India’s Nuclear Tests Left Cloud Over Economy

When North Carolina-based Cogentrix Energy Inc. headed for India six years ago, it was both pioneer and pilgrim.

Pitching a 1,000-megawatt power plant for southern India that could have created hundreds of jobs in the U.S. and supplied electricity to a key swath of this power-starved nation, Cogentrix’s Mangalore Power Co. was one of the earliest believers in India’s bold economic revolution. It was among the first official “fast-track” projects in the exciting new market in 1992.

Fast it was not.

For years after New Delhi began opening its behemoth state-run economy to the global marketplace, Cogentrix, its Indian staff and the San Francisco native who heads its operations here have wrestled with maddening red tape, fought court battles and endured ever-changing regulations from five successive Indian governments.

Finally, earlier this year, the company had won all but the last of more than 100 licenses and approvals from the government.

Then the bombs went off.

When India detonated its five nuclear devices in May, it triggered U.S. sanctions that have frozen $350 million in financing that the U.S. Export-Import Bank had earmarked for the Mangalore project provided its raw materials were made in the United States.

No power for India; no jobs for Americans.

And that’s just the beginning of the story of how deeply the sanctions are already starting to bite both here and in the U.S.--and how the future of India’s bold effort to leapfrog into the 21st century through a globalized economy is increasingly in doubt.

In the weeks since the sanctions were imposed, India’s credit rating has plummeted along with the Bombay Stock Exchange and the national currency, the rupee, which has lost more than 8% of its value since the nuclear tests.

Hundreds of millions of dollars in foreign investment have been withdrawn or frozen since Moody’s Investors Service lowered India’s credit rating to a “speculative” grade last month. As a result, the cost of financing any new development in this impoverished nation of nearly 1 billion people has soared.

Meanwhile, Pakistan’s economy, which is far smaller and less self-sufficient than India’s, has been even harder hit by sanctions imposed after its nuclear testing. As of Saturday, the Pakistani rupee had lost 20% of its value in two months, and government officials in the capital, Islamabad, warned a visiting International Monetary Fund delegation that it will be unable to repay hundreds of millions of dollars in debt due at the end of the month.

Last week, the U.S. Senate unanimously approved legislation softening the sanctions to permit loan guarantees for American agricultural exports to India and Pakistan, but lawmakers dropped a similar exemption--to permit Export-Import Bank financing for projects such as the Mangalore power plant--before the bill reached the Senate floor. The House is expected to debate the measure this week.

Clearly, the sanctions imposed by the U.S., Japan, Germany and others are just one factor hurting India’s recession-plagued economy, economists say. Southeast Asia’s financial crisis and other recent government policies here are also to blame, they say.

But as the Mangalore power project shows, the economists say, the sanctions already have taken a heavy toll in new U.S. investment here and employment opportunities in America. And the U.S. Commerce Department projects that, if the sanctions remain in place, a total of $4 billion in U.S. exports to India will be lost in the longer term through frozen U.S. Export-Import Bank financing.

Ron Somers, the San Francisco native who became Cogentrix’s managing director here in 1995, and other local company officials declined to comment either on the project or on the impact of the sanctions, citing pending litigation in India and the sensitivity of the sanction issue in both countries.

Industry analysts, however, said the sanctions have forced Cogentrix and other major developers to abandon their U.S. financing and suppliers and look instead to Europe and Asia. Western diplomats and power industry officials here call that “a direct hit” on American business.

“It means all the efforts and all the jobs that were going into American families now are going into European or Asian families,” one industry source said. “But it also means debt is getting more expensive in India, and that means the Indian people are going to pay a higher cost for all the goods and services that come out of these projects.”

What’s more, economists worry that the impact of the sanctions--combined with recently unveiled economic policies here--could stall the effort to open up one of the world’s largest economies for years to come.

Specifically, economists and trade analysts sharply criticized new energy policies and an additional 4% import tax included in the budget that Finance Minister Yashwant Sinha announced last month. Those measures, on top of Sinha’s public bottom line that the sanctions are just a “minor roadblock” in the U.S.-Indian trade boom that had been underway, have led many economists to question the government’s commitment to free-market reform.

“If the liberalization process is to be at all successful from India’s perspective, the rest of the world needs to see it as a policy that is not reversible,” said T. N. Srinivasan, chairman of Yale University’s economics department, who is a guest lecturer this month at the Institute for Social and Economic Change just outside Bangalore.

“Sending out a signal like a 4% across-the-board import-tax increase is the worst thing they can do, especially now,” Srinivasan said.

Srinivasan, a native of southern India, said the sanctions exacerbate a more fundamental problem: “The reform process got stuck. . . . The easier parts of it have been done. The harder steps, such as privatization, reforming labor laws, bankruptcy laws and the like, those steps haven’t been taken as yet.”

Several independent analysts, in fact, point to that project and four other privately financed power plants as classic case studies of how India’s old economic mentality has affected the country’s bold yet halting steps into global markets.

Srinivasan called the Cogentrix project the epitome of Murphy’s Law: “It seems to embody everything that can go wrong.”

Added V. Raghuraman, the senior energy advisor at New Delhi’s independent Confederation of Indian Industry, a private-sector advocate for manufacturing and business: “For Cogentrix and the private power industry in general, the last six years have been like running a marathon on a treadmill.”

The Mangalore power plant was precisely the kind of investment India sought when it launched its economic liberalization program in 1992. And it was just what Washington had in mind when the U.S. Commerce Department listed India among the world’s 10 biggest emerging markets in 1994, freeing up billions of dollars in U.S. government-guaranteed financing.

Perhaps more than any other commodity, India needs power to grow in the 21st century.

The government in New Delhi concedes that 70% of the country’s households lack electricity and that demand for power--particularly by business, industry and foreign investors--far outstrips supply.

The shortfall is particularly acute in southern India’s Karnataka state and Bangalore, its capital, which has become a mecca for high technology and the site of India’s most rapid private-sector growth during the past decade.

Drawn by a climate so pleasant that Bangalore is known as “the air-conditioned city” and by a cosmopolitan culture that boasts pubs, European boutiques and cyber-clubs, hundreds of foreign companies led by a still-booming software industry have settled here.

New glass-and-steel office towers have mushroomed around Bangalore. Billboards advertise e-mail pager systems, mobile phones, laptop computers, a new International High Tech Park and restaurants with “the best executive lunch in town.”

With that growth, however, has come an energy demand so great that it is already more than double the 3,300 megawatts the state power company can deliver.

Enter Cogentrix and its partner, China Light & Power, Hong Kong’s largest private power company.

“India today demands electricity,” Cogentrix stated in its first brochure, printed earlier this decade. “With it comes the power to improve the quality of life . . . to compete globally. It assures opportunities for the country and its people to grow and prosper.”

India’s central government heartily agreed.

New Delhi officially dubbed the plant in Karnataka’s coastal city of Mangalore one of the first “fast-track” projects in an overall plan to open up its entire power sector to private investment.

“How fast is fast track?” energy analyst Raghuraman asked wryly last week. “Well, common sense here is most uncommon.”

In the years that followed that official stamp of approval, the project endured a procession of four elected state governments and five new Indian prime ministers--each of whom changed policies, regulations and requirements.

The company was sued by environmentalists last year, only to have the Indian Supreme Court rule this February that its project would rank among the most environmentally sound power plants in India.

The state Chamber of Commerce says it hopes that the Supreme Court rules in the company’s favor soon in another lawsuit filed by a prominent politician alleging that bribes were paid on the project--which the company says it “vociferously denied . . . in sworn statements.”

But the last of the major hurdles--a central government guarantee that the power company will be paid for the electricity it supplies--may prove an even bigger one than the sanctions, not just for Mangalore Power Co. but also for the other four pending power projects.

Such a guarantee is essential in a country where, on average, 66% of all power is consumed by means of heavy government subsidies or “free” through illegal connections that often are run by organized crime.

Just four days after India tested its nuclear devices, the Indian government revised those guarantees in a Cabinet decision that the Confederation of Indian Industry labeled “unfortunate.”

The new policy, it said, reversed the previous government’s policy and “may convey the wrong signals to the investors and also create an environment of uncertainty among them.”

“For us, it was like there were two nuclear explosions,” one industry source said. “In the guise of clearing the counter-guarantees, the government in fact took them away. We’re not even thinking about sanctions right now. We’re worried about survival.”