Business - News Analysis

Indian economy shows unexpected resilience

By Prem Shankar Jha

For the past two weeks India has been on the brink of war. Its troops have been at full alert along the Pakistan border; its naval fleet has been at high alert in the Arabian sea, and its airforce has been at full readiness in its forward air bases. Had President Musharraf not given a categorical assurance in a televised address to his nation on May 27, that there was no more infiltration of irregulars across the Line of Control into Kashmir, and had the Indian security forces not confirmed a significant drop in infiltration between May 27 and June 7, war could have broken out anytime in June. Awareness that this was a real possibility made the western countries, Japan and a number of other nations pull out all inessential diplomatic personnel from India and advise their nationals in the country that they should leave as soon as possible.

Predictably, these `advisories' have touched off a wave of speculation in the foreign media on when a war would break out and whether or not it would turn nuclear. This nervousness, bordering on panic, should have been reflected by the key economic indicators in the country. Foreign portfolio investment should have started pulling out of the country. Non-resident Indians with large deposits in Indian banks should have followed suit. The exchange rate should have been sinking rapidly. The Reserve Bank of India should have been pouring dollars into the foreign exchange market to stabilise the rupee and wondering whether or not to impose exchange controls till the war scare was over. Commodity prices should have been rising as manufacturers began to hoard raw materials and intermediate goods in anticipation of a disruption of supplies. There should also have been the first incipient signs of hoarding by consumers. This should have pushed up the retail price index. Share prices too should have been falling as nervous investors, anticipating the worst, started converting some of their holdings into cash.

But none of this has happened. Incredible as it may seem the Indian economy has continued to behave as if there was not a cloud in the sky. In the week ended May 31 share prices actually rose substantially not once but twice. In the mild panic that ensued in the first week of June, as foreign diplomats and nationals queued to leave the country, share prices did drop, but by a mere 1.35 per cent. Overall, prices are still higher than they were two weeks ago. There was also no sign of panic among consumers and manufacturers. Proof of this is to be found in the absence of inflation. Inflation measured by the wholesale price index continued to fall in the third week of May, and stood at 1.3 per cent at the end of it.

Even stranger is the behaviour of portfolio and NRI investment. In the last week of May, there was a net inflow of $215 million. This followed an increase in foreign currency reserves of $608 million in the previous four weeks. It is too early to tell whether foreign direct investment will be affected. India was not receiving much anyway. But no company has announced a postponement of plans. On the contrary British Gas has announced an increase in its investment of $500 million.

Contrary to expectations there has also been no exodus of foreigners from India. Apart from `inessential' diplomats and the family members of others, relatively few of the expatriates working in India have decided to leave. The lone exceptions may be the Japanese, whose Government has taken serious alarm at the prospect of war, and decided to pull all Japanese nationals out of India till things calm down. The palpable relaxation of tension between India and Pakistan after June 5, and the growing likelihood that the two countries may once again move towards a dialogue, could leave the Japanese with egg all over their faces.

How does one explain the absence of panic in the economy? As far as Indian reactions are concerned one answer could be sheer ignorance. Despite the daily headlines in the newspapers people in India simply did not understand how close their country had come to war. This could be because most of the industrially dynamic states are in the west and south, far from the north where a war would be fought. For most people in Mumbai or Chennai Kashmir is impossibly remote and the Pakistan border not much closer. A second reason could be that the bad news on the political front was offset by the first good news on the economic front that the country has had in almost two years. Last week the Confederation of Indian Industries announced after one of its periodic industry surveys that the severe recession that had gripped the economy for the last 17 months was over. And as if to underline this, exports grew by 18 per cent in April, the highest growth recorded since March 2001.

But how does one explain the confidence that foreign investors continue to repose in the Indian economy? They, after all, should have been affected by the alarmist reports that were appearing in the foreign media. One possible answer is that they took their cue from their representatives in Delhi and Mumbai, who in turn took theirs from their Indian colleagues. But a more plausible one is that Indian interest rates are so much higher than the rates available in Europe, Japan and America that they remained attractive even after being discounted for the possibility of war and devaluation. This is not something that the Indian finance minister should be proud of.

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