MacroScan (Printable Version) - Planning by Statistical Jugglery

In many ways the intellectual force of Indian planning ended with the Third Plan (1961-66). While economic reforms were more than a quarter century away, what followed after the mid-1960s as only a ritual without content, with no purpose other than to keep the residents of Yojana Bhavan busy from day to day. Plans were prepared and the requisite numbers on the economy were generated. But barring the brief experiment in the late 1970s and early 1980s at planning with the concept of "minimum needs'', all the Five Year Plans that followed the Third Plan were no more than routine number crunching exercises that few inside the Government or outside paid any attention to.

Planning in India has plunged to new depths with the preparation of the Tenth Plan. The new Plan has targeted an 8 per cent annual growth rate over the next five years. The economy grew by an average of 6.8 per cent during the Eighth Plan (1992-97) and by just 5.5 per cent a year during the Ninth Plan (1997-2002). Naturally, the first question posed to K.C. Pant, Deputy Chairman of the Planning Commission, was: Is such an acceleration after a slow-down possible. Mr. Pant's analysis was an exercise in disingenuousness. Three of the five years during the Ninth Plan were drought years (were they?), then there was the East Asian crisis and the global boom also went bust. If that is the explanation for the slowdown in the past five years, one might as well get ready to trot out the reasons for why the Tenth Plan growth target will not be met. After all, 2002-03, the first year of the Tenth Plan is also a drought year and growth is not expected to be above 5 per cent. That means the economy will have to grow by an average of about 9 per cent a year during the subsequent four years, a well-nigh impossible target.

In the era of liberalisation, delicensing and privatisation, the talk is of 'indicative' planning. But nothing can be farther from any notion of indicative planning than the statistical jugglery with which Yojana Bhavan has come up with the target of an 8 per cent annual growth rate of the economy during 2002-07. A "target'' for the growth rate is in the end produced by a simple piece of arithmetic that includes the figures on investment and the additional production from every rupee of fresh capital expenditure. Higher the rate of new investment, the faster the economy should grow. But GDP growth also depends on how much output is generated by each unit of fresh investment, one measure of productivity. The latter is called the incremental capital-output ratio (ICOR).

So GDP growth is just the rate of investment divided by the ICOR. Obviously then, any growth target can be laid down and seem achievable by juggling with the investment rate and ICOR. A high rate of investment will "generate'' a higher growth target. A high rate of investment with a low ICOR is even better — it will produce an even higher target growth rate. This is what the Planning Commission has been doing since the 1980s to make the targets in each Five Year Plan internally consistent. By the time the next Plan comes by, five years would have passed and people would have forgotten the jugglery on the earlier occasion, so the same manipulation can be carried out again. Yojana Bhavan is continuing with this tradition in the 21st century, except that in the Tenth Plan the Planning Commission has gone one step further with the farce.

When the Approach Paper for the Tenth Plan was presented in 2001, it suggested that an 8 per cent growth would be possible with an annual investment rate of 32.6 per cent of GDP and an ICOR of 4.08. This annual investment would be financed by a domestic savings rate of 29.8 per cent of GDP and a current account deficit of 2.8 per cent of GDP. The Planning Commission must have realised that it is not possible to increase domestic savings (and therefore investment) to such required levels, since at present, the savings and investment rates hover around 24 per cent and this has been the level over the past decade.

The Plan therefore now pegs average savings and investment levels during 2002-07 at a relatively more realistic (but still ambitious) 26.8 and 28.4 per cent of GDP. With an ICOR of 4.08 this would have meant a Tenth Plan growth target of just 7 per cent. But an 8 per cent growth target had to be made achievable. So the solution? Simple. Just lower the ICOR. At present the ICOR is 4.5, the Approach Paper suggested it could be brought down to 4.08 and now the final draft says ICOR over the next five years will be only 3.6. That would make an 8 per cent target consistent with the other parameters of the Plan! The ICOR can be reduced by shifting capital to labour-intensive industries and by using capital more efficiently. But this cannot be brought about by fiat. It requires greater efficiency and a re-orientation of capital outlays to areas where more can be produced with less capital. It is also not something that can be done overnight. Besides, since infrastructure requires large lumpy outlays, a period of major infrastructure investment would mean a high and not low ICOR. A 20 per cent reduction of the ICOR over the next five years is therefore highly unrealistic, if not impossible. But the Planning Commission could not be bothered with such statistical sleights of hand.

The Tenth Plan claims to be different because it is supposed to be a ‘reform' and not just 'resources' plan. Another claim for uniqueness rests on its listing of monitorable targets in literacy, infant mortality, poverty reduction and the like. But in the ultimate analysis the intellectual bankruptcy of the Tenth Plan shows.

The Planning Commission was told by its political masters to produce a document that presented an internally consistent GDP growth target of 8 per cent. It has fulfilled that mandate, even if it means it has had to do so with a statistical farce.



