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Business Commentary/ R C Murthy

Why nuclear India should soften Japan to restore ADB aid

The Vajpayee government has miscalculated the determination of the Asian Development Bank to strike an independent posture vis-a-vis the Bretton Woods twins -- the World Bank and the International Monetary Fund -- and landed in a diplomatic jam.

The Indian delegation, led by Finance Secretary Vijay Kelkar, that went to Manila at the end of April was shocked at the volte face with respect to resumption of ADB lending to India. The ADB asserted publicly that restoration of normal lending to India was constrained by the prescriptions of the G-8 (group of eight top industrial nations).

Kelkar had hoped for a positive development. For, the US and Japan had abstained -- as against casting negative votes -- from the WB's meeting last January, when a decision on the $210 million power sector loan to Andhra Pradesh was to be made.

The abstention by the top two industrial nations was considered a major step forward in defreezing lending by all multi-lateral development institutions to India.

For instance, the key directors on the ADB board are also the driving force at the World Bank. The abstention and the new winds of change at the World Bank would culminate, Kelkar had hoped, into the ADB defreezing its aid to India very soon.

What are the magnitudes involved? In calendar 1998, the ADB sanctioned a mere $250 million against the annual average of $ 1 billion earlier. While all the ADB loans have been at market interest rates, this cost is still lower than what is paid by Indian organisations on the international market.

But hopes of quick revival of normal lending are rather misplaced on current reckoning. The new ADB chief, Tadao Chino, reiterated after the ADB closing session on May 2, that there could not be any ADB aid resumption till the G-8 decision was rescinded.

Top ADB officials skirted the issue of Japanese abstention at the World Bank board meeting in early February. They went on the offensive, characterising that decision as "bending the rules". The World Bank categorised the AP loan as humanitarian aid, which the ADB disputes.

The ADB is very much under Japan's sway and the hardened ADB stance means that Japan has not changed its position on India's de facto nuclearisation. Or, something happened between February (after the abstention at the World Bank board) and May as to make Japan turn full circle.

Yes, the successful Agni II missile tests early April angered Japan, whose reaction was more vocal than that of the US. New Delhi should have anticipated the hardening Japanese position on this count and should have mounted a damage control exercise.

The Vajpayee government was upset over the strident Japanese criticism which was not unexpected, though, since Japan was the world's only victim of nuclear war.

Vajpayee and Jaswant Singh, the duo to be directly involved in any initiative, were mired in local politics and in fighting for the survival of their government.

Now, as part of a caretaker administration, the duo would be less keen to launch a diplomatic offensive to soften Tokyo's stance.

By hindsight, it is clear now why Sonia Gandhi's Congress was not interested to topple Vajpayee immediately after Pokhran II. It wanted him to do all the dirty work of fence-mending.

As a fellow-Asian nation, Japan has been sympathetic to India. In the 1991 crisis, the UK, in spite of the close ties, insisted on India pledging gold as collateral for an urgent loan. But Japan announced at the outset a huge loan without strings to bail out the Indian economy under Manmohan Singh's stewardship.

Obviously, Tokyo expected New Delhi to give as much priority to Indo-Japanese ties as it assigns to shoring up relations with the US. But New Delhi, in Tokyo's perception, did not do this.

At the ADB meeting, Kelkar went on the offensive. "I must express our concern that the effectiveness of the bank's role will be grievously impaired if the size and timeliness of its agreed assistance is perceived to be subject to alterations in mid-course on account of non-economic considerations," Kelkar warned.

While Kelkar could certainly rake up the issue and air his views publicly, tangible results will flow from bilateral negotiations. In the case of the ADB lending, Japan holds the key. New Delhi should talk to Tokyo.

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R C Murthy

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