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a report of the csis

wadhwani chair in

u.s.-india policy studies

The Emerging Indian Economy

Persis Khambatta

Editor February 2013

C H A RT I N Gour future

Karl F. Inderfurth

Foreword


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a report of the csis

wadhwani chair in

u.s.-india policy studies

The Emerging Indian Economy

Persis Khambatta

Editor February 2013

C H A RT I N Gour future

Karl F. Inderfurth

Foreword


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About CSIS50th Anniversary Year

For 50 years, the Center or Strategic and International Studies (CSIS) has developed solutions tothe worlds greatest policy challenges. As we celebrate this milestone, CSIS scholars are developingstrategic insights and bipartisan policy solutions to help decisionmakers chart a course toward abetter world.

CSIS is a nonprot organization headquartered in Washington, D.C. Te Centers 220 ull-time staff and large network o affiliated scholars conduct research and analysis and develop policyinitiatives that look into the uture and anticipate change.

Founded at the height o the Cold War by David M. Abshire and Admiral Arleigh Burke, CSISwas dedicated to nding ways to sustain American prominence and prosperity as a orce or goodin the world. Since 1962, CSIS has become one o the worlds preeminent international institutions

ocused on de ense and security; regional stability; and transnational challenges ranging rom en-ergy and climate to global health and economic integration.

Former U.S. senator Sam Nunn has chaired the CSIS Board o rustees since 1999. Formerdeputy secretary o de ense John J. Hamre became the Centers president and chie executive o -cer in April 2000.

CSIS does not take specic policy positions; accordingly, all views expressed herein should beunderstood to be solely those o the author(s).

2013 by the Center or Strategic and International Studies. All rights reserved.

Cover photos: op lef, New Delhi rail construction, http://www.ickr.com/photos/we-bethere/3088096093/sizes/o/in/photostream/; right, Windmill, http://www.ickr.com/photos/yodelanecdotal/2215664150/sizes/o/in/photostream/; bottom lef, Medical acilityin Vellore, India, http://www.ickr.com/photos/morganmorgan/3253292665/sizes/o/in/set-72157613362960382/; bottom center, Fabric printing actory in Mumbai, http://www.ickr.com/photos/drsora/2187985193/sizes/o/in/photostream/.

Interior photos: Page viiiFreight transport o coal; Crispin Semmens photostream, CreativeCommons License, http://www.ickr.com/photos/conskeptical/5336571112/. Page xiDelhi tra -c jam; Lingaraj G Js photostream, Creative Commons License, http://www.ickr.com/photos/lingaraj/2415084235/sizes/l/. Page xiiPamban Collapsible Railway Bridge; Asim Chowdhurysphotostream, Creative Commons License, http://www.ickr.com/photos/asianu/6263247725/sizes/o/in/photostream/. Page xivPharmacy in Andhra Pradesh; Irekias photostream, CreativeCommons License, http://www.ickr.com/photos/irekia/6996791937/sizes/k/in/photostream/.Page xviii extiles actory in Mumbai; DRS Images photostream, Creative Commons License,http://www.ickr.com/photos/drsora/2188788064/sizes/o/in/photostream/.

Center or Strategic and International Studies1800 K Street, NW, Washington, DC 20006

el: (202) 887-0200Fax: (202) 775-3199Web: www.csis.org


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contents

Foreword iv

Acknowledgments vi

Introduction vii

1. Indias Energy Options: New Sources, Innovations, and Areas of Cooperation 1 Remarks by Vikram Mehta, Chairman, Shell Group of Companies, India

2. India on the Move: Infrastructure for the 21st Century (Part I) 9Remarks by Rajiv Lall, Managing Director and CEO, Infrastructure Development FinanceCompany, Ltd., India

3. India on the Move: Infrastructure for the 21st Century (Part II) 16Remarks by John Flannery, President and CEO, General Electric India

4. The United States and India: Innovating Health Care 21Remarks by Pratap C. Reddy, Chairman, Apollo Hospitals Group, India

5. The United States, India, and the Future of Automotive Manufacturing 25Remarks by Arvind Goel, President and Head, Business Group, Tata AutoComp Systems, Ltd.

Appendix A. Selected PowerPoint Slides from Arvind Goels Presentation 32

Appendix B. Speaker Biographical Information 35

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When President Barack Obama stated in November 2010 that India is not emerging; Indiahas emerged, he echoed an idea espoused by an array o American personalities, romTomas Friedman to Warren Buffett. Around the world, interest in Indias economy has beengrowing, and rightly so: according to a 2011 report by Citigroup, India may be on a path to sur-pass China as the worlds largest economy by 2050.

But or all the public attention surrounding Indias growth rate in recent years, misconcep-tions remain about what propels it. In the West, many perceive the Indian economys dynamism

as driven by the in ormation technology (I ) sector, when in act that industry accounted or only7.5 percent o Indias GDP and employs a meager 3 million people. While Indian I was the rstindustry to take off afer the liberalization o the economy in the early 1990s, some 20 years later,the singular emphasis on I has become outdated.

Another prevalent misconception in the West is to regard India as a cheap labor-driven econ-omy that outsources jobs rom other countries. In the afermath o President Obamas 2010 tripto India and the conclusion o several business deals worth $10 billion between the two countries,nearly 54,000 jobs were created in the United States. Furthermore, according to a report by theCon ederation o Indian Industry (CII), since 2005 nearly two-thirds o Indian companies haveadded jobs to their U.S. operations. ogether, these companies employ more than 60,000 people

across 40 U.S. states and have saved some 2,600 jobs rom being eliminated due to their acquisi-tion o U.S. rms.

In reality, many acets o the emerging Indian economy remain relatively unexamined, render-ing explanations o the countrys complicated growth story incomplete. Having attracted morethan $1 billion worth o U.S. oreign direct investment (FDI) in the short period rom April toDecember 2010, the Indian economy increasingly carries the interests o hundreds o major U.S.companies in many sectors. Te growing investment o the United States and the rest o the worldin the Indian market lend impetus to an examination o Indias economy beyond I .

Te Wadhwani Chair in U.S.-India Policy at CSIS there ore embarked on a signature lectureseries to provide an in-depth perspective on Indias economic uture by examining developmentsin underexplored sectors o the Indian economy. Te program, directed by Wadhwani Chair Fel-low Persis Khambatta, brought together industry leaders, policymakers, and public citizens viathis high-prole speaker series, both in Washington, D.C., and New Delhi, to address the com-plexities as well as highlight the challenges and areas o untapped potential in Indias burgeoningeconomy.

foreword


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Listed below are the sectors o the Indian economy chosen or the rst tranche o the signature lec-ture series, along with their accomplished and able speakers. Afer an introduction by Persis Khambattathat highlights their key thoughts and recommendations, the ull text o their remarks ollows.

Indias Energy Options: New Sources, Innovations, and Areas of Cooperation Vikram Mehta, chairman, Shell Group of Companies, India

India on the Move: Infrastructure for the 21st Century Rajiv Lall, managing director and CEO, Infrastructure Development Finance Company, Ltd., India

India on the Move: Infrastructure for the 21st Century (Part II) John Flannery, president and CEO, General Electric India

Te United States and India: Innovating Health CarePratap C. Reddy, chairman, Apollo Hospitals Group, India

Te United States, India, and the Future of Automotive Manufacturing Arvind Goel, president and head business group, Tata AutoComp Systems, Ltd.

aken together, these ive lectures provide invaluable insights into key sectors o Indias emerg-ing economy. hese sectors will, i ully developed, not only dramatically improve the lives o theIndian people, but also help India ully realize its potential to be a true economic powerhouse inthe 21st century.

Karl F. Inderfurth Wadhwani Chair in U.S.-India Policy Studies, CSIS

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In preparing this report, I received invaluable assistance rom many colleagues and riends inboth Washington, D.C., and India who deserve recognition. First and oremost, I would liketo thank Ambassador Karl F. Inder urth or his wholehearted support, insight, and guidancethroughout the series. I would also like to thank the GE Foundation or their generous supporto the Emerging Indian Economy Signature Speaker Series, and or enabling CSIS to host seniorexecutives in both countries. I am also grate ul or the support o the Con ederation o IndianIndustry, especially Chandrajit Banerjee, Sandhya Satwadi, Aditya Vemulapalli, and Sumani Dash.

Each speaker engaged in extensive question-and-answer sessions in order to get the most outo each interaction. In order o presentation, the speakers included: Vikram Singh Mehta, ormerchairman o the Shell Group o Companies, India; Rajiv Lall, managing director and CEO o In-

rastructure Development Finance Company, Ltd., India; John Flannery, president and CEO o GEIndia; Pratap C. Reddy, chairman o the Apollo Hospitals Group, India; and Arvind Goel, presi-dent and head Business Group o A A AutoComp Systems Ltd. I am grate ul to each o them ortheir participation, their willingness to answer difficult questions, and their ability to condenselarge amounts o unwieldy in ormation into a concise, clear set o remarks.

