Cost of Kargil

Even a protracted war in Kargil is not expected to put the Indian economy under the kind of stress that Pakistan's much more fragile econ...

Even a protracted war in Kargil is not expected to put the Indian economy under the kind of stress that Pakistan8217;s much more fragile economy will suffer. Although there is comfort in that thought, there would be greater confidence about riding out the storm when the government starts taking measures to preempt trouble. Complacency is completely out of place.

Despite many strengths, including healthy foreign exchange reserves, no one can pretend that the economy is as robust as the Foreign Minister would wish when the country faces an external threat. Wars cost money and even remote ones unsettle business and industry and make investors terribly skittish. But the signs are that the government still has to get the economic and budgetary impact of Kargil into clear focus.

In recent weeks it has been business as usual with questionable moves on the telecom front where a tough minister has been replaced, plans for major purchases for Indian Airlines which have led to concern even in Rashtrapati Bhavan and inexplicable foot-dragging on the restructuring of the ailing public sector giant, SAIL. All suggest muddling through or letting extraneous factors affect decision-making or dithering.

Conducting business as usual is reassuring only in as far as it suggests there is no need for panic as indeed there is not. However, when it comes to dealing with the impact of Kargil on the budget and economy, there is no scope for confusion or political or other calculation. There should be no delay in doing what is necessary to mitigate the effects of the war in the short and medium term.

Investor sentiment is on a yoyo which leads to exaggerated movements in the foreign exchange and stock markets according to whether the news is good or not so good on the military and diplomatic fronts. Speculators tend to make a mercurial environment even more unmanageable and this should be guarded against. It is better to anticipate panicky herd movements than to try and close the door once they have started.

Business and industry know that Kargil does not have a direct impact on business plans and also that the government is doing everything possible to contain the conflict and find an early diplomatic solution, if possible. The main concern is over the management of government finances. Government expenditure will increase on account of additional military requirements 8212; replenishing armaments and new purchases, including sophisticated equipment to secure Indian posts on the mountains once the infiltrators are evicted.

Many defence demands cannot be postponed and must be provided for irrespective of whether the war is of a short or longer duration.

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Furthermore, at the same time as there is a higher government wage bill and election expenses to meet, there will be no proceeds from PSU disinvestment in the near future. So, unless it is prudent, the government will end up putting pressure on interest rates by borrowing more just when the corporate sector may be preparing to borrow more. It is reassuring to hear that the Finance Minister wants to find savings by cutting non-plan expenditure.

Politics should not interfere with this plan or with raising the new resources which have become necessary to finance the Kargil effort.

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