Friday, June 14, 2013

12th 5-Year Plan

India’s 12th 5-Year Plan: What does the future of India’s economy look like?


            While India has seen major growth in GDP in the last decade, not all of the population has realized economic gains. It is no secret that India has done a poor job of solving its social problems like poverty and discrimination stemming from the ancient and lamentably prevalent caste system. Leaders are now forced to solve this issue, not only because it is the humane thing to do but also because the key to further economic growth is tapping into this massive potential labor force. The authors of the 12th 5-Year Plan called this inclusiveness and it is the overarching theme from the beginning to the end of the paper. While evidence supporting how inclusiveness will strengthen Indian business can be found in almost every chapter of the 12th Plan, for this paper I will focus on the chapters detailing the future of India’s farm sector, manufacturing, infrastructure projects, and innovation.

            The Farm Sector

            If India is serious about empowering and including the impoverished in its growth, the place to start is the farm sector. Half of the population of India is dependent on some sort of farm activity and expansion of farm incomes is the most potent weapon for reducing poverty. The gap between rural and non-rural incomes is enormous and employment growth in non-agricultural careers has not grown sufficiently to reduce the population dependent on agriculture. The attitude of the 12th Plan is that beyond the next five years a goal should be to reduce India’s dependence on agricultural jobs, but for now that will not change and India should make the agricultural sector as efficient, comfortable, and high-paying as can be.
            There are a few tactics that can be employed to achieve this goal. The first is improvement of water management. The agricultural sector is in desperate need of modernization of irrigation systems like a move away from flood irrigation towards sprinkler and drip irrigation, extensive rainwater harvesting combined with a groundwater recharge, and steps to improve governance in water management. Water management improvements also mean more clean drinking water, a basic resource that India still has trouble providing. With high quantities of cleaner water available, the overall health of the population will increase, leading to higher levels of productivity. It will also put less of a burden on India’s troubled public healthcare system.
Another problem is the overuse of inefficient or downright bad farming practices. For example, chemical fertilizers widely used because they are heavily subsidized. This needs to end in favor of organic fertilizers as overuse of chemicals degrades the quality of soil. Adoption of a farming systems approach which adopts livestock, fertilizer, crop rotations and composting as soil nutrient enhancers would do a world of good for the farm sector.

            As time passes, India’s population will be less dependent on agriculture as the youth decides to pursue urban career choices. While India’s service sector has exploded, primarily in providing IT services for foreign countries, the manufacturing of goods has not. Manufacturing is only 15% of GDP, very low when compared to other developing nations China and Thailand, at 34% and 40% respectively. The services sector alone cannot support the 250 million additional income-seekers that will join the labor force in the next 15 years. Unless the manufacturing sector can provide at least 100 million additional decent jobs, it will be difficult for India’s growth to be inclusive.
            One challenge facing manufacturing is the fact that the best of India’s engineering talent is going into IT. Many later on go through business management school and end up working for financial, consulting, and other service industries. Skilled workers, good supervisors and managers are essential for the success of any industry and India is faced with the question of how to attract these workers to manufacturing.
            Another reason why manufacturing is struggling is due to poor policy. For example, in a study of countries with strong manufacturing industries it was revealed that there was a very good consultation process between producers and policy-makers and for establishing coordination amongst policy-makers. In these countries, the primary goal of planning is to achieve learning and improving processes, not for budgets and allocations like it is in India.
            To turn things around, India has developed the National Manufacturing Plan. The objective of the plan is to increase growth 12-14% in the medium term. This growth must be sustainable in the long term and create the jobs needed. Special focus will be placed on some sectors of manufacturing which will enable the country to rapidly achieve its goals. Such sectors include textiles, garments, leather, footwear, gems and jewelry, and food processing for job creation. Sectors that will deepen technological capabilities in manufacturing include machine tools and IT hardware and electronics. Manufacturing technology for energy security include solar energy, clean coal*, and nuclear power generation. If infrastructure growth is to be a reality in India, manufacturing of heavy electrical equipment and heavy transport, earth-moving equipment is necessary. Finally, sectors where India already has a competitive advantage, such as the automotive, pharmaceuticals and medical equipment, must not be ignored. Policy makers and consultants must analyze the best practices of these sectors and see if they can fit into sectors in need of growth.
            Infrastructure / Public Transit
            Inadequate infrastructure was recognized in the 11th plan as a major bottleneck to growth. The total investment in infrastructure had risen from 5.7% of GDP in the base year to 8.0% in the final year. A large contributor of this growth is due to the successful implementation of PPP  (Public-Private Partnership) financing projects. However the pace of investment had favored some sectors, such as telecommunication, oil and gas pipelines, while neglecting others, such as electricity, railways, roads and ports. In the 12th year plan these neglected sectors need special attention.
            As inclusiveness of India’s poor into the economy increases, requirements of transport are likely to grow significantly faster than overall GDP growth. India has the second largest road network in the world totaling 4.2 million kilometers, but only half of it is paved and 2% of the length is national highway. Expect big changes here. A master plan for adding 18,637 kilometers of expressways will be taken up. These roads will be 4 or 6 lane and feature both passenger and freight movements. In addition, neglected single lane national highways will be repaved and upgraded to two-lane standards. Finally, it is essential for India to develop state highways and rural roads to ensure full connectivity. Rural roads are known to be a very effective catalyst for economic transformation due to connecting India’s rural poor to markets, hospitals and schools. It is necessary that universalization of rural connectivity be completed during the 12th Plan.