Te majority o this report results rom a series o on-the-record public events, or which thespeakers prepared remarks. However, some o the in ormation here results rom in ormal, not- or-

attribution discussions in both Washington and New Delhi, including experts in both the govern-ment and private sector. Genuine thanks to everyone who gave generously o their time to partici-pate in these sessions. In particular, I would like to thank Ambassador H. K. Singh and Aman RajKhanna at the Indian Council or Research and International Economic Relations (ICRIER) ortheir support and hospitality in hosting part o the series in New Delhi.

Tis report was a team effort, and all the staff o the Wadhwani Chair in U.S.-India Studiescontributed to it. Particular thanks to Nick Lombardo or providing exceptional support through-out the process; and Sameer Punyani, whose contributions as a researcher, analyst, writer, andeditor were invaluable. Niraj Patel, Justin Painter, Jesse Sedler, and Ritika Bhasker also providedhelp ul support during their internships. Te CSIS Strategic Planning team was instrumental inpreparing this report; I would like to especially thank Johanna Nesseth and Eric Palomaa or theirsupport and guidance throughout. Lastly, I would like to thank the Wadhwani Foundation ortheir support o this project and their dedication to advancing the U.S.-India relationship.

Persis Khambatta Fellow Wadhwani Chair in U.S.-India Policy Studies, CSIS

acknowledgments


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introduction

As a large emerging economy with a growing middle class, India has captured the attention odeveloped economies eager to tap into a new market with hundreds o millions o potentialconsumers. Within Asia, policymakers and private companies alike look to India as a regionalmarket or exports and large-scale projects. India has also increasingly emphasized strategic eco-nomic relations in the region, most notably with A ghanistan, Pakistan, China, and the Associa-tion o Southeast Asian Nations (ASEAN).

Te excitement Indias economy has generated lately is due in large part to changing internal

and external dynamics. By some estimates, Indias economy will grow rom its current $1.8 trillionGDP to be the worlds third largest in 2030, with a GDP o close to $30 trillion. 1 Correspondingly,North America and Western Europes share o global GDP is expected to shrink rom 41 percentto 18 percent, while developing Asia will grow rom 27 percent to 49 percent.2 Indias exports ogoods and services have risen rom 8 percent o GDP to 25 percent in the last two decades alone. 3 In addition, its exports are more diversiedboth geographically and in terms o the products itsellsthan its neighbors and competitors. 4 Many believe India could be the rising economic pow-erhouse that China is seen as today. 5 Tere is broad agreement that the global center o economicactivity and growth is moving to Asia, and investors are increasingly looking to India or economicand trade opportunities.

Internally, Indias prospects remain bright as the middle class continues to expand and thebenets o their participation in the economy spread throughout the countrya more highlyeducated middle class has encouraged growth in dynamic sectors o the economy and boostedentrepreneurship and consumption. Indias young population constitutes two-thirds o the totalpopulace; the nearly 800 million Indians under 35 will be an important engine o the countryseconomic uture. Ofen re erred to as a demographic dividend, this massive young set couldtranslate into an equally massive work orce in the coming decades.

1. Standard Chartered Bank, Te Super-Cycle Report, November 15, 2010, 5, http://www.standard-chartered.com/id/_documents/press-releases/en/The%20Super-cycle%20Report-12112010- nal.pdf . Byother estimates, Indias economy is projected to grow rom its current GDP o $4 trillion (in PPP terms) to

nearly $86 trillion by 2050, edging out China to become the worlds largest economy .2. Knight Frank and Citi Private Bank, Wealth Report 2012, 12, http://www.thewealthreport.net/.Measured in purchasing power parity (PPP) terms.

3. World Bank Data Catalog, Exports o Goods and Services (% o GDP), http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS/countries/1W-IN?page=4&display=de ault.

4. Anoop Singh, India: Linked or De-linked rom the Global Economy, IMF Direct, October 25, 2012,http://blog-imfdirect.imf.org/2011/10/25/india-linked-or-de-linked-from-the-global-economy/ .

5. National Intelligence Council, Global rends 2030: Alternative Worlds (Washington, D.C.: Officeo the Director o National Intelligence, December 2012), 16, http://www.dni.gov/ les/documents/GlobalTrends_2030.pdf .


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Te rising role o Indias states has also served to shif internal dynamics. Many o Indiasstates are as large as nations, and although New Delhi controls the budget or needed re orms andoversight, the implementation strategies or many important issues are largely lef to state govern-ments. As policymakers push through economic re orms, knowing which states will execute themwith a business- and development- riendly approach is integral to navigating Indias complexenvironment.

Te outlook is not all upbeat, though. Te widespread hope that the United Progressive Alli-ance (UPA) coalition government, led by the Congress Party, would ocus on re orms afer theirreelection in 2009 were dashed when it became clear that energy was instead being put towardbuilding more social-wel are programs,6 creating more pressure on the scal decit and evengreater dependency on an already nancially strained government. However, the latter hal o 2012saw a reinvigorated push or economic re orms by Prime Minister Manmohan Singh, together

6. Hemant Krishan Singh,Indias Prevailing Political Economy: Te Logic o Re orm, ICRIER IssueBrief , vol. 1, issue 1 (October 18, 2011), http://www.icrier.org/icrier_wadhwani/Index_les/ICRIER-Wadhwani%20Chair-%20ISSUE%20BRIEF-OC %202011.pd .

Figure 1: BRICS GDP Growth

Indias economy doubled in size from 2000 to 2010, outpacing all other BRICS countries except China.

Source: United Nations Conference on Trade & Development, UNCTADStat, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx, analysis by CSIS.

the emerging indian economy


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Te Emerging Economy Signature Series lectures have been transcribed or this compilationreport. Below, we distill many o the key takeaways and recommendations rom each speakerspublic remarks.

EnergyTere is no sector more critical to Indias uture growth than energy. With a chronic energy short-age, inadequate energy in rastructure, and an insatiable demand coupled with environmental con-cerns, energy looms large over Indias emergent economy. In spite o Indias abundant coal reservesand recent investments in nuclear, solar, and wind power, Indias energy supply is struggling tokeep pace with its rapid economic growth.

During his remarks on Indias Energy Options, Vikram Mehta identied several hardtruths about Indias energy sector and outlined a potential national energy strategy moving or-

ward. India is experiencing a surge in energydemand against a backdrop o inadequatesupply and transmission, technology is under-

utilized, the environment is threatened, andNew Delhi has an inadequate policy rame-work or addressing these issues.

According to Mehta, the underutilizationo technology has resulted in a low 28 percentrecovery rate o Indias oil and gas elds, ascompared with a global average o 40 percent;their coal-based power plants conversion

actor is 30 percent, against a global averageo 37 percent. Off-the-shel technology has

not been adequately harnessed to increaseproduction rates, but given the countryscompeting environmental concerns, increas-ing recovery and conversion rates should be apriority.

As the supply o energy lags behinddemand, not only are shortages o electricityrunning a 10 percent decit at peak hours,but sector nancial losses are even larger. 8 Tecombined cash loss o state-owned distribu-tion rms is more than $20 billion per year. 9 In addition, 17 percent o total electricity

8. Central Electricity Authority, National Electricity Plan (Volume 1) Generation, Ministry oPower, Government o India, January 2012, 1, http://www.cea.nic.in/reports/powersystems/nep2012/generation_12.pd .

9. Reema Nayar et al., More and Better Jobs in South Asia (Washington, D.C.: World Bank, 2012),24, http://siteresources.worldbank.org/IN SOU HASIA/Resources/223497-1327936304951/MBJSA_Consolidated extWithCover_Revised.pd .

Despite attempts to diversify its energy portfolio,coal will remain the principal fossil fuel in India forthe foreseeable future. According to Indias Ministryof Statistics, in 2010, approximately 52% of primary

source energy production was coal-based.



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capacity is based on expensive and polluting diesel generation. 10 As the massive July 2012 black-outs illustrated, Indias struggle with an unreliable power grid and insufficient capacity or powergeneration can have dramatic consequences. 11

Indias oil companies are aggressively pursuing overseas assets in order to increase supply,but politics and nationalist tendencies ofen intervene in an unhelp ul manner. With insufficientdomestic oil and gas reserves and blocked access to existing domestic coal supply, India will haveto continue to import energy at a higher cost. Tis likely means increased engagement with theMiddle East and Southeast Asia is necessary, as well as exploring the many opportunities or en-ergy cooperation and trade that lie across South Asia.

