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May 30, 1998


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The Budget '98 Interview/S S Bhandare

'Sanctions and defence can cost India up to Rs 100 billion'

Dr S S Bhandare, chief economist, Tata Services Ltd, tells Syed Firdaus Ashraf why his expectations from the forthcoming Budget are limited.

What do you expect from the Budget?

I think this is going to be quite an interesting Budget. Finance Minister Yashwant Sinha has to reconcile several formidable tasks. First of all is the task of managing the fiscal deficit within a particular limit. At the same time, he has to kickstart the economy.

Another difficulty concerns defence and development. The defence aspect comes in the aftermath of the Pokhran nuclear tests on May 11 and 13. The nuclear blasts will have some impact on budgetary receipts as well as expenditure. On the receipt side, there can be some reduction in the external growth or external aid. As a result, sanctions may affect certain performance.

It can affect expenditure in two ways. One is if the government decides to weaponise the nuclear bombs. This will entail some expenditure, besides the regular costs of other weapons.

A third difficulty for the finance minister is keeping inflation under control. Now inflation has already shown some signs of going up. So how he manages inflation will determine the strategy. Considering all these things, we expect limited things from the budget.

How far sanctions have affected the Indian economy?

There are a number of figures being mentioned. Some come from US sources and some from the Government of India. I suppose the truth must lie somewhere in between. The total picture is very difficult to get. It may be in the vicinity of Rs 50 billion. Apart from that, defence expenditure itself will be an additional burden. The combination of the additional defence expenditure along with the effect of sanctions will cost the country anywhere between Rs 85 billion to Rs 100 billion.

Considering the fact that the economy is in recession, was it necessary for the government to go ahead with the nuclear explosion?

This is a decision not based on pure economics. It is based on various other conditions like the geopolitical situation. It is very difficult to say whether it was right or wrong.

Do you see some reluctance among foreign investors after the sanctions were imposed?

The reluctance is caused by certain legislative provisions. If major countries consider India's security threat perceptions, there is not going to be much of an account. In terms of business and industry, they will be looking at India for long-term growth potential and other beneficial factors that India still offers. I feel since the southeast Asian countries are going through turmoil, profitable investments have emerged in India. And irrespective of this particular factor, India remains a promising place for investment.

The Bharatiya Janata Party raised the subject of swadeshi in their economic manifesto before the election. Do you think India can stand alone in today's world?

Absolutely not. There is no chance of any country keeping itself aloof in today's era of globalisation. Inter-dependence is the name of the game, whether it is a cry of swadeshi or because of the sanctions. India cannot afford to be cut off from the rest of the world. Swadeshi has its own kind of advantage and its limit, but by and large, it is not good for the economy as a whole.

But can't India stand alone considering the fact that they have produced nuclear bombs? Where do we fall short?

It's not a question of whether Indians cannot make each and every item. If you have established your potential as a nuclear power scientifically, it is not difficult in any other area of activity nor is it to commercialise these activities by Indian industries.

The question is different. First, it is about financial resources, which are limited. Secondly, the technology may or may not be available. And last, the market is also important. Collaborations take place in order to tap the market, and not just the domestic market. So at least on a few considerations, we require foreign investment to be there.

When India itself is a big market, wshat is the need to tap the global market?

Look at the size of the Indian market. The size of the Indian market will be governed by the domestic output. The GDP of this country is just about US $ 350 billion or $ 380 billion. This is the size of your market. Look at the global market. Global exports are about $ 5,000 billion to $ 6,000 billion. Compare this to our market, it is peanuts and just a fraction of the global market.

Now look at all the countries that have exports as the major driving force or engines of their growth. Chinese exports are worth $ 180 billion, half of India's GDP. Why does a huge country like China look at the global market? Because the domestic market is limited! India's exports are only 10 per cent of its GDP. This is only about $ 35 billion.

If you say we are not thinking of the $ 6,000 billion market, we don't have the right approach. India's total trade in 1991 improved to 0.7 per cent because we opened up the economy. If the government wants to expand the economy, exports are necessary. That is why we must increase our exports to 15 to 18 per cent of GDP instead of the present 10 per cent of GDP.

Dr S S Bhandare interview, continued

Budget '98

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