Debunking myths on the Modi-Obama nuclear breakthrough

Amid the backslapping comraderie between the leaders of the United States and India, has come a hard - hitting breakthrough over the civil nuclear liability issue. The significance of such a breakthrough cannot be underestimated, however, some myths around the process are already taking hold.

As a quick background to the issue, the landmark 2005 nuclear deal between the two countries, pushed through with remarkable difficulty on both sides, has been hostage to a few clauses of the Civil Liability of Nuclear Damages Act (CLiNDA) of 2010. The two main points of contention for investors have been Section 17(b) of the Act, which provides a Right to Recourse for India to sue the suppliers, American and domestic, for damages. The second contention is with Section 46 of the Act which opens up suppliers to liability outside the Act. Such provisions, which open up suppliers to the bulk of the liability go completely against the norm of international laws and conventions which traditionally place the burden of liability on the operator, in this case the Indian government.

For years the historic deal had become unworkable, with both sides locked in intractable positions - the government of India citing its experience of the Bhopal Gas tragedy as justification for supplier liability and the US industry refusing to invest unless CLiNDA was amended to shift liability to the operator. Prime Minister Modi, within hours of President Obama's visit, appears to have broken this logjam by setting up an innovative mechanism that bypasses legislative amendments entirely. With CLiNDA remaining the same, Mr. Modi has put forth an insurance pool that can cover both suppliers and operators for any damages.

The first major misconception with regard to the insurance pool is that it is an outcome of the recent dialogue between US and India. This is far from the truth. In fact, the major push for such a mechanism came not from the American lobby but from domestic industry. Indian suppliers, concerned about the need for them to maintain a Rs. 1500 crore liability amount, expressed these apprehensions to the Indian authorities. The General Insurance Corporation of India (GIC) was then approached to develop an insurance mechanism that covered both operators and suppliers. The GIC prepared such an insurance scheme early on but was stalled by Indian laws that did not allow coverage beyond Rs. 750 crore. The Indian government was then approached by the GIC to fund the remaining Rs. 750 crore of the prescribed Rs. 1500 crore amount. Additionally, the insurance mechanism was not completely novel but a part of the law - Section 8 of CLiNDA mandates that the operator be covered by an insurance policy.

The issue of funding for the insurance pool brings up the second misconception - that India is being cheated in some sense by the insurance mechanism since the bulk of the money being put up is Indian, not American. However, this is not an American imposition at all but India's own doing. Foreign funding in insurance would mandate foreign inspections of nuclear facilities. This is an unacceptable scenario for India, especially with regard to the inspection of domestically developed reactors, which are outside IAEA safeguards. Additionally, it is premature to judge who bears the burden of funding since details of the pool, such as the cost of premiums, have not been completely worked out. In fact, the proposal for the insurance pool is still under consideration by the Ministry of Finance; the pool has not yet been set up.

People have also mistakenly positioned the breakthrough primarily as an economic victory, when it is more an outcome of political and geostrategic considerations. On the political front, both leaders face significant constraints which make the insurance pool a viable solution. Prime Minister Modi is restrained by a recalcitrant Rajya Sabha and cannot easily amend the Act. On the other hand, an already politically embattled President Obama, needs a solution that addresses the concerns of American investors. On the geostrategic front, the implications of a deeper US-India partnership for China have also likely been key in winning American support for the pool. Similar considerations were behind America's acquiescence to a risky nuclear agreement with Vietnam. The decision to delay the announcement until Obama's visit also highlights similar geopolitical calculations given that the proposal for the insurance pool was ready much earlier. The actual economic impact of the announcement is more circumspect, as the law remains the same and suppliers are still vulnerable to liability claims. Thus, at some point a legislative amendment might be required to definitively open doors to investment.

The most concrete conclusion to be drawn from the development is the commitment from both sides to reshape India-US relations. Both leaders have put in considerable effort to design innovative and feasible solutions to overcome their respective political hurdles. Hopefully, a similar approach will be used to deal with the remaining challenges.


Courtesy Niti Central



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