Like many aspects o the economy, the energy sector is hindered by bureaucratic inertia andexcessive government intervention. Mehta described India as a state that still wants to hold onto the energy sector; it has not allowed the private sector and the government to operate on a

10. Ibid.11. Over the course o three days in July and August, more than 600 million people were without

power. For more in ormation, see Jim Yardley and Gardiner Harris, 2nd Day o Power Failure CripplesWide Swath o India, New York imes, July 31, 2012, http://www.nytimes.com/2012/08/01/world/asia/power-outages-hit-600-million-in-india.html?pagewanted=all.

Figure 2: BRICS Power Distribution and Transmission Losses

Although India has improved recently, compared to other emerging economies it still suffersfrom signicant electric power distribution losses.

Source: The World Bank Group, Databank, http://databank.worldbank.org/ddp/home.do.

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level playing eld. Energy is a vital national subject handled out o New Delhi, but it needs sup-port rom state governments and the private sector, and nding the balance is a tricky endeavor.Signicant subsidies on oil and other petroleum products distort market orces, and the variousministries that oversee the sector lack a coherent or strategic policy ramework. While recent gov-ernment re orms such as allowing FDI in power exchanges and reducing oil and uel subsidies aresteps in the right direction, structural issues still need to be addressed.

As a way orward, Mehta recommended boosting domestic production by establishing morepublic-private partnerships; leveraging natural gas as a bridge between current supplies and a

uture with renewable energy; rationalizing uel prices; and leveraging existing technology toimprove processes, including recovery rates. o emphasize its importance, Mehta suggested thecreation o an energy super-ministry, which would allow or a more strategic energy policycurrently as many as eight ministries oversee some aspect o the energy industry. I India were tocreate an institutional ramework, it would allow or a more cohesive and integrated energy policy,and better address many o the hard truths.

Figure 3: Indias Energy Production, Consumption, and Imports

The yawning gap between energy production and consumption has required India to increase itsenergy imports to meet the demands of its growing economy.

Source: The World Bank Group, Databank, http://databank.worldbank.org/ddp/home.do.



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ments should view in rastructure as the number-one national priority afer national security. He de-scribed in rastructure as the gif that keeps on giving, producing jobs and investment in the short

term, and supporting economic productivity in the long term. A critical industry in and o itsel , inno- vative and efficient in rastructure also enables many other vital economic sectors to ourish.

Flannery remarked that, in no small part due to a global ocus on job creation, India is being as-sessed by investors regarding their ability to create jobs, to retain workers, on income distribution, andon trade policy. In stressing the importance o in rastructure, he noted that India needs to recognize in-

rastructure as essential to the uture o its emerging economy. Flannery argued that a lack o investmentstarves an economy o basic strength and urged policymakers to prioritize in rastructure accordingly.

Regarding the current state o energy in rastructure, Flannery described a good news, bad newsstory. Te bad news is that India reacts only in the ace o a crisis, and the good news is that in energy,India is absolutely in a crisis. India aces crises along the entire spectrum o energy in rastructure rom

generation and distribution to pricingwhich is compounded due to the act that no large-scale gas orcoal-powered projects have been green-lighted in the past eighteen months. Multibillion-dollar projects,worth between 5 to 6 gigawatts o power, are stranded due to lack o uel supply. High rates o powerleakage and thef strain the system and create nancial stress or distribution companies. Inefficiencyin the energy and in rastructure sectors is a burden that directly and adversely affects Indias actoryproduction, illustrated starkly by recent lackluster quarterly growth rates.

Signicantly, two policies warranting attention are the availability o long-term nancing anda muddled tax policy. Indias 2012 budget included tax provisions that highlighted a willingness tochange the basic rules o [the] game well afer the game has already started, and a willingness tocircumvent or overrule the Supreme Courtwhich sent shockwaves through the investor community.Clarity, consistency, and a can do attitude on the part o policymakers would greatly improve investorcondence.

Flannery offered that while a change in the mindset o policymakers is paramount, real changecan come about with the implementation o already-existing policies. Focusing on a small number oprojects could set in motion a series o events that would enhance Indias image and increase investorcondence.

Expanded passenger and freight rail is essential for further economic growth. Shown here is the Pam-ban Collapsible Railway Bridge connecting mainland India to Rameshwaram, Tamil Nadu.



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Health CarePratap Reddy addressed the importance o health care in Indias 12th Five-Year Plan and expressedconcern regarding health care as an essential input into the Indian economy. Te lack o basichealth care and human resources in this sector are difficult hurdles to cross in order to developIndias latent human capital.

One o the health care industrys biggest challenges is capacity. With 9 hospital beds per10,000 people, India ranks 64th out o 194 countries, barely ahead o its neighbor A ghanistan.14 Inorder or India to solve its rst challenge o adequate hospital beds or its patients, it needs to add100,000 beds per year or the next decade, at a cost o 50 billion rupees per year ($1 billion/year).

Health care services are concentrated in urban centers and ail to reach hundreds o millionso Indias rural inhabitants, as well as its youngest citizens. Child malnourishment is rampant: 48percent o children are chronically malnourished and 43 percent o children in India are under-weighttwice the average o sub-Saharan A rica.15

14. World Health Organization, World Health Statistics 2012 (Geneva: World Health Organization,2012), 125, http://www.who.int/gho/publications/world_health_statistics/2012/en/index.html.

15. Naandi Foundation, HUNGaMA: Fighting Hunger & Malnutrition: HUNGaMA SurveyReport2011 (Hyderabad: Naandi Foundation, 2011), 8, http://www.naandi.org/CP/HungamaBKDec11LR.pd .

Figure 4: BRICS Infant Mortality

Despite Indias high rate of child malnourishment, it has improved on certain health outcomes such asreducing child and infant mortality rates.

Source: World Health Organization, Global Health Observatory Data Repository, http://apps.who.int/gho/data/#.

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Beyond capacity issues, a more recent develop-ment is the threat o noncommunicable diseases(NCDs); India is now one o the worlds leaders indiabetes, several orms o cancer, and heart disease.16 More tools are needed to address NCDs and otherdiseases, and utilizing I to trans orm health care de-livery is at the top o that list. Reddy emphasized theneed or India to rely more on existing technologicalinnovations used in other countries, such as electron-ic medical records. He also emphasized the need ora more holistic approach to ghting disease romancient medicines to I innovationsand encour-aged India to use both in order to improve healthoutcomes.

India currently spends 1 percent GDP equivalenton health care, and over the next ve years it aims to

increase that to 2.5 percent.17

Tis is a critically im-portant step in the right direction, productively enterthe skilled work orce.

16. World Health Organization, Noncommunicable Diseases: Country Proles 2011 (Geneva: World HealthOrganization, 2011), http://apps.who.int/iris/bitstream/10665/44704/1/9789241502283_eng.pd .

17. Government o India Planning Commission, Faster, Sustainable and More Inclusive Growth:An Approach to the welfh Five Year Plan, October, 2011, 87, http://planningcommission.nic.in/plans/ planrel/12appdrft/appraoch_12plan.pdf .

Figure 5: India's Public and Private Health Care Expenditure

Total health careexpenditure on a percapita basis doubledin the last decade withthe government con-tributing more, frompaying 26% of totalexpenditure in 2000 to29% in 2010.

Source: World HealthOrganization, GlobalHealth Observa-tory Data Repository,http://apps.who.int/

gho/data/, analysis byCSIS.

A major challenge confronting India is the need todevelop an effective health care system that pro-vides affordable and accessible medical services andmedicine to Indians in urban and rural areas.



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Indias workers will be unable to productively enter the skilled work orce. Reddy also men-tioned the high cost o health care in the United States, stating that the United States does not needto spend 15 percent o its GDP on health care and that lower-cost alternatives may be an area orcollaboration between the two countries systems.

Reddy noted that Indias inadequate supply o health human resources is, in act, an area

o vast opportunity. He suggested that the lack o health care workers could be made up or byenhancing the already-existing work orce under the ASHA (Accredited Social Health Activist)program, which helps implement Indias National Rural Health Mission. 18 Developing Indiashealth care human resources and using available I innovations will play a pivotal role in not onlyimproving health outcomes in an inclusive manner, but also ensuring robust economic growth inthe health care industry and beyond.

Automotive ManufacturingFor observers o India, it is a known act that leap rogging is a way o li e throughout the country.Many consumers who never had a land-line telephone skipped straight to mobile phones at therst chance, and young students with ew scholastic resources can now leap rog straight to theAakash tablet. Te same thing can be said o Indias economic development pattern. While mostsocieties move rom agriculture to manu acturing, then to a service or knowledge-based economyas they develop, India leap rogged rom agriculture to services, and manu acturing is now expand-ing to ll the missing middle. As such, the government has laid out plans to increase manu ac-turings share o GDP rom 16 percent to 25 percent by 2022,19 including creating 100 million new jobs in the sector.

