Agriculture 

The biggest risk to the Indian economy is the reason why India has a low per capita GDP, or why it is a developing country. The stark facts are that while agriculture employs some 60% of working Indians, it makes up about 25% of national income and is growing at less than 2% a year. While India attempts to step into the leagues of developed economies, it is in fact witnessing the emergence of two Indias. Services and manufacturing are thriving and achieving consistent 7-8% growth. With agriculture stagnating at 2-3%, simple math shows the level of income inequality will increase to unmanageable proportions in the next few decades. While the rising Indian middle class provides some ballast, many areas demonstrate virtual lack of development and extremely high incidence of rural poverty. The key to reverse this dynamic is to improve the growth of agricultural productivity. Until farmers’ incomes are increased and more farmers are migrated to decent urban jobs, India’s growth will not be sustainable. One positive for the current government is that in addition to maintaining momentum on services and manufacturing, it has declared agriculture an area for priority intervention. The effectiveness (or lack thereof) of the government on agriculture will be the main mitigant of this risk and determinant of whether India can effectively tackle poverty. 

The Indian private sector, meanwhile, is beginning to see the opportunity in the rural economy, in particular in agriculture and mass retail. Reliance and Bharti are two major corporates who have announced large investments to create a national mass retail presence that is expected to deliver large profits, job creation as well as efficiency in agricultural productivity. The success of such ventures will be another critical measure of whether this risk can be harnessed, and in fact turned into a profitable commercial opportunity. 

Governance 

The second big problem facing India after that of agricultural productivity is bad governance, outright corruption and stifling bureaucratic attitude in the provision of public services and regulation of private commerce. Failure of governance in the public realm ranges from widespread petty corruption at the local level, and in critical areas like the police force, to inefficiency in coalition politics at the national level. Part of this comes parceled with India’s democracy, demography and geography. However, it needs to be addressed because, like with agriculture, a large difference in growth rates between different regions (like slow growing UP and Bihar and faster growing states like Tamil Nadu) is not sustainable in the longer term. In addition, more fundamental problems of law and order threaten to undermine the existing stability in parts of India. For example, militant left-wing organizations have increased their control over a large swathe of eastern India while the Hindi-belt states like UP and Bihar continue to be influenced by feudal, caste and criminal inspired violence, undermining hopes of stability and development in these regions. 

As a result of harsh ground realities and ineffective media coverage, effective dialog with the left and improvement of the “Naxal situation” have not been very successful, but there has been a tremendous increase in awareness about regional imbalances in economic power and a desire to address these before they become a threat to India’s unity and stability. With the benefits of private investment so tangible, and constant media exposure of the dichotomies between successes and failures within India, even poorly run state governments have begun to compete for private investment. Last week, Laxmi Mittal announced that instead of Jharkhand he had decided to invest $10 billion to set up a steel plant in Orissa. The reason for the change in location: the Jharkhand government’s delay in getting the project approved, or in Mittal’s own words “We will go wherever we can proceed fast.” Many chief ministers are acting on such remarks, with the driver for improved governance being the need for faster development.  

Infrastructure 

Even assuming major investors are willing to set up capacity in a place like Jharkhand, they would still have to overcome serious deficiencies in critical infrastructure like power, transport and energy, dramatically increasing their cost of business. India’s biggest bottleneck is perhaps electricity, where peak supply is 11% less than current demand, not including the 56% of households without connections. Almost one third of total capacity is lost or stolen in transmission and a further 20% is provided at extreme subsidies to rural areas. India has 65,000 kilometers of national highways, but more than 90% of these are single-lane in each direction and about a third of Indian villages are not accessible by road. There are only three full-capacity international airports (at Delhi, Mumbai and Chennai) and, with the growth in air travel, these are currently handling more than twice their designed load. Even service businesses in the two main commercial hubs of Bangalore and Bombay are impacted by the poor state of infrastructure in these most cosmopolitan of Indian cities – acute traffic jams, urban squalor, power shortages, full hotels and congested airports. In addition to agriculture and governance, infrastructure is the third big risk that can undermine the India story.

Recognizing that this is an area where it can take effective action (unlike agriculture or governance), the government is making a big push on transport infrastructure, with schemes like the “Golden Quadrilateral” to link the four corners of the country, a substantial upgrade of major airports, revamp of the Indian railways and development of port capacity. Lack of adequate infrastructure also implies a business opportunity to those willing and able to fund its creation, and the last few years have seen a large increase in infrastructure participation by real estate, construction, engineering and finance companies. However, the role of the government is as important here as in agriculture or governance. In a situation of private provision of a ‘public good’ like a highway or airport services, the challenge for these companies will be how to work in a public-private partnership with the government to develop the required infrastructure in an adequately profitable manner. 

All three risk factors have one theme in common, namely the key role that must be played by the government in their mitigation. Poverty, corruption and poor infrastructure, unfortunately, are endemic in India. The key is to keep watching the trend at which these problems improve, or whether any of them deteriorates. And for better or worse, the major determinant of how these risks materialize is not the private sector but the government of India, now as always at the center of attention of institutional investors, civil society and all others interested in India’s development.

• • • (The Institutional Investor is a corporate finance and strategy specialist who hopes to catalyze anonymous yet informed debate on specific opportunities and risks in India’s economy.)

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