The lowered growth target of 8% in 12th Plan will require major policy initiatives; last 3 years will need 9% growth
The Planning Commission, after considering the global and domestic constraints, has revised the 12th Plan growth target downwards to 8%. However, even this lower growth target will require considerable policy initiatives to enhance economy’s growth potential. Given that the economy is likely to register less than 6% growth in the current year and both domestic and international environment may not permit a growth rate more than 7% next year, the remaining three years of the plan will have to register more than 9% growth. This would require a repeat of the 2005-08 performance, when Indian economy grew at more than 9%. With the savings and investment rates relative to GDP reaching 36.8% and 38%, respectively, in 2007-08, the growth potential of the economy expanded considerably. The consolidated fiscal and current account deficits were contained at 4.65% and 1.8%, respectively, which were the lowest in recent times. In the prevailing domestic and global situation, achieving an average growth rate higher than 9% for three years will be a major challenge and this would require significant reform initiatives.
What will be the drivers to enhance the growth potential? The answer to this lies in understanding the factors that caused deceleration in Indian economy after 2007-08 and these include both international economic environment and domestic factors. While the global financial crisis in the aftermath of the Lehman episode in September 2008 eventually impacted the real economy to cause a major economic downturn in the US, the eurozone crisis added to the problem to make global recovery a mirage. Indeed, the eurozone has a serious ‘birth defect’ in the sense that a monetary union without a fiscal union is an unsustainable arrangement.
From Indian perspective, the slowdown in OECD countries has decelerated exports, continued high oil prices have increased imports and persistence of high inflation rates has buoyed demand for gold imports resulting in a sharp surge in the current account deficit. The current account deficit in the second quarter of the current year at over 5% of GDP is clearly unsustainable.
Global environment is only a small contributor to the slowdown; the problems caused by domestic policies were even more important. Of course, there was significant fiscal consolidation from 2003-04 to 2007-08 due to buoyant income tax and service tax revenues and lower interest outgo. However,