On sanctions and being sanctimonious

Print edition : June 06, 1998

For all the nationalist rhetoric of the BJP in the post-Pokhran-II milieu, the economic actions of its Government have only increased the country's dependence and vulnerability to international large capital.

ARMS races are always, and at best, ridiculous. At worst, they not only reflect appalling expenditure choices, but also represent real threats to the security and life of citizens in the country concerned. The argument that anything that causes or accentuates an arms race is necessary for national security is therefore not just spurious but dangerous, since it actually involves the greater risk of all. This is generally true, but most obviously so for a nuclear arms race.

There are several aspects of the current nuclear competition in the Indian subcontinent which make it especially ridiculous. The first is the macho muscle-flexing on both sides, with announcements by representatives of governments of both India and Pakistan that they have the capacity to make bigger and even more destructive bombs, much as small boys compete about the size and power of their toys. The second is the apparent lack of awareness - certainly on the part of the more bellicose BJP spokesmen - that a nuclear war is one war that simply cannot be won, and therefore cannot even be considered. The third, of course, is that attention in India and Pakistan is sought to be deflected to this wasteful and injurious military escalation, at a time when both countries are suffering from very severe and potentially critical economic problems. And finally, it is ridiculous to note the sanctimonious official postures on either side, in reaction to the other's nuclear tests.

Thus we find that, just as the Pakistani press played up the international condemnation and imposition of sanctions on India after the Pokhran blasts, so too Indian media and officialdom have gloated over the big powers' negative reaction to the retaliatory Pakistani explosions. Indeed, the one-upmanship has gone even further, with claims that while the Indian economy will hardly be affected by the sanctions announced so far, the Pakistani economy is likely to land up in a major crisis in consequence.

The sheer hypocrisy of the countries imposing the sanctions, most particularly the United States (which has led the world in the nuclear arms race, has actually dropped these lethal weapons on another country, and retains by far the largest arsenal of nuclear weaponry in the world, yet presumes to judge and punish others), is even presented as being less obvious now that Pakistan rather than India is at the receiving end of the U.S. flak. It is difficult to imagine or justify the extent of self-delusion implicit in such statements. It is certainly true that Pakistan's economy, which is already in a very fragile state, is likely to be severely hit by sanctions that are similar in nature to those announced against India. It is also the case that the economic sanctions against India in themselves imply only limited penalties in terms of foregone aid or loans, and that alternatives to these may be found at some additional cost. But it is definitely not the case that these sanctions will not affect the economy much, or that their impact will be limited to the specific areas in which they have been imposed. In fact, their real effect may be much broader and more painful, if they succeed in reducing international investor confidence in a government that is desperate to attract foreign investment.

CONSIDER first the sanctions that have been announced. The United States, Japan and certain European countries (other than the United Kingdom and France) have announced suspension of bilateral aid. Such aid, as promised in the course of the last meeting of the Aid India Consortium, amounted to about $3 billion, and a similar amount was expected this year. However, this year's meeting, which was scheduled to be held in Tokyo in June, has been suspended because Japan has refused to play host following the blasts, and no other country has been willing to host this either. Japan is India's largest bilateral donor, with annual commitments exceeding $1.5 billion.

The immediate impact is likely to be a cutback of around $1 billion in Japanese bilateral aid, but this sting will be somewhat muted because it will apply only to future aid proposals, and is unlikely to affect aid that has already been cleared for this year. European and Australian bilateral aid is so limited that its suspension will hardly be noticed. The important player here, of course, is the U.S., and the sanctions imposed by the U.S. Government are really what are seen to matter. Under the provisions of a 1994 law, the U.S. Government is bound to impose economic sanctions on any country indulging in nuclear testing. These include suspension of bilateral aid, a halt to credit and loan guarantees for U.S. firms doing business in that country, moving for the suspension of finance from the multilateral credit agencies like the World Bank and the International Monetary Fund, to that country, and so on.

The bilateral aid component is not that large at less than $1 billion, but its impact will be sharply felt in certain sectors and activities that were disproportionately large recipients of such aid, especially in some health and educational activities. The effect on multilateral financing is more significant. Already the World Bank has announced that it is postponing the decision on approving more than $800 million of project aid for the coming year. This is not a final decision on these loans; that requires a majority of the World Bank's Board of Directors to approve, and it is not clear whether this would be forthcoming, especially since the European Union has already expressed its reservations on the matter. Even if such a denial were approved, annual World Bank loans to India account for less than half of one per cent of India's gross domestic product (GDP). Still, it remains likely that the U.S. will use its substantial clout in the World Bank and the IMF at the very least to postpone loans to India in the coming year. And, if the balance of trade continues to deteriorate as it has done, such delays may become a source of substantial concern for India.

The most substantive part of the U.S. sanctions against India - at least in quantitative terms - relates to the closure of credit lines for companies dealing with or in India. The bulk of such credit is directed through the Eximbank of the U.S. and the Overseas Private Investment Corporation (OPIC). These sanctions will hit private U.S. interests also. The Eximbank provides export credit for Indian importers of U.S. products, as well as loan guarantees for U.S. manufacturers, and about $500 million of loans and guarantees are currently awaiting approval. Indian importers could simply shift their demand for some products elsewhere, notably to Europe. Similarly, OPIC essentially finances and insures foreign investment, and the bulk of the foreign direct investment (FDI) from the U.S., including in infrastructure sectors, will be affected by this. The fast-track power projects that have just been counter-guaranteed by the BJP Government will certainly have to delay their plans as a result, and a total OPIC insurance and finance amounting to more than $10 billion may be negatively affected.

But the real threat in the sanctions lies not in the official flows, so much as in reducing private capital flows. This can happen both because of U.S. pressure and because of the effect such sanctions have on investor expectations. Thus, the international credit agency, Standard and Poor downgraded its outlook on India's credit rating on May 25, in its first review after the Pokhran tests. This immediately had a depressing effect on domestic stock markets and on the foreign currency market. The rupee plummeted to a historic low on the first day of trading thereafter, and has continued to slide, albeit less precipitately, since then. The current volatility in the market is strongly related to the insecurities brought on by the sub-continental arms race, and the associated international sanctions.

IT is interesting that for all the loudmouthed bullying the BJP Government can manage on the nuclear/security front, it has been unable to engage in any meaningful nationalism in relation to international capital markets. Rather, its economic actions have been precisely in the opposite direction, increasing dependence and vulnerability to international large capital.

Thus, the week after the bomb was marked by a desperate flurry of moves designed to bring smiles on the faces of sulking international investors.

The wooing of multinational companies began with the granting of 18 oil exploration contracts, 11 of them to U.S. companies. It continued with the granting of 34 exploration licences for onshore minerals, and once again most of the beneficiary companies were American. It intensified with the decision to provide counter-guarantees to three power projects of multinational companies in as many states. The Budget and future policy pronouncements are likely to contain further inducements: one such proposed measure is to allow 100 per cent foreign ownership of the equity of housing companies, rather than the current ceiling of 40 per cent.

All these blandishments may prove to be ineffective, however, not just because of sanctions, but because of the security threat created by the competitive nuclear testing. Thanks to the belligerence and irresponsible military adventurism of the BJP Government, which has brought forth an equally aggressive response from the Pakistani regime, the Indian subcontinent is currently the most volatile region in the world in terms of a potential flare-up. What is worse is that the statements of either side suggest that both governments could contemplate the unimaginable - a nuclear war. This is hardly a very safe or promising destination for international capital, which is fickle and demanding at the best of times.

Therefore neither Government should be surprised if their warlike positions are sufficient to negate their slavish offering of incentives to foreign capital.

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