By Kanes
When the United States imposed economic sanctions on India and Pakistan under the terms of the Nuclear Proliferation Prevention Act of 1994 which mandates strict penalties for countries not recognized as nuclear powers that receive or detonate a nuclear device, it was believed that they would hurt both countries, but Pakistan more than India as it was more dependent on foreign assistance. It was originally estimated that the sanctions would cost more than $4 billion to India and Pakistan — in the form of halting of all US government loans, credits, credit guarantees, banning of US bank loans and credits, ending of US aid, stopping of credits and guarantees by Export-Import Bank and opposing loans of IMF and the World Bank. Indian authorities, however, were of the view that the sanctions would not hurt India much as it was not heavily dependent on foreign assistance which only accounted for about 2 per cent of its national investment. The Minister of Finance described the sanctions as "minor roadblocks" and the Deputy Chairman of the Planning Commission in fact believed that India would achieve 7 per cent economic growth despite the sanctions.

India's optimism now appears to have been vindicated to some extent. The United States has apparently reconsidered its action and is cushioning the impact of its own economic sanctions by letting huge World Bank loans and private sector investments to India continue. Despite the sanctions US based Unocal Corporation is planning to develop a board range of energy projects in India over the next five years requiring $4 billion to finance. Further, the World Bank lending to India seems to be back on track. Its lending resumed when the World Bank Board recently approved $543 million on a health and education loan to Andhra Pradhesh and approved another loan for $506 to fund health and agricultural projects. It should be mentioned that US is by far the largest foreign direct investor in India, having invested about $10 billion since 1991 and continuation of US investments is crucial for India's development.

However, India has not entirely escaped from the effects of the sanctions. The Indian Rupee has declined in value from $1=39.55 on April 13 to $1-42.65 on June 29 or a depreciation of 7.2 per cent. The Bombay Stock Exchange sensitive Index has declined by 22 per cent from 4086 in mid-April to 3169 in mid-June. Institutional investors began withdrawing from Bombay Stock Exchange as they had lost much confidence after the nuclear tests and US sanctions. Foreign portfolio investors pulled out $218 million as May and $205 million in June. Moody's Investor Service has also lowered India's credit rating by 2 notches to below investment grade level and direct foreign investment is expected to decline from the 1997 level of $2.7 billion. Direct foreign investment had been rising in India from $0.1 billion in 1990 to $0.1 billion in 1994 and $2.7 billion in 1997 and the latest budget expects an increase over 1997 but this is unlikely to be realized.

Jagdish Bhagwati, professor of economics at Columbia University, in a recent seminar in Delhi had underlined the importance of foreign investment in India and urged Indian authorities to sign the Comprehensive Test Ban Treaty to end nuclear sanctions which discourage such investments. He is reported to have stated that the nuclear tests had severely upset the world community "It upsets the nuclear non-proliferation treaty regime. You are taking on a very substantial investment in the international regime and you are not going to get an easy passage. Signing the Comprehensive Test Ban Treaty could be a means to remove the sanction." Jaswant Singh, a key defence and political adviser to the Indian premier is also reported to have admitted that sanctions imposed by the US, Japan and the European Union had have an effect.

Pakistan
Pakistan's case is, however, different as it is more vulnerable than India. Its foreign debt of $30 billion is about 72 per cent of its GDP while India's foreign debt of $91 billion is 25 per cent of its GDP. The ratio of foreign direct investment to GDP in 1990-1994 was 0.51 as compared to 0.14 per cent of India's and the ratio of portfolio investment to GDP was 0.94 per cent in contrast to India's 0.62. Pakistan is more dependent on foreign borrowing; last year for instance, IMF agreed to lend $1.56 billion to tide over its balance of payments crisis; India, on the other hand has not borrowed from the IMF for the last five years. Pakistan's receipts of foreign grants and soft loans are equivalent to about half of government's domestic revenue. It is therefore estimated that the impact of economic sanctions could be between two and five times as heavy in Pakistan as in India.

Pakistan's foreign debt service payment for the current financial year 1998/1999 amounts to $3.0 billion. Its foreign exchange reserves are about $800 million or the equivalent of six weeks imports. The Pakistan authorities had assumed earlier that as $1.5 billion of assistance was in the pipeline, it was short of another $11.5 billion and was expecting to obtain it from the IMF. The IMF had agreed to the disbursement of its latest trench of a $1.56 billion Enhanced Structural Adjustment Facility (EASF) last October, but this has now been delayed on account of the sanctions. The US is using its votes in the IMF, World bank and other institutions to block further assistance to Pakistan. This follows the delayy of another tranche of $26 million due in June. If the IMF funds are not forthcoming, Pakistan has no alternative but to default and declare a moratorium on its foreign debt. Pakistan authorities have argued that sanctions should apply to new not old loans but the IMF and US do not seem to concur. Apparently they and the other developed countries do not propose to relax the sanctions until Pakistan signs the Comprehensive Test Bank Treaty (CTBT).

In this desperate situation the government announced an austerity programme to conserve resources. The Prime Minister moved from his palatial secretarial to a modest building, putting it for sale, and changed his car from a luxury Mercedes Benz to a Toyota and the Minister of Information switched off all airconditioners in his Ministerial office and adopted a vegetation diet to set an example to the public. The central bank governor taking his cue from the Prime Minister too has moved out of a grand official residence to smaller premises. The government imposed a 50 per cent cut in non-development expenditure and high levies on imports of non-essentials like reconditioners and airfrigerators. Fearing on a run on deposits of overseas Pakistanis, the government froze foreign exchange accounts on May 28. It also devalued the rupee by 4.2 per cent in June.

These measures, however, failed to arrest the fall of the rupee from $1=Rs. 46 to $1=Rs. 63 and the crash of the stock exchange from 2000 in October 1997 to a life-time low of 777. Standard and Poors in addition, downgraded Pakistan's long-term foreign currency issuer credit rating and senior unsecured rating.

Rethinking on Sanctions
The US authorities, in the meantime have had second thoughts on economic sanctions. They have realized that sanctions hurt the country imposing them as the country on which they are imposed. The US business and farming interests are of the view that sanctions do not work and they only clear the way for competitors from Japan and Europe to step in. Thus, particularly on account of the pressure from powerful agricultural interests in the US — the wheat farmers who fear losing their lucrative markets — the senate has voted to ease US sanctions on agricultural exports to India and Pakistan. This means that credits and governmental guarantees will be restored for agricultural exports for these countries.

The legislation to relax economic sanctions was rushed through because of Pakistan's impending purchase on 15 July 1998 of nearly 13 million bushels of wheat for which tenders had been called. Pakistan has hitherto been one of the largest buyers of American wheat and had purchased $350 million worth of US wheat with the help of export credits in fiscal year 1997 and $162 million of wheat with credit during the current fiscal year before the cut-off. The bill allows a one year exemption for agricultural products from non-proliferation sanctions. This concession is considered vital for US wheat growers as agricultural export credits are intended to facilitate US exports by assuring lenders they will get their money even it the borrowers default. Pakistan considered relaxation as a "very positive sign". Now she would consider the bid by American wheat growers along with those of others who have offered credit sales like Australia and Canada.

The US has imposed sanctions 104 times since World War 11 and incredibly 61 times since President Clinton came to power. About 70 nations are currently subject to US sanctions and many in US believe that lifting bans on credit for US agricultural exports to India and Pakistan might serve as a first step towards reviewing the whole sanctions issue. The Indian reaction to US government's decision is exemplified by the remarks of the Indian Prime Minister Vajpayee:-

"It is becoming clear that these kinds of sanctions are unproductive. The country has the capacity to stand up to the sanctions. Those who have imposed sanctions are now themselves debating. They are trying to find out who is hurt more".

The rumour regarding the relaxations of sanctions on agricultural exports and the news that the Islamic Development Bank and Saudi Arabia would come to Pakistan's resuce, after the Finance Ministers' negotiations, lifted the currency and stock markets on 15 July. Karachi stock exchange rose by 2.11 per cent to 782 points and the Rupee rose to $1=Rs. 56. The situation may improve further with the recent decision of Japan to ease its sanctions and engage in talks with other developed countries and the IMF on resuning assistance to Pakistan.