Prospects and policy challenges in the Twelfth Plan - A comment on the risks in Economic and Political Weekly

 Dr. Y Venugopal Reddy begins by stating that the article offers a comprehensive, succinct and summary overview of the subject and is very useful as reference material. However, there is, a vital element that is missing in the analysis, namely, a discussion of the risks to the economy and economic agents. An enumeration and discussion of the many risks must be taken into account while framing the Twelfth Plan.

Expe­rience shows that at high levels of economic growth there is vulnerability to shocks. The recent developments in the global economy are indicative of uncertainties in the outlook for the medium term and the volatilities in global commodity and financial markets. A growth strategy and a medium-term plan that explicitly recognises and analy­ses such risks may provide comfort and confidence in the plan.

The comments in this note are meant to invite the attention of planners to some of the obvious risks that warrant an assessment and design of mitigation strategies or contingent plans.

Dr Montek Singh Ahluwalia's response to this can be summed up as –

  • Y V Reddy’s central point is that while outlining a strategy for the Twelfth Plan, one must also focus on the risks that the economy may face and evolve a strategy to manage those risks. This is sage advice and a very useful input as we move towards finalising a workable strategy for the Twelfth Plan. The Plan will face different types of risks. Some are external in origin and we can do little to minimise them. We can only work to manage them if they arise.
  • Others are a consequence of the strategy we adopt and can arise for two reasons. First, there is always uncertainty about how an economy will respond to the changes we try to orchestrate, and if things do not work out quite as we planned, because we miscalculated the nature of the response, or some of the responses take longer to materialise, there may be unforeseen out­comes that may be unfavourable for some groups. Second, we may not be able to implement some of the things we have identified as part of the strategy and this creates an unbalanced strategy which could have unexpected poor outcomes.
  • For responding to risks we can aim at a high reward strategy combined with conscious meas­ures of risk management, to be able to deal with unfavourable outcomes should they arise. Sensible planning will probably involve a balance between these two alternatives, and the balance is likely to vary from sector to sector.
  • The external risks mentioned by Reddy – pressure of rising commodity prices on inflation, the impact of sovereign debt crises in industrialised countries on the availability of capital for emerging markets and the possible volatility in capital flows to emerging market countries – are all relevant and specific strategies for dealing with risks will have to be evolved, consistent with the basic strategy adopted.
  • One requirement of sensitivity to risk is constant watchfulness for unintended consequences. The effectiveness of policy needs to be subjected to independent evi­dence-based evaluation. The Planning Com­mission is strengthening its capability in this area by establishing an Independent Evaluation Office.

The comments by Dr. Y Venugopal Reddy and the response by Dr. Montek Singh Ahluwalia can be downloaded below, while the article by Dr. Montek Singh Ahluwalia is available here 

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Post By: Amita Bhaduri
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