Gulf War II And Its Aftermath
<a href=www.financialexpress.com>Read more.. Saumitra Chaudhuri
Estimating the cost of war has become a bit superfluous. Till some days back, the defining limits were thus: A short war of six to eight weeks, without adverse repercussions after the US occupation. Or a more drawn-out affair lasting many months, combined by terrorist strikes and simmering local discontent to the eventual occupation. Obviously, the first had much less of an associated bill of cost, than had the latter.
Three days into the war, and the Iraqi army seems to be melting on contact. Unless, that is, the Iraqi supreme command has taken a leaf out of Russian tactics in the Napoleonic wars. Like the Russians, Saddam is perhaps drawing US troops deep into Iraq, after which he will wait for winter. The empty bluster and singular intransigence of the Iraqi regime is matched only by its plain idiocy. The one route Iraq had to force a stalemate, was the ability to inflict pain to the invading force beyond its threshold to accept politically. Which always seemed to be a remote possibility, but the absurdity of even considering such an outcome is now evident. The 2003 Iraqi expedition might yet turn out swifter than that of Lt. Gen. Maude in February-March 1917.
So let us check out the three instruments by which adverse effects from this war could possibly bear on the Indian economy. First, West Asia accounts for 12% of our merchandise exports and this year it rose by 37%. The largest market is the UAE, followed at some distance by Saudi Arabia, Israel and Turkey. The fear was that if the conflict spilled over to other countries in the Persian Gulf, and if the dislocation were to last, our exports to this region could fall precipitately. We can safely rule this one out now. Our exports to Iraq of about Rs 1,000 crore are in jeopardy, but we will return to this later.
Second, there are the millions of our citizens who work in the region and who remitted a large part of Rs 64,000 crore over the last four quarters. In 1991 a big chunk of Indian workers were in Iraq and Kuwait and they had to be evacuated. This time round, there are none in Iraq and there is no cause for anyone to flee Kuwait. Of course, if sarkari flights are available, some in Kuwait will surely fly. And the powers that be in the civil aviation ministry must be looking forward to all those photo-ops. No, not much loss in remittances or re-location costs should be on the table.
Third, oil prices. Producers have reaped a bonanza ever since the Axis of Evil speech raised the possibility of conflict in Iraq. Oil prices defied the laws of gravity, that is, the cold logic of soggy economies across the developed world. By rights it should be in the low-20s, but they stayed in the band of $25 to $30 per barrel ever since mid-March 2002. The strike in Venezuela in December 2002, of course, worsened matters.
To understand why oil prices fell $10 per barrel since last week, reflect on the nature of the market. What we call spot prices are really contracts for delivery after one month. And contracts are written for 2,3,4 months and so on for over a year into the future. As the war became more imminent, forward contracts come under pressure, since everyone knows that the regime of gravity defying prices will end, once the war is over. Thus, with a date set for the beginning of war future prices collapsed with immediate consequences on spot. Also bear in mind that the nervousness in the oil market related not only to loss of Iraqi supplies, but to dislocation to Persian Gulf supplies in general. This nervousness has, of course, been fully diffused. Hence, we look at 2003-04 through a prism of oil prices that will be actually significantly lower than that which ruled in 2002-03. So scratch that item of cost, and substitute it with a benefit.
Thus, the costs of war in Iraq are minimal, and are likely to be outweighed by the benefits. Given the quality of Iraqi resistance, it is best if we turn to the aftermath. What are the things that can go wrong and how might they affect Indian economic interests. Restive Iraqi populations, making for the occupation to be a bloody business? Unlikely. The majority Shias will find political space in the new set-up. Knives will be out against the minority who ruled the roost with Saddam and they will have their hands more than full just to survive. Will the Turks try slaughtering the Kurds, or at least their present autonomy? The Turks would perhaps like to do just that, but it is unlikely that they will cross the Americans excessively, especially after Baghdad falls. But there is some potential for a mess. Will the jehadis strike, and with what success, for given the anger amongst Arab and other Muslim populations, it is an opportune moment? That remains a big unknown, as also what manner of tremors it will set off against the many unpopular regimes in West Asia and North Africa and the not so stable ones in our part of Asia.
Will we be able to sell our sub-standard (everyone else think so) wheat stocks to Iraq after the dust has settled? American and Australian producers expect to be given the opportunity to provide the liberated people of Iraq better quality wheat. And whoever can argue against that? Will Indian companies get back pre-1991 Iraqi debts? Maybe. Will they get a slice of the Rebuilding Iraq project? Sub-contracts from American companies are possible, for all these are reasonable people and the bottom line matters. How about the contracts that ONGC (and the Russians and the French and the Chinese) had with the deposed regime? Best to forget it.
Is Iraq the last pre-emptive strike? More likely not, and it would serve us well to work out what the next act in this play might be.
The writer is economic advisor, ICRA