Obama-Modi solve nuclear deal impasse: But what will it cost India?

When Prime Minister Narendra Modi visited the US in 2013, the two countries announced many major breakthroughs and business deals. After the hype disappeared and the noise from the Madison Square Garden, where the PM spoke to NRIs, died down, very little has been revealed about the outcome of Modi’s visit.

In contrast, Barack Obama’s trip to India as our Republic Day guest has led to at least one major step: movement in the Nuclear Deal. This is, of course, in addition to the optics and geopolitics of the NamObama bromance and the covert and overt messages to Pakistan and China.

But the real takeaway of the visit is the message that India is willing to circumvent or remove every obstacle in the way of US companies willing to invest in our country, even if the cost and other liabilities are ultimately passed on to Indians and our public sector units.

India has set for itself an ambitious target of generating around 10,000 MW of additional nuclear energy by 2020-21 and then another 13,500 MW by 2032.

Nuclear energy is a clean option—though risky as Fukushima has revealed forcing many countries to reconsider the option — but its initial cost is heavy. Each MW of nuclear energy costs about Rs 20-25 crore. So, at an average cost of Rs 20 crore, the investment for 10,000 MW in the next six years is estimated at Rs 200 thousand crore.

When the US had signed the Nuclear Deal with the UPA government, it was understood that the major beneficiary would be American companies that supply reactors and the technology for power plants. But the companies backed off because of the liability clause — inserted in the deal because of the insistence of the BJP — that made the supplier jointly culpable for any mishap, instead of the prevailing practice of making the operator and the country’s government solely responsible.

India’s experience with the Bhopal gas tragedy made the Opposition bring the supplier into the ambit.

In 1984, several hundred people had died when poisonous methyl isocyanate leaked from the Union Carbide plant in Bhopal; several thousand suffered serious long-term medical problems. But the owners of the plant escaped from India and the victims are still fighting for compensation, which were denied to them because of the absence of a legal clause.

In the aftermath of the Bhopal gas tragedy, the Supreme Court laid down the “absolute liability” principle, which made the operator and supplier jointly liable, with no cap on the damages that could be sought from them.

The BJP argued that the government was going out of its way to circumvent the Indian law and favour suppliers. Its leaders said the government wanted to transfer responsibility onto the public-sector Nuclear Power Corporation India Ltd (NPCIL), the operator of nuclear plants and the damages would have been the liability of Indian taxpayers and victims.

In the end a formula was worked out. First, it shall be NPCIL’s responsibility, as the operator of the plant, to pay the victims, whether or not it is at fault. Fair enough, because if a disaster happens following a terrorist attack, NPCIL can hardly expect the perpetrators to pay compensation to the victims. But the liability of the supplier to reimburse NPCIL kicks in only if the fault is proved to be the supplier’s.

However, the rules cap NPCIL’s liability at Rs 1,500 crore, beyond which the Indian government will pay. Under the Convention on Supplementary Compensation, an international pool will reimburse the government up to 300 million SDRs (Special Drawing Rights), valued today at Rs 2,800 crore. If the bill goes beyond Rs 1,500 crore plus 300 million SDRs, it is the Indian taxpayer who bears the burden.

But there wasn’t much progress.

According to an article in the New York Times, in return for Washington’s help in persuading the Nuclear Suppliers Group to create a special exemption — which allowed its members to engage in nuclear trade with India, although it is not a signatory to the nuclear nonproliferation treaty— the Manmohan Singh government promised the United States that it would buy reactors with a minimum generating capacity of 10,000 megawatts from American companies. This commitment was made without any economic studies, or even a comparison of reactors available in the world market. Going by the current capital costs of nuclear reactors, this would have translated into $50 billion or more in reactor sales.

Since Modi became the PM, his government tried various solutions to this impasse. Removing the clause would have been political hara-kiri — since it was a product of the BJP’s opposition to the deal. So the government tried to circumvent it. It even tried to farcically find out if the Indian operator—who was authorised to seek claims from the supplier — could give up its right to claim the damages from the supplier.

Finally, the two countries have found a way out. Though the details are not available, reports suggest the supplier will now be able to buy insurance for liability up to Rs 1500 crore. By paying a nominal premium— estimated at Rs 1.5 crore per year — they would buy insurance policies from a pool comprising Indian insurance companies like General Insurance Company.

What does this mean? It means, if there is a mishap tomorrow, the supplier is liable to pay a maximum of Rs 1500 crore. But this money will come from four public sector insurers and the government. In the end, the entire cost has been passed on to taxpayers in India .

Will this entice US companies? Though a roadblock has been removed, there is another important hurdle.

The US suppliers are wary of an Indian clause that allows individuals to initiate legal action for damages caused by a mishap. They are now hoping that the Indian government will guarantee suppliers that they would not be sued by individuals or organisations if there is an accident.

So, here is a sobering thought for the morning after the Obama high. In the event of a Fukushima-type disaster — which cost Japan almost $105 billion — in India, every penny of the liability would be borne by Indians, their government and public sector companies. And, if the compensation is inadequate, the victims may not even be allowed to take the supplier to court.

Is this what the BJP had set out to do when it insisted on the liability clause?