Foreign Relations of the United States, 1955–1957, South Asia, Volume VIII

158. Paper Prepared in the Embassy in India¹

New Delhi, March 13, 1956.

A FEASIBLE PROGRAM OF U.S. ECONOMIC ASSISTANCE FOR INDIA

I. U.S. Foreign Economic Policy Considerations

India is now moving into its Second Five Year Plan with a planned public and private expenditure double that of the First Five Year Plan which is just ending. The Second Five Year Plan will shift emphasis to industrialization.

India’s success in the First Five Year Plan and its needs, combined with its willingness to sacrifice under the Second Five Year Plan in order to build the economic base for the maintenance of independence and democracy, dictate at this time a thorough re-evaluation of U.S. aid programs and policy in India. This re-evaluation of U.S. aid policy must take into account the forceful new communist program of economic penetration. The Soviets stress aid and trade and on every political and economic occasion are taking some pains (with improving tact and ability) to pose as the protector of under-developed Asia’s interest against the more-developed, capitalist West.

U.S. interests dictate continuing close correlation of our U.S. foreign economic policy with personalized diplomacy in the strict political sense.

Even though India does not agree with the United States on all major aspects of foreign policy (and for that matter on all aspects of internal economic policy) India is a democratic country and is the largest free country in Asia. It has a great natural resource base in coal, iron and strategic minerals. It is in competition with Communist China in the sense of demonstrating the superior capacity of democracy in Asia for economic achievement for the people. The Soviets—thanks in large part to the success of U.S. policy—are now attempting economic penetration ostensibly on the basis of concern for the economic welfare of these under-developed countries. The Soviet move is an attempt to undermine the West in Asia and to place the United States in a position antithetical to that of the under-developed countries of Asia.

It is in the immediate and long-range interest of the United States to aid India in sufficient amounts to make India’s own economic efforts cumulatively successful. Such aid will be helpful in the political-economic sense of re-affirming our continuing interest in under-developed India as a democratic country. It will reaffirm also our sympathetic interest in the welfare of the people of Asia in addition to our concern with military defense against communist aggression.

II. Indian Need for Aid

India’s Second Five Year Plan calls for investment of 71 billion rupees ($14.9 billion, of which about $10 billion is in the public sector and $4.9 billion is in selected parts of the private sector). This is an ambitious plan to raise national income by 25 percent over a period of 5 years.

India’s Second Five Year Plan anticipates expenditures of 48 billion rupees in the public sector. One of the primary concerns of India (a politico-economic concern) is that of unemployment and under-employment. Although it will produce some eight million jobs, the Second Five Year Plan is not expected to produce direct employment opportunities equal to the increase in the labor force.

The resources pattern also shows some weakness. In brief, of the 48 billion rupees planned for the public sector, one-fourth is expected to come from increased Government revenues (seemingly a rather optimistic assumption), one-fourth from borrowings from the public, one-fourth from printing-press money, and one-fourth is unforeseen except through foreign aid. The estimated gap, therefore, is 12 billion rupees or about $2.5 billion. In terms of India’s need under its greatly-increased Plan expenditures, attention must be given to inflationary impacts and the needs of consumers within a democratic system. India, therefore, will have great need for consumer goods such as our surplus agricultural commodities in the context of the total needs under the Plan.

There is grave danger of a serious short-fall in resources for the Plan not only in the above-mentioned internal accounts but also from the standpoint of foreign exchange needed for the Plan. The Indian Government estimates that about 1.7 billion dollars in foreign exchange will remain after allowing for all foreign exchange resources at its command, including the drawing-down of its sterling balances. Indian estimates of assistance from the IBRD, the Colombo Plan (other than the U.S.) and Soviet assistance for the steel plant would reduce the gap to somewhat less than 1.4 billion dollars. It is our considered opinion that with a great effort by India and cooperation from the IBRD and other countries, the net foreign exchange gap could be reduced to approximately 1.1 billion dollars.

In connection with the physical execution as well as the foreign exchange requirements of the Plan, India will require imports of 5 million tons of steel. Steel is in short supply throughout the world; steel prices are continuing to rise. Thus India faces a problem of physical acquisition as well as a problem of foreign exchange requirements in excess of its present Plan estimates.

