This Country Will Outgrow Every
Other for the Next 25 Years
“Scotty, we need more power!”
“Dang it Captain, I’m giving it all she’s got!”
This infamous exchange on the USS Enterprise is a particularly apt analogy for what’s happening in India today.
India recently saw a dramatic reduction in its GDP growth from 10% to 7%.
India is the 10th largest economy on the planet. Over the last ten years, its exports have grown steadily and now stand at 18% of GDP. The country provides agricultural, chemical and manufactured goods. It has a significant service industry. It’s a major player in the rapidly growing medical tourism sector, which I discussed at the beginning of the month. You can reread that issue here.
So why the sudden, sharp, decline in GDP growth? The answer lies in power…or rather, the lack thereof.
Heavy-Handed Government Policies Slow
the Indian Powerhouse
You see, as a carryover from its old Soviet-style of management, the Indian government sets rates on many essential items, including power. Currently, the government requires coal miners to sell their product 70% below market prices. This acts as a natural restraint on production because Indian miners would literally go broke providing coal at that rate.
So, the electric plants that rely on coal (which is most of them in India) are now faced with shortages. This results in blackouts, which cut industrial production.
The New York Times reported that demand for power now outstrips the supply of power by over 10%.
Imagine what this situation must be like. Your business has enough orders to keep your factory humming along at full capacity, but you can only run at 90% because you lose electricity for several hours every day.
Well, this is exactly what’s happening in India. And it’s creating a catch-22 situation…
Without Power, India Can’t Increase its Power Capacity
A country can’t build power plants unless the operators can prove they have a coal supplier. For this, they need a written supply contract, which is proving nearly impossible to get thanks to the government’s ridiculous 70%-below-market rates on coal supply.
Without a written supply contract, ground never gets broken to build the plant. All the while, businesses in the country continue to expand and millions of poor Indians continue to flood into the cities for work, pushing the teetering infrastructure to the brink.
The solution here is clear: India will embrace alternative sources of energy for electrical generation, like natural gas. It’ll also eventually deal with the bureaucratic road blocks to growth.
It has no choice, with a population of greater than 1.1 billion and demographic and consumer spending waves working in its favor. Its working-age adults are young, hungry and they’re entering their peak-spending phase. More than a third of the country’s population is moving into the cities, where they’re earning more. This is something the Indian government simply cannot ignore.
However, the country has been independent for less than a century. It has been working on free market reforms for just a few decades. We must accept that there will be growing pains. The power problem is an example.
Despite that, with the demographic trends India has in its favor, it will eventually outgrow every other country for the next 25 years, which is why we have our eye on it.
As soon as we see the Indian government streamlines the regulatory environment, so that business owners can get back to business, we’ll position ourselves for the inevitable boom. Stay tuned.