Given its extraordinary demographics and the unfulfilled demand for infrastructure and consumption combined with the hopes and predictions of responsible bankers such as Citibank and Goldman Sachs, India must know her strategy to keep growing at 10% and with sub-5% inflation to be the largest economy in the world by 2045.
Is such a magic possible? How can a growth rate of 10% be maintained with an inflation rate of 5%?
Yes, this can be done if three issues, namely energy, reforms and governance, are addressed.
The first thing India needs to address is the growing dependence of oil imports of its energy requirements impacting its fiscal deficit.
The India growth story has been studied and opined on by major institutions across the world. A Goldman Sachs study clearly states that "India could be 40 times bigger by 2050a¦" It has also predicted that from 2007 to 2020, India's per-capita GDP in dollar terms will quadruple, with the Indian economy surpassing US (in dollar terms) by 2043.
Similarly, financial services group Citi mentioned in a report that "China should overtake the US to become the largest economy in the world by 2020a¦ then be overtaken by India by 2050."
However, it is equally real that one of the greatest impediments to India's growth is our growing budget deficit. A recent report by Standard & Poor's pointed out that the Indian government needs to pay specific attention towards reducing its deficit in public sector spending. It is, indeed, imperative that the government reduce subsidies in sectors such as fuels that would go a long way towards decreasing the budget deficit.
One core reality remains that although the country imports 80% of its crude oil requirement, it continues to maintain price controls on three sensitive petroleum products: diesel, liquefied petroleum gas (LPG) and kerosene. The government aims to insulate consumers against high global crude oil prices. And, although petrol prices were deregulated in June 2010, the current prices continue to cause under-recoveries to oil companies, especially the public sector undertakings.
RBS Asia Securities, Singapore, estimates that "with every $10 increase in crude oil price, India's current account deficit increases by 50 basis points and the fiscal deficit rises by 20-30 basis points (because of the current subsidy on LPG, kerosene and diesel)a¦" India's GDP for 2010-11 is estimated at $850 billion with our fiscal deficit estimated at 4.8% of GDP.
Considering the above, the primary agenda of the Indian government must be to address the country's requirement for energy through renewable and internal sources, thereby reducing dependence on imports and reducing the impact on current account deficit.
In a recent study by BMI, massive energy investment is required to achieve targeted economic expansion. To deliver sustained GDP growth of 8% till 2031-32, primary energy supply needs to grow to up to four times current consumption, installed electricity generating capacity needs to increase six- or seven-fold, and the coal requirement needs to triple.
The Indian government is making a significant foray into renewable energy initiatives. The ambitious Jawaharlal Nehru National Solar Mission aims to make the country a global leader in solar energy. The mission envisages an installed solar generation capacity of 2,00,000 mw by 2050. Total funding from the government for the 30-year period will be about 850-1,050 billion that includes investment of 50-60 billion during 11th Five-Year Plan and an investment of 150 billion during the 12th Plan period.
However, India's growth is driven by consumption.
Besides its investment in renewable energy, India will also have to build the required infrastructure to use its internal resources to meet energy requirements.
According to the Oil and Gas Journal, India had about 38 trillion cu ft of proven natural gas reserves as of January 2010. Recently, ONCG has made significant gas discoveries in the country's north-eastern state of Tripura. The bulk of India's natural gas production, however, comes from the western offshore regions, especially the Mumbai High complex, though the Bay of Bengal and its Krishna-Godavari (KG) fields are proving quite productive. The onshore fields in Assam, Andhra Pradesh and Gujarat are also significant sources of natural gas production. The recent RIL-BP deal will lead to substantially-accelerated natural gas production, higher discoveries and increase in gas recovery rates.
The second thing India needs to do is get reforms back on track and speed up disinvestments - not just of public sector undertakings but also of departments of ministries. Instead of investing in fixed deposits, Indians should be given an avenue to invest directly into its core public services. This route of investment will ensure that India is owned by Indians, not by the government or its institutions, and neither by foreigners through FDI.
The third and final thing India needs to ensure is transparency and accountability in all its economic activities and keeping corruption in check.
Incorporating the concept of public-private partnership will also necessitate corporate governance implementation that will go a long way towards fighting corruption and inefficiency.
Surveillance and monitoring frameworks that are successfully being implemented, digitisation of tax payments and filing of information by companies and implementation of XBRL would not only streamline governance processes but will ensure transparency, accountability and check and prevent corruption.
India will have to focus on and implement the above to maintain its growth trajectory at 10% for the next 35 years, and control inflation to be the largest world economy at $45 trillion by 2045.
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