Burdened under a dollar debt

Bizarre it may sound, but the end result of the prime minister’s autumn tour of the United States, Russia and China could mean a huge business bonanza for the three countries, running into tens of billions dollars, with defence, nuclear and telecommunications equipment figuring on top of India’s expensive purchase list. The civil nuclear deals with the US and Russia could totally cost the country close to US$ 30 billion. India has also agreed to offer a piece of its land to China presumably on long lease to help China build an exclusive industrial park for its enterprises in expectation of unspecified Chinese foreign direct investments (FDI) to the country.

India and China signed as many as nine pacts, including a ‘Border Defence Cooperation Agreement’ (BDCA) ostensibly to avoid face-offs between the two armies along the disputed Line of Actual Control (LAC). Chinese Prime Minister Li Keqiang called Prime Minister Manmohan Singh’s visit a great success. Li said BDCA would ensure ‘peace, stability and tranquility’ along the border though India’s strong objection to ‘stapled visa’ remained unresolved. The pacts, nicely worded and packaged, had little substance for India to genuinely cheer about. Premier Li, however, got what he wanted – India’s assurance of larger volume of bilateral trade and an exclusive industrial park for Chinese companies.

The exclusive industrial park deal with China, which may have also been intended to appease the aggressive military-economic super-power neighbour in exchange of peace along LAC, will have far-reaching impact on India’s economy as well as security.  The offer is meant to partly offset the adverse impact of huge trade deficit with China on India’s economy with anticipated large FDI inflow from that country. China will bring men, materials and money to set up business in the exclusive zone, housing only Chinese companies. China has already been shown several sites by Indian authorities to choose from.

Will China use its exclusive industrial hub in India for export manufacture or for flooding Indian market with its cheap wares and rehabilitating its surplus labour force? No Indian manufacturing firm worth its name, including Aurobindo Pharma, Ranbaxy and Indo-Asian Refractory, was allowed to survive in China as majority Indian-owned enterprise. They had to be sold off.

The talks on the proposed Chinese industrial park in India, which Singh revealed to the Chinese media, raises more questions than providing convincing answers. India ran a whopping $20-billion-plus trade deficit with china last fiscal against a total two-way trade of $67 billion. It represented almost a quarter of India’s total global trade deficit of $107 billion. FDIs, unless export-linked, are no solution to cover large foreign trade imbalances. The location and terms and conditions of the proposed land lease to China, including the disputes settlement mechanism, are still a secret. The result of any major bitterness over such disputes between India and China could be worse than the familiar Chinese military incursion tactics across LAC.

The nuclear deal with Westinghouse alone for six power plants of 1,000 MW capacity each at Mithi-Virdi in Gujarat’s Bhavnagar district, for which a pre-work agreement was signed between India’s Nuclear Power Corporation (NPCIL) and the American firm on June 13, last year, and revalidated last month, is expected to cost around US$18 billion (over Rs. 1,000 billion) if completed within the revised deadline. The US Nuclear Regulatory Commission released last year its final safety evaluation report on the technical review of the AP1000 standard nuclear reactor design and gave its certification for AP1000 Westinghouse Electric reactors. The Mithi-Virdi atomic power project was initially estimated to cost Rs. 500 billion when announced by NPCIL in January 2007.

The nuclear deal with Russia for the third and fourth units, having an installed capacity of !,000 MW each, similar to the first two units of which one has gone on stream, of Kudankulam atomic power station (KKNPP) in Tamil Nadu’s Tirunelveli district was estimated to cost US$ 7-8 billion. Curiously, the prime minister’s official pre-visit media statement missed reference to the setting up of the two new Russian nuclear reactors, the aspect of the inclusion of the nuclear liability clause and its cost implication which came up during Prime Minister Manmohan Singh’s talks with Russian President Vladimir Putin. The first two units escaped the provisions of the nuclear liability law as the contract was signed before its enactment.

The scope and extent of the agreements on defence procurements from the USA and Russia not quite clear either. It could be worth at least US$ 5-6 billion per annum. India, which recently lost a Russian-built nuclear submarine while anchored in Mumbai naval dockyard waters following a mysterious blast, is acquiring another from Russia reportedly for an annual lease rental of $ 1.2 billion. India’s defence purchases from both the countries are being stepped up following Dr. Singh’s recent visits of Washington DC and Moscow.

There is no denying of the fact that India needs to generate a lot more power to energise its energy-starved industry and meet the demands of urban and rural consumers. The country also requires sophisticated military hardware to defend its sovereignty. But, the question is: how long would its import-dependent economy facing huge current account deficits afford the luxury of importing high-cost nuclear and defence equipment and how would it pay for it?

The country’s present foreign exchange reserves are only around $ 250 billion against its overseas debt of over $ 390 billion. India’s average monthly trade deficit is over $ 8 billion. According to RBI: ‘India’s external debt, as at end-March 2013, was placed at US $390.0 billion showing an increase of US $44.6 billion or 12.9 per cent over the 2011-12 level.

‘Excluding the valuation change due to the movement of US dollar against major international currencies and Indian rupee, the external debt as at end-March 2013 would have increased by US $ 55.8 billion over end-March 2012.’ This is a matter of serious concern.  IPA