India Focus

S t r a t e g i c    A n a l y s i s    a n d    F o r e c a s t s

Special Report

May 1998


Politics    •    Business        Economy    •    Society        Culture    •    Diplomacy


India Goes Nuclear
Political, Diplomatic and Economic Implications

The 5 nuclear tests carried out by India on May 11 and 13 have triggered strong condemnation from Western nations, and economic sanctions from the USA and Japan. Many other countries, such as Canada, Sweden and Australia have cut back development aid, and have threatened more severe action unless India now signs the Comprehensive Test Ban Treaty (CTBT). INDIA FOCUS spoke to many high-level people within the BJP government, industry, diplomatic community, think tanks and media. We present our analysis and forecast of the likely fallout.

BJP has gained politically: Domestic public opinion is strongly in favour of India going nuclear, perhaps as high as 92 percent according to some opinion polls. The only segment of society which has voiced its opposition are the Communist parties and a few Left-aligned academics, intellectuals and writers. Till such time that economic sanctions do not have an impact, or unless the BJP regime draws India into another war with China (both are very unlikely) the BJP is likely to gain support among urban middle-class, youth, government employees, ex-servicemen (who number more than 10 million and are concentrated in North Indian states) and even farmers (who identify with "nationalistic" issues). Most political parties have been numbed into silence, and cannot go against popular opinion by criticizing the BJP. This problem is perhaps most acute for the Congress party and its Italian-born president, Sonia Gandhi: her foreign origin constrains her from saying anything which might be construed as being pro-West or anti-India. Some other implications:

  1. Prime Minister Vajpayee has become stronger vis--vis the RSS faction in the BJP. Also, BJP has become stronger vis--vis its allies, and has now taken charge of the government’s agenda for the next 6 months.
  2. Left parties are getting further isolated in Indian politics and are now, very ironically, on the same side of the debate as the USA. They are likely to lose support in local elections in West Bengal and in many university elections in the coming months.
  3. BJP will almost surely win local assembly elections in Delhi, MP and even Rajasthan, all of which are to be held by the end of the year. It is also likely that the BJP will try to exploit its growing popularity by calling early elections in Uttar Pradesh. The Yadav community in UP is numerically strong, has a large representation in the armed forces, and may now tilt towards the BJP rather than towards the Samajwadi Party. If the BJP wins in all these 4 states then it may very likely rule at the centre for its full 5-year term.

Senior US Officials Have Misread India: Domestic politics was certainly a factor in the decision by the BJP government to go nuclear, but not an over-riding factor as some US Senators and State Department officials believe. Due to a particular clause in the CTBT India only had till September 1999 to become a full nuclear weapons state, and any N-test after this date would have triggered UN sanctions (which would have been far worse than unilateral sanctions). A number of senior security and defense experts have been quietly and consistently telling successive Indian regimes to either forsake nuclear options totally (and this unacceptable in India) or to test the bomb now. As a matter of fact the planning for these N-tests was initiated during the earlier UF regime, well before the BJP came to power. Second, calling India a "poor country which hankers for false glory" goes down very poorly with most Indians, and only hardens anti-West and anti-US postures. Third, US legislators and the State Department also do not realize the extent of damage caused by Robin Raphael to India-US relations. Raphael, who was Assistant Secretary of State for South Asia in the first 4 years of the Clinton presidency, ruffled many feathers among Indian political leadership (especially the BJP) with her pro-Pakistan remarks and what many considered her insensitive and arrogant tone. But for her India may well have informally ‘committed’ itself to a test ban -- without actually signing the CTBT -- way back in 1995.

India is playing the "China card" to win support: Ever since the BJP regime came to power senior officials have been harping on the threat to India from China, rather than from Pakistan (which is its traditional enemy). The Defense Minister and the Chief of Army Staff have made frequent statements about the need for a "strategic deterrent capability to counter emerging nuclear and missile challenges to Indian security." This has meshed well with a rising anti-China mood among Republicans (the House of Representatives has voted to ban sale of missiles and satellites to China, and there are calls for President Clinton to cancel his China trip). House Speaker Newt Ginrich, Henry Kissinger, Senator Moynihan and Jimmy Carter are some of the leading public figures who have tacitly supported India, and there is growing commentary within US media that a nuclear India actually helps the US contain China. In separate polls conducted last week by CNN and TIME magazine India narrowly won out over China on the question: "Should the US support India or China in case of a confrontation between the two ?"

India has tacit support of ASEAN: Developing countries from SE Asia, Africa and Middle-East have either given no official reaction or at most have shown only mild concern over the Indian N-test, and even India’s other neighbours like Bangladesh and Sri Lanka have reacted very mutely. This is in contrast to the strong language and actions used by Western powers. ASEAN countries as a matter of fact secretly welcome a stronger India which can counter China -- the entire ASEAN region is preoccupied with economic recovery in the aftermath of the Asian currency crisis of 1997, and defense spending will be scaled down in the next few years -- and which can provide a balance of power in Asia. But they will be unwilling to publicly support India’s entry in APEC and ASEAN in future should China oppose it, which is now very likely.

China has been caught off gaurd, but may react later: India-China relations are now at their nadir since the two fought a war in 1962, specially after the disclosure of the letter sent by the Indian Prime Minister to heads of G-8 nations in which he mentioned Chinese nuclear & missile deployment as the main justification for the Indian N-test. China is currently distracted by the Indonesian crisis -- ethnic Chinese businessmen were the main target of attack, and many are now fleeing that country -- and is restraining itself from any precipitous action which might jeopardize President Clinton’s visit to China in July. But China may react to Indian N-test and accusations by increasing its support to separatists in Indian north-eastern states, which in turn will lead to more tension between the two countries. But having signed the CTBT, and mindful of the increasing anti-China mood within the US, China is going to be wary of raising the stakes too high.

