Why India needs a strategic Plan B

The Planning Commission has been in the news a lot in the last few days, largely because it decided to include representatives from the World Bank, the Asian Development Bank and McKinsey and Co in some of the 19 consultative groups it set up as part of the mid-term appraisal process of the 10th Five-Year Plan.

That it should be criticised for this by parties that draw intellectual inspiration from eminent personalities of Germany, Russia, and China is perhaps a bit ironic.

What does the Planning Commission do?

However, this is the less important of the news stories relating to the Commission. The far more significant one was the statement by the body in its approach paper to the mid-term appraisal that the Plan target growth rate of 8 per cent was out of reach.

Most observers of the economy would not be surprised at all by this admission.

I have not come across a single forecast with a three to five year horizon, which has suggested that the average growth rate for the Plan period is going to be much above 6 per cent, even in a relatively optimistic scenario.

Unless the government knows something that outside forecasters don't, which is of material significance to growth, there is no reason why its estimates should be any superior to others.

So, at one level, the decision to publicly admit that 8 per cent was aspirational and not practical brings the government thinking in line with that of outside observers.

For the forecasting community, inside and outside government, this makes everybody's job a little easier.

However, it is the detailed reasoning provided by the Commission for its downgrading of the economy's growth potential, as reported by this newspaper and others, that is the real substance of the exercise.

For many years, the terms of Five-Year Plans and those of governments ran almost concurrently. This may have been good from a co-ordination perspective, but it also imposed a kind of constraint; if things went wrong, and we know they did with virtually every Plan, the government was politically constrained from admitting this and thereby taking corrective action, except in dire emergencies.

With the tenures of Plans and governments now effectively de-linked, and the high probability of changes in the ruling dispensation in every election, occasions such as the mid-term appraisal offer the new government an opportunity to speak bluntly and realistically about the economy without having to take political responsibility for the warts.

This is exactly what the approach paper appears to have done. For the last few years, the Indian economy has displayed a kind of split personality.

This split can be viewed in terms of several dimensions -- rural-urban, regional, and so on, but I would emphasise the split on the macro-micro dimension.

We got our macroeconomic management pretty much in place -- reasonable growth, low inflation, a growth-oriented interest rate regime, healthy balance of payments, and a fiscal situation that is at least not exploding.

But, underlying this relatively positive aggregate picture was a somewhat uncomfortable microeconomic foundation -- the extreme volatility in agricultural performance, the absence of any significant investment activity in industry, the stagnation in employment and, most of all, the bottlenecks in most infrastructure sectors.

The Commission's downgrade is essentially based on these factors. It recognises the inter-linkages between infrastructure, private investment, and employment growth and points to several barriers, regulatory and legislative, which prevent the desired virtuous circle among these three from emerging.

It also points out that a combination of mandatory restrictions on government deficits, along with the new government's increased emphasis on the social sectors, makes it highly unlikely that public investment can grow significantly.

The approach paper achieves the objective of being blunt and realistic. In doing so, it places the mid-term appraisal process in an entirely different context.

Appraisals, typically, do not question the fundamental building-blocks of the Plan being assessed. If that happens, and the rejection of a growth target would certainly fall in that category, the exercise necessarily has to come up with an alternative -- new, more realistic, targets and an alignment of these with the resource and other constraints that have been pointed out in the appraisal.

The logical consequence of the assessments made in the approach paper would be a completely re-worked 10th Plan, starting in 2005-06 and running until 2010-11.

But, logical as that may sound, it is hardly a solution to the problems being highlighted. The approach paper makes it clear that the constraints to growth are immediate, here-and-now.

A five-year perspective may have its uses, but the need is to ensure that the most binding constraints on investment -- both infrastructure and others -- and employment growth are quickly eased.

Further, it is not much use advancing on one front at a time. There are clear complementarities between these issues, which require simultaneous progress on multiple constraints.

So, what should Plan B be? An essential principle of strategic planning is that, while abstract, visionary targets (like GDP growth) are important, the success of a strategy is dependent on the selection of targets that are (i) directly related to instruments that the organisation can control, and (ii) are quickly and easily observable. Effective strategic planning is based on relentlessly breaking down the visionary goals into individual targets, which satisfy these two criteria.

It would be a lasting achievement of the Commission if it were able to move away from the pre-eminence of the five-year horizon and bring this more functional approach to centre stage.

Having pointed out barriers to growth in various sectors in the approach paper, it is incumbent on the Commission to draw up immediate targets for each of the ministries concerned, not in the form of resources so much as administrative, regulatory, and legislative changes required to remove those barriers.

Let the Commission prioritise what its collective expertise believes to be the most critical constraints holding growth back.

Let it lay on the table in a systematic form all the evidence -- for and against, theoretical and empirical, domestic and international -- that is relevant to its case for change as well as the nature of that change.

Let it work with the government agencies concerned to translate the broad principles of change into concrete policy objectives and procedures.

By virtue of its command over the evidence, let it be a reference -- an "expert witness"--for the political debate that will inevitably emerge around each item on the change agenda.

And, finally, let it measure its own success by how much and how quickly its agenda is translated into actual change.