Friday, June 14, 2013

India's Twelfth Five-Year Plan

Marc O’Bryan

India Five-Year Plan Report

What are some of the main overarching implications of the most current Five Year Plan that are likely to affect businesses operating in India (both domestic and Western)?
India’s most current Five Year Plan aims to sustain India’s rapid economic growth through the continued implementation of comprehensive reforms. The country’s expanding economy, coupled with a recent global economic slowdown, has placed enormous strains on several of India’s already limited resources such as energy, skilled labor, natural resources, infrastructure, land, and innovative capabilities. In addition to addressing this myriad of problems, India is also attempting to reduce its widespread socioeconomic inequality that produces atrocious living standards and serious impediments to overall economic progress. India’s most recent Five Year Plan recognizes the importance of supporting a more inclusive growth in order to effectively address the root causes of these wide-ranging structural problems. Furthermore, this recent Plan also calls for actions that will open up the Indian economy in ways that will enable the country to better compete on a global scale. Most importantly, India’s current Plan involves reforms that develop its large pool of enterprising youths through a more committed investment in human development. This multitude of economic challenges, social problems, and resource constraints will have significant effects on business operations in India.
            India has a significant demographic advantage when compared to other developing countries, as well as more advanced economies. India’s disproportionately younger population is expected to provide the country with a potential 32% increase in the labor force, while most other countries’ labor forces are expected to decline by 4-5%, including China. This provides India’s business sector with a huge opportunity to narrow the gap between itself and the economies of more developed nations. However, the potential benefits of this large younger generation are entirely dependent upon India’s ability to achieve higher levels of education, skill development, and health standards. If the current and future Five Year Plans can implement effective reforms that improve these social conditions, then the country will gain a sustainable competitive advantage. The most current Plan attempts to improve the availability and quality of these basic services through collaborative efforts between the State and civil society organizations.  Indian businesses will potentially have access to a growing supply of skilled labor, while the rest of the world will see a decrease in domestically available labor. Western businesses may feel pressured to recruit a growing portion of its labor force from India if the country is able to adequately develop its human capital over the next twenty years.
            The current strain on India’s energy supply has become a huge issue for the country’s business sector and its ability to competitively operate. India’s most current Plan must address the rampant inefficiencies that plague the country’s energy use. In order to solve this problem, India’s current Five Year Plan must price energy in a way that discourages current wasteful practices and encourages innovations in energy efficiency. Additionally, India must implement alternative incentives, unrelated to price, that motivate its people to employ more efficient use of the country’s limited energy supply. Currently, most forms of energy in India are underpriced, due to misaligned State regulations, which promotes unnecessary waste and expensive inefficiencies. The most current Plan strives to increase domestic energy prices in order to promote more efficient energy use, decrease India’s reliance on foreign energy, and incentivize investment in more efficient methods of energy renewal. This will force businesses in India to cope with rising energy prices and hopefully encourage them spend more on energy saving investments or renewable energy sources. Western companies in India may also find it less to profitable to operate in that country unless they invest more in energy saving innovations. In a way, this may encourage more private investment from large corporations, both domestic and foreign, in energy efficient solutions.
            Transportation developments are another focus of the most current Five Year Plan, which will undoubtedly affect India’s appeal as a center of investment. Not only is there an increased demand for mass transit in growing urban centers, there is also increasing demand for more efficient and reliable connections between roads, railways, and ports. These large investments in transportation, as well as most other infrastructural improvements, will most likely be funded though Public-Private Partnerships (PPP), which showed positive results during the Eleventh Plan.
            Manufacturing is another focus of the most current Five Year Plan, which experienced an unexpected slow growth during the last Plan. India’s current manufacturing sector accounts for only 15 percent of its GDP, while this same sector accounts for double or even triple that amount for the GDP’s of other developing nations. India’s current Five Year Plan recognizes the importance of developing its manufacturing sector as a means of creating the additional employment opportunities that will be required to meet the expected increase in labor supply. Cost advantages are now derived primarily from well-executed supply chain management in which each activity on a business’ value chain is outsourced to wherever they can be performed at the lowest cost and most efficiently. This provides India with the opportunity to continue leveraging its past success with being able to engineer products quickly and at a lower cost. If it wants to continue enjoying this competitive advantage, India’s current plan must continue building upon its existing domain knowledge accrued through its past triumphs in auto manufacturing, electrical components, and IT services.   
            In summation, India’s most current Five Year Plan affords businesses the opportunity to capitalize on a potential growing supply of skilled labor, an improved system of infrastructural development, and new means of energy efficiency. These opportunities also pose challenges for these businesses in terms of doing their part in helping India improve educational and skill development programs, innovate new ways to efficiently use energy, and provide the public sector with financial support in constructing improved transportation systems.  
What are some of your key observations and takeaways from the 12th Five Year Plan?
            The main message of the 12th Five Year Plan is to develop India’s economy in a way that promotes inclusive growth, combats domestic resource constraints, and encourages entrepreneurial leadership. The mere fact that this Plan involved the inputs of over 950 civil society organizations speaks to the Plan’s commitment to promoting inclusive development. Following the path of the Eleventh Plan, India’s current Plan aims to more evenly distribute the benefits of the country’s emerging economy, so that historically excluded groups can start to realistically work toward a higher standard of living. The current Plan focuses heavily on developing the country’s most valuable asset, its people. India realizes that its future growth will depend heavily on its ability to improve its human capital through better education, health, and skill development. India is taking big steps toward achieving this goal. For example, India’s recent Right to Education Act provides children of certain ages the right to attend school; this limited form of universal education reflects the countries goal of achieving a more inclusive growth. Providing more universalized education is one of the best ways to help reduce poverty and shrink the current socioeconomic gap between the educated and uneducated in India. This goal of inclusive growth calls for the Twelfth Plan to more evenly allocate its resources among the different sectors of society. By doing so, India can engage in a structural transformation of its society.
The Eleventh Plan included several flagship development programs that aimed to improve rural and urban infrastructure, provide basic services to the poor to reduce poverty levels, and find ways to eliminate the bottlenecks that limit India’s growth potential. India’s inadequate infrastructure has proven to be a major constraint on its ability to achieve sustained rapid growth. A large focus of the Twelfth Plan is on developing the country’s infrastructure, particularly through the use of public-private partnerships (PPP). The use of this type of funding reflects India’s promotion of entrepreneurship. The government is encouraging private entities to take part in India’s rapid economic development by investing in infrastructure that will provide the country will long-term benefits. India knows that its future development will result in a rapid increase in urbanization. India’s past inability to meet the demands of its urbanization has led to the establishment of slums and extreme poverty. If India wants to achieve an inclusive growth, then it must focus heavily on expanding its infrastructure to meet future demands of urbanization. Consequently, India’s Twelfth Plan makes infrastructure development a top priority.
            Another primary constraint that seems to be holding India back is its energy challenge. Currently, India’s domestic energy supplies are severely limited and its dependence on foreign imports of energy is increasing. A big problem that the Twelfth Plan addresses is the rational pricing of energy. Currently, domestic energy prices are far too low, which dissuades companies from finding more energy efficient means of operating. The Twelfth Plan calls for a more competitive pricing scheme that will better align India’s domestic energy prices with global prices. However, the Plan recognizes that sustainable growth is only possible if India can establish for itself a more secure and cost-effective supply of energy. Mainly the Twelfth Plan aims to prepare India for its future sustained growth by creating a more equitable development program that betters the country as a whole.

Some economists argue that 10% GDP is the minimum growth floor India needs to achieve to create enough jobs for its markets and stability. The most recent plan appears to shoot for growth for most of 2012-2017 at 8.2%. Can India achieve such growth over the next four or five years? What may happen for them, and for us/the USA, if they come in lower than that number?
            The Twelfth Plan has several potential drivers behind it that make it possible to increase GDP past the 8.2% growth rate that was seen in the Eleventh Plan. There are a lot of uncertainties that plague the current global economy, which also make it possible that India will not meet its targeted growth rate of 9%. In light of the uncertainty surrounding the global economy, private investment in India has slowed down. This has contributed significantly to India’s decelerated economic growth. Also, after the recent global economic crisis of 2008-09, India’s government deficit sharply increased due to lower taxes and declining domestic energy prices. India’s Twelfth Plan addresses these issues through reforms that promote more fiscal discipline and create a more competitive market environment.
            Entrepreneurs are being given more flexibility regarding the investment decisions they make, which improves India’s productivity through a more efficient allocation of resources. Also, India is creating a more competitive market environment by making its economy more open to global competition. In doing so, India has been able to drastically increase its exports, which has played an important role in boosting the country’s GDP. Also, this new openness is attracting more foreign investment, which also helps India’s GDP. These increased competitive pressures on Indian businesses are forcing them to improve their production methods by producing better quality at lower prices. All of these factors contribute to a potential sustained increased in India’s GDP. Other major factors that will determine whether or not India is able to meet its target growth rate include the country’s ability to construct new infrastructure and provide better skill development programs.
            It is incredibly important that the Indian economy achieve these growth goals outlined in the Twelfth Plan. The aspirations of India’s population are positively correlated to the economy’s success. India is doing so much right now to promote inclusive growth through better education, health services, and skill development. This is galvanizing the younger population to better themselves in order to be able to take advantage of the future opportunities that they believe lay ahead as they expect their country’s economy to continue improving. If India’s economy underperforms, then the aspirations of this younger population will quickly disappear. They will feel cheated in the sense that they were given all of these opportunities to improve themselves in hopes of having access to better job opportunities only to have it all taken away due to an underperforming Indian economy. Therefore, a key goal of the Twelfth Plan is to make sure that India’s economic performance stays on par with what its people expect.
            If India does not meet its targeted growth rate, this could have serious negative implications for the U.S., who conducts a significant amount of trade with India. If India’s economy underperforms, it means Indian consumers will have less wealth on average. This means that they will be less willing to purchase U.S. goods/services and invest less money into U.S. assets. This of course will drive down America’s GDP. The U.S. also depends a lot on cheap skilled labor from India. If India’s youth suddenly loses its motivation to continue improving itself through education and skill development, then the U.S. loses a huge pool of low cost talented workers.

