Approach Paper for the Twelfth Five Year Plan - of Planning ...

20 Approach to the Twelfth Five Year Plan
2.16 There was also a purely domestic factor at play. In the Ninth Plan (1997-98 to 2001-02) the
rate of GDP growth was subdued at 5.5 per cent and the incremental capital output ratio (ICOR),
notwithstanding comparatively lower investment rates, was rather high at 4.5 per cent, as it also was in the
first two years of the Tenth Plan (2002-03 and 2003-04) at 4.9 per cent. This flowed from slower growth
in domestic demand during these years, and as a result India had a persistent current account surplus
for three successive years from 2001-02 to 2003-04. There was thus some slack in the system, which got
utilized in the Tenth Plan period. This should be borne in mind when viewing investment and growth
rates realized in the Tenth Plan.
2.17 The current account balance slipped back into negative in 2004-05 and averaged (–) 0.9 per cent
of GDP in the last three years of the Tenth Plan. On account of the large surpluses in the first two years
of the Tenth Plan, the average current account deficit for the five year period was nil. The Eleventh Plan
period did not start out with the benefit of a slack in the system, as did the Tenth. One consequence of
this was that despite the high investment rates that were realized during the closing years of the Tenth, and
early years of the Eleventh Plan, inflation came to be a persistent problem.
2.18 While there are specific sectoral bottlenecks that explain some of the inflationary pressures, at the
aggregate level, resolving these bottlenecks requires additional investment. Hence, in order to sustain high
rates of growth per centwhile maintaining moderate inflation, investment rate has to be higher than in the
past, especially in areas where supply side bottlenecks could trigger inflation. Thus the average investment
rate needed during the Twelfth Plan period is estimated to be 38.5 per cent of GDP for the 9.0 per cent
growth with 4.5–5.0 average inflation. The investment rate would have to rise to as much as 41.4 per cent
of GDP for the 9.5 per cent growth with 5.0–5.5 rate of inflation.
2.19 The rate of fixed capital formation had increased rapidly during the Tenth Plan. It averaged around
28.4 per cent of GDP over the Tenth Plan period as against 23.2 per cent of GDP in the Ninth Plan. It
had risen to 32.9 per cent of GDP in 2007-08, after which it declined through the years of the crisis to
29.5 per cent (provisional) in 2010-11. Even so, the rate of fixed capital formation is likely to average
around 31 per cent of GDP in the Eleventh Plan, which is 2.6 per centage points of GDP higher than
in the Tenth Plan. As pointed out above, the pick up in the average rate of growth in the Eleventh Plan
period was not fully commensurate with this increase partly due to external developments. Further in
order to sustain high growth while keeping inflation within moderate limits, it is imperative to expand the
productive potential of the economy at a faster rate. In order to achieve an average economic growth rate of
9.0 per cent, the rate of fixed capital formation needs to improve to around 33.5 per cent of GDP over the
Twelfth Plan period. This is feasible considering that a fixed capital formation rate of 32.9 per cent was
actually achieved in 2007-08.
2.20 For the 9 per cent economic growth scenario, the likely break-up of fixed capital formation by
investing sector shows some interesting features:
(i) Fixed capital formation in the household sector (which, in addition to agriculture and
residential construction, includes practically all the micro and small enterprises) has been
rather stable, and are projected to increase to 12.0 per cent of GDP in the Twelfth Plan from
11.6 per cent of GDP during the Eleventh Plan. For this to happen, the flow of financial
resources to these sectors has to increase significantly. This would require not only expansion
of the reach of the formal banking sector, but also revitalisation of the micro finance and other
innovative financial institutions.