In India a budget to be proud of

July 6, 2009

The free marketers are crying foul. In his budget speech on Monday, Minister of Finance, Pranab Mukherjee disappointed them by not detailing a plan for allowing foreign investment in the insurance sector, for privatization of public sector companies and of education.

Even as Mukherjee was making his budget speech, the Sensex of the Bombay Stock Exchange dropped.

To a large extent, big business led to its own disappointment by its euphoria after the re-election of the government of Prime Minister Manmohan Singh. Share prices soared on the stock markets as investors believed that the UPA, freed of its dependence on the Left parties, would now pursue a reformist agenda.

The term “Reformist” has usually been defined by business and the pro-business media in terms of free market policies that liberalize cross-border capital flows, open new sectors to private investment, and make labor markets more flexible (read ease out labor unions).

The evening after Mukherjee’s speech, the pro-business The Wall Street Journal is making a spectacle of itself, claiming interestingly that Mukherjee’s budget was ” a pretty dreadful spectacle”. Newspapers are expected to report and analyze, and not espouse causes, but that is a subject for another post, another time.

What industry and media like the WSJ mis-understood is that the Congress party, which is the main partner in the coalition government, has traditionally had a stand of its own on social policy, which is social democrat and far from pure capitalist.

Mukherjee used the budget speech to remind viewers that India was protected from the global financial meltdown because its large banks are government controlled and did not expose themselves to speculative activity, and stocking up on CDOs. He credited his former leader, the late Indira Gandhi, for nationalizing the banks when she was Prime Minister of the country.

By his focus on inclusiveness, on rural development, on expanding the economy through stimulus spending, Mukherjee has sent out a strong signal that social democracy is not dead in India.

By refusing to privatize education, and by in fact making a budgetary allocation for new IITs, Mukherjee is making the point that Pt. Jawaharlal Nehru’s strategy to spend on education and research as core competencies is still relevant.

Mukherjee’s budget in fact creates the opportunity for the emergence of more people from out of the pale of poverty, into becoming beneficiaries (and consumers) of the economic boom. The question is; will foreign investors decided this is a good market opportunity for them ? Or will they continue to demand what seems to be quite impossible in a country that is moving to its social democractic roots ?

There is some concern about the deficit in the budget, but at times of economic crises, deficit financing and government spending is the way out to stimulate the economy and create jobs. The challenge for Mukherjee is to rein in inflation when it happens, by a reduction of the deficit, and other appropriate fiscal measures.

There are also issues such as the implementation of the programs that aim to bring India’s vast rural poor into the mainstream of economic development. There will undoubtedly be leakages, corruption, and some of the money will not reach the target group.

But unbridled capitalism won’t solve that problem. Civil society and good politics can.


The Indo-US nuclear deal was flawed from the start

October 19, 2007

India’s communists are these days being blamed for the failure of the implementation or “operationalizing” of the 123 Agreement that would give India access to nuclear fuel and reactor technology for civilian applications.

First, the positive side of the agreement. Although India is not a signatory of the Nuclear Non-Proliferation Treaty (NPT), under the 123 Agreement it would get access to nuclear fuel for civilian reactors, even as it maintain a nuclear arsenal. There is a section of opinion that believes that the NPT itself is iniquitous as it perpetuates the dominance in the nuclear weapons area of countries that tested nuclear weapons before 1967.

India’s communists typically see only through ideological blinkers. They never look for the broad picture.. They stood by former Indian prime minister Indira Gandhi, as she trampled political rights and imposed an emergency in the country in 1975, raising the bogey of communal forces. The communists now have a knee-jerk reflex to anything proposed by the Bhartiya Janata Party (BJP), which draws a considerable part of its support from Hindu fundamentalists.

This time over, the Congress, triggered a knee-jerk reflex, by trying to do a nuclear deal with the Americans. Through the communist blinkers, the Americans can only appear as “imperialists”.

However if we keep ideological issues out of the debate, there are still reasons for concern about the impact on India’s sovereignty from signing the 123 Agreement. Yes I am referring to the “United States-India Peaceful Atomic Energy Cooperation Act” of 2006, which in fact forms the legal framework for the proposed 123 agreement. The Act by the US was devised to exempt a nuclear cooperation agreement with India from certain requirements of the Atomic Energy of 1954.

The Act does not however entirely protect India’s right to take decisions on its own on its non-civil nuclear program. It states for example that “a determination and any waiver under section 104 shall cease to be effective if the (US) President determines that India has detonated a nuclear explosive device after the date of the enactment of this title”. Click here for the text of the Act.

What this provision in the Act means is that all the waivers extended to India could disappear at one go if India tests a nuclear device. It does not require the US to prove that fuel or technology meant for India’s civilian program was diverted to the country’s military program.

If there are doubts as to how the situation will unfold if India detonates a nuclear device, then one has to look to the 123 Agreement for the details. Click here for the text of the proposed 123 Agreement

At Article 14 of the proposed 123 Agreement, it says that “Either Party shall have the right to terminate this Agreement prior to its expiration on one year’s written notice to the other Party.” So if India detonates a nuclear device, under the “United States-India Peaceful Atomic Energy Cooperation Act” of 2006, the US can, among other actions, immediately withdraw its waiver to India, and call for a termination of the 123 Agreement

“Following the cessation of cooperation under this Agreement, either Party shall have the right to require the return by the other Party of any nuclear material, equipment, non-nuclear material or components transferred under this Agreement and any special fissionable material produced through their use”, according to the 123 Agreement.

That would leave India’s civilian nuclear program starved for fuel. There have been hints that the US would in such a situation come to India’s rescue, by arranging for alternate supply from third countries.

But a country’s civilian nuclear program cannot be built on vague promises of good-will. If 123 Agreement is to go forward, the US will have to incorporate into the proposed agreement a clause stating that notwithstanding anything in earlier agreements and Acts of the US government, the supply of fuel from the US to India will not be affected by any developments in India’s military nuclear program.

By insisting that all is alright with the deal, Prime Minister Manmohan Singh may be doing a dis-service to India.