III. A Feasible Program of US. Aid

A. The U.S. View—A Business-like Approach

1. U.S. aid to India in the quantity and form required to further U.S. objectives can be accomplished without any substantial increase in the annual level of aid authorized by the Congress under the Mutual Security Program. This can be done under a five-year authority (or an expression of Congressional intent) at approximately the current authorized level of Mutual Security aid, combined with Executive Branch use of existing authority under other legislation.

2. An integrated program of aid to India, covering a period of up to 5 years, would undoubtedly make possible:

(a) Sales of U.S. surplus agricultural commodities—particularly wheat—in the amount of some $300 million over a period of 3 to 5 years (an amount which compares favorably with total PL 480 sales to the entire world to date).

(b) Substantial dollar repayment by India of aid loans as opposed to repayment in rupees under present loans.

(c) The achievement of the greatest possible political and economic impact from our aid, by the size of the integrated aid program and by use of a part of such aid for sound, larger-scale projects of popular appeal, requiring expenditures over a period of up to 5 years in politically important areas.

B. The Program

In the U.S. interest a program of aiding India in substantial achievement of its Second Five Year Plan must, in the current situation, be handled as an entity with recognition of the need for larger-scale impact projects of popular appeal and the need for planning expenditure over the Plan period.

An effective program does not mean that the U.S. should underwrite the entirety of any gap in India’s Plan. A certain amount of gap should be left for stimulation of greater effort by India—both internally and externally. U.S. aid, however, should take into consideration not only the foreign exchange need but also the internal financial requirements of India along with the political-economic factors involved in possible inflation. While the total residual gap in India’s resources is some 2.0 billion dollars, the estimated foreign exchange gap, as indicated above, may be in the order of 1.1 billion dollars. For purposes of analysis and consideration of U.S. aid these two figures are individually pertinent, but shortcomings on one part of the Plan may condition ability to develop resources on the other.

In this context the U.S. should consider a total program over a period of up to 5 years, for some 500 millions of dollars in Economic Development (foreign exchange) Assistance and a minimum sale of 300 million dollars in surplus agricultural commodities to India:

1. The FY 1956 Development Assistance authorized by the Congress is $70 million. $50 million were appropriated (in addition to the $10 million allocation for technical assistance to India). In a previous year such U.S. aid has been about $85 million. Annual Development Assistance of $75 million over a five-year period would be consistent with the past action of the Congress. The 25 million dollar increase over the current appropriations for development aid to India can also be justified in terms of the full dollar repayment in that amount. This 75 million dollars annually would total 375 million dollars over a five-year period. In addition to this amount, the U.S. could help India in its foreign exchange requirements for the Plan, by granting (upon request) a long-term moratorium on India’s repayment in kind of the U.S. Lend Lease silver (some 120 million dollars) due next year.² This silver is not now used as currency backing. The moratorium would enable India to draw down an equivalent amount of its own foreign exchange now necessary for currency backing. Technical assistance would continue on a grant basis at $10 million per year.

In connection with the Development Assistance program several pertinent aspects warrant particular attention:

(a) The present programs include a small proportion of U.S. surplus agricultural commodities under Section 402 of the Act. The higher cost of these U.S. commodities over world market prices now requires a grant to cover that differential cost. The Development Assistance program in India could be 100 percent loan if it were possible for surplus commodities to be handled only under PL 480.

(b) It should be a long term program as anticipated in statements to the Congress by the President and the Secretary. This continuity is desirable for purposes of planning for optimum use of the country’s own resources as well as for political impact and provision for continuance of longer range “impact” projects undertaken in any one year. This continuity might be provided either by specific wording in the legislation, giving the executive branch such authority, or by joint resolution expressing Congressional intent with annual appropriations to follow.

(c) The projects in the program should fit into India’s Five Year Plan either as specific projects or with regard to achievement of Plan production goals.

(d) A certain part of this long range program of Development Assistance should now shift to impact projects. Such projects will require expenditures over a period of years on the construction of integrated facilities which will bear the U.S. “label” and have popular appeal in India as well as long range political benefits from the U.S. viewpoint. The Neyveli lignite-power-fertilizer project in South India is one project which meets this requirement from both the political and economic standpoint.

