NEW DELHI: The multilateral lending agencies like the World Bank and the International Monetary Fund (IMF) are of the strong view that the present political crisis following the Ayodhya incident may lead to political instability in India which in turn will jeopardize the ongoing economic reforms unless it is resolved immediately.

They do not believe that the Finance Minister Dr.Manmohan Singh will be able to contain fiscal deficit to the targeted level in 1992-93 as the government will suffer substantial revenue loss and incur additional expenditure as a result of the developments in Ayodhya.

The present government is committed to economic reforms although the momentum has slowed down of late but the multilateral agencies are not confident that a new government at the Center will continue in the same direction. This has injected an element of uncertainty over the negotiations with the IMF for loans of seven billion under the Extended Fund Facility (EFF) to meet the exceptional financing requirements estimated at $9 billion in the next three years.

An IMF team has begun the preliminary round of discussions with the Finance Ministry over the proposed loan. The western media played up the Ayodhya developments in such a way that it created an impression that the government had lost control over the law and order situation. This dampened the enthusiasm of many in the headquarters of the World Bank and IMF who had believed that India was shaping up albeit slowly the way they wanted it. The IMF team initially thought of postponing its visit but the Finance Ministry prevailed on it not to do so as it would send wrong signals about the economy.

The negotiations for the proposed loan under EFF will be spread over three or four rounds. A final decision on India’s application will be taken only after assessing the political situation at that time.

Meanwhile sources in multilateral agencies say the government will find it difficult to limit the fiscal deficit for the current financial year to five per cent of the GDP. On present reckoning the government will have to spend at least Rs 300 crore in the next couple of months for the movement of paramilitary forces in connection with the Ayodhya crisis. There is no precise estimate of the loss in industrial production. With Bombay and Calcutta under curfew for most of the days after the demolition of the mosque in Ayodhya the loss could be substantial. This will affect the central excise target. In many industrial towns administrative machinery has come to a halt affecting revenue collection Exports have been hit as goods could not reach ports on time.

Finance Ministry sources are not in a position to estimate the production loss. According to one estimate if the Ayodhya crisis does not aggravate the loss in revenue coupled with additional expenditure on movements of paramilitary troops could be around Rs 700 crore.

Dr.Manmohan Singh is committed to bring down the fiscal deficit to the targeted level.

Article extracted from this publication >> December 30, 1992