Arvind Goel examined both the challenges and opportunities acing Indias manu acturingsector, highlighting the act that while manu acturings contribution to Indias GDP has risen rap-idly, it is still well below its potential. Manu acturing plays a crucial role in absorbing surplus labor

rom agriculture, and provides transitional opportunities to those seeking to join other labor-intensive sectors. Currently, agriculture employs nearly 60 percent o the Indian work orce, butcontributes only 16 percent o GDP. Agricultures contribution to GDP has stagnated at 15 percentto 16 percent since 1980, whereas others in the region have increased their share to 25 percent to34 percent. 20 Manu acturing also has a positive multiplier effect, indirectly creating additional jobsin related activities.

As covered in previous discussions, Indias power shortage weighs heavily on several othersectors, particularly manu acturing. According to Goel, power is considered a raw material orthe manu acturing industry, and while some states power-generation and distribution systemsare reliable, other states grapple with a consistent power shortage o 10 percent or more. In orderto address this, private industry has been impressing upon state governments the importance oreliable power or attracting industry. Many companies are orced to set up their own power plantsor rely on expensive diesel generators as a workaround, increasing the cost o doing business. Te

18. Ministry o Health & Family Wel are, Government o India, About ASHA,http://www.mohfw.nic.in/NRHM/asha.htm#abt .

19. Ministry o Commerce and Industry, Government o India, National Manu acturing Policy,November 2011, 4, http://commerce.nic.in/whatsnew/National_Manfacruring_Policy2011.pdf .

20. Ministry o Commerce and Industry, Government o India, National Manu acturing Policy,November 2011, 1.

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rising cost o power is reected in a companys cost structure, as are considerations like the priceo electronic and computerized machinery, which are used extensively and can be destroyed by

requent uctuations in voltage.

Policy instruments are already being used under the National Manu acturing Policy. Goelhighlighted the recent creation o National Investment and Manu acturing Zones (NIMZs) aroundthe country In these special zones, state and central governments are modi ying regulations ontypically difficult issues such as land re orm, zoning, and in rastructure to encourage greater in-

dustrial and manu acturing growth.Goel also discussed persistently high ination as a problem. High ination increases capital

costs or key auto-manu acturing inputs such as steel, making their already-tight margins eventighter. Stronger scal and monetary policy to control ination and economic and market uncer-tainty would help create more stable cost structures or manu acturers.

As Indias manu acturing sector continues to grow, human capital remains a major issue.Tirty-six percent o jobs in automotive manu acturing remain vacant because o a lack o skilled

Figure 6: Sectoral Composition of GDP

Industry and manufacturing together is slowly growing, contributing nearly 25% of GDP in 2010.

Source: India Economic Survey 2011-2012, chapter 1, table 1.6, http://indiabudget.nic.in/es2011-12/

echap-01.pdf.



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Figure 7: Indias Manufacturing Policy

Source: Ministry of Commerce and Industry, Government of India, November 2011, 4,http://commerce.nic.in/whatsnew/National_Manfacruring_Policy2011.pdf.

manpower. o address this, the ata group is leading skill development and training, creating earnand learn schemes where workers receive training and certication to quali y them or positions inmanu acturing. Te skill-development programs have also helped create opportunities or historicallyeconomically depressed populations, including lower-level castes. Although these centers receivesome nancial and policy support rom the government, they serve as an example o private sectorinnovation.

Finally, Goel included several recommendations regarding the countrys overall economic out-look. In a country as diverse and complex as India, growth will not come in an organized and struc-tured way; he advised audience members to use the compass, not the mapmeaning that progressin India does not occur in a linear manner, and India watchers should ensure that their overall path iscorrect, even i it does not con orm to their experiences elsewhere. He also noted that what got youhere will not get you there, to explain that while Indias recent dynamism has produced remarkablegrowth, policies and attitudes must evolve and adapt in order to sustain Indias emerging economy orthe decades to come.

Its All in the DeliveryIn each sector covered by the speakers, similar themes arose. Predictably, each can be connecteddirectly to the emergent middle class in India. Te most rapid growth o the global middle class isprojected to occur in Asia, with India somewhat ahead o China over the long term. 21 It is difficult tooverstate the importance o the rise o Indias young middle classthey represent a new India andhave different outlooks, expectations, and aspirations than previous generations. Tey are increas-ingly more urban and educated, and want more responsive, representative governance and they areunder 35 years old .

21. National Intelligence Council, Global rends 2030, 10.

GrowthIncrease manufacturing sector growth to 12-14% over the medium-term to make it the engine of growthfor the economy. The 2 to 4 % differential over the medium term growth rate of the overall economy willenable manufacturing to contribute at least 25% of the national GDP by 2022.

Job Creation Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2022.

Skill Development Create appropriate skill sets among the rural migrant and urban poor to make growth inclusive.

High-TechManufacturing

Increase domestic value addition and technological depth in manufacturing.

Policy Support Enhance global competitiveness of Indian manufacturing through appropriate policy support.

SustainabilityEnsure sustainability of growth, particularly with regard to the environment including energy efficiency,optimal utilization of natural resources, and restoration of damaged / degraded eco-systems.

Six Objectives of National Manufacturing Policy

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Troughout the many discussions under-taken during this series, rustration with Indiaspolicymakers was evident, and the inability othe bureaucracy to deliver basic goods to ordi-nary citizens was viewed with distress. I Indiais to realize the benets o its demographicdividend and burgeoning middle class, a ocuson the delivery o goods and services to thenext generation is crucial.

Politics and BureaucracyIndia aces many challenges in its rise tomiddle-income status. One o the largely sel -imposed challenges is politics. Identity-basedand populist politics o ten stand squarely

in the way o national economic re orms,and Parliaments lethargic pace o legislat-ing severely hinders Indias ability to unleashits ull economic potential. Beyond politi-cal impediments, the bureaucracys exces-sive regulations sti le resources, businesses,education, and the development o humancapital. Democracies are inherently messyand deliberative, but structural re orms like

land acquisition, labor laws, and consistent iscal policy merit special attention because o thewide-ranging and harm ul e ects o ad hoc initiatives or inaction.

Jobs, Jobs, JobsOne o Indias greatest assets is its human capital. Paradoxically, a critical limitation acing thecountry is the lack o skilled human capital to meet current industry demand. Tis problem is ad-mittedly aced by many countries, including the United States, but or India it is particularly acutebecause o the massive potential labor orce.

It stems in part rom inadequate institutions o higher education, and is a clear extension othe burdensome regulations under which they operate. Re orm o the education sector is vital toIndias young work orce, as the current number o universities and vocational training institutessimply cannot manage the recent increase in demand or higher education. 22

o keep pace with new entrants into the labor orce, India needs to create between 650,000

22. Kapil Sibal, Address o Mr. Kapil Sibal, Minister o HRD and C&I at the US India HigherEducation Summit, Embassy o India, October 13, 2011, http://www.indianembassy.org/prdetail1807/address-o -mr.-kapil-sibal,-minister-o -hrd-and-candit-at-the-us-india-higher-education-summit.

Textile workers in a factory in Mumbai. Humancapital development is critical to the future growthof Indias manufacturing sector.



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and 850,000 jobs every month. 23 Community colleges and vocational training institutes would beable to create synergies between industry and education, and create a more reliable pipeline oskilled workers suited to a host o different industries. Earn and learn schemes like the one de-scribed by Arvind Goel in his lecture, are an example o a private-sector innovation that could beexpanded, with subsidies rom the government, with a direct benet to both industry and workers.

Inequality and education deciencies are key weaknesses in India. 24 Te demographics areavorable, but unless efforts to bridge the talent gap are addressed holistically and effectively, the

projected demographic dividend could turn out to be a burden. Te imagined benets are notlikely to materialize without a less onerous, centralized environment or education and skillstraining. In countries lacking employment opportunities, large youth populations have repeatedlycaused social and political disruption, urther emphasizing the need or the right kind o institu-tional policy ramework or economic growth.

In order to meet its own goal o 10 million seats in higher education to bring India closer tothe global average or Gross Enrollment Ratio,25 India must build 1,000 universities and 50,000colleges within the next decade. 26 It is difficult to imagine that India can do this on its own. Tere-

ore, allowing oreign institutions to partner with Indian ones is key to meeting Indias own goals.Te speakers in this series, as well as higher education experts and officials, have repeatedly notedthat the system is bound by too much government regulation, making it inexible or students andindustry, and unresponsive to their needs. 27

A Final Word: Decisive Leadership NeededTere is still a long way to go in order or India to realize its potential in terms o employment, hu-man capital, and trade. On average, 750,000 people join the job market every month, and no singleindustry has the capacity to absorb them all. A lack o physical and social in rastructure, goodgovernance, bureaucratic capacity, and corruption are running themes in the lectures that ollow

in this report, themes that the government has emphasized in its policy pronouncements but hasyet to ully operationalize effectively.

