An economist's decision on going ahead with a full fledged war (or controlled fisher attacks) on Pakistan’s terror camps and establishments may be very different from a populist decision of a politician. Not with standing the war hysteria being created in our bedrooms daily by the breed of new age news channels, an economist will perceive this situation very different and that can have catastrophic effects on Indian Economy
A brief on current economic situation brings out a vibrant picture of a country with high GDP growth rates for the last couple of years coupled with a well developed and functional system of capital and money markets ably supported by a strong banking system. On the flip side, increased government spending on infrastructure and high farm/ oil subsidy ensures that India is one of the few Asian countries with a current account deficit, which gives it little leverage on the fiscal front. This is precisely the reason why the stimulus package of the central government to counter recession is merely cosmetic in nature.
Now lets see what happens if India goes to war with Pakistan. Since this will be a full-blown war or even if it is a fisher attack the warring parties are official armies (and not proxy army or militia as happened in case of Kargil or now with Hamas in Gaza). A war in such circumstances is likely to be a prolonged offensive with collateral damage to both countries in terms of human and physical capital. While loss of human capital would require increased spending on medical aid and rehabilitation, physical capital damage will require much more spending both in time and money to be restored to its original glory. Another cost will come in term of increased military spending and internal policing. Business is likely to be disrupted both within the country and with the outside world. There may also be a cost in terms of sanctions from certain foreign countries and a medium to long-term suspension of trade with them.
While this sounds like a heavy cost burden on the economy, let’s see what options does India have to finance this cost. On the fiscal front, as already discussed we have little headway. Another couple of thousand crores in war spending will send the current account deficit reeling and put both the currency and the country at the risk of hyperinflation. Lets see How?
India will either borrow from Britton Wood institutions to finance its war expense or under desperate and extreme circumstances, print additional currency. While debt may not be forthcoming considering there may be some sanctions in place and even a depressed world economy will not help. In war times, foreign investors will frenzy for their funds and there will be capital drain, which may be in excess of India’s current foreign reserves. Printing additional currency, though the last of resorts will increase the money supply and shoot up inflation. In such a situation inflation will take big leaps and an era of hyperinflation may be experienced. A similar hyperinflation was experienced in Germany during World War in 1920s and Zimbabwe is encountering it in current times by deleting zeros from its currency, which already has issued some billion and trillion dollar notes.
Pakistan is looking into an era of hyperinflation even without war, as its economy has failed and its political and military set up does not command any confidence. It’s being seen as a den of terror activities world over and any kind of foreign investment (both institutional and capital) may not be forthcoming. There may even be a freeze on grants by US and other western allies. Pakistan incidentally is one of the nations that queued recently in front of IMF asking for relief to prevent bankruptcy.
This is a time for economic offensive against Pakistan stopping all trade and commerce with it. Diplomatically India should ensure that countries across the world are appraised of Pakistan flip flap on terror. India has a strong case to push for a “Terrorist State” tag for Pakistan. The first tactics in any warfare is to cut enemy supplies and that’s exactly what India should be doing. Nip the terror in the bud.
A brief on current economic situation brings out a vibrant picture of a country with high GDP growth rates for the last couple of years coupled with a well developed and functional system of capital and money markets ably supported by a strong banking system. On the flip side, increased government spending on infrastructure and high farm/ oil subsidy ensures that India is one of the few Asian countries with a current account deficit, which gives it little leverage on the fiscal front. This is precisely the reason why the stimulus package of the central government to counter recession is merely cosmetic in nature.
Now lets see what happens if India goes to war with Pakistan. Since this will be a full-blown war or even if it is a fisher attack the warring parties are official armies (and not proxy army or militia as happened in case of Kargil or now with Hamas in Gaza). A war in such circumstances is likely to be a prolonged offensive with collateral damage to both countries in terms of human and physical capital. While loss of human capital would require increased spending on medical aid and rehabilitation, physical capital damage will require much more spending both in time and money to be restored to its original glory. Another cost will come in term of increased military spending and internal policing. Business is likely to be disrupted both within the country and with the outside world. There may also be a cost in terms of sanctions from certain foreign countries and a medium to long-term suspension of trade with them.
While this sounds like a heavy cost burden on the economy, let’s see what options does India have to finance this cost. On the fiscal front, as already discussed we have little headway. Another couple of thousand crores in war spending will send the current account deficit reeling and put both the currency and the country at the risk of hyperinflation. Lets see How?
India will either borrow from Britton Wood institutions to finance its war expense or under desperate and extreme circumstances, print additional currency. While debt may not be forthcoming considering there may be some sanctions in place and even a depressed world economy will not help. In war times, foreign investors will frenzy for their funds and there will be capital drain, which may be in excess of India’s current foreign reserves. Printing additional currency, though the last of resorts will increase the money supply and shoot up inflation. In such a situation inflation will take big leaps and an era of hyperinflation may be experienced. A similar hyperinflation was experienced in Germany during World War in 1920s and Zimbabwe is encountering it in current times by deleting zeros from its currency, which already has issued some billion and trillion dollar notes.
Pakistan is looking into an era of hyperinflation even without war, as its economy has failed and its political and military set up does not command any confidence. It’s being seen as a den of terror activities world over and any kind of foreign investment (both institutional and capital) may not be forthcoming. There may even be a freeze on grants by US and other western allies. Pakistan incidentally is one of the nations that queued recently in front of IMF asking for relief to prevent bankruptcy.
This is a time for economic offensive against Pakistan stopping all trade and commerce with it. Diplomatically India should ensure that countries across the world are appraised of Pakistan flip flap on terror. India has a strong case to push for a “Terrorist State” tag for Pakistan. The first tactics in any warfare is to cut enemy supplies and that’s exactly what India should be doing. Nip the terror in the bud.
1 comment:
An intresting Read !!!
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