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.

Interconnectivity

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.

Correlation

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.

Investment

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           

Random Monsoon and Sustainable Growth: Management of Power for Water

After a relatively long drought-free period, India is faced with the likelihood of a significantly deficient monsoon, if not a drought, this year. Coming on top of the slackening economic growth which is forecast to decline from a peak of around 9 percent reached in recent years to a current expectation of around 6 percent, the specter of drought is something which India could have lived without. In the past, declines in the initial month of June used to have been made up more than bountifully from the month of July. This time around, the deficit continues to be adverse even in the month of July, with the latest overall deficit forecast being placed at 15 percent by the India Meteorological Department. Not surprisingly, the common man and the businessman alike are worried about the likely impact of the truant monsoon on the economy.

Rains, the world over, have a significant impact in determining the quality of life; not merely for the farmers but also for the public at large, and the industries in particular. This is more so in emerging economies like India. The upstream and downstream linkages in terms of water for cultivation, drinking water, industrial water and electric power are substantial. While alternatives exist for generation of power, there is no alternative to water that is needed for irrigation, industrialization, drinking and household work. While groundwater serves to augment rain fed user needs, groundwater tables are highly dependent on copious rainfalls. Groundwater conservation and rainwater harvesting have helped in countering the rapid declines in groundwater tables but there has been no substitute for annual rainfall being timely and in adequate quantities for the health of the society and growth of the economy.

Forecasted, forewarned

The key to planning is forecasting. Despite the enormous technological development, prediction of monsoons is yet an imperfect science. The prediction of seasons is challenging mathematical modeling while prediction of seasonal or unseasonal rains is a proactive tracking science. More than that, in the context of global warming, the traditional seasons have been witness to unpredictable shifts, and the intensity of rainfall has been subject to much volatility. If the developed world has caused global warming, the developing world has borne its impact. Not recognizing the impact, however, the developing world has been following the earlier Western development path, with smoking factories and dated utilities, enhanced consumption of energy and reduction of green cover. Quite apart from a moderation of these trends, what is required is a robust globally integrated weather forecasting system, as opposed to India-specific weather tracking system.

The atmospheric and ecological variables that generate and influence the monsoons are far too many. While some of these such as natural solar heating, natural winter chilling, artificial atmospheric warming (real, man-induced!), draw of moisture from the seas, and other open water systems, soil conditions, plant conditions are visible they are so interactive, and are also so pervasive that they defy easy quantification. Over and above that, each severe weather phenomenon, be it a storm, cyclone, typhoon, hurricane or tornado modifies the cloud formation and travel, and accentuates or attenuates the monsoon seasonality and volatility. There is, therefore, a need for a concerted globally integrated research to identify appropriate primary and secondary variables and simulate predictive models. NASA and the US universities have invested, and continue to fund, millions of dollars to develop predictive models. In India, higher technological institutions (such as the Council for Scientific and Industrial Research and Indian Institutes of Technology through their specialized centers) conduct scores of projects to observe and conclude on these phenomena. The Indian Meteorological Department must explore how these scientific and technological initiatives can be better funded, better scoped, and better integrated to deliver more effective weather forecasts.

Declines, lagging growth

NASA has described the habitability criteria as “extended regions of liquid water, conditions favorable to the assembly of complex organic molecules and energy sources to sustain metabolism”. Clearly, monsoon and rainfall determines how habitats can form and sustain themselves. Yet, given that 70 percent of our planet is sea, and another 25 percent is either cold or hot deserts, and probably only 5 percent of the land is habitable, the rain-habitat nexus needs greater study. While 100 percent of rainfall occurs all over the planet, only 5 percent of the rainfall probably falls over the habitable region which has 100 percent of population. The need for rainfall to be adequate and predictable in habitable regions is self-evident. Yet, while the population has been doubling itself every four decades, especially in the larger and more populous countries such as China and India, the rainfall (or global precipitation) has at best been static, according to research studies. The need for the world to manage more of living with less of water is even more compellingly evident. It is, therefore, disturbing that all analysis of rainfall is carried out more in terms of historical trends rather than growth requirements.

