D-STREET MESSAGE: DE-ESCALATE

COVER STORY


A Mumbai-based macro economist, on a tour across the global financial centres of Asia, has had to modify his advice to investors every day since February 25. The day began with an assessment of the economic blowback from retaliation by the Indian side to the Pulwama terror attack. On February 26, the world woke up to the news of air strikes by India, destroying the Jaish-e-Mohammed training camp in Balakot, Pakistan. With the government packaging it as a non-military, pre-emptive action, the economist reasoned that the conflict wouldn’t escalate. On February 27, as news of Pakistan’s tit-for-tat strike against India beamed across television channels, he was worried.

A lot has changed since the last time India witnessed such an escalation in 2001, after the attack on the Indian Parliament. During the 1999 Kargil War, India had no foreign investment to speak of. India’s integration with the global economy is much greater now. In 2019, most Indian start-ups are funded by foreign investors. India’s foreign exchange reserves stood at $393 billion in December 2018, close to a historic high, though the foreign direct investment (FDI) declined by 7 per cent year-on-year to $33.5 billion. Prof. N.L. Bhanumurthy of the National Institute of Public Finance and Policy observes, If I were an investor, I would think of avoiding these muddy waters until May (when the general elections are due).

India faced sanctions after the Pokhran II tests in 1998. But, in 2019, the growing protectionism around the world presents unique challenges.

Foreign investors need peace. Since we have liberalised, there have been multiple terrorist attacks. If the current situation results in escalation, there will be concerns. But no two nuclear nations have gone to war, and Pakistan does not have too many supporters. For markets, the bigger risk is the stability of the government. Predictability of policy is important, says Nilesh Shah, managing director of Kotak Mahindra Asset Management Company Limited.

The equity markets’ response to surgical strikes 2.0 was sharp on February 26, though they recovered later in the day. On February 27, the BSE Sensex gave up early gains and was down 600 points at one stage in a volatile trading day. It ended the day at 35,905,68 points or 0.19 per cent lower than the previous close. Nifty closed 0.26 per cent lower.

While this is a negative short term, in the long term, there is a positive, it reduces political uncertainty, says another economist.

The Indian economy took off after the Kargil conflict. Usually, an exaggerated conflict or short-term wars lead to a demand stimulus in the economy; not just expenditure, the demand also increases. FII and FDI will be postponed. There may be a slippage in fiscal deficit, explains D.K. Srivastava of EY India.

India has revoked the most favoured nation status accorded to Pakistan in 1996. Pakistan, however, had refused to grant reciprocal status to India. Islamabad has 1,209 items on its negative list, meaning it does not allow imports of these items from India. Experts believe that revoking the status will not have much impact on Pakistan, as India’s exports to that country are much higher than what it imports from Pakistan. India imported goods worth $488.5 million (Rs 3,468 crore) in 2017-18 and exported goods worth $1.92 billion (Rs 13,632 crore) in that fiscal. Trade between India and Pakistan rose marginally to $2.41 billion (Rs 17,111 crore) in 2017-18 as against $2.27 billion (Rs 16,117 crore) in 2016-17.

Any escalation of tension between the two countries will have a much worse impact on Pakistan’s economy, since it was hoping for a revival under prime minister Imran Khan.

Once the Pakistan economy did better, there would have been a big market next door, says Biswajit Dhar of the Centre for Economic Studies and Planning, Jawaharlal Nehru University. That opportunity is in jeopardy now.

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