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163Twelfth Plan : An Overview

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INTRODUCTIONIndia’s 1.25 billion citizens have higher expectations

about their future today, than they have ever had before.They have seen the economy grow much faster in thepast 10 years than it did earlier, and deliver visible benefitsto a large number of people. This has understandablyraised the expectations of all sections, especially thosewho have benefited less. Our people are now much moreaware of what is possible, and they will settle for no less.The Twelfth Five Year Plan must rise to the challenge ofmeeting these high expectations.The Initial Conditions

Though expectations have mounted, thecircumstances in which the Twelfth Plan has commencedare less favourable than at the start of the Eleventh Plan in2007–08. At that time, the economy was growing robustly,the macroeconomic balance was improving and globaleconomic developments were supportive. The situationtoday is much more difficult. The global economy is goingthrough what looks like a prolonged slowdown. Thedomestic economy has also run up against several internalconstraints. Macro-economic imbalances have surfacedfollowing the fiscal expansion undertaken after 2008 togive a fiscal stimulus to the economy. Inflationarypressures have built up. Major investment projects inenergy and transport have slowed down because of a

CONTENTS OF THE CHAPTER

8 Introduction 8 Managing Natural Resources and the Environment8 Vision and Aspirations 8 Enagement with the World8 Developing Capabilities 8 Key Policy Initiatives Needed

variety of implementation problems. Some changes in taxtreatment in the 2012–13 have caused uncertainty amonginvestors.

These developments have produced a reduction inthe rate of investment, and a slowing down of economicgrowth to 6.5 per cent in 2011–12, which was the last yearof the Eleventh Plan. The growth rate in the first half of2012–13, which is the first year of the Twelfth Plan, is evenlower. The downturn clearly requires urgent correctiveaction but it should not lead to unwarranted pessimismabout the medium term. India’s economic fundamentalshave been improving in many dimensions, and this isreflected in the fact that despite the slowdown in 2011–12,the growth rate of the economy averaged 7.9 per cent inthe Eleventh Plan period. This was lower than the Plantarget of 9 per cent, but it was marginally higher than theachievement of 7.6 per cent in the Tenth Plan. The factthat this growth occurred in a period which saw two globalcrises, one in 2008 and another in 2011, is indicative of theresilience which the economy has developed.The Policy Challenge

The policy challenge in the Twelfth Plan is, therefore,two-fold. The immediate challenge is to reverse theobserved deceleration in growth by reviving investmentas quickly as possible. This calls for urgent action to tackleimplementation constraints in infrastructure which areholding up large projects, combined with action to deal

Chapter

7TWELFTH PLAN :

AN OVERVIEW

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164 Economic Survey & Government’s Plan, Programme & Policies

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with tax related issues which have created uncertainty inthe investment climate. From a longer term perspective,the Plan must put in place policies that can leverage themany strengths of the economy to bring it back to its realgrowth potential. This will take time but the aim should beto get back to 9 per cent growth by the end of the TwelfthPlan period.

The preparation of a Five Year Plan for the country isan opportunity to step back, take stock of the ‘big picture’,identify the strengths that can be leveraged to enable thecountry to move forward, and the constraints that couldhold it back, and on this basis develop a strategic agenda.In developing such an agenda, the Planning Commissionhas relied on four key elements.

• First, the strategy must be firmly grounded in anunderstanding of the complexities of thedevelopment challenges that India faces,recognising the transformation that is taking placein the economy and in the world. Thisunderstanding of the ground reality must be usedto identify the critical leverage points wheregovernment action could have the maximum impact.The focus must be on identifying the strategicleverage points where successful action couldtrigger many supportive reactions rather than fixingeverything everywhere.

• Second, progress will be achieved through acombination of government action in both policiesand public programmes, and the efforts of manyprivate actors that are important in the economy.Much of the inclusive growth we hope to achievedepends on investment in the private sector whichaccounts for over 70 per cent of total investment.This includes not only the organised corporatesector, but also Micro, Small and MediumEnterprises (MSMEs), individual farmers andmyriads of small businessmen who add to GrossDomestic Product (GDP) and create jobs. Thedynamism of this segment, and its ability to seizeeconomic opportunities, is critical for inclusivegrowth and the Plan must address the constraintsfaced by all these private actors in achieving betterresults.

• Third, the outlay on government programmes hasto increase in many areas but this must beaccompanied by improved implementation. For

this, it is necessary to focus on capacity buildingand governance reforms, including system changethat will increase accountability in the public sector.The Twelfth Plan must back this focus by makingspecific allocations to improve the ability ofgovernment to work better.

• Finally, the planning process must serve as a wayof getting different stakeholders to work togetherto achieve broad consensus on key issues. Thesestakeholders include (i) different levels of thegovernment sector: Centre, States and PanchayatiRaj Institutions (PRIs)/Urban Local Bodies(ULBs); (ii) the private sector, both big companiesand small businesses, whose investments will driveour growth and (iii) citizens’ groups and thevoluntary sector, who bring the key element ofpeople’s participation and can greatly help improvethe quality of government action.

VISION AND ASPIRATIONSThe broad vision and aspirations which the Twelfth

Plan seeks to fulfil are reflected in the subtitle: ‘Faster,Sustainable, and More Inclusive Growth’. Thesimultaneous achievement of each of these elements iscritical for the success of the Plan.The Need for Faster Growth

Planners are sometimes criticised for focusing toomuch on GDP growth, when the real objective should beto achieve an improved quality of life of the people acrossboth economic and non-economic dimensions. The TwelfthPlan fully recognises that the objective of development isbroad-based improvement in the economic and socialconditions of our people. However, rapid growth of GDPis an essential requirement for achieving this objective.

There are two reasons why GDP growth is importantfor the inclusiveness objective. First, rapid growth of GDPproduces a larger expansion in total income and productionwhich, if the growth process is sufficiently inclusive, willdirectly raise living standards of a large section of ourpeople by providing them with employment and otherincome enhancing activities. Our focus should not be juston GDP growth itself, but on achieving a growth processthat is as inclusive as possible. For example, rapid growthwhich involves faster growth in agriculture, and especiallyin rain-fed areas where most of the poor live, will be much





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more inclusive than a GDP growth that is driven entirelyby mining or extraction of minerals for exports. Similarly,rapid growth which is based on faster growth for themanufacturing sector as a whole, including MSME, willgenerate a much broader spread of employment and incomeearning opportunities and is therefore more inclusive thana growth which is largely driven by extractive industries.

The second reason why rapid growth is important forinclusiveness is that it generates higher revenues, whichhelp to finance critical programmes of inclusiveness. Thereare many such programmes which either deliver benefitsdirectly to the poor and the excluded groups, or increasetheir ability to access employment and incomeopportunities generated by the growth process. Examplesof such programmes are the Mahatma Gandhi NationalRural Employment Guarantee Act (MGNREGA), SarvaSiksha Abhiyan (SSA), Mid Day Meals (MDMs), PradhanMantri Gram Sadak Yojana (PMGSY), Integrated ChildDevelopment Services (ICDS), National Rural HealthMission (NRHM), and so on. This is also relevant for thesustainability objective since programmes aimed at makingdevelopment more sustainable also involve additionalcosts.Growth Prospects

The Approach Paper to the Twelfth Plan, approvedby the National Development Council (NDC) in 2011, hadset a target of 9 per cent average growth of GDP over thePlan period. That was before the Eurozone crisis in thatyear triggered a sharp downturn in global economicprospects, and also before the extent of the slowdown inthe domestic economy was known. A realistic assessmentof the growth prospects of the economy in the TwelfthPlan is that it concludes that the current slowdown in GDPgrowth can be reversed through strong corrective action,including especially an expansion in investment with acorresponding increase in savings to keep inflationarypressures under control. However, while our full growthpotential remains around 9 per cent, acceleration to thislevel can only occur in a phased manner, especially sincethe global economy is expected to remain weak for thefirst half of the Plan period. Taking account of all thesefactors, the Twelfth Plan should work towards bringingGDP growth back to an inclusive 9 per cent in the last twoyears of the Plan, which will yield an average growth rateof about 8.2 per cent in the Plan period. The outcome is

conditional on many policy actions as is described inscenario one.

Within the aggregate GDP growth target, two sub-targets are especially important for inclusiveness. Theseare a growth rate of 4 per cent for the agricultural sectorover the Twelfth Plan period and around 10 per cent in thelast two years of the Plan for the manufacturing sector.

The Twelfth Plan’s strategy for growth dependscrucially on productivity gains as one of the key driversof growth. Productivity is the additional contribution togrowth after taking account of the effect of capitalaccumulation and growth in labour. These traditionalsources of growth are not likely to be enough for India inthe coming years and we must therefore focus much moreon productivity improvements among all constituents: bigbusinesses, MSMEs, farmers and even government. Thiscan be done by improving the business regulatoryenvironment, strengthening the governance capacity ofStates, investing more in infrastructure rather thansubsidies, and by using Science and Technology (S&T)to drive innovation.Alternative Scenarios

The projection of 8.2 per cent growth in the TwelfthPlan period should not be viewed as a ‘business as usual’outcome that can be realised with relatively little effort. Itis in fact a projection of what is possible if we take earlysteps to reverse the current slowdown and also take otherpolicy actions needed to address other key constraintsthat will otherwise prevent the economy from returning toa higher growth path. Failure to act firmly on these policieswill lead to lower growth and also poorer outcomes oninclusiveness.

To illustrate the consequences of inaction on keygrowth promoting policies, the Planning Commission hasundertaken a systematic process of ‘scenario planning’based on diverse views and disciplines to understand theinterplay of the principal forces, internal and external,shaping India’s progress. This analysis suggests threealternative scenarios of how India’s economy mightdevelop titled, ‘Strong Inclusive Growth’, ‘InsufficientAction’ and ‘Policy Logjam’.

The first scenario ‘Strong Inclusive Growth’,describes the conditions that will emerge if a well-designedstrategy is implemented, intervening at the key leveragepoints in the system. This in effect is the scenario





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underpinning the Twelfth Plan growth projections of 8.2per cent, starting from 6.7 per cent in the first year to reach9 per cent in the last year and the second scenario‘Insufficient Action’ describes the consequences of halfhearted action in which the direction of policy is endorsed,but sufficient action is not taken. The growth in thisscenario declines to around 6 per cent to 6.5 per cent. Thethird scenario ‘Policy Logjam’, projects the consequencesof Policy Inaction persisting too long. The growth rate inthis scenario can drift down to 5 per cent to 5.5 per cent.The Meaning of Inclusiveness

Inclusiveness means many different things and eachaspect of inclusiveness poses its own challenges forpolicy.Inclusiveness as Poverty Reduction

Distributional concerns have traditionally beenviewed as ensuring an adequate flow of benefits to thepoor and the most marginalised. This must remain animportant policy focus in the Twelfth Plan. It is worthnoting that the record in this dimension of inclusivenessis encouraging. The percentage of the population belowthe official poverty line has been falling but even as thathappens, the numbers below the poverty line remain large.According to the latest official estimates of poverty basedon the Tendulkar Committee poverty line, as many as 29.8per cent of the population, that is, 350 million people werebelow the poverty line in 2009–10. Questions have beenraised about the appropriateness of the Tendulkar povertyline which corresponds to a family consumption level of`3900 per month in rural areas and `4800 per month inurban areas (in both cases for a family of five). There is nodoubt that the Tendulkar Committee poverty line representsa very low level of consumption and the scale of povertyeven on this basis is substantial. An Expert committeeunder Dr. C. Rangarajan has been set up to review allissues related to the poverty line keeping in viewinternational practices.

It is well established that the percentage of thepopulation in poverty has been falling consistently butthe rate of decline was too slow. The rate of decline inpoverty in the period 2004–05 to 2009–10 was 1.5percentage points per year, which is twice the rate of declineof 0.74 percentage points per year observed between 1993–94 and 2004–05. Normally, large sample surveys used forofficial estimates of poverty are conducted every five

years, but because 2009–10 was a drought year, the NationalSample Survey Office (NSSO) felt that it would tend tooverstate poverty and it was therefore decided to advancethe next large sample survey to 2011–12. The results ofthis survey will yield an official estimate of the extent ofpoverty in 2011–12, that is, the position at the end of theEleventh Plan period, but this will be available only in mid-2013. However, preliminary results from the survey havebeen published and they suggest that the percentage ofthe population in poverty will decline significantlycompared to 2009–10. According to some non-officialestimates, the rate of decline in poverty between 2004–05and 2011–12 will be close to 2 per cent per year, which wasthe Eleventh Plan target. If this turns out to be the case, itcan be claimed that the Eleventh Plan has indeed deliveredon inclusiveness.Inclusiveness as Group Equality

Inclusiveness is not just about bringing those belowan official fixed poverty line to a level above it. It is alsoabout a growth process which is seen to be ‘fair’ bydifferent socio-economic groups that constitute oursociety. The poor are certainly one target group, butinclusiveness must also embrace the concern of othergroups such as the Scheduled Castes (SCs), ScheduledTribes (STs), Other Backward Classes (OBCs), Minorities,the differently abled and other marginalised groups.Women can also be viewed as a disadvantaged group forthis purpose. These distinct ‘identity groups’ aresometimes correlated with income slabs—the SCs and STs,for example, are in the lower income category—and allpoverty alleviation strategies help them directly. Womenon the other hand span the entire income spectrum, butthere are gender-based issues of inclusiveness that arerelevant all along the spectrum.

