Number juggling

Set a credible growth target for the 12th Plan

The United Progressive Alliance (UPA) government has done great damage to its credibility – and, by extension, to the reputation of India internationally – by consistently being over-optimistic in its public forecasts and pronouncements. Governments should not be pessimistic. Nor should they appear to be detached from reality, especially if the economic situation is as grave as the one facing India today. Unfortunately, going by the numbers, it sometimes appears as if UPA-II is capable of ignoring not just reality but also simple arithmetic. The concern about the target for growth in the 12th Five-Year Plan, due to be discussed by the Centre and state chief ministers at the meeting of the National Development Council on Thursday, is a classic example of this problem.

The original estimate, from the Planning Commission’s approach paper for the 12th Plan, was for an average annual growth rate of nine to 9.5 per cent a year over the Plan period, from 2012-13 to 2017-18. The approach paper was launched when the manufacturing and investment slowdown had already begun to lead to India’s deceleration in quarterly growth, but the Planning Commission chose to ignore the clear signals that the slowdown would be protracted and difficult to escape. When the growth crisis became impossible to ignore, the Planning Commission revised the estimate sharply downwards, to an average annual growth rate of 8.2 per cent a year. Even this is a little high, and it is now reported that the Centre will instead peg average annual growth at eight per cent.

However, there is little doubt that, in spite of the double downward revision, the target remains unrealistically high. This financial year, 2012-13, is already a setback for growth; in the first half of the year, India grew at 5.4 per cent on an annualised basis. The finance ministry – again, over-optimistically – assumes that the full year’s growth will be 5.7 to 5.9 per cent. Remember, this is a slowdown driven overwhelmingly by the crisis in manufacturing — a crisis that will not end before investment picks up, and then too with a lag. Yet investment is clearly not recovering, and business sentiment continues to be weak. Thus, most estimates of growth next financial year, 2013-14, do not expect it to be much higher than it will be this year. But even if it is half a percentage point higher, at a currently unreachable 6.5 per cent, that still means that making a five-year target of eight per cent will require a sharp acceleration over the remaining three years. Indeed, on an average, India will have to grow at over 9.2 per cent. Without major reform, the miraculous disappearance of intractable supply-side bottlenecks, and much cheaper input prices, growth at that level seems unattainable. So where, precisely, will this average of eight per cent growth come from?

It appears that, once again, the fear of being called to account for its mismanagement of the economy is causing UPA-II to try and wriggle out of a corner through presenting over-optimistic forecasts. That is not responsible behaviour. The government must set a reasonable and credible target for the 12th Plan — and if, in the process, it has to endure justifiable censure from Opposition chief ministers at the National Development Council, it must realise that accountability has a bitter taste.