India is always fighting other people's wars. The Second World War had nothing to do with India. It was a fight between two big western powers for global supremacy, but we were dragged into it, because we were a colony, and colonies have no choice. Are we still a colony?
Our government seems to think so and has given the Americans a blank cheque, though they didn't ask for it. They are also not in a hurry to cash it, because they really don't need us. They need Pakistan, because it is a Muslim country, but it is a pity the government doesn't realise this.
We simply do not know what kind of a war we are being dragged into. We also do not know how long it will last, six days, six months or six years. We are not being taken into confidence because there is little we can contribute to this war. The Americans do not need us, and they are telling us in so many ways without actually spelling it out.
As far as India is concerned, the impact is going to be terrible, because we are a poor country and it is always the poor who suffer the most. We are vulnerable on a number of counts. Although the government says that our fundamentals are strong, that is just not true. Ours is a fragile economy, though not so fragile as that of, say, Pakistan, which has become a US colony for all practical purposes. If India has not become one, it is because of the fight many of us have put up for the last ten years of senseless globalisation, and also because of the wide support the Swadeshis have received in the country.
We are going to be hit in three ways. First, the stock market is going to crash further, wiping out thousands of small investors in the process. Second, the rupee is going to collapse, as portfolio funds flee the country, as they always do when things hot up. And third, GDP growth rate, already down to 4 per cent, may even turn out to be negative, as industry collapses and services get battered.
There is also a third factor, inflation. Prices will rise as imports of oil are throttled, and this will affect not just petrol, diesel and kerosene, but almost everything else. In short, we shall be facing stagnation once again, accompanied by rising unemployment.
In fact, I foresee three major developments:
1.The rupee will sink to 52 to the dollar.
2.The stock market index will go down to 2,000, that is, by 33 per cent since the attack in New York.
3.GDP growth, which was expected to sink to 4 per cent this year, according to IMF, may sink even further and may even be negative.
Let us take these items one by one.
The rupee will go down not only because of the flight of portfolio funds, but also because of a big dent in exports. Roughly a third of our exports are absorbed by the United States, out of which software and diamonds form a large element. Both are going to be affected. American companies are already fighting with their backs to the wall, and they will jettison software purchases, which are not really all that essential. Around 60 per cent to two-thirds of India's software exports are accounted for by American companies and it is only natural that they should suffer. Infosys and Wipro management say that their exports will not be affected.But one must remember that these companies are nothing but contractors to US companies and it is not for them to decide who will buy what and when. The growth of software exports will be affected badly, may be by as much as 50 per cent.
Then there are diamonds. This is not the time for Americans to worry about diamonds or gems. The diamond cutting industry based in Surat has already been affected as orders are falling behind schedule. The Americans will cut back on all frills at a time when their sons and daughters may be involved in hostilities in a land whose name they can't even spell correctly.
The external account deficit is currently around one per cent of GDP. With a cutback in exports, it may rise to two per cent or even much more. The more it increases, the bigger will be the pressure on the rupee to devalue. Remember that it was at the height of Kuwait crisis that we had to take our gold to Zurich for selling. We may not have to do it again this time as foreign reserves are adequate, but you never know. And remember also it is the same finance minister called Yashwant Sinha who may have to do it again.
Let us now come to the stock market. Actually, there is no reason for the stock market to stumble. After all, nothing really has happened to the Indian economy, or, for that matter, to the American economy. All that has happened is the collapse of half a dozen buildings in New York and a small part of the Pentagon in Washington. The cost is estimated to be around $40 billion. This is nothing compared to the American GDP, which touched ten trillion dollars or 10,000 billion dollars last year. What is 40 billion in 10,000 billion? In any case, New York and Washington are ten thousand miles away from India.
But in a globalised world, there are no distances. This is why a global tragedy affects everyone, not just the country where the tragedy takes place. So everybody has to pay the price, even countries like India which have nothing to do with what happened in New York. It is precisely for this reason that I oppose wholesale globalisation. We are too poor to pay the price, yet we shall be forced to pay it, mainly because of our foolish leaders who have embraced globalisation without trying to weigh its consequences.
Our stock markets, as of most other markets in the so-called emerging economies, are actually at the mercy of foreign players in the market. The Mumbai sensex has already gone down from 3150 on the day of the attack to 2600 on Friday, September 21st, that is, in ten days. How much more will it go down if the there is a real full-scale war?
It might go down to as little as 1,000, but that may not happen. My hunch is that it will sink to 2,000 and stabilise at that level until we know what exactly is happening. But you cannot rule out anything.
The biggest item on our import list is petroleum.We are dependent to the tune of 70 per cent on imported crude and other petroleum products. India has enough foreign reserves to meet the fuel bill but even then, a hike in the price of common fuels like petrol and diesel as well as kerosene cannot be ruled out. Wars and rationing always go together. Will there be rationing in the near future? It all depends on how long this new war is going to last. If it lasts less than three months, things will be under control. After three months we may be in real trouble.
The net effect of all this will be a big dent in growth. As it is, growth was floundering and has been floundering for the last three years. GDP growth rates have dived from 6.7 per cent in 1998-99 to 6.4 per cent in 1999-00, and 5.2 per cent last year. This slowdown has nothing to do with war, or with anything else. Remember, world growth has been rising all these years and the global economy has been doing pretty well.It is our faulty policies and bad management that is responsible for the slowdown since 1999.
In the current year, GDP growth is likely to plummet to 3 per cent, for the simple reason that all investments will dry up. Foreign investments dried up a long time ago, and there will be none this year, as investors will simply not be in a mood to take risks. You don't invest in a foreign country when your own country is on fire and requires your help. Foreign direct investment, already very low in relation to India's GDP, will go down further and may even be negative, if Enron succeeds in getting rid of its investments in Dabhol and quits India for good.
Secondly, there will be few domestic investments at a time when the stock market is collapsing. You don't put money in a business when your scrip is down and there are few buyers. You can't expect Infosys or Wipro to invest in new facilities when their existing facilities are under-utilised. This is true of all businesses, large and small, the net effect of which will be to bring down the growth rate. This is precisely what is known as recession.
It is shocking that we should suffer at a time when India has no role to play at all in the coming development. The United States did not ask for our help; we volunteered to give it, for reasons that do not make much sense. It is true that we have suffered a great deal from terrorism all these years. But we have fought it on our own, without any help from any source. Now that others are in the same boat, why should we be the first to stick our neck out?
This is not a time to get excited and rush into decisions that we may almost certainly regret later. The Americans are perfectly capable of taking care of themselves. They do not need us. Moreover, no one knows what their long-term plans are. They will come and they will go, as they did after the defeat of the Soviets in Afghanistan 12 years ago. But we cannot go anywhere. For the westerners, this is just another adventure. For us, and others in the region, it could be a question of life and death.
This is a time to sit back and question the very fundamentals of an economic policy that seems to have gone sour. What was wrong with the policy and why did it fail? In fact, globalisation itself seems to have failed. The attack on Twin Towers marks the beginning of the end of globalisation which the Americans and other westerners wanted to impose on us. Now they will have to think twice about it and all that it implies. We should do so too, for our whole future is now at stake.
This article was published in Samachar.com