Inclusiveness from a group perspective obviouslygoes beyond a poverty reduction perspective and includesconsideration of the status of the group as a whole relativeto the general population. For example, narrowing the gapbetween the SCs or STs and the general population mustbe part of any reasonable definition of inclusiveness, andthis is quite distinct from the concern with poverty, orinequality. For example, it is perfectly possible for anti-poverty strategies to be reducing income poverty amongSCs and STs without reducing the income gap betweenthese groups and the general population.





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Inclusiveness as Regional BalanceAnother aspect of inclusiveness relates to whether

all States, and indeed all regions, are seen to benefit fromthe growth process. The regional dimension has grown inimportance in recent years. On the positive side, many ofthe erstwhile backward States have begun to showsignificant improvement in growth performance and thevariation in growth rates across States has narrowed.However, both the better performing and other States areincreasingly concerned about their backward regions, ordistricts, which may not share the general improvement inliving standards experienced elsewhere. Many of thesedistricts have unique characteristics including highconcentration of tribal population in forested areas, orMinorities in urban areas. Some districts are also affectedby left wing extremism, making the task of developmentmuch more difficult.

In the Twelfth Plan, we must pay special attention tothe scope for accelerating growth in the States that arelagging behind. This will require strengthening of States’own capacities to plan, to implement and to bring greatersynergies within their own administration and with theCentral Government. As a first step, the PlanningCommission is working with it’s counterpart PlanningBoards and Planning Departments in all State Governmentsto improve their capabilities. An important constraint onthe growth of backward regions in the country is the poorstate of infrastructure, especially road connectivity,schools and health facilities and the availability ofelectricity, all of which combine to hold back development.Improvement in infrastructure must therefore be animportant component of any regionally inclusivedevelopment strategy.Inclusiveness and Inequality

Inclusiveness also means greater attention to incomeinequality. The extent of inequality is measured by indicessuch as the Gini coefficient, which provide a measure ofthe inequality in the distribution on a whole, or by measuresthat focus on particular segments such as the ratio ofconsumption of the top 10 per cent or 20 per cent of thepopulation to that of the bottom 10 per cent or 20 per centof the population, or in terms of rural–urban, such as theratio of mean consumption in urban versus rural areas. Anaspect of inequality that has come sharply into focus inindustrialised countries, in the wake of the financial crisis,

is the problem of extreme concentration of income at thevery top, that is, the top 1 per cent and this concern is alsoreflected in the public debate in India.

Perfect equality is not found anywhere and there aremany reasons why it may not even be a feasible objective.However, there can be no two opinions on the fact thatinequality must be kept within tolerable limits. Someincrease in inequality in a developing country during aperiod of rapid growth and transformation may beunavoidable and it may even be tolerated if it isaccompanied by sufficiently rapid improvement in theliving standards of the poor. However, an increase ininequality with little or no improvement in the livingstandards of the poor is a recipe for social tensions. Staticmeasures of inequality do not capture the phenomenon ofequality of opportunity which needs special attention.Any given level of inequality of outcomes is much moresocially acceptable if it results from a system whichprovides greater equality of opportunity. As a society, wetherefore need to move as rapidly as possible to the idealof giving every child in India a fair opportunity in life,which means assuring every child access to good healthand quality education. While this may not be possible toachieve in one Plan period, the Twelfth Plan should aim atmaking substantial progress in this dimension.Inclusiveness as Empowerment

Finally, inclusiveness is not just about ensuring abroad-based flow of benefits or economic opportunities,it is also about empowerment and participation. It is ameasure of the success we have achieved in building aparticipatory democracy that people are no longerprepared to be passive recipients of benefits doled out bythe Government. They are slowly beginning to demandthese benefits and opportunities as rights and they alsowant a say in how they are administered. This brings tothe fore issues of governance, accountability and peoplesparticipation to much greater extent than before. This alsocovers areas like access to information about governmentschemes, knowledge of the relevant laws and how toaccess justice. The growing concern with governance hasalso focused attention on corruption. How to tacklecorruption is now at the centre stage of policy debates.Inclusiveness through Employment Programmes

One of the most important interventions for fosteringinclusion during Eleventh Plan was the MGNREGA. While





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its achievements in ameliorating poverty and preventingacute distress during times of drought have been recordedand appreciated, there are also some complaints againstMGNREGA, primarily on the grounds that it is a dole,involving huge expenditures that could have been spentmore productively. There are also complaints that it isleading to increase in wages of agricultural labour andconstruction workers.

The view that rising wages by themselves representa problem is not credible since this is the only mechanismthrough which landless agricultural labour can benefit fromeconomic growth. If rising wages squeeze farm profitability,the solution lies in raising farm productivity toaccommodate higher wages. In any case, rural labourrelations in large parts of the country continue to be feudal,and use of migrant labour for both agriculture andconstruction continues to be exploitative. These inequitieswould not get corrected by themselves. We should not belooking to perpetuate a situation where low-cost labourprovides the necessary profit margins for farmers, removingincentives to invest in efficiency improvement.

The main point to note is that employment schemesare not new in India, and they have a wellestablishedpoverty reducing impact. With National Sample Surveyshowing an eightfold increase in employment in publicworks after MGNREGA, there is no doubt that its impacton rural wage earnings and poverty has been much largerthan all previous rural employment schemes. What is lessappreciated is that this has been achieved with a rathermodest increase in the share spent on rural employmentschemes out of total Central Plan expenditures. It hasincreased from an average of 11.8 per cent in the threeyears before MGNREGA (2002–03 to 2004–05) to 13.3 percent in the last three (2009–10 to 2011–12). This meansthat although MGNREGA is not free of leakages, thesehave declined considerably. Thus, far from opening abottomless pit as some critics still claim, the provision ofemployment as a legal right, has greatly improved the shareof intended beneficiaries in what government spends fordevelopment of rural areas.

There is also evidence that wherever land productivityhas improved and greater water security been delivered,small and marginal farmers working in MGNREGA siteshave reverted back to farming and allied livelihoods. Thereis also evidence that MGNREGA is enabling cropdiversification, particularly into horticulture, wherever it

has adequately converged with schemes of AgriculturalDepartments. An important lesson from this experience isthat it is the quality of assets created, which will determinewhether MGNREGA can go beyond the safety net tobecome a springboard for entrepreneurship, even at thelowest income levels.

Each of the dimensions of inclusiveness discussedabove is relevant, and public attention often focuses onone or the other at different times. We should aim atachieving steady progress in each of these dimensions.Accelerated growth in recent years has yielded distinctbenefits to many and the prosperity which this hasgenerated is visible to all, raising the expectations of allsections of the population, and creating a demand for afair share of the benefits of growth. Policymaking has tobe watchful of developments in each dimension of fairnessand be quick to take corrective steps as soon as the needarises. Box 1.1 provides an assessment of trends in somekey variables which point to the greater inclusiveness ofgrowth in recent years.Environmental Sustainability

While striving for faster and more inclusive growth,the Twelfth Plan must also pay attention to the problem ofsustainability. No development process can afford toneglect the environmental consequences of economicactivity, or allow unsustainable depletion and deteriorationof natural resources. Unfortunately, the experience ofdevelopment in many countries, and our own pastexperience in some respects, suggests that this can easilyhappen unless appropriate corrective steps are taken atearly stages. The Twelfth Plan must devise a strategy ofdevelopment which effectively reconciles the objective ofdevelopment with the objective of protecting theenvironment.

Box 1.1 : Eleventh Plan Achievements onInclusive Growth

The following are some importantindicators showing the extent to which theEleventh Plan succeeded in fulfilling theobjective of inclusive growth. (In somecases, where the data relate to the NSSOsurveys, the time period for comparison isbefore and after 2004–05.)

• GDP growth in the Eleventh Plan 2007–





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08 to 2011–12 was 7.9 per centcompared with 7.6 per cent in the TenthPlan (2002–03 to 2006–07) and only 5.7per cent in the Ninth Plan (1997–98 to2001–02). The growth rate of 7.9 percent in the Eleventh Plan period is oneof the highest of any country in thatperiod which saw two global crises.

• Agricultural GDP growth accelerated inthe Eleventh Plan, to an average rateof 3.3 per cent, compared with 2.4 percent in the Tenth Plan, and 2.5 percent in the Ninth Plan.

• The percentage of the population belowthe poverty line declined at the rate of1.5 percentage points (ppt) per year inthe period 2004–05 to 2009–10, twicethe rate at which it declined in theprevious period 1993–94 to 2004–05.(When the data for the latest NSSOsurvey for 2011–12 become available,it is likely that the rate of decline maybe close to 2 ppt per year.)

• The rate of growth of real consumptionper capita in rural areas in the period2004–05 to 2011–12 was 3.4 per centper year which was four times the ratein the previous period 1993–94 to 2004–05.

• The rate of unemployment declinedfrom 8.2 per cent in 2004–05 to 6.6 percent in 2009–10 reversing the trendobserved in the earlier period when ithad actually increased from 6.1 percent in 1993–94 to 8.2 per cent in2004–05.

• Rural real wages increased 6.8 per centper year in the Eleventh Plan (2007–08 to 2011–12) compared to an average1.1 per cent per year in the previousdecade, led largely by the government’srural policies and initiatives.

• Complete immunization rate increasedby 2.1 ppt per year between 2002–04and 2007–08, compared to a 1.7 ppt fallper year between 1998–99 and 2002–

04. Similarly, institutional deliveriesincreased by 1.6 ppt per year between2002–04 and 2007–08 higher than the1.3 ppt increase per year between1998–99 and 2002–04.

• Net enrolment rate at the primary levelrose to a near universal 98.3 per centin 2009–10. Dropout rate (classes I–VIII) also showed improvements, falling1.7 ppt per year between 2003–04 and2009–10, which was twice the 0.8 pptfall between 1998–99 and 2003–04.

Development cannot take place without additionalenergy and the energy requirement of development willhave to be reconciled with the objective of protection ofenvironment. The economy depends heavily on coal andhydro power to meet its energy needs and the developmentof each of these energy sources involves potential trade-offs with conservation of forests and the objective ofavoiding displacement of people. We need to manage theseconflicting objectives more efficiently, with adequatecompensation for those dispossessed and appropriateremedial steps to correct for loss of forest cover wherethis is unavoidable. Nuclear energy is another importantenergy source for the country, and has the greatestpotential over the next 20 years, of providing a substitutefor coal-based electricity. However, here too environmentaland safety issues have arisen, especially after theFukushima accident. These concerns are being addressed.

The achievement of environmental sustainability willimpact the life of communities in several dimensions. Itwill require the need development of new energy efficientpractices in urban housing and transport to contain thegrowth in the demand for energy. It would mean use of farmore energy efficient technologies in coal-based electricitygeneration such as the introduction of super critical andultra super critical boilers. It would require activepromotion of energy efficiency in industries, farms andoffices, and the promotion of more energy efficientappliances through policies of branding and mandatorystandards. Transport policies and related technologiesfor more energy efficient vehicles will need to be developedand adopted.

The issue of sustainability also has a globaldimension because of the threat of climate change caused





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by the accumulation of carbon dioxide and otherGreenhouse Gases (GHG) in the atmosphere due to humanactivity. Since GHG emission in any country acceleratesthe process of global warming, this is obviously an areawhere a global cooperative solution is needed. No countrywill have sufficient incentive to contain its own emissionsunless it is part of a global compact. Such a compact inturn is possible only if there is a fair distribution of theburden. Developing countries have consistently arguedthat since it is the industrialised countries that havehistorically contributed the bulk of the accumulated stockof GHG, and are also the most able to pay, they must bearburden of global mitigation and adjustment. India isparticipating in the ongoing international negotiationsunder the UN Framework Convention on Climate Change,but progress thus far has been minimal.

