The Planning Commission's Mid-Term Appraisal of the Tenth Five-Year Plan was released late last month, following the meeting of the National Development Council in late June. Though there were extensive leaks along the way, it is only now that outside observers can make a fair assessment of it.
The Tenth Plan's duration is from April 1, 2002, till March 31, 2007. It has roughly a year and a half of its five years left. This is pretty late for a mid-course adjustment. Had there been no change in government 15 months ago, the MTA would by now have come and gone.
We would soon be in the throes of the approach to the preparation of the new, Eleventh, Plan. But a new Commission (and Deputy Chairman) took office a year ago, and has taken this time to articulate and sell their views.
The foreshortening of the horizon creates problems. The time horizon for the proposed policy actions and their likely impact on growth are implausibly short. So, the sensible way to read the document is less as an MTA, more as an approach to the Approach which presumably lies around the corner.
No document coming out of any government can ever be free of politics, but a mature democracy should be able to accommodate both technical documents designed to inform the public and stimulate debate, and more partisan documents designed to present and defend policies already agreed upon.
The former is the stance that is usually aimed for in the Economic Survey produced under the supervision of the chief economic advisor in the ministry of finance, in contrast to the overtly political Budget speech of the finance minister.
The present MTA is a blend of the two approaches. It is long and voluminous (over 500 pages) with a great deal of technocratic detail. But the politics is not far from the surface. This comes through quite clearly in the first two sections of the report: Part I (Overview and Priority Areas for Action) and the first chapter of Part II, entitled Macroeconomic Performance and Projections.
The tone is set in the first paragraph of the Overview: "[T]he picture emerging from the appraisal is mixed. The economy is doing well in many areas and these gains need to be consolidated but there are also weaknesses, which, if not corrected, could undermine even the current performance level".
Subsequent paragraphs of the Overview acknowledge the strengths of the current situation. GDP growth has averaged 6.5% in the first three years and is expected to accelerate to 7.6% in the current year. Growth for the Plan period as a whole could reach 7% (as versus 5.35% in the Ninth Plan).
Private corporate investment is turning around. Manufacturing performance is strengthening. Many sectors in both manufacturing and services are showing considerably stronger competitive capability, and are increasingly confident in their engagement with the international economy. The balance of payments is strong, and inflation is substantially under control.
Ordinarily, one would expect a government to be celebrating these achievements, but clearly the authors face a couple of dilemmas. The first is that such a celebration would substantiate the claim of the former NDA government that it had bequeathed an economy in excellent health.
Second it would provide no basis for the spending agenda implicit in the National Common Minimum Programme, which has already forced the finance minister to concede a "pause" in the programme of revenue deficit adjustment enjoined upon him by the Fiscal Responsibility and Budget Management (FRBM) Act and Rules.
Accordingly, a different narrative is needed to justify these actions, and that is duly provided in the macroeconomic chapter mentioned above. The argument for significant expansion in public spending is based on two propositions.
First, that, even under the NDA, the Tenth Plan strategy looked to a revival of public investment to offset cyclical weakness. Secondly, that the poor performance of agriculture creates a presumptive case (emphasis mine) for assuming that the Plan's assumptions on demand for industrial goods and its employment and poverty goals are unlikely to be met.
Accordingly, to quote the MTA, "there is therefore a strong case for measures that can mitigate the consequences of non-attainment of the targets".
The numbers presented in the same chapter, and elsewhere in the report, show how significant a shift in the role of the public sector is proposed. The report at several points notes that investment financing is not a limiting factor, pointing to both the rise in the domestic savings rate over the past couple of years, in turn reflected in the build-up of a current account surplus and accumulation of foreign exchange reserves.
What is particularly startling, and relatively under-remarked, is the significant contribution made by the consolidated public sector to this improvement. Between 2001-02 and 2003-04, public sector dissaving was reduced by 2.4 percentage points of GDP, from 2.7% of GDP to 0.3% of GDP.
What is telling, though, is the projected shift in trajectory from this year onwards. While the original Plan forecasts had projected a positive public sector saving of 2.1% of GDP by plan end, this has now been pared down to 0.6%, presumably in large measure to finance increased recurrent expenditure.
The domestic savings rate, the domestic investment rate and the current account deficit are all correspondingly lower. Public investment is projected to rise sharply from its assumed level in 2004-05, although it remains below the level originally projected in the Plan because of underperformance thus far.
Is this a coherent and sensible macro strategy? It is if you believe that there is significant excess capacity in the economy, and that the public sector is efficient in its spending, both on the recurrent and on the capital account.
Yet other evidence in the report, particularly in the overview section, should make one sceptical about both accounts. The report is fairly complacent on the room for manoeuvre available to the economy and the low risk of overheating.
I am less sure. Even if the economy was in a cyclical trough when the Plan was conceived, it is much less so now, and the risks of crowding out of private investment that much greater.
Equally, while the agenda of structural reform in the overview section is by and large well conceived, it is also extremely candid as to the many failures of government delivery. The circle is perhaps meant to be squared by a significant increase in the tax ratio, but this too would have its own effects on private investment.
At a recent conference on the Indian economy held at Stanford University, a Wall Street investment banker pointed out financial markets were getting increasingly comfortable with the left-leaning governments (the case of Brazil was mentioned).
The strong performance of the stock market over the past year indicates that this government still has significant credibility. Certainly, on the evidence of participation in numerous international conferences, recently India's stock has never been higher.
While there are undoubted needs for both recurrent and capital expenditure, this is also the moment to create space for a private sector that seems to have finally found its feet. It would be a pity if appeals for stimulus based on an incorrect reading were to waste this opportunity.
The author is Director-General, National Council of Applied Economic Research. The views expressed here are personal.
