Nuclear deal strains India's government

 @ibtimes
on August 20 2007 12:34 PM

Indian Prime Minister Manmohan Singh's government is struggling to weather a crisis as communist allies threaten to end support over a nuclear energy deal with the United States.

The four communist parties have 60 lawmakers in the lower house of parliament, and while they are not part of the ruling coalition they shore it up from outside.

But they told Singh and the leader of the ruling Congress party, Sonia Gandhi, at the weekend that they should not proceed further with the nuclear agreement and warned of serious consequences if they did.

KEY POINTS

* The nuclear deal aims to end American sanctions on nuclear trade with India and give it access to nuclear fuel and equipment to help meet its soaring energy needs.

* Critics say it will hurt India's nuclear security because of U.S. laws on nuclear trade governing the pact.

* The communists have been critical of the government's growing friendship with Washington, and say the deal will damage India's sovereignty, placing it in the U.S.'s strategic embrace.

* They have urged the government not to pursue further negotiations for an inspection regime for its civil nuclear facilities, or seek approval from the 45-nation Nuclear Suppliers Group.

COMMENTARY:

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI:

It is a setback for whatever piecemeal reforms that were taking place and the issue will keep the fear of mid-term elections alive.

Hopefully, there will not be any dithering on the nuclear deal itself because that is going to be very negative for the perception of India.

The market has completely disregarded political developments over the last two years. My sense is that the market will be driven by global dynamics.

You will now have a lameduck government in place and the government may not be able to take anything outside common minimum program for debate or approval. It is a very dire situation from the view point of government policy making.

RAJEEV MALIK, ECONOMIST, JP MORGAN CHASE, SINGAPORE:

The left's resistance is significant. The key is how the two sides resolve the issue, and that will require a wait-and-see approach.

They can't go back to the drawing board (on the nuclear deal) so it's really a question of how it lands up getting resolved. At this point, the left is likely to extract more concessions from the government rather than bring it down. The left is clearly playing hard ball at this time but some kind of a compromise is likely to be struck.

The bottom line is that once again the broader issue about moving forward on reforms, including some policies that are favorable to India, ends up being subject to whatever the left may like or dislike.

RAJIV KUMAR, DIRECTOR OF INDIAN COUNCIL FOR RESEARCH IN

INTERNATIONAL ECONOMIC RELATIONS, NEW DELHI:

It's unsettling. If there is a stalemate, markets will react.

If the agreement is held back, it will be a step in the wrong direction for the energy sector and overall foreign direct investment inflows.

India will not be able to integrate with the global economy. Access of domestic companies to dual-use technologies will be denied.

Given the present volatility in the market (due to U.S. subprime impact), the political uncertainty will amplify it.

PRAKASH SUBRAMANIAM, DIRECTOR AND HEAD OF REGIONAL MARKETS,

STANDARD CHARTERED BANK, INDIA:

I don't think it is a cause of much worry. There may be some short-term impact in terms of sentiment, but broadly speaking the underlying fundamentals are so strong even the left parties would be loathe to disturb the applecart.

I don't think it is going to become a lame-duck government as there is too much at stake. Global factors as in the U.S. subprime market will have much more sway over local markets.

D.K. JOSHI, PRINCIPAL ECONOMIST, RATING AGENCY CRISIL:

Definitely, political uncertainty creates problems for economic performance. I don't think it will derail the strong economic performance, but that will delay reforms. Despite changes in government in the past few years, the Indian economy has continued to post strong growth.

Specifically, insurance and pension reforms, which left parties have been opposing, will be delayed assuming an early poll.

I think investors' confidence is affected but the magnitude will not be high. The domestic market is not factoring the political uncertainty but it's going to affect foreign investors' confidence to some extent.

Political uncertainty is one of the factors taken into account by global credit rating agencies for assessing the country risks.

HAN SIA YEO, STRATEGIST, BANK OF AMERICA, SINGAPORE:

I think there is probably no near term risk to the market. As far as reforms are concerned, we have not seen much happening. Privatisation has stopped. If the communist parties pull out support, elections will be brought forward. But the timing won't be bad for the government as headline inflation is below target and growth is good. On the ground, you can sense some improvements taking place, particularly on the infrastructure front, and we are seeing some trickling down effect.

MAHESH RANGARAJAN, POLITICAL ANALYST:

It is the beginning of the end of the United Progressive Alliance and left relations. The relations were based on some foundations which are now being questioned.

They (the left) are questioning the judgment of the prime minister and the government over the negotiations with the United States.

I think early elections are becoming a reality. It will not happen in the next two months but certainly we are looking at general elections ahead of 2009, most probably in early 2008.

HARISH MENON, ECONOMIST, ING VYSYA BANK, MUMBAI:

Apart from the risk of a knee-jerk reaction, fundamentally the big picture looks unchanged. It's looking unlikely that the government will fall, and even a hung parliament situation will only be a problem in so far as the reform process is concerned.

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