In a statement at the opening o 2012 World Economic Forum (WEF) on India, WEF Founderand Executive Chairman Klaus Schwab commented that economic recovery is not automati-cally guaranteed [ or India] as a cyclical process, but rather will require decisive and coordinatedeconomic and political leadership to put the country on a different and more inclusive path orthe next phase o its development.28 Indias economic growth is at an important inection point,and how its government steers policy and re orms in the next year will a ect its long-termtrajectory. In the ollowing pages, our speakers comments and perspectives give a uller un-

23. E-mail interview with World Bank, December 3, 2012.24. National Intelligence Council, Global rends 2030, ix.25. Government o India Planning Commission, Faster, Sustainable and More Inclusive Growth:

An Approach to the welfh Five Year Plan, October, 2011, 100, http://planningcommission.nic.in/plans/planrel/12appdrf/appraoch_12plan.pd .

26. Sabil, Address o Mr. Kapil Sibal, Minister o HRD and C&I at the US India Higher EducationSummit.

27. Arvind Panagariya, India: Te Emerging Giant (New York: Ox ord University Press, 2008), 44451.28. Klaus Schwab, India and the World Economic Forum, World Economic Forum, http://www.

we orum.org/content/india-and-world-economic- orum.

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derstanding o the macro- and microeconomies across Indias oundational sectors, and whatactions the government and the private sector should take in order to turn the potential or

urther economic growth into reality.



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indias energy options: newsources, innovations, and

areas of cooperationRemarks by Vikram Mehta, chairman, Shell Groupof Companies, India

October 18, 2011

1

Introduction

Energy sits at the nub o every policymakers deepest dilemmas in India. How does a policy-maker provide access to affordable and secure energy to the poor, without undermining theundamentals o the market, and imposing an unacceptable burden on the exchequer? How doesa policymaker accelerate economic growth without degrading the environment? How can Indiaextract the benets o globalization and connectivity and at the same time ensure respect and

urtherance o its national sel -reliance? Tese dilemmas are difficult to resolve. It is exceedinglydifficult or a policymaker in a democratic setup to establish the balance.

Tese questions should be viewed through the prism o the political economy o the energysector, by identi ying the issues that India aces, by setting out the agenda that the governmenthas laid out, and by perhaps ocusing on some o the questions that will need to be resolved in thecoming yearsall o this within the backdrop o the Indian political economy. First, it is impor-tant to provide a prole o the energy sector.

A Pro le of the Indian Energy SectorTe Indian economy has grown by 8-plus percent over the last ve years. During this period, thedemand or motor gasoline and diesel has gone into double digits.

Te per-capita consumption o energy in India is 500 kg o oil equivalent (kgoe). Te worldaverage is 1,800 kgoe. China and the United States consume 1,090 and 7,835 kgoe, respectively.

Over the last ve years, the international price o petrol, diesel, kerosene, and LPG have in-

creased by approximately 95 percent. During this same period, the domestic prices or these ourproducts have increased 35 to 45 percent. Te difference between the international price and thedomestic price has been made up through subsidies as well as losses or state-owned oil compa-nies.

In 20092010, the state-owned oil companies lost $20 billion. In 20102011, this gure ell to$15 billion. Te only reason these companies did not enter Chapter 11 was due to the IOUs andthe subsidies provided by the government. Te IEA has estimated that India ranks among the top-ve subsidizers in the world, next only to Saudi Arabia, but above Iran.


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2 | the emerging indian economy

Furthermore, the production targets or coal and oil have had to be scaled down. Te PlanningCommission has reduced the targets by 8 to 10 percent or both o those products. In 1980, Indiaimported 27 percent o its crude oil requirements, today it imports 80 percent.

Te IEA has estimated that the OECD countries require 1.1 barrels o oil to add $1,000 to theirGDP. Te equivalent is 3.3 barrels or India.

Forty-ve percent o Indias population is not on the commercial grid. Tey do not have ac-cess to commercial energy. Tey rely on rewood or dung to meet their uel lighting and cookingrequirements.

Te contribution o hydro, nuclear, wind, solar, and bio uels comprises 7 percent o Indiasenergy basket. Te entire energy in rastructure is, in short, based on ossil uels.

Te expenditure on R&D collectively by state-owned companies over the past ve years wasless than $1 billion. Tis is less than what Shell spent on R&D in one year.

Finally, there are as many as eight different government ministries dealing with aspects oenergy in India. Te Ministry o Petroleum and Natural Gas, the Ministry o Coal, the Ministry

o Unconventional Energy, the Ministry o Atomic Energy, the Ministry o Power, the PlanningCommission, and the Prime Ministers Office. Tese ministries are each headed by a cabinet min-ister with their own bureaucracies, their own vested interests, and they each operate through theirrespective silos.

Tese acts not only provide a prole o the energy sector, but also identi y ve hard truthsthat the Indian energy sector and Indian policymakers must con ront.

Five Hard Truths of the Indian Energy SectorMarket DemandTe rst hard truth is that demand or energy is surging. Te reasons or this surge are popula-tion, prosperity, and policy. Te population growth rate in India has come down rom 2.4 percentto 1.1 percent, but it still translated to a population o [1.2] billion people. India is entering themost energy-intensive phase o its economic development. Te country has a huge plan to investin in rastructure, manu acturing, and power plants and all o these are going to require massiveamounts o energy.

But over and above that, millions o people are entering what is loosely re erred to as themiddle class. Tese are people who have middle-class incomesor i they dont have middle-class incomes yet, they certainly have middle-class aspirations. Tese are people who currently aremaybe riding a bicycle, but have the aspiration to trade up to a two-wheeler and eventually to own

a Nano car.Te pressure on demand or energy is going to be huge as this mass o people move rom rural

India to urban India, and seek to meet their aspirations. Te policy environment has not beenconducive to containing demand. India is amongst the largest subsidizers o petroleum productsin the world. Te price mechanism has not been a countervailing orce. Te demand has beenencouraged because o the subsidies on motor uels, on transportation uels, and cooking uels.

It is estimated that the demand or energy in India will grow by 400 percent between now and


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2030. Tese estimates highlight the basic truth that Indias demand position is a worry. Demand issurging, and that is something that has to be considered very care ully.

Market SupplyTe second hard truth is that supplies o energy are struggling to keep pace with demand. Coalis the mainstay o Indias energy-consumption basket. India has abundant coal reserves. Tereserves-to-consumption ratio in coal is about 85 years; and, in principle, India should not haveconcerns about coal energy.

But there are three major blockers to realizing the potential o coal.

Te rst is that the coal mines are located hundreds o miles rom the main consumption cen-ters. Tey are also located in areas that are currently acing social unrest. Te Maoist movement inIndia is concentrated in those areas where coal mines are located.

Te second problem is that the in rastructure or bringing the coal rom the production point,rom the pit head, to the consumption center is relatively weak and inadequate. Recently it was

noted (in the Indian media) that 60 percent o the thermal coal power plants in India had lessthan seven days o stock because the rains had washed away the roads. And 30 percent o that 60percent had less than one day o stock. Tey had reached critical levels due to the inadequacy othe in rastructure.

Te third blocker to coal is quality. Te quality o coal in India is poor; it has extremely highash and sul ur content. For these three reasons coal has had difficulty in actually meeting its pro-duction targets, and indeed realizing perhaps the potential the policymakers had set out or it.

Oil is not available in abundance in India. India has 29 years o reserves-to-production ratio,but the bulk o these oil reserves are in areas that are geologically and topographically very com-plex. Tere is no easy oil lef in India. It has been difficult to locate the oil, but it has been even

more difficult to extract the oil on a commercial and sustainable basis.Now, that does not mean that India hasnt had some successes. In the private sector, the Reli-

ance Company discovered the worlds largest gas elds in all o 2002, and it has a productionpotential o hal a million barrels o oil equivalent (boe) today. Tere have been other smaller ndsbut they have all held out the expectation that India, in act, has a large amount o reserves thathave yet to be located. Te problem is that these reserves are in very difficult terrain and it is noteasy to access them.

India is hope ul about alternatives, but that is a long-term solution. Nuclear energy is veryhigh on the agenda but, ollowing Fukushima, there is local resistance. In early October 2011, agroup o very senior ex-bureaucrats headed by a cabinet secretary led a petition in the Supreme

Court asking or a stay on all new nuclear generating plants. Tey also asked or a complete reviewo the sa ety conditions. Te Supreme Court must look at this particular petition.

