At Large

No More Mr. Rice Guy

Inflation kills the India-U.S. nuclear deal.

By 4.25.08

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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 â€" $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.

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About the Author

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute, and a columnist for the Times of India.