Political Economy: Felled by the Fallout, Pg 2

The GOI failed to see through the Clinton Administration's initiatives to soften the impact of sanctions on India and Pakistan, which went nuclear on May 28, 1998. First, on July 14, 1998, the US President signed a Bill passed by both the Senate and the House of Representatives to lift curbs on agricultural credit. And, a day later, the Senate voted in favour of another Bill which sought to give the President the powers to waive off the remaining sanctions for a 1-year period. Presently, the sanctions are automatically imposed under the Glenn Amendment Act-which is part of the NPPA-and can only be removed by an Act of Congress.

That was enough to evoke a bout of optimism in this country-which was baseless. For instance, while speaking at a seminar on sanctions in Delhi on July 17, 1998, Bhagwati confidently said that the US President now had a 1-year flexibility to waive the sanctions imposed on the 2 countries. The chief guest at the seminar, Jaswant Singh, agreed. What Bhagwati failed to mention-and Jaswant Singh did not clarify-was that unless the Waiver Bill was passed by the House of Representatives, and signed by the US President, it could not become the law.

Similarly, the removal of restrictions on agricultural credit was not aimed at helping India, which does not import foodgrains from the US. Instead, the Clinton Administration bowed to pressure from the US farmers' lobby, which wanted to bid for a Pakistan tender to import 3.50 lakh tonnes of wheat. The GOI's response to these instances proves that it had overlooked the P-for-Pakistan factor in Capitol Hill politics.

Although the government took a leaf out of China's book, it failed to understand Beijing's bargaining power with the US. After the Tiananmen Square massacre on June 4, 1989, the Bush Administration imposed severe sanctions on China. But effective business and diplomatic lobbying ensured that most of them were lifted within a year. Indeed, by July, 1989, the US Government allowed Boeing to deliver 3 aircraft to China after the Chinese placed a $176-million order for 2 additional planes. And, by December, 1989, Hughes Corporation also got the green signal to sell sensitive satellite technology to China. In fact, 13 months after the massacre, the US allowed Japan and the World Bank to approve fresh loans to China.

Hoping that the Clinton Administration would be swayed by commercial interests, a spate of projects were cleared by the GOI-45 projects were approved between May 12 and 16, 1998-in sectors like power, mining, and oil exploration. And the Civil Aviation Ministry leaked out information that both the Rs 2,489.55-crore Indian Airlines and the Rs 3,659.30-crore Air India were planning to buy nearly 30 aircraft. Although the name of the would-be seller was never mentioned, it was fairly obvious that it was the US transnational, Boeing. Points out Dinesh Keskar, 50, the President of Boeing India: ''Despite the US sanctions (which also ban credit given by the US Exim Bank), we will have no problems in arranging alternative sources of aircraft finance.''

But, why use the Chinese card? Explains Mohan Guruswamy, 50, the economic advisor to the Finance Minister: ''India offers opportunities similar to China: a huge market and a large middle class.'' True, but there is more than a economic dimension to strategy. The Chinese bail-out was aided by the fact that Bush-who was the US ambassador to China in the 1970s-was pro-Beijing. That explains why the National Security Advisor, Brent Scowcroft, and the Deputy Secretary of State, Lawrence Eagleburger, made two clandestine visits to Beijing in July, 1989, and December, 1989.

Indeed, the GOI presumed that US commercial interests would overpower its foreign policy goals. What it did not understand was the unique circumstances that it had landed itself in. Explains Jeffrey E. Garten, the former US Under Secretary of Commerce (1993-95), in an article in Foreign Affairs (May-June, 1997): ''Americans have associated commerce with open markets, open markets with political freedom, political freedom with democracy, and democracy with peace.'' And peace was perceived to be at stake while the US was dealing with two sworn enemies who had blasted their way into the nuclear club.

It is obvious that the G-8's decision to oppose all multilateral loans will hurt India. In fact, the World Bank-which has cleared over $1 billion of loans in the health and the rural development sectors during the past 2 months-has postponed other loan proposals worth $1.17 billion in power and road development. After Japan's refusal to disburse additional loans under the ODA-which added up to over $1 billion in 1997-98-the total impact could be crippling. But the government thinks otherwise, maintaining that pipeline-loans will not be stopped; only fresh loans could be delayed. So, the actual impact will only be felt in 1999-2000.

Not everyone subscribes to the GOI's logic. Fears P.S. Bami, 65, the former chairman of the Rs 12,621-crore National Thermal Power Corporation (NTPC): ''The government does not realise that sanctions will take a long time to be lifted. There should have been concern and alarm, which are missing at both the project- and the government-levels.'' In fact, it is surprising that both the Central and the state governments-which receive the bulk of the loans from the ODA and the World Bank-haven't formulated a contingency plan as yet. For instance, the NTPC, which is negotiating the second loan tranche from the World Bank to fund its 2,000-mw Talcher-II power project in Orissa, seems unfazed. Claims C.P. Jain, 52, the Director (Finance) of the NTPC: ''We will arrange funds from the global or domestic market.''

