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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

SANCTIONS CUT BOTH WAYS

They will hurt India - but also U.S. giants

By Arjuna Ranawana / New Delhi


WHEN PRIME MINISTER ATAL Behari Vajpayee gave secret orders on April 11 for India to test its nuclear weapons, he made sure his finance minister was among the first to know. Yashwant Sinha was due in Washington the following week. On his return, Sinha quietly ordered all ministries to prepare papers on the effect of American economic sanctions. As Indian officials tell it, the conclusion was that the impact would be minimal. They estimated the potential losses in aid and soft loans at just $8 billion a year. "What we will lose is only about 10% of our inputs," says a Finance Ministry official, who points out that the country can still tap $72 billion in domestic savings.

The Americans quote a much higher figure - $20.7 billion. "India has made a fairly expensive decision," says U.S. national security adviser Samuel Berger. The sanctions Washington imposed after India exploded atomic bombs May 11 and May 13 include the termination of all non-humanitarian aid and loans, credit guarantees and military financing. In addition, the U.S. will oppose borrowings by India from the World Bank and other institutions. Japan, Germany, Canada, Sweden, Australia and New Zealand have also halted development aid. But no other nation has joined them. While the G-8 meeting of industrialized countries last week condemned the tests, Britain and France said sanctions will achieve nothing.

Can India cope? The answer depends on how long the sanctions are maintained and how well Vajpayee's government manages the economy. "India's economic fundamentals were worsening long before the nuclear devices were tested," says Arjuna Mahendran, South Asia economist for SG Securities Asia. Economic growth is expected to slow to 5% or 5.5% in the current financial year, from 6.9% in 1997-98. The trade gap is touching $7 billion and tax revenues so far are $312 million short of the target. Those numbers could get worse if foreign investment dries up and if the strong rupee continues to hold back exports.

In the short term, the sanctions are not likely to hurt too much. India cannot fully utilize aid money anyway - it has yet to allocate matching funds for nearly $4 billion promised last year by donor nations in a pledging session coordinated by the World Bank. "The economic impact of the sanctions has been overblown," says Kamal Sen, an economist with Merrill Lynch in Bombay. "European governments are unlikely to take the American view, and that means World Bank and Asian Development Bank disbursements will be untouched." But the loss of Japanese aid will have serious repercussions in the long run. Japan gave India $68 billion in the past seven years. The Japanese have now decided against hosting or participating in this year's pledging session of donor countries, originally scheduled to be held in Tokyo June 30.

The U.S. ban on guarantees and other government incentives will have a more immediate impact. But that can cut both ways. Boeing is eyeing a $2.8-billion contract to supply state-owned Air India with 10 jets. Europe's Airbus Industrie is also bidding. "If the U.S. government withdraws counter-guarantees for Boeing, then India will have no option but to buy Airbus aircraft," says Joseph Thachil of the Federation of Indian Chambers of Commerce and Industry. Adds a Finance Ministry senior official: "The Big Eight economies are divided, and that is in our favor. We can change our sources of finance and technology if and when it suits us."

U.S. banks are also prohibited from lending to the Indian government, though a ruling has yet to be issued on whether this covers investments in state bonds and other instruments. That could affect earnings at institutions like Citibank, a major financing source for New Delhi's purchases of U.S. goods. India is counting on U.S. corporations to put pressure on Washington to lift the sanctions. In a tactical move, Vajpayee ordered officials to speed up the approval process for American investors. Five U.S. prospectors, among them Oakland Oil and Samson International, have just been granted oil-exploration contracts. Phelps Dodge has also won a mining concession.

Even before the nuclear tests, India's economic managers faced tough choices. Mahendran expects the rupee to be devalued by up to 15%, though Sen says a much smaller fall, perhaps 5%, can help the country regain export competitiveness. "China realigned its currency in 1994 and that has hit India very hard," argues Mahendran. The rupee is not fully convertible, which explains why it slid only 2.3% - to a record low of 40.50 to the U.S. dollar - after sanctions were imposed. Higher taxes may be announced on June 1, when Sinha unveils his first budget. Says Thachil: "The finance minister can say there is a national catastrophe." Clearly, India's nuclear decision was well thought out.

- With reporting by Assif Shameen

Prices reported in Asiaweek are in U.S. Dollars unless otherwise specified.


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