We cannot, however, abstain from taking action todeal with climate change until an international solution isfound. It is known that India will be one of the countriesmost severely affected if global warming proceedsunchecked and as such appropriate domestic action isnecessary. A National Action Plan for climate change hasbeen evolved with eight component Missions.Implementation of these missions must be an integral partof the Twelfth Plan. Policies should be closely monitoredto ensure that we achieve the stated objective of reducingthe emissions intensity of our GDP by 20 per cent to 25 percent between 2005 and 2020.

Resolving the conflict between energy and theenvironment is not without cost. It involves additionalupfront costs both of mitigating the adverse impact onthe environment and of switching to more expensiverenewable energy sources. These costs must be built intothe cost and the pricing of the energy produced. Thereluctance to bear these costs arises largely because thecost of environmental damage is not properly measured.It is only when this is done that the cost of avoiding suchdamage can be compared with the environmental benefitsto reach a rational decision on whether the costs are worthit. Part of the problem is that the conventional ways ofmeasuring GDP in terms of production do not take accountof environmental damage caused by production of certaingoods which should properly be reflected as a subtractionfrom GDP. Only if GDP is adjusted in this way forenvironmental costs that growth of adjusted GDP can becalled a measure of the increase in total production in the

economy. Recognising this problem, the PlanningCommission has commissioned an Expert Group underProfessor Partha Dasgupta to prepare a template forestimating green national accounts which would measurenational production while allowing for negative effects onnational resources.

To summarise, the Twelfth Plan must be guided by avision of India moving forward in a way that would ensurea broad-based improvement in living standards of allsections of the people through a growth process which isfaster than in the past, more inclusive and also moreenvironmentally sustainable.

DEVELOPING CAPABILITIESIn this section, we focus on the capabilities we need

to develop to achieve the objective of faster, more inclusiveand sustainable growth. We first consider the developmentof human capabilities, which are in many ways the mostimportant. Then we focus on institutional capabilities andthe development of infrastructure which is a generalcapability enhancer for all agents. Both the Central andState Governments have a large role to play in developingthese capabilities and the Twelfth Plan at the Central andState level should accord high importance to this effort.Development of Human Capabilities

The development of human capabilities must be thefirst priority, for three reasons. First, these capabilities areactually ends in themselves. Second, they are alsoimportant instrumentalities which interact positively withothers to raise the productive capacity of our economyand therefore its ability to satisfy the material needs of ourpopulation. Third, proper development of humancapabilities will also ensure that our growth is moreinclusive in the sense that the marginalised anddisadvantaged sections of our society will be more able toaccess the opportunities thrown up by the growth process.Life and Longevity

The most fundamental of all human capabilities is lifeitself and the steady rise in life expectation in the countrysuggests that significant progress has been made in thisdimension. Life expectancy which was only 32 years atthe time of Independence is now 67 years. In other words,every Indian can expect to live twice as long as was thecase at Independence! Nevertheless, the level of life





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expectancy in India remains lower than in many emergingmarket economies and it is appropriate to plan forsignificant further improvements in this importantdimension.

The infant mortality rate (IMR) is another dimensionof human capability where we are making progress. IMRfell from 80 in 1991 to 66 in 2001 and at a faster rate thereafterto 47 in 2010. The rate of decline was 14 in the first periodand 19 in the second period. Nevertheless, the level ofIMR remains high and we need to do much better for ourchildren. We must strive to bring the IMR down to 28 bythe end of the Twelfth Plan. Maternal mortality rates(MMRs) are another indication of weakness in ourperformance. MMR has been falling over time, thanks tothe initiatives for promoting institutional deliveries underthe NRHM. The percentage of women giving birth ininstitutions with the benefit of skilled birth attendants hasincreased from 53 per cent in 2005 to 73 per cent in 2009.We need to do even better, and the Twelfth Plan mustbring MMR down to 1 per 1000 by the end of the Planperiod.

While there has been progress in the dimensionsdiscussed above, the decline in the child sex ratio rings anurgent alarm. This is an area of grave concern since itimplies that society is denying life to female children, andincreasingly resorting to female foeticide. The spread ofdiagnostic and medical facilities has paradoxically actuallyworsened the situation, as the falling child sex rate is beingseen in the more developed areas and cities.Education

India has a young population, and consequently, thelabour force, which is expected to decline in mostdeveloped countries and even in China, is expected toincrease over the next 20 years. This ‘demographicdividend’ can add to our growth potential through itsimpact on the supply of labour and also, via the fallingdependency ratio, on the rate of domestic savings. Besides,a young population brings with it the aspirations and theimpatience of youth, which in turn can become strongdrivers for bringing about change and innovation. To reapthis demographic dividend we must ensure that ouryounger citizens come into the labour force with higherlevels of education and the skills needed to support rapidgrowth. The SSA has brought us close to the target ofuniversalisation of primary education and the Right to

Education Act (RTE) 2009 makes eight years of elementaryeducation a fundamental right for all the children. TheMDM Scheme has ensured that retention in schools hasimproved greatly. However, the learning outcomes for amajority of children continue to be disappointing.Addressing the quality issue in our schools is critical forthe effective development of human capabilities and forachieving the objective of equality of opportunities. Thequality of teachers and, even more important, theirmotivation and accountability will need to be improved.Many of the children who are presently in school are first-generation learners, and these children need supplementaryinstruction. This is not easy due to shortage of qualifiedteachers in many schools across the country. New andinnovative approaches such as multigrade learning, whichhas been successfully tried in Tamil Nadu, could beadopted in such cases.

The success of the SSA has put pressure onexpanding the capacity of secondary schools and theRashtr iya Madhyamik Shiksha Abhiyan (RMSA)addresses this issue. Although there is considerable focuson providing secondary school access, the dropout ratesbetween elementary and secondary schools continue tobe high, and between the secondary and post-secondarystage they are even higher. This is a particularly seriousproblem for girls, who have to travel longer distances toattend secondary schools. Curricular and examinationreforms in secondary schooling would receive specialattention aimed at fostering critical thinking and analyticalskills, and preparing students for further education. Allthis requires innovative approaches, some of which arealready in evidence in certain States.

The last decade has also seen a huge increase in thedemand for higher education and this is expected toincrease further as more children complete school andmore and more jobs are seen to require higherlevelqualifications. However, our higher education institutionsalso suffer from problems of quality. Too many of ouruniversities are producing graduates in subjects that arenot required by the changing job market, and the qualityis also not what it should be. Higher education policy hasto be driven by three ‘E’s: expansion, equity and excellence.Of these, the third E, ‘excellence’, is the most difficult toachieve. India cannot hope to be competitive in anincreasingly knowledge driven world if our highereducation institutions do not come up to the high





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standards of excellence needed to be able to be globallycompetitive. Not even one Indian university figures in thelatest list of the top 200 universities in the world. We shouldwork towards ensuring that there are at least five by theend of the Twelfth Plan. For this, universities at the top ofthe quality hierarchy should be identified and generouslysupported so that they can reach the top league. Centresof excellence within existing universities should be created.A special initiative should be launched to attract highcalibre faculty from around the world on non-permanentteaching assignments. All these initiatives should bepooled into an India Excellence Initiative in the TwelfthPlan.Skill Development

The Skill Development Mission has been launchedto skill at least 50 million individuals by the end of theTwelfth Plan. Skill development programmes in the pasthave been run mainly by the government, with insufficientconnection with market demand. To ensure that skills matchdemand, special efforts are needed to ensure thatemployers and enterprises play an integral role in theconception and implementation of vocational trainingprogrammes, including managing Industrial TrainingInstitutes (ITIs) and in the development of faculty. Anenabling framework is needed that would attract privateinvestment in Vocational Training through Public–PrivatePartnership (PPP). We should try to optimise on therespective strengths of the public and private sectorentities engaged in skill development. Mobilising therequired investments, setting up first rate ITIs, ensuringefficiency in operations and management and enablingpost-training employment will be the primaryresponsibilities of private sector entities while thegovernment will provide the enabling framework and therequisite financial support especially in respect of SC, ST,Minorities and differently abled persons and other deprivedsections of society.Nutrition

Poor learning outcomes in our schools are partlybecause of poor quality of teaching but they are also partlydue to high incidence of child malnutrition, which reduceslearning ability. India has had the largest and the longestrunning child development programme in the world in theform of ICDS, but the problem of malnutrition remainslarge. Unfortunately, the latest data on child malnutrition

are from the National Family Health Survey (NFHS- 3)conducted in the period 2005–07 which pre-dates theEleventh Plan. The full impact of the Eleventh Planprogrammes on this aspect of human capability is thereforenot yet known. Surveys undertaken by the StateGovernments seem to suggest that malnutrition has fallenin many States. The next Annual Health Survey for 2012–13 will include data on malnutrition and these data willprovide a reliable basis for assessing what has happenedsince NFHS-3. Meanwhile, the ICDS programme will beexpanded and comprehensively restructured in the TwelfthPlan to make it more effective.

Malnutrition is also a problem among adults,especially women. The incidence of anaemia and low bodymass among women is very high in the country. The causesof this persistent malnutrition are not well understood.The availability of food, especially better quality foodproducts such as fruits, vegetables and dairy products, issignificantly better today than it was in the past.Nevertheless, the incidence of malnutrition remains high.There is a need to bring this dimension of human capabilityto the fore front of policy attention. The Food Security Billunder consideration will address some of these issues,but the problem of nutrition is actually much more complexand a multidimensional approach is necessary.Health

Health is another critical dimension of humancapability, which needs much greater attention in theTwelfth Plan. At present, less than 30 per cent of outpatientand less than half of inpatient health care capacity of thecountry is in the public sector, and the majority of thepopulation relies on private health care provision whichoften imposes a heavy financial burden. It is, therefore,essential to expand public sector capacity in health careespecially in the rural areas. The NRHM, launched duringthe Tenth Plan, made an important start in expanding healthcare facilities in rural areas. While additional infrastructurehas been created, there are large shortages of personnel,especially specialists in rural health facilities, reflectingthe fact that trained human resources in health are in shortsupply and it takes many years to set up new medicalcolleges to train the required number of doctors.

Ideally, the public health care system must beexpanded to address the health needs of the vast majorityof citizens, recognising that upper-income groups may





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opt for private health care. The Twelfth Plan will thereforesee the transformation of the NRHM into a National HealthMission, covering both rural and urban areas. Unlike ruralresidents, those in urban areas have access to privatehealth care providers, but private health care is costly andlarge numbers of urban residents especially slum dwellerscannot afford it. An important component of the NationalHealth Mission will be the Urban Health Initiative for thePoor, providing public sector primary care facilities inselected low-income urban areas. This will requireadditional resources in the public sector from the budgetsof both the Centre and the States, and cities.

There is a massive shortage of healthcareprofessionals in the country and their supply musttherefore be expanded rapidly if we want to fulfil ourcommitments in this sector. We must therefore plan for anexpansion of teaching and training programmes forhealthcare professionals, particularly in the public sectorinstitutions.

Finally, attainment of good health outcomes is notjust a matter of providing curative care. We need to givemuch greater attention to public health which hastraditionally suffered from neglect. We also need to focusmuch more on a provision of clean drinking water andsanitation, which can make a major contribution toimproved health. This was the experience in industrialisedcountries over a hundred years ago, and this is also truefor us today.

The longer-term objective of Health Policy must bethe provision of Universal Health Care (UHC), wherebyany one who wants it is assured of access to a well definedset of health care entitlements. Putting a UHC system inplace will take time, but we need to start building anappropriate architecture.Drinking Water and Sanitation

The problem of providing safe drinking water isparticularly acute in the rural areas. Successive plans haveemphasised programmes for expanding the coverage ofrural drinking water but they have not had as much success,as desired. The incidence of ‘slipped back’ habitationsappears to be accelerating and serious problems of waterquality have emerged in many areas. Part of the problem isthat rural drinking water schemes are not fully integratedwith national system of aquifer management. Excessivedrawal of groundwater for irrigation is leading to lowering

of water tables causing drinking water hand pumps to rundry and lowering of the water table is also causing salinityand chemical pollution, making the water non-potable. Asustainable solution to the rural drinking water problemhas to be found as part of a holistic approach for aquifermanagement.

