Diplomacy: Indo-US Ties: Signs of a Thaw

Resumption of foreign financial flows for infrastructure projects in exhange for India's signature on the CTBT is only one aspect of the post-Pokhran deal-in-making.

There was an almost audible sigh of relief in South Block when US Deputy Secretary of State Strobe Talbott got into his special aircraft to leave for Islamabad. Baldly put, everything had gone according to plan. No breakthroughs had been announced but there were hints aplenty. Enough, it appeared, to bring cheers to dozens of state capitals and the offices of the International Bank for Reconstruction and Development (better known as the World Bank) and the Asian Development Bank (ADB).

Spring in the Air: The talks between Singh (far left) and Talbott (far right) hint at the lifting of sanctions; it may ease the economic crisis faced by Vajpayee's Government

In the coming months, if all goes well, the US would, in exchange for India's decision to sign the Comprehensive Test Ban Treaty (CTBT), allow it access to World Bank and ADB loans worth roughly $2.8 billion (Rs 11,760 crore). These funds were allocated for power projects in several states and highway projects in Gujarat and Haryana.

Apparently, this is just the beginning of a carefully choreographed script. External Affairs Minister Jaswant Singh and Talbott have also agreed to allow expert groups on export controls and Fissile Material Cut-off Treaty (FMCT) to meet. This would help the two countries move on the stickiest item on the agenda -- differences over what India means by "credible minimum deterrence" (see interview).

Contrary to the official posture that there was nothing to worry about, the sanctions did indeed slow down India's ambitious thrust on infrastructure development as foreign financial institutions suspended consideration of their India projects. A Finance Ministry official admits that if the restrictions remain in place for another couple of years, the impact on the Indian economy would be substantial. However, the resumption of multilateral lending would now ensure that there is no lasting damage to the Indian economy.

In June, in a deft move to deflect public anger in India, the US and its allies had declared that they would allow loans for the so-called "basic human needs" sector. Consequently, six loans totalling some $700 million (Rs 2,940 crore) were allowed to go through. In December, even as the two sides sparred over the definition of "minimum nuclear deterrent", two low-interest loans, one for the reclamation of USAR or SODIC land in Uttar Pradesh and the other for healthcare in Maharashtra, were approved without any opposition. Around the same time, $380 million (Rs 1,596 crore) worth of loans were approved for the economic restructuring of Andhra Pradesh and agricultural development in Uttar Pradesh.

THE MONTHS AHEAD

> US lifts bar on World Bank funding.
India agrees to sign CTBT.
> India and US consult on FMCT negotiations.
US resumes training of Indian military officers.
> The two sides discuss ways to tighten Indian export control laws.
> Singh and Talbott keep negotiating the issue of credible minimum deterrence.

The US decision to allow all World Bank and ADB funding would not only be a shot in the arm for the BJP-led Government at the Centre but also for the state governments whose schemes for infrastructure development had been put on hold due to the sanctions following the Pokhran tests. While the immediate beneficiaries, would be the governments of Gujarat and Haryana dozens of other projects put on hold will now move ahead.

Another major beneficiary would be the Power Grid Corporation of India whose efforts to raise $2 billion (Rs 8,400 crore) were stymied when the World Bank deferred consideration of a $450 million tranche. A senior official says that the lifting of the sanctions would be a major boost for the project which is aimed at improving power transmission systems across the country. "It is not that money cannot be got from elsewhere," says he, "but the World Bank terms are much better than those of the commercial banks."

World Bank funding, says Planning Commission member Montek Singh Ahluwalia, may have a relatively small role in the total development expenditure of the country, "but it is very significant in certain sectors". Also, he notes, any loosening of sanctions will improve the overall climate for investments flowing into the country. After the World Bank had closed down the sluice gates of funds, the ADB also deferred consideration of $1.3 billion (Rs 5,460 crore) worth of loans and the Japanese stopped their annual $1 billion (Rs 4,200 crore) lending. The resumption of lending by these entities would mean an additional $3 billion (Rs 12,600 crore) worth of project aid coming through.

But problems remain. An ADB official says that the G-8 has decided that while the deferred loans will now be released, the net lending to India in 1999 will not increase to make up for the eight-month gap. "The roughly $1.3 billion gap will not be made up and fewer new projects will be taken up for consideration in 1999," says the official. However, a World Bank spokesman says that the bank had already allocated the money for the four projects and so "there will be no negative impact on lending in 1999".

At first sight, a CTBT-for-World Bank-loans deal appears to be a heavy price to pay. But it's clear that such an arrangement is part of a wider package that seeks at first to harmonise Indo-US perceptions on security and then build a new relationship. But for India immediately, the payoff will be on in funds coming in for building roads, sewer-systems, power-lines and bridges. That should be reason enough for India to sign on the dotted line.