            The President of India that this is the “decade of innovation.” Innovation is indeed key to growth, for any nation, but there are three distinct values that make “Indian Innovation” unique. These values are also squarely in line with the theme of inclusiveness:
1.     Focus on finding affordable solutions for the needs of the people without compromising quality. This is especially evident in India’s automotive and private healthcare industries, where one can buy a new car for $2,500 or receive a top-quality heart surgery for $5,000. In fact, it is possible for an American in need of heart surgery to pay only $10,000 for the procedure, airfare, and a one-week vacation. Compare this to $150,000 for the same surgery in the United States.
2.     Desired outcomes are produced by innovations in organizational and process models that deliver to people the benefits of technologies that may be developed in scientific laboratories.
3.     Innovations in the process of innovating to reduce costs of development. For example, management of intellectual property rights in India must me improved. There is a large fear of patent monopolies creating artificially high prices, which hurt the consumer, however without a patent there is little incentive to innovate. One innovative path to creation that was successfully used in India is Open Source Drug Development, which takes key principles in open source computing (collaboration and open access) and applies them to drug development. It accelerates the discovery process by mass-collaboration while keeping expenditures to a minimum by encouraging incremental contributions by volunteer scientists, removing the ability to patent any results. It de-links the research and development costs to the end sales-price of the product, giving drug manufacturers the ability to produce new drugs at a very low cost.

The Indian approach to innovation focuses on the efficiency of innovation and how the outcomes of innovation will benefit India’s people, especially the poor. This contrasts sharply with the conventional approach, mostly focused on increasing the inputs of science and technology R&D and measurements of the number of papers and patents produced. This is primarily a research-based approach to innovation. In contrast, conversion of R&D results to products for the people requires the efforts of an ecosystem of players: entrepreneurs, researchers, finance providers, business enterprises and policy-makers. Therefore, India must provide for the needs of these enterprises and encourage collaborative communication amongst them.
It is often said that India is a country with many successful experiments that never achieve scale. By having India’s innovation ecosystem operating collaboratively, Indian businesses will be connected to a larger pool of customers and good ideas will swiftly transform into needed products.


The most endearing characteristic of this latest plan is its humanity. India is not a nation that will tolerate its poverty problem any longer. India's social problems have caused a painful divide among the people that is weighing her down in the past. In the new plan, India does not separate social progress from economic progress; as the poor become educated, healthy, and included in the new bustling economy all of India will grow with them.
Of course this will not be easy. The current infrastructure is not compatible with the inclusion of India’s poor; new roads must be built to connect them with schools, hospitals and markets. The farm sector must be modernized to improve the wages of India’s rural workers, still the majority of the population. The manufacturing sector must be strengthened to offer needed future employment opportunities. And frugal, practical innovation must be encouraged, because without innovation that can change the lives of the many India is doomed to remain stagnant.

*<Gets on my soapbox> Personally I am against the adoption of coal. Policy to move away from this ancient fuel should be embraced, and towards it discouraged. Coal is one of the dirtiest forms of energy on the planet and is literally suffocating the people of China.  I would hate to see India in the same predicament. It is also once of the biggest carbon emission polluters of any fuel, making the act of burning coal largely responsible for climate change. “Clean” coal is a lie; the only difference is that the emissions are captured and buried deep underground in a process called carbon sequestration. This is not solving any problems, only sweeping them under the carpet.