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Case Studies in Sanctions and Terrorism: India

Case Studies in Sanctions and Terrorism

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Case 98-1
US v. India (1998- : Nuclear Weapons Proliferation)

| Chronology of Key Events | Goals of Sender Country | Response to Target Country |
Attitude of Other Countries | Legal Notes | Economic Impact | Assessment |
Author's Summary |

Economic Impact

Observed Economic Statistics

"India is the third-largest borrower from the World Bank ... In the fiscal year ending June 30, the bank expects to extend about $3 billion in loans and other assistance to New Delhi."(Wall Street Journal, 12 May 1998, A6)

"The [World] Bank says India's foreign exchange reserves, which were $26.3bn at the end of March 1998, will fall to $22.6bn in the current fiscal year." (Financial Times, 10 August 1998, 4)

"Imports were 9.3 percent higher for the first seven months of the fiscal year ... leaving a trade gap of $5.8 billion, more than 116 percent up on the period a year earlier." (Financial Times, 4 December 1998, 7)

"If all official flows, and loans from international agencies and export-credit agencies are cut off, the total could be $7 billion a year. However, disbursements are always lower than approvals: last year India is reckoned to have received only some $3 billion, less than 1 percent of GDP." (Economist, 16 May 1998, 37)

"In the first independent assessment of the potential economic fall-out from India's nuclear tests, the CMIE [Center For Monitoring Indian Economy] estimates that sanctions and negative sentiment will cut net [capital] inflows to $1bn for the year, compared with flows of $7.7bn last year and $9.3bn a year earlier. The estimates embrace official and private investment flows." (Financial Times, 14 July 1998, 4)

According to the Federal Financial Institutions Examinations Council, the exposure of US bank claims on India totaled $1,730 million at the end of 1997. The exposure of US banks to public borrowers in India amounted to $262 million at the end of 1997. (Federal Financial Institutions Examinations Council, www.ffiec.gov)

"GDP growth has slowed, from the average 7 percent in previous years, to 5 percent in 1997-1998. ...The public sector deficit (9 percent of GDP in 1997-1998) lies at the heart of the country's macroeconomic vulnerability. ...The current account deficit, at 1.6 percent of GDP, ... is expected to widen to 2.3 percent of GDP in 1998-1999, because of a deteriorating trade deficit and possible weaknesses on remittance inflows. ... The rupee has declined by 9.6 percent against the dollar between January ... and August 1998 owing to low investor confidence and rising inflation." (South Asia Monitor, 1 November 1998)

"Sanctions weakened the capital account. Foreign institutional investors withdrew more than US$400 million from the stock markets in May and June 1998 and Moody's downgraded India's credit rating to below investment grade. Sanctions are projected to cut net inflows of official and portfolio investment to US$1 billion for this year. To offset their impact, the government launched an "India bond", and raised US$4.2 billion." (South Asia Monitor, 1 November 1998)

"Sanctions have thus far cost India about $1.2 billion in World Bank loans, bank officials say." (New York Times, 2 February 1999, A9)

India: US Assistance, 1992-1997 (millions of US dollars)


 
1992
1993
1994
1995
1996
1997
 





Military aid
0.4
0.4
0.2
0.2
0.4
0.4
PL-480 food aid
98.3
144.8
118.5
104.8
131.4
93.7
Other economic aid
47.6
25.3
36.9
59.6
25.8
31.8

Source: US Agency for International Development, Overseas Loans and Grants, Obligations, and Loans Authorizations, series of yearly data.

White House Report on Potential Scope of India Sanctions states that for FY1998, $91 million was appropriated for PL-480, $51.3 million in additional economic aid, and $700,000 in International Military Education and Training (IMET).

India: US Military Sales, Commercial Exports Licensed Under Arms Export Control Act (millions of dollars)


 
Military sales
Commercial exports
 

1992
1993
1994
1995
1996
1997

0.01
0.03
0.02
0.01
4.5
10.4
97.3
4.6
1.5
9.0

Source: Foreign Military sales, Foreign Military Construction Sales, and Military Assistance Facts, as of 30 September 1997.

