Accelerating inflation in India has claimed an unexpected
victim: the controversial India-U.S. civil nuclear deal. If the
Indian government moves forward in the face of strong domestic
opposition, it risks being toppled and forced into an early
election. Until recently, it seemed willing to take that risk, but
in the last six weeks, consumer prices have shot up — those of
politically sensitive food items especially. Standing for an early
election in such conditions would be political suicide, so the
government has put the deal on ice.
The American non-proliferation lobby opposes the nuclear deal,
but George W. Bush has pressed forward with it nonetheless.
President Bush has urged India to hasten on the next three steps of
the deal so that it can be concluded during his term.
In India, the nuclear deal is opposed by the Left Front — four
Marxist parties — whose support in Parliament is crucial for the
ruling minority coalition, led by the Congress Party. The Left
Front believes the deal will make India a junior partner in an
American imperial endeavor, and will withdraw its support if the
government goes ahead.
Three more steps are needed to conclude the deal. First, India
must sign a nuclear safeguards agreement with the International
Atomic Energy Agency. Second, the U.S. must persuade the Nuclear
Suppliers Group — the six countries that control the global trade
in nuclear goods — to waive existing sanctions against India. And
third, the U.S. Congress must approve the already-negotiated
agreement, after which the Indian and American governments can sign
it. The Bush Administration wants this to happen by July, after
which the U.S. presidential campaign will make further discussions
impossible.
The Indian government has worked out the text of a safeguards
agreement with the IAEA, but worries that signing it would
precipitate its ouster by the Left Front. Influential factions
within the ruling Congress Party have ffavored signing the
agreement anyway, risking an ouster, and going for an election in
late 2008.
Under India’s Constitution, an ousted government would continue
as a caretaker government until the next election. And U.S.
Assistant Secretary of State Richard Boucher said last month that
the U.S. was prepared to sign a deal with any constituted
government, including a caretaker. In other words, the nuclear deal
could be completed even if the Left Front toppled the
government.
The next general election is set for May 2009, but the budget
crafted in February was intended to give Congress President Sonia
Gandhi the option to hold it earlier. The highlight of the budget
was the waiving of $15 billion worth of bank loans to perhaps 40
million farmers. Almost 60% of Indians earn their living from
agriculture, so this populist gesture targeted the biggest vote
bloc.
The budget also reduced taxes on consumer items ranging from
cars and motorcycles to paper and pharmaceuticals. It eased income
tax brackets, putting an additional Rs 5,000-50,000 ($125
— $1,250) back into the pocket of every taxpayer, and
thus appealed to the middle class.
Meanwhile, government outlays increased for rural employment,
health, education, and infrastructure initiatives. Scholarships and
special schools were decreed for lower castes, tribal groups and
Muslims. One analyst aptly described the approach as “no vote bloc
left behind.”
The budget gave Sonia Gandhi a strong platform for an early
election. In recent decades, however, Indian voters have ousted
incumbent governments around 80% of the time, so, an early election
is always risky. And while Sonia Gandhi pondered the risks,
inflation suddenly took off. In January, it was 4.5% — closing in
on the 5% at which voters tend to revolt. Inflation has gone up
every single week, reaching 7.4% in the week of March 29, and it
now seems headed for double digits. Consumer prices of some food
items are already up 10-20% over last year. This is largely because
global food prices have surged upward, but voters will blame the
government.
In panic, the government has banned the export of all varieties
of rice, barring the luxury basmati variety, as well as wheat,
corn, gram and lentils. It has abolished the import duty on edible
oils and grains. By threatening a ban on steel exports, it has
obliged producers to cut steel prices. Such tactics will discourage
production in the medium run. But bringing down prices in the short
run is all the government can think of right now.
High inflation means that the government can no longer risk an
early election. Instead, Gandhi and her coalition will hang on
until elections are due in May 2009, hoping world food prices will
fall by then.
As an unanticipated consequence, the India-U.S. nuclear deal has
been shelved. It will have to wait until after both countries have
held elections — which may bring very different people to power.
These new leaders will have to decide whether to go ahead with the
deal, and on what terms.