Sanitation and clean drinking water are criticaldeterminants of health and are complementary to eachother. Without proper sanitation, the incidence of diarrhoealdiseases due to contaminated drinking water will not comedown, and without adequate water supply, improvedsanitation is generally not possible. It is, therefore,necessary to adopt a habitation approach to sanitationand to institutionalise the integration of water supply withsanitation in each habitation. The problem of sanitation inurban areas is also very serious since almost all our cities,including even the State capitals and major metros, have alarge percentage of the population (45 per cent in Delhi)not connected to the sewer system. Urban developmentmust give top priority to planning for water, toilets andsewerage as an integrated whole taking into account thelikely expansion of the urban population.

Enhancing Human Capabilities through InformationTechnology

The ability to access information is an importantinstitutional capability we need to develop. Lack of readyaccess information is often a major impediment in effortsto improve the well-being of the people. With improvementin literacy and education, and developments in informationtechnology, we are in a position to provide our peoplewith access to information, including obtaining birthrecords, land records, payment records for utilities and soon.

The rapid spread of mobile telephony, including inrural areas has facilitated innumerable innovations whichdirectly benefit the ordinary citizen. Farmers in some partsof the country are able to subscribe to commercial serviceswhich deliver relevant information for a particular crop tothe farmer through Short Message Service (SMS). Theparents of babies born in municipal hospitals in Bengaluruget an SMS alert, when the next vaccination is due. Suchinnovations need to be encouraged. Yet another humancapability that is important is the ease and effectivenessof establishing identity. The Aadhar project, whichprovides a unique identification (UID) number, backed bybiometric data capture, to establish identity





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unambiguously, is a major step forward. Identity can bedifficult to establish, especially for the poor, when theymove from their place of origin, whether by choice or bycompulsion. The UID project has already enrolled 200million persons. Experiments with using Aadhar to makepayments under MGNREGS electronically into no frill bankaccounts which can be accessed through mobile phoneshave begun in 51 districts. It will soon be possible forlarge-scale use of the Aadhar platform to make varioustypes of government payments due to individuals in aseamless manner electronically, avoiding problems ofmisuse and leakage.

The Aadhar platform will also facilitate a shift fromthe physical delivery of subsidised commodities throughthe Public Distribution System (PDS) to a system of cashpayment, if desired. Some States have indicated that theywould be interested in such a shift. Adoption of a target tomove the major subsidies and beneficiary payments to acash basis linked to Aadhar by the end of the Twelfth Planperiod would be a major step towards improving efficiency.Development of Institutional Capabilities

The Twelfth Plan also needs to focus on developingthe capabilities of our institutions to perform theincreasingly complex and demanding tasks expected ofthem. We have three pillars of governance (Legislature,Executive and Judiciary) and three tiers of government(Centre, State and Panchayats/ULBs). The capabilities ofthese institutions to deliver on their mandate need to begreatly improved. The gaps are most evident at the lowestlevel of PRIs and ULBs, where trained personnel are lackingand the training systems are also inadequate. It is alsotrue at higher levels, where trained personnel may beavailable, but the capability of the systems is poor becausethey are not performance oriented and motivation is low.Implementation Capability

The consultations undertaken by the PlanningCommission in the course of preparing the Twelfth Planhave revealed a near universal perception that the capacityto implement is low at all levels of government. Thegovernment simply does not function with the efficiencythat is required in the twenty-first century. This is partlybecause of the lack of motivation at various levels, but itis primarily because governmental systems and proceduresare largely process-driven. They are not outcomeoriented.Accountability is often viewed as adhering to procedures

with no incentive to depart from procedures to securebetter results. Unless this weakness is overcome, mereprovision of more funds for programmes implemented inthe same old way will not help.

Where implementation rests within one Ministry, thereare problems of (i) insufficient attention to evidence-basedanalysis in the design of policies and programmes, (ii)insufficient concurrent evaluation that would givefeedback on outcomes achieved and (iii) lack of willingnessor ability to bring about systemic changes needed toimprove outcomes. Even when it is known that a changein procedures will help, it takes very long to bring aboutthat change. The problem is greatly multiplied when theeffectiveness of a programme depends, as it often does,on actions that have to be taken by several differentMinistries. Inter-ministerial consultations take far too long,and more importantly, are typically not oriented toresolving problems. This is because each Ministry worksin a silo, applying its own rules and procedures. The effortis to seek a consensus if possible, with little ability to overrule positions taken by individual Ministries in the interestof a holistic problem solving approach. Resolvingconflicting stands by consensus is of course desirable ifpossible, but beyond a point, it may not be possible, andsome systems for conflict resolution are needed.

To deal effectively with these problems it may benecessary to redesign governmental decision makingsystems. There has been a great deal of system redesignin the private sector in response to the new environmentcreated by economic reforms. A similar redesign ofgovernment is needed. For example, one way ofaccelerating the processing of large infrastructure projectsis to set up a National Investment Approval Board chairedby the Prime Minister and including all key Ministers andto amend the Transaction of Business Rules so thatstatutory clearances under various Acts for allinfrastructure projects above a given size are given by theBoard, taking into account the views of all Ministries. Theallocation of business rules could provide that suchclearances would be issued by the Cabinet Secretariatbased on the decision of the Board. This would be asystemic change which would ensure a holisticconsideration of complex issues and greatly acceleratedecision-making.





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Delivery of Public ServicesDelivery of public services in many States is hampered

by weak institutional capacity. Thus, although publichospitals may have trained doctors and nurses, and publicschools may have trained teachers, neither of theseinstitutions will have administrators who are trained in theoperation of health care or educational institutions. Toomuch of the knowledge needed to manage public servicedelivery is learnt on the job, which detracts from theinstitution’s effective functioning.

The first step in reforming public service delivery isto devise mechanisms for measuring the extent of publicsatisfaction with public services and publicising the results.The Public Affairs Centre at Bengaluru has done excellentwork in conducting systematic surveys of publicperception or satisfaction with various types of publicservices ranging from water and sanitation, health andeducation, public transport, police and so on. Such surveysperiodically conducted produce valuable information forthe political leadership on where performance is felt to bepoor and where it is improving

Greater involvement of citizens’ organisations can helpfocus government attention on these problem areas. TheDelhi Government’s experiment with Bhagidhari is exampleof citizen involvement and consultation operating throughResident Welfare Associations.Regulatory Institutions

An area where the lack of institutional capability isbeginning to manifest itself is in our expanding system ofregulatory bodies. As areas that were earlier dominatedby the public sector have been opened up for privateoperators, often competing among themselves or withexisting public sector operators, independent regulatoryinstitutions have been established to oversee thefunctioning of the players in the system. The effectivenessof regulatory organisations depends critically upon thequality of the personnel running the institutions and thedegree of independence established. Too many of theregulatory agencies are staffed by former bureaucrats andthere is not enough induction of specialists with domainknowledge. A thorough review of the regulatory systemestablished in different sectors is needed to determine theweaknesses of the system currently in place andrecommend ways of correcting them. This is especiallytrue as the next two five year Plans are likely to see faster

change in the global economy and in the structure of theIndian economy too.Development of Infrastructure

Infrastructure provides the basic support system forother sectors of the economy expanding capabilitieseverywhere. A distinguishing characteristic ofinfrastructure is that where imports can meet the gapbetween demand and supply, deficiencies in infrastructurecannot be made good through imports. Infrastructurerequirements can only be met through development of therelevant infrastructure capacity in the domestic economy.Furthermore, Good quality infrastructure is important notonly for faster growth but also to ensure that growth isinclusive.Power

Electric power is a critical input into all economicactivity and rapid and inclusive growth is only possible ifreliable electricity is made available everywhere. It isessential not only for agriculture, industry and commercialbusiness but also for basic household lighting. Thepercentage of households with electricity has increasedfrom 56 in 2001 to 67 in 2011, but even so almost 45 percent of rural households have no electricity connection.Furthermore, those that do typically do not have assuredpower, even in urban areas.

The Eleventh Plan added 55000 MW of generationcapacity which, though short of the target, was more thantwice the capacity added in the Tenth Plan. The TwelfthPlan aims to add another 88000 MW. This level of additionalcapacity is not infeasible but delivery of power dependscritically on solving serious fuel availability problems thathave arisen relating to coal and natural gas. Uncertaintiesabout fuel availability would seriously dampen investmentactivity, especially since about half the generation capacityis expected to come from the private sector, and they willnot be able to achieve financing if fuel supply issues arenot resolved. The problem is not that fuel cannot be madeavailable since domestic shortfalls can be met by importsbut since imports are at much higher prices, powerproducers are reluctant to accept. The problem can beresolved by resorting to price pooling and thus must beexplored. Equally important is the need to address thefinancial weakness of the distribution segment of thepower sector. Almost all the distribution companies(discoms) are running large financial losses, reflecting high





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transmission and distribution losses and also anunwillingness to raise tariffs in line with rising cost. Somediscoms have recently raised tariffs after many years,which is a welcome development but most have yet to doso.

Renewable energy, especially wind energy and solarenergy are potentially promising alternatives toconventional fossil fuel-based electric power. They aremore expensive at present, but given likely trends in fossilfuel prices globally, and technological developments inthese sectors there is a need to expand the contributionfrom these sectors.Telecommunications

Telecommunications has seen impressive expansionand large investments in the past several years with a tele-density increasing from 26.2 per cent in 2008 to 78.7 percent in 2012. The expansion has been led by private sectorservice providers whose market share (in terms of numberof connections) increased in this period from 73.5 per centto 86.3 per cent. Unfortunately, issues related to allegedimproprieties in the allocation of spectrum in 2008 havedominated public discussions. Several 2G licenses andassociated spectrum allotted in 2008 were cancelled bythe Supreme Court in 2011 and the court ordered thegovernment to auction the spectrum.

There is tremendous scope for further expansion intelecommunications, especially with the introduction of3G services. Telecommunications, and the associatedincrease in Internet connectivity is clearly a productivityenhancing development, and India is well placed to benefitfrom this. Already, a large number of services benefitingordinary people have come into being. For a small fee,farmers can sign up for a service which provides customerspecific information through SMS on market prices innearby markets, conditions and possible disease outbreaksin specific crops in which the farmer is currently interested.Mobile banking, through business correspondents actingas agents, is giving ordinary people in villages, far from abrick and mortar bank branch, virtually direct access tosimple banking service.

There is scope for using the Universal ServicesObligation Fund (USOF) creatively to enhance access tomobile telephone including especially as a platform fordelivery of a range of services to the underserved in ruralareas.

Road TransportIn the area of transport, there has been some progress

in the roads sector, both in the development of nationalhighways and in rural roads, but much more needs to bedone. The National Highway Development Programmeneeds to be stepped up with an aggressive pursuit of PPPto construct toll roads on a Build-Operate-Transfer (BOT)basis. The States too need to expand their road programmesto provide good quality connectivity in all areas. ManyStates have resorted successfully to PPP as a mode ofroad development.

A special effort is needed to speed up roadconnectivity in Jammu & Kashmir, the North East andother Special Category States. A good start has been madein the SARDP-NE in the Eleventh Plan and this needs tobe pursued with greater vigour in the Twelfth Plan.Enhanced connectivity of the North East should be a highpriority. This is also true for districts affected by Left-Wing Extremism.Railways

Development of capability in the Railways is anotherurgent priority for the Twelfth Plan. Capacity in theRailways has lagged far behind what is needed andfeasible, especially given the need to shift from roadtransport to rail in the interest of improving energyefficiency, and reducing the carbon footprint of ourdevelopment. Expansion of the system must beaccompanied by technological modernisation, greaterattention to safety and steps to ensure financial viability.Several important new initiatives are underway which willmaterialise in the course of the Twelfth Plan. These includeflagship projects such as the Western and Eastern FreightCorridor, the Mumbai Elevated Rail Corridor and the HighSpeed Corridor.Airports

Airport development is a basic infrastructurerequirement for connectivity, especially since the demandfor air travel is projected to grow rapidly. This area hasseen a sea change in the Eleventh Plan with thedevelopment of four new airports through privateparticipation in the PPP mode (Bengaluru, Hyderabad,Delhi and Mumbai), the upgradation of two metro airportsby Airport Authority of India (AAI) (Chennai and Kolkata)and the development of 35 non-metro airports by AAI.





