India's economy "condemned to reform"?

CRISIL's chief economist Subir Gokarn strikes a note of concern in his Business Standard article, "End of the India story?" about the underlying vulnerabilities in the Indian economy that are being exposed by the current economic turbulence. "The essential point," he says, "is that many of the symptoms of the current economic condition ["surging inflation, unprecedented oil prices, the fiscal situation threatening to slip out of control, foreign investment flows reversing and inducing the rupee to depreciate"] do appear to have a long-term dimension [the shortage of skilled labor, inadequate physical infrastructure, out of control oil and fertilizer subsidies and lack of investment in rural development] which poses risks for sustainable rapid growth. The common feature of these is that they are the consequence of government actions: either the failure to take appropriate ones or the enthusiasm to take inappropriate ones."

I have been arguing for some time with whoever will listen to me about the need to eliminate the subsidies on conventional fuels and electricity to encourage renewable energy and energy efficiency to limit GHG emissions. With the persistence of fuel subsidies, renewable energies cannot compete on a large scale. When we don't pay the true cost of the electricity we consume, there is diminished incentive to conserve .

The British economics firm Lombard Street Research estimated that in 2007 fuel subsidies cost the GoI some $17.5 billion - 2% ofGDP. With the surging oil prices this figure will no doubt rise significantly in 2008. Gokarn argues that spiraling oil and fertilizer subsidies threaten to crowd out public investment in infrastructure and social welfare, potentially creating a vicious cycle. Without adequate investment in education, the skills gap will worsen, constraining long-term growth prospects. The same analysis can be extended to infrastructure and rural development.

I have been approaching many issues lately through the lens of climate change, and Gokarn's analysis raises alarms. With productive investment crowded out by runaway subsidy bills, the engines that could propel us toward low-carbon growth are threatened. We need public investment to fuel R&D into low carbon technologies, and we need entrepreneurs and highly skilled labor to develop and deploy these technologies on a wide scale. We also need the "facilitating environment" Gokarn discusses that favors renewable energy and energy efficiency and provides the right incentives (not necessarily subsidies) to scale up their application.

I am hopeful that the India story has many more chapters yet to be written and that the chapter, "Global leader in the fight against climate change," will be prominent among them.