On the thirteenth day of the war, when the entry of Indian troops into Lahore seemed imminent, Islamabad fired two Ghauri missiles with nuclear warheads. One was targeted at Delhi, the other at Mumbai. India responded in kind, with two missiles targeting Islamabad and Karachi...

War seems an unlikely prospect as these words are being written, in mid-January; two weeks back it didn't look that way, and more than one Indian would have surely remembered a remark by Pakistan's blustery nuclear scientist A.Q. Khan about the Ghauri's ability to take out Mumbai and Delhi in five minutes flat.

The latest chapter in India's 54-year-old face-off with its neighbour can't be doing the Indian economy any good. ''Suspense,'' intones Prithvi Haldea, the CEO of Prime Database, ''is bad for the economy.'' Several economists agree with Haldea: in their opinion, while sustainable peace may be the best thing for the economy, a war may actually be a preferred option to status quo.

Poised as the economy is between first-generation reforms that have thrown up a host of implementation-related issues and second-generation ones that just don't seem to be able to get off the ground, the military high jinks couldn't have come at a worse time.

SCENARIO I: Status Quo

Nothing could hurt the economy more than a continuance of the status quo. Foreign investments will dry up as India's country-risk skyrockets; the private sector will curtail its spending; the government's focus will stray from the economy; planned initial public offerings will be shelved; and the stockmarkets will reflect the uncertainty.

No economy, argues, Vinayak Chatterjee, the CEO of Feedback Ventures, can live with an ''overhang syndrome-the uncertainty over whether there will be a war or not''. Faced with such a situation, investors dither on decisions related to new projects. Why, foreign institutional investors could even try and reduce their exposure to Indian stocks.

The Indian economy can ill-afford a status quo. The polity's main focus has shifted from the business of governance to the arithmetic of coalitions; an uncertain atmosphere will only help push crucial economic legislation to the lumber room of political consciousness. ''Do you think the government can really address crucial economic issues when it looks like we could go to war?'' asks S.S. Bhandare, an advisor to the Tata Group.

SCENARIO II: Border Skirmishes

India's politicos decide to stop talking of 'hot pursuit', and send out the army to destroy militant training camps in Pakistan-occupied Kashmir. Pakistan retaliates and a border skirmish, a la Kargil (if that can be called a skirmish) breaks out. That could cost more than Rs 2,000 crore (Kargil did Rs 1,894 crore). India should be able to afford it. Most investors, explains, U.R. Bhat, the Director & Chief Investment Officer of Jardine Fleming Chase, factor in possible border clashes with Pakistan in their investment strategies.

Predictably, though, a skirmish could hit some sectors like tourism, aviation, and hospitality. India's oil import bill, already expected to touch Rs 80,000 crore this year, may go up due to the armed forces' huge requirement for fuel. Net result: the oil pool deficit, estimated to be in the Rs 13,000-crore region, may balloon; consequently, the fiscal deficit could swell.

Then, there's the impact on exports. The global recession has forced the government to bring down the exports growth target from 12 per cent to 3 per cent. Even that, says B. Bhattacharyya, the Dean of the Indian Institute of Foreign Trade, could be a tall order if there is full-scale war. ''Potential importers will be loath to visit a country at war, thereby affecting any chance to increase exports.'' That logic applies to foreign direct investment too.

The stand-off between India and Pakistan could cost the Indian aviation sector close to Rs 50 crore a year. All of Air India's West-bound flights cannot fly in Pakistani airspace and the longer route around would mean a higher fuel bill. Tourism is another sector that will bear the brunt of a skirmish.

SCENARIO III: Full-blown war

A full-blown war will have a larger impact on the economy than a skirmish. For one, it would mean the collapse of the aviation sector (if even temporarily). ''No international airline will fly to India in case there is a war,'' says S.S. Sidhu, the President of the Foundation for Sustainable Tourism. ''War usually causes a drop in travel budgets,'' adds U.K. Bose, the CEO of Air Sahara.

The cost of the war itself-Air Commodore Jasjit Singh, the former head of the Institute Of Defence And Strategic Analysis, estimates that a two-to-twelve week war would cost around Rs 3,000 crore-isn't cause for concern. ''Numbers show that we haven't spent a major chunk of our defence budget (Rs 62,000 crore),'' says Sanjeev Goenka, the President of the Confederation of Indian Industry. There are other factors that point to this being the right time to go to war, say some economists. Inflation, at 2.5 per cent, is at a historic low; India's foreign reserves ($48 billion and counting) have never been healthier; and a possible devaluation of the rupee against the dollar will only help hamstrung exporters.

There's little chance that the US could impose sanctions against India if it initiates the war. ''The US has understood from the Pokhran II experience that American businesses stand to lose more than Indian ones from sanctions,''says Jardine Fleming's Bhatt.

Despite Goenka's reassurance, though, there's the risk of the government funding its war effort by holding back on infrastructure spending. And even ongoing infrastructure projects could find it difficult to achieve financial closure. In the absence of new revenue sources, the government could also decide to impose a war-surcharge on corporate and individual tax.

Will a full-blown war end in a nuclear scenario?

K. Santhanam, the director of IDSA, believes that both countries will be reluctant to exercise the nuclear option. ''In the last three wars, both India and Pakistan have restricted their attacks to the forward areas,'' points out Singh.

''But if India makes the first move,'' says Munesh Khanna, the country head of Andersen's corporate finance practice, then, ''it could find it difficult to project itself as a victim of terrorism.'' The war will definitely impact India's credit-rating-downgraded to stable from positive this July by Moody's. ''If the (Indian) economy spirals out of control because of a war, we will definitely make an adjustment in India's credit-rating,'' says Kristin Lindow, the lead India analyst at Moody's.

SCENARIO IV: Sustainable Peace

This is the stuff of which Utopian visions are made. But, if India and Pakistan can break the 54-year-old stand-off through diplomatic initiatives, the economies of both countries would benefit. The single-largest outlay in India's annual budget is dedicated to defence spending. If relations between the two countries thaw, this can be reduced significantly. That would free up funds for developmental and infrastructural initiatives. India can source cheap gas from Central Asian producers through pipelines that cut across that country; the trade between the two countries will increase (Pakistan is the world's second-largest consumer of tea, but imports none from India); and as Haldea points out, with India and Pakistan on talking terms, there's nothing that will stand in the way of the creation of a greater South Asian economic union.

Still, peace is a long shot. And as evident from the stockmarket's reaction to Army Chief General S. Padmanabhan's statement on January 11 that there may be a quick, short conventional war with Pakistan-it slipped 100 points before regaining 81 points by close of trading (so much for all that analysts said about the markets having already discounted war)-any of the other three scenarios is a possibility.

Other Story Links...
MARKETING	TELECOM	BT PHARMA	INTERVIEW	INVESTING