Political Economy: Felled by the Fallout

It may have misjudged the magnitude of the economic fallout when it exercised the nuclear option in May, 1998. But it could have then evolved an effective gameplan to counter the global sanctions. It didn't. BT assesses the A B Vajpayee Administration's crisis management strategy by analysing its responses since Pokhran-II, and the rationale behind them.

It has proved to be a N-bomb that has blown up in the Government Of India's (GOI) face, burying the economy's future under the fallout of the world's sanctions. A hundred days on, the cost of the Atal Bihari Vajpayee Administration's muscle-flexing: a drastic fall in external assistance, economic instability, and damage to India's pacific image. As pragmatism blows away the clouds of patriotism, the day after Pokhran-II-India's nuclear tests on May 11 and May 13, 1998, which came 24 years after the first blast at the same site-might just turn out to be a nightmare. For, not only did the government fail to gauge the impact of the fallout, it compounded the mistake by not formulating a proper crisis management strategy.

By blowing the trumpet of belligerence instead of employing the diplomacy of caution, the ruling Bharatiya Janata Party (BJP)-led coalition has conclusively proved that its key ministries-Defence and Finance-are not working in tandem. With Pokhran-II, the GOI has not only set back the reforms process, it has also dealt liberalisation a body-blow. With the G-8-the US, Japan, Germany, the UK, France, Italy, Canada, and Australia-imposing stiff curbs on India, Pokhran-II can cost India as much as $2.50 billion (Rs 10,000 crore) in annual aid flows. It may be a small amount, given the size of India's economy, but there is no doubt that the fallout could be costlier still. Here's why:

THE GOI DID NOT HAVE A PRE-POKHRAN-II PLAN. IT MAY NOT HAVE BEEN EVEN AWARE OF THE MAGNITUDE OF THE FALLOUT.

Strobe Talbott

"Sanctions imposed by the US in the recent past have sometimes, been more of a sledgehammer than a scalpel."
Strobe Talbott, US Deputy Secretary of State

Evidently, the GOI erred by embarking on an exercise whose fallout it did not measure precisely. Even before Pokhran-II, it was aware that India would not be able to avoid sanctions. Surprisingly, their impact was not factored in. All that the GOI did was to update an Impact Assessment Report prepared by the finance ministry in end-1995, when the Narasimha Rao Administration was dead-serious about conducting a set of nuclear tests, but was dissuaded from doing so by the US Government.

Worse, that impact analysis only assumed retaliation by the US, which is forced-by law-to punish nations that turn nuclear. But the GOI did not account for the fact that other nations would rally behind the US. In fact, the 1995 study concluded that since direct annual aid from the US was a dribble-a mere $150 million (Rs 600 crore)-and Uncle Sam had already stopped selling India dual-use technology, sanctions under the US Nuclear Proliferation Prevention Act (NPPA), 1994, would have a marginal impact on India. Agrees Abid Hussain, 72, the former Indian ambassador to the US: ''The government did not realise that although the sanctions may not hurt us directly, they could break the rhythm of the reforms process.''

THE GOI DIDN'T DRAW UP A POST-POKHRAN-II CAMPAIGN. IT JUST BANKED ON US BUSINESS.

Post-Pokhran-II, the government's efforts at crisis management were cramped. The inertia settled in during the first 15 days after the blasts only after which Operation Salvage began in New Delhi and Washington. In the US, the CEOs of 4 companies with business interests in India-the $13.29-billion Enron Corporation, the $22.68-billion Boeing, the $6.68-billion Kellogg, and the $79.18-billion General Electric-held meetings with US officials. According to an Indian spokesperson of one of the transnationals, the State Department was briefed about ''the size of the investments in India, the proposed plans, and the negative fallout of the sanctions on big business in the US.''

In Delhi, Rebecca Mark, 42, the CEO of Enron International, a subsidiary of Enron, assured the then-political advisor to the Prime Minister, Pramod Mahajan, that she would go ahead with the $2-billion Phase II of the Dabhol Power Project despite the curbs. Indeed, Mahajan was brimming with confidence when he was informally replying to queries from the Indian media on May 14, 1998: ''Tremendous pressure will be exerted by the US business on its government. We have to just wait for that to happen.'' On May 26, Mahajan sang the same tune: ''US companies like Boeing, Enron, and General Motors have political clout. We will show you, in 4-5 months, how we do business with these companies.''