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There is need for further expansion in the Twelfth Planwith the creative use of PPP wherever possible. Severalprojects are likely to be taken up in the Twelfth Plan. Theseinclude the Navi Mumbai Airport, the Goa Airport and theKannur Airport. A policy to make some of our airports intointernational hubs is also being considered.Ports

Ports are another critical capability for internationaltrade connectivity. Progress in this area in the EleventhPlan was disappointing as far as major ports wereconcerned because several institutional issues had to beresolved for the proposed PPP expansion plans tomaterialise. These have now been resolved and it isexpected that the Twelfth Plan will see a much greaterexpansion. In contrast minor ports (which come underState Governments) have done very well in the EleventhPlan. An aggressive expansion of port capacity in the majorports based on PPP is essential in the Twelfth Plan. Inaddition, two entirely new PPP ports are proposed by theCentral Government; one in West Bengal and the other inAndhra Pradesh.Financing Infrastructure

Traditionally, infrastructure development used tooccur through the public sector. However, given thescarcity of public resources, and the need to shift scarcepublic resources into health and education, efforts havebeen made to induct private participation in thedevelopment of infrastructure. These efforts have met witha fair degree of success. As of 31 March 2012, 390 PPPprojects have been approved involving an investment of`305010 crore. According to a report published by theWorld Bank, India has been the top recipient of PPPinvestment since 2006 and has accounted for almost halfof the investment in new PPP projects implemented in thefirst half of 2011 in developing countries. An AsianDevelopment Bank report states that India stands in thesame league as developed economies like South Koreaand Japan on implementation of PPP projects and theModel Concession Agreements prepared in India andused in our PPP projects have also been commended.

The total investment in infrastructure sectors in theTwelfth Plan is estimated to be ̀ 56.3 lakh crore, which isroughly one trillion dollars at prevailing exchange rates.The share of private investment in the total investment ininfrastructure rose from 22 per cent in the Tenth Plan to 38

per cent in the Eleventh Plan. It will have to increase toabout 48 per cent during the Twelfth Plan if theinfrastructure investment target is to be met. Theseprojections have also been validated by the high levelcommittee on infrastructure set up under the chairmanshipof Shri Deepak Parekh. The committee has howeverqualified its projections as dependent on several policyinitiatives that the government would need to take forensuring this level of investment.

The Twelfth Plan lays special emphasis on thedevelopment of social sectors in view of their impact onhuman development and quality of life. Unlike the casewith other infrastructure, experiments with PPP in the socialsector have been more limited. Many States haveexperimented with PPPs in health and education. TheCentral Government has approved setting up of 2500Model Schools in PPP mode and a proposal for setting up3000 ITIs through PPP is under consideration. Theseinitiatives will be strengthened during the Twelfth Plan.

Resort to PPPs in the social sector often raisesconcerns about the commercialisation of services that arenormally expected to be provided free or highly subsidised.These are important concerns but they can be addressedby well-drafted concession agreements and strictmonitoring to ensure that PPP concessionaires abide bytheir commitments. This must be reinforced with penaltiesfor non compliance. While extending the concept of PPPto social and urban sector projects, the need for ‘people’s’participation in the design and monitoring of PPP schemesbecomes crucial. Local citizens are direct stakeholders insuch projects and therefore their support becomes crucial.Therefore, some cities and States have begun to shapePPPs in the social and urban sectors as People–Public–Private Partnerships (PPPPs). This is a valuable innovationwhich should be applauded.The Reach of Banking and Insurance

Like infrastructure, development of an efficientfinancial services system is a key enabler of capabilitieswhich affects how well individuals can manage life cycleneeds and also affect the functioning of enterprises andtheir prospects of growth. More broadly, it affects theextent of entrepreneurship and of competition. India isunderserved by financial services on every parameter.More than 40 per cent of households avail no bankingservice at all. The ratio of total bank credit outstanding to





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GDP is only about 57 per cent as against over 140 per centin East Asia and Pacific. Insurance premia account for lessthan 1 per cent of GDP, which is only about a third of theinternational average. The organised financial sector doesnot reach out to large segments of the population whichare serviced if at all by all manner of informal financialentities at terms and costs that retard their growthprospects.

Lack of insurance products is an example of under-supply of financial services. It can be nobody’s case thatthe Indian economy has lower inherent risks than others,or that life cover is any less important. It is rather thatcosts of providing cover and assessing claims are currentlyso high relative to the cover itself that either premium-to-cover ratios become exorbitant or appropriate insuranceproducts are simply not created. High transactions costsrelative to size of accounts are also the main reason forlow banking coverage and this is compounded by highrisk perception of banks, in part because of lack ofinsurance. Agriculture and other forms of MSMEs areparticularly ill-served and the situation has in factdeteriorated in some ways over the last two decadesbecause of problems afflicting the cooperative bankingsector.

In recent years, financial inclusion has come backinto focus, partly because technology (such as the IT-infrastructure, set-up of a core banking network, mobilephones, satellite imagery and automatic weather stations)now permits solutions such as banking correspondentsand weather insurance which cut down on overhead costs;and partly because the power of cooperation, whetherthrough SHG–bank linkage, Joint Liability Groups orsimply the old fashioned Primary Agricultural Co-operativeSociety is again being revitalised. Cooperatives still havethe widest credit reach and their local knowledge and risksharing potential is an asset for the financial sector as awhole which has not been fully exploited. They should begiven increased prominence during Twelfth Plan becausepotential benefits and cost of inaction are both very high.An area that government should take a lead is in creationof suitable databases of registry information both for easiercollateral and finer actuarial calculations. The UID projectcan help with this, but there are also more basicrequirements such as proper land records and propertytitling which should not meet the same fate as the so fardisappointing record on registering births and deaths.

In the industrial sector smaller firms are creditconstrained. The size distribution of firms in India showsthat there are a number of large firms, as in other countries,but there are not enough firms in the middle range withemployees ranging from 100 to 500. Instead anoverwhelming number of firms are concentrated at thesmall end with less than 50 employees. This suggests thatour small firms do not operate in an environment in whichthey can graduate to the middle category. One of theconstraints is finance. Banks and other financialinstitutions have to be more creative to respond to theneeds of potentially dynamic entrepreneurs capable ofrapid growth. Indian banks typically do not exercisejudgement in expanding credit limits in a manner whichfavours companies that are more likely to grow.

The capital market has been an important source offunding for larger companies and the opening of theeconomy to portfolio flows from Foreign InstitutionalInvestors (FIIs) in recent years has produced a buoyantcapital market where companies have raised significantfunds through new issues. However, this mechanism hasbeen used mainly by the larger companies to raise funds.We do not have effective institutions that can channelequity funding to smaller companies and start-ups. In aknowledge economy, we need to do much more toencourage the growth of venture capital funds and angelinvestors. The Planning Commission had appointed aCommittee on Angel Investment and Early Stage VentureCapital which has since submitted its report.

Science and Technology

S&T is a vital aspect of national capability. ScienceDepartments/Agencies have played a significant role insolving the socio-economic issues. The Department ofSpace through satellite-based system has providednationwide land use/land cover mapping for naturalresources management, thematic mapping for nationalurban information system, the process of measuring forestand wasteland, locating potential drinking water zonesand potential fishing zone and crop production forecasting.The Twelfth Five Year Plan must build on the scientificbase created by earlier Plans and give a renewed thrust toemphasise creative and relevant research and innovation.The central focus must be to ensure that S&T becomes amajor driver in the process of the national development.





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The Twelfth Plan programmes of the Indian Scienceshould aim at three outcomes:

1. Realisation of the Indian vision to emerge as globalleader in advanced science;

2. Encourage and facilitate Indian Science to addressthe major developmental needs of the country likefood security, energy and environmental needs,addressing the water challenges and providingtechnological solutions to affordable health carerequirements and

3. Gain global competitiveness through awelldesigned innovation ecosystem, encouragingglobal research centres of multinationalcorporations (MNCs) to be set up in India.

S&T endeavours over the last decade have placedincreasing emphasis on contributing to the societaldevelopment and improving the quality of life of citizens.Such new initiatives in turn have also created in somecases societal reactions stemming from issues like healthand environmental safety. In the recent past, introductionof genetically modified (GM) foods and Nuclear Energyare two such examples. The Twelfth Plan envisages a moreeffective institutional framework in linking S&T withsociety through a variety of outreach strategies. This isproposed to be carried out both through the scientificestablishments as well as through educational programmesincluding initiatives from nongovernmental organisations(NGOs).

MANAGING NATURAL RESOURCESAND THE ENVIRONMENT

Achievement of rapid and sustainable growth iscritically dependent on our ability to manage our naturalresources effectively. India is not liberally endowed withnatural resources. In fact, we are among the lowest in theworld on almost all measures of resource availability on aper capita basis. In recent years, the deficiencies in theway in which we manage natural resources have comeunder increasingly critical scrutiny. Agitations around landacquisition, deforestation, water use, air and waterpollution, and also our response to natural disasters, havebecome more common. These are no longer peripheralissues: They are issues which demand mainstreamattention and pose challenges which this Plan mustaddress squarely.

Soil Health and ProductivitySoil is one of the basic natural resources that support

life on earth and this resource is under threat in India fromsoil erosion due to natural factors compounded bydeforestation which increases run off and also fromexcessive use of chemical fertilisers. The soil ecosystemis a living self-balancing system and excessive use ofsynthetic chemical fertilisers disturbs this balance oftencausing long-term damage to the soil.

Chemical fertilisers, especially urea, are highlysubsidised and the fertiliser subsidy has grownexponentially during the last three decades. These heavysubsidies on some fertilisers prompt overuse of thesubsidised chemical fertilisers which has resulted in severedepletion of micronutrients and degradation of soil in manyparts of the country. Chemical fertilisers should be usedwith great care and in conjunction with other means ofusing organic sources to replenish the soil. The wayforward is to rejuvenate the soil and restore soil healththrough addition of organic matter in large quantities. Useof organic manures will gradually bring down thedependence on chemical fertilisers. However, the use oforganic manures is discouraged because they receive nosubsidy while urea is heavily subsidised. This pricedistortion is an important factor discouraging the shift.

More generally, support for ecological/organicfertilisation is scattered under various schemes and henceit is not getting its due. The best practices of soil fertilitymanagement need to be adopted, which include generationof biomass for bulk addition of organic matter in the soil tomaintain proper soil health, in situ degeneration of biomassthrough sole cropping/inter-cropping/bund cropping ofgreen manure crops, recycling of farm and household wastethrough use of intensive nutrient recycling methods suchas composting, production of biofertilisers at regional andlocal levels, adoption of bio-dynamic farming methodsand crop rotations to enrich the soil.Rational Use of Land

Land is a fixed resource and its availability in India ona per capita basis is relatively low compared with mostcountries. Furthermore, the country’s population is likelyto continue to grow till at least 2040 whereas the landmass may actually shrink with increased coastal erosionand flooding due to climate change. In thesecircumstances, the rational and planned use of land must





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be an issue that needs the highest priority, and should bemade a central focus of our resource planning. Land is astate subject, but the issues are so critical that there isneed for better coordination at the national level.

There are three main areas of conflict that need to beaddressed. The first relates to the allocation of availableland between agriculture, industry and urban use. Thesecond potential conflict arises from the fact that allocationacross different uses cannot occur simply through marketprocesses and some land acquisition is thereforenecessary, but the terms on which this had been done inthe past are no longer acceptable. The third potentialconflict arises because most of our mineral resources arein areas, which are forested and the effective exploitationof these resources calls for acquisition, which may disruptsome tribal communities.

As far as the allocation to alternative sectors isconcerned, it is important to recognise that diversion ofland from agricultural to non-agricultural uses is inevitablein any development process since industry must expandand cities must also expand and in both cases land neededfor this expansion can only come from agriculture. Concernis often raised in this context about the impact on foodsecurity. This problem is greatly exaggerated because theproductivity of land in agriculture at present is very lowand the shift of some land from agriculture tononagricultural use can easily be offset by productivityincreases, which are feasible and have been seen in manyother developing countries. We need a clearer articulationof a strategy for dealing with such shifts while ensuringthe continuing increase in the supply of agriculturalproducts of the appropriate mix of grains, horticultureproducts and cash crops.

If the shift of land from agriculture to nonagriculturaluse could take place without any compulsory acquisitionit would not pose a major problem since all such shiftswould be voluntary. Unfortunately, this is not alwayspossible. Land required for constructing a road or a railwayline or even a dam has to be location specific and thiseffectively gives the landowner a veto right over theproject. Given the large number of landowners involved,problems can arise even if the vast majority of thelandowners are adequately compensated which is whycompulsory acquisition provisions are unavoidable andexist in every country. Compulsory acquisition isunavoidable where there is a genuine public purpose such

as acquiring land for infrastructure development. Theremay be a case for using acquisition for certain lands ofprivately owned facilities which serve a public purposebut this needs to be carefully defined. To remedy thedeficiencies in the existing legislation for land acquisitionwhich dates back to colonial times, the government hasintroduced the Land Acquisition Relief and RehabilitationBill in Parliament which is expected to create a much morebalanced framework protecting the rights of those whoseland is being acquired, as well as those whose livelihoodwill be disrupted.

