Not That Bad After All

"Sanctions by themselves don't move these countries very far. The threshold for pain is high. They will take the heat."—Karl Inderfurth, assistant secretary of state, South Asian affairs

"Coercive measures such as those interfering with the free flow of trade, investment and technology are unjustified and counterproductive."—Indian Foreign Office statement.

The American business community is seeing the Clinton Administration's June 18 announcement as a much-toned-down interpretation of the American sanctions law. But it may have been hit hard by Moody's downgrading of India's sovereign debt from Baa3 (prime investment) to Ba2 with a stable outlook. While the downgrade was expected, the severity was not. The initial reaction from Wall Street was positive.

"There's nothing new today that would worsen or improve our view of the credit ratings of the countries," said Joydeep Mukherjee, a sovereign analyst from Standard and Poor's. Mukherjee says his agency has no immediate plans to change India's ratings: "When the sanctions were announced, we did change the ratings of both Pakistan and India. What was announced now is sort of in line with expectations when we made the last rating change." S&P will maintain India's BB-plus long-term foreign currency rating with a negative outlook, at least for the near term.

Said a leading advocate of increased US-India business ties: "Basically, the picture now looks better than what was staring at us in early May. The Administration has decided not to use US companies as scapegoats over the testing issue. And that for us in the business community is a great signal and good news." Corporate America was concerned that guidelines of the 1996 law would be interpreted broadly by Administration officials. Some 42 government agencies and their affiliates are involved with the law, which only increased the uncertainties, Mark J. Riedy, a Washington attorney involved in US-India business activities, stressed. Riedy asked Congress to consider the long-range impact of punitive measures and cited this example: 47 per cent of the work under way to prevent a breakdown of US computers at the turn of the century, known as the "millennium bug", is being done by 150,000 Indian nationals based in the US or is being subcontracted out to software companies in India. If the effort fails, "it will be like hitting US industry in the face with a baseball bat," he said.

This announcement of guidelines will have very, very little impact on US commercial activities in India," a trade official told Outlook. "Even in hi-tech matters, the Administration will not be concerned over the level or type of technology being exported, but will focus on who is using them. As long as it's not the Indian government or one of its direct entities, there should be no problems."

Washington insiders credit two lobbies for keeping nasty surprises out of the sanctions. US corporations—especially those belonging to the US-India Business Council, which represents corporate giants like Boeing and Ford—warned the Clinton Administration that a broad interpretation of the sanction law would land American firms in the soup. And the Indian American community has carried out a quiet and understated campaign to overturn the sanctions.

Corporate majors mostly worked on the Treasury and Commerce Departments where the business community's concerns are better understood. "It took a while before we could weigh in on the folks at the State Department," a business official said.

"Some of our efforts at lobbying the Administration and our lawmakers have paid off," says Dr Sudhir M. Parikh, a top official of the influential American Association of Physicians of Indian Origin (AAPI), one of the wealthiest and influential Indian American groups. Dr Parikh, who raises campaign funds for lawmakers from both parties in New Jersey and elsewhere, added: "I do realise that the sanctions are still there, and they are odious. But from what I understand, they aren't as severe as feared by many of us. We will have to work hard to get the whole thing voted out in Congress."

 Precisely aiming at that goal, New Jersey Democrat, Frank Pallone Jr, founder and co-chairman of the Congressional Caucus on India and Indian-Americans, has initiated a tentative move to introduce legislation to allow certain economic sanctions against India to be lifted if the Indian government took steps toward nuclear non-proliferation. "I am drafting legislation that would lift the sanctions against India—piece by piece," Pallone said, adding: "The legislation would allow sanctions to be removed if India takes certain steps towards nuclear non-proliferation. For example, if India were to restrict the manufacture of nuclear fissile material, all sanctions related to infrastructure would be lifted."

The entire issue of sanctions as a tool of American diplomacy has attained a sharp edge in US policy circles with several leading authorities on the subject weighing in against its indiscriminate use. For instance, foreign policy guru Dr Henry Kissinger bluntly stated: "Sanctions rarely work. But whatever chance they have of working depends on the ability to define an achievable objective. Failing that, they become a permanent aspect of the international scene and demonstrate either the impotence of our policy or lead to the gradual weakening of the state against which the sanctions are being levied. And the systematic weakening of neither India nor Pakistan is in the American national interest."

Interestingly enough, the US has imposed foreign policy sanctions 100 times since World War II, and more than 60 times since 1993. Seventy-five countries are now subject to or threatened by US curbs. Two scholars from the prestigious Washington DC-based think tank, the American Enterprise Institute, lambasted the use of sanctions. "In the most comprehensive study of sanctions imposed by the US since 1970, the Institute for International Economics found a success rate of less than 20 per cent. In world markets, the target country can almost always find alternate markets," say economists Claude Barfield and Mark Groombridge.

No wonder then, even Madeleine Albright chimed in: "We must do something about it, because sanctions that have no flexibility, no waiver authority, are just blunt instruments. And diplomacy requires us to have some finesse." Complained she: "I can't do business, or the president can't do business, with our hands tied behind our back. It's all sticks and no carrots. We have all the sticks or the sledgehammers, and then other countries can go in and pick up the contracts." The other—and very important—aspect was that the US government realised that tough sanctions will possibly hurt India, but cripple Pakistan.

But despite what is being seen in the US as the kinder, gentler interpretation of the sanction laws, India still faces formidable economic repercussions because of the punitive measures. Rafiq Dossani, a professor at the Asia Pacific Research Centre at Stanford University, warned in an e-mail exchange to this writer: "It seems clear that there will be a slowdown in direct foreign investment into India.Foreign portfolio investors are also wary of the developments." That's precisely what set Moody's thinking and may impact American private investment decisions.

Meanwhile, Washington DC has begun considering its next moves. Former US joint chiefs of staff chairman John Shalikashvili said that though sanctions against New Delhi and Islamabad must remain in place, "India and Pakistan cannot be isolated and efforts must be redoubled to keep either of them from mating their nuclear devices to their missiles. Ways must be found to make the CTBT so attractive that they will sign."

Now that the Administration has unsheathed its sticks, analysts fervently hope that there are some carrots in store.