Themes > Current Issues	18.10.2002


Planning by Statistical Jugglery

C. Rammanohar Reddy

In many ways the intellectual force of Indian planning ended with the Third Plan (1961-66). While economic reforms were more than a quarter century away, what followed after the mid-1960s as only a ritual without content, with no purpose other than to keep the residents of Yojana Bhavan busy from day to day. Plans were prepared and the requisite numbers on the economy were generated. But barring the brief experiment in the late 1970s and early 1980s at planning with the concept of "minimum needs'', all the Five Year Plans that followed the Third Plan were no more than routine number crunching exercises that few inside the Government or outside paid any attention to. Planning in India has plunged to new depths with the preparation of the Tenth Plan. The new Plan has targeted an 8 per cent annual growth rate over the next five years. The economy grew by an average of 6.8 per cent during the Eighth Plan (1992-97) and by just 5.5 per cent a year during the Ninth Plan (1997-2002). Naturally, the first question posed to K.C. Pant, Deputy Chairman of the Planning Commission, was: Is such an acceleration after a slow-down possible. Mr. Pant's analysis was an exercise in disingenuousness. Three of the five years during the Ninth Plan were drought years (were they?), then there was the East Asian crisis and the global boom also went bust. If that is the explanation for the slowdown in the past five years, one might as well get ready to trot out the reasons for why the Tenth Plan growth target will not be met. After all, 2002-03, the first year of the Tenth Plan is also a drought year and growth is not expected to be above 5 per cent. That means the economy will have to grow by an average of about 9 per cent a year during the subsequent four years, a well-nigh impossible target. In the era of liberalisation, delicensing and privatisation, the talk is of 'indicative' planning. But nothing can be farther from any notion of indicative planning than the statistical jugglery with which Yojana Bhavan has come up with the target of an 8 per cent annual growth rate of the economy during 2002-07. A "target'' for the growth rate is in the end produced by a simple piece of arithmetic that includes the figures on investment and the additional production from every rupee of fresh capital expenditure. Higher the rate of new investment, the faster the economy should grow. But GDP growth also depends on how much output is generated by each unit of fresh investment, one measure of productivity. The latter is called the incremental capital-output ratio (ICOR). So GDP growth is just the rate of investment divided by the ICOR. Obviously then, any growth target can be laid down and seem achievable by juggling with the investment rate and ICOR. A high rate of investment will "generate'' a higher growth target. A high rate of investment with a low ICOR is even better — it will produce an even higher target growth rate. This is what the Planning Commission has been doing since the 1980s to make the targets in each Five Year Plan internally consistent. By the time the next Plan comes by, five years would have passed and people would have forgotten the jugglery on the earlier occasion, so the same manipulation can be carried out again. Yojana Bhavan is continuing with this tradition in the 21st century, except that in the Tenth Plan the Planning Commission has gone one step further with the farce. When the Approach Paper for the Tenth Plan was presented in 2001, it suggested that an 8 per cent growth would be possible with an annual investment rate of 32.6 per cent of GDP and an ICOR of 4.08. This annual investment would be financed by a domestic savings rate of 29.8 per cent of GDP and a current account deficit of 2.8 per cent of GDP. The Planning Commission must have realised that it is not possible to increase domestic savings (and therefore investment) to such required levels, since at present, the savings and investment rates hover around 24 per cent and this has been the level over the past decade. The Plan therefore now pegs average savings and investment levels during 2002-07 at a relatively more realistic (but still ambitious) 26.8 and 28.4 per cent of GDP. With an ICOR of 4.08 this would have meant a Tenth Plan growth target of just 7 per cent. But an 8 per cent growth target had to be made achievable. So the solution? Simple. Just lower the ICOR. At present the ICOR is 4.5, the Approach Paper suggested it could be brought down to 4.08 and now the final draft says ICOR over the next five years will be only 3.6. That would make an 8 per cent target consistent with the other parameters of the Plan! The ICOR can be reduced by shifting capital to labour-intensive industries and by using capital more efficiently. But this cannot be brought about by fiat. It requires greater efficiency and a re-orientation of capital outlays to areas where more can be produced with less capital. It is also not something that can be done overnight. Besides, since infrastructure requires large lumpy outlays, a period of major infrastructure investment would mean a high and not low ICOR. A 20 per cent reduction of the ICOR over the next five years is therefore highly unrealistic, if not impossible. But the Planning Commission could not be bothered with such statistical sleights of hand. The Tenth Plan claims to be different because it is supposed to be a ‘reform' and not just 'resources' plan. Another claim for uniqueness rests on its listing of monitorable targets in literacy, infant mortality, poverty reduction and the like. But in the ultimate analysis the intellectual bankruptcy of the Tenth Plan shows. The Planning Commission was told by its political masters to produce a document that presented an internally consistent GDP growth target of 8 per cent. It has fulfilled that mandate, even if it means it has had to do so with a statistical farce.



© MACROSCAN 2002