      114.0      38.2    39.5   - 62.7
12.Communications        69.2                 57.9             11.3
13.Banking  and  Insurance  104.4                  2.3            102.1
14.Real Estate, etc:    249.0      242.1               5.5      1.4
15.Public Admin, etc:   121.8                 16.3    88.2     17.3
16.Other Services        48.7       20.2       5.3    22.4      0.8
--------------------------------------------------------------------
    TOTAL              2170.6     1119.0     396.8   329.4    325.4
--------------------------------------------------------------------

2.103 As may be seen, given the limitations on the resources available to the public sector, it is not possible to arrive at an exact balance between the sectoral investment requirements as emanating from the model and the deployment of the resources available with the public and the private sectors, despite the over-all resource balance that has been assumed. For most sectors, the discrepancies are not large, particularly in view of the fact that for a number of sectors, such as trade, hotels and restaurants, communications and banking and insurance, it was not possible to estimate private investment demand functions from the existing data base. On the basis of the recent experiences, it is more than likely that these sectors will at the very least receive the required levels of investment from the private sector. In particular, the sectors which have been recently opened up for private investment, like mining and quarrying and communications, have fairly modest private investment requirements, which should be realised with relative ease, and may indeed be exceeded, if the policy and procedural frictions are reduced expeditiously. In so far as the financial sector, namely banking and insurance, is concerned, it does not fall under the purview of the public sector plan despite the bulk of the sector being in the public sector at present. The performance of this sector taken as a whole in recent years indicates that the required investment may not materialise in its entirety unless there is some step up in the level of private investment. While the conditions have been created for private investment in the banking and related financial segments and the performance of the public sector banks has also by and large improved, the insurance sector continues to depend upon the internal accruals of the existing public sector companies. It is unlikely that the desired rate of growth of this segment can be achieved without significant private participation either through equity or greater leveraging by the public sector.

2.104 There are, however, a few areas of significant mis-match which need to be noted. First, it is very likely that Other Transportation, which includes civil aviation and all surface transport except the railways, will attract much larger quantum of private investment than strictly necessary. There is need to restrict such investment and reorient the investment pattern in favour of the sectors which are likely to experience shortfalls. Similarly, registered manufacturing may also experience higher than necessary investments taking place under the present circumstances. In addition, the effects of FDI may not have been fully captured in the estimations which would aggravate the problem even further. As far as Other Transport is concerned, reduction in public investment by way of adjustment is not desirable since it contains public investment in ports, airports, waterways and public transportation, which are all essential for meeting the existing infrastructural deficiencies, particularly for exports. On the other hand, fishing and unregistered manufacturing are two sectors in which private sector presence is large and which may experience shortfalls in investment. In the case of fishing and unregistered manufacturing, the principal problem appears to be the availability of adequate credit for investment purposes. All efforts will therefore have to be made in reorienting the credit system in favour of these sectors and away from registered manufacturing and other transport.

2.105 In the sectors dominated by public investment, there is some excess investment than is strictly required by sectoral consistency planned for in Railways. It needs to be recognised that there has been a steady deterioration in the modal mix in transportation in favour of road transport, which needs to be corrected both in the interest of cost and energy conservation. Since the input-output based macro-economic balances reflect in part past behaviour, even if inoptimal, some adjustment is certainly called for. Indeed, an even higher level of investment than planned for would be desirable in this sector, and efforts should be made in attracting private participation, which is practically non-existent at present, by attracting resources away from sectors which are projected to have higher than necessary private investment. Similarly, the investment requirement for Public Administration, etc: tends to be somewhat understated by the conventional planning methodology since the planning model does not adequately capture the non-economic benefits of public health and education expenditure, which are included in this sector. In order to reflect the priorities of the Ninth Plan, some adjustment has had to be made in these sectors, particularly in the State Plans, but even these are insufficient.