The third potential conflict between accessing ourmineral resources and minimising disturbance to forestsalso poses difficult problems. The services that arerendered by forests are unique and cannot be easilyreplaced. They include sustaining the life styles of theadivasis, but go well beyond that to include criticalecological services such as acting as a carbon sink and asa natural harvester of water through enhancedgroundwater recharging. Mining encroaches on forest landand involves displacement of tribals, but the conflict canbe reconciled if mining is combined with scientificreplanting or regeneration, plus compensatory forestationon a larger scale, which may enable effective exploitationof our mineral resources with an actual increase in totalforest cover. There may be some areas of forests that weview as sacrosanct, such as special reserves andbiodiversity hotspots, where no intrusion is allowed, butother than these it should be possible to reconcile the twoconflicting objectives, extracting valuable minerals andprotecting the forests, through scientific methods ofexploitation combined with steps which can protect andeven enhance forest cover.

Resolution of this conflict is particularly necessary inview of the energy challenge facing the country. Most ofour coal resources and hydro potential are in ecologicallysensitive areas and a successful resolution of theseproblems is critical if we are to be able to exploit ourpotential energy resources. The alternative is to eitheraccept a much lower rate of growth, or rely even more thanwe already do on imported energy, which has implicationsfor both the balance of payments and energy security.

Alternative energy sources, including a variety ofrenewable energy sources, provide another route forenergy security especially in the longer run. However, itsquantitative potential over the next 10 years is small at





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present though it is expected to expand to 50000 MW bythe end of the Twelfth Plan. The costs of these sourcesare also are much higher though they are falling. This is apotentially profitable area for further research, which is ofspecial interest for us.

Expansion of nuclear energy as an important potentialalternative to coal-based electricity poses a new set ofconcerns following the Fukushima accident in Japan whichhas heightened fears of possible accidents with leakagesin radiation. This has promoted agitations against nuclearpower in some parts of the country but it is an option thatcannot be closed if we are to meet the essential energyneeds of the country. However, much greater attentionwill have to be paid towards improving the confidence ofthe people and especially in providing world-class systemsto counter the risks associated with this form of energy.Water as a Scarce Natural Resource

Water is another key natural resource in fixed supplyand its availability is now at a level which is just aboutequal to demand on average. Availability in some areas isgreater than demand but there are other areas which areseriously water-stressed. While intensive use ofgroundwater made a great contribution to the GreenRevolution, today in large parts of west, central and southIndia there is a man-made crisis of falling water tables.Economic growth at between 8 per cent and 9 per cent ayear will only be possible if the water requirements of theexpanding population, with a growing degree ofurbanisation and the water requirement of expanding GDPcan be met. Detailed studies suggest that on a businessas usual basis, the total demand for water by 2031 is likelyto be 50 per cent higher than today. This gap has to bebridged if the projected GDP growth is not to be choked. Itis estimated that about 20 per cent of the gap at most canbe bridged by taking steps to augment available supplythrough additional storage and groundwater retention.The rest of the deficit has to be bridged through greaterwater use efficiency.

Fortunately, there is large scope for improving wateruse efficiency in our economy. Agriculture consumesaround 80 per cent of our available water resources atpresent and its water use efficiency is among the lowest inthe world. Absence of rational pricing for canal water,combined with free or very cheap power for agriculture,has encouraged agricultural practices which are extremely

wasteful. Cheap power has encouraged excess drawal ofgroundwater leading to falling water tables in large partsof the country. However, the man-made crisis of fallingwater tables is forcing some change as farmers arebeginning to recognise the need to adopt technologiesthat economise on water.

The Twelfth Plan must break new ground in bringingsustainable management of our aquifers to the forefrontof policymaking. Although efforts are being made forrecharging of groundwater sources, these are yet to showsustained results across most parts of the country. Anaquifer mapping programme that would enable moreinformed participatory management and better alignmentof cropping patterns to water availability across thecountry will need to be the starting point of our efforts.This must be combined with a massive groundwaterrecharge programme based on integrating a reformulatedMGNREGS with programmes on watershed developmentand restoration of water bodies.

It is also necessary to consider whether a newlegislative framework is necessary to help manage ourwater resources better. Water, except for interstate rivers,is a state subject and as such, it is largely up to the Statesto consider what initiatives are feasible to avoid a steadyintensification of the problem. A framework law, that is, anumbrella statement of general principles governing theexercise of legislative and/or executive (or devolved)powers by the Centre, the States and the local governanceinstitutions needs to be developed. Such a framework lawis not intended to either centralise water management orchange Centre–State relations or alter the Constitutionalposition on water in any way. It is intended to be justiciable,in the sense that the laws are passed, and the executiveactions are taken by the Central and State Governments,and the devolved functions exercised by PRIs conform tothe general principles and priorities laid down in theframework law, and that deviations can be challenged in acourt of law. These are, indeed, sensitive issues, and actionon them must be receded by the largest possible consensusacross States. However, the urgency of moving forwardon these critical matters can no longer be disputed.

New model legislation is needed for protection,conservation, management and regulation of groundwater.The present model bill amounts to little more thangrandfathering existing uses. What is remarkable is thatsome of the most important legal principles governing





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groundwater even today were laid down in British commonlaw as early as the middle of the nineteenth century andhave not been updated since then. The new model billwould need to recognise that over the last two decades,not only has the groundwater situation in India acquiredcrisis proportions, new developments in jurisprudencehave created the basis as well as the necessity to redefinethe legal framework for use of groundwater. These includethe Public Trust Doctrine enunciated by the SupremeCourt, principles of environmental law and the 73rd and74th amendments to the Constitution.

Parallel efforts are needed to contain pollution ofsurface water and contamination of groundwater, which isreaching serious proportions. Industry must be pushedto adopt the best international practices to improve wateruse efficiency. Consumption of fresh water can besubstantively reduced through use of water-efficienttechnologies or changed processes in variousmanufacturing activities and also by reusing and recyclingthe waste water from water using industrial processes andmaking the reclaimed water available for use in thesecondary activities within or outside the industry.Enforcing pollution control measures in a context wherethe vast majority of producers are small and widelydispersed is not easy. However, this is a challenge in policydesign, which cannot be ignored. States have to ensurethat it is fully integrated into local planning.

Increased urbanisation will also pose additionalproblems for water management since urban populationsneed to be serviced with piped water systems available ona 24 × 7 basis and these systems should be accompaniedby sewerage systems, which ensure that only cleanedwater is returned to rivers or other disposal sites. Atpresent, no Indian city is in a position to boast of acomplete sewerage system. We have installed capacity totreat only about 30 per cent of the human waste wegenerate. Just two cities, Delhi and Mumbai, whichgenerate around 17 per cent of the country’s urban sewage,have nearly 40 per cent of the country’s installed capacity.The Twelfth Plan must ensure that no water scheme inurban India will be sanctioned without an integratedsewage treatment component, which ensures that citywaste does not pollute our fresh water sources.

ENGAGEMENT WITH THE WORLDEconomic reforms over the past two decades have

made India a much more open economy. The share ofexports of goods and services in total GDP has increasedfrom 6.9 per cent in 1991 to 24.6 per cent in 2012. Imports ofgoods and services as a percentage of GDP have alsoincreased from 8.3 per cent to 29.8 per cent in the sameperiod. These changes are the result of conscious effortsto open up the economy. Import duties have been reducedover time and a number of preferential trading arrangementshave been introduced as part of Comprehensive EconomicPartnership Arrangements with individual countries andgroups of countries, especially Association of SoutheastAsian Nations (ASEAN), Japan, Korea, Singapore and SriLanka. More such agreements are being negotiated withthe European Union and with Australia. Investment intoIndia, and also from India to other countries has increased.For all these reasons, India’s growth prospects in the yearsahead cannot be viewed in isolation from what ishappening in the world economy.Global Economic Prospects

The global economy is currently going through a verydifficult phase. The financial crisis of 2008–09 interruptedwhat had been a long period of global growth. Initially, theglobal economy appeared to respond well to the stimuluspolicies introduced by many countries in 2009, but thehorizon was again clouded by the Eurozone crisis whichis currently seen as a major fault line in the world economy.Many European countries are facing severe social andeconomic pain in their effort to introduce fiscal disciplineaimed at regaining market confidence. The InternationalMonetary Fund (IMF) projects zero growth in theEurozone in 2012 with only a gradual improvementthereafter, on the assumption that a disruptive outcome isavoided.

The major industrialised and developing countries,meeting at Summit level in the G20, have repeatedlyemphasised the importance of avoiding disruptiveoutcomes and the need for all countries to act in concertand cooperation to bring the global economy back on apath of sustainable growth. It is to be hoped that globaleconomic cooperation will prove strong enough to avoida hard landing. Although uncertainty remains high, anddownside risks are significant, the most reasonableassumption on which to plan is that the global economywill recover gradually. However, the structural change thathas been underway for some time, with industrialised





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countries growing more slowly while the emerging marketcountries, especially in Asia, grow more rapidly, willcontinue in the foreseeable future. We must, therefore,plan for a world in which the share of global GDP willtherefore shift steadily away from the current industrialisedcountries and towards the faster growing emergingeconomies, especially in Asia.Implications for the Balance on Current Account

Slower growth in industrialised countries will meanthat our exports to these countries will be adverselyaffected. Fortunately, India’s export basket is relativelydiversified and since emerging market countries areexpected to grow more rapidly in the years ahead, we maybe able to benefit from this. There is also scope forincreasing our share in industrialised country markets bycompeting more aggressively with countries like China,which will experience loss of competitiveness because ofrising labour costs at home. This is especially true ofservices, where India’s increasing sophistication will allowit to win more business from cost-conscious developedcountries However, there is no room for complacency,because other developing countr ies, such as thePhilippines, are improving their capabilities and there aremoves within developed countries to ‘on shore’ serviceshitherto outsourced. It is difficult to quantify the net effectof all these factors, but it is reasonable to plan formerchandise exports growing at an average annual rate of17 per cent in the Twelfth Plan than compared with 20.7per cent in the Eleventh Plan. Growth of earnings fromtourism and also remittances are likely to be subdued.

On the import side, a target growth of GDP over 8 percent per annum will require a rapid growth of imports,especially since most of our incremental energy needs willhave to be imported. The impact on the balance of paymentswill of course depend on what happens to oil and gasprices, but these are not expected to moderate significantlyin the short to medium term, and indeed may even go upas the world economy recovers gradually from the globalcrisis, or due to any sudden shocks in the Middle East.High import payments combined with modest exportgrowth means that the current account deficit will be animportant source of stress in the coming years.

Another contingency that we have to keep in mind isthe likely trend in global food prices. For a variety ofreasons, most notably rising demand from emerging

markets as their incomes expand, combined with laggingagricultural productivity in many emerging marketcountries and possible diversion of land to production ofrenewable energy in industrialised countries, global foodprices are likely to be high in the years ahead. Fortunately,our domestic food grain production has been expandingbut food security considerations may require import incertain conditions. Domestic import and export policiesand our buffer stock policy have to be calibrated to meetdomestic demand while responding to developments inglobal markets.

India’s current account deficit was a surplus 2.3 percent of GDP in 2003–04. Since then it has gone into deficit,reaching 2.7 per cent of GDP in 2010–11 and 4.2 per cent in2011–12. A large part of the increase in 2011–12 was due toimports of gold, which are not expected to be repeated.Even so, the current account deficit in the first year of theTwelfth Plan will be around 3.6 per cent, which exceedswhat has traditionally been regarded as a sustainable level.So the Twelfth Plan period averages around 2.9 per cent.On current prospects, it is likely to be somewhat higher.The ability to finance this deficit through stable capitalflows is therefore critical.Capital Flows

India has followed a calibrated policy of opening upthe capital account, differentiating according to the natureof capital flows. Foreign Direct Investment (FDI) isregarded as the most stable capital flow which alsoprovides technology and marketing links, and has thereforebeen most freely allowed. Portfolio flows are not as stableas FDI, but they are also not as volatile as short-term debtand have been allowed freely from qualified FIIs. Short-term debt from abroad is the least stable form of capitalflow and is, therefore, highly controlled except for tradecredit. Longer-term external borrowing is allowed moreliberally, but subject to caps. This policy produced goodresults in the Eleventh Plan, yielding an annual averagenet capital inflow of 4.1 per cent of GDP during the EleventhPlan. Since the average current account deficit was 2.7 percent of GDP, the net capital inflows exceeded what wasrequired to finance the current account deficit andcontributed to a build up of forex reserves.

