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Economics of Indo-US Nuclear Deal

Laxman Kumar Behera was Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • January 18, 2007

    With President Bush signing the India-US nuclear co-operation bill into law, critics and supporters of the bill have once again reinforced their stated positions over the future benefits and losses accruing to both countries as well as the world at large. While supporters have left no stone unturned in emphasising upon the strategic, bilateral and political importance of the bill, critics have flatly described it as an 'historical mistake' which will hound efforts to curb nuclear proliferation in years to come. With the law coming into force, one aspect that is clearly missing, rather is not being emphasised, is the economic rationale behind the deal. In a fast globalising world where business interests are shaping strategic relations, the India-specific waiver cannot be looked into without taking the economic factor into account. It is business and commercial interests that are transforming two hitherto "nuclear-unfriendly" nations into strategic partners.

    The economic connotation of the bill lies in the bilateral economic relations between the two countries on the one hand and future economic opportunity on the other. The interplay of the two economies in terms of trade and commerce has been a strategic factor in the overall improvement in bilateral relations. From a mere US$5.6 billion in 1990, total bilateral trade has gone up by 378 per cent to $26.76 billion in 2005, representing nearly 10 per cent of India's total trade. In the post-liberalisation period India has been a favourite hunting ground for US investors. Towards the end of 2004, the US became the largest source for India with respect to FDI approvals, actual inflows and portfolio investment. As of September 2004, total cumulative FDI inflow from the US totalled $4.1 billion, or 10 per cent of total FDI inflow to India. In the same period total cumulative foreign institutional investments (FII) from the US constituted 40 per cent of all FII into India. Similarly, in the other direction, Indian investors have invested heavily in the US economy. For example, Indian companies have invested to the tune of $2.0 billion in the US, accounting for nearly 20 per cent of India's total overseas investment.

    Despite significant improvement in economic ties, the actual potential for bilateral trade and commerce between India and the US is not fully harnessed as many highly lucrative sectors like space, defence, pharmaceuticals, energy, and biotechnology remain untapped because of the absence of a favourable political index, which has prevented greater movement of capital.

    At present the US is the largest economy in the world with a GDP of $12.5 trillion; India's GDP is only $785 billion. While the International Monetary Fund (IMF) projects a slow economic growth rate of 2.9 per cent for the US economy during 2007, it has predicted a robust growth rate of 7.3 per cent for India, making it one of the fastest growing economies of the world. However, according to the latest Central Statistical Organisation (CSO) estimate, the Indian economy grew by 9.1 per cent in the first half of this fiscal year (April-September 2006) and is all set to close out the year at 9 per cent, the highest since 1996-97. It is also believed that the Indian economy has the potential to grow by at least 7-8 per cent in the next decade. This tremendous Indian growth story is coupled with burgeoning foreign exchange reserves and increased amounts of foreign investment flows to India, the latter being determined by the lucrative returns generated in the host country.

    India's growing economic profile with a liberalised economic face means greater opportunities to overseas business entities, which aim to attain greater returns on investment and demand more liberalised procedures. Any constraint imposed by the host country is considered detrimental to the basic concept of free market economy and free-flow of capital. Also, it is in the interests of capital to move to and operate in that part of the global economy where the right business potential exists. It is in this context that India provides a right place to do business and justifies creating a favourable political atmosphere.

    Realising India's economic potential and the shared benefits of economic co-operation, both India and the US have moved economically closer, putting in place various mechanisms that work at government-to-government and business-to-business (B2B) levels. However, it is the B2B interaction that has played the greater role in the successful conclusion of the Indo-US nuclear deal. Earlier, greater economic interplay was handicapped by the question of India's nuclear status. Despite the denial regime led by the US, India achieved significant growth rates and now it is widely regarded as an engine of world economy along with China. Given that the US economy is not moving in the direction that its policy makers wish it to do, economies like those of India and China provide investors greener pastures for investments. US policy makers cannot simply wish away this simple law, especially when they see a partner like India which is not only democratic but also a responsible nation in nuclear matters.

    The nuclear industry in the US has been going through a stagnant phase in recent years as evident from the fact that no new commercial nuclear reactor has come on line there in the last decade. Having one of the largest nuclear industries in the world, such stagnancy does not bode well in the business-oriented minds of US policy makers, and certainly not for the nuclear industry there. With the Henry Hyde Act permitting trade and commerce in nuclear technology and fuel with India, the US nuclear industry stands to gain substantially from the nascent but emerging Indian nuclear market, which was so far constrained by technological and fuel gaps. Moreover, the Indian Planning Commission in its Integrated Energy Policy has set a target to lift electricity generation capacity through nuclear means from a mere 3,000 MW at present to 63,000 MW in the next 25 years, which alone will require new plant investment of more than $100 billion. Sensing a lucrative market in India, the US nuclear lobby is widely believed to have acted behind the scenes for the smooth passage of the nuclear co-operation bill. Their interest in the Indian nuclear market can be seen from the overwhelming presence of US nuclear manufactures (50 out of a 250-member delegation) in the business delegation to India a few weeks ago - which happens to be the largest ever business delegation that India has ever hosted.

    Since the end of the Cold War, the US arms industry has been undergoing structural and financial reforms due to increased rationalisation of defence budget and dwindling global arms demand. The external arms market which accounted for a bulk of the US defence industry's commercial operations a decade ago has now come down significantly, placing added pressure on the need to find new markets to remain competitive. Here, India's growing shopping list of defence equipments fits well in the strategies of US defence industries, which see it as a long-term partner with credible purchasing power. It, therefore, made economic sense for companies like Boeing to make extra efforts in lobbying the US Congress for the smooth passage of the nuclear bill.

    India's growing economy with its liberalised face and the largest capitalist country in the world are natural partners for economic co-operation. Any obstacle in the path of this growing relationship is destined to evaporate considering the mutual benefits accruing to both countries. On the nuclear debate, if it is liberalisation and its fruits that dictated India to go nuclear and subsequently helped it withstand the impact of sanctions, it is the same economic forces that have acted in lifting the stigma. As the final curtain falls on the nuclear deal, it is time to ponder over who wins and who loses. It is clearly economics that has emerged victorious after eight long years of nuclear politics.