Subir Gokarn: Sounds like a plan

The first of a new generation of plan documents is now with us in the form of the Mid-Term Appraisal

The Mid-Term Appraisal (MTA) of the Tenth Plan was approved by the Union Cabinet last week and now awaits final ratification by the National Development Council. Since we are already into the fourth year of the plan, strictly speaking, the value of a mid-term appraisal is rather limited.

There simply isn't enough time for course corrections to have any impact. And, based on media reports, the document has not confined itself to the limits of appraisal. Rather, the Commission decided to use the exercise as a platform to lay out a comprehensive agenda for reforms, a list it obviously believes should be implemented as soon as possible.

There are apparently 60 major recommendations in the appraisal document. I have not seen a comprehensive list anywhere, but virtually all newspapers reported on what they considered to be the major ten or so. Even this sample is impressive in two significant ways. The first needs to be seen in the context of the eternal dilemma that economists (and other professionals) in government have to deal with.

Should advice be given based on a judgment of the best available policy option, regardless of political acceptability? Or, should the technocrat be sensitive to the political environment and take the constraints it imposes in making his recommendations?

I am certainly in favour of the former approach. It is only when the best options are articulated that it is possible to assess the costs that politics imposes on economic performance. The proposal of options based strictly, or at least primarily, on economic considerations provides two important inputs to the political component of policy-making.

One, as indicated above, it gives all concerned a clear sense of the costs of choosing an option that is ranked down the list, even though it may be the best of the politically feasible set. Two, by ranking options, it gives political managers a sense of the efforts needed to build political consensus to get as far up the list as possible.

The MTA has clearly come down in favour of this approach. It has made major recommendations for policy changes, which will clearly not go down very well with various political interests. Among the recommendations reported, there are none that appear to be new or original.

Most have either been put forward by earlier bodies, some from within the Planning Commission itself. The second point of significance of the recommendations is that the Commission is asserting that growth acceleration will simply not be possible without them. It has lowered its estimate of annual average growth during the Tenth Plan to 7 per cent, from the original target of 8.1 per cent.

Looking at the first three years of the plan, 2002-03 showed GDP growth of 4.3 per cent, 2003-04 clocked in at 8.5 per cent and the early estimate for 2004-05 was 6.9 per cent. The average for this period is 6.56 per cent, which would require roughly 7.65 per cent per year in 2005-06 and 2006-07.

At this point, the optimistic end of the range of forecasts for the current fiscal is around 7 per cent. For the next year, many people, including myself, are seeing the strong possibility of an industrial slowdown, after more than three successive years of strong growth. So, an average of 7.6 per cent for this year and the next will not be a credible figure to most observers.

However, it is important to remember that these forecasts are based on "business-as-usual" assumptions on the policy front. An assumption underlying the MTA recommendations, it appears, is that implementing them quickly will fast accelerate the growth rate and, more importantly, offset a potential cyclical downturn that may make an appearance next year. Is this a naïve expectation?

Many of the policy recommendations are intended to stimulate investment. Getting the regulatory frameworks right, for example, will stimulate investment in infrastructure projects, which will come on stream only after a lag of a few years at least.

However, the sooner they can start getting built, the quicker the short-term benefits of construction activity will kick in. Similarly, labour reforms, by way of dilution of the job security regulations of the Industrial Disputes Act (reports suggest that the government is already considering increasing the floor for permission to retrench workers from 100 to 300), should cause an immediate inducement to hire more workers in the manufacturing sector, which will obviously contribute to growth through consumption spending.

The main value of these recommendations does not lie in their ability to achieve 7 per cent GDP growth for the period 2002-07. I have argued before in this column that the direct correlation between policies and year-to-year GDP growth is an obsolete notion and that the Planning Commission should not concern itself any more with growth targets.

Instead, having accepted the logic that a particular set of policies will raise the average rate of GDP growth over a long enough period, its resources are better spent designing the broad policy framework, advocating its logic and monitoring its implementation.

Good policies will not guarantee growth, because there are many external influences at work as well; but, they will increase the likelihood that growth will accelerate and be less vulnerable to influences outside the government's control.

By this yardstick, the MTA, far from being a formal exercise, which came too late in the day to make a difference, is in fact exactly what is required from the Commission.

It has taken the best policy recommendations that have come out of the deliberations of various groups and for which strong justifications exist. It has combined them into a comprehensive blueprint, recognising the fact that the benefits of any one change will be reinforced or diluted if several others are made or not made.

It has even apparently made some progress on implementation while doing all this, for example, in forming a joint group with the ministry of railways to index lower class rail fares to inflation. This simple step will go a long way in easing the financial constraints of the railway system, giving it more room to invest in enhanced safety measures or capacity expansion. It isn't enough, but it is a very good beginning.

From whatever I've seen of the MTA, calling it by that rather confining name seems a little unfair. It is, in fact, the first of a new generation of plan documents. Let's call it the First New Plan instead. And, rather than getting down to drafting the Eleventh Five-Year Plan, the Commission should now be thinking in terms of coordinating the efforts of different ministries and state governments in implementing the First New Plan instead.

The author is chief economist, Crisil. The views here are personal