Indian Economy after the Nuclear Tests

24 Aug, 1998    ·   138

Report of the fifth IPCS Seminar on the Implications of Nuclear Testing in South Asia

The topic of the 6th Friday discussion group was Indian Economy After the Tests. Mr. Chari, who chaired the session, highlighted two statements in his opening remarks. One was the statement of the Indian Prime Minister, Mr. Atal Behari Vajpayee: "We have the inherent strength to face the sanctions and we will not change our views or succumb to pressures from anyone." The other statement highlighted was that of Karl Inderfurth in which he informed the "termination of assistance under the Foreign Assistance Act of 1961, except for humanitarian assistance for food or other agricultural commodities." Inderfurth added that USA did not want civilians to suffer. He also said that India ’s sluggish industrial growth had serious implications for investment and that the Indian budget was lack luster.



These opening remarks were followed by a presentation made by Prem Shankar Jha. He agreed with the Inderfurth assessment of the Indian economy. Mr. Jha explained that the timing of the tests was wrong as India did not use the press sufficently. The press could have been used to propagate a China threat for more than 6-8 months. The foreign press, he added, was not sufficiently exploited to expose China ’s collusion with Pakistan .



From the viewpoint of the state of the economy also the timing to explode the bombs was wrong as the South East Asian markets had collapsed. He highlighted several bad decisions of the government. The TATA-Singapore Airlines project, which had been again been deferred, came in for specific mention.The rupee had deprecated by 11% against the dollar. The nine year boom in the US was slowing. Exports had stagnated there had been a steady decline from June 1996 to October 1997. India was sliding into a recession, but the government refused to accept this and various official sources continued to provide confusing data.



In the face of sanctions the short term impact would be the denial of foreign exchange which would mean cutting off projects in which the government is a partner; cutting off aid from multilateral organisations such as the IMF and World Bank, and in some cases even private contracts being called off. The Government has put at $6billion the estimated loss to the country although estimates very.



To face the sanctions the need was to revive the economy and increase exports. The interest rates can be lowered and deficits can be curbed. Subsides can also be brought down. Investment in infrastructure should be enhanced. Corporate Houses and Blue Chip companies should also get freedom from corporate tax for 5-6 years. The Rupee Dollar exchange rate is likely to go down to 45-48 or even 50, wild but that could still be fine. With the retirement age having been increased by 2 years means that pension liability in the budget has been postponed.



He also suggested that India could sign the CTBT and avoid the security threat from the  Sino-Pak axis, and the proxy war in Kashmir . Because of the recent explosions, Sino-Pak relations have come in the limelight. Clinton favored China inspite of its track record of nuclear proliferation. The last few weeks have resulted in a growing concern in the US over India ’s security and threat perceptions. India was in no position however to bargain and there can be no overt opening of technology doors unless it entered the CTBT.



In has presentation Mr. Srinivas Raghavan, highlighted some 10 events that have resulted in investors losing their confidence in the Indian economy. He made particular reference to the  SIA-TATA  Airlines and DOT-VSNL cases, exchange rate depreciation, rejection of foreign investment in the insurance sector, budget not being prepared with much contribution from the Finance Minister, and a Blue Chip company, Bata, whose boss got manhandled in Calcutta . In a situation like this the investor loses confidence in the system and foreign investment, direct or portfolio, gets effected.



The discussions that followed were lively. Amb. Arundhati Ghosh said that the split between the BJP and the rest of the political class evident. She added that the BJP was committing several errors and the opposition parties are waiting for it to fail. She said that CTBT is unacceptable in its present form. She said that the CTBT and FMCT basically intended to strengthen verification regimes and if one signs the CTBT one might as well sign the NPT. She also linked the issue of economic reforms with security requirements.