What are some of this plan’s targets and longer-term priorities? How do these differ from our priorities in the USA, and why?

            Inclusive growth is clearly one of this Plan’s long-term priorities. India is pursuing policies that actively aim to alleviate poverty across its entire country. The Twelfth Plan aims to decrease the rate of poverty through a “broad-based” improvement in education, health, and skill development. This is intended to provide India’s poorer population with better opportunities that will hopefully allow them to better their current standard of living. This type of resource allocation differs from priorities in the U.S., where resources are allocated in ways that do not promote an overall betterment of American society. Currently, the amount spent on education in the U.S. is declining, while programs that offer skill development are not widely and cheaply available. The current means of bettering oneself in the U.S. revolve around being able to afford increasing tuition rates at higher education institutions, which many believe are declining in quality. India, on the other hand, is taking active steps to improve its higher education, realizing that a large investment in this sector now will pay off big in the future. The Twelfth Plan recognizes that “education is the single most important instrument for social and economic transformation.”
            India is also taking a more proactive approach in its efforts to sustainably manage its limited natural resources. In particular, India is taking steps in its Twelfth Plan to implement long-term sustainable solutions to its current water management problem. India has a scarce supply of water, especially when one takes into consideration the amount that is required by a country that has 16% of the world’s population and access to only 4% of the Earth’s fresh water. India’s Twelfth Plan recognizes the urgent need to improve the efficiency of its water use and create sustainable solutions that will enable the country to expand its agricultural operations and meet the demands of increased urbanization. Currently, India’s primary use of water can be attributed to irrigation, which the Plan designates as a major area of reform in terms of ending its present unsustainable water usage. The fact that India is taking such a long-term view of how to manage one of its most scarce, yet vital resources speaks to the progressive nature that is embodied in each of its subsequent Five Year Plans. The U.S. does not place such a high level of importance on it need to come up with more sustainable means of managing its natural resources. As a developing nation that has never had the luxury to flippantly waste its resources, India’s perspective on sustainable natural resource management comes from a place of humility and an understanding of how important resources like water really are. For the most part, Americans have always had easy access to resources that we take for granted. This definitely plays a role in shaping how our country designs its policies regarding natural resource management.  
            India’s Plan aims to develop the country into a more egalitarian society through a State-sanctioned plan to redistribute wealth and opportunities. While this type of development is viewed as progressive in India, many in the U.S. would view this type of development as socialism. India’s current Plan takes an active role in shrinking the gap between advantaged and disadvantaged groups, recognizing that not everyone starts off on an even playing field. By helping historically disadvantaged groups become more active in India’s market economy, the country is promoting economic growth while also promoting social progression through empowerment.

