Imperatives for growth

More freedom for States to spend as they deem fit and focus on development of human capabilities are among the steps needed to take India on the path to economic growth

img-sept15-21GROWTH is indeed a major outcome of the planning process. We have to plan for a growth of 8 per cent to 9 per cent on a long-term and sustained basis to become a middle income country by 2025, or in the next decade. This is not a very ambitious goal for a country with per capita income levels of about $1,500.

The average growth of the GDP in the period 1990-2010 averaged 7.5 per cent. These were the initial years of reforms. Unfortunately, in the last three years growth has decelerated and averaged about 5 per cent. In the first two quarters of the current year it has continued to be sluggish and averaged 5.5 per cent. While part of the reason for this decline is slow growth in international demand, domestic policies have also led to depressed growth sentiments. Planning should correct this situation and generate growth which is inclusive of all groups and regions. Inclusion has several dimensions. The inequalities in income and wealth distribution need correction. More than 350 million people living below the poverty line must benefit from the growth process.

India has sharp income inequalities amongst different states. The North-Eastern states, the low-income states of Bihar, Uttar Pradesh, Rajasthan, Odisha, Jharkhand, Madhya Pradesh and Chhattisgarh, the Left affected areas and tribal areas need special focus. The different marginalised and low development social groups of Scheduled Castes and Tribes, women and minorities need a more inclusive growth process. Inequalities and deprivation would not go down by operation of market-led growth alone. An important component of inclusion is access to the social goods of education, healthcare, nutrition, infrastructure—both physical and social—and to modern technology.

The planning process cannot hope to generate equitable growth by providing subsidies or forcing public investment in an otherwise financially loss-making project. Such an approach leads to inefficiencies. The approach to growth of these areas and social groups should be anchored on large investment in physical infrastructure in these areas and capacity building. We should open up these areas for profitable industrial project investment by developing roads, railways, airports, ports, and power projects. The capacity building of these groups should lead to increased investments in health, education, and nutrition and skill development for them.

Globally, the growth process has accelerated with improved infrastructure. In this approach, subsidies may be required by the railways to build otherwise non-profitable lines while airlines may require support to operate in some of such areas like the North-East. Access to healthcare may need new medical colleges. A skill development programme for the region may need subsidies. It is here that the government should intervene and provide support. The 11th Plan has shown how some of these policies have resulted in reducing gaps in growth rates of SDP of
different states.

The planning process cannot hope to generate equitable growth by providing subsidies or forcing public investment in an otherwise financially loss-making project. Such an approach leads to inefficiencies

The process of economic growth, unlike in the second half of the 20th century, has to address special challenges now. In the field of energy we need to accelerate and create larger capacities. Such capacities must consist of a larger share of clean energy to enable us to meet our commitment in climate change negotiations and minimise our carbon footprint. We should minimise use of power generated from fossil fuels, especially coal. This requires expansion of solar and wind energy. We need to spend more on research and development to expand bio-energy capacities. The cost of renewable energy is quite high, though coming down. This process requires larger investment. The cost of a unit of solar electricity is `7-9 and that of wind power `4-6 which is nearly double of electricity generated from coal-based plants. The increased capital requirement and infirm power from these sources has put extra pressure on developing economies. This financial burden can slow down growth. We need to take steps to minimise these costs with new technologies and efficient processes.

THE efficient use of water, its overall availability for our requirement and supply to all areas is a very challenging task. Over the last century, we did not devote enough attention to it. A result of the poor management of this important resource is that large areas in the country are having water problems. The 12th Plan has observed that if the current pattern of demand continues, half of the demand will be unmet by 2030. Further, there are large areas with severe water shortage, which average values tend to hide. The groundwater extraction is fairly high in the country.

According to current estimates, exploitation of groundwater in Punjab, Haryana, Delhi and Rajasthan is more than 100 per cent while Tamil Nadu with 80 per cent and UP with 71 per cent are close behind. The over-exploitation is lowering the groundwater levels. Globally, our exploitation of groundwater is more than double that of the US and China. We have problems with qualities of groundwater or its availability in 60 per cent of the districts of the country.

