CPI(M)’s Comments On The Approach Paper To The Eleventh Plan

THE XI Plan is being formulated under the aegis of the UPA government, which is committed to reversing the trend of burgeoning unemployment and deteriorating agrarian situation, experienced during the past decade, particularly during the period of the X Plan. The National Common Minimum Programme of the UPA government had placed employment generation and addressing the agrarian crisis and rural distress as its topmost priorities. Unfortunately, the Approach Paper to the XI Plan prepared by the Planning Commission does not reflect these priorities. It rather chooses to only emphasise the achievement of a target growth rate of 8-9%. The problems of unemployment and poverty cannot be solved only through the achievement of a higher growth rate.

The fallacy of such a “trickle down” approach to economic development is clear by now. Acceleration of the annual average GDP growth to around 7 per cent during the X Plan from around 5.5 per cent during the IX Plan did not succeed in either making a dent on unemployment or accelerating the pace of poverty reduction. According to the latest available estimate of the NSSO, the unemployment rate went up between 1993-94 and 2004. On the basis of current daily status, the unemployment rate for males increased from 5.6 per cent to 9 per cent in rural areas, and from 6.7 per cent to 8.1 per cent in urban areas. Unemployment rate for females increased from 5.6 per cent in 1993-94 to 9.3 per cent in 2004 in rural areas and from 10.5 per cent to 11.7 per cent in urban areas. Moreover, the Approach Paper itself admits that there has only been a “modest rate of decline” in poverty. The figure of 28 per cent for 2004-05 cited in the Approach Paper implies reduction of poverty by only 8 per cent over a 11-year period, which is about half the rate of poverty reduction achieved between 1977 and 1990.

Therefore in order to chart out a trajectory of “more inclusive growth”, as suggested by the title of the Approach Paper, it is imperative to reorient the Planning approach and clearly define the social goals, by having targets with regard to employment, poverty reduction and social sector achievements. Efforts should be made to attain these targets through Planning, subject to the prevailing resources, economic, social and technological constraints. GDP growth should be considered as a means to expand employment, alleviate poverty and improve social sector indicators rather than being viewed as an objective in itself.

The Approach Paper has reduced the Planning exercise to a calculation of the projected growth scenarios and the associated requirements of public and private savings and investment as well as sectoral growth rates. These numbers are derived not just through extrapolating from the past but by making assumptions regarding what are perceived to be desired changes, without any consideration of how these different numbers are to be achieved. The annual average GDP growth rate of 7 per cent achieved during the X Plan, although lower than the target of 8 per cent, was higher than the GDP growth attained during any of the earlier Plan periods. However, agriculture, which employs over 50 per cent of the country’s workforce, registered a growth of only 1.8 per cent during the X Plan against the Plan target of 4 per cent. The agricultural growth rate was even lower than the 2 per cent achieved during the IX Plan. Moreover, while the Savings-GDP ratio of the economy at 28.2 per cent was well over the X Plan target of 26.8 per cent, the Investment-GDP ratio at 27.5 per cent fell short of the 28.4 per cent target of the X Plan.

Investment has actually under performed during the X Plan since it was well below the potential provided by the domestic savings rate and a feasible current account deficit (there was a current account surplus during the X Plan). The major reason for this under performance of investment during the X Plan is a much lower rate of public investment, which has been only around 7 per cent of GDP against the X Plan target of 8.4 per cent. This has critically affected not only the aggregate investment rate but also private investment, since there are well known synergies between public and private investment. The inadequate performance of public investment during the X Plan was related to the misplaced perceptions of fiscal constraint that have prevented the central government from increasing much needed public investment despite favourable macroeconomic conditions.

The Approach Paper for the XI Plan, however, seems to continue with a similar approach. The projections for Alternative Growth Scenarios for the XI Plan contained in the Approach Paper show savings by the Public Sector Enterprises as more or less constant as GDP increases, such that a higher rate of GDP growth is associated with a lower contribution of PSE savings. Obviously the underlying assumption is that profits of the PSEs would not grow along with the growth of GDP. The government is also projected to be moving from dissaving –1 per cent of GDP in a projected GDP growth scenario of 7 per cent to positive saving amounting to 2.4 per cent of GDP in the 9 per cent growth scenario, which hints towards a conservative fiscal stance.

Target Annual GDP Growth Rate	7 per cent	8 per cent	9 per cent
Savings Rate of which	27.1	29.6	32.3
Households Savings	20.1	20.5	21
Corporate Savings	5	5.5	6.1
Public Sector Enterprises	3.1	3.1	2.8
Government	1.1	0.5	2.4

This is a travesty of the idea of public sector involvement in a developing economy, since it takes the government sector and PSEs away from being net investors to being net savers and providers of resources for private investment. There are many areas where private investment will continue to be lacking or socially sub-optimal, because of externalities and social returns being higher than private expected returns. These include critical areas of physical infrastructure and social sectors. The projections envisaged in the Approach Paper imply that all such areas would be underprovided. This self-imposed constraint upon public investment by the government and the PSEs is the chief macroeconomic drawback of the Approach Paper.

