Mumbai: Last week two developments brought America and Iraq closer towards a fresh war. United Nations (UN) weapons inspectors found that Iraq had, in its arsenal, missiles which exceed the maximum range allowed under the UN resolutions. More significantly, a taped message by the fugitive Osama bin Laden, expressing solidarity with the Iraqi people, was aired on an Arab television channel.

This spurred US President George W Bush, better known as 'Dubya' to his friends, to come up with the dubious logic that Iraq has weapons of mass destruction and is hand in glove with bin Laden's Al-Qaeda group to destroy the 'civilised' world. Naturally for Bush, the only way to stop them is by waging a war.

India should obviously be concerned over the events as a war in the Gulf can have far-reaching consequence for the Indian economy. The imminent Gulf war can have two possible scenarios. A short and swift war (as was the case in the previous Gulf War) or a prolonged war (as it is in the case of America's present 'war against terrorism').

The Indian economy has the resilience to withstand the effects of a short war and is already geared up to meet certain contingencies. India may not be hit much by a possible short war over Iraq, according to a Confederation of Indian Industry (CII) study. The study states that India is ''well equipped'' with enough foreign reserves to withstand a short war of up to 20 days.

Reserve Bank of India governor Dr Bimal Jalan has also gone on record saying the Indian economy is capable of handling problems arising from a possible war in Iraq and there is no concern ''right now'' about either rising inflation levels or hardening interest rates.

Reason to worry
India is also holding on to three month's stock of oil and gas and a short war will not affect the supply and prices of oil and gas. Now, the moot question is: Will it be a short war like the previous one?'

Let us look at the previous war. Iraq had occupied Kuwait and the object of the war was to get Iraq to withdraw from the Kuwaiti territory. America had the support of the international community, including most Islamic countries. Saudi Arabia, an ally of America, permitted US ground troops to launch their offensive from Saudi soil. Thus the Americans succeeded in launching effective air and ground offensives to settle the matter swiftly.

This time, however, the basic object of the war is the removal of Iraqi President Saddam Hussein. Now, whether Hussein is guilty or not of the crimes he is being accused of, he remains the head of a sovereign state, and the international community, particularly the Islamic states, is not seeing his forced removal with favour.

This time, therefore, American troops are unlikely to get any ground support from any of the nearby Gulf countries. This would mean that after bombarding Iraq from the air, the troops have to enter Iraqi territory to carry on with their offensive. With no support from the majority of the civilian Iraqi population, this offensive could well be a long drawn-out affair.

Under such a scenario, the CII study says there could be a severe impact on oil prices, inflation and on the exchange rate movement.

Since India is an oil importer, any disruption of supplies would necessarily imply higher energy prices, though the impact would depend on the extent of the disruption caused. The overall inflation might go up from 2.5-3 per cent in 2002-03, to 4-4.5 per cent in 2003-04, on account of higher oil prices.

For India, a few other concerns are the burgeoning levels of subsidy and the rise in the oil import bill. The subsidy provided on kerosene, LPG and diesel might have to continue due to higher oil prices, thereby impeding the country's fiscal deficit.

An uncertain future
Remittances by the nearly 4 million Indians working in the Gulf region may also be disrupted. In case the war spreads to other Gulf states, the possibility of which cannot be ruled out, then India will have to consider evacuating its citizens at a huge cost.

War brings with it uncertainty - which slows down investments as investors prefer to wait and watch. The Indian stock markets have already plummeted on war fears. The inflow of foreign direct investments will also slow down during the uncertain period.

One of the key drivers of the Indian economy in the next decade will be software. Nearly 70 per cent of the software business is exports to America. With the American economy in recession and given a war scenario, this sector is likely to be severely affected.

The same can said of the business process outsourcing (BPO) market, which was set to capture about 30-40-per cent share of the emerging 700-million global BPO market in the next five years.

The Indian economy, therefore, will be severely hit in the case of a prolonged Gulf war. The economy - spurred by second generation economic reforms, strong growth in IT exports and BPO - is slated to become a trillion-dollar economy by 2010. It is most unfortunate that irrational acts by certain leaders whose intentions are suspect can well hinder this development process.