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India's Third Giant Leap

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Can the economy get back to an 8% growth rate?
Mon, 23 Dec Pre-Open

It is no secret that the Indian economy is facing serious problems. Falling growth rates, high inflation, a weak currency and high interest rates are just some of the issues that the economy is grappling with. Most of these problems are self inflicted. While the falling growth rate can be attributed to the government's policy paralysis and bureaucratic hurdles for infrastructure projects; the blame for high inflation will fall squarely on the mismanagement of our agricultural policies.

In such a scenario, what happens to central planning? The Indian government's planned expenditure is envisaged every 5 years. These 5 year plans, prepared by the planning commission, are a blueprint for government investment in important sectors of the economy like power, roads, ports etc. The plan also envisages an average GDP growth target for the 5 year period. Since the inception of central planning in 1951, India has had a mixed record when it comes to achieving this stated growth target. For example in the 11th plan (FY07-FY12), the GDP target was an ambitious 9% but only 8% growth was achieved. What could be the reason for this? One explanation is that the targets themselves are over optimistic.

In the current 12th plan (FY12-FY17), the target is lower at 8%. However, if the deputy chairman of the planning commission, Dr. Montek Singh Ahluwalia is to be believed, then the growth during this period could be as low as 5.5%. According to him, this would happen if infrastructure bottlenecks and financing concerns are not addressed quickly. But if they are, then the average growth could pick up to 7.5%.

While it's certainly true that growth has slowed down significantly, it would be optimistic to assume that a pick-up is just around the corner. Most of the problems facing the economy are structural in nature and GDP growth will only come back to 8% levels if these structural issues regarding land, power, infrastructure and natural resources are addressed satisfactorily. Until then, the optimistic growth targets will remain mere pipe dreams.

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