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Analysis Monday, 1 June, 1998, 13:24 GMT 14:24 UK
India - will sanctions bite?
Indian PM Atal Bajpayee
Japan and the USA have cut off all but humanitarian aid to Mr Vajpayee's government
The government of India claims it has already taken account of the impact of economic sanctions which could be imposed in reaction to its nuclear tests.

Industrialists in India have been sceptical that sanctions will have a significant negative effect on the economy.

They point out that when the United States government imposed sanctions on China following the Tiananmen Square massacre in 1989, foreign direct investment continued to flow into that country.

However, the government risks shutting off flows of international capital at a crucial time for the economy.

Sanctions so far

The United States is to impose measures under the Nuclear Proliferation Prevention Act.

This requires the President to impose severe penalties against countries testing or selling nuclear devices within 30 days.

The impact of these sanctions is partly symbolic - for example, the imposition of a ban on US banks making new loans to India.

More significantly, US opposition will be invoked to win support from the International Monetary Fund and World Bank.

The United States has considerable influence over the two Washington-based institutions, and India is the World Bank's largest borrower.

India owes a total of $44bn in loans to date, and has budgeted for loans from both organisations totalling around $6bn this year.

Japan, India's largest foreign donor, is to suspend an annual programme worth $26m, but will leave humanitarian aid programmes untouched.

However the Japanese government has, so far, refrained from announcing any changes to an agreed loan programme of around $1bn.

A reaction is also expected from the European Union - a new and substantial market for India.

Feeling the pinch

Sectors of the Indian economy depending on the import of technology, like the chemicals industry, are likely to be hurt by sanctions.

But strict sanctions are more likely to harm western business, which has invested heavily in India, especially in construction, computing and telecoms.

Several large American companies are now based in India, and the business community expects they may have some influence in restraining US moves against India.

The Indian government says it has already allowed for some economic response, but is willing to take the consequences.

According to the US credit rating agency, Moody's, a reduction in capital flows to India could not come at a worse time: the economic reform programme designed to open up India's economy has stalled.

Another major ratings agency, Standard and Poor, said it saw no imminent change to India's status, and thinks the insular nature of India's economy, with limited foreign involvement, would soften the effect of any sanctions.

See also:

29 May 98 | india nuclear testing
13 May 98 | india nuclear testing
13 May 98 | india nuclear testing
13 May 98 | india nuclear testing
13 May 98 | india nuclear testing
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