Perhaps. But the ripple effect will be felt across states. For instance, the ban on fresh World Bank loans will hit the State Electricity Boards (SEBs), which are being financed to make them profitable, hard. Since each tranche is disbursed on the basis of past performance, the remaining amounts may not accrue to the SEBs in Bihar, Uttar Pradesh, Gujarat, and Rajasthan. The impact could be similar in the transport sector, where highways are being financed by external aid. Agrees a senior official in the Ministry of Surface Transport: ''The curbs on the World Bank loans will force Gujarat and Haryana to provide additional budgetary resources since commercial loans are difficult to negotiate in this sector.''

That the GOI is deliberately playing down the impact of the sanctions has been evident since the presentation of Budget 98 on June 1,1998. The budget, which did not factor in the sanctions, estimated that external aid would increase from actual inflows of $2.37 billion in 1997-98 to $3.39 billion in 1998-99. This contradicts a confidential note prepared by the Ministry of External Affairs, which states that India may lose $1 billion of loans in 1998-99.

But Budget 98 did make bold attempts to attract NRI investments. Two mutual fund schemes-floated by the Unit Trust of India and the State Bank of India-are expected to garner $8 billion worth of NRI money. Claims Jagdish Shettigar, 50, Member, Economic Cell, BJP: ''The figure could double if the schemes are marketed through the Friends of the BJP and the Friends of the Vishwa Hindu Parishad in the US and the UK.'' However, the government's dependence on NRI funds is questionable. According to a 1998 study by G. Balachandran, a Delhi-based economist, one of the major reasons for the rapid drop in foreign exchange reserves in the second quarter of 1991 was the withdrawal of funds by NRIs.

Unfortunately, although India has reduced its dependence on NRI funds, short-term NRI deposits formed a substantial $3.77 billion, or nearly 14 per cent of the country's foreign exchange reserves of $25.97 billion on March 31, 1998. Add it to the $9 billion investment by Foreign Institutional Investors (FIIs)-and the scenario appears frightening. Indeed, both NRIs and FIIs have been losing interest in India. While total inflows into NRI deposits dropped from $3.31 billion in 1996-97 to $1.14 billion in 1997-98, FII outflows crossed $350 million in May and June, 1998.

Nearly 4 months after Pokhran-II, it must be obvious to the Vajpayee Administration that it has ignited a geo-political time-bomb. But swadeshi politics will not permit the right-wing government to admit as much. Unless India signs the NPT or the CTBT, and, simultaneously, accelerates the pace of reforms, foreign investment will eschew India. Even if the GOI does not sign up, it must, at least, make all-out efforts to attract Foreign Direct Investment.

Unfortunately, the reforms are moving at a snail's pace. Certainly, the BJP-whose leadership is divided on critical reforms in the insurance sector-is torn between short-term compulsions (elections) and long-term goals (globalisation). If nothing else, Pokhran-II will also prove to be the acid-test of the BJP's economic policies.

INDIA'S LOBBYING IN THE US

What can, possibly, save the day for India is the growing opposition to sanctions in the US. According to a 1995 study by the Washington-based International Institute of Economics, sanctions have had moderate-to-effective impact in only a third of the 116 cases since World War I. The annual loss to the US export industry: between $15 billion and $19 billion. Also, the ban on the sale of nuclear reactor technology to China could deny US business the opportunity to compete for projects worth $15 billion over the next 14 years. After all, Washington's restrictions on the sale of commercial aircraft forced Vietnam to opt for aircraft manufactured by Airbus of Europe. The fallout of sanctions can be judged by the response of Strobe Talbott, the US Deputy Secretary of State, who said that sanctions have sometimes been ''more of a sledgehammer than a scalpel.'' But Washington, obviously, believes that the former works.

PAKISTAN'S LOBBYING IN THE US

Unlike the Indian Finance Minister, Yashwant Sinha-who has maintained that sanctions will not impact India-his Pakistani counterpart, Sartaz Aziz, has said they would. Consequently, Pakistan froze all foreign exchange accounts, and announced austerity measures after its first series of nuclear tests on May 28, 1998. Unlike India, Pakistan is being helped by friendly Islamic countries like Saudi Arabia, which have provided it with concessional loans of $2 billion. And, unlike Sinha, Aziz used the budget to counter the sanctions. Aziz's three-pronged self-reliant strategy was similar to India's: increasing inflows from non-resident Pakistanis, giving a boost to the agricultural sector, and offering sops to small business. But the lynchpin of Pakistan's strategy has been the manner in which it has wooed the US to lift sanctions on agricultural credit, and urged it not to oppose loans from the International Monetary Fund. And it has worked.