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Japan - Impact on India

A number of clients wrote to me seeking our views on the fallout of the tragic events that occurred in Japan. My first impressions are that their impact on India are likely to border on the marginal.

Over the course of the past few days, the Bank of Japan pumped USD 280 bn into the economy and simultaneously offered a bond issue amounting to Y15 tn (approx USD 180 bn). In the short term, the Yen is bound to rise against a basket of currencies as Japan recalls its investments overseas and creates a demand for its own currency. In the longer term however, the economic impact of the tragedy will involve several rounds of pump priming and greater levels of Government borrowing, all of which will contribute towards rising fiscal imbalances. It is logical therefore, that the Yen will fall in value and this would much be as much a strategic imperative to bolster the competitiveness of the domestic economy as it would be an economic necessity.

In the short term, the recall of Yen investments will push up borrowing costs overseas and together with the reduced output from the Japanese economy, will knock off approximately 0.2% of global GDP.

As Japan begins the process of reconstruction, commodity prices should rise. Infrastructure will have to be created from scratch in vast areas of the north east. Hundreds upon thousands of homes would have to be rebuilt and therefore, it stands to logic that such an exercise will create the demand for basic metals. In the longer term, petroleum prices too will rise, as the possible closure of nuclear plants will need to be replaced by fossil fuels. It takes several years to complete the reconstruction of coal based generators and in the near term, Japan may have no choice but to use diesel power. Currently the oil markets witnessed a slight drop on account of the fact that Japan was forced to shut some refineries that were affected in the wake of the earthquake and tsunami.

Japanese investments overseas (including those in India) will take a hit. Over the next 2-3 years, the big Japanese kaishas will need to consolidate their businesses and are unlikely to make grand overseas investment plans. The Japanese Government has signed protocol agreements with Indian Ministries in several infrastructure projects, including the Delhi Mumbai freight corridor. In my view, these are likely to proceed, understandably with some delays, as the sums involved are not that substantial by Government standards and the projects themselves are long term in nature. Indo-Japanese trade is negligible – USD 10 bn – and is unlikely to have any material consequences for India’s economy. Clearly, some auto companies might have to struggle with their supply chains especially if they are dependent on Japan for imports of assemblies, components and auto steel. But these problems are unlikely to linger for too long.

The biggest fallout of the tragedy in Japan will be the reopening of debate within various constituencies in India on the viability of nuclear power. So far, the Government seems committed to pressing ahead with nuclear-based power stations but there is no question that opposition groups will now fight a lot harder, given the seriousness of the Japanese experience. India’s Environment Minister, Jairam Ramesh, has spoken up candidly on the necessity of re-examining the safety of existing plants. He may have done so with the tacit approval of the Party leadership. The National Advisory Council, chaired by Congress President Sonia Gandhi, comprises of a number of members who have inherently been uncomfortable with the use of nuclear technology. Therefore, in the very least, the debate will extend much longer. It is also likely that the Government will refocus its effort in the areas of renewable power and perhaps give greater thrust to the solar mission.

Finally, the Japanese tragedy should come as a wake up call to local authorities and provincial Governments on putting in place disaster management mechanisms. Frankly, India has none and a tragedy of this scale, should it God forbid ever take place, would be much more than catastrophic in nature. Hopefully under pressure from civil society and non Government organisations, some initiatives in this direction will begin.

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