Progress and Challenges Related to the Indo-US Civil Nuclear Deal

Dr Vijay K. Sazawal

Introduction

This paper seeks to address factors that led to the Indo-US civil nuclear deal, initial expectations, how those expectations evolved over time, policy drivers that keep the two parties from reaching a rapid closure on the issue, and what it will take to make this deal a success.

Background

The subject of granting “various rights and privileges available to signatories of the Nuclear Non-Proliferation Treaty (NPT) even though India would remain a non signatory” has come up in bilateral discussions between the U.S. and India ever since the U.S. lifted partial sanctions that were imposed following Indian nuclear tests in May 1998. In fact, a “non-paper” on the subject was passed by Jaswant Singh to his interlocutor Strobe Talbot during a meeting in London following the re-election of the NDA Government led by Vajpayee in 1999. Nothing came of it then as Democrats in charge of the U.S. government knew that it would be nearly impossible for them to deliver a deal that very few, if any, in their party would support. Furthermore, Mr. Talbot and his colleagues believed that if India was given such privileges so should Pakistan as the rivalry between the two would otherwise intensify to the detriment of regional security.

The subject resurfaced during the Bush Administration that followed Mr. Clinton in 2001. Mr. Robert Blackwill, who served as a foreign policy advisor to President Bush during the 2000 election campaign as a member of the “Vulcans” (foreign policy advisory group led by Dr. Condoleezza Rice, who subsequently became the National Security Advisor to the new President), was made the Ambassador to India. Ambassador Blackwill saw a strategic value in creating a special friendship between the U.S. and India, and knowing India’s desire to re-engage in nuclear commerce, strongly advocated support for such a deal. However, his resignation as the Ambassador in 2003, followed by the Indian election in 2004, put the deal on a relative backburner until Dr. Rice became the U.S. Secretary of State in 2005.

As much as the Indian Foreign Service officials and the then foreign minister, Mr. Natwar Singh, wanted to push for such a deal, the political leaders in New Delhi were not so sure. Dr. Rice made the nuclear deal the centerpiece of the U.S. effort to build a fundamentally different relationship with India, hoping it would lead to some bilateral nuclear commerce that would benefit American companies but she saw its importance mainly in creating a friendly environment for selling U.S. military hardware to India, the country being among the largest importer of arms in the world. Prime Minister Manmohan Singh and the Congress Party leader, Sonia Gandhi, however led a fractious group of diverse political parties – from communists to regional heavyweights – and both were unsure if the deal would be approved by the Indian Parliament. Within India’s nuclear and security community, many saw the deal as a game changer, while an equal number of policy experts saw it as constraining the Indian “Swadeshi 3-stage nuclear program” intended to exploit to energy value of India’s abundant thorium, or infringing on Indian sovereignty and national security. The deal was eventually signed during Prime Minister Singh’s visit to Washington on July 18, 2005.

When the U.S. Administration made the deal public, it raised a lot of hue and cry among the American politicians as well. In particular, Congressman Henry Hyde, the powerful Chairman of the House Foreign Affairs Committee, was incensed that the Bush administration will make such an exception for India. He called Dr. Rice to his chambers, and once the anger subsided, the Congressman asked how many jobs the deal would create in the U.S. nuclear industry as that information would be his rationale for seeking endorsement of the deal from fellow Congressmen in the Committee and in the full House. Dr. Rice, and her supporting team in the U.S. Department of State, had not assessed the value of deal beyond its strategic implications, and therefore did not have such information. The request was passed on to the U.S. Department of Energy (DOE), but no such data existed there either. In fact, outside of some classified data related to India’s weapons program, there was only sketchy information available about India’s nuclear power program among the scientific community in the U.S. Perhaps because India was under rigorous sanctions until then, no effort had been made to collect such data.

In February 2006, Mr. David Garman, the DOE Under Secretary, attended a meeting at the U.S. India Business Council (USIBC) in Washington where he asked if the U.S. industry had any data indicating how many jobs will be created by a possible nuclear deal with India. But the industry was equally ignorant, and I being the only nuclear specialist on the USIBC team was requested by Ron Somers, head of the USIBC, to prepare such a report.

India’s Nuclear Power Programme

I knew it was not going to be easy to explain the unique Indian nuclear power program and its future prospects to an audience unfamiliar with the rationale and progress of the nuclear program in India. The general expectation in the U.S. is that since India is a developing country with surging growth rates, it would require insatiable amounts of energy, including nuclear power, to meet growing demands in electricity. However, India’s nuclear power program is not geared to match immediate power needs of the country. India has an exquisitely planned 3-stage nuclear program which would result in nuclear contributing 25% or more electricity to the national electric grid by 2040 and beyond, utilizing indigenously designed and built nuclear reactors using India’s abundant thorium fuel supply. The overarching program is currently in stage 1 for power production (and deeply engaged in research and development of stages 2 & 3), which is contributing miniscule amounts of power, about 2.5% of the total electricity demand to the national grid, produced mainly from indigenously designed and built pressurized heavy water reactors (PHWR’s). Any near-term expansion of the stage-1 program would happen only if it technically supported the 3-stage program in order to ensure an optimum balance in fuel supply, reprocessed fuel, nuclear waste, and cost.

Indeed, technical experts in the Indian nuclear program had concluded by the mid-1990’s that eight (8) imported light water reactors (LWR’s) would be required during the stage 1 to supplement the planned construction of indigenous PHWR’s in order to generate sufficient spent fuel for reprocessing and subsequent use in fast reactors (stage 2) and thorium reactors (stage 3). Subsequently, the Union Cabinet approved purchase of eight imported reactors by the Department of Atomic Energy (DAE).

When I wrote the paper for the USIBC in February 2006, I made it clear that the Government of India had given clearance to DAE to enter into contracts for up to eight foreign reactors, two of which were already under construction at Kudankulam, two additional imported reactors were planned to be built at the same site, and India was in serious negotiations with the French to procure two reactors to be sited at Jaitapur. Since six out of the eight imported reactors were already accounted for, that left open the possibility that India could buy two reactors from the U.S.

My report caused great consternation among the corporate community in the U.S. who were expecting huge reactor orders from India. Numbers like $100 billion in projected reactor sales were being tossed around in the USIBC and my report was unceremoniously shelved.

However, my report did draw the attention of Dr. Rice, who found it perfect for the article she wrote to “sell” the U.S.-India deal to the U.S. public and the U.S. Congress. Writing an op-ed piece in the Washington Post on March 13, 2006, she stated that, “…. Third, our agreement is good for American jobs, because it opens the door to civilian nuclear trade and cooperation between our nations. India plans to import eight nuclear reactors by 2012. If U.S. companies win just two of those reactor contracts, it will mean thousands of new jobs for American workers.”

As much as Dr. Rice saw the future of the new bilateral relationship with India mostly in strategic terms tied to defence sales, intelligence sharing, and a balancing act against the Chinese, the U.S. nuclear vendors began to express their unhappiness at the deal and wanted India to purchase additional foreign reactors. This was the time when the U.S. Congress had to approve a measure to grant an exception to India in order for the two countries to sign the civil nuclear “123” Agreement. There was a great degree of diplomatic and commercial pressure put on India to “come through” on its pledges and commit to purchase of additional reactors since the U.S. was single-handedly helping India to re-enter the global civil nuclear commerce.

