February 22, 2020
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Brevity Is The All-Of-It

War is hell. India's hopes of riding this one out hinge upon how long it doesn't last.

Brevity Is The All-Of-It
Brevity Is The All-Of-It
It'd have been so calming if our politicos weren't so unreliable. But two days after the first US missiles pounded Iraq in what is easily the most unwanted war in centuries, New Delhi was undeterred in its task of playing down Gulf War II's impact on the economy and its citizens. Not only didn't its budget announced two weeks ago factor in any war impact "due to clear signs of revival of domestic demand and the resultant buoyancy imparted to the domestic economy", but for a country that imports 73 per cent of its petro needs, the only reaction its ministers have produced is to assure of enough stocks of "petrol, diesel, ATF, LPG…for the next 60 days".

But it might get worse before it gets better. After all, the US and the global economy are more battered than what many thought and markets have been a bit grizzly all over. Against everybody's hopes, the war might spill beyond weeks, turn nasty, screw up oil prices and create more geopolitical tensions for India than ever before. Despite the government's assertion that "the country is well equipped to finance a higher import bill" or subsidise domestic product prices, the budget deficit could go for a six and the expected growth momentum lost. Don't forget, the US itself, since it imports 3.4 billion barrels of oil a year, expects a $65-billion spike in its trade deficit. This is apart from the war estimate of $100 billion by the Congressional Budget Office.

Like it or not, the best practical scenario for all is that the war is short, sharp and ends in victory for America. More so in Asia, where all except two countries are major oil importers and dependent on the American growth engine to pull their economies along. But why is India, the third largest oil importer, optimistic? Mainly thanks to forex reserves, $75 billion and growing at $1 billion a week. According to finance secretary S. Narayan, the cost of war will be only $3-4 billion extra on the oil import bill. The reserves thus shockproof the economy and ensure that any economic pain is just short-term.

If the Iraq crisis is resolved fast, the forex flow might increase, say currency analysts. Over the current fiscal, the rupee has risen around 3 per cent against the dollar, reversing a five-year trend of annual depreciation of 4-5 per cent. That steady upward trend is expected to continue over 2003, despite and because of the war. According to a senior RBI official, the RBI will surely control the volatility in the forex and money markets. As for the unevenness of capital inflows, particularly if global private flows start seeking havens safer than the US, they may reach India or Southeast Asia. That's reflected in the stockmarkets, which have settled down with the removal of uncertainty.

Even in exports, which grew 20 per cent in nine months, commerce minister Arun Jaitley has been quick to dispel fears of trade being hit. That's because, says Institute of Economic Growth director B.B. Bhattacharya, our $12 billion trade deficit is balanced right now by the remittances figure of $13 billion. But that can change swiftly if one of the variables alter.

Or if costs go up all round. They would, once oil prices go up, raising transportation costs, and as war risk and insurance premia rise. Air fares are up sharply following rise in fuel prices. But the government is committed to keeping prices "reasonable", says petro secretary B.K. Chaturvedi, and provided Jaswant Singh agrees, will either absorb the extra burden or may even cut customs duties on crude and products. Servicing this burden will raise the fiscal deficit directly, says Bhattacharya, or through a shortfall in revenues, and both may raise inflation and push growth down by half a point at least.

That's what industry feels too. With costs rising, the fight for the consumer's wallet can only intensify.ficci expects a 9 per cent hike to keep the oil subsidy at the budgeted Rs 8,116 crore, a slowdown of industrial growth to 5.5 per cent and inflation at 4.5 per cent. cii too expects a similar impact if oil prices stay at $30 a barrel. Much like the US, where oil shocks have clearly led to recession, the Indian experience also shows a dip in industrial growth following sharp hikes in oil prices. And if the hikes are passed on to the consumers, says crisil chief economist Subir Gokarn, we might be left with higher inflation and lower growth, or stagflation, in a matter of months. "It is in times like this that economics earns its title as the dismal science," he rues.

A similar scenario may await us in software, India's great hope, and the nascent tourism industry. But before that, a closer look at ground zero of oil.

Oil: Slippery Road
Every dollar rise in crude prices inflates the oil import bill by $620 million a year. So could we be heading for an oil shock? The initial spasms from the energy markets have all the signs of such paranoia. Global inventories are perilously low while in the US, petro products prices have skyrocketed before dropping a bit. Crude was hovering at the lethal $40 per barrel, before dropping to $25-26, and the futures market remains choppy. So, one should believe the warning echoed by Peter A. Gignoux, head of oil practice in Citigroup London, that "there has been genuine chaos".

Irrespective of the expected outcome—that Iraq yields swiftly—analysts project high energy prices in the short to medium term. That's because supplies are squeezed and all leading producers are operating flat out. So, even after opec's decision to suspend production quotas, the scope for higher supplies remain limited.

For example, Venezuela, the only oil-producer working its wells at below capacity, is reeling under a disastrous oil strike. In Nigeria, the pre-election ethnic violence has resulted in lower production. While ChevronTexaco has shut down its Nigerian capacities that produced 140,000 barrels/day, Shell has claimed that shutting down wells may lead to a loss of 76,000 bpd.

Unfortunately, as production is being curtailed, the global demand for oil is on the rise. Japan may need more oil after shutting down several of its nuclear plants. The US had its coldest winter and its stocks have touched rock bottom.

