High global oil prices have once again put the Indian economy under pressure. It is likely that India will end the current fiscal with a payments deficit of around $60 billion. This would be manageable, especially given the buffer of foreign exchange reserves with the Indian central bank. There is no reason for extreme apprehensions right now. However, whether tensions increase or decrease will depend on how global oil prices play out in the coming months with slowing global economic growth as well as international investors’ response to ongoing monetary tightening by several central banks. Huh. Given the volatile geopolitical situation, it is not easy to predict.
There is a great lesson in the ongoing volatility in the global market for crude oil. India is structurally short of energy, and needs to generate foreign exchange from the rest of the world to pay for its energy imports, either through exports or capital flows. It is as much a question of economic strategy as it is of macroeconomic management.
In his Sukhmoy Chakraborty Memorial Lecture delivered in January 2019, Vijay Kelkar pointed out that the development strategy to be adopted by any country would focus on identifying the critical structural barriers to development and then designing policies to reduce those barriers. depends. What follows is a clear history of how India broke through the earlier four structural barriers, and whether the green transition offers an equal opportunity in the context of our energy crunch.
Saving constraint: Estonian development economist Ragnar Narkse once briefly defined the development challenge for poor countries in terms of the ability to raise the rate of voluntary savings from 5% to 20% of national income. The savings rate of around 9.5% of the Gross Domestic Product (GDP) in the post-independence years was very low. The average citizen was too poor to save enough to invest in the new capacity. It was only in the late 1980s that the country’s savings rate crossed 20% on a permanent basis, although the first major change occurred in the 1970s, as bank branches were opened across the country after bank nationalization in 1969, when India’s savings The rate increased further. More than five percentage points within a decade.
Food shortage: India’s initial development plans focused on industrial capacity building. It was assumed that agriculture was a bargaining sector, where productivity could be increased with minimal investment. Shortages of food – and wage goods in general – began to sting in the 1960s, a decade characterized by persistent drought. Our reliance on food imports from America also jeopardized independent foreign policy. The Green Revolution in the late 1960s helped India overcome food shortages. The macroeconomic impact of a poor monsoon today is far less severe than it was 50 years ago, even though rising food prices may still be a major political issue.
Forex Handicap: There was a time when Indian economic documents almost automatically added the adjective ‘rare’ to the words ‘foreign exchange’, which was rationed by the Reserve Bank of India. Our policy on import substitution behind high tariff walls ensured that the country barely had enough currency to buy machines or oil from other countries, let alone consumer goods. India was facing a balance of payments crisis till 1991. The importance of exports began to be recognized in the 1980s, although the opening up of the economy in 1991 actually helped India break through its foreign exchange barrier, through increased trade with both. Capital flows into the economy along with the world.
Domestic Market Constraints: In the 1970s many economists began to point out that India did not have a domestic market large enough to absorb industrial goods produced by local manufacturers. The underlying reasons were the fact that the median income was low as well as unequally distributed. A gradual increase in income through economic growth was part of the solution. The second was a set policy in the 1980s to strengthen the rural market through higher support prices for agricultural produce. The third was the recognition of the importance of the international market, first through the depreciation of the rupee in the 1980s and then the trade reforms of 1991.
Each of these constraints—domestic savings, food, foreign exchange and domestic demand—was mitigated through specific policy measures, such as pushing banks into unbanked areas, encouraging farmers to adopt new cropping techniques. , export promotion, a competitive exchange rate, and re-linking India to the international economy.
There are other structural constraints to think about, such as state capacity. However, the question worth asking now is: Is the ambitious transition to green energy that India is committed to helping reduce the country’s energy barrier? It is no secret that India is endowed with better sunlight than crude oil, but we need to be part of the emerging global supply chains for the provision of new forms of energy in the coming decade.
Niranjan Rajadhyaksha is CEO and Senior Fellow at Earth India Research Advisors, and a member of the Academic Advisory Board of the Meghnad Desai Academy of Economics.