Search the Internet          Tips  Sites: Finance, Investment

Economy bowed, not broken, by quake

The devastating earthquake that took such a terrible toll in human life is unlikely to hit the country's economy anywhere near as hard, economists say.

In fact, if Turkey and Taiwan which both suffered big earthquakes in the last two years are anything to go by, its economy should handily weather the crisis but not without some short-term pain.

Already, the big oil, petrochemical, steel and pharmaceutical companies in the country's quake-hit industrial heartland have reported their plants escaped relatively unscathed, easing fears that output could suffer badly.

Still, economists cautioned that the task of counting the human and financial costs of rebuilding Gujarat was only just starting.

While the January 26 quake spared big industry in Gujarat, it collapsed villages, homes and high rises and killed an estimated 30,000 people. Tens of thousands more were injured and hundreds of thousands left homeless.

Livelihoods destroyed

"Thousands of people have been displaced and livelihoods destroyed, said Standard Chartered Bank economist Vasan Shridharan.

The Gujarat government doubled its damage estimate on Saturday to more than Rs 200 billion, slightly less than two per cent of national GDP.

Even before the quake, growth in India was already slowing under a triple whammy of high global oil prices, a weak rupee and gradual easing of import restrictions.

After expanding more than 7.5 per cent for three straight years in the mid-1990s, the economy slowed to a 6.6 per cent pace in 1998-99 and 6.4 per cent the following year. This year, private economists expect growth to ease to 6.0 per cent or lower.

Economists say the quake has ruled out chances of a soft 2001-2002 budget to kickstart the economy. In fact, analysts and industrialists fear the budget due on February 28 will contain measures that could further depress demand.

"In all probability, the provisions in the budget for the rehabilitation of Gujarat will be huge," said Arun Kejriwal, director with independent research firm KRIS.

Widen deficit

The earthquake may also widen the gaping fiscal deficit which jumped to 5.6 per cent of GDP in fiscal 2000 from 4.5 per cent in the previous year.

Last week, the cash-strapped government announced a two per cent surcharge on income and corporate taxes to raise Rs 13 billion and Prime Minister Atal Bihari Vajpayee warned that would not be enough to foot the massive rebuilding costs.

He ruled out the imposition of further "heavy taxes" but analysts were not convinced.

"The big concern is whether the government will impose additional taxes in the forthcoming budget," said Ved Praskash Chaturvedi, chief executive officer of Cholamandalam Cazenove Asset Management.

Further tax increases would most likely fall on corporations, with India's top 1,346 listed companies bearing most of the brunt. Their combined tax bill is already set to rise by $162 million because of the new income tax surcharge.

But the government cannily sought to mute the impact of the surcharge on financial markets by saying it would step up its drive to sell off stakes in key state firms and investors bit.

Stock prices surged

News that the long-stalled divestment drive was back on the rails caused the stock prices of the 31 listed, state-owned firms to surge on Friday, boosting their total value by $862 million.

By close of business last Friday, the Sensex , where state-run companies have a nearly 12 per cent weightage, had risen 0.51 per cent since the quake.

"The government seems to be cornered. It will now have to go in for privatisation to raise money," said Nilesh Shah, fund manager with Templeton India.

And aid that is flowing in from all corners of the globe should help strengthen the rupee. India has already asked for $1.5 billion in aid from the World Bank and the Asian Development Bank. Money is also flowing from other sources, foreign governments and expatriate Indians.

India can take heart from Taiwan, Turkey

Indians worried about the economy can also take heart from Turkey where economists say the country has witnessed a surprisingly rapid recovery from the quake that struck the prosperous industrial northwest in 1999, killing 17,000 people.

Early estimates suggested that lost production and corporate tax revenues could cripple an economy suffering its worst recession since 1994 at the time.

Instead, industrial output which shrank 5.2 per cent in 1999 was up 3.4 per cent year-on-year in the first half of 2000, helped by a reconstruction boom.

And 15 months after an earthquake killed thousands in Taiwan and left 19,000 others homeless, the economy is expected to grow a healthy 6.47 per cent in 2000, a full percentage point from 1999 when the quake struck.

Fund investors also said they were not exiting India.

"Although the quake is a big human tragedy, it is no reason for us to change our stance on India," said Singapore-based Samir Arora, head of Asian Emerging Markets at Alliance Capital, which has $750 million invested in Indian markets.

The Complete Coverage | List of earthquake sites

Tell us what you think of this report