Pages

Thursday, February 10, 2011

Mid Term Appraisal of Eleventh Five Year Plan—First Part

INTRODUCTION
 The Eleventh Plan (2007-08 to 2011-12) sought to build on the gains achieved in the Tenth Plan and shift the economy to a path of faster and more inclusive growth.
 Inclusiveness a critical element in the strategy was to be achieved by ensuring that growth is broadbased and is combined with programmes aimed at overcoming deficiencies in critical areas which affect large numbers of the vulnerable sections of our population, particularly the Scheduled Castes (SC) and Scheduled Tribes (ST), the Other Backward Classes (OBC), women and the minorities. The Plan sought to deal with these deficiencies through programmes aimed at providing access to health, education and other essential services and programmes of livelihood support.
AGGREGATE AND SECTORAL GROWTH
 The Eleventh Plan aimed at an average growth rate of 9 per cent per annum, beginning with 8.5 per cent growth in the first year and accelerating to reach 10 per cent in the last year. The economy exceeded expectations in the first year of the Eleventh Plan (2007-08) with a growth rate of over 9 per cent but the momentum was interrupted in 2008-09 because of the global financial crisis.
 As in other countries, the Government responded to the global recession by introducing fiscal stimulus and monetary accommodation which continued into 2009-10 when the economy was further hit by a severe drought. The growth rate in 2008-09 declined to 6.7 per cent but rebounded to about 7.4 per cent in 2009-10, despite the fact that agriculture showed negligible growth at 0.2 percent.
Resilience of the Economy
 The relatively modest slowdown in the face of an exceptionally sharp contraction in output in the industrialised world, has established the resilience of the economy in terms of its ability to manage a downturn despite greater openness. While the advanced economies saw their growth decline from a trend rate of 2.0 - 2.5 percent to (-) 2.0 -(-) 3.0 percent, growth in India declined by only about 2 percentage points. Since this reduction applied to an underlying growth rate that was much higher, the outcome was a GDP growth rate that remained relatively robust. China and other East Asian countries also have had a similar experience.
 There are several reasons for the superior performance on the growth front.
 First, India’s financial system was not exposed to the ‘toxic’ assets which affected the financial system in most industrialised countries. This was the result of a traditionally conservative approach to bank regulation and of a conscious government decision to adopt a cautious approach in liberalising capital flows, especially short term debt, combined with building up ample foreign exchange reserves. If the financial system had suffered a severe shock, the disruptive effects of the crisis on the real economy would have been much greater.
 Second, although the economy is much more open than in the past, it still is much less dependent on exports as a demand side driver of growth than some other countries. The growth in demand which supported rapid growth in GDP was pre-dominantly domestic demand, particularly domestic investment which increased rapidly in the pre-crisis years.
 Third, the underlying macro-fundamentals were strong. The level of private savings has been high and fiscal consolidation in previous years had improved the public savings performance. As a result the domestic savings rate had increased to 36.4 percent of GDP in 2007-08 declining to 32.5 per cent in 2008-09 because of the adverse effect of the crisis on tax revenues coupled with the fiscal stimulus. However, the private savings rate was more or less unchanged. Gross investment declined from 37.7 per cent in 2007-08 to 34.9 per cent in 2008-09 and is expected to recover to 36.2 per cent in 2009-10. Gross fixed Capital Formation remained at about 33 per cent through these years.
Prospects for the Eleventh Plan
• Growth prospects in the remaining two years of the Eleventh Plan period depend to some extent upon the global economic prospects which remain uncertain at present. However, if the industrialised countries show positive growth of 2.3 per cent per year in 2010, and 2.4 per cent in 2011, as is currently thought likely, it is possible to envisage India’s growth rate increasing to around 8.5 per cent in 2010-11, with a further increase to 9 per cent in 2011-12.
• Projecting a return to 9 per cent growth may appear optimistic since growth at this rate in the past has only been achieved in years when industrialised countries grew at close to 3.0 per cent per year. However, India’s macroeconomic fundamentals suggest that 9 per cent growth can be achieved despite slower growth in industrialised countries provided supportive policies are put in place.
Macro-economic Fundamentals
Export Growth:
Exports, which grew at an annual rate of 25 per cent (in US $) from 2003-04 to 2007- 08, is likely to grow at a much slower rate. Export growth decelerated to 13.7 per cent in 2008-09 and (-) 4.7 per cent in 2009-10 and an early return to very rapid growth is unlikely.
Weaker export demand will have to be offset by some other source of domestic demand to sustain high rates of GDP growth. This should ideally be through increased investment in infrastructure, using a combination of public and private investment, and Public Private Partnership (PPP).
Enhanced investment in infrastructure will not only provide the demand needed to replace export demand in the short term, it will also ease a critical supply constraint on growth over the medium term.
Current account deficit:
The increase in the current account deficit in the next two years is likely to be modest, at approximately 2.5 percent or at most 3 percent of GDP. A deficit of this order could be financed relatively easily through long term capital flows including foreign direct investment (FDI).
FDI:
Despite the crisis, FDI flows (which exclude FII inflows) have held up well and the estimated FDI inflow in 2009-10 was US $ 26.8 billion. Our prospects for attracting FDI in the years ahead are very good.
Fiscal deficit:
An important area of concern in this context is the size of the combined fiscal deficit of the Centre and States which increased from 6.3 percent of GDP in 2006-07 to about 10 percent in 2008-09 and remained around the same in 2009-10. A higher fiscal deficit was an inevitable consequence of the stimulus strategy, but it is also necessary to signal a return to fiscal prudence. This signal has been given in the Budget for 2010-11, which shows the fiscal deficit declining from 7.8 per cent of GDP in 2008-09 to 6.9 per cent in 2009-10 and further to 5.5 per cent in 2010-11 with further decline projected in subsequent years. Adherence to this time path will contribute to creating investor confidence and help bring inflationary pressures under control.
Growth rate:
If the economy achieves 8.5 per cent growth in 2010-11 and accelerates to 9 per cent in the last year of the Eleventh Plan, the average rate of growth in the Plan period could be a little over 8 per cent. Although below the original Eleventh Plan target of an average of 9 per cent growth it would be better than the 7.8 per cent attained in the Tenth Plan period. To have achieved this outcome in an otherwise highly unfavourable external environment would be a major achievement. More importantly, the economy would be well positioned for transition to a growth rate higher than 9 per cent in the Twelfth Plan period.
Growth in the States
The median growth rate of GSDP in the States was 7.6 percent in the Tenth Plan and 8 percent in the first year of the Eleventh Plan. States for which data is available for 2008-09 the median growth rate dropped to 6.4 percent on account of the slowdown caused by the global crisis.
The distribution of growth across States appears to have improved in favour of the slower growing States. The median growth rate for the lowest quartile of the States (ranked by descending order of growth rates) did not exceed 4.9 per cent in the Seventh, Eighth and Ninth Plan. It rose to 6.3 per cent in the Tenth Plan and remained at that level in 2007-08 suggesting that all States have benefited by the improved growth climate. Although growth rates continue to differ across States, the variation has tended to decline.
Prospects for Agriculture
An important sectoral target of the Eleventh Plan was to raise the rate of growth of GDP in agriculture from about 2.5 per cent in the Tenth Plan to 4 percent. The average growth rate of agriculture in the first two years of the Plan was 3.2 per cent, which was better than that of the Tenth Plan, but the drought in 2009- 10 reduced the average for the first three years to a little over 2 per cent. In case of a normal monsoon across the country in 2010, a substantial rebound can be expected. Achieving the target of 4 per cent growth in agriculture would require an average growth of 7 per cent per annum in the next two years. This may be difficult but with normal weather conditions there is a good chance of agricultural growth averaging 3.0 to 3.5 per cent over the Eleventh Plan period.
Positive developments in agriculture.
 Total public and private investment in agriculture as a percentage of agricultural GDP has improved from 14.1 per cent in 2004-05 to 19.5 per cent in 2008-09 according to the new national accounts series.
 The write-off of farm debts in 2006 gave many farmers the opportunity to start afresh and the flow of agricultural credit has expanded considerably in the Eleventh Plan period with the Kisan Vikas card experiment proving to be very successful.
 Programmes such as the Rashtriya Krishi Vikas Yojana, the National Horticulture Mission and the National Food Security Mission are doing well.
 Minimum support prices have been raised to give farmers greater incentives to produce foodgrains.
 Investment in irrigation is being expanded significantly and the Accelerated Irrigation Benefit Programme (AIBP) has stepped up allocations in support of state government efforts.
 The Mahatma Gandhi National Rural Employment Guarantee (MGNREG) programme, which is focussed on schemes that improve water conservation, together with enhanced efforts at watershed management, holds out the hope of greatly improving access to water in rainfed areas.
 Improved rural road connectivity through the implementation of Prime Minister’s Grameen Sadak Yojana (PMGSY), has given farmers improved access to markets supporting faster growth in farm incomes.
The Manufacturing Sector
 The Eleventh Plan had noted that the high growth of the economy recent years had not been accompanied by rapid growth in manufacturing as happened in other fast developing economies. The Plan called for double digit growth in manufacturing and emphasised that this is essential if we want to shift substantial numbers of the labour force out of agriculture into the formal sector. Performance in this dimension in the first three years of the Eleventh Plan has been below expectation.
 Manufacturing grew at an average 9.3 percent during the Tenth Plan, and reached 10.3 percent during the first year of the Eleventh Plan, but thereafter it was hit by the global slowdown in 2008-09, causing the rate of growth in the sector to decline to 3.2 percent. It has recovered to 10.8 per cent in 2009-10 and our objective should be to maintain the growth of manufacturing at double digit levels in the last two years of the Eleventh Plan.
 Several institutional and policy reforms are needed to achieve this objective. Improved power supply is particularly important since shortages of power or poor quality of supply of power have an adverse effect on the competitiveness of manufacturing. The Micro Small and Medium Enterprise (MSME) sector needs special attention because it creates more jobs than large companies do. It is also an important seed bed for entrepreneurship and innovation. Credit is however, a key constraint for this sector and this calls for continued deepening and strengthening of the financial sector as well as the mechanisms for expanding access to equity financing. ‘Clustering’ is an effective way to provide small units with infrastructure support and should be encouraged.
 Manufacturing units in India are also burdened by a plethora of regulations, including many at the State level, resulting in low scores on indices of the ease of doing business. There is an urgent need to review these regulations in individual States. The need for greater flexibility of labour laws also has to be addressed if labour intensive manufacturing is to be encouraged.
INCLUSIVENESS AND THE ELEVENTH PLAN
 The Eleventh Plan viewed inclusiveness as a multi-dimensional objective and listed 27 monitorable targets. Of these, two were: (a) growth of GDP and (b) the growth of agricultural GDP. There were also 25 other parameters relating to poverty reduction, employment, education, health services, child nutrition, gender balance, access to basic infrastructural services and environmental sustainability.
Poverty Reduction
 The Eleventh Plan target was to reduce the percentage of poverty by 10 percentage points over the Plan period, or 2 percentage points per year, which is more than twice the pace observed in the past. It is not possible to measure progress against this target at this stage because no official estimates of poverty are available after 2004-05. The next estimate of poverty will be for the year 2009-10, based on the NSS survey currently being conducted in the field, data from which will become available only in 2011.
 An issue that has attracted considerable attention is whether the poverty lines used in the official estimates, which were fixed in 1973- 74, and have been updated for inflation since need to be revisited in view of the many changes that have taken place in our economy. A High Level Committee under Prof. Suresh Tendulkar was appointed in December 2005 to consider this issue.
 The Report of the Committee has been submitted. The Committee has recommended that the urban poverty line need not be changed, but the rural poverty line should be raised to reflect the basket of commodities that can be purchased at the urban poverty line after allowing for the difference in urban and rural prices. The Tendulkar committee has recomputed poverty lines for individual states for 2004-05 on this basis.
 The revised poverty lines recommended by the Tendulkar Committee have been accepted by the Planning Commission for 2004-05. They indicate no change in the urban poverty estimates, but the rural poverty line is revised upwards significantly and as a consequence the percentage of the population below the poverty line in rural areas is higher than in the earlier estimates. The percentages of the population in poverty in rural and urban areas using official estimates and the Tendulkar Committee estimates are indicated in the Table 1.1

 The Tendulkar Committee has specifically pointed out that the upward revision in the percentage of rural poverty in 2004-05, resulting from the application of a new rural poverty line should not be interpreted as implying that the extent of poverty has increased over time. To assess the underlying time trend using the new method of computing poverty lines, we should compare the poverty estimates in 2004-05 with those for 1993-94, using the new methodology for both years.
 These estimates, as reported by the Committee, are presented in Table 1.1 .They clearly show that whether we use the old method or the new, the percentage of the population below poverty line has declined by about the same magnitude.
 An important programme contributing to poverty reduction in rural areas is the MGNREG Programme which began in the first year of the Eleventh Plan and was quickly expanded to cover the entire country. This programme is expected in 2009-10 to generate about three times the volume of employment generated by the rural wage employment programmes that were in place before it was introduced. There is evidence that implementation of MGNREG Programme has reduced distress migration and improved the bargaining power of agriculture labour leading to higher wages.

Important Economic Concepts
1. What is deficit financing?
Deficit financing refers to financing the excess of government expenditure over its revenue through printing of currency notes or through borrowings.
2. Define poverty line.
An income level that is considered necessary to satisfy a minimum nutritional requirements of a person is called poverty line.
3. What is PDS?
The Public Distribution System is a system of management of scarcity and for distribution of food grains at affordable prices.
4. Differentiate between plan and non-plan expenditure.
The expenditure in developing ‘planned’ projects is plan expenditure while that on maintenance and running of the existing projects is known as non-plan expenditure.
5. What do you mean by democratic planning?
Planning is ‘democratic’ if people are associated at both formulation and implementation stages and it is finalized through debate among people’s representatives.
6. What is regional planning?
Regional planning is a sort of spatial planning at various territorial levels (such as block/district/state) for achieving sustainable development for the region.
7. Define recession.
A recession is a decline in a country's gross domestic product growth for two or more consecutive quarters of a year.
8. What do you mean by Phillips Curve?
Two goals of economic policymakers are low inflation and low unemployment, but often these goals conflict. Suppose, for instance, that policymakers were to use monetary or fiscal policy to expand aggregate demand. This policy would lead to higher output and a higher price level. Higher output means lower unemployment, because firms need more workers when they produce more. A higher price level means higher inflation. Thus, when policymakers move the economy up, they reduce the unemployment rate and raise the inflation rate. Conversely, when they contract aggregate demand and move the economy down, unemployment rises and inflation falls. This tradeoff between inflation and unemployment, called the Phillips curve. The Phillips curve is named after New Zealand–born economist A. W. Phillips. In 1958 Phillips observed a negative relationship between the unemployment rate and the rate of wage inflation in data for the United Kingdom.
9. What is Sacrifice Ratio?
The sacrifice ratio, is the percentage of a year’s real GDP that must be forgone to reduce inflation by 1 percentage point. A typical estimate is about 5: for every percentage point that inflation is to fall, 5 percent of one year’s GDP must be sacrificed.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.