Wind EnergyIndia is currently producing 8 gigawatts (GW) o wind power and has, again on paper, hugeexpectations rom wind. But here the problem lies with the site. It is never easy to actually locate a


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tackle them together. But in order or India to tackle these hard truths together, we have to recog-nize the issues, the constraints, the limitations within which the energy sector currently unctions.

Intervening IssuesTere is a set o internal conicts that have a direct bearing on how energy policies are ramed.

Te rst is the conict between society and the state. Indias society is vibrant, dynamic, andthe people are demanding. Tey are questioning traditional concepts, they are upending tradition-al hierarchies, they are entrepreneurial, and they are clashing with a state that is still hesitant andsuspicious o change. Tey are clashing with a state that has certainly shed its lefist rhetoric, butmaybe they have not shed their lefist impulses.

Tis is a state that still wants to hold on to the energy sector. It has not unshackled the energysector. It has not necessarily allowed the private sector and the government to operate on a levelplaying eld. Tis is a clash between good economics and good politics. Good economics woulddemand that we must reduce subsidies. Good economics would suggest that we must use pricing

as a countervailing actor to control demand, and that we must encourage real competition. Popu-list politics, good politics, however, ears the market. Tis clash between good politics and goodeconomics is a major actor in the decisionmaking process regarding energy.

Tere is also a clash between centralization and ederalization, or ederalism. India is a ed-eral polity. Energy is a central subject; its a subject that is handled out o Delhi. But Delhi cannotimplement its energy policy without the support o the state governments. It cannot implement itspolicy unless they have the support o governments that can give them access to lands. It cannotimplement its policies i the political party in Delhi is in loggerheads with the political partiesrunning the states. Tis dynamic between the center and the state is another actor that we need tokeep in mind when we discuss the policy issues related to energy.

And nally, there is the dynamic between globalization and sel -reliance. As mentioned, weare connected, but our oil sector today is aggressively looking or assets overseas. Tey alreadyhave a presence in 15 different countries. Tey are in partnership with a number o different inter-national players. So they are looking aggressively to benet rom our connected and global world.But at the same time, the logic or going overseas is always written in a language that highlightsnational security or energy security. And sometimes this dynamic between the imperative o glo-balization and the imperative o nationalism, can actually lead to energy policy alling between thecracks.

Toward a National Energy StrategyTis is the backdrop against the next question: what should Indias energy strategy then look like?Well, the premise o an energy strategy in India has to ow rom the hard truths mentioned above.Te act is that ossil uels will be the dominant uel in India or the coming decades. Te act isthat India must do something to weaken the link between economic growth, energy demand, andthe environment. India has to also look at energy security against the short-term compulsions oensuring that it does not suffer rom technical and market disruptions, and the long-term require-ment to ensure access to reliable and secure supplies. And India also has to premise its strategy onsomehow moving the economy rom ossil uels toward the alternatives.


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Tose are the our premises upon which Indias national strategy on energy should be based,and it is indeed the our premises upon which the government is currently looking to develop anational strategy. What should be the elements o this national strategy?

Boost Domestic Production and Smart PartnershipsTeres no doubt that India has to do more to harness indigenous hydrocarbon uels, its hydro-carbon resources. It has to not only bring technology that will improve the recovery rate rom 28percent to 40 percent or 45 percent, but must establish partnerships that will enable access to theoil and gas, and the new unconventionals like shale oil and shale gas that are certainly available inIndia but are difficult to locate and develop commercially. India cannot manage that on its own.It should be looking to liberalize coal mines so that the private sector has access to its coal mines.And it must certainly do more to ensure that the scal terms are competitive, are predictable, andthere is no doubt in anyones mindwhether the private sector, public sector, international ordomesticthat contract terms will be respected, that it will not ex-post alter the terms that havebeen agreed to ex-ante.

Leverage Natural Gas PotentialTe second element o Indias strategy has to ocus on natural gas. Natural gas is the bridge uelbetween our present position and our hoped- or uture situation when renewables become a moredominant part o the energy basket. Te reason why natural gas has not acquired a more dominantposition is because o the absence o pipelines, and also because India has not invested enoughin liquid natural gas (LNG) port terminals. Now, both those acts are known to the governmentand both those acts are being considered aggressively by the government. Tere are plans to putup ve more regasication terminals in the west coast o India, and there are plans to look at twoLNG regas terminals in the east coast o India. A whole blueprint has been drawn up or a networkthat links the southern markets to gas supplies. oday, the two gas pipelines both cover the northand the west o India, but they do not go to the south. Gas is not available to the south o India.India has to do much more to accelerate the investment in in rastructure, to link the southernmarket to the gas-production system.

Rationalize Fuel PricesTe third important policy initiative, which has ound expression in the Planning Commissionreport that is just being published, is to rationalize uel prices. India just simply cannot afford tocontinue to subsidize petrol, diesel, kerosene, and LPG (liqueed petroleum gas). It is a burden onthe exchequer; it makes a mockery o all hopes and plans to control Indias scal decits. But morethan that, it is pushing the public-sector companies to the edge o Chapter 11 bankruptcy. It is alsoskewing the playing eld between the public-sector companies and the private companies, and as aconsequence the investment environment itsel has been somewhat undermined.

Elevate Oil DiplomacyTeres an important reason or India now to elevate the role o its oil diplomacy. Te bulk o itsoil supplies come rom the Middle East, and they come rom Nigeria, and India will be reliant on


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those countries or years to come. India there ore has to see what can be done to better establish itsrelationship with the Middle East countries. Tey have oil production, India has the market. Per-haps there is scope here or upstream-downstream linkages. But, in effect, the idea o elevating therole o oil diplomats, energy diplomats, within Indias policy ramework is something that needs tond stronger traction.

Promote Demand Focus and InnovationTe demand conversation is a low-hanging ruit. It has not yet acquired the importance that itshould have. As mentioned, there is no way India can meet its energy-security aspirations i it

ocuses only on the levers o supply. We have to also introduce demand into the equation. Demandconservation and energy efficiency has there ore got to be a very pivotal part o Indias energystrategy. R&D expenditure is among the lowest in the industry. Tat has to change.

Te technical-resource base in India is phenomenal. Shell, or instance, has a technical cen-ter in India; it is the only center o its kind east o Suez. At the time that Shell set up this center, itestablished a bar or short-listing candidates, and the bar had to be raised three times be ore Shell

was able to start interviewing an acceptable number o people. Tere were ar too many peoplewho met the threshold that Shell had set out in the early stages o the centers development.

oday, Shell has 600 technocrat scientists and its own laboratory. Tey are providing supportto the Shell Group o Companies around the world. Shell has decided to look at only three tech-nology centers around the world, one o which will be the one set up in Bangalore. Te reason orthis example is to essentially highlight the act that India has the human resource talent, but theindustry has not spent enough on extracting the most rom this talent. Tat is something that hasto change.

Invest in Smart InfrastructureIndia cannot push or an increase in the role o alternative energies unless it also invests heavilyin smart in rastructure. India has wind arms in amil Nadu that are unable to actually provideenergy because they have not been linked with the consumption centers. Te act is that India hasto start looking at investments across the integrated alternative-energy value chain. It is no good just saying that we want to develop commercialized solar, wind, and bio uels. India has to alsosee what can be done to recalibrate its in rastructure so that these new orms o energy are able tomeet the needs o the customer and are also able to be scaled up. Tat is one o the major impedi-ments to developing new sources o energy in India. So the development and investment in smartin rastructure has to be a key element o strategy.

Increase U.S.-India CollaborationsIndia has to also now look at a much stronger collaboration with countries like the United States,and these collaborations must be in the realm o technology. Several examples have been men-tioned regarding how technology can actually add value. Trough the input o appropriate tech-nology, India can shif the needle 5, 10, or 15 degrees, adding considerable value to the existingenergy picture. India should not be looking at technology to radically reinvent the energy-con-sumption basket or the energy-supply situation, but the U.S. and India should look at technologyto do better what we are already doing.


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Establish a Super-Ministry on EnergyFinally, theres a need or a super-ministry in India that ocuses on energy. India needs to actuallyask the question: how does a country develop an energy policy i it is handled through a multi-plicity o decisionmakers, each o whom have tur to protect, each o whom have companies toprotect, and all o whom are looking at the energy picture through their particular silo? Tis issue

perhaps is the most important and arguably the most urgent issue acing the Indian energy sector.Were India to create an institutional ramework that allows or a more cohesive and integratedenergy policy ramework, it would be able to address many o these hard truths.