As Saddam Hussein starts blowing up Iraqi oil assets—there are already reports that he has blown up 30-40 wells—to take his country's 2.4 million bpd out of circulation, prices may spurt to $50. Such turbulence could knock India out. "This budget limits the government's revenue options. If they do not handle the situation deftly, Jaswant is in for big trouble," says a Hong Kong-based fii oil analyst.

Add to that the conditions in domestic oil companies. The industry has been demanding a hike in LPG and kerosene prices to compensate for the Rs 2,600-crore shortfall in subsidies during April-December 2002, but in vain.

The battle for fiscal jugglery is on. While the petroleum ministry provides assurance to domestic companies of duty reliefs, North Block refuses to do so. The reason, says Ashok Lahiri, chief economic advisor, is because "a reduction in customs duty may make a small contribution to softening domestic petro prices but at great cost to the exchequer". Now, George W. Bush has added a big hole in the balance-sheets of domestic oil majors, affecting future profitability.

All that the government is saying is that there's no need to worry. "We have enough stocks," says petroleum minister Ram Naik. Post-1991, India also imports from new sources like Egypt, Libya, West Africa and Malaysia. Naik has also asked domestic refiners and exploration companies to defer maintenance shutdowns by four months.

Currently, Indian oil psus have crude stocks for 57 days. However, the situation in case of kerosene (23 days), auto fuels (33 days) and LPG (two weeks) may not seem too bright. But, once the existing crude stocks are processed, they can provide for additional product coverage of 39 days for petrol, 30 days for diesel, and 27 days for kerosene.

Software: Hard Choices
Like oil, can the software sector too handle the sudden disruptions when the US, its largest services destination, is at war? Last year, 68 per cent of revenues earned by software companies came from North America. Software exports to the US alone grew at over 25 per cent this year. By March-end, its share in total exports may touch 20 per cent.

But the war could devastate this. The industry feels if the war is short and swift, it may manage to even get over its current problems of hardening rupee and regional tensions. Beyond that lies serious trouble. Says Techspan chairman Arjun Malhotra: "The war comes just when the industry is at the cusp of recovery. The key worries among our clients are about the probability of the war ricocheting out of control, the duration, the consequences of retaliation, its effect on the perennially delicate Indo-Pak situation." Adds Nasscom president Kiran Karnik, "Already, companies are holding back IT spending. And when international travel is affected, it hits our business."

Will the war result in a cutback in future orders from American clients? After 9/11, Indian companies have learnt how to handle that. Also, the economic logic of offshore outsourcing, especially during a recession, is established and India has a clear lead in that. Says Malhotra, "Clients who have stuck with Indian companies through 9/11 will continue to do so. There would be a short-term blip and if some other war-related speculation proves true, who knows...?"

Does the industry have a contingency plan? Post 9/11, the need for Indian companies to have business continuity and disaster recovery plans and to hardsell global delivery models to their potential clients has been driven home. Many have invested in bases outside the country at neutral zones like Singapore, to ensure that such tensions don't disrupt their services. Some, like Polaris, which faced a business disruption of a different kind recently, have set up a special division, the Risk and Audit Department, to not only prepare contingency plans but also identify and mitigate risks to ensure business continuity. Polaris has contingency systems for its clients—those in the war zone. Says S.R. Ramaswamy, VP and head of the special group, "We have a few key clients in Kuwait and neighbouring areas. But we are ready with strategies to ensure their business is not disrupted."

Then there are those who see a silver lining in all this. Says Vishnu Dusad, ceo, Nucleus Software, "In the medium to longer run, Indian companies capable of filling the vacuum created due to diversion of attention from the customer needs to their security needs must convert this to an opportunity."

Tourism: Receding World
Lurching from one crisis to another, the travel trade began clocking cancellations as soon as the first air strike was launched. "In hours, I received over 10 per cent cancellations, especially on European packages," says a Delhi-based agent. It's not only war fears, says Balbir Mayal, vice-president, Travel Agents Association of India, "but flying time to Europe now increases by about two hours since you can't fly over West Asia. As a result, fares to Europe and the Americas are expected to go up by at least 5-10 per cent". Plus, there could be the added hassle of foreign airlines, already battling recession, cutting back flights out of India.

Air-India and Indian Airlines have a contingency plan ready to evacuate Indians.A-I spokesperson Jitendra Bhargava says that if necessary, special charter planes will augment scheduled flights. None of the national carriers fly to Iraq but have over 50 flights a week to the Gulf touching Kuwait, Saudi Arabia and Bahrain. If these areas get caught in the war, these flights will have to go, leading to a revenue loss of over Rs 100 crore a month.

Airlines worry about a further increase in ATF prices as well as the insurance premium. A-I will hike fares by 8 per cent from April 1 consequent to the iata agreement over war premium, while IA and Jet have announced a 15 per cent fare hike to take effect immediately. Due to the inland air travel tax, the hike will translate into a higher outgo for the domestic traveller.

But the trade is happy the tourist season is over. "There has been a rebound since January," says Arjun Sharma, MD, Select Hotels. Incoming traffic has also halved and metro hotels boasting over-70 per cent occupancy rates have seen the good times dying out. Says a hopeful Ravi Dubey, Taj group spokesperson, "We are soon going to be in the lean season and hence the impact of the war might be marginal."

Everybody is keeping their fingers crossed over the hope that the war will be over before large-scale damage to Iraq's oilfields. In this slippery and often foolish business of forecasting, those digits might be that way for some time to come.

Paromita Shastri, Arindam Mukherjee, Gauri Bhatia and Arijit Barman
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