FM questions Plan panel's stance on growth

Finance Minister P Chidambaram has questioned the Planning Commission's stance that increasing current account deficit (CAD) could hinder overall economic growth.

In a letter written to Montek Singh Ahluwalia, Planning Commission deputy chairman, on the draft approach paper to the 11th Five-Year Plan period, the FM has questioned how CAD as a proportion of the GDP rise by 40 basis points (from 2 per cent to 2.4 per cent and further to 2.8 per cent) for every percentage point increase in the GDP growth rate (from 7 per cent to 8 per cent, and further to 9 per cent).

The letter adds that the constraint to growth, particularly with the already tight incremental capital output ratio (ICOR) of 3.9-4 assumed in the approach paper, will come not from a burgeoning CAD, but from insufficient private investment.

Lack of private investment would lead to an inability to provide a supportive investment climate through appropriate reforms.

"The approach paper projects imports to grow at 12.1 per cent and exports at 16 per cent. With these growth rates, and the import ($ 156.3 billion) and export ($104.8 billion) in 2004-05, the trade deficit will marginally narrow from $55.5 billion in 2007-08 to $55 billion in the terminal Eleventh Plan year of 2011-12. With such deficit, a deteriorating or even unchanged CAD as a proportion of the GDP, if it grows at an annual 8.5 per cent, requires a sharp deterioration in net invisibles such as manufacturing and services," the letter adds.

Pointing out that 4 per cent agriculture growth will not be sustainable unless aggregate GDP growth is much higher than 8 per cent, Chidambaram said the commission may suggest ways to integrate the organised credit system effectively with the agriculture sector and strike a balance between adequate credit and "cheap" credit.