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From billions to trillions

Less than a week before the Planning Commission meets to clear the approach paper for the Twelfth Plan, there is media speculation that the target growth rate for the five years beginning 2012 could be set at an awe-inspiring 10% annually.

india Updated: Oct 22, 2011 14:28 IST

Less than a week before the Planning Commission meets to clear the approach paper for the Twelfth Plan, there is media speculation that the target growth rate for the five years beginning 2012 could be set at an awe-inspiring 10% annually. With a conservative estimate for inflation at 5% a year over the period, India, a $2 trillion economy now, will weigh in at $4 trillion by 2017. That could make it the fifth largest economy in the world trailing the US, China, Japan and Germany. India is widely expected to overtake China soon — if it hasn’t already — as the fastest growing major economy on the planet. It is reassuring to have an internal target, even if it is a stretch. Policymakers see India growing at 8.5% in 2010-11 and upwards of 9% in the terminal year of the Eleventh Plan. This should bring the average for 2007-12 closer to 8% than the target 9%.

It takes an investment of Rs4 in India to produce every extra rupee of income. A 10% growth target for the gross domestic product thus requires Indians to invest $800 billion in the first year of the Twelfth Plan itself, up from the $720 billion it would need if it were to grow at 9%. The highest India has saved in any year is 36.9% of its GDP, and that will be $70 billion short of the targeted investment in a $2 trillion economy assuming our savings rate climbs up from 33.7% now. Over a five-year period, the shortfall could be upwards of $400 billion unless Indian companies grow much faster and save more or multinational firms are allowed to bring in capital. In either case, India has to be more business friendly if it wants to grow faster. So far, we have seen that this endeavour to attract investment has not followed a predictable pattern, rather it has been in fits and starts. It is imperative that we have a fixed policy in place on business procedures so that those wishing to come in here are on a sure footing from the word go.

Foreign capital has been bridging India’s savings-investment gap and our policymakers must heed it when it seeks greater access to our economy. Areas marked off-limits for foreigners like retailing and financial services can see a surge in investment if the government floors the reforms pedal. But that has not been the elephant’s style and politically contentious issues like big format retailing are yet to be thrashed out while environmental concerns on no-go areas for mining firms are debated. There is no doubt that these issues have to be discussed and a consensus arrived at. But this has to happen sooner rather than later. An ambitious growth target is likely to remain merely on paper unless backed by speedy reforms. A business-as-usual approach cannot hope to deliver $1 trillion investment in India’s infrastructure during the Twelfth Plan.