The author is an economist at the Indian Statistical Institute, New Delhi
With the planning commission having given the final touch to the plan document, the country will soon launch the tenth five year plan. Like its predecessors, this plan too contains a number of very implausible targets. Obviously, the most important macro target is the promised rate of growth in gross domestic product. This has been set at 7.93 per cent per annum. To put this in proper perspective, one needs to remember that the rate of growth achieved during the ninth plan was less than 5.5 per cent. Equally impressive rates of growth have been projected for investment and savings, while the incidence of poverty is supposed to record a significant decline.
This is as good a time as any to highlight what may appear as a paradox to the casual reader of plan documents in India. On the one hand, the projected figures are all worked out to several decimal places. Notice for instance that the annual rate of growth in GDP is projected to be an exact 7.93 per cent, it is neither 7.90 nor 7.95. Lest the reader think this is an exception, let me point out that the ratios of savings and investment to GDP are also worked out to the second decimal point.
Indeed, the tenth plan document like all others before it is a remarkably consistent document. No one can fault our planners for being deficient in arithmetic since the plan projections will surely satisfy intersectoral consistency. That is, the projected levels of demand for all important commodities will match projected levels of supply.
On the other hand, plan targets have seldom been satisfied. The usual experience has been that the actual levels of rates of growth of GDP have typically been far below projected levels. Similarly, investment targets have proved elusive. Surely, the woefully inadequate infrastructural facilities could not have been anticipated by our planners. Agriculture is still dependent on the whimsies of the rain gods simply because planned irrigation projects have not been completed. It is pointless to catalogue shortfalls in various sectors or give precise numerical estimates of these shortfalls. It is sufficient to mention that the per capita income in India would have been close to that of the more prosperous Asian countries if all plan targets had been achieved.
The obvious question is why such wonderfully consistent plans fail, with monotonous regularity, to deliver the goods. The answer is not hard to find. While plan documents contain remarkably detailed quantitative estimates of the physical requirements of various sectors as well as of financial resources, they are equally silent about the policies which are essential to achieve these targets. Consider, for instance, the tenth plan target for gross domestic savings, which is projected to be 26.84 per cent of GDP. This is an extremely ambitious target — the estimate for the ninth plan is only 23.31 per cent. In order to achieve the target, the percentage of total consumption will have to fall by a fairly large amount.
How is the government supposed to achieve this' Newspapers carry frequent reports about the financial distress of different state governments. Some of them even have difficulties in paying their employees. How are these state governments supposed to increase their levels of savings' What composition of taxes and other fiscal and monetary instruments can the government employ in order to extract the required level of private savings' Should the bulk of the additional resources be raised through additional direct or indirect taxes' Should agric- ulture be subjected to additional taxes' Each plan document raises a plethora of such questions. Unfortunately, the documents themselves do not provide any answers. In the absence of such exercises, the plan documents are not worth the paper they are written on because there is no check on whether the targets are at all feasible.
The commission could have protected itself by being less assertive and dogmatic. That is, it could have prepared less detailed, but more useful documents by providing the government with a menu of options. “Save at 20-25 per cent and grow at 5-6 per cent per annum” or “save at 26-28 per cent and grow at 7-8 per cent” and so on. The government of the day could then have evaluated the feasibility of the various options, and then chosen the option that it was comfortable with. Certainly, this model would have been vastly more useful for the country as a whole.
But, perhaps, I am being unduly optimistic. Surely, the government too would have chosen the most optimistic option' After all, it sounds so much better to announce that the economy will grow at 8 per cent rather than a prosaic 6 per cent. That might win the ruling party some extra votes. And only a handful of economists will remember plan targets at the end of the plan period.
As it is, the current scenario raises the question of whether the planning commission is worth preserving in its present format. Despite doubts and debates over the progress of second generation reforms, there is no doubt that a significant amount of economic reforms have taken place. An inevitable consequence of these reforms is that the government has less control over the economy as larger volumes of production take place in the private sector. There is now no system of industrial licensing which allows the government to impose direct controls on sectoral production levels. In its absence, the government can only take recourse to indirect controls through taxes and subsidies. But these indirect controls are very ineffective. Nor is there any reason to believe that private firms will have any incentive to produce the socially optimal quantities.
The situation is made infinitely worse by the increasing trend towards globalization. Different countries’ economies are intricately linked to one another. A poor harvest in some Latin American country can result in large rises in agricultural incomes in Africa. American intransigence over Iraq can result in sustained increases in world petroleum prices, thereby raising costs of production and resulting in a fall in world demand.
These trends make it impossible for individual countries to plan for the future over a long time horizon. Perhaps, the bigger economies can attempt to do this since they exert so much influence over world economic trends. But, certainly, the smaller countries essentially have to take “world conditions” as given — these are beyond their own control. They have as much chance of success in achieving planned long-term rates of growth as Don Quixote had against the wind mills.