India: Export-Import Bank Assistance, 1994-97 (millions of US dollars)


Years
Loans
Guarantees
Insurance
Total

1994
1995
1996
1997
679.6
32.2
94.0
20.3
4.3
33.6
30.1
280.5

2.4
2.7
4.2
683.9
68.2
126.8
305.0

Source: Export-Import Bank annual reports, various issues.

Overseas Private Investment Corporation (OPIC): Investment Projects,
1995-97
(millions of dollars)


FY1995
215
FY1996
320
FY1997
50

Source: OPIC annual reports, 1995, 1996, 1997.

India: Multilateral loans, 1992-1996 (million of dollars)


 
Total multilateral
Concessional
multilateral

1992
1993
1994
1995

1996
2,424
2,084
2,230
1,942
2,234
1,192
675
979
736
924

Source: World Bank, Global Development Finance, 1998.


"There was in fact a sharp decline in the capital flows to India during the months following the nuclear tests in May. For April-June 1998, the net inflow was about $4.2 billion less than in the same quarter in 1997. This amount is modest but not insignificant relative to the whole Indian economy: it is equivalent to about one percent of GDP and four percent of gross domestic investment. Initially, this shrinkage in net capital inflows brought about a decline in India's foreign exchange reserves.... ...India was able to compensate for this initial loss of capital inflows through the sale of the so-called Resurgent India Bonds to nonresident Indians. This bond issue brought in over $4 billion, and by October 1998 total reserves exceeded the April level." (Morrow 1999, 5-6)

"Indian researchers are feeling buoyed by the new budget unveiled last weekend that hands science its largest increase of the decade. A 20% hike that would benefit both civilian and defense sectors is seen as a shot in the arm for domestic efforts to overcome foreign sanctions imposed in the wake of last spring's nuclear tests. These large increments "reflect India's determination to fight…the sanctions and denial of technology," says Raghunath A. Mashelkar, director-general of the Council of Scientific and Industrial Research (CSIR). (Bagla 1999, 1429)

"The indirect impact of the sanctions on private capital flow was greater in so far as they increased the uncertainly about India's external environment. Between 1997-98 and 1998-99, FDI flows declined from $3.5 billion to $2.5 billion while portfolio flows declined from $1.8 billion to $-0.07 billion. While it is difficult to disentangle causality, the fact that flows have again increased in 1999 suggests that the uncertain domestic political environment in India in 1998, and the resulting uncertainly regarding the course of economic reforms, together with the systemic crisis in capital flows to emerging markets were more important than the sanctions in the decline in private capital inflows in India. With economic reforms faltering and capital markets already spooked, the sanctions added to the negative factors that led to a lowering of India's sovereign ratings…. [A]ny potential financial pressures from the sanctions were severely undercut by the resounding success of the Resurgent India Bonds (RIBs).. which raised $4.23 billion in just 20 days based in the support of over 74,000 expatriate Indians in over 30 countries." (Kapur 1999, 6-7)


Calculated Economic Impact
(annual cost to target country)


Suspension of Ex-Im Bank and OPIC guarantees; welfare loss estimated at 10 percent of average annual flows, 1995-97.

$36 million
Suspension of US military and economic assistance; welfare loss estimated at 90 percent of average annual transfers of 1994-1997.

$35 million
Suspension or cancellation of other bilateral aid; welfare loss estimated at 90 percent of value of aid withheld.

$315 million
Suspension of nonconcessional multilateral development loans; welfare loss estimated at 20 percent of average annual disbursement, 1994-96.

$250 million
Reduction in high-technology imports; welfare loss estimated at 40 percent of value of licenses denied.

$29 million
Reduction in military sales, commercial exports licensed under Arms Export Control Act.

negl
.
Restriction on bank lending to Indian government; welfare loss calculated as 5 percent of US bank exposure to public borrowers (end 1997).

