People's Democracy

A Critique Of The Approach To 

The Eleventh Five Year Plan 

Amiya Kumar Bagchi, 

Debdas Banerjee and 

Achin Chakraborty

THE Planning Commission has recently put into circulation the Approach Paper (though yet to be approved by the Commission) to the Eleventh Five Year Plan and trying to get feedback by organising region-level consultations.

The Approach Paper clearly reveals a contradiction between the objectives, namely, a faster and more inclusive growth of the Indian economy, and the instruments put forward for achieving them, and the differences of perspective of different members of the Commission. We argue these contradictions should be ironed out in the direction of a people-friendly growth, taking account of the need to protect the economy against the stresses of a fully globalised financial system and respecting the federal structure of the economy and paying due attention to the needs of a severely undernourished and ill-educated population. Otherwise divisions among the people along the lines of class, caste, community, gender and region will be further accentuated and the majority of the Indian people will face greater insecurity and substantial sections will face utter destitution and loss of real freedom.

Let us look at the macroeconomic projections made by the Approach Paper. It deliberately budgets for a current account deficit rising from 2 per cent of GDP for a growth rate of 7 per cent per year to 2.4 per cent of GDP for a growth rate of 8 per cent and to 2.8 per cent of GDP for a growth rate of 9 per cent per year. The Planning Commission pronounces that the current account deficit of 2.8 per cent ‘should not pose any danger, provided it is financed mostly from FDI and long-term external borrowings rather than short-term borrowings or portfolio flows’. But the fact is that the recently increasing levels of current account deficit have been financed much more by portfolio investment or short-term borrowing than by FDI. According to data given by the Reserve Bank of India, during the financial year 2004-05, the net figures of FDI, portfolio investment and short-term borrowing came to $3.24 billion, $8.91 billion and $3.79 billion respectively. For the period April-December 2005, the corresponding figures were $4.73 billion, $8.16 billion and $1.70 billion respectively. It is certain that this dominance of portfolio has increased during the recent stock-market boom. Capital inflows lead very soon to escalating outflows on account of foreign investment. The outflow on account of payments on foreign investment increased from $2.67 billion for the full year 2004-05 to $4.34 billion for the nine months of April-December 2005. 

WRONG STRATEGIES

The Approach Paper relies almost entirely on FDI for bringing about technical change in manufacturing. Such a ‘strategy’ of supine reliance on FDI or foreign capital inflows has several drawbacks. First, not all FDI comes in as greenfield investment, but takes the form of acquisition of Indian companies so that FDI leads to minimal technological upgradation. Secondly, this policy does little to correct the criminal negligence with regard to R&D expenditure displayed by most sectors of Indian private sector industry or services, including the two most supposedly dynamic sectors, namely, the information technology and drugs and pharmaceutical sectors. China had virtually no major R&D expenditure officially until the beginning of the 1980s and South Korea was also spending less than India until then. Indian public expenditure on R&D was perhaps 0.75 per cent of GDP, around that time, and the Indian private sector had always been very delinquent in this respect, never accounting for more than 10-15 per cent of public R&D expenditure. By 2002, the Chinese and the South Korean R&D expenditures were around $15-16 billion as against less than $4 billion in the case of India. Most of that R&D expenditure in South Korea was by the private sector and in China also the private sector is beginning to dominate in this respect. If anything the balance has tilted further again since then. The Approach Paper emphasises competitiveness of Indian producers all the time but seems to be innocent of the need for increasing R&D for a globally competitive economy. It does talk about the need to spend more on research by universities and research laboratories but has no mention of the institutional mechanisms needed to forge better linkages between academic science, technological research and actual producers, especially in the industrial sector. It shows no awareness of the fact that Indian industrialists have been very unresponsive to the utilisation of the fruits of indigenous research and that the WTO regime has further damaged the incentive and the opportunities for research that would help raise the competitiveness of domestic industry or tackle the killer diseases such as malaria, tuberculosis, pneumonia or the looming threat of an AIDS epidemic.

The Indian system of financial regulation has been very peculiar especially since 2003-04 when the long-term capital gains tax was abolished in the interest primarily of stock market operators. The finance ministry has refused to heed the caution of finance specialists who have warned that allowing hedge funds, and sub-account holders of foreign financial institutions (FIIs) to operate and allowing FIIS to issue tradable participatory notes (PNs) would lead to losing control over the movement of funds into and out of the stock market and put the whole system to greatly increased risk. Hedge funds are not regulated in most countries and can get into any hands, including those of terrorists. Moreover, the finance ministry has refused to heed the advice of its own Central Board of Direct Taxes that most FIIs should be treated and taxed as the traders they are in reality and not escape taxation as investors. All these measures greatly reduce the badly needed revenues of the government, which a redirection of the plan programmes in a people-friendly direction will require and at the same time exposes the economy to the vagaries of a turbulent global financial network. Unfortunately, the Planning Commission projections have swallowed the FII-friendly logic of the finance ministry hook, line and sinker and has confronted us starkly between a people-friendly objectives and FII- and speculator-friendly policies.

