How India turned US sanctions into a dud 25 years ago, forced their withdrawal

When Washington sanctioned India after its 1998 nuclear tests, New Delhi did not back down. It kept its economy growing, diversified trade, and continued engaging with America. Three years later, the sanctions were waived. As India once again confronts the possibility of US sanctions, the old episode offers some important lessons.

PM Atal Bihari Vajpayee with US President George W Bush in Washington, DC, in November 2001, two months after Bush waived sanctions imposed on India in 1998. (Image: Getty Images)

US President Donald Trump has signed the Lindsey O Graham Sanctions Bill into law, effectively giving him the power to impose tariffs of up to 100% on countries trading with Russia. The move leaves India, which sources more than half of its crude oil imports from Russia, exposed to potentially severe trade barriers in its largest export market. This, however, is hardly the first time India has found itself under the shadow of US sanctions.

Exactly 25 years ago, New Delhi came out on top after facing a similar set of punitive measures imposed by Washington.

The story goes back to the late 1990s, when India was in the midst of a heady transformation. The country was rapidly liberalising its long stagnant economy and opening up to the world. Economic growth was on the upswing, driven by strong foreign investment and growth of the IT and services sector. On the global stage, New Delhi’s once all-weather ally, the USSR, had been consigned to history, and India was in the midst of a rapprochement with the West, especially the US.

Then in 1998, the administration of then-US President Bill Clinton slapped a sanctions package on New Delhi that banned almost all foreign aid, financial assistance, military cooperation and technology transfer in a bid to clip India’s ambitions to become a nuclear power. But if the sanctions were an attempt to make New Delhi toe the Washington line, they failed. On September 22, 2001, President George W Bush waived his predecessor’s sanctions.

As fresh US sanctions loom over New Delhi, the 1998 episode offers a useful reminder of how New Delhi dealt with Washington’s pressure a quarter of a century ago.

THE NUCLEAR TEST BEHIND AMERICAN SANCTIONS

On May 11, 1998, at 3.45 pm, three underground nuclear detonations were carried out at an Indian Army firing range in Rajasthan’s Pokhran as part of Operation Shakti (also called Operation Pokhran-II), with then-PM Atal Bihari Vajpayee shortly thereafter announcing that India was now a full-fledged nuclear power.

But while the news of the tests might have made Buddha smile, it wasn’t the case in Washington DC. Caught completely unawares, America’s reaction to India’s entry into the nuclear club was one of disbelief and anger. According to the US State Department Archives, then-President Clinton had stated that he was “deeply disturbed by the nuclear tests”, and that they were contrary to the goal “of building a safer 21st century”.

“This action by India not only threatens the stability of the region, it directly challenges the firm international consensus to stop the proliferation of weapons of mass destruction,” Clinton had further added.

An American response was thus inevitable, and it came on May 13, 1998. That day, Clinton informed the US Congress that he had imposed sanctions on India, under Section 102 of the Arms Export Control Act, also known as the Glenn Amendment Act. The aims of the sanction package, according to the State Department Archives, were to force New Delhi, among other things, to not “deploy or test missiles or nuclear weapons”, and “cut off fissile material production for nuclear weapons”.

SANCTIONS CUT OFF FOREIGN ASSISTANCE, BLOCKED WORLD BANK FUNDING TO INDIA

The 1998 American sanctions led to the termination of all US foreign assistance except humanitarian and food aid. This cut off about $21 million in economic development assistance and $6 million earmarked for a greenhouse gas phaseout programme, as per official US government data.

The US also opposed loans from global institutions such as the World Bank and IMF, blocking $3-4 billion in funding for India’s infrastructure and development projects. Washington also committed American banks and government agencies to deny New Delhi any and all new loans and credit lines, except those to be used in purchasing food and agricultural commodities.

Additionally, the sanctions suspended the sale of defence hardware, services, and foreign military financing under the Arms Export Control Act, directly impacting potential arms deals and cooperation.

SANCTIONS FAILED TO DENT INDIA — IT GREW STRONGER OVER THE YEARS

In 1998, India was in the midst of a sweeping economic liberalisation programme, with reforms opening up the economy to greater foreign investment and international trade. The transformation began after the 1991 balance-of-payments crisis, when India received substantial financing from institutions such as the IMF and World Bank while undertaking wide-ranging structural reforms.

The American sanctions, thus, did have some effect. The suspension of sales of military equipment and financing was felt during the Kargil War the following year. And the blocking of funding via the World Bank and the IMF led to delays in several infrastructure and even military projects (such as the HAL Tejas project). Exports to the US also saw a dip that year.

New Delhi, however, stayed the course. Then-PM Atal Bihari Vajpayee, addressing Parliament on May 27, 1998, defended the tests as a matter of national security. “The touchstone that has guided us in making the correct choice was national security,” he told the Lok Sabha, insisting that India’s new nuclear weapons were “weapons of self-defence” intended to ensure that the country was not subjected to “nuclear threats or coercion”.

Asked whether the American sanctions could impact India’s economy, he told India Today Magazine, “Sanctions cannot and will not hurt us. India will not be cowed down by any such threats and punitive steps. India has the sanction of her own past glory and future vision to become strong in every sense of the term.”

And in many ways, India did become stronger despite the sanctions.

GDP growth averaged around 6.5% in the mid-1990s due to market reforms, and by the time sanctions were imposed, the economy was stable at about 5.8%. By 2003, just 5 years after the US sanctions, India’s GDP was growing by 7.8% annually. India’s trade links with the world remained robust.

New Delhi also diversified its trade partners during this period. The US continued to import billions of dollars’ worth of textiles and gemstones while exporting machinery. The European Union imported textiles, leather, and chemicals, in return for exporting industrial equipment. Russia supplied defence hardware and bought Indian pharmaceuticals and tea. The UAE and Saudi Arabia exported oil while importing gems and rice. Japan and China also remained active partners, trading in electronics, textiles, and chemicals.

In fact, then-Finance Minister Yashwant Sinha would later tell news agency PTI in 2001, “As far as the Indian economy itself was concerned, except for certain defence supplies, sanctions had no meaning.”

Source : https://www.indiatoday.in/india/story/us-tariff-india-1998-nuclear-test-pokhran-2-sanctions-america-atal-bihari-vajpayee-george-w-bush-2999436-2026-09-22