The NCMP of the UPA government has made several commitments to the people. These include 100 days of guaranteed employment for “one able-bodied person in every rural, urban poor and lower-middle class household”, raising public expenditure on education and health to 6 per cent and 2-3 per cent of GDP respectively, moving towards universal food security, expanding social security schemes for unorganised sector workers and universalisation of the ICDS. The National Commission on Farmers has also made several recommendations, in keeping with the NCMP, in order to address the agrarian crisis and ameliorate the condition of the farmers. Fulfilling these commitments require substantial increase in public expenditure and planning. Resources have to be mobilised for the same. The Approach Paper, however, has not considered these issues with adequate seriousness. Calculating the public expenditure required to meet the NCMP commitments, especially in the areas mentioned above, and suggesting measures to mobilise additional resources to finance such expenditure should be the foremost priority of the XI Plan.

Many of the public sector enterprises currently hold their profits as reserves or provide savings for use by the government and the private sector rather than engaging in active expansion and investment. An analysis of 57 central public sector enterprises having positive net worth and net current assets, based upon the public enterprises survey, 2003-2004, indicated that only 17 CPSEs had invested more than 33 per cent of their reserves and surplus in the year 2003-04. The remaining 40 CPSEs had invested less than 33 per cent, and a considerable number had practically not invested at all. In the aggregate, there were 50 CPSEs, which collectively had reserves and surpluses of Rs 2,21,157 crore, amounting to nearly 7.5 per cent of GDP, but had actively invested only Rs 81,805 crore, i.e. only 37 per cent of the available resources. This disturbing trend towards underinvestment by the CPSEs needs to be reversed at once. The CPSEs should be reinvigorated to undertake massive capital expenditure, diversifying their activities if necessary.

The most critical aspect of economic growth that determines whether it is more “inclusive” is the extent to which it generates productive employment. It is here that the GDP growth experienced in India over the past decade and a half has failed miserably. Acute agrarian crisis combined with lack of adequate employment generation in other sectors has rendered the growth process jobless and thereby increasing income inequalities. Yet, in the listing of the major challenges at the start of the Approach Paper, there is no mention of employment generation!

The need to shift the pattern of employment away from agriculture by increasing non-agricultural employment has been discussed in the Approach Paper. However, besides suggesting that such a shift would only happen through higher growth in manufacturing and services sectors and identifying some labour-intensive sectors like food processing, textiles, tourism and construction, there is hardly any concrete strategy in the Approach Paper, which would ensure greater employment generation. Instead several policy initiatives suggested in the Approach Paper, such as liberalising the entry of foreign players into retail trade and reducing the list of industries reserved for the small scale sector at an accelerated pace, would actually diminish employment opportunities even further.

The Approach Paper limits the scope of state intervention as far as employment generation is concerned, to the implementation of the NREGA and promotion of self-employment ventures. These schemes, welcome as they are, would be inadequate given the extent of unemployment and underemployment prevailing in the country. The XI Plan needs to work out employment generation targets concretely, so that unemployment can be progressively reduced. Sector and sub-sector wise employment targets should be worked out, along with the required quantum of public and private investment, given the employment elasticity of output in each sector. Strategies should also be adopted to improve the quality of jobs and increase the share of organised workforce to total workforce. Specific provision should also be made for the social security of the workers in the unorganised sector.

Moreover, the misplaced belief contained in the Approach Paper regarding labour market flexibility leading to greater employment generation in the manufacturing sector should be abandoned. Amendments in Section V-B of the Industrial Disputes Act, 1947 and the Contract Labour (Abolition and Regulation Act) have been specifically suggested. These amendments seek to make the process of industrial closures easier for a large number of industries and facilitate casualisation of workers on a massive scale. While the theoretical argument behind such steps leading to greater employment generation is tenuous and the empirical evidence difficult to find, their adverse impact on the employment security and working conditions of the workers are easily conceivable. These proposals have been opposed by the Trade Unions, and therefore no consensus exists on such reform of the labour laws. The XI Plan should not contain such contentious proposals, which violate the spirit of the NCMP.

The other great economic challenge facing the country at present – the agrarian crisis reflected in high and unsustainable levels of peasant debt and the lack of viability of cultivation because of the cost-price relationship for many crops – is barely considered in the Approach Paper. The Plan projections assume that GDP in agriculture will grow at a faster rate of 4 per cent, which it has not done for the past decade, and yet does not chalk out any strategy to ensure this. It is blithely suggested that diversification into horticulture, development of modern marketing infrastructure, encouraging corporate investment and contract farming will automatically generate much higher income growth from agriculture. There is no discussion of any planned and systematic state intervention to address the structural and conjunctural forces currently devastating crop production.

