Explosive growth became the norm for India in the global economy’s boom years, and few pundits disagree that long run growth potential is better here than anywhere else.
Explosive growth became the norm for India in the global economy’s boom years, and few pundits disagree that long run growth potential is better here than anywhere else. India’s prowess was tested in the global recession, but the subcontinent has rebounded handily. Its sights are now trained on longer term growth in an ambitious new five-year plan. Will India achieve its high-growth objectives?
Worries escalated as India’s growth slowed substantially in late 2008, but they were short-lived. By the third quarter of 2009, growth was back to the 8 per cent level. Growth slowed again in the dying months of 2009, but details show that strong underlying growth was hampered by temporary contractions in agricultural production and government spending. Why the resilience? India has below-average export exposure, and monetary policy was very responsive to the downturn. But the key reason is likely India’s pre-recession stimulus plan: its heavy ongoing investment in public infrastructure.
Policymakers in India are keenly aware that poor infrastructure is a key growth inhibitor, and as a result, attention has been paid to infrastructure spending in most of the more recent five-year plans. The current plan earmarked US$500 billion for various projects, from telecommunications to energy and transportation systems. India has been increasingly looking for private sector participation, with the targeted private component moving from 25% in the 10th plan to 36 per cent in the current plan.
Not content with these substantial sums, the government has again upped the ante for infrastructure spending. In a preview of the 12th 5-year plan (2012-17), senior government officials have endorsed a whopping US $1 trillion in infrastructure monies. If successfully dispensed, the program could go a long way to alleviating some of the most significant encumbrances to long term growth.
Will plans turn into projects? Only time will tell. For all its past heady growth, India has huge fiscal constraints. Public debt as a share of GDP hit 82% in 2009, and the near-term prognosis is not good. The consolidated deficit soared to 11% of GDP, weighing heavily on an already-stretched system. To compensate, a target of 50% private sector participation was set in the 2012-17 plan – risky, given that the private portion of the current plan has been revised down significantly.
Aware of the risks, the government is mulling over possible participation of pension plans, insurance plans and the possibility of private bond floats to support infrastructure plans. Even if successful, there are questions about overall domestic funding capacity, which has led to the inclusion of FDI – even though it weakened considerably in 2009 – as a key source of additional capital.
Canada has a growing presence in India. In the good years, exports rose 30% annually, bringing two-way trade to $4.5 billion in 2008. Direct investment in India surged at the same time, rising 13% annually to $801 million in 2008. This, plus a proven global infrastructure record, suggests strongly that Canada is well placed to participate in India’s ambitious medium-term infrastructure plans.
The bottom line? Infrastructure is critical to India sustaining its robust growth potential. But even with the size of the population, India does not have the capacity to build solely with domestic players. This is fertile ground for Canadian participation, and huge rewards face those who rise to the challenge.
