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High global oil prices have once again put the Indian economy under pressure. It is likely that India will end the current fiscal year with a balance of payments deficit of around $60 billion. That will be manageable, especially given the buffer of foreign exchange reserves with the Indian central bank. There is little reason for overblown fears right now. However, whether the stress increases or decreases will depend on how global oil prices move in the months ahead in tandem with slower global economic growth, as well as the response of international investors to the ongoing monetary tightening by many central banks. Neither is easy to predict, given the volatile geopolitical situation.

There is a bigger lesson in the ongoing episode of turmoil in the global market for crude oil. India is structurally deficient in energy, and needs to generate foreign exchange from the rest of the world to pay for its energy imports, either through exports or capital inflows. This is as much a question of economic strategy as it is of macroeconomic management.

In his Sukhamoy Chakravarty Memorial Lecture delivered in January 2019, Vijay Kelkar had pointed out that the growth strategy followed by any country depends on empirically identifying important structural constraints to growth, and then designing policies to ease those constraints. What follows is a potted history of how India broke through four earlier structural constraints, and whether the green transition offers a similar opportunity in terms of our energy constraint.

The savings constraint: The Estonian development economist Ragnar Nurkse had once succinctly defined the growth challenge for poor countries in terms of their ability to raise the rate of voluntary savings from 5% to 20% of national income. India had a very low savings rate in the years after independence, of around 9.5% of gross domestic product (GDP). The average citizen was too poor to save enough to fund investment in new capacity. The country’s savings rate crossed 20% on a sustainable basis only in the late 1980s, though the first big change took place in the 1970s, as bank branches were opened across the country after bank nationalization in 1969, when India’s savings rate went up by more than five percentage points within a decade.

The food constraint: India’s early development plans focussed on building industrial capacity. It was assumed that agriculture was a bargain sector, where productivity can be increased with minimal investments. The shortage of food—and wage goods in general—began to pinch in the 1960s, a decade that saw successive droughts. Our dependence on food imports from the US also put independent foreign policy at risk. The Green Revolution at the end of the 1960s helped India break the food constraint. The macroeconomic impact of a poor monsoon is today far less severe than it was 50 years ago, even though rising food prices can still be a major political issue.

The foreign exchange constraint: There was a time when Indian economic documents would almost automatically add the adjective ‘scarce’ to the words ‘foreign exchange’, which was rationed by the Reserve Bank of India. Our policy focus on import substitution behind high tariff walls ensured that the country barely had enough hard currency to buy machines or oil from other countries, let alone consumer goods. India was hit by periodic balance of payments crises till 1991. The importance of exports began to be recognized in the 1980s, though it was the opening up of the economy in 1991 that really helped India break its foreign exchange constraint, both through greater trade with the world as well as capital inflows into the economy.

The home market constraint: Several economists in the 1970s began to point out that India did not have a domestic market that was big enough to absorb industrial goods that were being produced by local manufacturers. Among the underlying reasons was the fact that average incomes were low as well as unequally distributed. A gradual increase in incomes through economic growth was one part of the solution. The other was a determined policy in the 1980s to strengthen the rural market via higher support prices for farm produce. The third was a recognition of the importance of the international market, first through rupee depreciation in the 1980s and then the trade reforms of 1991.

Each of these constraints—domestic savings, food, foreign exchange and home demand—were eased through specific policy moves, such as pushing banks into unbanked areas, incentivizing farmers to take up new crop technology, export promotion, a competitive exchange rate, and re-linking India to the international economy.

There are other structural constraints to think about, such as state capacity. However, the question worth asking right now is this: Will the ambitious transition to green energy that India is committed to help ease the country’s energy constraint? It is no secret that India is better endowed with sunshine than it is with crude oil, but we need to be part of emerging global supply chains for the provision of new forms of energy in the coming decade.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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