Sunday, September 6, 2015

Debates on Inflation, Deflation, Globalization and Localization for India: Why Not on the Reality of a Water-stressed rather than Monetary-stressed Economy

A twist to economic debate in India has occurred in recent times with Arvind Subramanian, Chief Economic Adviser to the Government of India, and a reputed economist postulating that India is in the throes of deflation. This is in somewhat sharp contrast to what India’s other economic luminary and the Governor of Reserve Bank of India (RBI), Raghuraman Rajan holds firm on – that India is still not free of inflation! The truth is somewhere between the two polarities of expert opinion. Possibly, India is experiencing disinflation (reducing inflation rate) and is, in fact, suffering from deflation at wholesale price index level and moderated inflation at consumer price index level. As a result, the North Block seems to be batting even more aggressively for a rate cut by RBI while RBI seems to be still concerned about inflation rearing its head with a rate cut.

The fact is that India is now beset by a host of contrarian macro and microeconomic trends and compelling external and internal economic factors. The biggest positive has been the unexpectedly sharp drop in crude prices, saving the oil-dependent India millions of dollars in import bill. This has also contributed to reduced costs of feedstock and utilities for a number of industries. At the same time, the weakening of the Rupee has led to a ballooning of material costs for a number of industries that are dependent on imported raw materials and components. The slowdown in Chinese economy has given rise to hopes that India would find a new manufacturing opportunity globally at one level but is buffeted by lower demand from China and higher dumping into India at a practical level. Against the contrarian trends, the investment cycle remains subdued and corporate earnings remain muted.


India is concerned about interest rates probably more than any other country because households as well as industries are critically dependent on debt to fund their growth and sustainability. Banks are not able to pass on whatever rate reductions the RBI has done so far due to the pressure on their banking operations. Falling exports, slowing manufacturing output, stagnant infrastructure, ballooning real estate inventory, increasing discounts on durables and non-durables, unresolved stressed asset situation, volatile stock markets, and falling demand for energy are contributing to an uncertain industrial and economic environment. While Rajan may be right, from his own perspective, that RBI cannot be the cheer leader for stock markets, there is no doubt that there is a thin line that divides populism and pragmatism in so far as public policy is concerned.

One year ago, it was felt that green sprouts of economic resurgence are evident. If nothing else, a deficient monsoon has starved the sprouts of the needed nourishment, it looks. A buoyant rural demand that emerges on the basis of robust agricultural output has, for long, been the mainstay of India’s economic growth. The Make in India theme can compensate for the slowdown in the rural economy by creating more industrial jobs and generating more purchasing power but urban islands of prosperity cannot adequately make up for rural distress, with 70 percent of 1.2 billion population living in India’s 600,000 villages. While globalization couples India to important global economies, there is a clear imperative to ensure positive interconnectivity within the internal supply and demand system to cushion the economy from adverse external developments.

Water economy

Human and plant/animal life requires water; there can be no life without water. It is not surprising that lack of rains, drying up of water resources and dwindling of underground water table cause serious concern in all nations. India is particularly vulnerable. Arthasastra written in 300 BC by Kautilya mentions dams as critical to civilization and outlines principles of dam construction as necessary guideposts for orderly development of civilization. Post-independence, the Governments recognized the importance of dams and went about constructing many large dams which transformed rural economy. However, dam construction has plateaued and declined over years. Some statistics on decade-wise completion of large dams in India are interesting but are also quite concerning, given that it has not been compensated by growth in major and minor dams. Large dams in India are conservatively defined; primarily any dam with a height not less than 15 metres from the deepest foundation to the crest is defined as a large dam.
According to National Register of Large Dams, India has a total of 5171 dams. Around 11 percent of such dams, 565 to be exact, were constructed up to 1950, roughly half prior to 1900 and half between 1901 and 1950. In post-independence India dam construction accelerated up to 1990 but started declining thereafter. The statistics are quite revealing. Between 1951 and 1960, 235 large dams were completed and between 1961 and 1970 the completion rate was doubled to 497. Between 1971 and 1980, the number of completed dams more than doubled again to 1293. Between 1981 and 1990, the tempo was kept up with another 1262 large dams getting completed. Unfortunately the subsequent two decades (1991 to 2000 and 2001 to date) saw virtual halving of completed large dams to 628 and 373 respectively. As of date, only 314 large dams are under construction.


As against total arable land area of 160 million hectares (395 million acres), even as of date only around 60 million hectares are said to be irrigated. Of this, again, as much as 40 million hectares (around 67 percent) is irrigated through groundwater well system and the rest of 20 million hectares (around 33 percent) is through dam and canal irrigation system. Even this increase has come through the development of large dams. The vulnerability of the Indian agriculture to monsoons to seasonally provide water and retain ground water table is evident. Though India is blessed with a fairly long rainy season of 4 to 5 months (except in some regions), it is estimated that only 18 percent of rain water is used effectively while 48 percent is wasted into oceans. If 18 percent of effective use is linked in some way to 5000 plus large dams, it is easy to imagine that 100 percent use of water would require at least another 15000 large dams, conservatively put.

Water reservoirs in copious times not only irrigate but also generate clean electricity. More importantly, they balance out monsoon deficiencies and replenish groundwater. There is a serious debate about whether large dams are economical to construct and whether they pay back to the community. Each large dam is expected to cost between USD 1 to 1.5 billion with 5 to 10 years to complete, suffering significant overruns.  They are seen to also impact communities as the catchment areas submerge villages and habitats besides causing irreversible extinction of native forests, fauna and species. There does not seem to be much research in India to develop new knowledge of water and conservation mapping in a mix of large, medium and minor dams, with environmental sensitivity. Even greater is the need for understanding contemporaneously the techno-economic feasibility of inter-linking rivers across India. Compared to industrial projects, river projects seem to be receiving lower priority in planning and budgeting.


Foreign and private investments are seen to be the savior for everything economic in India, except projects of volatile and uncertain community returns like river projects. It appears that other sectors (industry, real estate and entertainment) seek what belong to agriculture, like land and water, but what they provide in return like economic benefits of processed foods and distribution of agricultural produce are not exactly commensurate. Governments have no way other than directly investing in a host of river projects that conserve water, control floods and irrigate arid and semi-arid areas. Dams are probably one of the highest employment generators and users of the widest range of construction materials and construction equipment.

Indian public is increasingly appreciating the importance of agriculture and pesticide and chemical free production of cereals, grains and other products. There is, however, little excitement for investing in agriculture compared to eCommerce! Only the Governments, Centre and States, are positioned to strengthen the agricultural sector through investments. Rather than direct investments, Governments can provide interest and tax subsidies through tax-free, high-interest bearing agricultural bonds which can be traded on stock exchanges. These could be a hit on the volatility-weary investor public if they are positioned with exciting socio-economic benefits, and provide several thousands of crores to fund the much needed dam and irrigation projects.  
Food value chain

The drive for India’s growth aspirations must sprout from India’s valuable and natural resources, land and water. There is a direct correlation between water retention through dams and increase in arable area, and therefore with agricultural output and economic growth. That said, challenges exist that need deployment of technology and management. The first challenge is to produce more nutritious and more organic food with less water. The second is to strengthen human and institutional governance to enable natural ownership and responsible utilization of rainfalls and water reservoirs. The third is the optimization of the total food value chain, from agricultural production, post-harvest handling, processing and storing, wholesaling, distribution and retailing, and consumption as well as optimization of water use throughout.

Current food grain production of 260 million tonnes needs to be doubled to provide to every individual the right to nutritious food. High quality food in adequate quantities not only meets basic livelihood but also promotes wellness. Nutritious food that is hygienically processed and delivered can enable health and wellbeing of population. Well-structured rain water projects can protect India’s bio-diversity and provide a competitive advantage. It is time that intellectual discourse steers away from the never-fading and ever-fashionable themes of inflation versus deflation or globalization versus localization and focus on preserving and enhancing the value of the natural resources God has blessed India with. Diversification of urban food basket is evident as one sees the retail food shelves but it produces a deep adverse skew unless it is accompanied by deepening of rural prosperity. The optimal economic balance in India emerges not from the balance of inflation and deflation rates or globalization and localization indexes but from a balance of rural and urban growth imperatives.

Posted by Dr CB Rao on September 6, 2015           

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