June 22, 1998

The BJP's budget is not exactly what post-Pokhran India needed

Kaushik Basu

What is good about India's coming out of the nuclear closet is it challenges the myth that the world can live happily with some countries armed to the teeth and refusing to even consider nuclear disarmament. What is bad is this did not happen under I.K. Gujral. India's foreign policy has long been handicapped by strident speech but feeble action. Our policy of refusing to sign the CTBT and at the same time not to make any use of the fact that we did not belong to the treaty, epitomised this tendency. We incurred the world's wrath for no purpose.

Then came the five blasts, Atal Bihari Vajpayee's mature open letter to the world leaders explaining the decision and the hint that India may now be ready to sign the CTBT. I felt that at last our foreign policy was changing.

What is blatantly wrong is the US administration's position that it will indefinitely retain the nuclear option. If the world's most powerful government takes such a line, there is little hope for global nuclear disarmament. Whatever else they do, India's five nuclear tests and Pakistan's "anywhere between two and six" have one silver lining. They may get the world thinking once again about total nuclear disarmament. India's traditional position -- that it does not accept the current nuclear apartheid but is willing to work towards total disarmament -- is eminently defensible.

This was amply clear from, for instance, The New York Times. There were some very critical pieces on India's blasts, the most notable being the one by Robert McFarlane, one-time national security adviser to Ronald Reagan. On May 30, he wrote, "We must make clear to the Indian Government that it is ... an arrogant, over-reaching cabal that, by its devotion to the caste system, the political and economic disenfranchisement of its people ... is unworthy of membership in any club." Fortunately, a remark like this is too crazy to be taken seriously; it makes one speculate if the author once had an Indian neighbour whose dog on occasion (or, if one wanted to be charitable, habitually) eased itself on his lawn.

Moreover, McFarlane's diatribe was outweighed by the very many letters to the editor and op-ed articles which took the line that, given the hypocritical stand of the nuclear-haves, India's action was not totally incomprehensible. This is really the best the BJP Government could have expected.

Then the bungling began. Soon it became clear India's foreign policy had not changed. The hyperbole was back. Not from Vajpayee, it must be said; but a number of other BJP leaders began making utterly irresponsible and threatening statements vis-à-vis Pakistan and boastful claims of how India could withstand any sanctions. There was too little emphasis on our commitment to total global nuclear disarmament and to no first use. There was no initiative to defuse tensions with Pakistan. This is where a seasoned foreign policy expert with secular credentials, such as Gujral, could have played the cards better.

On sanctions, to say that India can take any amount is silly. If the industrialised world were united on this, the Indian economy could be seriously hurt. Fortunately, such unity occurs rarely in this world of profit-seeking corporations; and, in the case of India, there is too much doubt in people's minds about the moral justification for such punitive action. This means it is unlikely (unless the BJP's belligerence goes out of hand) that there will be any more sanctions than those required by American law.

This is a small adversity that could even be turned into an opportunity for economic advancement. In particular, the budget could have been used to seize this opportunity, the way the 1991 budget converted a crisis into a spur for reform.

Given the verbal bravado, it is clear the Government had to pretend there was no need to make any provision for the sanctions. But the least the budget should have done was to keep the deficit really small -- because the sanctions can exert an inflationary pressure. My fear is inflation will cross the 10 per cent mark before the end of this fiscal year.

A second mistake was the decision to impose an additional customs levy of 8 per cent. It gives the wrong signal by reversing the direction of past reforms. The justification given for the levy is that it is in lieu of the local sales tax and it therefore creates a level playing field. Suppose we keep raising local sales taxes and make matching increases in the tariff rates. By this logic we will have a level playing field. But the field will be so high up that there will be no players on it.

The right policy for India is to lower import tariffs, minimise quantity restrictions, increase its economic interaction with the world, and remove as many domestic bureaucratic hurdles as possible so as to enable local firms to compete better. The great benefit of lowering trade restrictions is it encourages our firms to be more efficient. More important, it brings pressure on our Government to restructure the domestic industrial environment.

In other words, the playing field should be levelled by removing domestic inefficiencies -- not by providing landfills of tariffs. This would be the best remedy for sanctions as well.

The author is C. Marks professor of economics, Cornell University

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