Despite the above problems, we have not woken up to the need for serious policy intervention in this area. Some changes required forthwith are: recycling of water by industry and other users, efficient use of water in agriculture, including change in cropping pattern and use of new technologies in paddy cultivation and water harvesting, specially in urban areas. The large leakage in the water distribution systems, both in urban and rural areas, will need to be plugged. Private investment may be required for this. These measures will need to be supported with water bodies’ regeneration and other supportive measures to generate river systems with water conservation measures. A very important component of this plan will be working mitigation measures to counter the effect of climate change.

A major change is taking place in India in urban settlements. According to current estimates, by 2030 nearly 40 per cent of the population will be living in urban areas. This will increase to 60 per cent by 2050. In most plans, our thinking on evelopment of urban infrastructure has been governed by the need to develop rural areas. The overriding priority has been development of villages and the urban sector has been starved of funds. In view of the large population share and growth of urban centres, we need to step up investment in this sector. Sanitation, water and roads will need to be a major priority while developing these areas. We have an opportunity here. If we miss it, larger urban slums will dot the skyline. Since the urban growth is currently taking place, we can plan organised urban expansion. There has been recognition of these changes in the reports of the 12th and 13th Finance Commissions, in their recommendations. The Planning Commission recognised this in the 11th as well as the 12th Plan. It needs to be reflected both in the financial allocations and planning of state governments. A strong institutional mechanism needs to be set up to meet financial needs of the urban sector.

Growth process also requires a strong manufacturing sector. Unfortunately, the share of manufacturing in India’s GDP is very low. The 12th Plan, while emphasising this, mentions its low share in GDP of 15 per cent as against 36 per cent in Thailand, 31 per cent in South Korea, 30 per cent in China, 26 per cent in Malaysia and 21 per cent in Germany. If the large population currently under-employed in agriculture is to be moved to manufacturing to make agriculture more profitable, manufacturing has to grow at a faster rate. The 12th Plan projections of 12-14 per cent appear ambitious and unrealistic. But a long-term growth of 10-12 per cent per annum is feasible, considering the potential. It is, however, a difficult task, considering only China has, in the first decade of the current century, averaged growth of slightly above 10 per cent.

Sustained GDP growth of 8 per cent or above over the next decade-and-a-half will not be feasible unless efficiency of investment improves sharply. This requires improved governance across the country. It requires sharply reduced corruption which is feasible by adopting a comprehensive approach covering economic growth, community education, independent and fair investigation and systemic reforms of procedures and institutions. It requires decentralisation of powers to states and greater flexibility in centrally sponsored schemes. The states should have the freedom to spend in accordance with their needs rather than on those perceived by the Centre. Institutional changes need to be made across all sectors, but especially in delivery of justice and the organisation of the police force. The rule of law cannot be implemented unless wide ranging changes are brought about in these critical areas. This requires a strong political will.

The efficient use of water, its overall availability for our requirement and supply to all areas is a very challenging task. Over the last century, we did not devote enough attention to it

A comprehensive strategy on handling corruption should ensure improved efficiency in use of funds. The processes for delivery of public services need to be simplified. We must address both political corruption and petty corruption. We should quickly set up a Lokpal, bring the CBI under it, start a campaign across the country against corruption and bring administrative procedures in accordance with those prevailing in developed economies. We should fully understand the diversity of India and give to the states freedom to enable efficient use of funds. Good governance should be our watchword in the next two decades.

India is no more a centralised plan economy. The plan for economic growth at this stage of development must focus on development of human capabilities, including skills, expansion of infrastructure and policies to promote private investment. We must focus on governance to improve efficiency of use of funds. A long-term growth strategy of sustained high growth must be built around the above policies.

HOW do we achieve this? The Planning Commission reforms are still work in progress. While the old institution has been abolished, the outline of a new body is under discussion. Clearly, the investment priorities must be decided by the Planning Commission or its successor body in consultation with states, to ensure focus on education, health, regional development, and other objectives mentioned in the Directives Principles of the Constitution.

To make it a consultative institution or purely an advisory body would be disastrous. The participation of states in a reformed National Development Council in a more meaningful way will, however, be a very progressive step. Reform of institutions and improved governance should also be an important part of the new body. The reformed institution must aim to shift the economic activity in the new direction to meet our aspirations of inclusive and sustained high growth.

VOL. 9, ISSUE 6 | SEPT, 2015

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