The projections of different growth rates and associated macro-balances such as export, import or investment rates parade the astrological wisdom of the programmers, for the bases of most of the assumptions are as dubious as those of the astrologers’ predictions. There is no real grounding of the growth rate of Indian exports: one assumption underlying the likely cost of imports has already come unstuck, since the price of a barrel of oil has already gone above the $70 per barrel underlying the Approach Paper simulations. Is the rate of investment really under the control of a government which is so keen to hand over all the commanding heights of the economy to the private sector, and a private sector that has been extensively penetrated by foreign capitalists? (Most of the portfolio investment has gone into the equities of large Indian private and public sector companies, and they may soon acquire a controlling interest in some of those companies). How has the Planning Commission arrived at the estimate of average investment rate as 32 per cent of GDP adequate to achieving 8.5 per cent growth rate? Very few countries in the developing world have actually been able to achieve 8.5 per cent growth rate, among which (keeping aside China), South Korea was the most prominent in the 1980s. But South Korea had accomplished some of the most crucial institutional reforms like land reforms, and had achieved a very high level of human development, the investment rate there was higher than targeted by the Planning Commission now.

MYTH OF TRICKLE-DOWN EFFECT

The Second Five Year Plan is still celebrated, despite many of its loopholes, as the plan for industrialisation in post-colonial India. During the following years as poverty rate began to explode, Fifth Plan declared its goal as to eradicate poverty (‘garibi hatao’). We are soon going to celebrate the 60th year of Independence but with about one-third of the population living below the poverty line, and with unemployment the rate of which is more than nine per cent in rural India and eight per cent in urban areas. However, the target of the Eleventh Plan, as stated in the Approach Paper, has been fixed as to achieve a GDP growth rate of 8.5 per cent. The first question that appears in the minds of the concerned citizens is “What will we do with a growth rate that is 8.5 per cent?” Or, “Why is a 7 per cent growth rate bad?” 

Second, it is too early to make any comment on this though, what are the technical specifications of the model that is expected to generate an 8.5 per cent growth rate? If the IT exports market dries up tomorrow which sector is going to compensate for?

Besides, and which is often lost sight of, is the fact that time-series cross-country studies do not find any statistically significant positive correlation between GDP growth rate, on the one hand, and declining poverty and, unemployment rate, on the other. In fact, in India, as soon as the GDP growth rate showed an upward trend over the last three years the unemployment rate, after a pretty long period of stability, also began to move upward. In other words, the ‘trickle down’ effect of GDP growth rate has turned out to be a myth. In fact, in countries where the substantive democracy is weak – no matter whether the formal democracy is strong or weak – it is very unlikely that the distribution of gains would be symmetric. One has to have a comprehensive plan for that.

The Indian Plan by now has lost much of its earlier glory and been reduced to a mere indicative one. Earlier the State used to steer the entire economy, and also the private investment behaviour via its control over the ‘commanding heights of the economy’ no matter what percentage of total investments really construed public sector. Now, private investments would look to Sensex rather than what the Plan wishes them to undertake. Therefore, the ‘model’ based on expectations is likely to flatten in odd circumstances. We are anxious because the title of the Approach Paper is “Towards Faster Growth and More Inclusive Growth”. If growth were not faster enough would the idea of inclusivity be dropped at once from the Plan target?

Thus, more important is to give priority to reducing income inequality as well as vulnerability of people. It is important to recognise that India is a unique case in the sense that no country in the world at the current level of GDP growth rate ever had such a high level of income inequality and vulnerability of common people. We often quote from China’s recent development experience, but, for the sake of convenience, remain silent about the fact that the overall Gini coefficient is 0.38, the rural-urban disparity there though has increased. 

At the current level of growth, it is most expected that we pay more attention to the development of human resources. For that, we do not need to invent any new growth model. These are there to convincingly show how human capital generates growth (some of it are known as ‘endogenous growth model’). In order to accomplish that Planning Commission needs to put emphasis on (a) distinctive distributive plan; and, (b) comprehensive social security for the vulnerable sections of the population. In the case of the latter, the National Commission for Enterprises in the Unorganised Sector has recently submitted to the Government of India its first Report on “Social Security for Unorganised Workers” (2006). And, that needs to be incorporated in the Plan framework with necessary modifications, if necessary. 

(To be continued)