Reality Check on India's Rise (Agenda)
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Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.
Video Transcript:
Colin Chapman: When 680 million people -- about one-tenth of the world's population -- are without electricity for the best part of two days, it's a news story. But the power grid outages in northern and eastern India that crippled cities, caused chaos to public transport, hospitals, schools and industry are over, along with the headlines about the biggest blackout in world history. But there's much more to it than that. The question is: How ramshackle is India's overall infrastructure and what impact will this have on the country's development? Given that the world's largest democracy is so often talked up as a global industrial powerhouse.
Welcome to Agenda. I'm Colin Chapman and welcome back Stratfor's Reva Bhalla.
Reva, India's newly appointed power minister blamed some states for hogging too much electricity. And apparently, without a trace of a smile, he told the Business Standard newspaper that India still has the world's best power grid -- a statement rather at odds with the widespread public anger.
Reva Bhalla: Well this is certainly an embarrassing episode for India, but anyone familiar with the country shouldn't be surprised. The fact of the matter is that India's high growth rates over the past several years have led electricity demand to vastly outstrip the supply. But blackouts in India are an all too common occurrence. During one of my more memorable trips to India, I remember sitting across the table from a colleague at an air force base in New Delhi. And in the course of our two-hour meeting, the power was out for about 60 percent of the time. Now I was unaccustomed to holding a meeting in the pitch dark, but my colleague did not even flinch. And so, the infrastructural problems and the lack of faith in the government to alleviate those problems have been conditioned in many ways. Now there's been a lot of hype over the past decade about this concept of a "Shining India," the idea that a well-educated, somewhat English speaking, cheap and enormous labor pool could allow India to emerge as a major player on the global stage. At Stratfor, we've actually been much more pessimistic about India's economic prospects. You'll find pockets of this so-called "Shining India" concept in places like Bangalore and Hyderabad where a number of multinational corporations have moved. But you still can't escape India's interminable dilemma of matching that steady growth rate with a bloated and lethargic bureaucracy, crippling infrastructure, rampant corruption, crushing demand and a population that's not afraid to riot and complain against the government when basic services aren't met.
Colin: We know one root cause was states drawing too much power from the grid then they were supposed to, partly because the lack of rain has forced farmers to pump water to spray their crops. But we also know that gas production from the Reliance field in the Bay of Bengal has dropped by half and the prime minister's energy plan is simply not moving fast enough. Can these things be fixed?
Reva: The blackout was yet another wake up call for the government, but the constraints are so deeply institutionalized that I think it's going to be very difficult for the fundamental causes of the electricity crunch to be addressed in any meaningful or efficient manner. So let's look at what led to this particular blackout. It's been a really hot summer, urban power demand for air conditioning has skyrocketed, the monsoon season was late this year and so that raised rural demand since pumps are used to pull out ground water to compensate for deficient rains in the farmlands. The lack of rainfall has also hit the country's hydroelectric dams and then you have the problem of the major northern states hogging the bulk of electrify from the national grid, because the penalties for drawing excess power are pretty minimal and there's a severe lag of grid discipline and monitoring overall in India. The funny thing is that India had actually set a record in the past five years in new generating capacity which in theory should have alleviated the shortages, but then you've got fuel problems and as you mentioned Colin, natural gas from the Bay of Bengal has been depleting, forcing many power plants to take a hit. And coal is still a major energy source and the coal industry in India is monopolized by the state. That means extremely high levels of inefficiency across the country. Many power stations haven't been able to adjust to increases in coal pricing, and then domestic environmental concerns have been impeding the few private coal stations. Then you've got high oil prices complicating matters even further.
So then look at what is happening at the state level. Indian elections cycles run every five years and most Indian politicians are far more worried about their personal status in their re-election then they are about long-term development. And so not wanting to risk riots, many state governments haven't raised their power tariffs for up to 10 years and free or subsidized power supply, especially to farmers, is a very common campaign promise. So not surprisingly, the power distribution companies are going bankrupt and they simply can't keep up with the demand. So now some states -- Kerala, Tamil Nadu, Karnataka, West Bengal and Delhi have felt enough pressure to finally raise tariffs up to 30 percent to save the power stations.
But there's going to be a political fallout, and there's no other choice especially when politicians are going to be blamed anyway for major power failures like the one we saw this past week.
Colin: What's the state of India's other infrastructure -- roads, railways and ports? Many talk about India as a potential rival to China but is that really possible? Reva: It's a similar story, Colin. The electricity crunch caused by massive amounts of red tape, corruption, heavy subsidies and lack of coordination among the states and between the state and the center is really just one example of India's infrastructure crisis. The roads, railways and ports suffer from the same ailments. In some ways the attention India received as an emerging power over the past decade has actually hindered the country's development. This idea of "Shining India" was attractive, but Indian policy makers felt that they could take the shortcut to superpower status without addressing fundamental developmental concerns. Nuclear weapons and pockets of foreign investment are not enough to claim that status especially when much of the country is still living in abject poverty and when states have very little incentive to carry out policies from the center. So even when New Delhi announces a major five-year infrastructure plan, for example, it doesn't mean that in five years these problems are necessarily going to be resolved. It has to work through bureaucratic maze of policy makers who are generally not willing to deal with the public backlash and who are prone to pocketing funds along the way.
Colin: And this shows of course how difficult it is for a developing country to morph into, well, an OECD [Organisation for Economic Co-operation and Development] country.
Reva: Every country lives under constraints and India as country of 1.2 billion people, is really no exception. Foreign investors are growing tired of dealing with these kinds of constraints and they're searching for cheap labor elsewhere. India's growth numbers are now below 6 percent, which is still pretty high according to the global standard, but it's also a reminder that high levels of growth are not sustainable. Every country needs to go through a correction cycle and in countries that lack the institutions and the infrastructure to cope with those downturns, the pain is going to be that much more intense.
Colin: Does what you've said, what we've seen in India this week apply elsewhere?
Reva: Well remember that India is not the only BRIC country hitting the wall. Brazil is still struggling to keep inflation under control and stimulate industry when its currency continues to appreciate. China's problems have become much more visible and are now becoming exposed through the country's political struggle as Beijing struggles in trying to balance the need for economic reform with social stability without compromising on the need for high growth to avoid unemployment. The European crisis is only compounding China's problems, as you would expect and depressing demand for Chinese goods. While China has a much easier time than India in implementing policy, the economic and political interests at the local and provincial level are increasingly out of sync with the party leadership.
Colin: What about that other BRIC country, Russia?
Reva: Now Russia is doing all right now, but it will certainly take a hit from the European slowdown and its commodity-heavy economy will run into trouble as shifts take place in the global natural gas market over the next decade. Russia's political and business environment has also not been very attractive for foreign investors for a lot of reasons. So with Europe and China both slowing down and the second- and third-tier economies suffering the consequences of those shifts, it's going to become all the more important to watch out for the new basket of emerging economies to come out of this crisis. On our shortlist, we're looking most intently at countries like Mexico, Poland and Turkey.
Colin: Reva, we're out of time, we'll have to leave it there. That's Agenda for this week. Thanks for your company and for being with Stratfor.
