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June 24, 1998


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BJP looks to Europe to overcome sanction effects

George Iype in New Delhi

The Bharatiya Janata Party government is exploring ways and means to tap the European market in an attempt to boost foreign investment flows into the country following the economic sanctions in the aftermath of the nuclear tests.

Sources said the government has written to Indian envoys in Western capitals asking them to woo European businessmen and to highlight India's case as a "reliable and strong economic partner."

This follows the tough formal sanctions -- worth more than $ 2 billion in foreign capital inflows -- slapped by the United States last week against India for conducting nuclear tests.

Though Finance Minister Yashwant Sinha has stated that "there are many other sources of funding apart from the US," the assessment within the government is that funding of many infrastructure projects will dry up as a result of the US sanctions coupled with the uncertainty regarding the World Bank loans.

The US, the largest foreign direct investor in India since 1991, has been the country's biggest trading partner, according to the 1997-1998 annual report from the industry ministry.

"The squeezing of US loans would definitely hurt India. Therefore, Indian envoys in Europe have been advised to present the country as a vibrant partner for foreign investment," a finance ministry official said.

The diplomats, he said, have been told to cite a number of factors which favour foreign investment in India as compared to many other countries in the crisis-hit Southeast Asian region. They include the stable economic fundamentals such as a low deficit account, the comparatively low debt ratio, and the impressive foreign exchange reserves in the country.

According to a status paper prepared by the ministry of external affairs on the impact of sanctions, domestic projects worth $ 2.2 billion will be hit by the US and other nuclear powers working together to delay consideration of loans by the World Bank.

These projects include the $ 550 million Andhra Pradesh economic restructuring programme, the $ 300 million Gujarat road projects, the $ 450 million for Power Grid Corporation, and the $ 275 million Haryana highways projects.

The World Bank last month put off loans to various projects worth $ 1 billion. Moreover, three projects -- the $ 550 million Andhra Pradesh economic restructuring programme, the $ 300 million women and child development project, and the $ 300 million Gujarat roads projects -- are also slated to come up before the World Bank on Thursday.

While finance ministry officials are certain that clearances of these projects would also be deferred by the World Bank, many state governments are up in arms against the curtailment of loans. States like Andhra Pradesh, Karnataka, Orissa and Tamil Nadu have asked the Vajpayee government either to arrange fresh loans or to assist them to carry out the projects.

The Andhra Pradesh government, headed by Chief Minister N Chandrababu Naidu, has been hard hit by the economic sanctions. While loans worth $ 500 million loans to the state is on hold, Naidu has informed the finance ministry about his fears of losing $ 1.2 billion international loans for power and water supply under negotiation.

Similarly, Karnataka has estimated that the economic sanctions would puncture foreign investment inflows worth $ 1 billion to the state while Tamil Nadu would suffer from a loss of more than $ 600 million for panchayats (village councils), urban development, and transport.

Even as the states cry foul about the loss of loans, officials said the Vajpayee government runs the risk of getting caught on the wrong foot if Finance Minister Sinha does not chalk up an alternative strategy without dismissing the impact of sanctions.

Ministry officials said though the government is yet to take stock of the fallout of the denial of loans by the US Exim Bank and the Overseas Private Investment Corporation, Sinha, Industry Minister Sikander Bakht and Commerce Minister Ramakrishna Hedge have started meeting foreign institutional investors and fund managers to arrest the fund crunch in the country.

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