Military gains and economic losses

Print edition : July 03, 1999

An accelerated movement down the 'liberalisation' road India has traversed ever since Pokhran-II is likely to be the most significant economic fallout from Kargil.

THE Kargil operation, it is now official, is likely to be prolonged. With the immediate shock of being dragged into a "virtual war" having waned, attention is increasingly being focussed on the internal consequences of the war-like situation. An area in which the fallout is of obvious concern is the economy, since diversion of financial and material resources is inevitable in a military operation conducted in demanding terrain. Needless to say, with even the intensity and duration of the operation being anybody's guess, the quantum of such resources required can only be a 'guesstimate'. Financial estimates therefore vary.

The cost of the basic operation has been variously estimated at between Rs.10 crores and Rs.30 crores a day. To this must be added the cost of equipment which would have to be acquired to continue with this operation as well as guard against future infiltration of a similar kind. Based on extrapolations of different kinds, expenditure estimates going up to as much as Rs.10,000 crores this fiscal year are being circulated through the media.

Whatever be the exact sum involved, it would amount to a large increase in defence-related expenditures budgeted at Rs.45,700 crores in this year's Budget. The real issue, therefore, is the consequence of such spending. A cursory examination of economic conditions suggests that the fallout could in fact be positive from the point of view of growth. Indian industry is today in the midst of a recession, saddled with considerable excess capacities. Foodstocks with the government are comfortable, and the current dilemma relates to how the additional amounts that are being procured can be disposed of. Inflation, at least as measured by the wholesale price index, is at an 80-plus-week low. And, if the government is to be believed, India's foreign exchange reserves position is extremely comfortable. With no material bottlenecks and with foreign exchange available to deal with any specific shortages of tradable commodities, additional expenditures on commodities which are being virtually 'blown up' in Kargil and its neighbourhood should stimulate demand and spur growth, without leading to inflation. That is, a series of blunders committed by the government that have led up to the current wasteful and dangerous confrontation could turn out to be an advantage for a coalition which bears the burden of incumbency when returning to the electorate.

Finance Minister Yashwant Sinha. His claim that Kargil would make no difference to the fiscal deficit is not based on facts.-ANU PUSHKARNA

THERE is, however, one hitch. This relates to the fact that, influenced by international finance and its backers (in the G-8, the Bretton Woods institutions and the media), liberalisation and fiscal-deficit targeting have in official economic thinking taken precedence over other objectives like growth. So whatever the material consequences of the expenditure triggered by Kargil may be, the primary concern and fear appears to be that the operation would result in an 'unsustainable' increase in the fiscal deficit.

This is not because such an increase in the deficit cannot be prevented. Since any "war-like situation" calls for austerity on the part of the nation as a whole, the most obvious way of meeting the cost of Operation Vijay is a progressive direct tax, either in the form of a hike in rates of taxation or of a surcharge. This, of course, cannot be implemented by a caretaker government. But there are still ways around the problem and in any case the current government has already displayed its willingness to stretch its definition of 'caretaker' responsibilities to great lengths whenever convenient.

So the reason why the tax option to finance expenditures is not being mentioned lies elsewhere. To start with, the Bharatiya Janata Party-led government, which has a lot of explaining to do on why the present situation has come to pass, would hardly want to risk its popularity by touching the wallets of the well-to-do in the country. Secondly, if instances like the telecom licence fee controversy are any indication, in the run-up to the election, the government appears keen to "pay off" big business at any cost rather than tax it. And, finally, an understated assumption behind the reform strategy that the BJP backs is that tax concessions are a crucial component of the effort to unleash private initiative and growth. As a result, there can be no discussion of the possibility of additional taxation.