The events that followed showed that the government had misjudged the situation. Indian policy-makers simply failed to comprehend that sanctions were automatic under US law, and that the US President had little room for manoeuvre despite business' pressures. American companies also have a part to play in foreign policy concerning Japan, China, and East Asia; India is low on their list of priorities. Importantly, US industry is wary of taking up the cause of nuclear states like India, especially after recent exposures that some US companies had supplied critical nuclear technology to Iraq. And, finally, US business was disappointed with India's progress on the reforms. It was hoping that the country would take giant steps, says Jagdish Bhagwati, 63, a professor of international economics at Columbia University, ''rather than pursuing incremental reforms.''

If there is one thing that the government could have done without, it is chest-thumping. While Madan Lal Khurana, the Union Minister for Parliamentary Affairs, warned about a fourth war with Pakistan, L.K. Advani, the Union Home Minister, spoke about snuffing out cross-border terrorism in Kashmir. Not to be outdone, the Defence Minister, George Fernandes, has been regularly peppering his speeches with anti-China rhetoric. The initial bravado acquired a new meaning when the government realised that the best way to soften the blow it had inflicted upon itself would be to push Pakistan into conducting its own nuclear tests. For, a pro-Pakistan US would be compelled to let off India lightly. But such thinking proved to be erroneous.

Despite its pro-Pakistan stance, the US was livid with both countries. The US Secretary of State, Madeline Albright, set clear guidelines for India and Pakistan, asking both to sign the Non-Proliferation Treaty (NPT) and the Comprehensive Test Ban Treaty (CTBT) immediately. Only such a move, Washington said, would help the two countries escape punitive action from the developed world. The US, subsequently, lobbied at a P-5 meeting-which includes the US, Russia, the UK, France, and China-on June 5, 1998, and the G-8 gathering on June 12, 1998, to impose multilateral sanctions against India and Pakistan.

Three days after the US President, Bill Clinton, signed the order imposing economic sanctions on India on May 13, 1998, the Confederation of Indian Industry (CII) put out a full-page advertisment in The Financial Times, explaining India's need to conduct nuclear tests. Later, the cii organised meetings with government officials in Tokyo, Cologne, London, Washington, Seoul, and Singapore. And, on May 25, 1998, the CII President, Rajesh Shah, personally wrote to the CEOs of Enron, the $31.65-billion PepsiCo, the $14.70-billion Ford Motors, and the $50.28-billion Sony Corp..

Explains Tarun Das, 59, the Director-General of the CII: ''It was the most effective way to keep India's interests alive.'' The letters dwelt on India's security concerns, and highlighted the impact of the sanctions on Indo-US business relations. The response was positive. For instance, Kenneth Lay, Enron's CEO, wrote back on June 11, 1998: ''My team and I have worked very hard to communicate with our Congress and Administration about the critical nature of the commercial relationship between US and Indian businesses...''

The Federation of Indian Chambers of Commerce and Industry (FICCI), too, pitched in, sending a 4-member team headed by Shashi Ruia, 54, the Chairman of the Rs 3,300-crore Essar Group, to Washington on June 4, 1998, to explain India's position to Congressmen, lobbyists, and businessmen. Points out Amit Mitra, 49, the Secretary-General of FICCI: ''During our 90-minute discussion with 4 Congressmen on Capitol Hill, the American politicians became so engrossed in it that they refused to leave the meeting to vote on a Bill.''

But, given the lack of diplomatic moves by India, such efforts could yield little results. Especially after Budget 98 failed to enthuse both US business and government. The importance of diplomatic efforts was only realised a month after Pokhran-II, when Jaswant Singh, the Prime Minister's special envoy, and Strobe Talbott, the US Deputy Secretary of State, met in Washington on June 12, 1998. By then, the US had already taken punitive action against India.

WHAT INDIA SHOULD DO

Accelerate the reforms process by initiating policies favourable to global investors.
Use the services of pro-India Congressmen and the Indian community to lobby the White House.
Rework loan proposals pending with the World Bank as per its norms on humanitarian aid.
Increase dialogue with the US and Japanese governments through regular diplomatic interaction.
Seek alternative avenues of finance to speed up work on projects affected by the sanctions.
Scale down the swadeshi rhetoric, and present a pro-liberalisation face to the global community.