Waiting for the bite

Sanctions could have an impact on many levels of the Indian economy.

Soon after the 11 May nuclear tests, the US, Japan, Germany and a number of other countries announced the suspension of fresh aid, besides humanitarian assistance, to India. The US sanctions are the most far-reaching and include the suspension of further export credit and guarantees from the Eximbank and OPIC, military sales, commodity assistance, and direct bilateral aid. Of these, the first one is the most important since the US is the largest investor in India, especially in the power and telecom sector with their huge demand for funds, and all US investors depend on Eximbank for credit equipment. Moreover, the law under which the US is mandated to impose sanctions against any non-nuclear country conducting tests also requires the US to oppose loans from multilateral financial institutions (MFI) such as the World Bank and Asian Development Bank.

There has been much wishful arithmetic in the Indian press on whether the US with its vote share in these organisations will be able to block loans. But now that the G-8 countries – including France and the UK, both of which had not suspended bilateral aid – have supported the cut-off of loans from the MFIs except for humanitarian purposes, the fate of loans is no longer in doubt. The only hope was that the World Bank interprets "humanitarian" broadly to let through a number of social sector and poverty-related new loans, and that is precisely what happened when the WB let through a number of such loans in the last week of June, including the Andhra Pradesh restructuring loan of USD 543 million (see Himal December 1997).