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Policy paralysis could numb 12th five year plan growth: Planning Commission study -Vikas Dhoot
-The Economic Times


NEW DELHI: A study commissioned by the Planning Commission to validate the growth estimates of the Twelfth Five-Year Plan has thrown up a rather depressing outlook for the economy, sending alarm bells ringing in the government.

An independent think tank, the National Council for Applied Economic Research (NCAER), has pegged average annual growth for the Twelfth Plan at a mere 4.8%, if the present logjam in policymaking continues.

The NCAER had been entrusted by the Planning Commission to use econometric models to derive key macro-economic indicators for this five-year plan. The NCAER analysis uses three different scenarios for growth based on the extent of reforms that can be pushed through.

In all three scenarios, the NCAER has found that the Twelfth Plan would see slower growth than the Eleventh Plan, which saw 7.9% expansion between 2007 and 2012. Though the NCAER presented its findings to the Plan panel in April, they have been kept under wraps.

Reviewed by ET, the NCAER models are based on "more recent data till 2011-12 and 2012-13" while the plan document's growth simulations for each scenario were carried out last year using data up to 2011-12, when the Indian economy grew by 6.2%.

Assuming a 'business as usual' approach - the worst-case scenario, in which the policy logjam would persist - the Plan panel had assumed growth of 5-5.5%. In contrast, the NCAER study says growth would slip to below 5%.

Even under the 'insufficient action' scenario, growth won't meet the government's expectations.

The government expects that under the 'insufficient action' scenario - which envisages a piecemeal approach to reforms - growth will be 6-6.5%. But the NCAER expects it to be just 5.9%.

The Twelfth Plan document had pegged average growth at 8.2% assuming a best-case scenario of strong, inclusive growth delivered by all-round government action. But even in this scenario, the NCAER sees growth at 7.8% over the five-year plan that is already in its second year.

Policy paralysis could numb 12th five year plan growth: Planning Commission study

In 2012-13, the first year of the plan, the economy expanded only 5%, the slowest pace in a decade. Since the first year of the plan saw slower-than-anticipated growth, overall expansion is likely to be lower, said Pronab Sen, the chairperson of the National Statistical Commission.

"What is more critical is the trajectory of growth and the trends beyond the headline growth, in key economic indicators such as the investment rate. The real question is if the public policy approach outlined in the plan document is consistent with the high-growth scenario it envisions," Sen said, stressing that an average growth of 7.8% in the Twelfth Plan would mean growth could soar to 8-9% by 2016-17.

The NCAER's assessment matches the sentiment among industry captains that the worst is yet to come. Last week, the Confederation of Indian Industry said the industrial slowdown has not bottomed out and sluggish private and government capital expenditure is hurting investment in industry and the economy.

"Strong inclusive growth is the only way for the country to go and the policy agenda laid out in the plan is designed to achieve the objective," states the plan's macro-economic framework.

Unless there's a dramatic shifting of gears by the economy's managers, the assessment carried out by the NCAER expects growth in 2016-17 to be just 5%. The first year of the plan period, 2012-13, also logged 5% growth - the slowest pace in a decade.

This means the intervening three years, including this financial year, could see much more pain for the economy as the NCAER expects average annual growth over the five-year period at just 4.8% in the worst-case scenario. Back-of-the-envelope calculations based on this fresh projection indicate that average growth from this year till 2015-16 would, therefore, hover in the range of 4.6-4.7%.

Such a slow pace of growth would have a deleterious effect on all key economic indicators, such as the current account and fiscal deficits, investment rate, poverty ratio and inflation. Without coherent and big-ticket policy action, average inflation is expected to be 7.9% through this plan period, fiscal deficit could be at an average 5.3% of GDP and the fixed investment rate may plummet to 28.7% from the 31.8% recorded over the Eleventh Plan period.

A slower economy would also mean only a marginal improvement in poverty numbers from the 28% recorded in 2011-12, to 26.8% - of course, based on the Planning Commission's contentious poverty line. The current account deficit, NCAER has estimated, would soar to 3.8% of GDP compared to the 2.7% averaged between 2007 and 2012.