Doomsday scenarios

The usual American cowboy brashness, an exaggerated faith in high technology and excessive optimism about the low morale of the Iraqi army m...

The usual American cowboy brashness, an exaggerated faith in high technology and excessive optimism about the low morale of the Iraqi army made many believe that Gulf War II would be concluded over the weekend. Live television coverage of every move and manoeuvre added to this impatience. As it has turned out, the military campaign against Saddam Hussein8217;s regime is taking more time than most anticipated. However, merely because it is taking more time does not mean its negative economic impact on the world economy, or the Indian economy, is likely to be larger than anticipated. While the nervousness of investors and markets 8212; financial and commodity 8212; is understandable, there is no reason to imagine even at this stage that the Iraq war will have catastrophic results for the world economy.

Remember the war in the Balkans? It dragged on for months and the world economy did not teeter on the brink. The only thing that makes the Iraq war different from the campaign in the Balkans, apart from the quarrel between the United States and France-Germany is the fact that Iraq is in the middle of the world8217;s oil reserves. Any long term disruption of oil supplies could hurt the world economy. However, as of now there is no reason to believe that such a situation will come to pass. While the loyalty of Iraqi soldiers to the Saddam regime seems to be standing the test of sustained bombing for the moment, there is as yet no reason to doubt the final conclusion of this battle. Saddam Hussein8217;s regime will in all probability go. The human cost may be higher than originally anticipated, and this will influence the economic cost, but the long term economic impact is not going to be any different from what has already been factored in by investors and markets. In the medium term oil prices will stabilise at reasonably low levels. There will be a huge post-war reconstruction boom and it should be back to business.

For all these reasons, the current phase of nervousness in the markets must be seen for what it is, a response to earlier optimism and not a re-assessment of the likely result of the war. Make no mistake, the United States is not in this game to call it quits at the first sight of market nervousness. Note must also be taken of the fact that the initial rush of Indian nationals coming home for spring holidays from Kuwait has now become a trickle. The fact that Indians in the region are not rushing home suggests that they have a good measure of the fact that much of the negative fallout of the war will remain confined to Iraqi territory and is unlikely to spill to other countries in the region where Indians are based. The joker in the pack would be a desperate attempt by the present Iraqi regime to blow up oil fields. That would be catastrophic for the oil economy and must be prevented at all costs.