The India Risk Report 2008 presents the latest insights into trends, consequences and mitigation strategies.
The deterioration of the global financial environment has affected the national economy and the spill-over effects on the real economy are still unfolding, indicating the risk of a threat to economic security. Slower global growth will mean sluggish demand from developed economies and affect Indian exports in the coming quarters. Growth in the second quarter of 2008 fell by 1.3 per cent to 7.9 per cent, compared with the same period last year.
The financial crunch has also sucked out liquidity from India's domestic markets, because foreign investors started to pull out their capital to support themselves on their home turf. Dependence on such capital inflows to finance its current account deficit suffered.
The Indian rupee's volatility poses another risk. As on October 2008, it depreciated by 24 per cent in the previous 12 months. While currency depreciation led to growth in exports (mitigating low demand) by 35 per cent during April-August 2008, compared with the same period last year, importers have been feeling the heat.
Agriculture and food and water security
Almost 65 per cent of India's population depends on agriculture. The reliance on land has made rural communities resist land-use for infrastructure development or industry unless they feel they can share in some of the generated advantages. To ensure that the land transactions required for infrastructure projects are satisfactory to all parties, it is necessary to implement a transparent price-setting mechanism.
Rural development, including infrastructure, micro-finance and employment, will help alleviate the insecurity of these people. The sector cannot provide sufficient growth to enable its rural population of 600 million to improve livelihoods.
Changing weather patterns pose another challenge to Indian agriculture, affecting output. Climate change has caused further erratic flooding and drought. Warmer weather is helping certain pests breed.
Another threat for the rural community is scarcity of good quality water. The use of water for agricultural purposes is depleting water tables. Water supply is also strained due to wasteful irrigation practices; a shift to more water-intensive crops, such as horticultural produce; industrial and domestic water usage rising from a currently low base; and erratic rainfall.
In comparison with other high-growth economies such as China or Brazil, India's agricultural yields are lower and productivity is climbing at a slower pace. Per capita productivity in India only rose by seven per cent between 1995 and 2004, compared with 25 per cent in China.
Food security remains another risk. About 25 per cent of India's population is malnourished and lives below the poverty line. Child malnutrition is responsible for 22 per cent of India's disease burden and 50 per cent of the 2.3 million child deaths each year.
Energy security
The gap between energy demand and supply will worsen as India's energy needs grow with population growth and economic development. Stagnant production of crude oil has increased dependence on oil imports, which is more than 70 per cent. One-third of the power supplied fails to reach consumers.
Inexpensive and reliable electricity supply is vital to India's prosperity, especially for the 400 million people, mostly in rural areas, who don't have access to electricity. To ensure adequate energy supply and maintain an average growth of even eight per cent, there needs to be a ten-fold increase in energy capacity generation.
Diversifying India's energy supplies will also help India mitigate the energy risks. Energy risks remain one of the biggest for a country which sources most of its energy supplies from outside. India's energy security is a vital part of its strategic national security. Geopolitical tensions with energy suppliers and energy transit countries pose a threat to uninterrupted energy supplies, even as competition for limited conventional energy resources mount.
National security
India's security policies must address potential threats coming from outside its borders, by considering the economic, diplomatic and military aspects of external threats to protect Indian society.
Regional sources of instability also present India with external threats. The situation in Kashmir and the continued instability in Afghanistan and along its border with Pakistan remain a source of instability in the region. China's claim on Arunachal Pradesh, especially Tawang, poses a similar threat.
The perceived threats have led India to spend nearly three per cent of its GDP on defence for the past several years; however, the last Union Budget increased defence spending by 10 per cent, putting India's military expenditure higher in percentage terms than many other states, including China. Military spending is planned to total $81 billion over the period 2006 to 2020.
Internal security threats for India include radical groups organized along ethnic, religious or political lines which are increasing in numbers, especially in disadvantaged districts. Terrorist incidents raise fears about insecurity and place pressure on the police and government to prevent such attacks. If left unchecked, the rise of non-state actors within the state poses as great a risk as exogenous threats.
Experts feel instability rises from a lack of human security- poor access to education, health to job creation and economic development. Greater progress is needed to reduce disparities, particularly in disadvantaged regions such as Bihar, West Bengal and Andhra Pradesh, Jammu and Kashmir.