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Te last decade saw an extraordinary turnaround. And over this decade, spending on in ra-structure, as a share o GDP, almost tripled rom 3 percent o GDP to about 8 percent o GDP.What is remarkable is that in 2003, very little o that spending was a result o privately developedin rastructure. In 2008, roughly a third o that 8 percent was a result o private in rastructure. Soprivate in rastructure is now doing approximately 3 percent o the GDP. So we are talking about$60 to $70 billion a year in private in rastructure. And when I say private in rastructure, I meanin rastructure where the equity risk is, in some measure, being taken by a private provider.

Te scale o private participation is unprecedented in historical terms. And this is in sectorsthat are delivering services that are quasi-public goods. So whether it is electricity, water, trans-portation, or telecoms, there is an element o essential service that is being provided to the generalconsuming public.

My third comment is that private parties are being called upon to deliver these public services in a political context that is extraordinarily demanding. Whereas in the 19th century in theUnited States, private parties might have delivered in rastructure services, the expectations o theconsuming public were very different. We did not even have universal suffrage then. In the 21stcentury, not only do we have universal suffrage, the expectations o the electorate are much higherthan at any time be ore. Now electricity, access to water, and to communication and public trans-portation are increasingly considered to be part o peoples rights. Te sense o entitlement romthe electorate is much, much higher than be ore.

India has reasonably strong institutions, but it is no secret that the administrative capacities othe government have been weakening over time and they are not as efficient as they used to be. Wehave a weak state apparatus whose dys unction has been exacerbated because o the nature o ourcoalition politics.

I we juxtapose all our different aspects o the contexthugely increased, unprecedentedparticipation o the private sector in the delivery o services that are regarded by a very active andpolitically conscious electorate as entitlements, within a weak statethis is a cocktail or an inter-esting rollercoaster ride. Te intersection o public interest and public goods with private partiesseeking to maximize prot is a well-known problem elsewhere in the world. It is challenging inmost parts o the world. But when you transpose that into the Indian context, you can then under-stand the term in rastruggles. It is a very, very difficult and challenging environment in which weare trying to deliver these services.

Indias Achievements since 2003First, there is port cargo-handling capacity, and this re ers to container-handling capacity inparticular, which is the modernization o port in rastructure. Over the last decade, capacity has

tripled rom 3 million twenty- oot equivalent units ( EU) to 9 million EU. And the share oprivate participation has gone rom under 25 percent to nearly 80 percent. Eighty percent o thecurrent 9 million EU are delivered through privately developed and privately managed ports.

Next is power generation, which is the subject o one o the two recentEconomist articles.oday we have capacity o a little over 200,000 megawatts (MW), and we have added about 45,000

to 50,000 MW just over the last ve years. It is short o the plan estimates or targets, but this is themost capacity we have added in any ve-year period since independence.


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And what is more extraordinary is that o the 200,000 MW o current capacity, roughly 30percent is actually in private handsprivately developed and privately managed. Teres another20,000 MW o capacity that is currently under construction or completion in the next scal year,and two-thirds o that is private. So by the end o the next scal year, we will have close to 220,000or 230,000 MW in operation, o which more than a third will be in private hands.

Tere is also the telecoms story, which has been the poster child o Indian in rastructure, andis well known to many. In just over the last decade we have gone rom under 20 million subscrib-ers to close to 950 million subscribers. wo-thirds o these subscribers are urban; one-third isrural. Urban penetration is 160 percent now and rural penetration is close to 40 percent. Te costo telecom service delivery has come down rom 15 rupees per minute, or 30 U.S. cents, to 1.5 U.S.cents per minute.

Tat is the scale and speed with which this bit o in rastructure has been built. We have pavedabout 13,000 kilometers o new roads. Te previous minister used to boast that he would bid up to20 kilometers a day o new roads or private participation. We are now up to 15 kilometers a day,so over 13,000 kilometers o road have been bid out or private participation.

It is the largest public-private partnership (PPP) program currently in operation anywhere inthe world. In absolute terms the numbers, compared to China, are nothing. But in terms o thescale o private participation, and in the Indian context, these numbers are absolutely humungous.

Analyzing the State of the Indian InfrastructureSectorTe successes within Indian in rastructure reaffirm and revalidate that the execution capacity andrisk-taking capacity o our entrepreneurs is indeed phenomenal. Te quality o what has beenbuilt, whether it is new roads, power plants, or ports, has been excellent. And the efficiency per

gantry crane is as high as Singapore.Almost all o this is domestically unded. So it demonstrates that our nancial system, not-

withstanding its limitations and railties, has had the depth and the breadth, so ar, to accommo-date this huge expansion.

Furthermore, the success o the in rastructure sector shows the depth and breadth o thesupporting ecosystem to make all o this happen. You need a whole bunch o pro essionals thatare able to write the contracts and en orce the contracts, because these are complex commercialarrangements, and that ecosystem does exist in India.

And nally, the success demonstrates that there must have been some government policybreakthroughs to enable all o this. It is not as i government policy is completely dys unctional.Without some initial breakthroughs, we would not have had the pace o development that we havehad.

However, there is also a downside. Imagine a car that must have our wheels. One wheel isgovernment. Te second wheel is the private sector. Te third wheel is civil society, and the ourthwheel is regulators and judiciary.

For this whole system to keep working, or this car to keep rolling, all wheels must be riding orturning at the same speed. What has happened in the last decade is that the private-sector wheel othis car has gotten ahead o itsel .


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Afer years o repression, years o suppression o this huge entrepreneurial energy, nally inthe 1990s, the bottle was uncorked. Te genie came out o it. Te hugely enthusiastic private sectorthat is driven by prot emerges and they invest lef, right, and center and they have created thishuge stock o investment.

But the wheel that is government is not turning quite as ast. Tere is weak administrative

capability. And what that means in this context is that there is room or gaming.Te civil-society wheel that has been dormant or some time becomes more vocal when they

realize the government and the private sector are not really in sync. So now there is systematicprotest. You have civil-society movements that are becoming more and more articulate, voci er-ous, and inuential, aided by a very effective media.

And this is between the middle class and the media. Te media in our country is privatelyowned and the commercial interests o the media lie with the middle class because that is whereadvertising dollars are generated. So anything o concern to the middle class gets amplied in themedia, especially the electronic media. And corruption has become a big issue or the middle classin India. It has been picked up by the media and amplied.

So when all this is happening, the regulators and the judiciary are compelled to react. And itis a blunt instrument, lets ace it. I am now re erring pointedly to the Supreme Court decision onrevoking the 122 telecom licenses. Morally and ethically it was the right thing to do, it is a correct judgment. But it has consequences or business. Tere are some people who entered into the con-tracts on the presumption that they were valid contracts. Now those contracts have been declaredinvalid. What does it do to the billions o dollars the Norwegians invested in Indian telecom?

Tere are ve areas where there is a lot o work to be done.

Five Areas to DevelopLandTe rst is the acquisition o land when it comes to developing in rastructure. Land is a hugelyemotive issue in our country. It is very scarce, and it is at the heart o distributive justice. So when

at cats come acquire land, using the state as a shield, supposedly acquiring land or the publicpurpose, and the public sees that this land is being used to generate prots, it causes some reac-tion, rightly or wrongly.

Tis is a grey area. I I acquire land or a power project to generate electricity or the public, Ican argue quite legitimately it is or the public purpose. But i I have a captive mine associated withthat, a captive coal mine, which gives me extraordinary prots, then the debate could swing theother way.

How we distribute land and what is air is one set o issues. But what is efficacious is quiteanother set o issues. Te political system is such that we are ocused on airness, but efficiency isbeing relegated to a second-order debate. In the world o political rhetoric, efficiency o decision-making does not gure.

Te legislation that is being proposed today is potentially disastrous rom the point o viewo business, but it has the perception o being fair . Tis is a huge challenge that needs to be ad-dressed, and land is at the heart o it.


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EnvironmentTe environment is a similar issue. It mostly has to do with de orestation and water. It just so hap-pens that most o our coal lies in heavily orested areas o the country, where most o our tribalcommunities also live. When access is given to mining companies, trees are cut down and peopleare displaced.

How do you nd the balance between the rights o those individuals and the obvious need orcoal? We have 280 billion tons o coal reserves. We have the fh-largest coal reserves anywhere inthe world, but we cannot dig it out o the ground to eed our power plants. And the environment isat the center o that big ght.

FinancingFinancing or public in rastructure is very easy; it is just budgetary nancing. But private nancing

or private projects is much more complex. It requires the layering o differing kinds o securitiesand other complicated procedures.

Tere is a mismatch between the savings that we have, where they lie, and the needs o thein rastructure sector. It is not as i we do not have signicant savings, we save 35 percent o GDP.

Te bulk o those savings lies in banks or is not properly intermediated through the ormalnancial system. And so they are not available with a long-enough term that can be delivered toin rastructure, because the long terms must match the long term o the assets.

Tere is a mismatch that requires institutional evolution. We need to develop our own pensionand insurance industry, which is happening but will take time. oday we have a disconnect, so wehave to rely on a bridging mechanism, on long-term savings rom overseas. And we have to ndcreative solutions, and this is where connectivity with the U.S. capital markets in particular is veryimportant to us.

Administrative CapacityTe ourth issue that we need to resolve is administrative capacity. Coal India is an example. odaywe are importing 50 million tons o coal per year at a cost o $5 billion, whereas we have all thecoal in the world. And we are not able to do it because Coal India has been singularly unprepared

or the pace at which generating plants have come on-stream. Tey have never seen this in 50years.

Tere is 30,000 to 40,000 MW o new capacity suddenly coming up; although they havepromised that they will provide coal, they just do not have the ability to do it. Te situation is com-pletely suboptimal because we do not have the administrative capacity to bring the coal out o theground in time. We are going to have to rely on imported coal at triple the price, the cost o whichwill have to be borne eventually by the taxpayer.

RegulationAnd nally, we need to vastly improve our regulatory capability, because regulation in this in-tersection between private and public, which is so intense in India, has to be absolutely rst rate.Tey have to adjudicate between the interests o the risk-taking private provider o the service and


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the general public good. Te regulatory community has been politically inuenced, and do nothave the capacity and the sophistication to stand up independently rom government and makethose regulatory decisions.

The Great Muddle-ThroughFinally, let me turn to the way orward. Roads and airports are still doing reasonably well. But thetwo big sectors, telecoms and power, are reeling rom this: the wheels o this car are going in di -

erent directions. Going orward, it could be characterized as Te Great Muddle-Trough.

We have to live with third- or ourth-best policy choices. And while there can be no accom-modation or corruption, let me describe to you the real-li e dilemma o a sincere public officialcalled upon to make critical decisions. Te choice or a number o public officials is either to haveno in rastructure, candidly admitting to the lack o administrative capacity within government todeliver it, or to tolerate some untidiness in the system and have in rastructure built.

Here is an example in the telecom sector. Te comptroller and auditor general, who has acted

as a very strong voice o conscience on the telecom issue, estimated the loss rom the manner inwhich the 122 telecom licenses were given out. Te last set o telecom licenses were given out atclose to $35 billion. He is trying to make a rhetorical point, to bring this issue to the center opublic debate.

Depending upon how you discover the price o spectrum, I estimate the real cost lost to theexchequer to be closer to $10 to $15 billion, and not $35 billion. en billion dollars is less thanwhat we spend on our ood subsidies. And o those ood subsidies it has been empirically recordedthat two-thirds to three-quarters are wasted. Tey do not even get to the intended recipient.

Te telecom companies that got licenses even in 2001 have not made beyond-normal protsonly $2 revenue per user per month; 1.4 cents per minute is really not a prot. It is hypercompeti-

tive. Why are we debating this issue to the extent that we are? We must go afer corruption, but wehave to keep perspective. Te debate has gotten out o hand, and we are losing sight o the moreimportant things that we have to achieve.

So in Te Great Muddle-Trough, I suspect what will happen is that there will be an accom-modation whereby deals will be cut and in the power sector, or example, power purchase agree-ments that were supposed to be binding or 25 years will have to be reviewed, and will be allowedto pass through the higher cost o imported coalwhich means that lenders will be protected. Teasset will be built. Te equity returns or the developer will decrease, but the cost to the consumerwill increase.

So the pain will be distributed somewhat widely, and there will be debate about how air that

distribution o the pain has been. But it will be a muddle-through because the ideal situationwould be that we get our act together in Coal India and mine the coal that we are sitting on at athird o the cost, and use that to re our power plants rather than relying on imported coal romAustralia at three times the price. So that is the muddle-through in power.

A similar story will un old in telecoms, where the aggrieved parties will come back to thetable, and probably bid again. Tey will have to absorb some higher cost, but they will be allowedto operate. Tere will be some consolidation in the industry and li e will go on. And I can go on

rom sector to sector, but that is the nature o the muddle through that is likely to mani est itsel .


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Now you can ask, Is that good enough? Is the best we can do, in the complex country that weare, a muddle-through in the construction o such an important sector? And the answer is surelyno. A muddle-through cannot be good enough.

The Challenges AheadWhat are the challenges or the next 10 years? For the next 10 years, we have to deal with the chal-lenge o urbanization. Tat is going to be the next big wave or in rastructure. We expect over thenext 20 years, our urban population will grow by 250 to 300 million people. Tere will be about600 million to 650 million people living in cities in India by 2030. Te quality o our cities is dete-riorating by the day. Te administrative capacity to plan urban in rastructure does not exist. Tescal base or our towns is nonexistent. How is this in rastructure going to be built?

Water is only now beginning to appear on the edges o the debate. We are depleting our watertable at an astonishing rate. I will conclude by leaving you with one act about water: we have beensubsidizing the use o electricity or irrigation pumps or the longest time. And government afergovernment makes the supply o electricity to armers ree. Pump irrigation is what is causing ourwater tables to deplete at an astonishingly ast rate.

What was intended to help agriculture production has become a huge problem in terms oavailability o water resources. And the politics o it is suchand this is the undamental issuewith democraciesthat we are unable to think about the long term. So, how we start ocusing onthe long term and translate that into political decisions today, I think that is the challenge we are

acing in all capitalist democracies. And we are no different, except that we are at a different stageo our evolution.

However, I am hope ul. And the reason I am hope ul is that I think that we are on the cuspo a radical change in the nature o politics in our country. And it is the youth, urbanization, thegrowth o the middle class and media that are conspiring to bring about that change.

A young demographic and urbanization, combined with electoral re orm, means that the con-cerns being expressed through the electorate will become more issue-based rather than identity-based. Te dynamics o the middle class and media will begin to exert huge pressure and inuencethat will change policies. And hope ully a combination o those two orces will help us navigate thechallenges that lie ahead.

Tank you.


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16 |

GE has been in India in one orm or another or 110 years. Amazingly, someone ventured outin 1902 rom the United States and came to India and built a hydroelectric power plant, and

no one can account or who that was or why they came to India in 1902, but it was built in Karna-taka and GE has been in the country commercially ever since then.

Between 1993 and 2000, GE built up a lot o back-office presence in India, and was one o therst companies to develop the business process outsourcing (BPO)and you now know that com-pany as Genpact. GE did the same thing with many research and development and engineeringactivities in Bangalore, so today there are 5,000 scientists, engineers, and others doing work or GEin Bangalore. Tat was a big phase o GEs development in India and it was trailblazing.

In the last three years we have been trying to make the company much more commercial. GEIndia still has back-end activities, but is now much more commercial and especially more local.GE India is now a stand-alone local company with products and manu acturing in India, which isa change rom the way we have done things in the past.

Te large sectors that GE is involved in are:

Energy: GE is heavily involved in power generation; renewable energy, specically the windbusiness; digital energy, and water-related treatment.

Health care: Health care is a very large and strongly growing business or us in India; mostlyimaging equipment and related services.

Transportation: GE makes aircraf engines, locomotive engines, and all the related services thatwould go with that.

And lastly, GE Capital: In addition to day-to-day nancing, GE Capital nances a number oin rastructure projects. Quite ofen we might put equity into a project or development companythat is also working with GE on the commercial side. GE there ore has a pretty wide-ranging viewo the activity in the in rastructure sector in India right now. Overall, weve got about 15,000 em-ployees in the country.

Te global economic scenario right now really touches India and the in rastructure space inparticular in a ew ways. GE, as you know, is thought o as an American company in many ways,but our number-one strategic commitment is to grow the company outside o the United States.

india on the move:infrastructure for the 21st

century (part ii)Remarks by John L. Flannery, president and CEO,General Electric (GE) India

July 6, 2012

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First, in power generation, there is a signicant and growing shortage o power. en to 13percent shortages are roughly accurate, but they are rapidly expanding. Tere have been no large-scale gas or coal-powered projects done in the last year, and probably almost 18 months. Tere areissues around uel, the supply o natural gas, the availability o coal, and the price o coal. But inthe power-generation side o the industry today, there are major short alls. In our own customerbase, there are between 5 and 6 gigawatts o completed power projects that are not operating dueto lack o uel. o put that in perspective, that is roughly the energy supply or the Delhi metroarea. Tese multibillion-dollar investments are basically stranded or lack o uel supply.

Second, the distribution network is very troubled in a couple o ways. One is the efficiencyo the networkit is re erred to as a lost percentage, and is very high in India. Tere is a largegap between the percentage o electricity that is generated and what is ultimately paid or: this isleakage, in one sense, and thef, in many circumstances. India would be quite high in any globalranking o the dissipation o power production to act

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