Dr Subir Gokarn
Jan 16 2015
Part-5
Excerpts from the presentations at the Roundtable on National Security Key Challenges Ahead organised by The Tribune National Security Forum in collaboration with the Indian Council of World Affairs See also, www.tribuneindia.com
In the last three years, we have seen repeated jolts and shocks to the rupee. It has moved very sharply in the course of a few weeks and this has been extremely disruptive to business, to sentiment, to overall economic activity. People cannot deal with such volatility in the rupee, particularly foreign investors whose returns were completely neutralised by the rupee depreciation. Why did that happen and what are the national security implications?
Obviously, it makes the economy extremely vulnerable. There is a loss of credibility, a sense of firefighting and the inability to focus on long-term policy-making. All of these are vulnerabilities that we need to recognise, but the key issue is why we, or how we, let our current account deficit increase from a very, very stable 2 per cent of the GDP, or less, for 20 years — in fact, we had surpluses — to a sudden explosion of 4.2 per cent in a year and 4.8 per cent in the second year? That is the context in which rupee vulnerability became very, very acute.
So, a very significant element of economic vulnerability is to have a mechanism in place to not allow the currency to move so dramatically. We were not the only ones affected by this. Other countries also saw a lot of turbulence. But the impact on our economy was acute in the financial and retail sectors and foreign investment. There is a lesson there in terms of trying to create conditions which prevent this kind of shock from manifesting. Why did our current account deficit grow so large? There were four factors.
Firstly, gold imports grew from 1.2-1.3 per cent of the GDP in 2007 to about 3.1-3.2 per cent in 2012. It was a massive increase, but it created a big hole. The second factor was oil and the increase in its prices from about $80-85 per barrel in 2010 to $105-110, which persisted until a few months ago. Two other factors came into play in 2010 and 2011. Our coal imports grew from virtually nothing in 2007. We import lots of coaking coal, but not non-coking coal. Now, we import about $10 billion worth of non-coking coal because we have to feed all the power generation capacity we created without the corresponding increase in coal capacity. And we know the story behind that. But this kind of rapid increase and dependence on other countries for critical items is something that is of great significance when it comes to managing microeconomic vulnerability. We need to focus on it as we move forward.
Three long-term issues
We are faced with three long-term issues. The first is food. China has acquired about 1.2 lakh sq km of land in Brazil for producing food, which will then be shipped back to their country. They have realised that their man-land ratio and productivity has started to fall and they cannot risk being in a situation of vulnerability and depending on global markets for food supplies. So, they are locking things. They are locking minerals and raw materials in Africa and food supply chains in Latin America. We are not doing anything like that, so our best bet is to ensure that our domestic food supplies are adequate to feed our population. Are we growing the right kind of things? I have been a regular critic of our cropping patterns, that have been distorted by the procurement policy. We are producing too much cereal, as you can tell from the very large stocks that we have, and not enough other things, particularly proteins, which you can tell from the consistent price rise of these things. It suggests that something needs to be done to rebalance the production and cropping patterns.
Land productivity is the second issue. The causes are partly manmade, partly natural. There is a very skewed use of fertilisers and excessive use of urea, which is induced by subsidies. This has contributed to a significant reduction in land productivity and will come back to haunt us as we try to feed larger amounts of food to more and more people.
The third issue is water. We have problems from both above and below. If we look at rainfall patterns over the last several decades, there has been a steady downward trend in the annual average precipitation. The absolute level of normality is going down, and if you break it up into regions, the most significant decline is in the central part of the country, which is essentially rain-fed, has little irrigation capacity and grows some critical crops, pulses, oilseed and cotton. Vidarbha lies in this region.
Meteorologists call this multi-decadal reversion, or variation, which happens for 50 years before the reversal. But we do not know if it is going to reverse, we do not know the impact of climate change on rainfall patterns. The prognosis for South Asia, not India alone, in the three-volume Intergovernmental Panel on Climate Change report indicates that South Asia may not witness too much reduction in the overall precipitation, but will see a significant increase in extreme weather events. The same rainfall as per their models will start to get bunched into a few or a number of long-spell events; long, dry spells interspersed with heavy flooding.
We have seen floods in Uttarakhand and Kashmir, cyclones in the Bay of Bengal. The phenomenon has increased in visibility and we are paying a lot more attention to it. There is going to be disruption of normal agricultural patterns because you have a structure of sowing and harvesting which gets disrupted by rain. This is something we have to look at. That is the top-down view. The bottom-up view is the extreme depletion of ground water for a variety of reasons.
In Delhi, within a kilometre or so of the Yamuna, which you should expect to have a very high water table, we have seen a decline of about 150 feet over the last decade. Everywhere you go, you see borewells becoming more and more expensive to dig, more and more risky in terms of finding water. This phenomenon poses huge threats to agriculture and urban settlements as ultimately, cities are going to grow and become efficient to the extent that they have access to water.
Need of more jobs
Another critical issue pertains to livelihoods. We need to create 10 lakh jobs a month to accommodate new entrants in the workforce, forget about the backlog of people still without organised, formal jobs. It is a daunting task and we have to anticipate that without making significant inroads into this particular pool of people, there are threats that materialise from it.
We have to think about creating skills among people entering the workforce, which is challenging enough. We have the National Skill Developing Cooperation, we have the Skilling India Mission, we have a new ministry focused on skills, but what we also have to accept is that in today’s environment, skills become redundant or absolute in very short cycles. What you learn today in a manufacturing process will be obsolete in five years. So, either you move up, which means you take on supervisory roles or something that does not require the direct application of technologic or technical skills, or you move out because a younger person comes along and allows the employer to assimilate the newest technology. In the US, certain professions have become completely obsolete and redundant over the past few years. The tax preparer used to be a very solid middle-class profession. However, software has wiped this profession completely out of sight. It does not exist anymore and we see that happening in more and more activities as we go long. So, not only do we have to worry about skilling new entrants to the workforce, but also about re-skilling people at five or six-year intervals to keep them employable. Given our demographics, that may actually be an even more significant challenge because taking a 28 or 30-year-old out of the workforce and giving him or her a new set of skills is inconceivable in our current framework.
This problem is compounded by the fact that the maximum number of people entering the workforce are actually in the least-affluent states. That is the correlation which we have to recognise: the skew of population and economic performance, economic growth and the very adverse impact.
Migration is a safety valve of some kind, but as it increases, it also poses political risks. There is a conflict, there is the “sons-of-the-soil” kind of tendency that many states manifest, and so, how are we going to create jobs where people are in a situation where the states are relatively backward in terms of all of the things that you need to put in place to create an employment process? It is a huge source of economic vulnerability.
The tasks are huge and the risks high. A concerted focus is required in addressing these individual problems and appreciating the linkages between them.
For Part-1, click here
For Part -2, click here
For Part -3, click here
For Part-4, click here
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