Global Economics

India-U.S. Nuclear Deal Is in Sight


Prime Minister Manmohan Singh survives a no-confidence vote inside a raucous Parliament, paving the way for a nuclear pact with the U.S.

The Indian government won a vote of confidence July 22, with 275 members of Parliament voting to support the coalition of Prime Minister Manmohan Singh, vs. 256 who voted against. The victory opens the way for India to ratify a long-delayed nuclear accord with the U.S.

It was a hot, rumor-filled day in New Delhi as members of Parliament gathered for a vote of confidence tied to the controversial nuclear power deal with the U.S. Arriving at the Lok Sabha, the lower house of Parliament, deal advocate Singh flashed a victory sign as he was mobbed by journalists. With the government's survival likely coming down to just a few votes, ambulances carried ailing parliamentarians to stretchers and wheelchairs that were waiting to take them inside. Three members of Parliament even showed up with suitcases stuffed with $750,000 in cash that they claimed was bribe money offered to them to abstain rather than voting no.

Inside, critics of the nuclear deal, including Communist Party members who only recently left the ruling coalition over their opposition to the pact (BusinessWeek.com, 7/18/08), tried to shout down pro-government speakers. Among those they heckled was Finance Minister Palaniappan Chidambaram, who tried to cast the nuclear deal as not only important for India's economic expansion but also as a way to keep pace with the country's longtime rival to the north. "I don't want to be envious of China," he told Parliament over shouts of derision from opponents. Amid the pandemonium, lawmakers delayed voting by two and a half hours.

Investors Bet on the Deal

It was all too much for the monkeys and langurs that usually run amok near the Parliament and its administrative annexes. Frightened by all the commotion, the animals retreated into the bushes in the garden surrounding Parliament. But by 8 p.m. Delhi time it was safe for them to come back. The results were in: The government won by 19 votes, even though Singh was forced to table his speech when protesting members of Parliament would not allow him to speak before the vote. The Speaker of the House also indicated there would be a formal investigation into the allegations of bribery, which appear to involve a sting operation by a private television channel. Betting that the deal would squeak through, investors had already sent the Mumbai stock index up 1.8%.

The Indian government now plans to move rapidly through the last few steps required for the nuclear deal to be presented to the U.S. Congress for approval. India's chief negotiator for the deal, RB Grover, is already in Vienna with the draft proposal, and said in an interview last week that he will meet with representatives of the International Atomic Energy Agency to thrash out the fine print. Next come meetings with the Nuclear Supplier Group, an informal grouping of 45 countries that promotes guidelines for export of nuclear-related products. Then the ball is in the U.S. court. "We'll do all we can to move forward with it once we hear from the Indians," U.S. State Dept. spokesman Gonzalo Gallegos told the Press Trust of India in a briefing in Washington.

Even though the United Progressive Alliance government survived what could have been a fatal blow, it remains unclear whether Singh's coalition has the ability to steer the country in a different economic direction. Some economic reforms will become a possibility now that the government has shed its communist allies, says Omkar Goswami, a former chief economist of the Confederation of Indian Industries and chairman of the Corporate & Economic Research Group.

Nuclear Furor Could Weaken Singh

The Communists, for instance, had opposed moves to promote privatization of state companies or to allow greater foreign investment. Now the government "can certainly open things on foreign direct investment," Goswami says. "They can make some movement on things that don't require parliamentary (support), like disinvestment of public-sector companies." Moreover, he says India could consider pushing through other reforms in the banking and insurance sector that are mostly regulatory and can be decided at the cabinet level.

Not everyone is convinced that with nine months to go before elections, Singh will be able to push through reforms. There's a feeling that the Prime Minister will emerge as a weaker leader after the partisan rancor over the nuclear deal. "The government will be engaged in populist measures and handing out doles to allies. So where is the room for reforms?" asks Brahma Chellaney, a member of the Policy Advisory Group in New Delhi. He believes the government couldn't push reforms in the past four years, and won't do so in the next few months.

Economist Surjit Bhalla believes that a new period of reform might just follow the nuclear vote, though. These reforms include raising the amount permissible for foreign direct investment, disinvestment from state-owned companies, or even opening the pension funds market.

Inflation Still the Main Issue

But the biggest focus will be on inflation, which crossed an annual rate of 11% last month, and reduced support for the government, which faces regular state elections later this year and a general election early next year. "They will actually be doing everything possible, whichever way they can and pray in every which way possible that inflation comes back down to single digits," says Goswami. Those moves could include interest-rate hikes by the central bank and increased import of grain for the public distribution system.

Srivastava reports for BusinessWeek from New Delhi. Lakshman covers India business for BusinessWeek.

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