India Blase About Potential Impact Of US Sanctions

Government says economic clampdown from last month's nuclear tests won't rock economy.

Standing at one of the limousine counters at the New Delhi airport the other night, a newly arrived passenger tried one last gambit to get a lower price for the ride into town. "Oh come on," he implored the attendant, "now that our country has the bomb, can't you do a little better than that?"

But the woman didn't budge. In the new, nuclear-armed India, having the bomb changes everything - and changes very little - at the same time.

On June 1, Finance Minister Yashwant Sinha stood up in the wood-paneled lower house of parliament and told his colleagues that last month's nuclear tests indicated that "a new India is rising." Then he read his annual budget message, which manifested only the slightest concern over sanctions that the US and Japan, the world's two biggest economies, are preparing to clamp upon this country and its neighbor, Pakistan.

The attitude of India's government, led by the nationalist Bharatiya Janata Party (BJP), is that sanctions are, at worst, a surmountable obstacle. "There seems to a total indifference to [the impact of sanctions], as far as the budget is concerned," says Rajendra Pachauri, an economist who heads the Tata Energy Research Institute here.

He and other analysts believe this approach is overly optimistic. They say sanctions and concerns raised by the nuclear standoff will hinder the upgrading of India's infrastructure, deter foreign investment needed to invigorate the economy, and force cutbacks in education, health care, and other social causes.

"I don't think this budget acknowledges the reality of sanctions and the fact that foreign direct investment ... could dry up," says Ajit Dayal, managing director for India of a Florida-based fund management firm, Hansberger Global Investors. India has only received about $3 billion in such investment, a fraction of what foreign companies have spent in China, but analysts say outside money is a key source of funding on infrastructure - the antiquated phone, road, and energy systems that slow economic growth generally.

The World Bank said late last month that it would postpone loans to India worth nearly $900 million, funds intended for energy and highway projects.

The sweeping sanctions law President Clinton invoked after India's tests requires the US to try to block similar funding, as well as halting official support for arms sales and other types of trade with India.

Even though European nations haven't said they will pursue sanctions as a group, the opposition of the US and Japan will likely be enough to stop future funding from the Bank and other multilateral institutions. The pipeline won't be shut off immediately, but it will dry up over time.

Mr. Dayal isn't worried about the sanctions themselves, but says the uncertainties posed by the nuclear standoff will discourage foreign companies generally.

The economic policy outlined in the budget message was mixed. Mr. Sinha spoke of reform and economic opening, but the details said otherwise. The government said it would make it easier for Indians who live abroad to invest here, rather than taking concrete measures to invite more foreigners. The government will also add an 8 percent customs duty on imports in order to shield Indian companies from outside competitors. The Economic Times, the country's leading business daily, called the budget a "retreat from the world."

The policies of the governing party, the BJP, come at a sensitive time for India's economy. Since the early 1990s, Indians have been trying to move away from a notoriously inefficient centrally planned economy in favor of a more globalized and free-market system.

The new strategy has produced impressive growth rates that have slowed in recent years, and many businesses and reform-minded economists want the changes to continue. The problem is that part of the BJP's appeal rests in what it calls swadeshi economics, meaning an emphasis on self-reliance and a resistance to too much foreign participation in the economy.

One bright note, says Pachauri, was that spending on defense and nuclear-related research wasn't increased as much as it might have been. The hikes "were fairly modest," he says, way too little to fund the costly project of turning nuclear bombs into weapons systems.

Should India and Pakistan go down that road, the economic impact will be grave. "Then you're getting into a spiral that really impoverishes both countries," he warns.