It is for this reason that there appears to be an air of inevitability about an increase in the deficit on the government's budget to the tune of somewhere between Rs.5,000 crores and Rs.10,000 crores, despite the government's effort to quell all such speculation. Having made 'deficit management' one of the indicators of his self-proclaimed competence as Finance Minister, Yashwant Sinha would hardly want to admit that strategic blunders since Pokhran-II have tied his hands in fiscal terms. And making any such open admission would definitely create a stir in international financial circles, which could influence the attitude of the United States. Since the government has been desperate to win the favour of American officialdom and has made much of every sign that official U.S. opinion is biased in its favour and against Pakistan, anything that could adversely affect such opinion is anathema. So the 'caretaker' Finance Minister has gone on record, without any explanations provided, that the Kargil operation would not upset his deficit calculations. This is merely a continuation of the situation ever since the nuclear tests, wherein the BJP-led government has bent over backwards to please international capital and through them win back the favour of the U.S. government and its allies.

HOWEVER, whatever the rhetoric, the reality is that given the optimistic estimates of tax buoyancy and proceeds from disinvestment, realising the fiscal deficit target of 4 per cent of GDP for 1999-2000 was an impossibility even without the present conflict. This implies that Yashwant Sinha's claim that Kargil would make no difference to the deficit is nothing more than an unavoidable pretence. His calculation probably is that this is a problem best dealt with later. After all, if the BJP does not return to power, he would not be called upon to defend the revised estimates for 1999-2000.

But what would ensue if his party does return to power and he remains the Finance Minister? With the elections behind him, it is inevitable that he would try and shore up his deficit figures by cutting social and capital expenditures, on the one hand, and disposing of the more profitable sections of the public sector, on the other. With social and capital expenditures already under squeeze for the last few years, it is the disinvestment initiative that would be more crucial. If there are few takers at home, sales to foreign buyers can be experimented with, on the grounds that the domestic market may not be able to 'bear' a large-scale retrenchment of public assets. Even if this only partially helps him rein in the deficit, these policies would win favour from international capital and the Bretton Woods institutions. As South-East Asia has made clear, the International Monetary Fund and its backers can forgive a rising deficit so long as liberalisation that allows cheap acquisitions of valuable assets is adopted.

Special mountain troops at Moghalpara waiting to move towards the Batalik region last fortnight. Expenditure estimates going up to Rs.10,000 crores during this fiscal year are being mentioned for the Kargil operation and its follow-up.-SHANKER CHAKRAVARTY

However, even in this scenario the problem of a larger fiscal deficit is not likely to go away. Nor, therefore, would the problem of how to finance it. Since borrowing from the Reserve Bank of India through the issue of ad hoc Treasury Bills has been foreclosed by the process of fiscal reform, other forms of debt are the only option. However, turning to the open market while keeping money supply growth under control can tighten money market conditions and lead to an increase in interest rates.

This would only worsen the recession, forcing the government to consider seriously the option of borrowing abroad. This is something the private sector would push for too. In fact, the Investment Information and Credit Rating Agency (ICRA), a rating agency, whose role is not to advise the government on policy but assess the creditworthiness of its clients, has reportedly come out with a gratuitous recommendation that the government should issue sovereign bonds denominated in foreign exchange to finance its post-Kargil deficit. Such recommendations, which would only make India more dependent on foreign finance and therefore more vulnerable to the whimsical demands of foreign financial interests, are bound to intensify. And they are likely to be accepted by the government, since they serve to win G-8 appreciation as well. If the government's recent record is any indication, initiatives to appease private foreign capital seems to be the bargain chip used most often in its post-Pokhran diplomacy. Thus an accelerated movement down the 'liberalisation' road India has traversed ever since Pokhran-II is likely to be the most significant economic fallout from Kargil.

There are lessons here for both Pakistan and India. It was not India alone that paid the price of diminished economic sovereignty in the wake of Pokhran-II. Responding as Pakistan did, it too faced both the sanctions and the subsequent compulsion to compromise on the economic front. Unfortunately, Pakistan learnt little from the experience. Its misadventure in Kargil is bound to aggravate the problem, just as India's need to respond to the infiltrators would weaken its economic independence in the days to come. In the end no real decisions would be made in the course of skirmishes along the Line of Control. The two governments would have to turn to the third umpire ensconced in Washington.

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