It’s economics, stupid

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The Indo-US nuclear deal may not be concluded during the current US administration.  In two months, the Bush administration will become a “lame-duck” in the run-up to the impending elections to the White House. The Indian government led by PM Manmohan Singh seems none-too-keen either to risk a general election over the deal. It is perhaps time to look beyond the deal that never was.

The US-India Civil Nuclear Co-operation Initiative, as it is called, has managed to iron out several issues that have caused annoyance to both New Delhi and Washington in the past. As the joint statements of July 2005 and March 2006 declared and the 123 Agreement of July 2007 undertook, India will identify its civilian and military nuclear establishments and bring the former under IAEA supervision for the first time since 1974; India further pledged to conform to the NPT and the CTBT without having to sign these. In return, the US will repeal all remaining sanctions against the Indian nuclear establishment, facilitate the exchange and transfer of nuclear technology, and will help India gain access to nuclear fuel from its accredited global suppliers, the Nuclear Suppliers Group.

Another dimension is that some US foreign policy experts see the deal’s ultimate benefit as securing India as a strategic ally in South Asia to create a regional counterpoise to China’s growing clout in the Indian Ocean region. One of the components of this containment strategy pertains to policing the high seas. China’s ventures of upgrading its ‘green-water navy’ (operating within territorial waters) into a ‘blue-water navy’ (capable of operating on high seas), its increasing presence in Africa and construction of a $1.16-billion port in Gwadar, Pakistan—all these factors are likely to increase Chinese capability of threat projection considerably in the Indian Ocean region. Tied down in the Persian Gulf, the US needs some allies taking over some of its responsibilities in the Indian Ocean region, and India is considered to be most suited for the purpose, given the size of its own ‘green-water navy’. It is, therefore, argued that the nuclear deal presages a relationship of considerable strategic depth, laying to rest the unpleasant memories of the Cold War era, characterised by US suspicion of, and opposition to, India’s nuclear programme. Bypassing the nuclear non-proliferation regime, the Indo-US nuclear deal is meant to signify US confidence in India’s capability to behave like a responsible nuclear power.

There is, however, an additional dimension that is frequently ignored by critics of the deal in India.  Since the liberalisation of Indian economy began in 1991, Indo-US economic relations have tended to grow quite fast. American FDI in India, for instance, grew from $11.3 million (7.87% of total FDI in India) in 1991 to as high as $736 million (16.09%) in 1997. This trend was disrupted by the nuclear tests at Pokhran in May 1998, which automatically invited US sanctions under the 1994 Nuclear Proliferation Prevention Act. As a result, US FDI almost halved to hover in the $360-390 million region, falling as low as $282.8 million in 2002. 

After some of the original sanctions were repealed by the Bush administration in 2001, this trend has somewhat reversed and strengthened after 2004, when President Bush and PM Vajpayee established Indo-US Strategic Partnership. In 2006, American FDI in India climbed back to $737 million, with cumulative US investment standing at $6.29 billion. The same year, the US-India Peaceful Atomic Cooperation Act (the Hyde Act), was passed by US Congress to allow direct civilian nuclear commerce with India for the first time in 30 years. It is not altogether unreasonable to argue that US investments in India increased, and economic ties improved, till the Pokhran tests. Thereupon, there was a thaw because of legal impediments for US business with India.  The efforts of Bush administration have reduced such impediments considerably, but some concerns about India’s nuclear establishment remain alive in the non-proliferation lobby in the US establishment.  The conclusion of the nuclear deal that the Bush administration proposed would allay most of such concerns, without compelling India to formally join the global non-proliferation regime. Thus, if the deal were to go through, India’s economic ties with the US could only improve further.

This is not to argue that if this deal falls through now, the next US administration might walk the other way. If there is a bipartisan position in the US establishment favouring better ties with India, a similar deal might be in the offing in the future as well. The terms of such a deal, however, are unlikely to be as generous as the 123 Agreement has offered. One can only hope that India would develop a consensus on better ties by then.