Indian Economy: Why Risk Losing Office over a Nuclear Deal?

New Delhi, 21 July 2008. Both the Congress Party and the opposition BJP are waged in a frantic attempt to lure minority parties and rebels to their side of the fence as the clock ticks down to a No Confidence vote in Indian parliament scheduled for Tuesday 22 July 2008.

New Delhi, 21 July 2008. Both the Congress Party and the opposition BJP are waged in a frantic attempt to lure minority parties and rebels to their side of the fence as the clock ticks down to a No Confidence vote in Indian parliament scheduled for Tuesday 22 July 2008.

Prime Minister Manmohan Singh has been determined to push through the nuclear energy deal he has engineered with US President George Bush. As a result, the left-leaning parties that made up his fragile coalition have deserted him.

If you want your son to get a plum job or would like to see a pet policy enacted, then there has never been a better time to strike a deal. The vote is expected to be razor-thin, and marathon negotiation sessions are going on day and night in the run up to the vote. Smaller parties are being courted by both Congress and the BJP in an attempt to secure their support. Over the weekend, for example, the JMM announced that two of its five MPs would be given cabinet positions and a post in state government would be secured for, you guessed it, the leader’s son.

Leaving aside the gritty real politik of Indian parliamentary democracy, as intriguing as that is, it is worth questioning why Congress believes this deal is so important. With inflation running at close to 12% tempers are flared on the ground. The situation is already challenging, why go out even further on a limb?

The answer, as with so many other things in economics and politics, comes down to oil. India and China have been growing their economies at 9%-12% per annum for the past few years, with similar increases in their energy demands. Oil producing countries have not been able to raise production levels to meet that demand. There is a growing debate as to whether this is a cyclical phenomenon, which will abate in a few years once new oil wells come online, or a deeper structural one, in which natural limits to oil production are being reached. In either scenario, it seems sensible to assume that at least the next ten years or so will see supply lagging behind demand.

India and China are reacting to the crisis in different ways. China has been aggressively and single-mindedly tying up energy and commodity supplies on a global scale. It has become a big investor in regions as far flung as Africa and Latin America, and often represents a more palatable alternative than traditional western investors in that it does not weigh things like human rights in its investments.

India, as the world’s largest democracy, cannot move as quickly to lock in supply-side deals, and it does not have the latitude to strike major deals with regimes that the often left-leaning public would have objections to.

Alternative sources of energy therefore need to be secured. More ‘eco-friendly’ sources such as hydro-electric, wind or solar power would certainly be more politically palatable, but will not be able to scale quickly enough to slake India’s monstrous energy thirst. With food supplies already a major challenge given India’s 1.1 billion population, biodiesel is also not a viable option.

Prime Minister Manmohan Singh, an economist and former Finance Minister, therefore feels he has no choice but to look at nuclear power as the only source of energy that can scale to meet the supply shortfall that is just getting underway.

He is not alone. Advances in the safety and disposability of nuclear energy technologies over the last twenty years have put nuclear power back on the map for many countries worldwide. Ironically environmental activists who were once the biggest its biggest critics are increasingly seeing nuclear as a clean alternative to fossil fuels.

Even the BJP believes that nuclear cooperation with the US, but believes the current deal is too favorable to the Americans and would like to re-negotiate. With US Presidential elections due this November, and India required to hold an election by May 2009 at the latest, however, it is doubtful that a new deal can be constructed any time soon.

Dr Singh is convinced that this deal is vital to the long-term interests of India and he is therefore willing, as is his party, to stake everything on getting it through.

Santos de la Raya, EconomyWatch.com

Related:Indian Inflation Backgrounder