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Upsurge will continue in post-Kargil phase, say economists

Ambereesh K Diwanji in New Delhi

Leading economists have shared the view of leading commerce and industry chambers that the Kargil crisis has not dampened the economic resurgence.

"I know this will not sound right and I don't mean it in a negative sense since I too desire peace and don't want to see our jawans killed. But if the war had carried on a bit longer and hurt the Indian economy badly, it might have just forced the government to take some drastic steps," said Pradeep Chattopadhyay, economist at the National Council for Applied Economic Research, New Delhi.

Dr Chattopadhyay's statement reflects the fact that liberalisation has more or less come to a standstill even as the economy is slowly picking up the threads. And the Kargil conflict did not really dampen the resurgence, a view shared by economists and corroborated by some figures, even though some fears were expressed in this regard.

Finance Minister Yashwant Sinha had time and again stated that the Kargil war will have no effect at all on the economy and promised to spare no effort to help the armed forces meet their objectives. His confidence is born from the fact that the economy is coming out of its recession-like state and bringing good cheer all round.

The greatest indicator is the rise and rise of the Bombay Stock Exchange's Sensitive Index. The Sensex has reached an all time high of 4678, and punters say it will breach the 5000 mark! However, Chattopadhyay adds a note of caution. "The Sensex really does not reflect the Indian economy any longer. It almost has a life of its own. The Sensex's recent rise is because Asia is once again a favoured destination of the foreign institutional investors who are now pumping in money into the BSE," he says.

However, it is not just the Sensex. The Confederation of Indian Industry, India's apex business chamber, in a statement pointed out that the economic fundamentals continued to remain strong. Industrial growth was at 6.8 per cent in April 1999 as against 4.8 per cent in 1998 and 3.9 per cent in 1997. Better still, the manufacturing sector registered a growth of 7.8 per cent against the pits of 4.9 per cent in 1998 and 3.8 per cent in 1997.

"Manufacturing is still the primary barometer of Indian industry, and this can only be considered a positive sign," says Manushi Roy, deputy director general of CII. "Though the figures for the months of May and June are still to be compiled, preliminary indications are that the upsurge will continue," she added.

Industrialists are happy. Demand for automobiles, commercial vehicles, steel, cement has risen alongside the increase in road and housing construction activities. Good news flows in from the rural sector that has seen a bumper production. "With more money available, there will be more demand. That will help maintain the momentum," said Roy.

Further good news. Inflation has reached an all-time low of 2.6 per cent while our foreign reserves, which today is seen as a symbol of economic resilience, continues to hover at over $33 billion. And while exports continue to flounder, showing a growth of only 2 per cent, imports have increased by 8.66 per cent. "The imports are primarily in capital goods, which in turn will help industrial recovery and growth," said Roy.

For instance, consumer durables have registered a growth of a whopping 18.4 per cent, capital goods by 19.2 per cent and basic goods by 5.1 per cent.

Over the past two years, industrialists and business chambers had cried themselves hoarse, demanding that the government should spend more to stimulate growth. The Kargil conflict helped.

"The war makes it own demands for ammunition, weapons, vehicles, and for better roads in the affected areas and other areas where the forces are on alert. For instance, ordnance factories have increased their production and this in turn has a multiplier effect," points out Chattopadhyay.

Economist at the Rajiv Gandhi Foundation, Bibek Debroy, however, warns against such spending. "Let us not get into this Adolf Hitler mode of considering such spending as positive. Yes, spending is up and increased demand is fuelling growth, but the reasons are actually beyond Kargil. The real good news is that the Kargil conflict did not derail our economic recovery," he said.

There is, however, a reason for concern and it is over the widening fiscal deficit because of increased government spending. During the last Budget presentation, the government had projected a fiscal deficit of around 4 per cent of the GDP.

Debroy is clear that this is no longer possible. "I have no doubt that if anything, the deficit will actually rise by about half a per cent," he said. That would be to around 4.5 per cent of the GDP.

The CII, and other chambers, have warned the government against a widening fiscal deficit. It is being calculated that each day of operation cost the government anywhere from Rs 200 million to Rs 300 million. The total tally will probably come out shortly, but which the government may fudge to paint a rosy picture.

However, the blame for a larger defict does not lie in the Kargil conflict alone, though higher government expenditure towards the war effort would have a certain short-term impact. "The conflict itself was very limited and therefore not very expensive. The present increase in deficit is more due to the huge interest payments that we are making," said Debroy.

"You know, every crisis is also an opportunity and I wish the government had used this conflict, when the feeling of patriotism is running high throughout India, to push in some great reforms. The government could have made a beginning towards privatising the public sector units and slashing subsidies, all of which are culprits in our huge deficit," said Chattopadhyay.

Certainly there is relief that the Kargil conflict did not continue for long, nor did it spread into a general war with Pakistan. "Either of the two would have had disastrous effects on the economy and on the fiscal deficit, hence there is reason to be pleased that this war was both limited in spread and duration," said Debroy.

And with the war over and the Indian economy smiling once again, corporate houses are singing. Some more good news: the latest AT Kearney survey report, covering the world's top 1000 companies, ranked India as the sixth most preferred destination for foreign direct investment. Kargil or not, India is today ranked ahead of Germany as an investment destination!

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