Businessweek Archives

India: And Now For The Fallout


International Business: INDIA

INDIA: AND NOW FOR THE FALLOUT

Its nuclear tests may bring more trouble than it bargained for

If India was after attention, it got it. But if it was after respect, it may have failed miserably. Shocking the world with a series of nuclear tests beginning on May 11, India seemed to be trying to propel itself into the ranks of the nuclear powers. Instead, it found itself a pariah as the U.S. imposed sanctions and Japan cut off development aid to New Delhi's two-month-old government. Indian Prime Minister Atal Bihari Vajpayee may have given nationalists reason to cheer with its bold move to elevate itself onto the world stage. But India now faces grave consequences.

The implications for India's economy and the U.S. companies that do business there are already starting to pile up. The U.S. sanctions, if implemented in concert with other nations, could reduce India's $350 billion gross domestic product by 2%--a considerable figure for a developing nation struggling to attract foreign investment. With much of Asia reeling from financial crisis this year, India was in an excellent position to be a safe haven. Now, investors unable to secure financing for new projects will join the capital flight out of Asia. "It's a lost opportunity," says Guonan Ma of Salomon Smith Barney in Hong Kong.BIG BITE. At the same time, India has shifted the delicate balance of Asian politics. India is trying to pose itself as a nuclear counterweight to China while casting China as a potential enemy. And India's atomic tests have upset the world's already precarious nuclear containment policy. Even though India says it now intends to sign a nuclear test ban agreement, President Clinton's ballyhooed visit to India in November is in question. And Clinton will now seek a unified approach among members of the G-8 during the summit in Birmingham, England, on May 15-17. Germany and Japan have already indicated support.

The duration of the sanctions, effective as of May 13, will determine how severe the impact will be. They can only be lifted by a vote in the U.S. Congress. "If this is a permanent cut of 2% of India's GDP forever, it's very serious," says Joydeep Mukherji of Standard & Poor's. "If it's six months to a year, the impact will be smaller." Under sanctions, the U.S. is required to halt about $1 billion a year worth of Export-Import Bank and Overseas Private Investment Corp. (OPIC) loans, as well as U.S. bank loans to the Indian government. Companies such as General Electric, Bechtel, and Enron will be unable to find the cheap loans on which their Indian ventures depend. Enron, for example, financed 25% of the first half of a $2.5 billion power plant in Maharashtra state with such loans. But funds to complete it are now in jeopardy. While other sources of financing are available outside the U.S., they carry interest rates about 2% to 3% higher.

Even though foreign direct investment in India is quite small, accounting for less than 1% of its GDP, India has been trying to catch up with China as a destination for international capital. It attracted just $3 billion in 1997--nearly a third of it from the U.S.--compared with China's $43 billion. Now, it will fall even further behind. "The risk premium of India has just gone up," says Sunny Oberoi of Capital International, India.

In addition, the sanctions demand the U.S. vote against approval of new World Bank loans. Nearly $2 billion worth are still pending this year, and another $6 billion are planned over the next two years. The halted loans would go primarily to building power and highway projects, and agricultural and health-care projects would be spared.

Japan and some European nations have already taken a hard line. Japan, for example, has canceled low-interest aid loans and other development assistance. Such aid totaled $1.2 billion last year. It also canceled an annual donors conference scheduled for Tokyo on June 30 that was expected to generate about $4 billion in aid pledges.PRESSING CONCERN. India's Hindu nationalists gave hints of this kind of belligerence before, but no one expected that they would go so far. The Bharatiya Janata Party (BJP), when it won elections and formed a coalition in March, made some noises about restarting a nuclear program. But the more pressing concern was that they would deter some foreign investment--in the consumer-products sector. Ironically, the BJP pledged to welcome foreign investors doing infrastructure projects--power plants, roads, and refineries. Now it is those very projects that are in jeopardy for lack of financing.

Investors are worried not just about sanctions but that military outlays might now increase India's government spending. The deficit is already about 5.5% of GDP, higher than economists say India can afford if it wants to keep growing. Moreover, if the government must now take on the burden of financing infrastructure projects, it will also raise expenditures. Already, the country's growth has slowed to less than 5%, well below the government's target of 8%.

There is another concern. If India loses these crucial bank loans, it will still have to pay some $6 billion to service its foreign debt this year. So the government must not only cut spending but increase exports to come up with the needed foreign exchange. If it is unable to meet its obligations, capital flight could quickly destabilize the country. And sanctions would pull away the International Monetary Fund safety net.

It's possible that the sanctions could be temporary, that the BJP could pledge to sign the Comprehensive Test Ban Treaty and that investment could pick up again. But this is an important test case for President Clinton and the future of nuclear nonproliferation. If other countries, including Pakistan, see India getting off lightly, the consequences could really be serious.By Sheri Prasso in New York and Manjeet Kripalani in Bombay, Stan Crock and Paul Magnusson in Washington, and bureau reportsReturn to top


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus