Surgical strikes on Pakistan won't help India, economically
Economy.
The surgical strikes that India has conducted against terrorist occupations across the Line of Control will, in itself, not cause any drastic impact on the economy and investment flows into the country. The reasons are many.
For one, India has been transparent regarding the attacks it carried out in the wee hours of Thursday, September 29, announcing the action to the world through a press conference later.
Second, India took time after the latest Uri attack to respond, building enough economic and political pressures to isolate Pakistan, by threatening to scrap the Indus Waters Treaty and pulling out of the SAARC Summit to be held in Pakistan in November.
Third, it put across the country’s concerns on cross-border terrorism overtly and covertly supported by the Pakistan Army to the world, using the platform of the UN General Assembly, where foreign minister Sushma Swaraj unequivocally condemned Pakistan that "nurtures, peddles and exports" terror.
The diplomatic offensive gave India enough time to convince the world that it was well within its rights to retaliate to any actions from the neighbouring country that hurts its citizens or soldiers. However, that does not mean that something as sensitive as the stock markets can hold on in a stable manner when a military operation happens across the border.
 |
| India has been transparent regarding the surgical strikes it carried out. (Photo: AP) |
That is exactly what happened on Thursday, when the markets registered a big fall. But this was more of a knee-jerk reaction, based on the limited information the markets had at that point of time.
Going forward, the economic implications of this attack will depend on the duration of the ongoing border tensions between the two nations.
In general, there can be two types of impacts - immediate and medium, to long-term impacts of the cross-border tensions. Here are some points from a Care Ratings report:
1. Immediate implications
A. Sensex and Nifty have fallen significantly:
Sensex went down by 465 points and Nifty by 154 points recording 1.64 per cent and 1.76 per cent fall receptively on Thursday, September 29, as news of the targeted attacks by the Indian Army trickled in. The day was marked with volatile trading after the markets reacted to the reports of the surgical strike.
The following day too Sensex slipped, this time only by 0.11 per cent at 1.30pm, even as the market waited with bated breath as to what Pakistan’s retaliatory action will be.
However, with Pakistan PM Nawaz Sharif indicating that it is not keen on a war with India but will defend its borders, investors seemed to be a little more relieved.
B. Government securities (GSecs) yields increased:
The 10-year benchmark GSec yield went up from 6.78 per cent to 6.86 per cent, as the markets remain uncertain and cautious about the strikes and the future course of the ongoing tensions on the border.
C. Exchange rate-rupee declines:
The Indian rupee which was on a winning streak for the past consecutive three sessions has fallen against the US dollar from 66.47 from to 66.85. The uncertainties in the country coupled with the weak performance of the equity market weighed on the rupee as well, causing it to weaken.
2. Medium to Long-term implications:
The implications will be contingent on the duration of the military activity. It is largely expected that the issue will settle down in the next couple of days. If it does, then the following may be expected in the interim period.
A. Volatility in market:
The markets will remain turbulent with the investors remaining wary about the future course of actions and the probable consequences of the same. Higher interest rates, weaker currency and nervous stock markets would be the likely situation. However with fundamentals being strong, it may be expected that the volatility will be with shorter amplitudes.
B. RBI monetary policy action:
The RBI monetary policy is due on October 4. While under normal circumstances we would expect an unchanged stance, depending on the seriousness of the battle and the reaction of the market, the RBI could consider more seriously a rate cut. The chances of such action would increase until Tuesday (October 4) depending on the course of the tension at the LoC.
The other possibility is of a prolonged tenure of such tension between the two countries which would lead to the following possibilities:
C. Spending on defence:
In the long-term, in terms of sustainability, the government might have to engage in increased expenditure on defence of the nation. This would add to the government stimulus package. The decision will be whether to increase allocations for defence expenditure and cut down on other capex or do so with a higher deficit. The latter will help to keep the pace of activity up.
D. GDP growth is not likely to be affected and the path of around 7.8 per cent could be expected.
E. Industries related to defence will receive a boost which will help stimulate the economy. Metals in particular along with capital goods could receive a boost.
F. It has been observed across the globe that higher defence spending if conducted without other expenditure cuts can improve growth prospects.
G. Inflation would largely be under control especially with a good monsoon and low commodity prices. In the earlier wars in the '70s, we were impacted by high crude oil prices which are not the case today. Hence, while demand-pull forces would be there it would be absorbed by the system. A CPI inflation rate of 5-5.5 per cent can be maintained.
G. Trade and investment:
No significant impact expected on either trade or investments flows as Pakistan is not a significant partner. The exchange rate would remain stable with close monitoring by the RBI.
H. The external situation is strong with forex reserves of around $370bn which can absorb any external shock, which is unlikely.
Also read: