The Hindu Business Line : `8-9% growth in 11th Plan feasible with a strong fiscal effort'

According to the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, launching on to a high growth path with the completion of the reform agenda after evolving a political consensus is the sure-fire route to progress. G. SRINIVASAN records Dr Ahluwalia's take on the crucial issues that have a bearing on the economy in the context of the Eleventh Plan Approach draft.

DR MONTEK SINGH AHLUWALIA, Deputy Chairman, Planning Commission. — Kamal Narang

The Approach Document to the Eleventh Five Year Plan (2007-12) is in the making; the Planning Commission is holding a series of consultations with the States , which have become the principal shareholders in the development effort. Moreover, political consensus is an important component of reform if it has to succeed. And in this formidable task, the role of the premier policy-making forum, the Planning Commission, is too important to be ignored.

In a draft: "Towards Faster and More Inclusive Growth — An Approach to the 11th Five Year Plan," that the Commission circulated to all Chief Ministers on June 14 before it began its first regional consultation for Western India in the last week of June, the Plan panel contends that the task of achieving an average growth rate of 8-9 per cent in the Eleventh Plan is "macro-economically feasible with a strong fiscal effort that is difficult but not impossible," combined with other correctives on sector policies.

A die-hard reformist with a proactive role in the economic reform process since 1999 (during the NDA government he was a Member of the Plan panel) before he went to the IMF's first Independent Evaluation Office (IEO) as its Director, the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, has a keenly perceptive and analytical mind. Not one to get ruffled over the wobbly pace of many of the important second generation economic reforms, Dr Ahluwalia contends that high economic growth is an essential part of the strategy for development. This is because, as he puts it, it is only in a rapidly growing economy that we can expect to raise the incomes of the masses sufficiently to bring about a general improvement in living conditions.

He firmly believes that India's economic fundamentals have improved to the point where they have the capacity to make a decisive impact on the quality of the life of people, including the poor, provided the necessary policy steps are taken. High growth path, accompanied with completion of the reform agenda after evolving a political consensus, is the sure-fire route to progress, he believes.

He is disappointed that the average economic growth rate in the Tenth Plan will be only 7 per cent, a full percentage point lower than the 8 per cent target, though he says the acceleration during the last three years of the Tenth Plan gives ground for some satisfaction.

He feels that agricultural growth, which is below 2 per cent in the Tenth Plan on an average, must reach 4 per cent, while the manufacturing sector, mostly in single-digit growth in the Tenth Plan, must move to double-digit to have a greater impact on poverty alleviation and quality employment generation.

Dr Ahluwalia took some time off to speak to Business Line on crucial issues that have an immediate bearing on the economy in the short to medium term. Here is Dr Ahluwalia's take.

On inflation and imbalances in the economy: It is clear that there is an upsurge of inflationary pressures from a very low level. This is not just in India but all over the world. We recognise that inflation is a problem and the Government has to take action to bring it under control. It can and it has already taken a number of steps for increasing supply through imports and also through stimulation of domestic supply. Additional imports are an important instrument for controlling inflation. There should be no hesitation, in my view, in using this instrument if one is concerned about inflation.

When there is a shortage of supply and possible speculative pressure, then the consumer interest justifies resorting to imports. In India's case, since there was a shortage of wheat procured, the Government took corrective action. International crude oil prices are the other source of inflationary pressure and this is so all over the world, but we could not have avoided this shock.

That we have strong foreign exchange reserves gives us flexibility to manage the situation. For instance, when the oil price suddenly shoots up you have to pay more in foreign exchange for oil imports. In the long run, we must be able to cover additional demand for foreign exchange through forex earnings and, hopefully, we will be able to do so.

On current account deficit: There has been a big increase in the current account deficit over the last couple of years. One reason is that investment has gone up and that is good. We are not unhappy that we have moved away from the position where we had current account surpluses to one with higher investments and a current account deficit.

The other reason for the deficit is really the higher payment on oil import. This cannot be avoided. Of course, over the medium term we have to adjust to the higher oil prices by passing on the increased cost to the consumer in a gradual manner. We have been doing this and we will continue to do so. It is also important to earn the forex needed to pay for the higher import bill and that means emphasising the kind of areas where we have comparative advantages, such as tourism, services and labour-intensive manufactures. We have to push all these.

On seeking consensus on controversial reforms: The Approach to the Eleventh Plan does not address all the specific issues that are under discussion, but it does indicate the broad approach. The economy has the capacity to grow rapidly but it will only do that if we can remove some of the many constraints that are holding it back. We have drawn attention to these constraints and some of them are politically sensitive. There is no alternative but to try to develop a political consensus.

On modernisation of airports: Modernisation of four airports — Delhi, Mumbai, Bangalore and Hyderabad — based on private sector-led models is going ahead. We took a decision recently for modernisation of 35 non-metro airports where the aeronautical aspects will be handled by the Airports Authority of India and the non-aeronautical, or what is called "city-side" development, will be through public-private partnership.

On accelerating manufacturing growth: There are several policy constraints that are holding back high manufacturing growth, and the Eleventh Plan is focusing on those constraints. The most important one is infrastructure, which is a very big part of the agenda. We also need to extend the improvement in the investment climate, evident in some States, to all States. So the States have a lot to do in order to create an investor-friendly atmosphere.

We are now running into skill constraints as too many of our institutions are not producing graduates of good quality who can meet expectations of modern industry. Science and technical education need a major re-look in our policy towards higher education and towards vocational training.

On labour reforms: This is a controversial issue and we need to build a consensus. One of the messages from industry is that if there was more flexibility in labour laws, it would lead to a high level of employment in the organised sector. This is an issue we have to work hard to build a consensus on.

On power sector reforms: The critical missing link here is the continuing inefficiency of the distribution system, which is entirely under the control of the States — the good thing is that some States, such as Tamil Nadu and Andhra Pradesh, are showing improvement . There were other pockets where, through managerial efficiency, the aggregate technical and commercial (AT&C) losses have been contained.

However, progress to date is too slow. AT&C losses are still as high as about 38 per cent and the decline in losses is a little over one percentage a year. For the AT&C at 38 per cent to go down to 15 per cent requires an improvement of 23 per cent. This will take more than 20 years unless the pace is accelerated.