T N Ninan: What price growth?

The 12th Plan's ambitions are best set aside

What the latest macroeconomic numbers do is to drive a coach and four through the official targets for the 12th Five-Year Plan. After initially projecting growth at nine per cent to 9.5 per cent for the 2012-17 quinquennium, the Planning Commission late last year dropped the Plan's growth target to 8.2 per cent. It looked unrealistic then, and has become impossible now. The first year's growth has dropped to just five per cent, and the Economic Survey projects 6.1 per cent to 6.7 per cent for next year. Taking the mid-point of that range, the average growth in the first two years of the Plan would be 5.7 per cent. Taking that up to an average of 8.2 per cent for the full five-year period would mean averaging close to 10 per cent annually in the final three years of the Plan - something not achieved during even the glory days of 2005-08. Such vaulting ambition is not on anyone's agenda just now; the prime minister has talked only of getting back up to eight per cent in two or three years. If one makes the generous assumption that growth in the final three years will indeed average eight per cent, then the full five years would have achieved about seven per cent. Most people would say that the country should consider itself lucky if it manages that, considering that the latest quarterly growth figure is a miserable 4.5 per cent.

The macroeconomic reality today is such that we should not be pushing for too much growth too soon. The two large deficits (on the fiscal and current accounts) that the system has been grappling with point to excess demand in the system, apart from supply constraints on the infrastructure side, which if removed would achieve some import substitution (of things like coal and gas) and also encourage more production for exports. However, even optimistic assumptions about the pace of correction suggest that macroeconomic balance will not be restored for another two or three years. No serious growth push should be attempted until that is achieved.

Meanwhile, facile arguments about reducing interest rates to spur growth have come up against the hard fact that bank deposits are growing too slowly. Interest rates on these deposits are lower than inflation, and therefore yield negative rates for savers; this has pushed savings into gold and real estate. It is worth noting that while the Reserve Bank of India (RBI) has lowered the policy rate by a notch, some banks have actually raised deposit rates. If the banks don't get enough deposits, they will not be able to lend and fuel faster growth, unless the RBI intervenes in the money market to pump in liquidity. But with inflation still quite high, this is a debatable policy option. In other words, inflation has to drop before interest rates do. That too mitigates against a quick return to rapid growth.

The uncomfortable fact is that years of poor economic management have resulted in the accumulation of a complex set of problems that cannot be wished away or made to disappear by wizardry from the finance minister. Correctives have to be worked through the system so that the economy gets back on an even keel, and this will take time. Also, there will be a new government in place after elections next year, it is likely to be a hodgepodge coalition, and what course corrections that might entail are anyone's guess. The present government may have learnt its economic lessons the hard way, but such lessons are not automatically transmitted to a new set of rulers. Especially in the context of these political uncertainties, policy makers and commentators should focus on steps that restore economic balance, and give up on unrealistic growth targets.