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V Shankar Aiyar

AU CONTRAIYAR

Keynesian Opportunity

Flag: If planned well, the quake could be the Keynesian opportunity for Yashwant Sinha to trigger growth, says India Today Associate Editor V. Shankar Aiyar.

Monday. January 29. BSE Sensex: down 95 points at 4234.
Tuesday. January 30. BSE Sensex up 135 points at 4372.

It took the stock market just 24 hours to discount the fears of an economic aftershock generated by the earthquake that devastated Gujarat. Perhaps they realise the Keynesian opportunity presented by the quake. Others are not so confident. The tremors of an economic disaster have sent ripples of panic across the country.

Consider the widely divergent estimates of the loss and devastation. FICCI has put the figure of the loss at Rs 25,000 crore, the Gujarat Chambers of Commerce and Industry has put the damage (to property and business) at around Rs 25,000 crore while CII has arrived at a conservative Rs 1,500 crore.

And what has been the extent of the damage to units of production in India+s second most industrialised state? Reliance, Essar, Torrent, Saurashtra Cements, Gujarat Ambuja, Cadila, Nirma and the PSUs have all reported no major damage to their establishments. Even those industrial units --- like that of HLL+s personal care unit at Kandla - which have been hit have reported minimal damage and short-term operational debility.

But there has been devastation --- in terms of human life and property. The Government of Gujarat has estimated the damage at Rs 6,000 crore in private property, Rs 1,000 crore damage to power and water utilities Rs 1000 crore loss of opportunity to trade, and industry Rs 2000 crore. Yes, the budding tourism industry, the gems and jewellery units as also the traditional handicrafts have been affected. There has also been the problem of large-scale exodus of migrant labour and some units have been forced to operate at sub-optimal capacities.

Without doubt, the devastation is widespread and massive in proportion. But it is important to separate the immediate damage from the long-term impact. Some commentators have turned into pure scare-mongers. The panic they have triggered is almost as if India+s economy could be buried under the debris of the Gujarat quake.

Consider the panic:
Fear: Struggling with a demand slack, loss of a market as large as Gujarat will kill the economy.
Fact: The total population of Gujarat is 4.8 crore (48 million). Of this the quake is said to have directly affected about 1 crore or 10 million. India+s consumer market size: 100 crore or 1 billion.
Fear: Offtake of FMCG products --- already caught in a hump --- will be dampened.
Fact: Holds good in the short term. But in the medium and long term, it will be business as usual.
Fear: Consumer durables will suffer a slump.
Fact: The affected populace forms but a small portion of the durables market. Even in cities like Ahmedabad --- where over 25,000 families are affected --- people are unlikely to change their lifestyle overnight. One has to also factor replacement. In any case, the durables market runs on credit financing rather than spot payment.
Fear: There will be a slump in the sale of apartments in multistoried structures.
Fact: Sure. But there will be a growth in new areas --- row houses, new quake-resistant construction.

As my friend S.K. Shelgikar, adviser, Videocon Group, puts it, -It is important to understand that casualty figures cannot be the causality of an economic disaster.- The phenomenon India will witness following the quake is one of asset re-allocation. Yes, there might be a drop in savings instruments+ growth. There could be a drop in the travel plans of the globally mobile Gujaratis. But money will pour into reconstruction and development.

Just flip the Government+s figures on its head. Just in the housing sector, the government, NGOs, donors and private bodies will pump in over Rs 6,000 crore to re-house the homeless. Which directly translates into higher offtake for cement and steel. The devastation actually provides a window of opportunity for the core sectors --- steel and cement. With the Government embarking on a rehabilitation project --- both residential and infrastructural --- production worth crores is likely to be consumed. Just take Ahmedabad. Over 170 buildings have crashed and many more have been affected. Re-construction or replacement of these dwellings will trigger a revival in steel and cement industries which have thus far been languishing.

There is another positive element. Gujarat is facing the second consecutive drought. In fact it is worse than last year with 22 districts ---as against 18 last year --- being declared drought-hit. The state Government has been working on a drought-relief plan which was to cost the Government over Rs 2,500 crore. The reconstruction will also provide an opportunity for it to provide employment to thousands of affected farmers.

Indeed, as John Maynard Keynes would have advised (and as had happened through the post WW II Marshall plan), devastation provides an opportunity for regeneration and economic growth.

(V. Shankar Aiyar is Associate Editor, INDIA TODAY. He is based in Mumbai.
Write to V. Shankar Aiyar.)

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