India can't afford not to invest more in nuclear power.

Photographer: Adeel Halim

Modi Needs to Be a Generous Host

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
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In all the talk of “deliverables” that might come out of President Obama’s trip to India this weekend, two areas would seem like no-brainers. Both countries stand to benefit greatly from greater cooperation in civil nuclear power and defense technology, unlike other areas where very real conflicts remain. The U.S. is home to manufacturers of cutting-edge nuclear technology and military equipment, which are eager for new markets abroad. India is starved for power and almost entirely dependent on imports for military equipment. It’s desperate for quality suppliers.

Between them, India’s needs are greater. When he meets with Indian Prime Minister Narendra Modi, Obama will press for concessions that would open the door for U.S. companies. Modi should grant them.

Unquestionably, the biggest breakthrough in U.S.-India ties in recent history was the signing of a civil nuclear agreement in 2005 under which India agreed to separate its military and civil nuclear programs and to put the latter under the supervision of the International Atomic Energy Agency. Significantly, the deal permitted India de facto entry into the exclusive club of nuclear-armed nations -- much more in its interest than America’s -- and allowed the U.S. to sell India the technology for civil nuclear plants. The latter should in theory have benefited both.

Unfortunately, a controversial liability law passed by the Indian Parliament in 2010 ended up stalling any prospect of investment. The bone of contention lies in two particular clauses. One of these places the liability for any accident caused by faulty or defective equipment on the supplier rather than the operator of the plant, which in this case would be the state-owned Nuclear Power Corporation of India.

This clause in the law is tougher than -- and indeed, violates -- the Convention on Supplementary Compensation for Nuclear Damage, which makes only operators liable for accidents. The second clause leaves liability unlimited, which is unusual by international standards. That means that no U.S. nuclear energy company can get insurance to supply equipment to India.

The stakes are much higher for India than for the U.S. India's total power supply currently falls at least 10 percent below its peak demand. Nuclear meets only 3 percent of its power needs; the government wants to quadruple the amount of power generated by nuclear plants over the next five years. Given fluctuations in the price of coal -- which currently contributes over 60 percent of India’s power -- as well as the impact on climate change and environmental costs of coal mining, the country has no option but to invest more in nuclear.

Ideally, Modi, whose party was in opposition when the liability law was passed, would move to abolish both controversial clauses. As a stopgap, Indian and U.S. negotiators are hard at work in London to see if an insurance pool can be set up by Indian companies to offset the extra financial burden put on U.S. suppliers. But Modi needs to make the case for changing the law in the public interest -- at least to put a time limit on the first clause and introduce limited liability into the second. The prime minister hasn’t hesitated to initiate other reforms through executive action. He could do the same in this case while awaiting parliamentary approval.

Defense sales should be more straightforward. The U.S. is already the biggest supplier of arms to India, overtaking France and Russia in 2013. It’s clearly in India’s interests to reduce its dependence on imports, which currently account for over 80 percent of its arms purchases. To do so, it needs to make it easier for U.S. manufacturers to invest in India. Modi’s government has raised limits on foreign ownership in the defense sector from from 26 percent to 49 percent. But without management control, few companies are likely to invest in such a high-technology industry.

The government should seriously consider raising the limit on foreign investment to at least 74 percent. India must also abandon longstanding political hangups about using the same U.S. weaponry as archrival Pakistan. The fact is that U.S. defense technology far surpasses that of Russian or European suppliers. Given India’s hostile security environment, with nuclear powers Pakistan and China on either border, its armed forces need to buy the best.

Modi has shown he’s not afraid of taking risks: Simply inviting a U.S. president to be the guest of honor at Republic Day was too difficult for any other prime minister to attempt earlier. Now’s the time for Modi to take more chances -- for India’s sake.   

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net