A growing economy will be a pretty hungry one, too

NEW DELHI: Four months before the Central Statistical Organisation put out figures showing gross domestic product (GDP) had grown 8.1% in the first half of 2005-06, economist Surjit S Bhalla was making a presentation on Indian Economy: Breaking Away at the Aspen Institute Programme on the World Economy. ”India is in a sweet spot of growth and this can last another decade or two,” one of his slides said.

Sure it can, is the general consensus, despite some downside risks - the slowing down of the world economy, and rising oil prices, to name just two. The only problem is fast-paced growth makes its own demands and the question is whether India can rise to the challenge.

An expanding economy - and a growing industry - will have a huge appetite for fuel - whether it is petroleum or coal or gas. “Energy demand usually grows as fast as GDP and there is a need to ensure that energy supplies keep pace with growing industrialisation,” says Ajit Ranade, group chief economist, Aditya Birla Management Corporation.

Indian industry isn’t as huge a guzzler of oil as many other countries - oil intensity (use of oil per unit of output) has actually fallen a bit since 2000 when it was 0.05 to 0.04 now. But this could well change and, with close to 70% of oil requirements being imported, this could push up India’s oil import bill. And if the currently softer international oil prices start to harden again, it could change the outlook for the economy. A study by the Federation of Indian Chambers of Commerce and Industry (Ficci) — “Impact of high oil prices on Indian economy” — quotes the International Energy Agency as observing that a $10 per barrel increase in oil prices would reduce India’s GDP growth by 1%.  The Ficci study shows that the negative impact of oil prices is higher in India than elsewhere largely because of the high levels of diesel consumed by industry for captive power plants. Among the biggest users of diesel-based captive power plants are the textiles, automobiles and engineering industries (areas where India is very competitive).

That points to the other major challenge - the need to address the issue of power supply (close to 8,000 mw of additions to capacity are estimated to be required). Fuel is an issue here as well. Coal production - though the quality of Indian coal isn’t very good - is currently mired in a slew of policy distortions. Several National Thermal Power Corporation (NTPC) plants have reached financial closure, but are waiting for gas supplies. Addressing all these issues is just one part of what needs to be done. The other, says DH Pai Panandiker, president, RPG Foundation, is to look for alternative sources of fuel. For him the best option would be nuclear power, since other alternative sources like wind or solar energy can never meet the huge requirements that will come up.

Other infrastructure will also come under strain, especially ports and roads. A growing industry will consume more imports - again pushing up the import bill - and churn out more goods for exports (manufactured goods account for close to 80% of exports). Though turnaround time in ports has improved, that won’t be good enough for the exponential rise in trade which is sure to happen. There is work going on for road and rail connectivity of ports but the pace will have to be stepped up.

The need to act on the infrastructure front would definitely put pressure on public finances. That public investment will have to be stepped up is something that even Bhalla acknowledges. But there’s a classic conundrum here - how to increase public spending while keeping the deficit within manageable limits (something the Fiscal Responsibility and Budget Management Act mandates the government to do). In any case, Bhalla notes, a 10 percentage points improvement in the fiscal deficit will add 1% a year growth in GDP.

A high fiscal deficit could also lead to credit getting squeezed, thanks to rising demand. The cost of capital will go up, warns SS Bhandare, advisor, economic and government policy, at the Tata Strategic Management Group, pushing up interest rates. Internationally, too, he points out interest rates seem set to rise, with the European Central Bank and Japan indicating a rise is likely. Not everyone agrees. Credit sources are widening, Ranade points out, with access to external commercial borrowings, deepening of the corporate bond market and initial public offers. Bhalla insists the central bank will never sabotage the industrial recovery by raising interest rates. They will, he is sure, go down over time.

Overall costs could go up as input costs rise, with increasing demand. World commodity prices are already heading north, Ranade notes, and the process could hasten as other economies also start expanding.