The cost of India's quake

Lost lives and survivors' traumas will hurt the economy

Gujarat is India's second-largest industrial region, and its devastation by an earthquake will have an impact way beyond its state borders.

The devastation of the quake is extensive and resources need to be mobilised

Yashwant Sinha
finance minister

The Indian Government will have to brace itself for massive financial damage, said one economist: "On the one hand, there will be a drop in revenues from one of India's industrial centres and on the other, massive reconstruction and rehabilitation expenditure."

On Friday, the government announced that it will give up its majority stake in the state-run telephone company, VSNL, to help raise funds to pay for emergency aid and reconstruction.

India's finance minister Yashwant Sinha is well aware of the "enormous costs" of rebuilding Gujarat, and points to the fact that the country's economy was already in the process of slowing down.

"The devastation of the quake is extensive and resources need to be mobilised."

Damage worth billions

Fixing the damage to buildings and installations is expected to cost around 150bn rupees ($3.3bn, £2.2bn), according to a preliminary estimate by the Federation of Indian Chambers of Commerce and Industry (FICCI).

Where will they go now?

It is an expense that India can ill afford.

In the financial year that ended in March 2000, the government ran up a budget deficit much higher that its target of almost 800bn rupees.

In fact, it overshot the target by nearly a third, and this year the deficit is expected to come in at 1,700bn rupees.

Analysts now expect economic assistance from abroad and a tax surcharge to pay for the reconstruction.

The government has asked the World Bank and the Asian Development Bank for a $1.5bn loan to aid the restructuring.

Additional aid should come from non-governmental aid organisations and through bilateral government aid.

Industries hit

The damage to both Gujarat and to India as a whole has damaged some industries more than others.

Most of the large industrial units have survived the earthquake because much of the shock hit rural areas.

But industries such as pharmaceuticals, garments and cotton are expected to be severely affected, officials said.

The massive loss of life and the injuries and trauma suffered by the survivors will also hurt the state's economy.

The tragedy is made worse by economic difficulties

"The lives lost would impact the units as many employees would have been a victim of the tragedy," the Confederation of Indian Industry said in a statement.

Absenteeism and the consequent loss of production will cost at least 4bn rupees a day, estimates the FICCI.

Exporters fear even larger losses. The FIEO predicts a daily loss of production worth as much as 10bn rupees a day.

Underinsured

India's homes and businesses are generally underinsured, even though many insurance companies offer policies that cover earthquakes.

This means more of the costs of the earthquake will be carried by local firms and individuals than would have been the case in, say , the United Kingdom or other industrialised societies.

Consequently, many firms will fail to get back on their feet following the earthquake.

Jobs will be lost and overall industrial production will fall.

Trade will slow

Although much of Gujarat's key industrial installations escaped physical damage, the indirect damage was extensive.

FICCI estimated that infrastructure losses would amount to 20-30bn rupees.

This would include snapped telephone lines and broken electricity supplies as well as destroyed roads, disrupting transport and communication as well as production.

Some industry officials believe the earthquake could result in a 4-5% fall in India's exports.

Beyond the restructuring costs to the Indian economy, the earthquake abruptly halted a recent influx of foreign investment.

So far this year, foreign investment funds have poured almost $650m (£445m) into the Indian stock market, almost half the total amount they spent on Indian shares during the whole of the past year.

But following the quake, fickle emerging markets fund managers will put their equity investment in India on hold, predicted an international stock broker.

"People are confused and concerned," he said.

Average share prices fell 4% on the Bombay Stock Exchange when trading started on Monday, the first day of trading after the earthquake.

Market opportunity

But some market players saw the fall as an opportunity to buy cheap shares, and this demand lifted the benchmark 30-share Sensitive index back to close at 4,234 points, down 2.21% on the day.

"Unfortunate as it may sound, the quake is actually an opportunity for the core sector," said Sun F&C Asset Management's chief financial officer Gul Tekchandani.

"Companies in steel and cement industries are likely to benefit from the increased activity to rebuild the earthquake-hit region," he said.