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Kargil will affect business confidence: ICRA study

Kargil has not created any apparent panic in the stock market or resulted in any price rise at grocery stores. But it does not mean that there are no worries for the Indian economy from the undeclared war with Pakistan, an expert study has said.

''The economy is thus a candidate for suffering the attrition that comes with military hostilities -- however contained -- and the political rhetoric that is bound to accompany it, especially in an election year,'' ICRA or Investment and Credit Rating Agency said.

The challenge before the economy, said an ICRA paper, is to manage conflict successfully. ''The present undeclared war with Pakistan must be conducted in a way that not only advances military and diplomatic objectives, but also provides a success story of capability in conflict management that will enhance the country's standing in the world capital market.''

"We might expect a mixed fallout from Kargil. There would be no panic as long as it does not become an all-out war. The immediate impact, the ICRA study said, would remain restricted to additional expenditure burdens on government, continued economic distress for the long-suffering population of the Kashmir Valley and additional uncertainty for overseas corporations contemplating investment in India.

''Since in any event, major decisions would all have been put on hold till October when the new government is scheduled to take office, postponement of investment decisions may perhaps not be that big an issue,'' the leading investment and credit rating agency said. However, as hostilities continue, the political atmosphere will become increasingly focused on the military conflict and business and investor confidence in general is likely to suffer.

The Kargil conflict makes the external economic atmosphere less conducive. But luckily for the economy, there is a neutralising factor. ''Lifting of US sanctions and the improved world economic outlook in general and that of the emerging market economies in particular, provide offsetting factors. So does the recent drop in spread of emerging market bond yields over US treasuries.''

Development of an overseas/off-shore market in Indian gilts will provide liquidity and exchange risk free market for private agents.

International sovereign bond offerings will also help develop a pricing structure for India -- origin paper, making it easier for corporate issuers to tap into world liquidity. ''Part of winning the military battle always lies in not postponing the necessary initiatives on the other fronts.''

While the Reserve Bank of India managed to contain the Kargil impact in the foreign exchange market, the Indian currency can come under pressure in the foreseeable future if there is no significant improvement in the inflow of funds on account of foreign direct investment.

In the event of a sharp depreciation precipiated by political, military or economic events, the central bank is likely to find it difficult to mount a rescue operation through sale of foreign currency in the spot and forward markets. ''At the same time, a high interest regime can be detrimental to domestic growth, and will hence adversely affect the inflow of capital into the economy in the future.''

Improvement in export performance and approval to actual inflow ratio of foreign direct investment is imperative, the study concluded.

UNI

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