The relief came in terms of a new analysis completed by the DAE in the summer of 2008, which was made public at the IAEA General Conference in Vienna in September 2008. The new analysis indicated that without additional LWR imports, India will have a deficit of 412 GWe by 2050 even after all other fuel sources like coal, hydroelectric, renewables, hydrocarbons, etc. are accounted for. But if 40 GWe in LWR’s are imported immediately (by 2020), it would have a “multiplier effect” of providing sufficient reprocessed fuel for stages 2 and 3 of the nuclear program and would wipe out the entire deficit predicted without imports in 2050. It seemed more like an empirical analysis given that the country lacked capacity building to ensure such mammoth expansion of nuclear power in just 12 years, but it provided the logic for subsequent planning within DAE.

Based on the new DAE analysis, and following the exception granted to India by the Nuclear Suppliers Group (NSG) on September 6, 2008, the Indian government sent a letter to the U.S. government (at the urging of then U.S. Ambassador, David Mulford) on September 10, 2008, affirming following key points:

• India will offer two nuclear plant sites to American reactor vendors without any global tendering allowing them to build nuclear plants in India amounting to 10GWe or more, provided technical and commercial terms are acceptable to both parties and result in affordable power
• India will complete the separation of its civil and military nuclear programs as per the agreed schedule, and implement the India-specific Additional Protocol as agreed with the IAEA on August 1, 2008
• India will develop its nuclear liability regime consistent with the Convention on Supplementary Compensation (CSC) for nuclear damage

This letter, unfortunately, created unintended consequences.

American vendors, noting that India had committed to buy U.S. reactors without competition, reacted differently than what India’s nuclear operator, National Power Corporation (NPCIL) had hoped for. Neither of the two vendors paid attention to the requirement that the tariff generated from the plant had to meet specific guidelines of the Central Electricity Board. Indeed, it is for that very reason NPCIL has created a business model where the plant designer/technology provider enters into an open “teaming arrangement” (as against a “prime-subcontractor” relationship) with NPCIL to work jointly, allowing NPCIL to bring its experience in value engineering, reforming supply chain efficiencies, reducing contingencies with discrete fixed-cost subsystem packages, etc., to be incorporated in the foreign designed plant to be built in India. But one of the U.S. vendors insisted on using its own business model which gave NPCIL diminished capability to explore ways and means of streamlining hardware and management costs quoted by the vendor. The second nuclear vendor decided to market in India its first-of-a-kind reactor, contrary to the Indian practice of requiring a foreign plant be licensed by the home country’s nuclear regulator and be already constructed or in substantial stages of completion elsewhere before it can be built in India. I am not sure how such a plant will be judged for establishing a viable tariff regime.

On the other end, India failed to fully comprehend the overwhelming influence of litigation and legal judgments that shape American business decisions. The commitment to pursue the CSC liability regime was made, in my view, without a full understanding of American sensitivities. In hindsight, it would have been easier for India to have signed to the Vienna Convention as Indian lawmakers are familiar with a long-standing Indian association with the IAEA, and such an approval would have received Parliamentary approval with minimal review. CSC could have been considered at some later stage in the future. There are presently two global nuclear liability regimes supported by the IAEA. The European law (“Joint Protocol”) is inconsistent with the U.S. domestic liability law called the Price-Anderson Act, whereas the U.S. law is consistent with the CSC. The U.S. has initiated a large diplomatic offensive to sign countries without a liability law to the CSC, and its insistence on the CSC is not directed only at India.

India passed a historic civil nuclear liability law in 2010, and Rules for implementing the Act were published in 2011. The U.S. government and American vendors deemed the law unsatisfactory and have been seeking a change in the law. India contends that the law is consistent with the CSC since Article XII.2 of the CSC allows harmonization of the CSC with domestic laws under certain conditions. The Indian government has repeatedly stated that it is willing to work with U.S. vendors “to develop mutually acceptable solutions to this issue within the four corners of its domestic liability law.” There is currently an impasse in this matter, and continuing discussions between the two sides have failed to resolve this matter until now. Meanwhile, one of the two U.S. nuclear vendors still does not meet Indian statutory requirements to sell its proposed Generation III+ reactor in India.

Delays in reaching a closure on the liability issue is also affecting other contiguous issues dealing with Administrative Arrangements under the 123 Agreement, and on a related issue dealing with the determination by the National Nuclear Security Administration (NNSA) to place India in an authorization category for a case-by-case approval for nuclear “810” technology transfer to India. Experience with a scant few “810” technology transfer approvals for India indicates that the process is laborious and time consuming. Establishing even a limited design and hardware supply chain in India for U.S. nuclear vendors is mostly impossible at this time.

India has completed its obligations under the Separation Plan ahead of the December 2014 deadline, and ratified the IAEA India-specific Additional Protocol in June 2014.

There are, however, new perspectives evolving within the U.S. Government in regards to the liability issue. Recent thinking within the U.S. Government was mentioned by the Assistant U.S. Secretary of State for South Asian Affairs, in testimony in the U.S. Senate Foreign Affairs Committee on July 16, 2014 when she stated that, “While we have not yet had detailed discussions with the new government in New Delhi on the way forward on civil nuclear cooperation, we believe that there may be an opening to address nuclear liability issues either through a legal framework or through other frameworks that can help create more surety on what the application of liability might be, so that it is not unlimited liability as the companies are rightly concerned.”

While the primary U.S. reactor vendors are insistent on a legislative fix, a flexible approach such as proposed by the U.S. Department of State opens possibilities for other options especially for sub-tier suppliers who, based on a case-by-case risk-benefit analysis, may find non-legislatives fixes to the equally effective in ensuring proper indemnification for their products and services with a broader appeal to serve the growing Indian nuclear market in addition to primary American nuclear vendors. However, creation of a sound nuclear liability insurance program by India is absolutely important in that case.

Finally, nuclear power is capital intensive and hence very expensive. Some countries are reconsidering whether to buy nuclear reactors or look at alternatives. The low price of electricity (and in India the price is among the lowest) puts additional pressure on nuclear vendors to reshape their business models and marketing strategies to meet customer needs. The traditional American business model used by American utilities and reactor vendors cannot and will not serve new and developing markets overseas. The mantra of “affordable power” places a burden on both owner-operator and nuclear vendors to demonstrate their collective ability/plans to meet consumer expectations on tariff, because without a customer there is no sale – whether or not the vendor selection is made competitively or by invitation. India has an envious record of being among the three countries (along with South Korea and China) that can put up a domestic nuclear plant at a much lower than average global overnight construction price. It would be unwise for the U.S. nuclear vendors not to adjust their business model in India, and for the U.S. government not to create an India specific “810” technology transfer regime that will maximize the use of local manufacturing supply chain, intellectually bright manpower, and access to other quality resources.

In closing, I am reminded of the brief statement that the Prime Minister made during his maiden visit to the Bhabha Atomic Research Centre (BARC) on July 21, 2014, stating that “Growing international nuclear cooperation is a welcome development, provided such projects can be timely, meet techno-economic viability and safety standards, and such partnerships result in substantial technology transfer.” I believe the two sides can reach a satisfactory closure with a better understanding of the situation and by being flexible to accommodate each other’s redlines.

In the end, there is no reason why the Indo-U.S. nuclear deal cannot be a shining example of successful cooperation between the two great nations.

APPENDIX


Timeline - Indian Three Stage Civil Nuclear Program and the Indo-U.S. Nuclear Deal

Prime Minister’s visit to BARC on 21^st July:

• Three-fold increase in nuclear power at the end of 13^th 5-yr plan, as planned
• Growing international cooperation is a welcome development, provided such projects can be timely, meet techno-economic viability and safety standards, and such partnerships result in substantial technology transfer
• Not to ignore self-reliance in the nuclear fuel cycle and proceed full steam with commercial utilization of thorium

India’s “Swadeshi nuclear fuel cycle”- The amazing vision of Dr. Homi Bhabha:

• 1939: Bhabha denied re-entry into U.K.; plans for harnessing the power of atom without government (British colonial power) support
• 1948: Free India constituted the Atomic Energy Commission (AEC), Bhabha selected as its first Chairman reporting directly to the PM
• 1954: India announced its plan to harness the power of atom by maximizing utilization of its abundant thorium reserves; the program is directly at odds with key elements of the U.S. President’s speech at the UNGA on 8^th December 1953
• 1955: Unfettered access to the PM ensured that the Indian 3-stage indigenous nuclear development program is viewed synonymous with Indian leadership of NAM; Bhabha chaired the Geneva Conference preceding the formation of IAEA
• 1956: India co-opted in the “Washington Group” to canvass for IAEA membership in NAM; India successfully argued against the creation of a uranium cartel and the centralized storage of plutonium to enhance IAEA membership
• 1965: India joined the ENAC to propose principles for the NPT being considered
• 1968: India announced in UNGA that it will not sign the NPT
• 1970: NPT comes in force; India excluded from the 1971 Zangger Committee

India’s 3-stage program is thorium-centric and program’s scope and schedule has been affected by many challenges in implementing the first-of-its-kind approach:

• 1965: Stage 1, which started with RAPP-1 operations, is initially hampered by limited uranium resources and Zangger/NSG restrictions, is now paced by capacity building and need for additional and accelerated plutonium stockpile based on cutting edge research and modelling in thorium fuel cycle by BARC
• 1985: Stage 2 phase was initiated with operation of 40 MW Fast Breeder Test Reactor; 500 MW Prototypic Fast Breeder Reactor (PFBR) is expected to begin operations in 2014 (after a 2-year delay)
• 1996: Stage 3 phase initiated with operation of world’s only 30 kW U-233 (derived from thorium) fuelled reactor; design of 300 MW Advanced Heavy Water Reactor (AHWR) completed and site selection is underway
• 1998: Import of foreign light water reactors (LWR) planned to shorten Stage 1 period; initial research indicated that 8 imported LWR’s are needed and received approval from the Cabinet, a reassessment indicates it could be as many as 40
• 2025: Domestic LWR program operational to supplement or replace purchase of imported LWR’s to provide needed spent fuel quantity for generating reprocessed reactor fuel for Stages 2 and 3 programs
• 2035: Technological challenges indicate that Stage 3, utilizing India’s abundant thorium, will not be fully commercialized until at least until 2035 or beyond. With proper planning for capacity building, fully indigenous Stage 3 may meet about 25% to 50% of electricity demand, resulting in a dramatic reduction in greenhouse gases, and high reliability in assured fuel supply and energy security

Advent of Indo-U.S. nuclear cooperation:

• 1954: USA promoted “nuclear diplomacy” as part of the Cold War; India was a leading beneficiary, and the first Indo-U.S. “123 Agreement” was signed in 1956
• 1963: Indo-U.S. agreement for “turnkey” construction of Tarapur 1&2 reactors (TAPS) signed; U.S. contractually required India to buy only U.S. nuclear fuel and put the plant under IAEA safeguards; TAPS connected to electricity grid in 1969
• 1974: Indian nuclear test triggered U.S. sanctions, including stoppage of TAPS fuel supply; NSG was set up in a secret meeting in London in April
• 1975 to shut out India from global nuclear commerce
• 1978: The U.S. NNPA came into force; All prior 123 Agreements required renegotiation of bilateral civil nuclear agreements that are now very restrictive

A new chapter begins in the Indo-U.S. nuclear cooperation:

• 2005: U.S. announced plans to grant “full” civil nuclear energy cooperation
• 2006: U.S. Congress granted India exception from NNPA; new 123 negotiated
• 2008: India agreed to buy U.S. reactors without global tendering, PROVIDED the mutually acceptable terms and conditions would result in a viable tariff regime for electricity generated
• 2008: India Specific IAEA Safeguards finalized; NSG exception for India granted; New Indo-U.S. 123 Agreement finalized
• 2009: India announced two nuclear sites for American nuclear vendors in Chhayamithi Virdi in Gujarat and Kovvada in Andhra Pradesh
• 2010: Nuclear Liability Law passed by the Indian Parliament
• 2011: Rules pertaining to the new liability law submitted to the Indian Parliament and published in the official Gazette
• 2013: Westinghouse and NPCIL signed an “Early Works Agreement” prior to the visit of PM to the U.S.
• 2014: Westinghouse completed initial tasks under the EWA and is reimbursed for its services by NPCIL
• 2014: U.S. Government shows flexibility in resolving the liability issue, U.S. nuclear vendors however adamant; lost in the fog of corporate media buzz: the price of electricity to Indian consumers

(The author is an atomic industry expert. The author presented this paper at a talk by him at the VIF on Progress and Challenges Related to India’s nuclear deal, on August 8, 2014)

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Published Date: 24^th September 2014, Image source: https://prabaharan.files.wordpress.com

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

India-US Ties: Need to Take a Realistic View

Kanwal Sibal, 

Dean, Centre for International Relations and Diplomacy, VIF

India-US relations need to be put back on track. The relationship has lost steam in recent months with many contentious issues surfacing that remain unaddressed. We have now to see whether with the change of government in Delhi a new start can be made. The 5th India-US strategic dialogue on July 31 will provide an occasion to review the state of our bilateral ties. The composition of the US delegation indicates the subjects the US side intends emphasizing. Apart from the US Commerce Secretary, the Deputy Secretary of Energy, the Under Secretary for Homeland Security and the US Envoy for Climate Change will be accompanying Secretary of State John Kerry, who will be visiting Bengaluru, which has cast somewhat as a villain in the US for causing job losses there. It should be useful for Kerry to expose himself to the concerns of the Indian IT industry about immigration reform legislation under consideration in the US, H1B and L1 visas, the totalisation agreement etc.

The challenges ahead will not be easy to overcome. The irritants marking the relationship arose when a “pro-US” Indian Prime Minister, Manmohan Singh, was in power, with an economic team with a similar reputation. His government was grappling with development and growth issues and sought US participation in building a strong and modern Indian economy. Indeed, the strategic dialogue, with its five pillars- strategic cooperation, energy and climate change, education and development, economy, trade and agriculture, science and technology, health and innovation- was instituted in 2009, under his watch. Nevertheless, despite the intensification of India-US engagement and the large scope of the bilateral agenda, the feeling grew that the relationship had not lived up to its promise. If despite four previous rounds the relationship became somewhat morose, no breakthroughs can realistically be expected from the fifth one.

To begin with, the US must make an extra effort to establish a relationship of confidence with the new Prime Minister, whom the Americans have treated very shabbily with an obstinacy that makes little political sense. President Obama seemingly established a good personal chemistry with Manmohan Singh; it is unlikely that this will be easily repeated with Narendra Modi, although the US President has reached out to him immediately after his election and welcomed him to Washington, as did Secretary Kerry. Deputy Secretary Burns visited India very recently to personally deliver Obama’s invitation to the Prime Minister. Modi himself has been remarkably large-hearted towards the US, conveying through his decision to quickly visit Washington that he intends to overlook the visa denial insult and move forward to establish a mutually productive relationship in India’s national interest. It is indisputable that a perception of some malaise developing in the India-US relationship complicates some of our external relationships and the management of an overall balance in our foreign policy.

