Breakthrough in U.S.-India relations?

Breakthrough in U.S.-India relations?

January’s state visit by President Obama to New Delhi was highlighted by a supposed major breakthrough on the implementation of a U.S.-India civil nuclear agreement. But what was actually agreed upon and what does it mean for the U.S. and Indian nuclear power industries? Less than the headlines may have led you to believe. 

In January, President Obama became the first American President to attend the Republic Day parade, an annual celebration marking the formal adoption of the Indian constitution in 1950. While the vivid pageantry of this festive occasion marked the symbolic apex of the President’s state visit to New Delhi, a significant compromise on the long-delayed implementation of U.S.-Indian civilian nuclear cooperation represented the crowning substantive achievement of this visit.

This “breakthrough understanding” was hailed by both governments as a major achievement, helping put aside years of enmity over how and when bilateral nuclear energy cooperation could finally materialize. The accord seemingly marked a turning point for U.S.-India bilateral relations under the Obama Presidency, which so far have been significantly cooler than the partnership cultivated under the Bush Administration.

Nevertheless, a month later, critical details regarding what was exactly agreed upon remain vague and incomplete, with both governments noting that further talks must be held to finalize the understandings reached during the state visit.

Investors betting on a resurgence of American investment in India’s nuclear power industry should remain cautious. It is not all clear whether the agreement reached between President Obama and Prime Minister Modi last month was a real game-changer or yet another effort to kick this can down the road once again.

In 2005, the United States and India reached a landmark agreement that would integrate India’s civilian nuclear power industry into the international system in spite of India’s nuclear weapons program and associated refusal to accede to the Nuclear Nonproliferation Treaty.

Over the next three years, this accord was endorsed first by the Nuclear Suppliers Group, allowing India to import key components and supplies, including enriched uranium, for its nuclear power industry, and then subsequently by the U.S. Congress. The latter vote technically consented to a specific bilateral agreement defining how the United States and India would cooperate on civil nuclear energy matters.

Nevertheless, six years later, this bilateral accord remains still-born, with thorny disputes outstanding over the contours of its implementation. Two key disagreements have prevailed: 1) The extent of liability borne by U.S. suppliers providing reactors and other components in the event of an accident; and 2) U.S. nonproliferation objectives in ensuring no materials intended for civilian purposes is diverted to India’s nuclear weapons program.

These disputes have failed to yield any real progress since President Obama took office, essentially putting a freeze on any investment in the Indian nuclear sector by U.S. companies like GE and Westinghouse. In the meanwhile, foreign competitors, led by France and Russia, have moved quickly to exploit the NSG waiver and begin construction on new civilian nuclear reactors on Indian soil.

However, last fall, with both sides weary of the prolonged stalemate, a high-level Contact Group was established to expedite key compromises, helping set the stage for last month’s agreement.

So what was agreed? Based on press reports and statements from U.S. and Indian officials, many delivered only on background, here is what we know:

India agrees to abide by international rules on liability damages

The Vienna Convention on Supplementary Compensation for Nuclear Damage has established an international standard that, in the event of accidents at nuclear plants leading to casualties and/or economic harm, liability should be borne by the operator of the plant, not the suppliers of parts and components that may have failed.

This standard helps ensure that, in most countries, it is sovereign governments who bear liability responsibility, since most nuclear power plants are state-run.

However, India has resisted this interpretation articulated under the Vienna Convention and instead, in 2010, passed domestic legislation requiring that suppliers bear appropriate responsibility under certain circumstances. Although not directly targeted at the United States, American companies bore the brunt of the burden because many competitors were state-owned and hence enjoyed access to unlimited reserves for liability protection.

Under the compromise reached last month in New Delhi, the Indian government will issue a legal memorandum affirming its domestic legislation is entirely consistent with the Vienna Convention. How exactly this will square with Indian domestic law and the political realities of New Delhi remain a question for another day.

India has also agreed to take steps to ratify the Vienna Convention to enable New Delhi to become a state party, although such promises have been made in the past and ignored.

Perhaps more importantly, the Indian government has agreed to create a domestic financial reserve to help cover liability claims against suppliers. Both operators and suppliers will pay premiums to help establish a $250 million reserve, with the Indian government creating a back-up $200 million reserve to help cover claims from any future accidents.

India consents to nonproliferation requirements on nuclear fuel tracking

A less-publicized, but still important obstacle to finalizing U.S.-Indian civil nuclear cooperation involved American insistence that India take steps to demonstrate it is not diverting any imported parts or supplies, including nuclear fuel like enriched uranium, to its nuclear weapons program.

The Indian government has accepted this demand in principle, but has chafed at intrusive inspection requirements that allegedly impinge on its sovereignty. Press reports indicate that the two sides agreed on a compromise whereby the IAEA will take lead responsibility for such oversight, especially when non-U.S. imports are involved.

It remains an open question whether this will satisfy the U.S. Congress, which wrote tougher tracking requirements into the Hyde Act that legally ratified bilateral U.S. cooperation with India’s civilian nuclear program.

What is the bottom line for investors?

Even a month later, the absence of specific details on what exactly was agreed underscores the murkiness surrounding this supposed diplomatic breakthrough. Investors would be well advised to exercise caution, following the lead of major U.S. firms like Westinghouse and General Electric who are awaiting further details before making any decisions on future moves.

Even if American entities finally receive a legal green light to invest in and trade with India’s domestic nuclear sector, a deep-seated mistrust of U.S. intentions, lingering bad blood from the Union Carbide episode three decades ago, and notorious Indian red tape will limit near-term opportunities.

In short, investors should cultivate a healthy dose of patience in anticipating the rewards of an Indian nuclear renaissance.

About Author

Jofi Joseph

Jofi is an experienced national security professional who has served in senior level positions on Capitol Hill and in the Executive Branch, with a particular focus on WMD proliferation and homeland security issues. He worked on U.S. policy toward Iran’s nuclear program and participated in P5+1 negotiations with Iran as a White House National Security Council staffer from 2011 to 2013.