Pakistan is caught in a fix: BJP may have cleverly put Pakistan in a no-win situation. The current Pakistan regime will be in political difficulty if it does not conduct a N-test soon, and in great economic difficulty if it does (similar American and Japanese sanctions which will hurt its economy much more than India). Senior Indian officials have publicly said that "Pakistan is a sovereign nation, and it has every right to conduct its own N-test in keeping with its security concerns," which is almost begging Pakistan to bite at this bait. In months to come New Delhi can be expected to (deliberately) raise the temperature between the two countries in order to provoke Pakistan into a nuclear race in which India knows it has an edge. Pakistan’s best option may actually be to appease hard-liners with promises of future N-test while extracting economic and military concessions from the USA, but subcontinental rivalry is so deep that it is unlikely that Pakistan will be able to restrain itself.

India has re-opened the debate on nuclear disarmament: The biggest problem for the US is not the threat of an arms race in South Asia, but the dilemma over how to treat India. India is now clearly a nuclear state, but explicitly awarding it this status is both difficult and awkward since it means reworking the 1968 Non-Proliferation Treaty. This will open a Pandora’s box, and other countries might well question the existence of any cut-off date in defining nuclear status. Many commentators on BBC and CNN have, while disapproving of the Indian N-test, actually sympathized with India over the "hypocrisy and double-standards" of previous agreements such as the CTBT and NPT. The recent meeting of foreign ministers of Non-Aligned countries also pointedly made no mention of Indian N-tests, but instead renewed demands for global disarmament. There will now be an increase in anti-nuclear activism in developed countries, and a push for complete nuclear disarmament rather than selective entry into the nuclear club.

Sanctions will have limited impact in short term: Sanctions by major Western powers do not directly affect trade, foreign investment, portfolio investment, or other private sector deals. As things stand now the real impact will be felt in the following ways: aid to Indian NGOs will be cut, dollar loans to Indian firms will become more expensive, financial closure of infrastructure projects will be delayed, foreign business delegations will be postponed, Indian currency may weaken slightly, and stock markets will stay nervous. The most potential damage will be in power projects, and to US companies: almost 40 percent of IPPs and EPCs are from the US, and a large part of their business in India is financed/insured by the US EXIM Bank or OPIC. None of this will have any significant impact in the short term, but if this problem continues beyond 18 months then the stakes will very likely go up, and against India. Foreign investors will start withdrawing, World Bank loans will dry up, and India’s overall credit rating and investor confidence will decline. Also, having gone nuclear and in the process becoming even more isolated in the world, India can no longer afford to annoy MNCs by going against international commitments on IPR laws, import liberalization etc. So, unwittingly, the BJP regime may have pushed India towards faster economic reforms.

Crisis may be diminishing: There are signs that international condemnation of India, and Indian isolation in the world, may already be lessening. France, UK and Russia have refused to go along with US sanctions, US companies have begun lobbying with the Clinton administration not to impose new (and harsh) measures against India, Western nations such as Denmark and Netherlands have quietly told their companies to continue investing in India, Japan has softened its reaction in recent days (it has sent back to India its Ambassador whom it had recalled in the immediate aftermath of the test, and has said that private Japanese investment to India will not be affected by sanctions), the Indonesian crisis has pushed the Indian N-test from front pages of newspapers (besides highlighting the economic importance of India for foreign businesses), and a resurgence of anti-China mood in US politics has taken away some momentum from US outrage towards India. The BJP government has also started a (belated) damage-control exercise on two fronts: 1) expressing its willingness to discuss signing CTBT, and 2) speedily clearing many (previously moribund) foreign investment proposals in ports, power and hydrocarbon sectors. If India does accept the CTBT -- and it increasingly appears likely that it will even though the actual process will not be easy -- then it would be a personal triumph for President Bill Clinton who is very keen to end his 8-year presidency with the CTBT in place. Economic sanctions against India would then be lifted, or exist only in a theoretical sense. The crucial period to watch is between July-August, that is after the Indian budget and Clinton’s visit to China and before the end of the monsoon session of Parliament (BJP will want parliamentary approval before accepting CTBT). President Clinton will visit India only if the BJP regime promises to sign CTBT, else not.

Overall Assessment

The BJP regime took a high-stakes gamble, and it increasingly looks as though the gamble has paid off. Western powers have realized that it may be counter productive for them to react to India’s nuclear explosion with rigorous sanctions or cancellation of World Bank loans since that may force India to become even more confrontationist. India will escape with minimal damage, at least economically, as long as it adopts a sober & serious dialogue with Western powers. However, India is also unlikely to be invited to join APEC, ASEAN or UN Security Council. With a boost to the moderate wing of the BJP, and the growing isolation of Left parties, the overall political risk for foreign investors will improve in the medium to long term, and India may open up more areas of its economy to foreign investors.


India Focus

E 10/9 (2nd Floor), Vasant Vihar, New Delhi 110 057, India

Tel: +91-11-6151801    Fax: +91-11-6152219    Email: indiafocus@vsnl.com

India Focus is a private-circulation report for senior international executives, bankers and diplomats, and is issued six times a year. Reproduction in any form is strictly prohibited. It is published by Business Foundations, a political risk consultancy which advises foreign investors on political scenarios, business trends, social changes, economic outlook, investment conditions and other high-level issues which may affect Indian business plans and strategy. To subscribe to India Focus or to know more about us, contact us via phone, fax or email. Or else, visit us at our website:

www.indiastrategy.com


Home Page What is India Focus?
Indian Business & Political Consultancy View Some Past Issues
Why Political Risk? Subscribe
Staff Profile Order Complimentary Report
Client Testimonials & Press Reviews Contact Us