Japan and the global aftershocks

I write this in tribute to the Japanese people who have shown extraordinary fortitude, discipline and calm in the face of the worst-ever disaster to have hit the country since the Second World War.

The country has suffered an unprecedented triple whammy — an earth-splitting earthquake combined with a tsunami and the accident at the Fukushima nuclear power station, which could still suffer a complete meltdown of the nuclear core in one or more of its reactors. It has been heart-rending to receive emails from Japanese friends who, while admitting to the tragedy, are also full of optimism and keenness to get back to work.

JAPAN'S EXTERNAL ACCOUNT

The impact of these disasters on the global economy and in particular on India's economic prospects could be significant. Events in Japan can be expected to impact the global economy, including India, in several ways.

As a major trading nation, Japan may be hampered in supplying critically needed intermediate inputs to its partner countries. Japanese corporations which have established large manufacturing capacities abroad, like our own Maruti-Suzuki, are beginning to feel the shortages of goods imported from Japan like special steels, electronics and auto components. These imports are also likely to become more expensive; this is on account of the appreciation of the Yen, due to Japanese savings held abroad being brought back to Japan. Some appreciation was already visible in the last week.

The rising yen and, more significantly, the domestic demand generated by post-earthquake reconstruction, which will start sooner rather than later, will push up imports and will surely reduce, if not eliminate, Japan's current account surplus in the coming months.

HIGHER CAPITAL COSTS

The Japanese reconstruction demand will contribute to rectifying global economic imbalances and provide a demand impetus to global economic growth. The full positive impact of this post-disaster demand, will however, be understood only towards the end of this calendar year. By that time, the short-term import demand in Japan in the immediate aftermath of the shock would have receded somewhat.

India and the rest of the world can expect a major slowdown of both portfolio and direct investment capital outflows from Japan as their own economy will need more than $200 billion for reconstruction.

This will raise the cost of capital globally and will therefore affect growth prospects in emerging economies, which, like India, were expecting Japanese capital to finance their infrastructure and manufacturing capacity expansion. Clearly, flows of concessional Japanese finances or official development aid will also decline.

Global hydrocarbon prices will head north because of higher demand from Japan as it tries to substitute the loss of its nuclear energy with alternative energy sources. In the post-disaster reconstruction phase, Japanese demand will also push up global commodity prices.

We can thus expect a harder struggle to subdue inflationary pressures. This could have some significant implications for India's efforts to achieve macroeconomic stability while retaining the growth momentum.

NUCLEAR POWER DEBATE

The most significant impact of the Japanese catastrophe will be on the future of nuclear energy. A definite outcome is the demand for greater information on, and a thorough review of, safety standards and procedures in nuclear power stations. This is, of course, a positive development because, given the enormity of the negative fallouts of a nuclear meltdown, no amount of circumspection can seem excessive in handling nuclear fission.

Such a review might push us to the conclusion that we humans with our frailties are simply not sufficiently equipped to meddle with nature's most potent energy source. This requires a debate on human ingenuity and technological prowess, which will perhaps take several years or decades to decide. In the meantime, it will be a real pity if we in India are forced into a knee-jerk response, thereby taking a position against expanding our nuclear energy generation capacities.

Yes, there should be more stringent safety provisions and better contingency plans. But this does not imply that we push ourselves away from the course of producing clean and cheap energy, which also brings about a quantum jump in our technical and manufacturing capabilities. Given the very poor quality of our coal reserves, rising import dependence for hydrocarbons, the difficulties associated with expanding hydro-power generating capacities and the pressure to reduce the carbon imprint on our environment, India does not have too many choices.

With per capita energy consumption a little less than one megawatt per annum, the Indian energy demand is set to explode in the coming years. We cannot deny this to our people. So it is better to focus on measures to make nuclear energy safer, rather than open up the question of using it at all.

Let us hope the 50 heroic Japanese technicians who are valiantly fighting to avert the meltdown at Fukushima will be successful in their efforts at damage control. This will also demonstrate to the world that nuclear energy can be used because human ingenuity and determination has made it safe enough to withstand an earthquake that measures nine on the Richter scale.

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