Repeating the 1991 formula will not be enough to reverse the economy’s downward trend
The Prime Minister has alerted the country by describing three scenarios in the 12th Plan. In one, called ‘Insufficient Action’, GDP growth in the 12th Plan could be 6% to 6.5%. In the second, ‘Policy Log Jam’, it could slip further down towards 5%. In the third, ‘Strong Inclusive Growth’, it will be 8.2%. We must have strong and inclusive growth. It requires determined action; otherwise the other scenarios will appear.
The technique of scenario planning, which the Planning Commission has used for the first time, explains the ‘delta’ in economic growth—the difference between what economic models would project and what will be actually obtained. Economic models focus on the quantifiable economic variables, such as investments, savings, production and trade flows. Generally these models do not include non-quantifiable social and political forces which remain exogenous to them. However, these forces strongly affect the economy through the ‘confidence’ and ‘sentiments’ of citizens and investors, and other ways too. Scenarios include all such forces. Therefore, while economists’ predictions are numerically precise and often wrong, scenarists are numerically imprecise but generally right. Another benefit of scenario planning is that it analyses the root causes of a system’s condition and points to actions required to produce desired outcomes.
In 2005, scenarists had ‘unofficially’ looked into the future of India. They had forecasted three scenarios. In one, called ‘Bollyworld’, the benefits of the 1991 economic reforms were very visible. Businesses were expanding, and the wealth of many individuals was increasing. The scenario also noted the perceptions of increasing inequality and the impatience with the pace of ‘trickle down’. It also painted into the picture the increasing protests by civil society organizations and the violence in an expanding swath of LWE affected areas. In this scenario growth was projected to touch 9% but then to decline with tensions within the country putting brakes on policy action. With root causes of tensions unresolved, the scenarists foresaw another scenario emerging which they called ‘Atakta Bharat’. In this scenario, with political log-lam and policy paralysis, growth could decline to 6%. The good news was the possibility of another scenario called ‘Pahale India’ in which growth could stay at the 9% to 10% level for many years. Since these scenarios were made when the global economic environment was more benign than it is now, the growth projected in all three scenarios, i.e. 10%, 8%, and 6%, was higher than one would project in the present global environment. However, the ‘delta’ of around 2% between them must be noted. An even more valuable analysis was the agenda of reforms required for the desired sustainable high growth.
The analysis by the Planning Commission in 2012 has revealed a very similar pattern to the scenarios of 2005; therefore the delta between the growth rates of the three scenarios projected now may similarly be 1.5% to 2%. The agenda of reforms required is also very similar. Indeed, insufficient action on those internal reforms so far while the global environment soured has made the India growth story slip more than it should have. What is necessary is a slew of institutional reforms: reforms to improve the Indian system’s ability to implement programs and projects faster; reforms to improve citizens’ confidence in the delivery capability of institutions of government; and reforms of policy-making processes to make them more transparent and more inclusive to arrest the declining trust in institutions of government and big business.
The ‘first generation’ reforms since1991 have opened up the economy to competition and foreign investments. They also toned up public sector companies by divesting their shares to the market to bring in better management disciplines. These reforms have spurred GDP growth and also improved the lives of citizens with better quality goods and services. The reforms announced last week, opening more sectors to foreign investment, and selling more shares of public sector enterprises, are necessary for further progress along the same track. However, for stability in the country’s progress, reforms on another track need more urgent action. These are reforms of government and policy-making institutions. In fact, by pushing harder on the foreign investment and public sector disinvestment track, with limited progress on the other track of institutional and governance reforms, the country’s progress will get derailed by social and political tensions. This was the insight from the 2005 scenarios. And it is the lesson from the scenarios presented with the 12th Plan too.
Two sets of institutional reforms have become imperative along this second track. One set is to expedite project implementation by improving the capacity for coordination within the Indian system. Merely opening up sectors to investment is insufficient to actually get investments. If investments are stranded in unfinished and unviable projects, as they are in power and infrastructure sectors, further investments will not come. Therefore an empowered coordination process, with the ability to discipline actors within the government and private sectors to deliver against their commitments, is essential. This is not easy but means have to be found for this. The second set is institutional and administrative reforms. The 2nd Administrative Reforms Commission has examined these thoroughly in its 15 reports. 95% of its recommendations have been accepted by Cabinet committees. But only 10% of its reforms are implemented on the ground, we are told. These two sets of ‘track two reforms’ are politically uncontroversial compared to the ‘track one reforms’ in FDI and public sector disinvestment. The benefits from them are more fundamental and much wider also. Moreover, without track two reforms, the India growth story can get derailed again.