The nuclear fallout -- II
The economic consequences of Pokhran II relate to both sanctions and the costs of weaponising and providing a credible nuclear deterrent, particularly against China. On the last we can be brief, as given the secrecy surrounding India's nuclear and missile programmes, informed public debate about the costs and benefits of the nuclear deterrent have had no quantitative dimension. But a simple analytical framework can be provided to make the assessment if the relevant data were available (see Lal: Arms and the Man, UCLA, Economics Dept. WP 1997).
This is based on the analogy between defence and a national insurance policy. For, national defence remains the public good par excellence. We can think of the expected utility, as economists call it, arising from two alternative 'projects' to meet a perceived external threat.
These are: one with only conventional weapons (Ec); the other including nuclear weapons (En). The difference in the expected utilities will depend upon the relative costs of the two alternatives (Mc-Mn) and the expected losses from the two alternatives if there is a war (pc.Lc-pn.Ln), where pc is the probability of war if the country has only conventional weapons and pn if it has nuclear weapons, and Lc and Ln are the relative losses which will be incurred with the two options if war does break out. So that we have: En - Ec = (Mc-Mn) + (pc.Lc - pn.Ln).
Assuming, not unrealistically, that the potential losses associated with a nuclear war are much larger than in a conventional one, the second term could still be positive if, as the MAD doctrine of deterrence claims, the nuclear option significantly reduces the probability of the occurrence of war (pn) over the conventional option (pc). The nuclear option could thus provide sufficient insurance 'benefits' to even counteract the higher costs of the nuclear option (which would make the first term negative).
In fact, it has been claimed by some Indian military experts that given the existing geo-political threats facing India, whereas a minimum of 3 per cent of GDP would be needed with conventional arms, only 2.5 per cent would be required if nuclear weapons were deployed. (see S Gupta: India Redefines its Goals, Adelphi paper no.293, IISS). One of the benefits of Pokhran II is that now an informed quantitative debate can and should occur to base judgements on the form of provision for this most important public good for any country.
But what of the indirect economic costs associated with the sanctions that have been imposed after Pokhran II? All the estimates I have seen suggest that, taken in themselves, they are not serious. Moreover, as they effect what are arguably the most politicised form of capital flows in the form of multilateral and bilateral assistance, even their complete cessation would not worry someone of a classical liberal persuasion!
Moreover, as these capital flows are now dwarfed in the world economy by private flows, it is the impact of Pokhran II on the latter which matters for the economy's future. There was little sign of any marked effects on these private flows after the blasts -- their slowdown predates the blasts and was due to the perception of the capital market that the reform process had slowed and its future was clouded given the political uncertainties arising from the shenanigans of India's politicians.
The further worsening of the climate for private capital flows came after the budget, with Moody's providing the ultimate raspberry by downgrading Indian debt to junk bond status. While the diplomats have been running around trying to mitigate the effects of sanctions and trying to prevent the 'internationalising' of the Kashmir issue -- both issues of supreme irrelevance, I have argued -- Yashwant Sinha and his appartchiks have in effect shot the country in the foot. And what an opportunity was missed, for finally burying the failed Nehruvian economic legacy and showing up not just the hypocrisy of western sanctions but their complete inefficacy.
This was the time to have used the euphoria to overcome the political resistance to the next steps in economic reform, and generate faster growth, which ultimately must underwrite any military deterrence. These steps, as I have argued in past columns, entail first, a reform of India's harmful imperialist labour laws, which would then allow the wholesale privatisation of the public sector. Besides providing badly needed revenue to the haemorrhaging fisc, it would also have closed one of the major source of the haemorrhage, while by improving efficiency it would have raised the economy's growth rate.
Second, the announcements of full capital market liberalisation with no restrictions on direct foreign investment flows (DFI - which are the most desirable form of these flows) on a stated date would have demonstrated that India was integrating with the world economy.
Third, the substitution of tariffs for import controls on consumer goods, but with the proviso that the controls would remain temporarily on goods from countries which had imposed economic sanctions until the sanctions were removed, would have put the cat among the US and Japanese pigeons, raised badly needed revenue, and again greatly improving the efficiency of the economy.
If the finance minister was even more daring he could also have made a bonfire of the plethora of subsidies combined with the liberalisation of agricultural trade. The latter would do more for agriculture and the rural poor than all the special schemes supposedly to help agriculture which is just a continuation of failed past policies.
None of this was done. Instead, the finance minister gave in to the Bombay Club -- predators par excellence -- who have fattened on the Indian poor. The raising of import duties was a grave mistake, sending the inevitable signal that trade liberalisation, which had been one of the major achievements of the first stage of the reforms, was now being reversed.
Even if, for political reasons, the finance Minister had to raise tariffs, he could have avoided the illiberal impression by justifying them as a temporary impost to provide the revenue to replace the multilateral and bilateral aid lost to the fisc due to sanctions.
Moreover, the continuing BJP stance against DFI while giving all sorts of incentives to increase portfolio flows is dangerous for the reasons set out in earlier columns. DFI remains the ideal form of foreign capital flow. It shows the brain-dead nature of the BJP's economic thinking that they still want to discourage such flows.
Economic nationalism, both of the Right and the Left, is increasingly penalised by global capital markets. Witness the free fall of the South African rand. There is no half-way house to globalisation. Either you integrate with the world economy as rapidly as possible or suffer the perpetuation of poverty. That is the stark lesson which even the communists in China have learnt.
But our Indian political classes have still to accept it. China has, moreover, shown how by enmeshing the interests of foreign firms in its economy it has important leverage in the domestic politics of the major western powers, thereby furthering its nationalist political agenda. India has eschewed this necessary antidote to US and Japanese sanctions because of the BJP's perceived attitudes to DFI.
Finally, of course, there is the fiscal deficit. There is no way in which the optimistic growth assumptions on which the forecasts are based can be realised given the various growth retarding measures taken in the budget. As I argued in one of my earliest columns, this continuing and growing fiscal irresponsibility need not, however, worry economic reformers. A deep fiscal crisis has been the progenitor of reform.
India is well on its way to another fiscal-cum-inflationary-cum-balance of payments crisis. Yashwant Sinha will then go down in history as the only finance minister who has presided over two fiscal crises which engendered reform, and perhaps Manmohan Singh will then have another opportunity to complete the reforms that he began with the first of Sinha's fiscal crises.
The author is James S. Coleman, Professor of International Development studies at the University of California, Los Angeles.
Thursday, September 3, 1998