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Business Commentary/ R C Murthy

Material cost of Operation Vijay: Rs 200 million a day, but India can absorb it

In the ongoing battle of wits with Pakistan, Prime Minister Atal Bihari Vajpayee has succeeded partially: he has secured Pakistan's diplomatic isolation internationally, but is unable to cash in on that factor.

Had there been a diplomatic breakthrough by now, the huge cost in men and material might have been avoided. In a sense, Pakistan has succeeded in forcing India to commit a lot of cash to renew equipment and fire power urgently. This is just a beginning.

The human cost of Operation Vijay now underway is immeasurable indeed. In terms of material and services, the daily cost has been a minimum Rs 200 million. Already, 40 days have passed since the crisis broke out. If the current pace is any indication, the operation may last at least another 50 days, barring a diplomatic breakthrough.

Pakistan hiked its defence budget this year by 11 per cent to $2.6 billion. The actual defence outlay could be higher since many defence-related dual-use items have been accounted for under other heads.

Finance Minister Yashwant Sinha may be excused if he fails to trim the fiscal deficit this year below the projected 4.4 per cent of gross domestic product. If anything, the deficit would rise. By how much?

The burden on account of Operation Vijay will be some Rs 18 billion. That is the immediate cost.

Besides, the Kargil episode has short-term costs (with a bearing on this year's budget) and far-reaching long-term implications. Note China has not joined the West in calling upon Pakistan to undo the violation of LoC.

So far, the adversity to the troops was limited to defending Siachen in hostile climatic conditions. Now the entire border from Srinagar to Kargil and beyond will be active round the year. Even a semblance of army presence on all the strategic snow-bound mountains in the coming winter will mean India protecting probably a dozen Siachens.

The cost of equipping the personnel on the dozen Siachens is enormous. Firstly, "glacier clothing," a set of 13 items costing Rs 30,000, will have to be procured immediately. The set, that includes multi-purpose snow boots, snow goggles with ultra-violet protection and special jackets, is given now only to those deployed at Siachen.

Secondly, enough artillery shells, each costing $1,000 (Rs 43,000), have to be secured for Bofors guns from South Africa, the only alternative source to Sweden at present. After the Bofors controversy erupted, the defence ministry put on hold local manufacture of shells, though Bofors had agreed to supply technology.

An initial order of $250 million (Rs 10.75 billion) was placed on South Africa for these artillery shells and other ammunition.

Thirdly, to use these weapons effectively in Kargil's challenging climate, at least four artillery location radar systems, each costing Rs 2 billion, will have to be acquired and put in place immediately.

All these will cost Rs l9.75 billion. Also, a quick decision has to be taken on the advanced jet trainer whose absence is being keenly felt. The AJTs can provide air support in the ongoing ground operations.

The defence outlay, as per Sinha's budget, is Rs 456.94 billion this year. Assuming the operations will continue to be localised to LoC, an additional Rs 57.75 billion or 12.6 per cent may have to be provided this year.

Sinha would also have to reckon with the cost of holding general elections and additional dearness allowance to government staff -- some Rs 50 billion. He should be happy if the year ends up with a fiscal deficit of Rs 907.30 billion or 5 per cent at the projected level of GDP against the budgeted 4.4 per cent (Rs 799.55 billion).

In fact, the fiscal deficit as a ratio to GDP would have been higher had recession continued to grip industry. Which is because of falling revenues.

But an upturn has been seen over the past couple of months and if it continues, the GDP too would be higher. That should impact the Indian economy favourably and keep inflation down. (The latest figures indicate that inflation rate for the week ended June 6 was at a 14-year low of 3 per cent). Industrial production would be up. So would be revenues to the exchequer.

The fiscal deficit in absolute terms may be higher than projected at the outset. But as a percentage to GDP, it would only inch up, if at all. This is of course an optimistic scenario.

At worst, the spurt in industrial production seen earlier might run out of steam. The defence spending, additional DA, might enhance liquidity in the economy, putting pressure on prices.

This is not the time to take risks, especially by a caretaker government. Sinha is well advised to defer by a couple of months the disbursal of DA till clear pictures on the industrial front and monsoon trends emerge. The government staff would certainly rise to the occasion in the hour of national need and cooperate with the government.

Looked at realistically, the economic trends are positive and the Indian economy should be able to absorb the Kargil shock for the present.

Foreign institutional investors are upbeat about the Indian economy. On the stock markets, they are focusing on scrips like steel and cement. The fact that FIIs are betting on cyclical stocks indicates that the upturn is not a flash in the pan. They do their home work properly before taking a plunge. Apparently, the industrial upturn has depth.

The medium and long-term costs of the Kargil episode are not quantifiable now. They depend on the perceptions of the new government.

Taking a cue from Kargil, the new government will hopefully be wise enough to review relations with all neighbours and strike a balance between a rupee saved on defence on every front and national security.

R C Murthy

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