The past year has driven home the fact of globalisation, even for countries like India that are relatively less integrated with the global economy. For example, India?s ratio of exports of goods and services to GDP is only about two-thirds of China?s (despite excluding Hong Kong and Macao). But it has still felt the wind from global storms. The European crisis, in particular, has heightened risk perceptions, slowing global growth, and leading to a flight to safety of global capital. What are the potential global threats for India in 2012?
First, the European crisis in not going away soon. At the time of writing, Greece is on the verge of a sovereign default. IMF, headed by a European, is saying clearly that Europe?s leaders need to do more to create a safety net for its high-debt economies. This will require additional funds of the order of half a trillion dollars. The Germans continue to oppose this, since they will have to be major contributors. Instead, the problems will drag on, with prolonged uncertainty and a slow spiral of stagnation. This will mean more of what happened in 2011, with continued negative consequences for India?s growth.
The second global threat is sharper and newer. Everything points to increased global friction associated with Iran. Iran?s nuclear programme continues unchecked, and the US is stepping up the pressure on other countries to tighten sanctions. China, Japan and India, Iran?s three largest oil customers, will feel the heat. India is in the worst position of the three, both economically and strategically. Oil supply disruptions or price increases will have significant negative impacts on India?s economy. The problem is worsened by India?s overall weakness in the energy sector. It is even having to import coal, as domestic production is failing to expand adequately. Other countries have been building energy security in various ways, including significant investments in renewable power sources and technologies. India has appeared to drift in its energy policy implementation, after making big plans for renewable energy and nuclear power.
A third threat is again somewhat familiar and predictable. Rising global food demand, supply constraints and weather vulnerabilities have already been manifesting themselves over the last few years. 2011 witnessed long-running debates about the causes of food inflation in India. Little has changed, however, in the country?s vulnerability to global food supply shocks. India?s looming water crisis, and the imminent danger of a collapse in its breadbasket of Punjab, due to groundwater depletion, will only make things worse.
None of the above means that globalisation is bad, or that India can deal with it by erecting barriers to the rest of the world. Doling out food or money to the poor are also not solutions, merely ways of giving the worst-off some protection against bad outcomes that will hurt them the most. The problem is that global conditions are not as favourable as they were when India crossed 9% growth three years in a row. Even with current savings and investment rates, India may struggle to reach 8% growth, and may settle at closer to its current rate of 7%.
The bright side of all this, of course, is that there are so many avenues open to India?s political leaders to relax internal constraints on its economic growth. Little can be done about Europe?s political problems and its slow decline. But energy and food are sectors where India has enormous opportunities. In both cases, India is so far inside the efficiency frontier (including both technical and organisational aspects of efficiency) that substantial improvements must be feasible. For example, India?s cereal yield per hectare is well below half of China?s. Transmission and distribution losses in electric power occur in India at four times the rate of China. Why should that be so?
Metaphorically, these inefficiencies are like leaving thousand rupee notes on the pavement. These large amounts are visible to many, and there is a great deal of discussion about them, and the need to pick them up. Sometimes, though, it seems that the discussion focuses on which notes to pick up first, or who will get to keep the notes when they are picked up. Meanwhile, they stay on the pavement.
It seems that in the early years of this millennium, the winds of globalisation blew some of the thousand rupee notes into our pockets, while a few enterprising souls did make the effort to pick up others from the pavement, where they had lain for a while. Now some of those notes are blowing away, as the global economic and political climate becomes harsher, at least in the short term. But there are still many notes to be picked up, even after decades of economic reform. These were dropped even longer ago, and have kept dropping as inefficiencies persist. 2012 would be a good year to start picking them up.
The author is professor of economics, University of California, Santa Cruz