In taking stock of the medium term prospects of the economy — the approach paper to the Twelfth Five-Year Plan beginning in 2012 — Prime Minister Manmohan Singh has delivered in his characteristic understated style an assessment of the reforms he crafted in 1991, and of the road ahead.
In the 20 years since India began liberalising its economy, Mr Singh points out, it has been ruled by the Right and the Left, but they stayed the course laid out by him. That, however, is not good enough.
The need now is for a wider consensus on a second generation of reforms that ought to keep the economy on a 9% growth path. These are changes in how the markets for land, labour and resources operate and the political forces that do not permit them to clear.
Of immediate concern is deepening the financial markets to raise money to fund the humongous spending on infrastructure and social welfare.
In the event, the prime minister sees the economy growing at 9% over the Twelfth Plan, which is not too much of a stretch.
If we are lucky, we might also grow at 9.2% over the five years. It takes an investment of Rs 4 in India to produce every extra rupee of income. A 9% growth target for the gross domestic product thus requires Indians to invest $720 billion in the first year of the Twelfth Plan itself.
The highest India has saved in any year is 36.9% of its GDP, and that should keep a $2 trillion economy ticking over at 8.5%. But push the pedal any harder, say for 9.5%, and we need more capital. Indian companies will have to grow much faster and save more while multinational firms will need to bring in extra dollars.
Essentially, India has to be more business-friendly if it wants to grow faster.
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 a uniform tax, big format retailing and foreign insurers are being thrashed out. An ambitious growth target is likely to remain on paper unless backed up by speedy reforms.
A business-as-usual approach cannot hope to deliver $1 trillion investment in India’s infrastructure during the Twelfth Plan. The economist in Mr Singh sees the merits of this argument.
The politician in him has to convince others.