What were some of the accomplishments (and failures) from some of India’s previous Five Year Plans?
India’s Eleventh Plan achieved its goal of empowering disadvantaged groups by encouraging them to learn more about their rights and entitlements as afforded to them by law. This helped to place pressure on the Indian government to improve its delivery of these public services and to hold itself more accountable for the welfare of its citizens. Another important achievement that took place during the Eleventh Plan that should be noted was the more even distribution of economic growth across the States. This shows that resources are being allocated more evenly and more efficiently. During the Eleventh Plan, poverty decline by just under 2% and wage rates increased by 16%. Education has improved due to the policies implemented by previous plans. As mentioned earlier, the Right to Education was passed in 2009, which guaranteed all children (6-14 years of age) access to schools. This has resulted in a huge increase in student enrollment, and consequently a marked decrease in the number of children who do not attend school. While investment in infrastructure is still not as strong as India would like it to be, the Eleventh Plan saw a sizeable increase in the percent of GDP that was invested in much needed infrastructure, including roads, railways, ports, electricity, etc. The Eleventh Plan called for enormous allocation of resources to rural and farm sectors, which has increased the number of job opportunities available and has improved their access to basic necessities like clean drinking water and electricity. Part of this effort was an attempt to promote agricultural development, which India views as a vital aspect of their overall future economic growth.
            One area where India continues to fall short is in regard to its attempts to prevent the misappropriation of funds through government scandals. This has been a longstanding problem in India, which does more than reduce the amount of money that is used to improve the economy or provide much needed social services. This type of devious behavior causes the public to lose faith in its government, which makes it several times harder for the government to promote social and economic improvement. India’s previous Plans also fell short in providing adequate health services to the public. This was made evident by India’s poor resulting health indicators, which still show high infant and maternal mortality rates. Also, the country’s drinking water continued to contain high levels of contamination, which led to several health problems primarily among children. Energy prices were a major problem during the last Plan, and continue to act as a constraint on India’s economic growth. With India’s energy prices remaining significantly below world prices, the country has no incentive to improve its energy efficiency, which is becoming a huge competitive factor in this increasingly globalized economy. Being able to produce quality goods at low prices will be essential for India to enjoy a sustained economic growth trend in the future, but this can only be achieved if the country can devise a more efficient means of energy use. Prior plans also did not do much to address the serious problems with India’s inferior transportation infrastructure, which is slowing down the country’s economic growth. Another huge let down of the Eleventh Plan was its inability to meets its targeted growth in manufacturing, which fell short by about 3%. India is depending on manufacturing to provide a sizeable number of additional job opportunities in the future, so its slow pace of growth does not bode well for the country’s up and coming youth population.

Do you think this type of strategic planning is possible in the USA? Would the pros outweigh the cons, and what would be some of the pros and cons of a Five Year Plan in the USA? If a Five Year Plan option was presented to American voters as a constitutional amendment, would you vote for or against it, and why?

            If we were to analyze this situation in terms of each country’s uncertainty avoidance, the results would actually show that the U.S. is more prone to avoiding uncertainty. While India scores a 40 on the UAI, the U.S. scores a 46. This suggests that the U.S. would be more amenable to a Five Year Plan because it would allow us a greater ability to prepare for the unknown. However, I think that U.S. citizens would be skeptical in having a Five Year Plan, especially since we have presidential elections every four years. A Five Year Plan devised by a Republican president may not sit well with Democrats, especially if there was an election coming up.
            There are several pros that could arise from having a Five Year Plan. Such a plan would give the country a well-defined direction that could resonate well with people’s ambitions. A Five Year Plan would also place emphasis on achieving long-term, sustainable goals. This would especially benefit the U.S. when it comes to environmental regulation policy, where the target dates are usually set too far off in the future to merit any immediate action. A Five Year Plan may encourage younger Americans to pursue higher education or vocational training if there were a realistic prospect of increased future employment opportunities. It is always motivating to have a goal that one can work toward rather than hoping for the best. A Five Year Plan would provide our country with more of a collective consciousness that may help to unify this country, and create a more egalitarian society.
            The negatives of a hypothetical U.S. Five Year Plan could stem from focusing too narrowly on pre-determined objectives, while ignoring relevant changes. This potential tunnel vision could distract the U.S. from the constantly changing global economic environment. Also, as we have seen with India, any expectations that are not met may be perceived as signs of the country’s diminishing ability to fulfill its promises to the public. This could in turn lead to a less ambitious young population that may decide that higher education is not worth the time and money if there are not enough job opportunities available in the future. With a Five Year Plan comes enormous pressure on the government to follow through with its promises. Any results that fall short could lead to less faith in the U.S. government. At least now when the U.S. government currently exhibits a poor performance, we don’t have a prior promise to compare it to. This may actually work to their advantage because it makes them seem less incompetent.
            I would definitely be in favor of some sort of long-term plan established by the government. This would give me a much better idea of what kind of opportunities I may have available at a certain future date. It might encourage me to attend law school if I know that the government has plans to provide additional legal job opportunities in the future. It would provide all people my age with a better understanding of what direction they should aim for. It would also help people my age make better decisions about how to invest their money in terms of what kind of education they decide to pursue. If job opportunities are projected to be scarce in the future for a particular field, it may deter people from majoring in that field. However, this could also lead to the U.S. losing its competitive edge in whatever field that may be. Similar to any government policy, a U.S. Five Year Plan would have its prose and cons that would have to be weighed carefully before a decision was made to implement one.