The Hindu Business Line : What could put India@Risk?

A report presented at the recent India Economic Summit of the World Economic Forum provides insights into the six key risks that could be a hurdle to the India growth story.

Vinay Kamath

The palatial surroundings of the Taj Palace hotel in New Delhi seemed an unlikely setting to discuss the potentially debilitating risks that could hamper India’s rapid growth, far removed as it were from that bleak scenario. ‘India@Risk: Six global challenges ahead’, was one of the subjects of a weighty discussion at the India Economic Summit of the World Economic Forum (WEF) held recently in New Delhi. But as the panellists on the discussion, among them Ms Madeleine Albright, former US Secretary of State, and Mr Robert Blackwill, former US Amabassador to India, pointed out, the risks are quite real and India had better be alive to them.

The key risks

A report prepared by the WEF’s Global Risk Network and the CII gave the latest insights into trends, potential consequences and mitigation relevant to six key risks India faces. The risks outlined were:

Economic impact of demographics: India is facing a demographic dividend, what must be done to ensure it does not turn into a demographic liability?

Loss of freshwater (quantity and quality): How best can India cope with increasing freshwater insecurity?

Economic shocks and oil peaks: How vulnerable is India to external economic turbulence?

Geopolitical risks: Globalisation vs protectionism — what happens if there is a backlash or retrenchment from globalisation? With the explosion of expectations, can India keep up with its own aspirations?

Climate change: Environmental challenges to India’s growth — can India balance the trade-offs between the environment and growth?

Societal risk: Infectious diseases — what must be done to combat the spread of high-mortality disease and pandemics? What if India fails?

In preparing the report on risks, more than 40 experts from business, academia, NGOs and policy-making were asked to consider the drivers of the recent period of unprecedented growth and the opportunities that exist, as well as the threats to continuing progress.

War, oil and terrorism

“It is clear that India is at an inflection point,” points out the report, “the prospect of sustaining 8-10 per cent growth is achievable but a number of basic challenges are acting as a handbrake on development and need to be addressed.” Mr Blackwill pulled no punches when he conjured up two apocalyptic alternatives: a US attack on Iran or living with a nuclear-armed Iran. As he said, “Iran has clearly embarked on an effort to acquire nuclear weapons.” So, within the next two years, the US president will face a “binary decision” to attack or acquiesce, both with disastrous consequences, emphasised Mr Blackwill.

A US attack, he said, would lead to a long war, alienate the Islamic world and increase terrorism globally. The other alternative is if Iran acquires nuclear weapons, “it will change the world” and other Sunni states will acquire weapons and India will be in the firing line. At the least, this has the potential to create serious negative effects on the Indian economy.

The other thing that could potentially derail the India growth story, said Mr Blackwill, is the price of oil. An ADB study indicates that every $10 per barrel rise in the price of oil held for a year could cut India’s annual growth back by one per cent. So, if the price of oil reached $150, India would stare at a three or four per cent rate of growth. Describing it as a possible “disaster”, Mr Blackwill said this is a real possibility if the US attacked Iran. “I am not predicting a war, but we are going down that river at about four knots,” he added.

The other high-profile panellist, Ms Madeleine Albright, too, was equally candid when she pointed out the risks to India were from terrorism, nuclear proliferation and the gap between the rich and the poor.

She also questioned the relevance of world bodies created in another age, such as the UN, the WTO and the Doha Round, saying: “Given the interdependence of the world, the international institutions we’ve grown up with don’t work.” She said that the world should look at ways of bringing different players to the global decision-making table, particularly businesses and NGOs, to reflect the changing power structures in the world. “Coca-Cola probably has more power than Uruguay,” she exclaimed.

Demographic dividend?

The demographic challenge was dealt with at length by the panellists. Over half of India’s population is under 25 years of age and within a decade the working population could peak at 800 million people, posing huge challenges in terms of creating employment and training workers.

As Mr Shamsher Mehta, Director-General, CII, pointed out, “The rest of the world is ageing; India is in a position to provide the world’s workforce.” However, he conceded that the education system has come unstuck and vocational training is seen as a failure. India’s demographic surge should be converted into an opportunity, he said, cautioning that “these ten years are never going to come again.”

Mr Chaly Mah, CEO, Asia Pacific, Deloitte, Singapore, busted another myth about the demographic dividend. Education, he said, is the core of the issue. “If 71 million people are going to join the workforce in the next five years, the question is not if there will be enough jobs but are these 71 million employable?” Deloitte’s costs, he said, in recruiting and training Indian employees have escalated. It’s a myth that China and India have a lot of people available for hire, because “when talking about skilled professionals, there is a massive shortage.”

Going in-depth

The India@Risk report deals in depth with each of the potential threats to the Indian economy. Most of the statistics and the reality of it all are known but, collated together, it makes for stark reading.

Loss of freshwater: India has 18 per cent of the world’s population but only 4 per cent of its water resources. The National Commission on Water predicts that by 2050, demand for water will exceed all available sources of supply. It goes on to say that social, political and economic tensions over access to quality water resources may cause short- and long-term damage to the business and investment climate in India.

Economic shocks and oil peaks: The report points out that the mood is upbeat; the consensus is for a repeat of a “Goldilocks year of growth in 2008” (i.e., 8 per cent plus). India is far better placed to withstand an economic downturn than it was in the 1990s. However, while sustained 8-10 per cent growth for India is possible, it is not a given, as three ugly bears are threatening the Goldilocks scenario: a rising rupee, an oil price shock and an asset price collapse (either local or global).

Globalisation vs protectionism: The report says there are divergent views on this. Some experts see a reversal of globalisation as a key risk, while others posit that India is well-shielded by virtue of its low share of world trade, huge international diaspora and success in becoming an ICT hub. Others believe that inequalities are beginning to diminish, while yet others say they are growing. The mismatch of interests and/or negative perceptions could lead to an endogenous backlash against globalisation, as well as social and political tensions.

Climate change: The trend is that India has become a major global player in carbon emissions — it is now number four in the world in its overall carbon dioxide emissions, behind China, the US and the EU. India’s emissions per capita increased by 50 per cent in the last 15 years, says the report.

Trends in India’s climate change risk depend on global drivers: global carbon emissions and deforestation, both are systemic and entrenched. The mean surface temperature in India has increased broadly in line with the global trend, while in 2007, the worst flooding in western India in over a century killed over 1,200 people with millions displaced. The risk is that the indirect impact of global climate change could have dramatic effects on demand and investment patterns as well as interrupting business operations and supply chains.

Infectious diseases: The report points out that HIV/AIDS and TB are highly connected and mutually reinforce each other: the high prevalence of both threatens the Indian society and economy by reducing the workforce, diminishing productivity and cutting household incomes. Diseases such as malaria are developing new drug-resistant strains. And other chronic diseases such as diabetes, cancer and heart diseases too are emerging as debilitating factors.

The report has systematically catalogued each risk, the important trends, impact, and the risk mitigation by the government with examples of affirmative action.

Terrorism: Lastly, the emerging risk for India is the emergence of organised terrorism. In recent times India has faced the worst terrorist attacks on its soil since 2004, second only to Iraq in terms of lives lost! Certainly, the risks outlined in this report provide food for thought, and action, as India hurtles on.