Over the last month and a half, the dreadful events in Gujarat have cast a dark shadow upon the ability of the Indian State to govern, and its commitment to uphold the laws of the land. It is a trite point that without effective laws protecting property rights, you cannot have an effective market. If the State cannot protect the lives of the States citizens, which is indeed its first function, and those in office can defy their constitutional obligations, much more than the possibility of a market comes to be at stake.
India as a nation has been at the brink of the precipice before, and has survived. It will surely survive the present crisis too. But there is a cost that the Indian State will have to pay. A cost in terms of credibility in the eyes of each of its citizens, serious erosion of stature in the eyes of the world, loss of confidence amongst both domestic and overseas investors, and a consequent loss of economic opportunity. All this, at a time when we thought we were competing with China for candidate membership in the new second world, whose exclusive tenancy had been surrendered 12 years back by an imploding Russia.
With the efflux of time, and the expansion of the information age, the standard of what constitutes the threshold of uncivilised and barbaric behaviour is continually being lowered. Which, of course, is a singularly welcome development. It also means that what might have been considered to have been a mere reversion to stereotype some decades back is not so lightly dismissed today. The manner in which the apparatus of the State was subverted to the end of massacring hapless civilians, in combination with the fact that this is the year 2002, not the 12th century, or for that matter not 1947, is a monumental anathema. One that will take much time and great effort to wash away. Certainly, 2002-03 is in this wash.
On another front, the massive flare-up in Israeli-Palestinian conflict, and the possibility of war between Israel and Syria, has combined with the continuing possibility of a US-led offensive against Iraq, to put the Middle East pot on the boil. The region is an important market for India, taking 12 per cent of our merchandise exports, while also being the source of a large part of the $12 billion inflow of private remittances. The adverse impact of higher crude oil prices alone can mean an import bill that is higher by as much as $3 bn, while any negative fallout on Indian exports and the well-being of Indians working in the region can deliver a rather unpleasant not-so-little blow.
Higher oil prices are likely to negatively impact the recovery process in the US and European economies, to that extent depressing their appetite for imports. Given that India is not quite beating the competition hands down, it will just mean more bad news for our exporters. What about the single largest export item, gems and jewellery It is difficult to believe that the business, with significant activity in Gujarat, will remain unaffected by the developments in the state.
Higher prices for imported crude oil in the post-Administered Price Mechanism world will reverse the direction of inflation at home. Large-scale outbreak of hostilities in the Middle East is more than likely to disrupt the regular activities of commerce and secure supplies of goods boosting inflationary conditions. Further, let us not forget the hard realities of the politics of our own region. Escalation of violence in the Middle East will not leave these tensions untouched and the manifestations may well be quite diverse, including the possibility of further sectarian violence. The nervousness in the foreign exchange market, with the rupee rapidly approaching Rs 49 to the greenback despite record accumulation of foreign exchange reserves in the last two weeks of March, reflects these sentiments. Market players are giving expression to the foreboding of bad news and nervousness about upcoming uncertainties.
Not only is this not the best environment for economic expansion, it is a particularly bad time for policy making. Witness the facile attempt to foist the general failings in governance upon the union budget 2002 and more generally on the reform agenda. The budget certainly could have done with much improvement but surely it, and the tepid reforms of the National Democratic Alliance government, were not the source of the drubbing that the Bharatiya Janata Party and its allies received in many states. Important elements in the ruling alliance have advocated hoisting high the sectarian flag in the hope of engendering the support that it did generate in the early nineties. That would certainly mean the end of the NDA as we know it. The competing move to pass the buck of electoral defeat on to the budget, and the reforms in general, is distressing but less dangerous being as it is the outcome of the intellectual bankruptcy that has become such a common failing of our political formations.
Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin