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

166. Memorandum of a Conversation, Department of State¹

Washington, May 31, 1957

SUBJECT

• India’s desire for additional US assistance in financing the Second Five-Year Plan

PARTICIPANTS

• Mr. B.K. Nehru, Secretary Ministry of Finance of India
• Mr. Dillon, Deputy Under Secretary for Economic Affairs
• Mr. Smith, SOA/E

Mr. Nehru called at his request to discuss India’s desire for further United States economic assistance.² He opened the conversation by stating that India’s present position was extremely difficult. Apart from the serious financial and economic situation, it was essential from a political and social viewpoint for development to go forward. If stability is to be preserved in a democracy it is essential that visible progress be shown to the people.

This was the basic purpose of the Second Five-Year Plan, but India has found that it lacks the necessary resources to carry it through. Over the period of the Second Five-Year Plan India faces a total foreign exchange gap of approximately $3 billion. Committed external assistance and the planned reduction in India’s foreign exchange reserves would reduce this deficit to approximately $1.9 billion. The planned reduction of $400 million in reserves has already been exceeded, since India has used $650 million of reserves since April, 1956. India has already drawn $1271/2 million from the International Monetary Fund. Nevertheless, well before the end of this year Indian reserves will be reduced to their legal minimum. While India has the authority to go below this level temporarily, to do so would raise grave questions of the stability of its money.

If India’s expectations of additional aid from the IBRD, the US, the Colombo Plan, private foreign investment, and the new Russian credit are taken into account, the foreign exchange gap is reduced to about $700 million. However, new difficulties are arising. The IBRD has made no financial commitments as yet. Mr. Black has offered only $75 million now for India’s railroads, as against commitments already made by India of $150 million. Furthermore, the Plan calls for additional commitments of $280 for railroads by the end of this year. According to the IBRD, the supply of money is tight and India is unpopular in the money market.

Faced with these problems, India has declared a complete embargo on any new capital development unless it is self liquidating in foreign exchange terms. This applies to both the public and the private sectors. In addition, projects are being slowed down wherever possible. However, the bulk of the Five-Year Plan undertakings are started, and commitments on these projects are so large that it will be most difficult to finance even those presently under way. If development is limited to present projects, the rate of development will be too slow to meet India’s political requirements. If it is assumed that the IBRD loans India not the $600 million anticipated but only $400 million, India’s foreign exchange gap will amount to approximately $1 billion.

In view of this situation, Mr. Nehru had been asked by his Government to raise with the US the question of additional financial assistance. He recognized that any specific legislation in favor of India would have difficulty in Congress. As to alternatives he suggested the possibility that further PL 480 assistance might be extended and that India might obtain a larger share of the proposed Development Fund. Mr. Dillon asked whether additional PL 480 assistance would substitute for planned requirements. Mr. Nehru replied that India has had to increase its planned imports of food and agricultural products to meet consumer demands, and that PL 480 assistance would therefore reduce the demand for foreign exchange for this purpose.

Mr. Nehru summarized his presentation by stating that the problem was not only one of the amount of resources but also that of the speed with which additional funds could be found. In his view, India could not tamper with reserves and jeopardize the position of the rupee.

Mr. Dillon complimented Mr. Nehru’s remarkable knowledge of US aid programs and of the situation in this country. Studies undertaken recently of foreign aid resulted in a widespread acceptance that such assistance is worth while in and of itself. The proposed Development Fund will provide aid assurance over a longer term. It is probable that the projects to be financed will be considered on a basis similar to that of the IBRD. The form of the Development Fund will make it easier to give a disproportionate share in any one year to a particular country than is now possible with country programs. This change in US aid procedures should be welcomed by India. While recognizing Mr. Nehru’s desire for quick action, Mr. Dillon pointed out that we will not know how much is available until the Congress completes its action, perhaps by August first, at which time we could begin to make plans. While the amount to be made available to India will, of course, be further studied, he indicated that since India has many projects in an advanced state this should place India in a favorable position. It is obvious that even a disproportionately large share of the $500 million requested for fiscal ’58 would not come near to filling India’s gap. However, additional funds will be available in succeeding years.

Mr. Dillon indicated that Congressional action on a new PL 480 legislation authorizing $1 billion should be completed in about two weeks. However, the US has applications in excess of that amount. Nevertheless, it would not be unreasonable to think that India might obtain some additional aid from this source.

Mr. Dillon agreed with Mr. Nehru that special loan legislation is not practicable now. In the first place, there is a strong economy drive in Congress. Consequently, it would not be advisable to take up special legislation at the time new general aid is in progress. However, if the Administration’s aid proposal is accepted, it will mean that the general idea of development assistance has been advanced and that the general atmosphere may be more favorable than it is now. Special action for India, however, could not be considered for at least a year.

Mr. Dillon indicated that any further information Mr. Nehru wished to give us would be helpful. He informed Mr. Nehru that the US had made a study of India’s Second Five-Year Plan which indicated a gap in foreign exchange resources of $600 to $900 million. However, this was based on many estimates and left many questions unanswered. Consequently, further technical discussion while aid legislation is in progress would be helpful, particularly to determine the particular timing problems to which Mr. Nehru had referred. Mr. Dillon also indicated that the new Development Fund might be closely coordinated with the IBRD loans and consequently might permit a larger volume of such IBRD loans.

Mr. Nehru inquired whether it was accurate then to summarize the US position, as that we would not know our situation for another six weeks but that the US desired in the meantime to get at the facts. He indicated that it was difficult for him to carry all the factual material with him but that the IBRD is fully informed. He suggested therefore that he request the IBRD to make all the information that it has available to the US Government. Secondly, he inquired whether it would be possible for the US to spare an expert to go to India to consult with their personnel.

Mr. Nehru reiterated the urgency of India’s need and indicated that India would be favorably placed to present projects immediately to the US for consideration. He also expressed the hope that the new aid legislation would make it possible for the US to finance parts of old projects as well as new. India’s urgent need is to complete the financing on high priority projects now under way. He inquired whether US loans under the aid fund would be as hard as those of the IBRD.

Mr. Dillon replied that our loans would not be on the same basis as the IBRD but that the legislation provided for considerable flexibility with regard to the currency of repayment and the timing. Mr. Nehru emphasized that if it was determined to be desirable for an American to go to Delhi this could be done quietly without any commitment or publicity, and that India would never attempt to take advantage of the US in these consultations.

Mr. Dillon then referred to the appointment of Mr. Winthrop Brown, formerly Economic Counselor in London, as Deputy Chief of Mission in Delhi as evidence of US recognition of the importance of India’s financial problems. Mr. Nehru inquired when the Development Fund would be in operation. Mr. Dillon replied that if the law was passed by the first of August there would then be a transition period while new procedures were being developed, lasting for perhaps six months.³

Mr. Nehru finally suggested that any influence the US might bring to bear on the IBRD with regard to larger loans to India would be helpful. IBRD loans to India amount to 56 cents per capita as compared to $34.50 per capita to Australia. In his view, US support might make Mr. Black feel more secure in increasing bank credit to India.

1. Source: Department of State, Central Files, 891.00–Five Year/5–3157. Drafted by Smith.
2. Mehta met with Rountree on May 29 and requested that preliminary talks on India’s economic needs be held on a confidential basis to avoid any publicity to the effect that India had been “‘rebuffed’” should the United States not find it possible to grant requests for assistance. (Memorandum of conversation by Robert W. Adams; ibid., 891.00–Five Year/5–2957) Documentation on B.K. Nehru’s visits with Department of State officials is ibid., 891.00 and 791.5–MSP. Documentation on his conversations with ICA officials is ibid., NEA/SOA/E Files: Lot 60 D 449, Working Group on India 1957)
3. Reference is to the Mutual Security Act of August 14 (71 Stat. 355).