If the Indo-US nuclear deal was Manmohan Singh’s signature moment in his first term as prime minister, the week gone by could well be the one for his second. In 2008, Singh risked mid-term elections in an attempt to secure the country’s future energy needs. He has again staked a lot on energy security, this time his focus is on cutting waste.
Huge open-ended fuel subsidies do not fit into the script of a vibrant economy, neither do mountains of food rotting before they reach our kitchens. India is short of energy in terms of what we need to feed ourselves as well as what we put in our factories and power stations. And the bill on either count keeps climbing by the year.
Subsidised fuel has inured us to rising crude oil costs across the world and we end up burning more fossil fuels than we can afford. In 2011-12, India imported $155 billion of oil, nearly a third of its total imports and almost enough to cover the trade deficit of $184 billion. Oil imports climbed $50 billion from a year ago due to spikes in crude prices and also because India’s energy consumption remained oblivious to how international prices moved. Our oil demand does not decline as prices rise and this adds to the downward pressure on the rupee, which makes subsequent purchases more expensive. It’s a vicious cycle that can be broken by freeing up all fuel prices and reimbursing only those who cannot afford market rates.
The world’s second largest producer of fruits and vegetables loses a quarter of its produce between the farm and the table. Likewise, nearly 7% of Indian grain rots in fields and granaries. The refrigeration that would preserve all this food is non-existent, only one in seven tonnes of our vegetables goes through cold storage. Foreign investment in cold chains has not materialised because India denies their developers access to retail sales. The most immediate way to raise farm productivity involves allowing the Wal-Marts and Carrefours to open vends with deep back-end infrastructure that can contain this horrible waste.
Singh’s government has been accused of doing nothing on both counts. Not anymore. The prime minister has put his foot down on the reforms he believes in: India’s economy must be unshackled to protect its most vulnerable citizens from poverty, disease and hunger. The odds on the two occasions that Singh has taken a big political gamble have been in favour of his government. In 2008 — and now — the PM risked a few months out of office for lasting economic gains. The managers of the ruling alliance will have crunched the political numbers before taking on defiant allies like Mamata Banerjee, as they did with the Left on the nuclear deal.
The soft option would have been simply too expensive. The economy has slowed to a crawl, it grew 5.5% in April-June 2012, down from 8% in the same period a year ago. The loss of momentum endures from the immediately previous quarter when the gross domestic product grew by 5.3%, the slowest pace in nine years. Industry, apart from power, has stopped growing. Agriculture is slowing down, and the biggest chunk of services is down to a third of its growth rate a year ago.
The situation — where current economic momentum as well as future prospects are being jeopardised by the UPA’s welfare commitments like cheap diesel — can only be salvaged by fiscal rectitude. Government consumption in April-June 2012 grew twice as fast as during the same quarter of 2011. Such prodigious spending is squeezing out private consumption, which is now growing a fifth slower than a year ago.
This is nothing compared to the havoc wreaked on investments. Real expenditure on setting up new production capacities in the economy has all but stopped growing. In effect, a bloated government is eating into household spending after having wiped out investment demand.
When Singh was called in to drive India out of its 1991 crisis, he set out to alter the way the Indian economy works so thoroughly that it would never again have to face a similar situation. Of late, however, a familiar set of economic conditions prevails: government spending beyond its means, high and persistent inflation, not enough exports to cover imports of oil, mounting public debt, unwieldy subsidies, and a threatened sovereign credit rating. Singh is now displaying the mettle that pulled India back from the abyss once.