The Prime Minister Narendra Modi of Indian government has vowed to respond. And this time too, the macroeconomic indicators are good.
Soon after the terrorist attack on Parliament on December 13, 2001, Atal Bihari Vajpayee’s government decided to mobilise troops on the border and along the LoC in the face of strident demands to carry out a strike against Pakistan. The movement of troops and armaments was known as Operation Parakaram (Strength or Prowess).
A political decision had been taken to respond to the attack militarily and diplomatically, and Finance Minister Yashwant Sinha had to issue instructions to release funds at a difficult time — there was a deceleration in the global economy, India was facing one of its worst droughts ever, and the 9/11 attacks had plunged the world as a whole into uncertainty.
Indeed, there were worries that fullscale war would break out. But as Sinha recalls, no Finance Minister could have, in that situation, put a squeeze on defence spending.
In any case, for many years, including in his tenure, the experience in the Ministry was that actual capital spending by the Defence Ministry was way below allocations in the Budget, leading to savings. And while extra spending wasn’t a major issue, there was also comfort in prevailing macroeconomic indicators.
Inflation remained pretty low well well into 2002, and India had ended 2001-02 with a surplus on the current account after 24 years. That was also the year when the country had the biggest build-up of foreign exchange reserves in a year — with buoyant inflows, including portfolio flows, during April-November 2001 of over $ 1 billion.
As a result of a conscious decision by policymakers to augment reserves, the government had raised over $ 4 billion through the State Bank of India’s India Millennium Deposits in 2001-02.
Net foreign investment inflows in the 2001-02 fiscal — $ 5.29 billion — were high, and the comfortable situation was reflected in foreign exchange reserves topping $ 50 billion by January 2002. By end-December 2001, the rupee too had strengthened.
Across North Block, Sinha’s colleague, External Affairs Minister Jaswant Singh, who was also in charge of Defence then, was at work on the diplomatic front. India’s point of view was conveyed to various countries.
India recalled its High Commissioner to Pakistan, Vijay Nambiar, and stopped the Samjhauta Express and Delhi-Lahore bus after Pakistan banned Indian flights in its airspace, forcing aircraft to take a longer route via Tehran to western destinations.
Prime Minister Vajpayee travelled to the UN and major global capitals — Moscow, London and Washington to build pressure on Pakistan.
There was tremendous pressure from western powers to show restraint. President George W Bush’s Secretary of State Colin Powell, a former four-star general himself, and Deputy Secretary of State Richard Armitage, came to India to counsel restraint. Germany and the European Union too put pressure on India to demobilise.
In the Budget for 2002-03, Sinha announced Rs 65,000 crore for Defence, and said he would not hesitate to provide more for the modernisation and upgradation of the country’s defence preparedness.
But by August of that year, Sinha had to move out — exchanging his job with Singh, and breaking the news to his officers at a farewell meeting a little before the final withdrawal of troops began. There would be a little more of diplomacy in North Block and more Finance in South Block where he was headed, Sinha famously said.
By the time the nine-month troop mobilisation ended, the pick-up in industry and services was clear.
By the end of that year (2002), though net foreign portfolio flows were only $ 49 million in the April-November period — a reverse compared to a year ago — foreign exchange reserves had crossed $ 75 billion, and external debt indicators had improved; India even prepaid foreign loans worth $ 3 billion with a current account surplus.
Given the situation, Sinha says, India did not feel the need to push aggressively to counter any possible impact on inflows.
Fifteen years on, the situation is similar. The government of Prime Minister Narendra Modi has vowed to respond. And this time too, the macroeconomic indicators are good: inflation is relatively low and the currency is fairly stable — but like in 2001, the economic rebound is probably a few quarters away.