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Hindustan Times
January 01, 2013
The National Development Council (NDC) may have been unduly optimistic in paring the economy’s medium-term economic growth expectation to 8%. With growth in the first year of the Twelfth Plan at below 6%, the climb back to the 7.9% average growth of the Eleventh Plan will be steep: the economy will need to grow at upwards of 9% in the terminal two years of 2012-17. Prime Minister Manmohan Singh warned assembled chief ministers of this eventuality at the council’s meeting last month to approve the latest five-year plan. This is quite a climbdown from a year ago when Mr Singh was seeking a wider consensus on a second generation of reforms designed to keep the economy on a 9% growth path over the Twelfth Plan. These are changes in how the markets for energy and resources operate and in the political forces that don’t permit them to clear.

Some of the India’s rapidly declining economic potential is captured by a Planning Commission working paper on diminishing productivity gains. Total factor productivity, which is driven among other things by technological change, the policy environment and infrastructure, peaked in 2006-07 and today contributes a percentage point less to overall growth. The economy is now relatively capital-scarce and there is little incentive to innovate and adopt new technologies at low levels of capital accumulation. A slowdown in the reforms momentum and increased policy uncertainties likewise discourage innovation and investments. The study concludes a business as usual approach will deliver 7% average growth over the Twelfth Plan, a considerable regression from the preceding five years when the global economy faced its fiercest turbulence since the Great Depression.

This would be a pity. India needs 20 years of rapid growth to bring it to middle-income level. The country could have weighed in as a $4 trillion economy by 2017 with five years of 10% growth. That would have made it the fifth largest economy in the world trailing the US, China, Japan and Germany. Mr Singh also delivered in his characteristic understated style an assessment of the biggest challenges confronting the economy: energy and water. The government cannot endlessly keep subsidising imported fuel; prices at home must, in phases, align with those across the world. And unless we watch how we use water, we could run short. Our policy-makers would be well advised to heed the prime minister’s caution on how we allocate natural resources. Deliberately obscured price signals have played havoc with the economy’s demand and supply responses. It’s time markets were allowed to get on with their job.