India’s immediate prognosis

India should return to stronger growth in the next year, ending more than a year of slumping performance. Why India should return to stronger growth and what the pressures facing the subcontinent formed an address by Shri Montek Singh Ahluwalia, the deputy chairman of the Planning Commission of India and often nicknamed “India’s chief strategist.” He was speaking at the second-annual Canada-India Business Forum in New Delhi last month. A smooth, erudite figure sometimes vetted as a possible successor in the Congress Party to Prime Minister Manmohan Singh, Ahluwalia took a reassuring position, and even if things don’t turn out the way he believes they will, his thoughts deserve to be taken seriously.

Montek Singh Ahluwalia with the Canada-India
Business Forum’s Peter Sutherland
Photo: C-IBC

He noted that the deceleration of India’s economy, which had been growing at 9% only a few quarters ago, had bottomed out at 5½%. Although 5½% would be impressive in a developed economy, it is inadequate for the size and needs of India’s population. He predicted that the next six months should see a return to speedier growth. Part of the slowdown stemmed from the global slowdown, but domestic constraints also played a role.

Ahluwalia said he believed that government would “stay the course on economic reforms.” One continuing reform, an example of where economic innovations may lead, is the matter of foreign direct investment (FDI) in the multi-brand retail sector. A day before the Canada-India forum convened the largest political faction in India’s governing coalition, the Congress Party, held an enormous rally in Delhi to demonstrate newfound, even raucous support for the foreign multi-brand retail. That rally, Ahluwalia said, is a signal of the government’s renewed resolve on FDI. (A reporter from The Hindu newspaper queried some party faithful on why they were in New Delhi and the participants said they couldn’t really say.)

Like many Indians Ahluwalia seemed to simultaneously lament and revel in his countrymen’s label as a “very participatory, noisy and argumentative democracy.” Many of the structural reforms that India needs, he said, must be passed by the central parliament and accepted by the states, an especially trying process at a time when Indians are entering a new cycle of federal and state elections. Yet he remains optimistic and believes that Indians have already tasted some of the benefit of a more open economy and they’ve grown to like it. “The undertone,” Ahluwalia said, “is one of growing consensus.”

Even more important, he said, what needs to be done doesn’t actually require legislative action. There is the business of granting approvals for infrastructure projects. Many such projects get stuck in the approvals stage, and that fosters an atmosphere of uncertainty that makes banks reticent to lend.

He said that India needs to rid itself of outmoded or unhelpful administrative and statutory clearances. One example is a traditional fixed rate of adding electrical generating capacity. India is making a big effort, he said, to speed up adding capacity. In 2011-12, extra capacity totalled 54,000 megawatts. Private sectors have contributed to that capacity but they didn’t receive an adequate increase in fuel supply, mostly coal which is controlled by a government monopoly.

As an energy-importing nation, India works with domestic prices for coal and liquefied natural gas (LNG) that are far below what world prices are. These distortions can only be resolved in the short term through government subsidies or losses for private generators. But Indians do not seem prepared to reconcile the price differences. “We are grappling with how to resolve this satisfactorily,” Ahluwalia said.

Funding for India’s badly inadequate infrastructure has fallen. Raising money for public works from tax revenues is all the more difficult since economic growth has slowed. Returning to a more robust level of government-funded infrastructure growth may not be possible in the next half decade, he said, but will be a pattern of gradual acceleration.

Therein, lies a warning, he said, about India’s ongoing fiscal deficit. The  deficit is much larger than most developing countries have, and the government is uncomfortable with it. The central government’s new finance minister has laid out a deficit-reduction program of 0.5% a year. Not to address the problem as the economy returns to rapid growth would, in absolute terms, drive India toward what Ahluwalia called “an absolute cliff.”

He advised observers of India’s economy on what to watch out for. He said that “95% of all international organizations analyzing developing countries look at the demand side. But India isn’t a big exporter.” He said it’s important to look at the supply side. India’s diverse economy and celebrated entrepreneurship will contribute to a stronger supply-side.

Ahluwalia saw three major challenges facing India in the medium term, and he discussed how they may play out economically:

Energy: Managing energy will be a crucial issue for India, he said. “India is not well-endowed with energy. [We are] a superpower among energy-deficits.” There remain problems in exploiting India’s domestic coal supplies as well as the quality of that resource. India coal has a low calorie value compared to imported coal. Meanwhile, use of LNG is growing and it will have to be imported. To afford imported energy, India will have to adjust to higher prices “any way you cut it.” He said that the central government’s current five-year plan needs to come to terms with prices.

Water: India is not abundantly supplied with water, Ahluwalia said. Until recently, India’s demand for water was a deficit. “Today, it’s roughly in balance, but there are regional differences. But within 10 years, India will shift to a water deficit.” Water deficits, he said, could become “massive,” and will have to be addressed with greater efficiencies.

Urbanization: India, he said, has been slow to urbanize. “We have 380 million people in urban areas. By 2030, it will be 600 million. So far, only half the 380 million get reasonable urban services.” But by 2030, he said, India may have the world’s third-largest economy. “What that means is urban services must be catered, and that’s a huge commercial opportunity.” One structural political challenge is public resources-sharing, he said. “We have a strong federal system to share resources between the federal government and the states, but a poor system for sharing with municipalities.”