$13 million
Total
$678 million

Relative Magnitudes


Gross indicators of Indian economy  
    Indian GNP (1996)
    Indian population (1996)
$356.5 billion
939.4 million
Annual effect of sanctions related to gross indicators
        Percentage of GNP
        Per capita


0.2
$0.72
Indian trade with US as percentage of total trade
        Exports (1997)
        Imports (1997)

19.3
9.5
Ratio of US GNP (1996: $7,637.7 billion) to Indian GNP
21

Sources: IMF, International Financial Statistics Yearbook, 1998; Direction of Trade Statistics Quarterly, June 1998.

 

Assessment

Melvyn Krauss, senior fellow at Hoover Institution, Stanford University
"The economic sanctions will not change India's behavior. New Delhi surely knew before it conducted the tests that the US would impose economic sanctions in retaliation: the Nuclear Proliferation Act of 1994 requires it. The fact that the Indians went ahead with it suggests the new nationalist government believes the benefits of testing their weapons exceed the likely costs of sanctions." (Wall Street Journal, 22 May 1998, A16)

Council of Foreign Relations Independent Task Force
"U.S. efforts to prevent the current situation [nuclear tests] from coming about-a policy predicated on endeavoring to develop bilateral ties with both India and Pakistan and deterring nuclear proliferation through ... the threat of comprehensive economic sanctions-may have slowed the advance of the two nuclear programs. But U.S. policy failed in the aftermath of the elections of the new Indian government." (Council on Foreign Relations, After the Tests: U.S. Policy toward India and Pakistan, Report of an Independent Task Force, 1998.)

Washington Post
"[T]he purpose of the sanctions law was deterrence, and deterrence in this case failed. Since the threat of sanctions did not dissuade India and Pakistan from testing, some officials argued, there was little point in imposing a trade ban or Iran-style cutoff that would have undermined U.S. business interests." (Washington Post, 19 June 1998, A29)

Jim Hoagland, chief foreign correspondent, Washington Post
"A crusade to punish India politically for being the messenger of a new and uncertain nuclear era that challenges the established nuclear order may be temporarily satisfying, but it is likely to be as untenable as were the initial U.S. outrage and dictates of last May." (Washington Post, 21 February 1999, B7)

Journal of Commerce
"Problems with the sanctions law emerged soon after both countries [India and Pakistan] staged a series of nuclear tests last May. It quickly became clear that the mandatory curbs were so tough that they could only serve as a deterrent. No one knew how to apply them if testing actually took place. The first thing that U.S. officials found was that they had neglected to write implementing regulations for the sanctions law. ... As a result, the sanctions were ineffective as a deterrent and ambiguous as a punishment." (Journal of Commerce, 22 February 1999, 4A)

Daniel Morrow and Michael Carriere
"The fact that the threat of the US sanctions failed to prevent the nuclear tests by India and Pakistan is certainly not sufficient reason to abandon the Glenn Amendment. Although the US threat ultimately failed in the case of India and Pakistan, it might be the case that the threat of sanctions delayed testing by many years for both nations. A sufficient rationale for executing the threat was, as Undersecretary [Deputy Secretary] of State Talbott said, to create a disincentive for other states to exercise the nuclear option if they are contemplating it."

"At present the states that seem interested in developing a nuclear capacity—in particular, North Korea, Iraq, and, to a lesser extent, Iran—are already isolated from the global economy by their own policies and existing sanctions. The presence of the Glenn Amendment is irrelevant to their incentives. However, further down the road there may be circumstances in which nations that are more fully engaged in the global economy and that have now pledged to remain non-nuclear are driven by domestic politics or regional pressures to reconsider." (Morrow 1999, 13)

"The experience of India is particularly relevant because it indicates, that, for a country that participated in global capital markets, the indirect effects of sanctions, i.e. their impact on attitudes and expectations of both domestic and foreign economic agents, can magnify the direct effects. …The overall economic cost of these indirect effects of loss of confidence by global financial agents may far outweigh any direct costs of sanctions." (Morrow 1999, 13)

