US-India nuclear pact: Done deal or cracked egg?

By Wayne Rogers, Sonnenschein Nath & Rosenthal
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US-India business relations have been increasing at breakneck speed. The emphasis within the US business community on creating ties with India is remarkable. Indra Nooyi, chairman and CEO of PepsiCo (and Fortune magazine’s Most Powerful Woman of 2007) stepped up to chair the US-India Business Council. The council is promoting a bilateral investment treaty to enhance greater investment flows in both directions.

Wayne Rogers, Sonnenschein Nath & Rosenthal

Dow Chemical has moved to create a US$100 million global research and development centre in Pune: a facility that will rival those in the US and Europe. Lockheed Martin has offered a bid to the Indian Air Force for the multi-role combat aircraft. Boeing has increased its presence with a US$100 million maintenance centre in Nagpur and is working with Air India on a US$75 million engineer and pilot-training institution in Mumbai. Having already sold US$25 billion in civilian carriers, Boeing estimates sales of over US$86 billion in aircraft over the next 20 years. In the military arena Boeing is working on sales of the F/A-18 Super Hornet combat aircraft, P-8 Long Range Reconnaissance Aircraft, Chinook CH-47 helicopters, and Apache attack helicopters.

High profile deals

Best Buy, the US electronics retailer, is looking at entering India, and Bharti and Wal-Mart have launched a retail joint venture. Deals in all sectors are closing in India as well as in the US.

The most high profile deal, the US-India nuclear pact, agreed by the leaders of the two countries in July 2005 and passed by the US Congress in 2006 (the “Hyde Act”), is still languishing. The landmark civilian nuclear deal will give India access to US technology in return for international nuclear inspections. Announced with great fanfare, it was seen as the signature deal in US-Indian relations and a centerpiece for both Prime Minister Manmohan Singh and President George W Bush. However, almost immediately, problems arose on both sides of the world.

In India, the prime minister appeared unable to put together the requisite support of the deal in the Indian parliament. Singh’s left-leaning coalition allies criticized the deal as being too favourable to the US. In early July, after much effort, the prime minister was able to enlist the support of the unaligned Samajwadi Party, giving him confidence that his coalition government would hold together and that the deal would move forward.

International hurdles

There are hurdles to be overcome in the international arena before even reaching the US Congress. The International Atomic Energy Agency and the Nuclear Suppliers Group (NSG) must both approve the deal. The NSG requires a unanimous vote to gain approval. This is a high hurdle and the outcome is by no means certain.

In the US, the Hyde Act requires that after the two international approvals are given, the deal must be approved by the Congress sitting in a continuous 30-day session. The Congress will adjourn on 26 September. This leaves scant time for approval and seems almost insurmountable.

What are the options?

The deal could be presented after US elections in the fall and before President Bush leaves office in January 2009, or it could await a new president.

On 4 November, the US will hold elections where a new Congress and president will be elected. Conventional wisdom in the US dictates that the Democrats will increase their majority in both Houses of Congress. Both the House and Senate leaders have said that that they will not call the Congress back into session after the elections until the new Congress and president take office. This would doom the deal until 2009.

Political forces

The Republican presidential nominee, Senator John McCain, is in favour of the agreement. The Democratic nominee, Senator Barack Obama, has not taken a clear position and took action during the debate on the Hyde Act to limit the scope of the agreement. Polling in the US in July puts Senator Obama as the likely winner, creating more uncertainty.

Time for the law of unintended consequences?

Once international approvals have been granted, India would be free to proceed with the civilian nuclear programme, with (after US approval) or, more significantly, without the US. It is not a stretch of the imagination to foresee French and Russian companies vying for nuclear contracts, opened as a result of the work on the agreement, while US companies are blocked by US law from participating.

In any case, unlike the Enron Dabhol imbroglio and its negative impact on the US-India business climate outside of the nuclear suppliers, the failure of the US-India nuclear pact will not slow continued business ties between the countries.