Amid the Prime Minister’s top advisory panel raising concerns about a slow pace of asset creation this year, the Planning Commission has said the average investment rate has to increase to 38.5 per cent a year in the 12th Five-Year Plan from 36.4 per cent in the ongoing plan so as to deliver an annual economic growth rate of nine per cent.
Given the track record of the past plans, the government has not pegged the targeted increase in investment rate (gross capital formation as a percentage of GDP) that high going by the approach paper to the 12th Plan (2012-17) that was finalised by a full Planning Commission meeting yesterday. Yet, even this much increase may not be such an easy task, analysts say, given the current slowdown in investment highlighted by the Prime Minister’s Economic Advisory Council (PMEAC).
The 11th Five-Year Plan, which will complete this financial year, is estimated to increase investment rate to 36.4 per cent from 31.8 per cent in the previous plan. The ninth plan had just 24.6 per cent investment rate.
Last month, the PMEAC had said high rates of domestic inflation, excessive government debt, political instability and the global situation had eroded business confidence, adversely impacting asset creation. As such, the Council had lowered its growth forecast for economic growth to 8.2 per cent this year from 9 per cent projected earlier.
But why is estimated 36.4 per cent investment rate delivering just 8.2 per cent economic growth a year in the ongoing plan period? The approach paper attributes this to rapid increase in inventories and valuables. “The impact of this large increase (investment rate) has not been fully reflected in the growth rate in the eleventh Plan period.... One reason for this has been the rapid increase in inventories and valuables, essentially for hedging against the crisis,” the paper says.
Although the ongoing uncertainties in the global economy may keep these at somewhat elevated levels, the paper says they are unlikely to be as high as the immediate past. This suggests the impact of the already-achieved increased investment rate is likely to spill over into the 12th Plan.
“The increase in investment is not reflected fully in the growth over the eleventh Plan period, but it can be expected to have its full impact over the twelfth Plan period,” the paper adds.
Initially, the approach paper to the 11th Plan had fixed a target of average nine per cent growth rate with a terminal year (this financial year) delivering a ten per cent growth rate. But as the global financial crisis hit the Indian economy, the mid-review lowered the target to 8.1 per cent a year.
For this financial year, the planning commission is expecting growth rate in the range of 8-8.3 per cent, which will give average GDP growth rate of around 8.2 per cent in the ongoing plan. This is higher than 7.8 per cent witnessed in the 10th Plan, but does not represent such a steep rise as was expected.
The approach paper to the 12th FYP fixed the growth rate at 9 per cent a year on an average. However, PM Manmohan Singh had said the target could be raised to 9.2 per cent for the plan if global conditions improved and domestic inflation came down by the beginning of next fiscal when the plan would start. Even 9 per cent economic growth rate is feasible “only if we can take some difficult decisions”, he said.
The PMEAC had called for carrying forward reforms agenda and generate conditions for asset creation. After chairing the full Planning Commission meeting, the Prime Minister had also stressed on building a broad political consensus on carrying out second-generation reforms.