Such an approach arises out of a serious conceptual shortcoming. The problem with the Indian economy of late should be seen not just as the stagnation of agriculture, but above all as the stagnation of peasant agriculture. The relevant category in other words is not sectoral but social. And this makes a world of difference to the understanding of the remedies. If the problem was merely one of increasing agricultural growth, then corporate agriculture and contract farming, as endorsed by the Approach Paper, should make eminent sense. But if the problem is one of protecting and promoting peasant agriculture, then unbridled entry of corporate players and promotion of contract farming could have a further adverse impact on the peasantry, pushing it towards destitution, causing even larger numbers of suicides, greater rural unemployment and destroying the rural economy even further. If contract farming is to be undertaken then the contract cannot be between peasants and the corporates alone; the state must insert itself as a party to the contract to ensure that the interests of the peasants are properly defended.

The Approach Paper’s lack of comprehension of the nature of the agrarian crisis manifests itself in its attributing several “problems facing agriculture” to the provision of subsidised power, to the under-pricing of canal water and to the “preset system of fertiliser subsidy” and thereby advocating their withdrawal. In each case, it argues, the provision of subsidy has resulted in over-use and wasteful use of the relevant input and contributed to agricultural stagnation. The Green Revolution strategy itself required intensive use of fertilisers and water. Water required power. Many have criticised the Green Revolution strategy on the grounds of its intrinsic unsustainability arising from such intensive use. But the Approach Paper’s argument emphasises not this strategy as such, but only the price-“distortions”, as if “getting prices right” would rid us “costlessly” of the problem of intensive input use. No evidence is given in the paper for the implicit perception that it was not the intensive use of inputs per se under the Green Revolution strategy, but only the “over-use” arising from “price distortions” that makes agricultural performance unsustainable. The consequences of removing these subsidies, which would entail not “optimal” use of these inputs, but rising input costs in the context of falling or subdued commodity prices, would be thoroughly detrimental to the interests of the peasantry.

The way out of the current crisis of the agrarian economy cannot be found unless the centrality of state interventions is recognised. Some of these like enhanced outlays on irrigation, rural infrastructure, agricultural research and strengthening of the extension services provided by the state have been mentioned in the Approach Paper. However, strengthening and widening of the price-support system, the creation of a price stabilisation fund for agricultural commodities and universalising crop insurance are conspicuous by their absence. While the Approach Paper has emphasised agricultural diversification and agri-exports, the need to provide protection to the peasantry from subsidised imports and price volatility have been ignored. Moreover, strict enforcement of priority sector lending norms besides the revitalisation of the cooperative credit institutions is urgently required, in the context of rising indebtedness. The XI Plan should specify steps to provide debt relief to the peasants and bring down the interest rate on farm loans. The important agenda of land reforms, which has been missed out completely by the Approach Paper, also needs to be emphasised.

The silence of the Approach Paper on the vital question of food security is a very serious shortcoming. The government had to recently import wheat, as well as sugar and pulses, in order to meet domestic shortages which had led to steep price rises. In this backdrop, besides emphasising increased production of cereals and other essential commodities, it is important for the XI Plan to take a fresh look at the targeted public distribution system which has failed to ensure food security for the poor and vulnerable sections of the population. The most recent evaluation of the Planning Commission points out that as many as 57 per cent of those who should be identified as BPL have been excluded. The fault however lies not only with the process of identification of the poor but with the very system of targeting in a poor country like India. Steps to strengthen the PDS and moving towards a universal PDS, as committed in the NCMP, should be seriously considered by the XI Plan. More essential commodities should be brought under the PDS in order to ensure food security.

The Essential Commodities Act, 1955 which enabled the central government to monitor and control the prices of essential commodities has been progressively diluted by successive governments at the centre. The number of commodities designated as essential commodities, which stood at 70 in the year 1989 was brought down to 15 during the X Plan period, in the name of facilitating “free trade and commerce”. The licensing requirements, stock limits and movement restrictions on specified food items under the Essential Commodities Act were also diluted thus allowing dealers to freely buy, stock, sell, transport, distribute or dispose any quantity in respect of essential commodities. It is evident from the recent experience of price rise of essential commodities that such dilutions of the Essential Commodities Act have jeopardised the capacity of the central government to check hoarding and reckless profiteering in the trade of essential commodities. Dilution of the Forward Contracts (Regulation) Act, 1952 permitting futures trading in essential commodities have also led to large-scale speculation in the commodity exchanges. The volume of trade in commodity futures has grown sharply over the past two years and prices of commodities have increased simultaneously. The farmers and small traders, however, who do not have access to the commodity exchanges, have not gained anything from such price increases. Only the big players who have the capacity to hold large stocks and the resources to participate in futures trade have benefited from huge speculative gains.