To the extent that these diplomatic signals are watched when a new government takes over in a country headed by a Prime Minister who has the reputation of being focused and decisive and capable of producing results, but whose thinking on foreign policy issues is not known, it would have been noted that the first foreign visit by Modi announced by the government was not to the US. As against this, Modi has reached out exceptionally towards China by allowing the Chinese to stage a diplomatic coup of sorts, especially vis a vis Japan, in having their foreign minister received as the first foreign envoy by him, holding an unusually long conversation over the telephone with his Chinese counterpart and following it with a “very fruitful” meeting with the Chinese President in Brazil who was invited to visit India in September, programming the Indian army chief’s visit to China and that of the Vice-President to celebrate the 60th anniversary of the Panchsheel Agreement along with the Myanmarese President, which boosts China’s “peaceful” credentials, enables it to present itself as a benign neighbour to offset its image as a threatening power in the east, and also indirectly signals reduced concern about China’s thrust into Myanmar.

This has implications for our “strategic cooperation” with the US. The Modi government, by intensively engaging China and inviting it to invest in India, has emphatically distanced itself from the US “re-balance” towards Asia. While the trilateral US-Japan-India naval exercises in the Pacific have just been completed and the Indian Navy will no doubt continue to exercise frequently with the US navy in the Indian Ocean, the new government is clearly being responsive to a calculated Chinese charm offensive that, not surprisingly, excludes any softer nuance on its territorial claims on Indian territory. The strategic independence of our China policy is being affirmed.

The upcoming strategic dialogue will hardly bring about any greater congruence between our positions on developments in the troubled Islamic region to our west. The US continues to mishandle Pakistan at our cost. It US has brought about regime changes in various countries through military interventions; it has resorted to suffocating sanctions against Iran, for instance; it is threatening to isolate even a powerful nuclear armed country like Russia by targeting its vulnerabilities. Yet, it is accommodating towards Pakistan, although the latter has been responsible for indirectly inflicting the greatest number of casualties on the US by a friendly country- indeed, a non-NATO ally- because of the safe havens it has provided to the Taliban. The ambiguous way the US deals with Islamic movements, including its outreach to the Taliban and its unwillingness to scotch the dangerous idea of the Islamic Caliphate, is not consonant with our strategic interests. Its current geopolitical compression of Russia is reviving cold war type tensions in Europe that could spread elsewhere if the confrontation with Russia is pursued in a bid to divide Russia from Europe so that US hegemony over Europe through NATO is not diluted. This puts India at odds with the US strategically over Russia with which we have a “special and privileged strategic partnership”.

On the nuclear issue, the BJP, responsible for inserting those provisions in our Nuclear Liability Act that the Americans adamantly object to, will find it that much more difficult to find a legal solution. On defence sales, the new government wants to give priority to local manufacturing and technology transfer. On the latter, the US has the record of being the most restrictive. We cannot also move too much in the US direction as we have defence ties with other “strategic partners” too.

The several irritants on the economic side have contributed most to the perceived loss of élan in the bilateral relationship. Select US corporations have led a campaign, including in the US Congress, against India’s investment, trade and IPR policies, leading, inter alia, to a year-long investigation by the US International Trade Commission and India’s classification as a Priority Watch Country under Section 301 for IPR violations. On our pressing need to obtain massive foreign investments to upgrade our physical infrastructure, not much can be expected from the US. Another limitation is the unwillingness of US companies to work with the public sector. The US uses the strategic dialogue for policy changes in India that would create a business environment tailored to the need of their companies looking for opportunities in the financial, energy, agriculture and environment sectors, for instance. While being demanding on this score, the US is unwilling to address long standing Indian concerns on a number of trade and services issues. On top of this, detracting from their “strategic cooperation” on global issues, India and the US have serious differences within the framework of WTO and Climate Change negotiations, a situation unlikely to change soon given the entrenched US positions and India’s resolve to protect its legitimate interests.

An upset Kerry has already cautioned India that “it has a decision to make about where it fits in the trading system”, and that India’s willingness to support a rules based trading order and fulfill its obligations would help it to get US and global investments. He has called upon India to give greater space to private initiative, to be more open to capital flows, to limit subsidies that stifle competition and provide strong IPR protection for attracting more US companies to India. He has a vision of expanding India-US trade to US $ 500 billion a year.

Unrelated to the strategic dialogue but relevant to political atmosphere of our ties, the sanctimonious State Department has issued its 2013 report criticizing India’s “restrictive” religious laws. It is time the US ceased being the moral policeman of the world and showed restraint in criticizing countries like India who have a civilizational record of religious tolerance that the US itself lacks.

All in all, we have to take a realistic view of the scope of our “strategic partnership” with the US and not be beguiled by rhetoric, much as we must seek to build strong bridges with that country in pursuit of our larger national interest.

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Published Date: 29^th July 2014, Image source: http://www.indiawrites.org

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Vivekananda International Foundation)

India Needs to be Tough on Pakistan

Kanwal Sibal, 

Dean, Centre for International Relations and Diplomacy, VIF

Mentioning toned down expectations from his meeting with his Pakistani counterpart at New York, Shri Manmohan Singh gave an advance signal that nothing substantial would emerge from it.Until almost the last moment, we let uncertainty hang over the decision even to meet, which itself indicated watered down prospects.

Normally, summit meetings serve to boost existing ties and infuse them with new political purpose. They are well prepared with planned positive outcomes. Our troubled relationship with Pakistan makes the management of summit outcomes particularly sensitive. If the circumstances surrounding a planned summit are not propitious and preparatory work has yielded no assurance of notable progress, postponement is preferable. Obama, for instance, cancelled his agreed bilateral summit with Putin just before the September G-20 summit in St Petersburg because continued divergences between the two countries on several issues did not promise success.

Postponing Talks

If the PM’s meeting with Nawaz Sharif had already become controversial because of cease fire violations by Pakistan, the freedom given to extremists like Hafiz Saeed to pursue their anti-Indian crusade, lack of progress on trying those responsible for the Mumbai terror attack and delaying the decision to grant MFN status to India, the advance admission by PM that the New York meeting would be low in results argued strongly in favour of postponement.

The Samba attack immediately before the summit made the case for deferment even stronger. Our position that we will continue talking to Pakistan even if it carries on terror activities against us is not easily comprehensible. We cannot claim zero tolerance of terrorism if we indulge the country sponsoring it against us. By allowing a distinction to be made between state and non-state actors, we have given political room to Pakistan to blame the so-called non-state actors for such activity and distance the Pakistani governmental agencies from it.

Worse, Pakistan no longer admits that even non-state actors are to blame. It pretends they don’t exist and that incidents in India have local origins. Pakistan has feigned ignorance of recent incidents on the LoC and even denied their occurrence. It is unwilling to assume any responsibility for terrorist attacks against India. When pushed, it accuses India of terrorism not only in Balochistan but also in FATA where we are supposedly complicit with the Pakistani Taliban. Nawaz Sharif’s foreign policy Adviser Sartaj Aziz threatens to produce evidence of Indian interference in Balochistan at an appropriate forum, which suggests that Pakistan intends to step up propaganda on this issue in advance of US withdrawal from Afghanistan and create the ground for targeting our consulates in Jalalabad and Kandahar. The Samba incident provided us a timely opportunity to begin reversing our costly policy of delinking dialogue from terror by adjourning the summit to a later date when Nawaz Sharif’s position on terrorism became tangibly aligned with his protestations of friendship with India.

The PM’s reference, in his joint press conference with Obama and his UNGA speech, to Pakistan being the epicenter of terrorism was commendable. The robust affirmation in his UNGA speech that Jammu & Kashmir is an integral part of India and that we will never ever compromise with our territorial integrity was equally praiseworthy. Nawaz Sharif apparently took exception to PM complaining to Obama about Pakistan’s involvement with terrorism, provoking him to compare his conduct allegorically with that of a “village woman”, a slight later denied.

Pak Game

The macho image that Pakistani Muslims have of themselves apart, Nawaz Sharif can hardly cavil at India involving the US as a third party in bilateral India-Pakistan issues, when seeking third party intervention in resolving the Kashmir issue has been the staple of Pakistani foreign policy for decades, not to mention the issue of a strategic balance in South Asia, both to procure more arms from the US and place curbs on India’s nuclear and missile programmes.

Sharif himself tweaked India at New York by asking for UN or third party intervention in investigating the LoC violations, knowing India’s allergy to such interference. He emphasized Kashmir in his UNGA speech in line with his declared intention after assuming power to focus on this issue, even describing Kashmir as the jugular vein of Pakistan. His statement on Kashmir was more expansive than that made by Pakistani leaders in recent years at the UN, which exposes the argument that he needed to pander to domestic lobbies in Pakistan. On terrorism too, in his media interviews, he equated India and Pakistan in terms of answerability for such actions.

Non-State Actors

Indisputably, stabilising the LoC and ending cease fire violations would be essential for resuming India-Pakistan peace talks and hence the agreement at New York that the DGMOs of the two sides will meet and devise mechanisms to restore peace on the LoC. This initiative will produce results only if Pakistan acknowledges the existence and activities of “non-state actors” and its responsibility for controlling them. It should be willing to establish a five kilometre deep anti-infiltration grid on its side to match the Indian disposition so that any hostile movement within this zone is prevented. It should share information on attempts to cross the LoC culled from intercepts. Border meetings even down to brigade level would help to control the sort of destabilising activity on the LoC that the DGMOs have been tasked to do. All this hinges on Pakistan’s sincerity in ending cross border activity, which remains illusory as shown by last week’s infiltration bid in the Keran sector, so soon after New York.

We were right in not agreeing this time to a joint statement after both premiers met. If this signals a more hard-headed approach to Pakistan in the future, it would merit general approbation.

Why the Indian Economy is in a Mess?

Dr M N Buch, 

Dean, Centre for Governance and Political Studies, VIF

Up to the election of 2004, it was ‘India Shining’ all the way. Glasnost and Perestroika had removed the Soviet Union as a serious player on the world stage and the new Russia had not yet taken root. Rajiv Gandhi had come to power riding a wave of sympathy when Indira Gandhi was assassinated and India embarked on what was to become an era of economic liberalisation. Nevertheless, it was actually Narasimha Rao, as Prime Minister, who really brought about the partial liberalisation of the Indian economy. Manmohan Singh was the Finance Minister and is said to be the author of the new economic regime, but the fact is that he was the hack who carried out Narasimha Rao’s directives and implemented his policies. My own view is that Manmohan Singh is neither creative nor inventive in his economic thought and has, in turn, adopted that theory which was contemporaneously fashionable. He has been a Nehruvian socialist, a South-South protagonist in the North-South dialogue, a centrist-liberal, a market oriented capitalist, a neo-liberal, a disinvestment back-tracker under Left Front pressure and a populist do gooder because Sonia Gandhi’s National Advisory Council dictates it. Is it any wonder that we have no economic policy at all, only populist adventurism and economic ad hocism?

Today we are in a mess. The rupee has been fluctuating violently at historically low levels almost day by day, inflation is out of control, industrial growth has fallen and industrialists are in despair, the markets are in a free dive and investment is declining, global confidence is shaken and our foreign exchange reserves are under pressure as foreign funds are flowing out of India and all that government and ruling party spokespersons can say is, “The fundamentals of our economy are sound.” Well, surprise of surprises, the fundamentals of our economy are not sound, in fact, they are ailing seriously, if not terminally. Our failure to recognise this makes an ostrich with its head buried in the sand almost an avid seeker of knowledge when we compare this with our refusal to see the reality. There is something very flawed about our economy. It is this blindness which is preventing us from taking those painful measures, those hard decisions, which can set us back on the road to recovery.

At a later stage in this paper, I shall attempt, perhaps somewhat ignorantly, to look at the theoretical underpinnings or lack thereof of the economy and our policies. At this stage, let us look at the so called fundamentals of our economy. The primary sector, mainly agriculture, but also mining for essential raw materials, has been our mainstay and it is this sector, which is most labour intensive, which has provided the bulk of employment. Being rural based, this sector has contributed to the basic equilibrium in our settlement pattern, from village to metropolitan city. This is our strength, because neither do we have one or more primate city which dominates the whole country, nor is the rural to urban migration alarming. Some improvement has been initiated over the years in the agricultural sector and as against the earlier Green Revolution states such as unified Punjab, which included Haryana, now one finds significant agricultural growth in states such as Gujarat and Madhya Pradesh, but overall the picture is very patchy indeed. The first three Five Year Plans did put emphasis on agriculture and irrigation, but the effort has not been sustained and we are unable to break free of our almost total dependence on the monsoon. There is, therefore, a major flaw even in the fundamentals of agriculture, the largest sector in terms of employment, though not in the share of GDP.

Our approach to agriculture has not been either holistic or consistent. Agriculture has major components --- the farmer, the land and its tenure, soil productivity, the cropping pattern, water availability, amplitude of quality power supply, agriculture research aimed at applying technology, technique, seed, fertilisers and sound agricultural practices in order to maximise productivity, the support services of roads, developed markets, financial support through easy credit, value addition through processing and government backing to ensure that the farmer to consumer relationship is healthy and mutually beneficial. We also need to promote land related activities such as animal husbandry, fishing, poultry keeping, horticulture, fodder development and silviculture which meets the village requirements of fodder, fuel and secondary timber. But before we do any of these, we need a national land use policy which identifies and allocates land according to the use to which it is best suited, of which agriculture would be the most predominant. From this would flow land management at meso, mili and micro level, an art at which the Japanese seem to excel. Unfortunately, India has no national land use policy at all. So much for our fundamentals!

It is not as if we are unaware of the above issues. We are and from time to time we have even addressed some or all of them. But never wholly, holistically, harmoniously, or consistently and with persistence. Apparently we either tire very quickly or else are soon bored by consistency and want to move on to something new. Let me give two or three examples. We launched land reforms to give land to the tiller. Madhya Pradesh embraced this enthusiastically and enacted the Abolition of Proprietary Rights Act, 1950. We abolished Malguzari which was not quite zamindari and the Malguzar had only limited authority. He, however, was charged with the responsibility to manage the village commons, including the village forests. This function ceased in 1951 and from that year till 1961, when we brought the old “chhote jhad ke jungle” and “bade jhad ke jungle” within the ambit of protected forest under the Indian Forest Act, Madhya Pradesh lost four million hectares of village forests to indiscriminate felling, of which 2.8 million hectares were encroached upon. That is when village nistar rights were gravely affected, biotic pressure on reserve forests increased and villagers and forest officials entered into conflict. Yet another sound fundamental, Mr. Politician?

In the early fifties of the twentieth century. we launched S.K. Dey’s Community Development Programme. The whole country was divided into Community Development (CD) Blocks, each headed by a Tehsildar rank Block Development Officer, but forming with his team a separate cadre of development officers. We thus separated the Revenue, or regulatory and the development administration, from which eventually flowed Panchayat Raj. In a C.D. Block, all planning and implementation was participative and whereas the villagers prescribed their priorities, work was undertaken on the basis of fifty per cent contribution by the people in cash, materials or voluntary labour. Because the people had a stake in the work, they saw to it that it was done honestly and the roads, wells, minor irrigation works, schools and panchayat bhawans built sixty years ago are still intact. The Block was a complete unit, with a Primary Health Centre and extension officers in education, social welfare, agriculture, animal husbandry, cooperation, etc. In 1963, however, we abolished the C.D.B., gave up participative development and replaced it by hundred per cent government grants works. The fundamentals still OK?

A third example is of the watershed development and management programme. The whole country is divided into mili (about 5000 hectares covering about ten villages) and micro (about 500 hectares covering a village) watersheds. For each mili or micro watershed, a Project Implementation Agency was identified, whose job was to prepare a detailed management plan, do a participative rural appraisal with the villagers, form a watershed development committee and then oversee the work. With ridge to valley vegetation treatment of hill features, undertaking soil conservation works and suitably treating all waterways and creating water bodies, the programme has succeeded in converting sizeable tracts of drought prone areas into productive areas, reduced seasonal distress migration and substantially raised the water table and improved the availability of fuel and fodder. Employment is locally generated, first as wage labour on the works proper and then in the improved agriculture of the village. Because everyone benefits, there was very little corruption in the programme.

But can our “The fundamentals are sound” brigade leave well alone? Along comes the National Advisory Council (NAC), headed by Sonia Gandhi and with woolly headed do gooders, long on intention but very short indeed on practical commonsense, as members. They persuaded government to launch the National Rural Employment Guarantee Programme, supported by the MNREG Act, the purpose of which is to give a hundred days’ employment per capita per year. This is an employment programme, muster based, whose prime objective is not asset creation. NAC may think it was pioneering something, but all such programmes can trace their origin to the scarcity relief programme of British days. In his famine relief programme, Maharaja Sardul Singh of Bikaner at least built the Lal Bagh Palace. All we are building through NREGS is a massive web of corruption which has engulfed the entire Panchayat Raj system. The vast sums of money spent on a programme which, because it is muster based, has corruption built into its genes, have completely skewed our economy without creating any worthwhile assets which will give us long term returns. How can such a programme be part of our sound fundamentals?

An important component of the primary sector is mining for minerals which are the raw material for industry. This activity is extractive and impacts the environment, hence is the target of activists, some environmental, some social, some just plain cussed and, therefore, antiestablishment. Such activism has seriously affected mining for coal, iron ore, bauxite aggregate and sand, to mention just a few items. Thermal power plants are denied coal, thus inhibiting new plants. Steel plants are denied iron ore. Sand mines are closed. Apart from adversely affecting industry, this has led to huge job losses, estimated at over 50,000 in Bellary and over 20,000 in Hoshangabad. No one advocates exploitative mining which destroys whole ecological systems, or the corrupt practices that have burdened these industries in recent years. But one has to evolve a balance between exploitation, curbing corruption, and using the resultant ore for job creation and generating wealth and minimising the adverse environmental impact and rehabilitating the mined areas.

The German State of Rheinland Westphalia worked out about 70 years ago a policy whereby before mining began, the company had to submit a detailed plan of the mining operations, site for dumping overburden, restoring the site through backfill and layering with fresh soil, carrying out a vegetation plan and generally ensuring a return of the site to its old biodiversity. The policy has paid rich dividends, especially because it is vigorously enforced. That is the direction in which we must move, that is, extract, but responsibly and restore the land to its former state thereafter. We have a huge potential for employment and wealth generation in this segment of the primary sector and we must use this wisely.

The backbone of a modern industrial state is the secondary or manufacturing, sector. At the time of independence, this was still rudimentary, though the Second World War had given a fillip to manufacture because many of the industrial goods which were imported could not be brought in and the British war effort needed the contribution of Indian industry. However, the main push to industry was given after independence when India deliberately embarked on a voyage of developing capital goods industries and of infrastructural development. From the First Five Year Plan onwards, the State took the lead in capital investment in power, irrigation, metallurgy, defence industry and other sectors of the economy, which were generically clubbed together as the high ground of the economy. Various power projects, steel plants, aluminium, copper, etc., smelters all came up in the public sector. At that stage, only the State had the capacity to mobilise capital in sufficient quantity and at a scale necessary for investment in infrastructure and the capital goods industries. If this formed the core of Nehruvian socialism, which is now being condemned by modern economists and the neo-liberalists, it was nevertheless the only course open to India for rapid development at a time when India had few real industrialists and the average businessman would rather trade than manufacture. Japan went through a similar phase after the Meiji Restoration, but wisely that country kept open the doors of private enterprise and as the great Japanese business houses, the Ziabatsu, were able to undertake a larger role, the State stepped back from directly running the economy and allowed the private sector to take over. The State first led, then it worked in tandem and finally it allowed management to go into the hands of business houses whose primary objective was to maximise profit. The Japanese being a patriotic people, the State was able to retain a major role as facilitator and regulator and industry itself imposed self-discipline in which the interests of the nation were always kept paramount.

In sharp contrast, in India, as our planned economy increased the tentacles of the State, those in charge of governance began to taste economic power and not merely government power. Patronage soon skewed any sensible personnel policy in the public sector, nepotism led to unsuitable appointments to critical posts, the temptation of making money soon overcame the interests of the enterprise and the whole system began to fall apart because of inefficient management, overstaffing, delay in decision making and outright corruption. Huge amounts of money were frittered away in loss making activities and cumulatively this has certainly affected our economy adversely.

Rajiv Gandhi, followed by Narasimha Rao, did bring about a change of attitude in terms of opening up the economy to private enterprise. This did bring a large number of new start ups and sunrise industries and brought about rapid industrial growth in many sectors. Unfortunately, the government continued to vacillate because many of the sectors related to industry, mainly dealing with infrastructure, continued to be inefficiently run by government. Power has been one of biggest bottlenecks and this is one sector which government did not deregulate for a long time. Even today, private participation in power generation and distribution is hedged in by many constraints. These include a reluctance on the part of government to loosen its hold over what government considers a strategically important sector but which in fact is only a public utility. The constraints are in licensing of new power stations, environmental clearance on their location, making available land, reserving coal for the use of the power stations and evolving environmental norms which, while protecting the environment, do not completely negate the project itself. Much of the problem of the episode now popularly referred to as ‘Coalgate’ arose out of the fact that government has not holistically looked at the power sector. There is demand for power and it can be met by private investment, provided a reasonable return can be ensured. If on the one hand, government decides to allow private players to function whilst at the same time government insists on subsidising whole sections of users, which denies the generation company a fair return on its investment, how can we expect private participation?

Because all major minerals are a monopoly of the State and coal is a major mineral, unless government allocates coal to a power plant, how can it produce power? The Environment Ministry does not clear coal mining projects, in the allocation of coal blocks there are allegations of corruption and wrongdoing, the mining of coal never takes place and yet we expect the power plants to generate electricity. This scenario is so reminiscent of a lunatic asylum. If power is to be generated and a power plant is to be built, then it is the job of the ministries concerned to sit together, hammer out norms of environmental clearance and then ensure that the power plant gets all the necessary clearances automatically. The Coal Ministry and the Environment Ministry have to sit together and work out the areas from which coal will be mined and made available to the power plants. My own view is that even if coal is given free it would be worthwhile because that coal will be converted to electrical energy, the users of which would pay the State electricity duty and the use of that power for industrial production will create jobs and generate income. Instead of being apologetic, though one can understand that because in the allocation of coal mines government’s policy has been inconsistent, the Prime Minister should have stood up in Parliament and said that he has approved the allocation of coal, he stood by his decision and that anyone who did not like it could campaign for the defeat of the ruling party at the next election. Mere police agencies such as CBI or even the Supreme Court cannot sit in judgement over the executive decisions of the Prime Minister which he is constitutionally competent to take. It is the absolute lack of guts of government to stand by its decisions which is responsible for its woes.

