“Policy Options for 9% Growth during the Twelfth Five Year Plan of India: Some Results Using a CGE Model”

Citation: Ganesh-Kumar, A. and M. Panda. 2011. “Policy Options for 9% Growth during the Twelfth Five Year Plan of India: Some Results Using a CGE Model”. Report submitted to the Planning Commission, New Delhi.

Abstract:

In this paper, we explore some policy options corresponding to a high 9% growth in Indian economy during the Twelfth Five Year Plan. We use a modified and updated version of a CGE model calibrated for a base solution around a new social accounting matrix for 2006-07 and solved sequentially over time for a ten-year period covering the 11th and 12th Plan periods. Several alternative policy scenarios have been developed around a base as usual (BAU) scenario by considering shifting of resources towards agriculture and industry and towards distributional programmes like the National Rural Employment Guarantee Scheme.

The BAU scenario for 12th Plan incorporates the expected pattern of growth across the broad sectors based on recent experience with an average growth rate of 3.7%, 9.5% and 10.0% in agriculture, industry and services respectively. Correspondingly, the structure of the economy would change substantially during the 11th and 12th Plans. The share of agriculture in GDP falls from 14.6% in 2011-12 to 11.4% in 2016-17 with corresponding rise in share of service from 57.6% in 2011-12 to 60.2% in 2016-17. Savings and investment rates are expected to reach 40% of GDP by the end of the 12th Plan. The average income of various classes rises by 1.8% to 6.9% per annum in real terms. But, higher income classes gain more than those at the bottom end implying more adverse income distribution.

Two alternative scenarios, ‘pro-agriculture’ and ‘pro-industry’ are designed to tilt the sectoral growth pattern towards agriculture and industry even while maintaining an overall growth in GDP at about 9%. An additional agricultural growth of 1.2% over the BAU could lead to a fall in relative price of agriculture by 3.1% with favourable effects on real wages and private consumption. The adverse income distribution in the BAU gets moderated because the poorer sections gain more in real terms due to fall in agricultural prices.

An additional industrial growth of 1% in the pro-industry scenario leads to fall in relative price of industry by 1.2% while that of services rise by 1.4%. All income classes witness loss in real income, the maximum being 1% for urban top most decile. Income distribution improves because the loss for the upper income classes is relatively larger compared to that for the lower income groups.

The NREGS scenarios are implemented by expanding the exogenously given labour endowments of the bottom 70% of rural population by 3%. GDP effect of introduction of NREGS of this scale is negligible without productivity effect, but composition of GDP moves marginally in favour agriculture. Aggregate private consumption rises by 0.3% compared to corresponding scenarios without NREGS. The upward pressure on agricultural prices is not large; it is about 0.3% over BAU. NREGS has large distributional implications. The per capita income of bottom 70% of rural population rises by 1.3 to 1.8% in the terminal year over the BAU; but, all urban classes lose marginally due to the relative price effect.

---