But, No Domino Effect

Economists, both here and abroad, have allayed fears over the impact of the disaster which spared industrial areas, ports and other major infrastructure. While Thailand has cut GDP forecast to 5.7 per cent due to the harsh hit taken by its tourism economy, the Indian coastline is not a comparable travel attraction. On January 3, Morgan Stanley noted that the damage is "largely confined to rural areas rather than the key economic and densely populated urban centres and industrial hubs."

Which is also why, argues Fitch India director Ananda Bhoumik, the total loan loss provisioning requirement of Indian banks (since loans to distressed rural individuals could turn non-performing) as a direct result of the tsunami could be lower than Rs 100 crore ($23 million), or only 0.01 per cent of their Rs 8.6 trillion loan portfolio, keeping the rating untouched.

Therefore, Saumitra Chaudhuri, ICRA, and member of the PM’s economic council, concurs that "GDP growth will not be affected as the loss is only of the capital stock". A similar argument is put forth by NCAER’s D.K. Pant, Institute of Economic Growth’s B.B. Bhattacharya and Planning Commission’s Pronab Sen, while arguing that a clearer economic picture in the states is still to emerge.

However, even if growth or the budget is not overtly affected, the tragedy can still impact the economy in myriad ways. For instance, as the Asian Development Bank estimates, since the poorest farmers and fisherfolk were affected, about 6.45 lakh people could slip below the poverty line in India (two billion in the region).

The other vital part is, of course, relief and reconstruction. While relief efforts and offers of financial aid have swamped the region, it is reconstruction that will need a lot of time and careful planning. The government, for instance, has yet to even estimate the damage in Andaman and Nicobar islands—the latter might need total rebuilding. Even the Planning Commission hasn’t yet received any estimate from the states.

As of now, the Centre’s disaster management team estimates Tamil Nadu’s loss at Rs 4,700 crore, followed by Kerala (Rs 1,300 crore), Pondicherry (Rs 500 crore) and Andhra Pradesh (Rs 340 crore). This is much higher than the initial estimate of Rs 5,322 crore. But even adding the unofficial estimate for Andamans of Rs 2,500 crore, the government’s tally is unlikely to touch Citigroup’s estimate of $6.5 billion for India.

The higher Citigroup figure is due to their taking into account the combined share of Tamil Nadu and Kerala in agricultural GDP. However, economists here say the affected region’s contribution to GDP is at best marginal. Both rbi governor Y.V. Reddy and finance minister P. Chidambaram are confident of achieving the targeted 6-6.5 per cent growth this fiscal.

Even Michael F. Carter, World Bank country director in India, while pressing for rehabilitation aid, wouldn’t "significantly change our outlook for fiscal 2005". It has pledged up to $1.5 billion in aid for all affected nations, but India is more keen on long-term aid from multilateral agencies to help rebuild infrastructure and set up a disaster management system. WB and adb will now work with the government to first organise "needs assessment" and then develop a programme of reconstruction.

While that could take some time, the immediate question is, could this mean a significant change in India’s external debt position? It depends, say government officials, on whether the loans are extended under the almost interest-free IDA grants or under normal loans. Also, at 17.6 per cent of GDP, the external debt is not much to worry about, given that forex reserves are higher than the debt stock.

The disaster hit India at a time when the economy seemed growing at a steady clip. Some Indian economic monitoring agencies were already thinking of updating their outlook. NCAER, for instance, still sticks to its estimate of 6.5 per cent GDP growth for the fiscal. While poverty could worsen in the affected regions, it will hopefully be offset by demand boost from the relief and reconstruction work.