Nuclear race-from Pak angle

By Satyabrata Rai Chowdhuri

Recently as many as five articles have been published in differ-ent Pakistani newspapers on India-Pak nuclear race and Pakistan's policy towards the issue. Since the authors of these articles are either eminent defence analysts or political commentators, their views carry considerable weight.

Although these authors are almost on the same wavelength, their view need to be pored over carefully for more than one reasons. It may not be unreasonable to assume that these views represent the official policy on this sensitive question.

The major thrust of these articles is that India's nuclear doctrine, released in May 1999, envisages, in the guise of "credible minimum nuclear deterrence", a massive expansion of strategic as well as conventional forces with large land, air and sea-based strike force of bombers and missiles capable of reaching every nook and corner of Pakistan.

They argue that Islamabad's repeated denunciation of the Indian nuclear posture is an exercise in futility and frustration. Such vociferation will have no effect on New Delhi. Nor should the people of Pakistan expect major power to prevail on India to abandon its ambitious plans. Their cpacity, if not also the desire, to promote nuclear restraint in South Asia has ebbed. They do not have effective leverage, or lack the will, to use it for fear to detriment to their economic and political interests in India.

Therefore, what is urgently needed is focus on objective analysis and assessment of the implications of India's plans for Pakistan's defence and security.

How long will India take to realise the project force goals? To what extent might Pakistan's minimum deterrent capability become vulnerable to a surprise attack by Indian missiles and strike aircraft? Might India conclude that its preemption and interception capability, enhanced by the antiballistic missile system it is planning to acquire, make it immune from a Pakistani response?

If so, what concrete steps should Pakistan take to ensure the survivability and credibility of its deterrent force? Restoration of the credibility of Pakistan's deterrence capability is thus the supreme task of the day.

In the widening power disparity, priority should be given to formulation of a nuclear doctrine and a plan of action to ensure the continued efficacy of Islambad's deterrence force. Says Zulfiqar Ali Khan, "As we embark on the development of a counter-strategy, it should be necessary to bear in mind the rationale of Pakistan's policies and the sessions that have been learnt from our experience. Based on proven premises, projections into the future will be more reliable."

It has been further argued that although the precise contingencies in which Pakistan might use nuclear weapons have not been articulated or perhaps even defined by the government, the assumption has been that if the enemy launches a general war and undertakes a piercing attack threatening to occupy large territory or communication junctions, the "weapons of last resorts" would have to be involved. That possibility cannot be ignored and hence acts as a deterrent.

Deterrence being the sole aim, a small arsenal was considered adequate. At no time did Pakistan contemplate using nuclear weapons for war-fighting or seek to develop capability for a pre-emptive attack. Apart from the obvious constraint of resources, it was not so unrealistic to a disabling strike. Besides, any such attempt would provoke retaliation with disastrous consequences.

It was exactly for this reason that Pakistan's purpose warranted no more than a minimalists approach. Pakistan was satisfied with its nuclear capability. For years after achieving that capability, it realied on relied deterrence refraining from a test explosion, Islamabad's policy of nuclear deterrence was based on the proverb: "More is unnecessary it less is enough."

Believing that its minimal capability was then sufficient for deterrence, it even discontinued further production of fissile uranium in 1989. That decision had to be revised in 1990 when India was reported to be considering air raids on sites in Azad Kashmir. Still Pakistan did not embark upon weaponisation.

Only after India conducted multiple test explosion, Pakistan followed suit mainly because influential opinion seemed to discount Pakistan nuclear capability. It is rather strange that the Indian leaders and the people of the country did not realise that nuclear deterrence, unlike the conventional one, is not degraded by quantitative or qualitative disparity, the Pakistani analysts argue.

But India's nuclear doctrine leave no one in any doubt that New Delhi is determined to go ahead with its highly ambitious programme of upgrading deterrence. In this situation Pakistan's security is certainly under serious threat and, obviously, Pakistan's deterrence force will have to be upgraded to the heightened threat Pre-emption and interception, they write.

Augmentation of the quantum and variety of Pakistan's strategic arsenal is not only unavoidable but also absolutely imperative. But this will certainly involve huge expenditures. Here it must be borne in mind that there are quite a number of friendly countries ready to give Pakistan any amount of money to bolster its defence and strategic might.

Equally important are the questions about adequacy of conventional forces. A nuclear response cannot be involved to deal with local contingencies given the consequences, nuclear threshold should be maintained at the highest level. Can Pakistan cope with the budgetary burden?

The people of Pakistan should not, however, presume that the task cannot be managed within the limits of the country's resources. Innovative planning should have been to restructure the defence forces, integrating conventional and nuclear deterrence within the limits of Pakistan's financial capacity and without compromising prospects of economic growth, which is indispensable if the country is to sustain its ability to maintain long-term defence needs.

Minimum deterrence has been, and should continue to be, the guiding principle of Pakistan's nuclear pursuit. Of course, the minimum cannot be defined in static numbers. In the absence of an agreement on mutual restraints, the size of Pakistan's arsenal and its deployment pattern have to be adjusted to ward off dangers of pre-emption and interception. Only then can deterrence remain efficacious, the writers note.

They also argue the concept of nuclear race is fundamentally flawed. It eclipses the basic point that nuclear deterrence is not dependent on parity of arsenals. Pakistan does not need to enter into a competition with India.

Invocations of an impending nuclear race are irrelevant and counterproductive. Given the disparity in size are resources, the implicit threat of Pakistan challenging India into a competitive build-up lacks credibility.

Worse, by conjuring up the prospect of such a competition and of enormous additional expenditures, statements by government spokesman succeed only in frightening the people into the false impression that the task of maintaining deterrence is beyond their means, the observers write.

Every nuclear state has determined its nuclear posture in the light of its own objective and assessment of the security environment. The US-USSR paradigm has no relevance for Pakistan. Nor can India be an example for Pakistan, the writers say. Pakistan's objective is limited and specific. On that solid foundation the people of Pakistan can erect an appropriate nuclear posture with their limited means. PTI Features

PSBs should invest more in Govt securities
or follow the basle norms

By Ramesh Kanitkar

The RBI has taken measures to tighten prudential norms applica-ble to urban co-operative banks (UCBs). These include debarring UCBs from lending directly or indirectly to individuals or corporates, against securities, of stocks, restricting UCBs borrowing from the call money market to two per cent of their aggregate deposits, and limiting the parking of funds by UCBs with other UCBs. At present, UCBs are allowed to maintain their statutory liquidity requirement (SLR) of 25 per cent of their liabilities in the form of investments in Government and other approved securities and/ or as deposits with district or state co-operative banks. This arrangement is being streamlined, raising the proportion to be maintained in Government Securities.

In fact, from April 1, 2003, scheduled UCBs will be required to maintain their entire SLR assets of 25 per cent of liabilities only in Government and other approved securities. Further, the cash reserve ratio (CRR) requirements would be on a par with scheduled commercial banks. These measures, taken together, would go some way towards providing greater security for depositors and members of UCBs and would contribute to the development of the co-operative banking sector on sound lines.

Tightening of prudential norms and plugging of loopholes, however desirable, represents only a "minimalist" intervention. The co-operative movement has lost its old elan and at present co-operative banks and co-operative credit institutions, in general, seem to lack a sense of direction. There is a secular decline in the credit-deposit ratio of primary co-operative banks, clearly demonstrating the sub-optimal use of available resources. For instance, the credit-deposit ratio fell from 68.3 per cent in 1997-98 to 63.3 per cent in 1999-2000. This is hardly an indication of viable banking, let alone vibrant banking.

That this should have happened at a time when the credit demand of small and micro enterprises remains unsatisfied is a concrete case of a lack of direction on the part of the urban co-operative banks. The problem of non-performing assets (NPAs) continues to haunt the PCBs. The gross NPAs were more than 12 per cent of total advances as at end of March 1999, marginally higher than the level a year ago.