Rainwater conservation and optimal utilization of water are the twin parameters of sustainable habitability expansion in future. The real challenge lies in retaining and harnessing the millions of cusecs of water that is showered in the catchment areas of rivers and their tributaries as well as the smaller rivulet and lake systems of the country. The largest dam in India is the Indira Sagar Dam in India which has a capacity of 12.22 billion cubic meters. In contrast, the Three Gorges dam in China has a capacity of 39.3 billion cubic meters! Before 1949, there were only 22 dams of any significant size in China. But now China has more than half of the almost 50,000 dams in the world that are classified as "large" because they have a height of at least 15 m or a storage capacity of more than 3 million cubic meters. In contrast, India has less than 2000 large dams today, though it had probably 300 of them (15 times more than in China) in 1947! Evidently, India has had a large lag in dam construction vis-à-vis China, and with a renewed determination of the governments, hopefully has still a huge unexplored potential, given the saying that India is a land of rivers. Not that dams do not come with their formidable financial and human costs and the tragedy and trauma of human resettlement. The benefits probably outweigh the costs to a significant measure, if the human elements and ecological protection are taken care of. The dependence on water in dams should not lead to any slackening of use of water in irrigation, industries and living. Given that 70 percent of fresh water usage is for irrigation purposes, low-water irrigation is a model that India needs to vigorously pursue. Israel is a role model in this context. Israel’s agricultural sector turned out a sustained growth in agricultural production based on close cooperation of scientists, farmers and agriculture-related industries. Israel has developed advanced agricultural technology, water-conserving irrigation methods, anaerobic digestion, desert agriculture and salinity research. Greenhouse technology ensures instant, year-round supply of high quality produce, while overcoming the obstacles posed by adverse climatic conditions, and water and land shortages. Technologies include computerized greenhouse climate control, greenhouse shading, drip irrigation, fertigation, water recycling, and biological control of plant disease and insects. Control of production parameters and titration of water use is the primary strategy.

For other industrial uses, several measures such as substitution of water cooling by air cooling, reduction in use of water for cleaning without compromise to quality, use of dry methods and delivery systems in water intensive industries, and water-efficient industrial processes (for example, low solvent manufacture of bulk drugs and low coolant usage for metal cutting) support water conservation. Metered usage of water, and evaluation against best practice requirements should be part of performance management of any industrial operation. Researchers in such industries must also aim at water efficiency in product and process development. For domestic, commercial and public uses, municipal utilities must aim at supply and regulation of high quality water to ensure public health. It is possible to conserve rain water in urban habitats with determination. In Tamil Nadu, mandatory rainwater harvesting in urban dwellings has resulted in a 50 percent increase in groundwater table. This strategy and achievement is a role model for other parts of the nation, and individual dwelling units. In India, this needs to be supplemented by enhanced availability of water for sanitation. The efforts by Bill Gates Foundation and others in this area must be supported and supplemented by the governments.

Power for water

India has nearly 20 percent of its total power requirement drawn from hydro-power. While hydro-power is an optimal solution when rainfall is copious, it risks both agriculture and industry in drought years. In fact, the power cuts routinely applied in India in summer months is solely related to the drop in hydro-power generation in water-starved summer months. India would do well to enhance its share of safe nuclear and clean thermal power, leaving water to largely its irrigation course. Hydropower in such instance would be the bonus and insurance. India’s total installed power generation capacity is reportedly 205 gigawatts (GW) while the expensive captive back-up generation capacity is another 60 GW (about 30 percent). The power blackouts that have happened in most parts of the Northern India on July 30 and 31, affecting over 670 million people in total for about 22 hours, are indicative of the urgent need for a steep increase in power generation capacity in India. However, in the new strategy, rather than depend on conventional hydropower generation as an adjunct newer and innovative methods have to be explored.

Given India’s long coastline of around 7500 kms there is a significant scope to pursue tidal and wave power projects and reduce the dependence on rain water power generation. Researchers believe that there exists enormous potential for non-conventional hydroelectricity generation from tidal and wave projects, as well as from small in-stream projects that will not require new dams. Thus far, few of these hydrokinetic projects have reportedly been realized. France’s La Rance Tidal Barrage, with a 240-megawatt maximum capacity, was the first large tidal power plant. It began generating power in 1966, and is still operating today. In South Korea, a 254-megawatt project was completed in August 2011. Now the world’s largest tidal operation, it has the capacity to provide electricity for half a million people on the country’s west coast. New Zealand also recently approved a coastal hydropower project. Wave power is also drawing the attention of both engineers and investors. Firms in France, Scotland, and Sweden, among other countries, are working to capture this emerging market. Estimates from the World Energy Council indicate that worldwide, wave energy has the potential to grow to a massive 10,000 gigawatts, more than double the world’s electricity-generating capacity from all sources today. India can take the lead and demonstrate how innovative hydro-kinetic (wave and tidel) power generation can conserve scarce rain water for the more important uses, including building an insurance for other non-power uses, and in any case, conserving water in the scarce months.

Posted by Dr CB Rao on August 5, 2012