Looking ahead, if we assume that worst case outcomeswill be avoided, then even though Europe may grow veryslowly in the coming years, world financial markets can be





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expected to stabilise. On this assumption, it is reasonableto assume that India can finance a current account deficitof around 2.5 per cent of GDP relying mainly on FDI andFII flows, with some recourse to long-term borrowing.Since the projected current account deficit for 8.2 per centgrowth is somewhat higher, financing the deficit will be astress point in the years ahead. Capital flows from Europemay well be subdued, but there is scope for diversifyingto tap other markets, notably Japan and also the sovereignwealth funds in the Middle East. The key element that willmake this possible is that India must be seen to be set ona high growth path, with macroeconomic balances comingunder control over the medium term, and policies towardsforeign investment being viewed as supportive.

KEY POLICY INITIATIVES NEEDEDIn this section, we discuss some of the major policy

initiatives needed to achieve rapid, more inclusive andsustainable growth. Policies and programmes to improvehuman capabilities, institutional capabilities and to developinfrastructure, have been discussed earlier. They are allnecessary for achieving the Twelfth Plan objectives andshould have high priority.Immediate Priorities: Reviving InvestorSentiments

An immediate policy objective in the very first year ofthe Plan must be to revive investor spirits, which havesuffered for a variety of reasons. Some of the reasons fora downturn in investor sentiment can be easily corrected.For example, the perception among investors, that someof the tax changes introduced in the Budget are anti-investor need to be allayed as quickly as possible. TheFinance Ministry has appointed two expert committees tolook into these issues and it is hoped that therecommendations of these committees will provide areasonable basis for reviving investor confidence on theseissues. A firm decision on the recommendations of theCommittee should be announced as early as possible.

The next important short-term action must be toremove the impediments to implementation of projects ininfrastructure, especially in the area of energy. Thefollowing steps are especially urgent.Fuel Supply to Power Stations

The fuel supply problem affecting electric powergeneration stations that have been commissioned but do

not have adequate assurance of supply of coal or gas,and the problems of power stations currently underimplementation which have yet to tie up fuel supplyagreements, need to be addressed urgently. Coal India isthe dominant domestic producer of coal because ofnationalisation. It must take on the responsibility of makingcoal available to all power plants which are governed byregulated tariffs or have entered into PPAs based oncompetitive bidding for tariffs. Coal India must take stepsto enhance its domestic production capability as much aspossible, including by exploring possible PPParrangements with mine development operators workingon a contract basis. In the short run, however, the shortagecan only be made up by imports. Additional imports arepossible but the fact that imported coal is available only atmuch higher prices discourages potential consumers. Oneway of resolving this problem is through a system ofpricing pooling. This should be explored and it should beimplemented urgently.Financial Problems of Discoms

Many discoms have accumulated high volumes ofdebt to finance their large current losses. Commercial banksare increasingly unwilling to finance the losses any further.This in turn has created unwillingness on the part of banksto finance power generation projects that are being set upbecause of doubts that they will be paid by the discoms. Adebt restructuring plan, in which State Governments takeover a large part of the burden of paying back the debt hasbeen approved by the Cabinet and must be implementedby all the affected Sates. The commercial banks will haveto bear part of the burden by restructuring the loans, andthe Reserve Bank of India (RBI) may have to allow someregulatory forbearance relieving the banks of treating therestructured loans as non-performing assets (NPA) andmaking suitable provisions for them. As envisaged in thepackage, these steps must be combined with credible stepson the part of the State Governments and the discoms toensure restoration of the operational viability of thediscoms in future. An early implementation of open accesswould help create an environment that would promoteefficiency and competitiveness.Clarity in Terms of NELP Contracts

Several problems have arisen in interpreting existingNew Exploration Licensing Policy (NELP) contractsespecially related to the process for approving expenditure





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on the development plan and the approval for gas prices.This uncertainty is not conducive to attracting privateinvestment in this very important part of the energy sector.A committee under Dr. C. Rangarajan has been set up tomake recommendations on future NELP contracts, whichwould avoid uncertainty and establish clear rulesregarding the pricing of oil and gas from future NELP fields.The Size of the Public Sector Plan

Although planning should cover both the activitiesof the government and those of the private sector, a greatdeal of the public debate on planning in India takes placearound the size of the public sector plan. The Twelfth Planlays out an ambitious set of government programmes,which will help to achieve the objective of rapid andinclusive growth. These programmes add up to a totalplan size for the Centre of ̀ 4769841 crores including bothbudget resources and the resources of the public sectorenterprises which comes to about 6.98 per cent of GDP.This compares with `2025130 crores in the Eleventh Planwhich was 5.96 per cent of GDP. The total plan size of theStates is ̀ 3716385 crore or 5.44 per cent of GDP comparedwith ̀ 1725848 crore in the Eleventh Plan, which was 5 percent of GDP.

Although the proposed Plan size is large, the demandfrom various sectors is also very high. However, resourceconstraints are a reality and even the plan size projected isconditional on high growth rate of revenue and asignificant degree of control over subsidies. If for anyreason these assumptions prove too optimistic, the sizeof the Plan may have to be trimmed at the time of the MidTerm Review.

In view of the scarcity of resources, it is essential totake bold steps to improve the efficiency of publicexpenditure through plan programmes. To this end thePlanning Commission had established a Committee underMember, B. K. Chaturvedi to make recommendations forrationalisation and to increase efficiency of CentrallySponsored Schemes (CSSs) and for improving theirefficiency. There has been a proliferation of CSS over theyears, many of which are quite small. The ChaturvediCommittee had recommended that the number of CSSsshould be drastically reduced and the guidelines underwhich the schemes are implemented should be made muchmore flexible. The recommendations have been discussedwith the Ministries and the States and have generally been

welcomed. It is proposed to implement theserecommendations with effect from 2013–14.Longer-Term Increase in Investment and SavingRates

Bringing the economy back to 9 per cent growth bythe end of the Twelfth Plan requires fixed investment rateto rise to 35 per cent of GDP by the end of the Plan period.This will require action to revive private investment,including private corporate investment, and also action tostimulate public investment, especially in key areas ofinfrastructure especially, energy, transport, water supplyand water resource management.

The strategy of expanding investment will help tocounter the weakening of external demand on account ofthe global downturn. It is important that the expansion indomestic demand should not be in the form ofconsumption, but in the form of higher levels ofinvestment. This not only provides demand in the shortrun to support higher levels production but alsostrengthens the longer-term growth potential of theeconomy. We should also ensure that a large part of theincrease in investment goes into infrastruc-ture as thiswould have a positive effect on reviving private investmentin other sectors and would ease supply constraints, whichlimit future growth. The Eleventh Plan succeeded in raisinginvestment in infrastructure from 6.2 per cent in 2007–08to about 7 per cent in 2011–12. The Twelfth Plan shouldaim to raise it further to 9 per cent by 2016–17.

Higher levels of investment have to be supported bya sufficient expansion in domestic savings to keep theinvestment savings gap, which is also the current accountdeficit, at a level which can be financed through externalcapital. India’s domestic savings capacity has been animportant strength of the economy, although recent yearssaw a distinct weakening in this area because ofdeterioration in both government and corporate savings.Household savings, however, have remained strong andare likely to increase in the future, both because of our agecomposition and as result of increased financial inclusion.Nonetheless, reversal of the combined deterioration ingovernment and corporate savings has to be a key elementin our strategy.The Need for Fiscal Correction





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The decline in public savings in the past few years islargely a reflection of the stimulus policies that werefollowed, which are reflected in the expansion in the fiscaldeficit. The Central Government fiscal deficit was 5.9 percent of GDP in 2011–12. Allowing for a fiscal deficit of justunder 3 per cent for the States, the combined deficit of theCentre and the State Governments, which had fallen to 4.7per cent in 2007–08, expanded to just under 9 per cent in2011–12. This has to be reversed through a crediblecorrection over the medium term. The Finance Ministryhas set up an Independent Expert Committee to advise ona credible medium-term road map for fiscal correction. TheCommittee has recommended a new road map for fiscaldeficit reduction to bring the Central government deficitdown to 3 per cent by the end of the Twelfth Plan. It will benecessary to take action on two fronts:

1. The Centre must persevere with reforms of the taxstructure, notably the introduction of Good andServices Tax (GST), which will represent a majormodernisation of the indirect tax system. GST willgreatly simplify the system and improve revenuemobilisation, primarily by plugging loopholes.Since introduction of GST requires a Constitutionalamendment, it needs a broad political support whichhas taken time to build. However, if it can beintroduced soon, it will give a boost to efficiencyand to revenue mobilisation without raising rates.

2. It will require a reversal of the trend witnessed inrecent years for Central Government subsidies togrow as a percentage of GDP. It must beemphasised that the objective is not to eliminatesubsidies. Subsidies can even increase in absoluteterms as the GDP grows, but they must be reducedas a percentage of the GDP. There is a role fortargeted subsidies that advance the cause ofinclusiveness, but such subsidies can be containedwithin a predetermined level of affordability. Itshould be possible to do this without hurting thepoor. Some subsidies such as under the proposedFood Security Act will be predetermined. Otherssuch as on fertiliser can be redesigned to servetheir purpose at less cost. Subsidies, on petroleumproducts are untargeted and do not benefit thepoor and the most needy. They will have to bereduced.

The State Governments also need to take steps toreduce the growing burden of subsidies, most especiallythe large and growing losses in the power sector.Managing the Current Account Deficit

The initiatives described above to increasegovernment savings and corporate savings will createconditions conducive to keeping the current accountdeficit at 2.5 per cent of GDP. This level of deficit can befinanced through long-term capital flows as long as India’smacroeconomic parameters are seen to be improving andGDP growth recovers above 7 per cent. India is still underweight in most global portfolios given its economic sizeand growth potential and positive signals about the revivalof growth, combined with a credible commitment to improvemacroeconomic balances and a welcoming stance towardsforeign investment will ensure the financing needed tomaintain a current account deficit of 2.5 per cent.

The steps taken to liberalise FDI, especially in areaswhere there is evident investor interest such as for example,FDI in retail, would help by sending the right signals. Wemust build on the success of previous liberalisation inFDI in other sectors, such as insurance, and before thattelecom.Transparency in Allocating Scarce NaturalResources

The economic reforms successfully eliminateddiscretionary decision-making in areas such as industriallicenses and import licenses. The process of extendingtransparent policies and mechanisms to allocation of scarcenatural resources to private companies for commercialpurposes has also been initiated. This is an extremelyimportant gain. It will be further carried forward during theTwelfth Plan.Agricultural Growth

It is well recognised that faster growth of agriculturemakes the overall growth process more inclusive. A positivefeature of the experience is that agricultural growthincreased from 2.4 per cent in the Tenth Plan to 3.3 percent in the Eleventh Plan. Further acceleration to 4 percent is essential to ensure inclusiveness.

Action is needed on several fronts includingprovision of basic support services such as technologyand irrigation infrastructure, access to credit, good and





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reliable seeds and improved post-harvest technology. Thelatter is particularly important since the bulk of theacceleration in growth will come from diversificationtowards horticulture, animal husbandry and fisheries. Thegreatest potential for improving productivity is in the rain-fed areas, which account for 58 per cent of net sown areaand where most of the poor live. Land productivity is lowin these areas, but a combination of effective watermanagement combined with better seeds, promotion ofsoil health and critical on farm investments combined withpublic sector efforts to improve infrastructure can make abig difference. Rain-fed farming requires a natural resourcemanagement perspective with a farming systems approachfocusing on producing diverse products that mutuallyreinforce each other and stabilise the system. These areasare ecologically fragile and highly vulnerable to thevagaries of climate, so the resilience of the system has tobe increased. They require knowledge and institutionalinvestments to improve soil moisture management,enhance soil productivity, revitalise common poolresources, provide appropriate seed and low external inputsystems as also farm mechanisation, along with diverselivelihood options such as livestock and fisheries. Someof the government’s key inclusiveness promotingprogrammes, such as MGNREGA, can make a majorcontribution to improving land productivity, if the projectsunder it are structured to increase on farm productivity.Properly designed and converged, MGNREGA cancontribute to creating positive synergy with agriculturalgrowth.

In addition, the Twelfth Plan must address some basicimbalances. First, to increase rice productivity in EasternIndia and at same time relieve North-West India from thestress on groundwater caused by this water-intensivecrop. Second, to focus on growing imbalances in nutrientuse that can affect productivity seriously. Third, to ensurethat there is enough parity between procurementoperations for crops such as oilseeds and pulses as forrice and wheat, so that we can avoid situations like atpresent when huge stocks of the latter coexist with hugeimports of the former. Fourth, to put at the centre of ouragricultural policies.Manufacturing

The manufacturing sector provides the best

opportunity for creating quality jobs, which require skillswhich are relatively easily imparted to someone who hasfinished secondary school. However, this is also an areawhere business as usual will not produce rapid growthand a paradigm shift is needed. The reasons whymanufacturing in India has not grown sufficiently rapidlyand also not created as much employment in the formalsector as might have been expected. The following aresome of the initiatives needed to correct this performance:

• First, India ranks towards the bottom ofinternational comparisons of ease of doingbusiness. The business regulatory environmentin the country is intimidating for manufacturers,especially smallscale enterprises. It saps theirproductivity and deters further investments. ThePlan proposes some initiatives to tune up India’sbusiness regulatory environment. Much of theaction needed lies with State Governments.

• Second is the state of the physical infrastructure—power and transport, in particular—on whichmanufacturing enterprises depend much more thanIT-based service enterprises, strategies forimproving infrastructure are a core of the Plan andthey will make a difference to performance ofmanufacturing as a whole.

• Third, India needs to increase the technologicaldepth of its manufacturing sector to improve itscompetitiveness and also the country’s tradebalance. India is increasingly importing high-techand capital goods and exporting raw materials inreturn. Strategies are required to induce more depthand value-addition in India’s manufacturing sectorthat are not ‘protectionist’ and that leverage FDIand are compatible with an open global traderegime.

• Fourth is a rethinking of the role of humanresources in manufacturing. Successfulmanufacturing requires learning and absorptionof technologies and the ability to improve themand this takes place principally through the humanside of the enterprise. Sustainable competitivenesswill also require a new way of dealing with labourRefurbishing of India’s outdated labour laws isnecessary, but improvement of industrial relationsand the collaboration that is necessary betweenemployees and management will not be obtained





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merely by changing the laws. It will require a newsocial contract founded on a developmentalorientation and on partnerships in India’sManufacturing and Industrial sectors and in theenterprises within them.

• Fifth, the growth of the MSME sector must be acentral focus of India’s manufacturing strategy.This sector is the foundation for a strongmanufacturing sector providing more employmentwith less capital. It has a complementaryrelationship with large industries because itsupplies components and inputs to them. It is theentry point for workers and entrepreneurs whomove through it to larger-scale enterprises.Whereas much government attention is given toconsult with and address the issues of largerenterprises, the development of the MSME sectormust become more central to the deliberationsabout the challenges of Indian industry and theIndian economy. The sector must be viewed notas a static and weak sector, requiring constantsupport and protection, but as an integral part ofthe industrial system with upward mobility forindividual units within it.

• Lastly, many of the changes in policy andimplementation that are required to improve theenvironment for manufacturing—in the businessregulatory environment, in implementinginfrastructure projects, in industrial relations, andthe requirements of SMEs—are within the domainsof the States. This includes the quality of powersupply, much of road connectivity, implementationof sales tax administration, implementation of lawsrelating to safety, pollution control and labour,industrial parks and so on. The Centre also has acritical role to play in areas such as railtransportation, income tax, Cenvat, exportregulation and the functioning of the financialsystem.

These issues are also relevant for India’s entirebusiness sector, which apart from manufacturing, coversservices and off-farm rural enterprises. All of them willbenefit from better business regulation and betterinfrastructure.

Energy Policies for Long-Term GrowthA rate of growth of about 8.2 per cent in GDP requires

a growth rate of about 6 per cent in total energy use fromall sources. Unfortunately, our capacity to expand domesticenergy supplies to meet this demand is severely limited.We are not well-endowed with energy resources exceptfor coal and the existence of policy distortions makemanagement of demand and supply more difficult. Someof these problems have already been discussed earlier inthis Chapter in connection with the immediate need torevive investor sentiment. There are also longer-termconstraints that need to be addressed.Coal Production

Coal is the most abundant primary energy sourceavailable in the country, but most of the country’s coalresources are in forest areas, traditionally inhabited byour tribal population. Coal production for supply to thirdparties is nationalised but projects in some sectors areallowed to have captive coal mines. Coal India was notable to meet its coal production targets in the EleventhPlan and, as pointed out earlier, domestic coal supplies arenot assured for coal-based power projects coming onstream in the Twelfth Plan. It is absolutely essential toensure that domestic production of coal increases from540 million tonnes in 2011–12 to the target of 795 milliontonnes at the end of the Plan. This increase of 255 milliontonnes assumes an increase of 64 million tonnes of captivecapacity with the rest being met by Coal India Limited.However, even with this increase, we will need to import185 million tonnes of coal in 2016–17. Environmental andforest clearances of coal projects have presented problems.A special mechanism for inter-Ministerial coordinationneeds to be set up to accelerate processing of theseprojects in a time bound manner. Unless this is done, India’senergy needs will be in jeopardy and investor sentimentwill weaken irreversibly, at least for the duration of theTwelfth Plan. Taking a longerterm view, the policy ofnationalisation of coal itself needs to be reviewed as waspointed out in the Eleventh Plan. If private sector producersare allowed in petroleum, which is a more valuable resource,there is no reason why they should not be allowed in coal.They are allowed to a small extent in the State of Meghalaya,which has private ownership of coal, because the triballand there is not government land.





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Petroleum Price DistortionsThe petroleum sector suffers from a serious distortion

in product prices which lead to huge under-recoveriesand discourage private investment. Domestic prices fordiesel charged by Oil Marketing Companies (OMCs) was35.3 per cent lower than trade parity prices before therecent price adjustment. Prices for kerosene and LPG are72.6 per cent and 53.6 per cent lower than they should be.

Continuation of these systems indefinitely, withoutprovision of a budgetary subsidy, would seriously damagethe petroleum industry, limiting its ability to invest in thediscovery and development of new oil sources anddiscouraging all new private investment. If on the otherhand, the gap is covered by a budgetary subsidy, it willimpose an impossible burden on the budget, necessitatingeither a sharp cut in other government expenditures or ahighly destabilising increase in the fiscal deficit. It is inthis context that the diesel prices had to be raised to reducethe gap or a cap was placed on the number of subsidisedcylinders. The Twelfth Plan must ensure a move to morerational petroleum product pricing, It may not be possibleto remove all distortions immediately, but a phased priceadjustment is needed that would reduce subsidy tomanageable levels. As a general rule small increases inprices effected over time can help reduce the gap bymanageable levels.Natural Gas Pricing

Natural gas also faces problems of price misalignment.At present, the price of gas paid to domestic producers is$4.25 per MMBtu, whereas the spot imported liquefiednatural gas (LNG) price is around $11–14 per MMBtu.Producers argue that unless they are assured of priceslinked to world prices, no investment will take place in thissector. The government has appointed an expert committeeunder Dr. C. Rangarajan to advise on the form of NELPcontracts. The Committee is expected to submit its reportvery shortly and it is hoped that it will recommend stepsto introduce clarity about the policy regarding pricing ofgas without which new investment may be inhibited.Urbanisation

More effective management of the process ofurbanisation in the country will be critical for moreinclusive, more sustainable and faster economic growth.

Urbanisation is a natural part of the development processbecause cities provide substantial economics of scale andof agglomeration. In India the cities are also effective driversof inclusiveness because barriers of caste, creed, andlanguage are bridged in interconnected efforts byresidents to earn better livelihoods. At present, about 31per cent of the population, that is, about 380 million, live inurban areas and this will increase to about 600 million by2030. Providing reasonable quality services to the growingurban population presents a major challenge. Urbanservices are very poor, particularly sanitation, solid wasteremoval, water, roads and public transportation.Affordable, decent housing is woefully inadequate in allIndian cities, leading to the formation of slums, health andliving conditions in which are aggravated by poor waterand sanitation services.

The Jawaharlal Nehru National Urban RenewalMission-II (JNNURM-II) was a landmark initiative becauseit put India’s urban agenda centre stage. It set aboutproviding resources to the States linked to incentives forreforms which would trigger to focus on improvements tocities and towns. The seven years’ experience withJNNURM has been a substantial learning experience whichhas also revealed weaknesses in the governance systemsand the capabilities of cities, States and even the Centreto manage the process of urbanisation. Urban governanceis very weak, with poor coordination amongst the manyagencies that must work together to create and maintaingood functioning habitats. Personnel and institutionalcapabilities for urban management have to be developedon a massive scale across the country. Capabilities forplanning locally are woefully inadequate, which is leadingto projects not aligned with local priorities and poorcoordination amongst separate initiatives.Monitorable Targets for the Plan

The aspirations and challenges that guide the TwelfthPlan have been discussed in the body of this chapter. Tofocus the energies of the government and otherstakeholders in development, it is desirable to identifymonitorable indicators, which can be used to track theprogress of our efforts. Given the complexity of the countryand the development process, there are a very large numberof targets that can and should be used. However, there is





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a core set of indicators which could form the objectivestowards which all development partners can work, whichincludes not only the Central and State Governments, butalso local governments, CSOs and international agencies.

Twenty-five core indicators that are listed belowreflect the vision of rapid, sustainable and more inclusivegrowth:

Economic Growth1. Real GDP Growth Rate of 8.2 per cent.2. Agriculture Growth Rate of 4.0 per cent.3. Manufacturing Growth Rate of 10.0 per cent.4. Every State must have a higher average growth

rate in the Twelfth Plan than that achieved in theEleventh Plan.

Poverty and Employment5. Head-count ratio of consumption poverty to be

reduced by 10 percentage points over the precedingestimates by the end of Twelfth Five Year Plan.

6. Generate 50 million new work opportunities in thenon-farm sector and provide skill certification toequivalent numbers during the Twelfth Five YearPlan.

Education7. Mean Years of Schooling to increase to seven years

by the end of Twelfth Five Year Plan.8. Enhance access to higher education by creating

two million additional seats for each age cohortaligned to the skill needs of the economy.

9. Eliminate gender and social gap in schoolenrolment (that is, between girls and boys, andbetween SCs, STs, Muslims and the rest of thepopulation) by the end of Twelfth Five Year Plan.

Health10. Reduce IMR to 25 and MMR to 1 per 1000 live

births, and improve Child Sex Ratio (0–6 years) to950 by the end of the Twelfth Five Year Plan.

11. Reduce Total Fertility Rate to 2.1 by the end ofTwelfth Five Year Plan.

12. Reduce under-nutrition among children aged 0–3years to half of the NFHS-3 levels by the end ofTwelfth Five Year Plan.

Infrastructure, Including Rural Infrastructure13. Increase investment in infrastructure as a

percentage of GDP to 9 per cent by the end ofTwelfth Five Year Plan.

14. Increase the Gross Irrigated Area from 90 millionhectare to 103 million hectare by the end of TwelfthFive Year Plan.

15. Provide electricity to all villages and reduce AT&Closses to 20 per cent by the end of Twelfth FiveYear Plan.

16. Connect all villages with all-weather roads by theend of Twelfth Five Year Plan.

17. Upgrade national and state highways to theminimum two-lane standard by the end of TwelfthFive Year Plan.

18. Complete Eastern and Western Dedicated FreightCorridors by the end of Twelfth Five Year Plan.

19. Increase rural tele-density to 70 per cent by theend of Twelfth Five Year Plan.

20. Ensure 50 per cent of rural population has accessto 55 LPCD piped drinking water supply and 50 percent of gram panchayats achieve the Nirmal GramStatus by the end of Twelfth Five Year Plan.

Environment and Sustainability21. Increase green cover (as measured by satellite

imagery) by 1 million hectare every year during theTwelfth Five Year Plan.

22. Add 30000 MW of renewable energy capacity inthe Twelfth Plan.

23. Reduce emission intensity of GDP in line with thetarget of 20 per cent to 25 per cent reduction by2020 over 2005 levels.

Service Delivery24. Provide access to banking services to 90 per cent

Indian households by the end of Twelfth Five YearPlan.

25. Major subsidies and welfare related beneficiarypayments to be shifted to a direct cash transfer bythe end of the Twelfth Plan, using the Aadharplatform with linked bank accounts.

States are encouraged to set state-specific targetscorresponding to the above, taking account of what is thereasonable degree of progress given the initial position.Sector-wise growth targets for each State are given inChapter 11.




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