In the light of recent experience, the RBI has commended the setting up of a new supervisory body which can take over the entire inspection/ supervisory functions in relation to scheduled UCBs. While concending that the present arrangements whereby three authorities-Central and State Governments and RBI-are involved in regulating, supervising and administering UCBs is unsatisfactory, the proposal to establish an altogether new body is rather escapist. Nurturing the co-operative/financial institutions is an integral function which includes supervision. Through supervision and inspection, the RBI is able to be in continuous touch with the UCBs and there is some feedback. A policy for promoting healthy growth of these institutions can be formulated only on the basis of constant touch. There is, therefore, merit in the RBI continuing to supervise co-operative financial institutions.

The Centre's fiscal deficit is budgeted at 4.7 per cent of GDP for 2001-02 and the borrowing programme of the Centre at Rs.1,18,852 crore (gross) or Rs.77,353 crore in net terms. In this context, the RBI has made the following most important statement, which does not seem to have attracted adequate attention: "..the overall monetary management becomes difficult when a large and growing borrowing programme of the government, year after year, puts pressure on the absorptive capacity of the market. The banking system even now holds government securities of around 35.0 per cent of its net demand and time liabilities as against the minimum statutory requirement of 25.0 per cent. In terms of volume, such holdings above the statutory liquidity ratio (SLR) amounted to as much as Rs.1,0,000 crore, which is substantially higher than the net annual borrowing of the government."

This excess investment in Government securities by banks, particularly public sector banks, has persisted for the last few years. This results in two distortions. First, banks' resources are being siphoned off away from productive sectors to support government consumption. The credit-deposit ratio of banks has been hovering around 50 per cent for the last few years, reflecting sub-optimal use of resources.

The second distortion is the result of the RBI's failure to develop the government debt market, despite all the rhetoric of creating new institutions and instruments. Banks have, therefore, begun to bear a disproportionate burden of government debt. In part, the central bank is itself responsible for bringing about such a sorry state of affairs.

There are far more serious implications of excess investment in government securities by banks. The amount of Rs.1,00,000 crore mentioned above, could be taken as a proxy for the quantum of deficit financing. If suppose banks decide to withdraw their excess investments - and they are perfectly entitled to do so - the RBI would have to finance such unloading of securities by banks. In a way, it is better to expose this situation, rather than continuing with the Government concealing the size of the potential deficit financing. The RBI's forthright statement on the issue, though made belatedly, is a welcome sigh of transparency.

At present, all scheduled commercial banks (excluding RRBs) are paid interest on eligible cash balances maintained with the RBI at the rate of four per cent per annum. The RBI has now proposed that from the fortnight beginning April 21, 2001 the interest paid on these balances would be raised to six per cent. Subsequently, it proposes to raise the interest to the level of bank rate - seven per cent. In other words, the proposal to raise the interest rate to six per cent effectively translates into subsidizing banks to the tune of Rs.850 crore. Analytically, instead of injecting created money, it would be neater to reduce the level of CRR itself by a corresponding amount. This would be one more step towards the avowed objective of RBI to eventually reducing the CRR to the statutory minimum level - three per cent.

There is further softening of interest rates on export credit. By prescribing ceilings instead of specific rates and by linking the rates to the concerned banks' prime lending rates (PLR), the new regime of export credit would ensure cheaper rates. The RBI itself gives a concrete example of the softening of export credit rates. At present, the forward premium for US dollars in the Indian market is around 4.5 per cent for six months. An exporter can, thus, avail of rupee export credit at 8.5 or 9 per cent interest rate and sell the expected export earnings in the forward market, effectively reducing the interest cost to only around 4 or 4.5 per cent, which is internationally highly competitive.

In fact, speaking more generally about the interest rate structure, the oft-repeated argument that Indian interest rates are higher does not hold water. Given the excess liquidity with banks, high-rated corporates can raise funds at 9 per cent through commercial paper (CP) or non-convertible debentures. Superimposed on this low rate is the fiscal concession; interest cost is treated as deductible expenditure. Effective interest rates are therefore quite low.

By explicitly stating that Government borrowing has crowded out productive sectors of the economy, the RBI has touched the core issue confronting public sector banks - the sub-optional use of resources. The central bank could improve the situation by stipulating that no public sector bank should invest more than 25 per cent of its incremental resources in Government securities. Such a measure may prove far more effective in making public sector banks vibrant than mere application of the Basle norms. INAV