Devesh Kapur
"By mid-1999, any changes in India's position were driven—like the tests themselves—from perceived national self-interest, and sanctions were of little import in the changes (or lack thereof). India had agreed in principle to sign the CTBT although had not yet done so. This change in India's position was not because of the sanctions but because the tests had removed the rationale in not signing the treaty. If anything it could be argued that the continuation of sanctions (despite the temporary waiver) made it more difficult for the government of India to move from accepting the CTBT in principle to actually signing it, since it would seen domestically as giving in to duress." (Kapur 1999, 12)

Randy J. Rydell
"Both the threat and the implementation of sanctions have advanced US nonproliferation goals in both India and Pakistan, whether they be measure in (a) the length of time it took for such tests to finally occur, (b) the costs of having to undertake such tests quickly, underground, and with elaborate measures of deception, or (c) the message US actions have sent to the world community about America's commitment to defend both global ideals and its own national security interests. The sanctions are in all likelihood key reasons explaining why neither country has proceeded with additional tests." (Rydell 1999, 11)

Karl F. Inderfurth, assistant secretary of state for South Asian affairs
"I should stress that since the time of India's nuclear tests, our two countries have made progress toward understanding each other's security considerations, but we have yet to see the concrete actions taken that could help reconcile our differences."(USIS, 25 May 1999)

Author's Summary

Overall assessment  

Policy result, scaled from 1 (failed) to 4 (success)

1

Sanctions contribution, scaled from 1 (negative) to 4 (significant)

2

Success score (policy result times sanctions contribution)scaled from 1 (outright failure) to 16 (significant success)

2
   
Political and economic variables  

Companion policies J (covert), Q (quasi-military), R (regular military)

International cooperation with sender, scaled from 1 (none) to 4 (significant)

3

International assistance to target A (if present)

Cooperating international organizations

Sanction period (years)

3

Economic health and political stability of target, scaled from 1 (distressed) to 3 (strong)

3

Presanction relations between sender and target, scaled from 1 (antagonistic) to 3 (cordial)

2

Regime type of target, scaled from 1 (authoritarian) to 3 (democratic)

3

Type of sanction X (export), M (import), F (financial), Z (asset freeze)

F,X

Cost to sender, scaled from 1 (net gain) to 4 (major loss)

2

Comments

The Glenn amendment was written with deterrence as the goal. Once that failed, however, economic sanctions were maintained to pursue goals beyond deterrence, especially India's adherence to the CTBT and associated restraints. The policy result score of 1 reflects the fact that India is unlikely to sign the CTBT before the September deadline for the treaty's entry into force, or to sign the Nuclear Non-Proliferation Treaty or the Fissile Material Cut-off Treaty without conditions, or discontinue the weaponization of missiles.


Bibliography

Bagla, Pallava. 1999. Big Increase Seen as Answer to Sanctions. Science 283 (5 March): 1429–30.

Congressional Research Service (CRS). 2002a. India and Pakistan: Current U.S. Economic Sanctions. RS20995. By Dianne E. Rennack. Updated 11 February.

Congressional Research Service (CRS). 2002b. India-US Relations. IB93097. By K. Alan Kronstadt. Updated 7 November.

Kapur, Devesh. 1999. The Domestic Consequences of India’s Nuclear Tests. Paper presented at conference on South Asia’s Nuclear Dilemmas, Weatherhead Center for International Affairs, Harvard University, February.

Morrow, Daniel, and Michael Carriere. 1999. Economic Impacts of the 1998 Sanctions on India and Pakistan. The Nonproliferation Review 6, no. 4 (Fall): 1–16.

Rydell, Randy J. 1999. Giving Nonproliferation Norms Teeth: Sanctions and the NPPA. The Nonproliferation Review 6, no. 2 (Winter): 1–19.

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