Planning commission increases investment rate to 38.5% for 12th Plan

Amid the Prime Minister’s Economic Advisory Council (PMEAC) raising concerns over the slowdown in the pace of asset creation in the current financial year, the Planning Commission has increased the average investment rate to 38.5% per year in the 12th Five Year Plan (2012-17) from current 36.4% achieved in the ongoing plan (2007-12) so that the economy can achieve growth rate of 9%. The planning commission has finalized its approach paper to the 12th plan on August 20.

However, the government has not pegged the targeted increase in the investment rate i.e. gross capital formation as percentage of Gross Domestic Product. However, economist and analysts believe that achieving almost 2% increase in investment rate would not be an easy task, given the present slowdown in the investment rate highlighted by the PMEAC.

During the eleventh five year plan, which includes the current fiscal year, is estimated to increase investment rate to 36.4% compared to 31.8% in the last five year plan. In the ninth five year plan, the government had achieved just 24.6% of investment rate. In July, the PMEAC had said high rates of domestic inflation, excessive government debt, political instability and the global situation had eroded business confidence, adversely impacting asset creation. On the other hand the council has also reduced the economic growth forecast for the current financial year to 8.2% from 9% estimated earlier.

However, the increase in the investment rate and slowdown in economy growth is contrary, on this issue the planning commission’s approach paper says “The impact of this large increase (investment rate) has not been fully reflected in the growth rate in the eleventh plan period.... One reason for this has been the rapid increase in inventories and valuables, essentially for hedging against the crisis.”

But the current uncertainties in the global economy might keep these at a bit elevated level. The approach paper says, they are unlikely to be as high as the immediate past. This trend indicates that the impact of already achieved increased investment rate is expected to spill over into the 12th plan. “The increase in investment is not reflected fully in the growth over the eleventh plan period, but it can be expected to have its full impact over the twelfth plan period,” the approach paper added.

Earlier, the approach paper to the 11th Plan had set the economic growth rate target of average 9% with the current financial year or terminal year of the 11th Plan delivering 10% economic growth. However, on the back of international financial crises, the mid review of the 11th Plan reduced the economic growth target to 8.1% a year.

For 2011-12, the planning commission is expecting economy to grow in a range of 8% to 8.3%, which will deliver average GDP growth of around 8.2% in the 11th five year plan. The expected growth is higher than the 7.8% achieved in the tenth five year plan, although it does not show sharp increase in the economic growth, made at the beginning of the eleventh plan.  

For the 12th plan, the planning commission as pegged economy to grow by 9% on an average. But the Prime Minister has indicated that it can be raised further to 9.2% for the 12th plan, if the international situation improves and domestic inflation comes down by the start of the next financial year. Prime Minister said, “Even 9 per cent economic growth rate is feasible “only if we can take some difficult decisions.”

After heading the full planning commission meeting, the Prime Minster had given stress on the building broad political agreement to carry out second generation reforms. Earlier, the PMEAC had called for carrying forward reforms agenda and generate conditions for asset creation.