(e) India has a great need for assured supplies of steel for its own development program over the next five years. India’s steel problem is one of price as well as certainty of delivery to meet its additional needs of approximately one million tons for the next five years. U.S. steel of common types lands in India at approximately $150 per ton. The lowest world market price brings steel to India at approximately $120 per ton. India’s problem in view of its foreign exchange shortage (even on the basis of $120 per ton for Five Year planned steel imports) indicates the advisability of some assistance to India.

India may be able to meet some 3 million tons of its 5 million ton requirement, from the Soviet Union as well as other sources. (The Soviets are selling to India at lowest world market prices.) As much as 25 percent of past U.S. Development Assistance programs for India have been in the form of steel. Under the proposed 5-year program, the U.S. might undertake to supply up to 1.5 million tons—either by purchase under Development Assistance or through triangular arrangements with third countries under PL 480. In the latter case (PL 480), India’s repayment of the loan would be in dollars.

(f) Part of the technical assistance for India, under the integrated program, should be used in a coordinated manner on the above-mentioned, large-scale projects. This is necessary in connection with the shift to industrialization, India’s need for technical training and, incidentally, the Soviet emphasis on technical “infiltration” which is designed to undermine Western politico-economic interests in India.

(g) In addition to the Development Assistance noted in 1. above, the U.S. must allow for sound economic projects with great economic impact and popular appeal, and which fit into regional programs of development under the President’s fund for regional development.

2. The U.S. can sell more than 300 million dollars worth of surplus agricultural commodities to India over the next three years under PL 480. At a minimum India will take 3.5 million tons of wheat—a matter of prime importance to the U.S. at this time. The size of this U.S. surplus agricultural commodity program could equal the total PL 480 program in all the rest of the world. In brief, this PL 480 program:

(a) Will require a waiver of certain PL 480 requirements for dollar appropriations to cover grants of rupees to India from the rupee sales receipts. This waiver is permitted by the law. The grant is necessary to cover the differential (higher) price of U.S. commodities as compared with other free-world suppliers of agricultural commodities. Most of the rupees received from the “competitive price” sales to India will be loaned to meet the rupee costs of development and will be repaid to the U.S. on a long-term loan basis; the remainder of the rupees will be used for U.S. purposes, including purchases of materials for the U.S. supplemental stockpile.

(b) The commodities are needed in India to counter the inflationary trends which will be engendered by the greatly-increased expenditures and deficit financing under the Plan.

(c) The Plan will increase consumption of such commodities in India and so permits a large PL 480 program which will not harm the normal markets of other friendly countries.

(d) This PL 480 aid will help India meet its internal financial gap (by a U.S. loan of the rupees) and enable India to draw down the maximum of its foreign exchange holdings without fear of emergency foreign exchange drains due to food imports in bad crop years.

3. For maximum effect and in order to gain the best terms possible for the U.S. under this loan-aid program, the combined programs of “internal” and “external” aid should be negotiated as a whole, and at a very high level in the Indian Government. This will facilitate the sale of an optimum amount of U.S. surplus agricultural commodities under the most favorable terms possible, along with maximum amount of aid repayment in dollars (as opposed to local currency repayment).³

1. Source: Department of State, Central Files, 791.5–MSP/3–1356. Secret. No drafting information is given on the source text. Attached to a letter from Cooper to Dulles dated March 13, in which the Ambassador indicated that when he had been in Washington he had promised Sherman Adams a summary of his views concerning the U.S. aid program in India for the President. If the summary met with the Secretary’s approval, Cooper requested Dulles to pass the paper to Adams.
2. Under Secretary of the Treasury W. Randolph Burgess wrote to Hoover on March 30 to express the view of the Department of the Treasury that it would be a mistake to interfere with the scheduled Indian silver repayment. He stressed that such an action might have unfortunate consequences in influencing the decisions of other debtor nations. (Ibid., 891.00/3–3056)
3. George V. Allen addressed a memorandum to the Secretary on April 24 noting the numerous questions of detail and policy raised by Cooper’s proposals, and urging him to approve the creation of an ad hoc committee at the Assistant Secretary level to address the matter. (Ibid., 791.5–MSP/4–2456) Dulles approved the recommendation and informed Ambassador Cooper on April 30 that Deputy Under Secretary Prochnow had been selected to head the committee, which would determine the feasibility of the proposals. He also noted that a copy of Cooper’s paper and the covering letter were sent to Adams on March 24. (Ibid., 891.00/4–3056)