2.106 The above adjustments to the optimal investment programme arising from the planning model are relatively minor in nature, and do not violate sectoral consistency requirements in any substantive manner. The major area of concern, however, is the public utilities sector comprising of Electricity, Gas and Water. It may be seen that after accounting for private investment based on past behaviour and the public sector allocations, about 40 per cent of the total investment requirement remains to be filled by additional resource deployment. While it is true that the estimates of private investment do not take into account the impact of the recent liberalisation in the electricity and gas sectors and some incipient private sector forays in water supply, it is unlikely that on current trends these would entirely bridge the gap. In fact, it appears that an additional amount of investment in the region of about Rs.100 thousand crores would have to be mobilised for this sector during the Ninth Plan period over and above the private commitments that are presently perceptible. Reallocation of the public investment pattern is in itself not a viable solution since the magnitude involved is over 13 per cent of the estimated investible resources available to the public sector, and it would therefore involve a sharp reduction in sectors which are of equal national importance, primarily in agriculture and in social and other economic infrastructure. Although there is some possibility in substituting public investment in manufacturing with private investment, the re-appropriation of these resources may not be easy since the bulk is in the form of internal accruals of PSEs, especially in the form of depreciation reserves.

2.107 The implications of this wide gap between the requirement and availability of investment in the utilities sector, particularly in power, need to be fully appreciated. First, as has been the experience in the past, the cut-back in investment in the power sector is likely to fall disproportionately on transmission and distribution, which are the areas in which there is already a substantial back-log of investment requirement and where the conditions of entry by the private sector are yet to be created. As a consequence, even if adequate generating capacities are realised through new investment and improved efficiency, imbalances in peak/base loads and in spatial distribution are likely to become exacerbated. In such a situation, it would become necessary to introduce rational rationing mechanisms in order to minimise disruptions. Second, the short-fall in investment in this sector will imply an excess availability of private investible resources in the economy, which would either be invested in non-productive assets or in other sectors of the economy. In the first case, the growth rate of the economy is likely to be adversely affected and the extent of speculative behaviour to increase. In the latter case, the demand-supply balance for the utilities will further deteriorate and thereby put greater pressure on the government for management of shortages. Third, the pipe-line investments necessary to accelerate or even maintain the growth rate in the post-Plan period would not be available in adequate measure, resulting in even more serious problems in the longer-term future.

2.108 The basic cause of this problem therefore is not the availability of investible resources in the economy, but the inadequate generation of internal resources by the public utilities and their consequent inability to tap the capital market for additional investible resources either in the form of equity or debt. Despite the assumptions made in the Plan regarding improved efficiency and better collection of user charges, the financial viability of the public utilities would have to be improved even further if these resources are to become available. Immediate action on power sector reforms, and similar reforms in the other utilities, will need to be taken to prevent the present shortages from widening and to create adequate pipeline investments for maintaining the growth impetus in the post Plan period. In other words, the public sector plan may have to be further increased beyond the more or less realistic resource assessments made in the Plan on the basis of increased internal resources and market borrowings by the utilities, which are dominantly in the State sector. However, these measures may not be sufficient within the time-frame available, and the government would have to seek ways of augmenting the resources available for this sector within the over-all resource position outlined in the Plan.

2.109 In this context, disinvestment or divestment of government holdings of both equity and debt in the existing PSEs has a special role to play. As has been noted, there are a number of sectors in which private investment is able and willing to not only supplement public investment, but substitute for it as well. Mining, manufacturing, telecommunications, hotels and financial sectors are prime examples of such sectors where the public sector has large investments and is likely to make even more during the Ninth Plan. It has also been mentioned that much of the future public investment in these sectors are not reappropriable as such since they are in the form of depreciation reserves. Disinvestment, however, enables the government to realise the capitalised value of such future flows in the form of a draft on private resources and to redirect them into the utilities sectors where they are required. Therefore, an aggressive programme of disinvestment of equity and sale of securitised government debt in some of the existing PSEs will need to be pursued if the investment needs of the utilities sectors are to be realised during the Ninth Plan. It should be noted that this argument for disinvestment is not being proposed on budgetary considerations, which has been examined earlier without any recourse to disinvestment proceeds, but as a method of altering the asset holdings of the government away from the non-critical sectors to those which are essential for the development of the country and in which the public sector will always have to play a dominant role. However, it needs to be borne in mind that such a step will have budgetary implications in that the non-tax revenues of the government can be negatively affected in the medium-run. It is therefore imperative that the financial performance of the public utilities be improved sufficiently in order to obviate such a possibility.

2.110 Although the analysis of sectoral growth and investment thus far has been in the context of ensuring macro-economic balance and sectoral consistency, and sectoral details have not been provided, there are four sectors which are critical in achieving success of the proposed growth strategy and in the realisation of the Plan objectives. These are Agriculture, Infrastructure, the External Sector and the Financial Sector. The strategic approach towards these sectors are discussed in some detail in the following sections within the context of the over-all development strategy being proposed in the Plan.