Be that as it may, unlike China, India post liberalisation preferred the easy path of the tertiary sector for its own economy growth. In the tertiary sector, we emphasised IT and ICT as the core areas. The world was seeking the information highway and India provided it, which led to a massive upsurge in employment in the IT sector. Does information technology directly produce tangible goods? Obviously not because information technology is merely an enabler to access information, analyse data and suggest a course of action. By itself Information Technology produces nothing, though by using this technology manufacturing industry can extend its horizon and massively upgrade its own efficiency and profitability. China produces, we give ideas. India has the capacity for marrying both but our industrialists and businessmen prefer the easy path and our government enthusiastically falls in line. We are proud of our IT industry and we also claim to have the fastest growing mobile telephony sector in the world. But do we manufacture even one brand of mobile telephone? Do we produce any computers? We assemble some but that is only screw driver technology. All the hardware is designed and manufactured in the United States, Japan, Taiwan, Korea and China. Lenovo has become a big name both in IT and ICT and the market is flooded with Lenovo computers and Lenovo mobile telephones. Our over dependence on the tertiary sector for economic growth is also the source of our greatest weakness because this is a vulnerable sector which is very quickly affected by what happens elsewhere in the world and by itself generates neither manufacturing competence nor manufacturing capacity.

Yet government used growth in the sector to showcase its claim that India is amongst the fastest growing economies in the world, part of the global market and yet protected against global economic vicissitudes because of the fundamental strength of our economy. The hollowness of the claim has been suddenly exposed as inflation threatens to get out of hand, the rupee is devaluing from day-to-day and investor confidence in India is ebbing away. If our fundamentals are sound, why is this happening? Before we look at the unholy mess in which we find ourselves today, let us try and understand the theoretical underpinnings of our economy. Do we believe in the laissez faire of Adam Smith? Do we believe in capitalist free enterprise? Do we practise mercantilism which, in any case in the present day and age of open seas, does not lend itself to monopolising trade through a Navigation Act? Are we players in the monetarism advocated by Milton Friedman, who advocated that it is possible to control the economy by controlling money supply? Are we Keynesian in our belief that the State has a major role to kick start a flagging economy and to generate employment through public spending on works which create assets? Are we Marxian in outlook or Fabian socialist? Are we neo-liberals? What exactly are our economic moorings and to which brand of macroeconomics do we owe allegiance? Do we really believe that India is part of the global economy and is almost wholly controlled by global trends? Is that why a minor policy change by the Federal Reserve in the United States can make or break the Rupee? This last point is emphasised because the various apologists for government, ministers, economists and planners all claim helplessness because they say that it is global trends which are affecting the Indian economy and these forces are beyond our control. When Y.V. Reddy was Governor of the Reserve Bank and the entire banking system in the Western world and in South East Asia was collapsing, his conservative policies enabled our banks to be relatively immunised from the crisis. At that time, we claimed that we had the innate strength to resist the global trend. Today what has happened to that strength that a mere whiff of a rumour somewhere else causes the rupee to go into freefall?

Much has been written on what is causing our woes, but some points need to be made again, because failure of government to recognise that our policies are flawed has resulted in exacerbating the situation. Let us begin with inflation. There are many factors behind inflation, but excessive money supply is certainly not one of them. If money supply were excessive, would government be prepared to spend anything between Rupees 1.25 lakh crores and 3.0 lakh crores in subsidising grain for the poor under the Food Security Programme? And yet government adopts monetarism as one of the means of checking inflation. Money supply is attempted to be restricted by a high bank rate, which pushes up the cost of money by way of credit. In a country where there is a very strong parallel economy and where in any case the Reserve Bank is totally clueless about how much money is actually circulating, pushing up the bank rate does not push down consumption. What it does is to make the cost of legitimate capital needed for investment in business and industry unaffordable and thus render the product of such industry costly and uncompetitive in the global market. The way to counter this is not to make the rupee worthless. The way forward is to make money affordable so that the input costs reduce and the product can be produced at a competitive price. The high interest rate has some effects. The cost of capital is increased. Even at a high interest rate, industry could invest, provided there is an optimistic climate in which the possibility of reasonable returns cannot be ruled out. However, when this is accompanied by a fast devaluing rupee, the economic climate is vitiated and industry is holding back investment. This causes growth to stagnate, new start ups to be postponed or even abandoned, investment in upgradation and modernisation kept pending and, generally speaking growth suffers. This is the direct result of the monetarist policy followed by our government. This is also inhibiting industry from investing self owned capital in expansion, new start ups or modernisation. All this in a situation in which the banks are flush with funds but are not going for aggressive lending because the state of the market does not encourage this.

Another area in which we are on the wrong track is in our capacity to take sound decisions. The world can live with a harsh tax regime, provided it is practicable and consistent. In India, however, the tax regime is totally inconsistent, as has been proved in the Vodafone case. Our tax policies are not economics driven but are completely political in character. Somebody suggests to tax the rich and so everyone runs in that direction. Then someone else says that we must give concessions to encourage industry and that becomes the flavour of the day. Someone makes some complaint about wrongdoing because a certain order has been issued in a tax matter and everyone runs around like a chicken with its head cut off. Why can we not have a long term tax policy aimed at sending a message to investors about what they can expect in this country in terms of taxation and the policy of government regarding fair repatriation of profit?

I had said in the beginning of this paper that we take a holistic view of almost nothing. Many smaller activities are involved in any activity and one component can cause all components to fail. Industry has certain requirements, the first one of which is land on which industry can locate. Some States are able to handle the matter better than others, Gujarat being one of them. Industry is welcome to locate in Kutch where land is plentiful and does not have a gainful alternative. Water is a problem here, which the government has solved by bringing in Narmada water. A number of industries, therefore, have located in Kutch. The Gujarat Government had made it clear that it will not use coercion to acquire fertile land for industry, though it has no objection to private purchase. There is no ambiguity and, therefore, the industry has no inhibition in locating in Gujarat. We should certainly keep the interests of cultivators in mind, but we cannot adopt a policy whereby land is simply not made available for undertaking public works or for location of economic activity which provides large scale gainful employment. Therefore, land promises to be a big obstacle in any future development project.

There are many countries which have struck a balance between environmental considerations and development needs. There are very strong environmental regulations, but they stop short of bringing all economic activities to a halt. What these regulations do is to force industry to realise its key role in protecting the environment and to make it accept responsibility to discharge this role both in the setting up of the industry and in running it. There is regular environmental audit and violation of environmental laws invites and in fact gets severe punishment. However, industry is encouraged to establish new plants, but with responsibility. In India our approach is the reverse. There is a shortage of wood and, therefore, government has put a ban on use of wooden furniture in government offices. My approach would be to insist on the greater use of wood, with a specific mandate being given to the Forest Department to go in for aggressive afforestation and to create an environment in which the people and the private sector become partners in afforestation. Without sand, buildings cannot be constructed. Unless I find a sand substitute, I would not stop the use of sand but would regulate mining so that environmental damage is either avoided or minimised. In any case a ‘can do’ mindset would have to replace a ‘do not do’ mindset because ultimately Ludditism is not only an enemy of growth but is an ally of negative primitivism.

The obvious lack of policy direction is compounded by hair brained schemes to go on spending nonexistent money on so-called welfare programmes. Lord Keynes was a product of the Depression. He developed a theory that in times of depression or economic recession it is the duty of the State to kick-start the economy by judicious public spending on works which create permanent assets. If necessary the State would be justified, under controlled conditions, to print currency notes to fund such works, a process which goes by the name of deficit financing, which also covers revenue deficits in the budget. Franklin Delano Roosevelt, President of the United States, used the New Deal to fund public spending to overcome the effects of the Great Depression. The magnificent works in the Tennessee Valley, which harnessed the Tennessee River and its tributaries, generated hydel power and made available water for irrigation, is one of the finest monuments to well designed public spending to counter economic recession. In a way President Eisenhower’s post war programme of building 40,000 miles of interstate highways in the United States not only put money into the economy by way of public spending, but it created the infrastructure which today supports trade, commerce and industry in the whole of the United States. These are all Keynesian measures and are perfectly justified. This was the path we followed in our earlier plan period. There was a budget deficit on revenue account, but so what? It generated jobs, created assets and if there was a slight inflationary pressure, it was countered by greater productivity. That is still legitimate in India.

