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COVER STORY: ECONOMY
A Heavy Price
After soaring to
$31 a barrel from $26 a barrel on the day the US was attacked, the global
crude oil prices fell back to $27 a barrel by September 13. The promise
by the Organisation of Petroleum Exporting Countries (OPEC) to prevent
any flare up in oil prices and Saudi Arabia's spare capacity to produce
2.1 million barrels a day should keep prices stable. But only if the Arab
world does not become the centre of conflict in the coming days.
An increase of $1 per barrel will add Rs 500
crore to India's import bill and bloat the existing Rs 14,500 crore oil-pool
deficit. Oil prices had shot up to $40 a barrel during the Gulf War in
1991, but as Sunil Bhandare, consultant with Tata Services points out,
"A big push in oil prices could hurt the economy much more grievously
today, by pushing up inflation and raising cost for the industry that
is already caught in a three-year downturn."
Exports: Even before the terrorist attack,
the slowdown of the US economy had begun to show on Indian exports. That's
because the US accounts for 21 per cent of India's $44.4 billion annual
merchandise exports and 60 per cent of its $ 6.2 billion software exports.
Though software exports are unlikely to suffer, and may actually get a
marginal boost after a few months, there are fears that merchandise exports
would fall. Gems and Jewellery Export Promotion Council fears a fall of
$300 million in exports to US as a direct consequence of the terrorist
attack. The underlying fear is that the already depressed consumer spending
in the US may be further dampened. Consumer spending accounts for two-thirds
of the American GDP.
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TERRIBLE TUESDAY'S ECONOMIC
TOLL
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THE SHOCK WAVES IN THE US...
# US stock markets, where $90 billion of shares are traded daily,
closed for four days.
# Trade in $1.1 trillion-a-day global currency
markets slowed to a near halt for a day.
# Closure of offices, airports and borders could
add up to an average loss of 2.5 days' work.
# Insurance claims on loss of property estimated
at between $20 and $30 billion.
# Consumer spending, which accounts for two-thirds
of US $9.1 trillion GDP, will be shaken.
# US economy may go into a recession in the coming
two months.
... AND HOW THEY COULD SHAKE INDIA
# FIIs start selling India stocks; net sales on
September12 alone amounted to $38 million.
# BSE lost 162 points in two days after the attack;
uncertainties to continue on fears of US counterattack.
# Every $1 increase in price per barrel of crude
oil will add Rs 500 crore to the import bill.
# Trade could take a beating since 20% of goods
exports and 60% of software exports go to US.
# No dramatic fall in the rupee value, given
the $45 billion foreign currency reserves.
# Security concerns may force dilution of Rs
75,000 crore government spending plan to revive the economy.
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THE
$20 BILLION INSURANCE BILL INCLUDES $4 BILLION FOR THE TWIN TOWERS,
$1 BILLION FOR CRASHED PLANES AND $3 BILLION FOR BUSINESS LOSS.
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Insurance: The destruction of the World
Trade Center will cause the biggest ever loss to the insurance companies
with claims likely to top $20 billion. The most expensive insurance incident
prior to Tuesday's catastrophe was Hurricane Andrew that hit the US east
coast in 1992 and cost $17 billion. The cost of insurance across the world
will climb because more properties will now have to be insured against
terrorist attacks and the premium on such insurance will rise. Admits
Aloke Gupta, country manager for Cigna International: "In the long
term, the incident could see premia going up in India."
Then there are worries about the collapse of
the rupee and a hold back on foreign direct investment (FDI). The record
foreign-currency reserves of $45 billion are enough of a war chest for
the RBI to prevent a rupee collapse, though a gradual depreciation in
its value is probably good for India's exports. The FDI too is unlikely
to fall from its last year's abysmal level of $2.2 billion, unless there
is a global recession.
Right now, what most experts are ready to bet
on is this: if the attack on the US does not escalate into a prolonged
conflict, the impact on the Indian economy will be short-lived. India
could actually gain from the new geopolitical alignments that will emerge
from the US's hunt for terrorists. Besides, bigger hurdles in India's
economic growth are internal-the bulging baggage of unfinished economic
reforms.
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