World Energy Outlook 2007

South Asia is the least integrated region in the world, with trade among the
countries in the region at only 2% of GDP. Trade could increase
substantially if more conducive framework agreements were put in place on
transport, custom formalities and other trade-related issues (World Bank,
2006c). India has been using the South Asian Association for Regional
Cooperation (SAARC) 9 , in which it plays a leading role, as a forum for
rapprochement with Pakistan. Trade between India and Bangladesh is heavily
weighted in India’s favour and Bangladesh sees a more balanced trading
regime as one condition for enhanced co-operation in other areas. Energy,
particularly natural gas, and transport are key areas for co-operation between
SAARC countries.
Fiscal Discipline
The persistence of high fiscal deficits is a potential threat to continued rapid
growth in India. India’s combined central and state government fiscal deficit
was around 6.3% of GDP in 2006, while the level of public debt stood
at around 75% of GDP in March 2007 (OECD, 2007). The Planning
Commission argues that fiscal targets should be subordinated to social
spending needs, but the current fiscal deficit and public debt constrain the
scope for financing much-needed public investment in infrastructure
through borrowing. The large deficit also crowds out credit to the private
sector. The government has accordingly proposed measures to cut the deficit,
including reducing subsidies, widening the tax net and cutting government
employment; but these face stiff opposition in parliament. States, too, mostly
face high levels of debt which limit their ability to increase investment
through borrowing.
Some progress has nonetheless been made. The central government
introduced a value-added tax in 2005 to increase state savings and is
committed to abiding by the framework established in the Fiscal Reforms
and Budget Management Act, enacted in 2003. The goal is to reduce the
fiscal deficit to no more than 3% of GDP by March 2009. Curbs on
spending will be crucial to meeting this goal. Some states have begun to
increase user charges to limit subsidies and to reform pension systems for
their employees. 10 Others, however, are lagging behind. Funding for
infrastructure development could be made available by creating favourable
conditions for a sustained increase in private investment.
Progress in reducing the fiscal deficit in order to garner the needed funds
for infrastructure investment in all sectors will be an important determinant
9. Created in 1985 by Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
Afghanistan joined in April 2007.
10. See IMF (2007) for a review of the fiscal performance of India’s states.
436 World Energy Outlook 2007 - INDIA’S ENERGY PROSPECTS