What is not legitimate is throwing money down the drain, which the National Rural Employment Guarantee Scheme as enshrined under the Mahatma Gandhi National Rural Employment Guarantee Act and the so-called Food Security Bill are doing and will do. The real addition to money supply in the parallel economy is from the corruption generally found in India and corruption in NREGS specifically. To this will be added the colossal amount to be spent on subsidising food grain, which can have only one result --- a virtual collapse of the economy. Money, which should go into infrastructure, agriculture, business, industrial growth, promotion of foreign trade, will be denied to all these sectors and will be thrown down the drain. The way to feed people is to generate jobs which give them the money to buy food. Giving subsidised foodgrain but denying money to the sectors which generate employment is the single most foolish decision that government has ever taken in India since independence. It is so perfect a method of ruining the economy that it should be archived as a permanent record of how foolish governments can be. In any case, India now needs economic administrators with a sound practical knowledge of Indian realities. What it does not need is foreign trained economic advisors, who are clueless about India and what it emphatically does not need is the National Advisory Council.

To sum up, we need to abandon every scheme which squanders money for possible electoral gain. We need very clear decisions on directions of growth, with ruthless planning on providing both the environment and the financial and natural resources thereof. We need gainful employment generation which creates long term assets, thus providing the equality of opportunity to all enshrined in the Preamble to the Constitution. We need massive State support for health, education, skill development and infrastructure building. We need policies which carefully balance environmental concerns and protection on the one hand and growth of employment on the other. We need a government which decides and stands by its decisions. We need a grievance redressal mechanism which refuses to allow irresponsible activism to trivialise the process and bring development to a halt. We need to promote equity, not through doles but by encouraging activities from the village level projects which create assets all the way up to major industries, which genuinely give people equality of opportunity. What is more, we need a government, not the present spavined, paralysed, dithering apology of a government that we have today. All this in a democratic set up because as has been proved over and over again, a self critical (not self destructive) democracy, in the long run, will always be better than totalitarianism. This is where we must say, “Yes, we can do, we shall do.”

Time to end Unilateral Concessions

Kanwal Sibal 

(Member, VIF Advisory Board) 

Prime Minister Shri Manmohan Singh’s remark that there can be no business as usual with Pakistan after its troops mutilated the bodies of two Indian soldiers they killed, and that those responsible for this crime will have to be brought to book, is unexceptionable in so far as it goes. But to interpret this as indicating a radical reversal of our policy towards Pakistan would be a mistake. 

The prime minister has made tough sounding statements before on Pakistan’s linkage with terror threatening the peace process and the imperative need to bring to justice those responsible for the Mumbai carnage, without this affecting the fundamental decision to engage Pakistan despite provocations. The beheading incident is not more intolerable than the killing of a large number people in cold blood in the Mumbai attack, and yet after a pause we resumed the dialogue with Pakistan, the justification being that we have to live with it as a neighbour and closing the doors to a dialogue is not an option. We say that we need peace with Pakistan to realise our goals of high economic growth and poverty alleviation. The argument that as the bigger and stronger country we should be more generous with Pakistan entices us. The fluidity of our convictions and general reluctance to take hard decisions makes us choose soft options, which we wrap in the cloak of moral superiority, statesmanship and our vocation for peace.

If we could disregard the intense provocation of the macabre dance of death in the Mumbai attacks and engage in hope-filled diplomacy with Pakistan subsequently on the assumption that its propensity to bleed us through terrorism could be contained by goodwill gestures on our part and that relations with it could be normalized as between two civilized and rational countries, then to believe that all our earlier arguments in favour of a sustained dialogue have now lost all relevance would be wrong.

Defence minister Antony has called the recent events a “turning point”, which is strong phraseology but doesn’t necessarily mean a change of direction in our policy towards Pakistan. The Air and Army Chiefs have spoken of options India will use at the time of its own choosing, but these seem aimed more at boosting the morale of our forces rather than any concrete plan of action for the future. The Army Chief has in fact clarified intentions by speaking of tactical action, not any strategic change of course. The anxiety to salvage the dialogue even as accountability is demanded of Pakistan comes out in the External Affairs Minister’s statements. The seeming robustness of our statements sits ill with our proposal for a flag meeting with the Pakistani military, as if we are more nervous than Pakistan about escalation. This request appeared all the more anaemic as it was made despite the obnoxious Pakistani reaction to national outrage in India.

Pakistan is unbothered by the statements coming out from New Delhi. Its Foreign Minister , Hina Rabbani Khar, is conspicuously defiant in her tone, “appalled” as she is at the “absolutely unacceptable” Indian charges. She has added insult to injury by suggesting UN involvement, knowing our allergy to any such proposal. Assuming an ill-fitting mantle of peace, she has accused India of war-mongering. She has clearly signalled that Pakistan has no intention to “bring to book” those responsible for an incident which its own enquiry shows did not occur in the first place. Pakistan has not brought to book even after four years those responsible for the Mumbai attacks, whose occurrence at least Pakistan could not claim to be contrived by India. 

For the moment we have curtailed sporting and cultural exchanges with Pakistan. If, as the Prime Minister says, it can’t be business as usual with Pakistan after its outrageous conduct, we should act on the business front and postpone the visit of the Pakistani Commerce Minister due this month. The operationalizing of the visa agreement can be delayed too. In response to Pakistan seeking to involve the UN, we should state that the only issue for discussion is Pakistan’s withdrawal from the territory occupied by it illegally. We should bite the bullet on UNMOGIP and expel it from Indian territory as a signal to Pakistan and the separatists in Kashmir. We should avail of this incident and Pakistan’s truculence to cease equating ourselves with Pakistan as victims of terrorism and expressing our helplessness by affirming that we have no other option but to talk to it come what may.

The government’s decision to curtail sporting and cultural exchanges for the time being is appropriate, but it is being contested by some who want to sing and play with Pakistanis even as their army brutalizes inhumanly our soldiers defending our frontiers. It is true that invidual Pakistani artists and sportsmen are not involved in this barbarism, but their country is. Our people to people relations with Pakistan, good or bad, are mediated by the state and are not autonomously established at individual level. The army is defending our territory not because of a personal compact but because they discharge a function enjoined upon the state. If, as individuals, we must share the grief of the families of our soldiers mutilated on the Line of Control, indivdual Pakistanis must bear the burden of their army’s heinous conduct.

Unfortunately, it is Pakistan’s habit not to accept responsibility for violating agreements and codes of civilized conduct. In its eyes, the other party is always wrong or manipulative and Pakistan is the victim of the conspiracies of others. It is very difficult to deal with such a mind-set. We continue to nurture the false hope that Pakistan will see it in its own interest to behave differently, to discard its policies to promoting jihadi terrorism that is recoiling on the country itself, to accept that it has to live in peace with its larger and more powerful neighbour for the sake of the welfare of its own people and not cling to notions of parity and revenge fired by religious fervour. While we should not underestimate the difficulties of the government in dealing with such a recalcitrant country, we should not exaggerate the possibility of winning Pakistan’s trust by well-meaning unilateral concessions.