Sanctions Casting Pall Over South Asia

Economic fallout from India’s and Pakistan’s decisions to go overtly nuclear has begun to descend on the two countries, among the world’s poorest, and could become enormously damaging.

India, home to more impoverished and illiterate people than any other nation, could be stripped of up to $20 billion in U.S. and international loans and aid, according to estimates from the White House. The country’s already lagging growth rate may be slashed in half, Indian economists say.

In Pakistan, whose smaller economy depends on transfusions of foreign cash, U.S.-led sanctions could turn off the tap on $2 billion in critically needed foreign grants and loans and force the government of Prime Minister Nawaz Sharif to default on the country’s international debt payments.

Pakistan’s coffers now hold $1.3 billion in foreign exchange--enough to pay for six weeks’ worth of petroleum and other imports in normal times.

“India will be able to ride out the sanctions far longer than we can,” said Mushtaq Khan, chief economist at ABN-Amro Bank in Islamabad, the Pakistani capital. “We’ll be forced to adopt more austerity measures--to eat more grass--than the Indians.”

Under a state of emergency intended to prepare for troubled times ahead, restrictions were slapped on dealings in foreign currency, including withdrawals.

“We have calculated that security considerations are paramount and that economic sanctions are relatively less important,” Pakistani Sen. Akram Zaki said during a visit to the United States.

It was uncertain whether Saturday’s second round of nuclear testing will affect efforts underway in Washington by Clinton administration officials to soften the congressionally mandated sanctions against Pakistan.

U.S. officials have been sympathetic to arguments by Pakistan that the earlier test blasts by India, on May 11 and 13, left the Muslim country little choice but to do likewise.

“Sanctions could isolate Pakistan, push it into the extremist Islamic camp. And that is something the West doesn’t want to do,” Khan said.

For India, the potential economic difficulties born of nuclear testing are of a different nature. Its more than $1.4-trillion economy is five times as large as Pakistan’s, and its self-sufficiency--an ideal promoted by Mohandas K. Gandhi--was a matter of pride to Indians for decades. But since the early ‘90s, successive governments in New Delhi have been wooing foreign investors, who now may shy away.

“It’s now clear the impact of sanctions is going to be quite serious,” said Amitabh Mattoo, a specialist in international security issues at Jawaharlal Nehru University in New Delhi. “They may create a climate in which people are reluctant to take the risk to invest in India.”

Since India held its first round of tests, its currency, the rupee, has fallen in value by about 4% compared with the U.S. dollar. In the same period, the Bombay Stock Exchange, the country’s biggest, fell 7.4%.

India’s economy was already lagging. Growth fell from a 7.5% annual rate in 1996-97 to 5% in the last fiscal year, which ended in March.

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Sanctions and their effect on private investment could shave 2 to 3 percentage points off next year’s growth rate, Indian economists say.

To help domestic and foreign businesses cope with sanctions, the Confederation of Indian Industry has set up an advisory panel and a New Delhi hotline. In one western state, Gujarat, there already has been a backlash against U.S. reprisals for India’s nuclear program: Trucks hauling Pepsi and Coca-Cola were attacked by mobs, and a Baskin-Robbins store was ransacked and set on fire.

Some Indian officials have said that for big, publicly funded projects such as airports, they may now favor firms from countries other than the United States, Japan, Sweden, Canada, the Netherlands, Denmark, Australia and Germany, which have imposed sanctions, frozen aid or dropped plans to give India more assistance.

State-owned Air India hinted that U.S. sanctions could shut Boeing out of a $2-billion deal for new aircraft, to the benefit of European rival Airbus.

“Who loses? Essentially American companies,” said Amit Mitra, executive director of the Federation of Indian Chambers of Commerce and Industry. “And all major U.S. companies are in India today--Kellogg’s, Pepsi, Coke, General Electric, Ford, Whirlpool, Enron, Boeing.”

However, other experts, including Mattoo, fear that a drop in confidence will not be limited to U.S. corporations alone. And they expressed hopes that the Indian annual budget, to be released today, will be rejiggered to parry the sanctions by making investment in India more tempting than ever.

The Hindu-nationalist Bharatiya Janata Party, the leading partner in Prime Minister Atal Behari Vajpayee’s governing coalition, “has to realize it can’t have nuclear tests and a closed economy too,” Mattoo said.

When the Indians and Pakistanis chose to undertake nuclear testing, they set off another chain reaction--in Washington.

Under a 1994 law that had never before been applied, President Clinton became obligated to impose a list of reprisal measures if a country other than the five declared nuclear powers--the United States, Russia, China, Britain and France--exploded a nuclear device.

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The sanctions mandated by the Nuclear Proliferation Prevention Act include a ban on the sale of U.S. weaponry, a halt to foreign aid and loan guarantees, and an end to lending by American banks to the foreign government in question.

There is not much direct U.S. aid to cut to either country. Pakistan was already under American sanctions since 1990 because of suspicions about its nuclear program, but it was supposed to receive about $18 million this year in food aid and assistance to humanitarian groups.

India was scheduled to get $144 million in economic and military aid--less than 15 cents for each of its 988 million citizens.

But U.S. sanctions also mean an end to credits to finance exports to the two countries and so-called risk insurance to cover American investments there.

The strictures of the U.S. law also put a $1.5-billion loan from the International Monetary Fund to Pakistan in jeopardy.

Pressure from the Clinton administration already forced postponement Tuesday of $865 million in World Bank loans to India.