Though the Planning Commission has done well to lower its annual GDP estimates for the 12th Plan to 8% from the 8.2% it was looking at in September and the 9% before that, as PM Manmohan Singh pointed out, even achieving this isn’t going to be that easy. Given a likely 5.5% growth in FY13 and a 6.5% one in FY14, this means growth in the remaining 3 years of the Plan ending March 2017 has to be a bit over 9% per annum. Keep in mind the last time India clocked that kind of growth was in FY06 to FY08, when savings rates rose from 32.4% of GDP in FY05 to 36.8% of GDP in FY08 and investment levels to a high of 38.1% in FY08—today, they’re 32.5% and 35.1%, respectively. At that point, global growth was respectable—5.3% in 2006 and 5.4% in 2007, today it is 3.3%. Apart from the fact that global growth is important from the point of view of India’s exports drive, it is also critical in terms of money flows to corporate India.
Look at the composition of where this 9%-plus growth is going to come from, and the picture gets more daunting. Even if you assume agriculture grows at as much as 4% and services at around 9%, this means industry has to grow at 12% per annum for the next 3-4 years. Industry grew at 3.2% this year and 3.4% in FY12—the only time it grew in double digits in the last decade was in FY07. A 12-14% industrial growth, to put things in perspective, is what the National Manufacturing Policy (NMP) envisages industry and that is what will drive up the share of manufacturing in India’s GDP to 25% by 2022, from around 15% at present. To be sure, India has a big opportunity afforded to it by rising Chinese wages as well as the appreciation of the renminbi, but translating the NMP into action requires a lot of rejigging, from fixing labour laws to setting up large NIMZs and so on. Perhaps why, while Manmohan Singh said that achieving 8% would be an ambitious target, Planning Commission deputy chairman Montek Singh Ahluwalia said 8% was the optimistic target, the base line was 6-6.5% while the policy logjam one was 5-5.5%.
The PM outlined some of the basics that needed attending to, and top on this list was petroleum and oil subsidies. With an under-recovery of R86,000 crore in the year’s first half, this alone represents a 1.5% of GDP drag on fiscal savings. Add R90,000-1,00,000 crore of annual electricity losses, and we’re talking another 1% of GDP that’s being wasted and is not available for investments. Fixing this is critical if India’s savings rates are to rise. When India was growing at 9% per annum, savings rates were a high 34-36% of GDP—if investments were to rise without savings rising commensurately, this would make the current account deficit rise to unsafe levels. And since household savings and corporate savings have remained a lot more steady, the biggest difference is caused by public sector savings. When these rose from minus 2% of GDP in FY02 to 5% in FY08, overall savings rose from 23.7% to 36.8%; when these fell to 1.7% in FY11, overall savings fell to 32.3%. In the ultimate analysis, the success of the Plan depends upon what’s happening to government savings.