Geopolitics

[acharya]

Issue Date: April 1, 2008, Posted On: 3/28/2008

Harvard panelists debate toll of India’s economic growth

Infrastructure issues still seen as crucial to future


BY CHRIS NELSON




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CAMBRIDGE, Mass. – Sometime within the next few weeks, the Indian government will issue a report card on the country’s economic performance during the 2007-2008 fiscal year, which ended March 31. If the government reports economic growth of at least 8.7 percent during the period, then India will continue a trend that has seen the country’s economy grow by an average 8.75 percent over the last five fiscal years.

No matter what the Indian government reports, however, economists who are familiar with “the India story” are debating how long India can sustain its current rate of growth. The subject was the focus of a panel discussion at the recent Harvard Business School India Conference, a daylong event on March 16 that featured nine other forums on India’s economic development and carried the theme “Charging Ahead.”

Dubbed “The Macro Picture: Maintaining India’s Growth in a Changing World,” the aforementioned panel featured input by Udayan Bose, chairman of Tamara Capital Advisors Pvt. Ltd., a Mumbai private-equity firm; Tushar Poddar, vice president of Asia economic research at the Goldman Sachs Group Inc.; Ron Somers, president of the U.S.-India Business Council in Washington, D.C.; and Sanjay Puri, chairman of the Washington-based U.S. India Political Action Council. Richard Vietor, the Sen. John Heinz Professor of Environmental Management at Harvard Business School, moderated the forum.

Puri led off the discussion with comments on education and infrastructure – two areas that he said will determine whether the Indian economy soars or crawls in the years ahead. “One of the challenges that we see down the road for India is education. It may shock you to understand that every time we take a delegation of businessmen and politicians to India, the one message that consistently comes up is that not enough attention is being paid to vocational training and secondary education in India,” Puri said. “When you want to see the income dividend of any one individual, it is when you go past secondary education. When people talk about doing business with India, education is a tremendous sector of the country that people should be looking at; it is the great leveler that gives people equity in society, and not just growth to the economy.”

Puri noted India’s staggering economic expansion in recent years, and predicted that as the country continues to grow, hundreds of millions of Indians will leave the country’s rural areas and head for the cities. But therein lies a major challenge: These transplants will need jobs, which India’s manufacturing sector appears capable of handling – but not without substantial investments in the country’s dilapidated infrastructure, Puri warned.



Tushar Poddar, VP of Asia economic research at Goldman Sachs spoke at the recent Harvard Business School India Conference. Photo by Chris Nelson

“Infrastructure plays directly into the manufacturing sector. You have so many people in the agricultural sector – about 60 percent of the population – yet over the next five years, approximately 500 million Indians will be moving into the country’s urban areas and they’ll need jobs,” he said. “Right now, there are no jobs for them. The manufacturing sector can absorb them, but not until India builds up its power supply, builds roads and special economic zones – all of those things come into play.”

India’s infrastructure deficit is so critical that economists and academics around the world are in agreement that it is preventing the country from achieving its true economic potential. India is home to more than 3 million miles of paved roadways – the second-largest network of roads in the world, behind the United States – but decades of underinvestment and political inertia has led to their decline. The country is also prone to widespread power outages and lacks a reliable water supply. Jagdish N. Bhagwati, a professor of economics at Columbia University in New York City, has stated that India’s gross domestic product growth would run two percentage p­o­ints higher if the country had decent roads, railway and power.

“The challenge for India right now is how to pay for the half-trillion-dollar price tag for building the country’s infrastructure – the roads, the airports and all the basic wires and tubes of the country’s economy,” Somers, the U.S.-India Business Council president, said at the forum. “Here we are right now in the United States sliding into a recession, and the question that looms is how are we going to raise the money to plow back into India?”

Somers said this dilemma surfaced in 2003, when Indian conglomerate Reliance Industries Ltd. discovered a massive, deepwater natural gas field in the Bay of Bengal. At the time of the discovery, there was no pipeline capable of delivering the gas from its source to the company’s Jamnagar refinery in the western state of Gujarat. But with so much at stake, Reliance secured funding and tapped U.S.-based contractor Bechtel to build it.

“In 2008, the first natural gas will be produced and transported via a 48-inch pipeline from the Bay of Bengal to the Jamnagar refinery. This is a major transnational pipeline that will pump 2.5 billion feet of natural gas a day. That’s a lot of gas,” Somers said. “What does this mean? Well, if you think of the HBJ pipeline (currently carries most of India’s natural gas), all along that pipeline you have power stations, fertilizer plants and every kind of downstream [operation] that you can think of – and they don’t even need to be Reliance-specific.”

Somers praised India for encouraging more foreign-direct investment in the country’s retail sector, which he said will improve the efficiency of the domestic supply chain, and called on Indian leaders to ratify the 123 Agreement of the United States-India Peaceful Atomic Energy Cooperation Act of 2006, which remains stalled. “I want the nuclear deal to happen – it’s the end of India’s nuclear isolation – and if that happens, it will unleash collaborations and unlock India’s access to entirely new technologies,” Somers said. “In part of the bargain, it calls for major defense cooperation between the United States and India. But India needs to upgrade its entire defense establishment, which is the world’s second-largest but uses obsolete equipment. Indian [MiG fighter aircraft] are falling out of the sky. Well, who makes the best military equipment? Frankly, the United States of America does.”

Somers spoke beyond his allotted 10 minutes – Vietor, the moderator, politely asked him to wrap up his comments at one point – yet neither his fellow speakers nor the audience seemed to mind.

In fact, his final point drew a round of applause from the roughly 100 people in attendance.

“We are about to go to the Moon, the United States and India are. India’s first mission to the moon will launch this May,” he said. “It will be the first time in our history that American technology will be sitting on top of an Indian rocket that is going to the Moon. And 54 percent of India’s population and all of American youngsters will be looking up to the sky together as the United States and India go to the moon together.”