The XI Plan has to address these important issues, which are related to the question of food security. A proper evaluation regarding the consequences of the dilutions of the Essential Commodities Act and permitting futures trade in essential commodities has to be made. Concrete ways of stabilising prices of essential commodities have to be explored including a strengthening controls and prohibition of futures trade in essential commodities.

The Approach Paper has recognised some of the difficulties posed by the rigid and unreasonable demands of the FRBM Act and has even suggested a postponement of the FRBM targets for fiscal and revenue deficits, by a period of two years. It has also made the point that the focus on revenue deficit should be abandoned, since a number of items of expenditure which contribute to human capital formation are listed as revenue expenditure. Normally, the opposite point is made, namely that it is the revenue deficit rather than the fiscal deficit which should be restricted: while a government must not “consume” beyond its income, its borrowing for capital formation should not be frowned upon. While this latter argument is persuasive, the Approach Paper has rightly pointed out that in the Indian system revenue expenditure does not reflect pure consumption and includes crucial components of Plan expenditure in the social sectors. Therefore the revenue deficit also should not be arbitrarily curtailed. It follows then that the FRBM Act should be scrapped in toto, since it makes no sense to put a ceiling either on the fiscal deficit or on the revenue deficit in the Indian context. However, the fact that the Approach Paper has advocated cutting down subsidies by levying user charges in order to cut down revenue expenditure shows that its suggestion for postponing the FRBM targets for two years is not a theoretical departure from fiscal orthodoxy.

The obsession with curbing the size of the fiscal deficit and cutting down upon government expenditure in order to impose fiscal discipline irrespective of the economic situation is not based upon any sound economic theory. In an economy characterised by idle resources, expanding the fiscal deficit neither causes inflation nor leads to an increase in the interest rate. Rather an expansion of the fiscal deficit can help in generating additional demand in an economy characterised by idle resources like excess capacity in the industrial sector and idle foreign exchange reserves and therefore promote growth and employment. Fiscal responsibility cannot be enforced through meaningless formulae, which puts bizarre constraints on necessary and desirable revenue spending and does not allow anti-cyclical fiscal stances.

The fact that FRBM Act type legislations have been imposed on the state governments via the twelfth finance commission is symptomatic of a deeper malaise, namely a severe curtailment of the rights, powers and authority of the state governments in recent years. The issue is not one of the centre versus the states; it goes much deeper, to the strength and autonomy of the Indian nation-state, of which both the central and state governments are constituent units. The centralisation of financial powers in recent years has been accompanied by greater permissiveness with regard to agencies like the World Bank and the ADB exercising control over “governance” at the state level. We have a simultaneous combination of processes of centralisation and decentralisation, which are undermining the strength of the Indian nation-State by giving a larger say to external agencies in the running of our economy and polity. These tendencies can be arrested only if a proper balance is introduced between the powers of the centre and the states, a balance that is optimal for the strength of the nation-state as a whole. Instead of moving towards such a balance, we have been moving further and further away from it in recent years.

The twelfth finance commission while providing debt relief, made such provision conditional upon state governments enacting fiscal responsibility legislation. Curiously, however, the finance commission did not take the centre to task for any act of fiscal omission or commission on its part. The twelfth finance commission in other words has acted more like a school monitor appointed by the central government to discipline the states like recalcitrant school children, according to the centre’s notions of discipline. The introduction of a uniform VAT regime, which took away the discretion of state governments to alter tax rates in the main sphere where they raise their revenue, the sales tax, was yet another blow to the autonomy of the state governments. Today, since the VAT rates are given to them and since their borrowing limits are determined by the centre, there is very little elbowroom available to state governments for garnering resources. And the availability of even these resources depends on their “behaving properly” to the satisfaction of the centre.

But it is not just in the matter of finances that the power and authority of the state governments have got eroded. A whole range of international treaties have been signed which have extremely important bearing on the livelihoods of the people living in particular states without any consultations whatsoever with the concerned state governments. Likewise, tariff policy, which affects the people of particular states, has been pursued without any consultations with the state governments. The same is true of food policy. The state governments in short have merely become the recipients of the consequences of central decisions without having any say in matters that affect them crucially. This is completely contrary to the spirit of our federal system; but the Approach Paper makes no mention of this fact, which certainly has an important bearing on the Planning process.

Planning is concerned not just with a set of growth rates, resource mobilisation and expenditure targets; it also encompasses the erection of an appropriate economic regime within which Plans can be decided and implemented. There must be appropriate institutional structures. To further democratise centre-state relations, the following proposals are being made:

People's Democracy