Although the matter has been dismissed as not being of major consequence by the government and certain sections of media, the impact of the sanctions in my opinion is highly underestimated. It is not as if one doubts the resilience of the Indian economy, but the negative repercussions of the sanctions need to be addressed, before the effects snowball into a major crisis. Again it is not so much the sanctions themselves, but the negative sentiments attached to them that will hurt. The indirect impact will be far more severe than the direct impact. Some of the direct impact would be:
Withdrawal of funding facilities and guarantees by the US Exim Bank. This could hamper financial closure of certain power and telecom projects.It is precisely this thinking that lends the government to a sense of complacency. The indirect impact will arise from:
Fall in the value of the rupee: The rupee has already depreciated by over 3 per cent post budget and approximately 20 per cent during the last year. Sentiments continue to be negative.
Depressed capital market: The negative sentiments will hurt the capital markets. Yashwant Sinha's avowed objective of raising Rs 5,000 cr through disinvestment of PSU's will be a total washout. May and June have already witnessed significant FIIoutflows have exceeded $150 million.
Increased borrowing cost: Corporate nursing ambitions of raising external borrowings will have to defer such plans or veto the idea altogether. Moody's rating putting India in the speculative grade will result in sale of Indian paper, and increase borrowing cost.
Deferment of FDI by foreign MNC's: Typically, MNC's will adopt the wait and watch attitude before investing their money. Once again, Sinha's intentions of doubling FDI in two years seems to be in jeopardy.
Each of the above fallouts tend to feed on each other further aggravating the problem. Quantifying the above will not be an easy task.
We need to be pro-active to counteract these problems. We possess nuclear capability, sanctions have been imposed, the country rating has been downgraded are statements of fact, which cannot be changed. There is no blueprint to solve the crisis, but some of the following actions will be useful in mitigating the problems.
Sinha needs to invite the CEOs of all MNCs andforeign banks operating in India to request them to lobby on our behalf at Washington and other western capitals. It does not need much foresight to realise that they would not need much persuasion in this regard. A dilution of the sanctions is what is to be aimed at.
One of the main reasons for the success of the Chinese export offensive, has been their significant investments in infrastructure. We cannot turn a blind eye to the fact, that we need the funds and we need them fast. The opening of the insurance sector to the Indian private sector does not carry enough teeth. The Indian private sector, may not possess the strength and expertise to go at it alone. The opening up of this sector would be too large a lollipop for the foreign investors to resist.
One of the deterrents for an FII is the uncertainty regarding the value of the rupee. Although RBI has permitted forward covers on the incremental portfolio post June 22, 1998, this will have limited benefit, particularly when FII investments are likelyto diminish during this period. An opportunity for the FII to cover his entire rupee exposure will prevent any hasty withdrawals or disinvestments. One does appreciate the constraints in which Sinha operates, but these are only some steps which need to be taken, on a warfooting. A fiscal deficit of less than 6 per cent appears a pipe dream, if we further sleep over the issue.
Admittedly, the announcement of steps like these would need a consensus of all parties, and would be a landmark change in the policies. It does appear like a knee-jerk reaction, but it needs a crisis to shake us out of our slumber.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
