The combative prime minister has let it be known that the economic consequences of Pokharan II were taken into account in deciding to raise the nuclear threshold. If sanctions are imposed and loans and aid suspended, AB Vajpayee has asserted, "We will face them" and not fight shy of taking "difficult routes".However, the mandarins of the North Block seem to have been caught unprepared by the announced sanctions, aid denial etc, judging by the noises they have been making about the difficulty of quantifying their impact. But the market has been quick to assess the shape of things to come.
The rupee has taken a knock. The reason is simple. Though India's current account deficit is small (one per cent of GDP in 1996-97), it gets covered by the surplus in the capital account. This surplus comes under pressure (at the margin) with a squeeze on aid.
A weak rupee could accelerate FII outflows and sharply slow down foreign currency reserve accumulation. The question is how best to sustain inflows in thecapital account. This issue has alerted the government to the need for expediting foreign investment, especially by US MNCs.
There is talk of hastening purchases of Boeing aircraft. Prospecting licences have been freely issued to Australian mining companies. The expectation is that foreign business will plead with their respective governments on India's behalf. Thus, the government has now reconciled itself to a depreciating rupee and to wooing foreign investment.
International hostility has been aroused precisely when the economy needs to ginger up its growth rate. The government has reportedly cleared three fast track power projects. Counter-guarantees are being reworked. But many more foreign-initiated power projects will have to take off the ground to make an impact on GDP growth. Foreign investors will have to get either exim bank support in their home countries or shop for commercial alternatives.
Getting the modalities right will take time. It will be more fruitful to increase the annual planoutlay, as reportedly proposed by the prime minister. But the entire increase in plan outlay cannot be covered by budgetary support. Besides, there is the issue of prioritising the additional allocations between infrastructure and rural development.
Especially the latter, requires the Centre to financially accommodate the states. Irrespective of their merit, the nuclear blasts have forced the government to face hard issues, even rethink the role of planning.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
