169. Letter From the Deputy Under Secretary of State for Economic Affairs (Dillon) to the Chairman of the Council on Foreign Economic Policy (Randall)1

Dear Clarence: On May 3 a report by an interdepartmental study group entitled “The Economic Problem of India” (Tab A) was forwarded to you.2 This report described the economic difficulties arising out of India’s expanded development program and particularly the anticipated shortages of foreign exchange resources to carry forward the second Five-Year Plan (1956–61) on schedule.

A part of the difficulties are caused by expanded private investment activity, which has turned out to be greater than expected. A sharp reduction in the Indian development program would doubtless have a depressing and lasting effect upon the private sector in India. [Page 360] The report estimated that the foreign exchange gap for the Plan period, after taking into account assistance from all available sources, including an assumed $300 million of development and technical assistance from the United States under the Mutual Security Program and an assumed $400 million from the International Bank for Reconstruction and Development, would total $700–900 million.

More recently the Government of India has taken additional steps to adjust to the serious situation which is developing. For example, it is revising its tax structure to raise additional revenues, and by delaying the initiation of new projects not yet underway, it is in process of rephasing its development program to conserve foreign exchange resources. Whether the Government of India further reduces the scale of its development activity will be significantly affected by its judgment as to the likelihood of further United States assistance.

Consistent with the policy directives of the National Security Council, the United States should assist the Government of India at this time in every practicable way, without however engaging its prestige in the Plan objectives. It does not appear that United States aid resources of the magnitude which the Indians believe necessary to carry out the Plan are available at this time. The Department of State believes however that the following measures constitute a feasible course of action within present budgetary limitations for the United States to assist India in realizing its objectives.

Consider supplementing the existing Public Law 480 agreement to prevent further inflation of food prices in the event that subsequent information demonstrates a pressing need. Such an agreement would not contribute to meeting the gap in resources required to carry out the Plan, as that gap was estimated in the May report, on the basis of data available at that time. However, food requirements appear to have proved greater than anticipated and such an agreement would assist in meeting these increased requirements. Consideration might also be given to short-term credit financing through Commodity Credit Corporation thirty-six month credit sales, and to deferred payment barter transactions wherein we would receive payment in strategic materials over a three- to five-year period.3
Extend loans from the new Development Fund for sound projects which cannot otherwise be financed. The Indians heretofore had estimated a continuation of United States Mutual Security Program Developmental and Technical Assistance at a rate of $60 million a year. In the future, with the establishment of the Development Loan Fund, India in all likelihood will have to rely on this Fund for all Mutual Security Program aid other than technical assistance. If Indian project submissions prove sound and well documented, development financing from the Fund might well run at a somewhat higher rate than from present Mutual Security programs.
Extend loans from the Export-Import Bank especially to strengthen selected private enterprise in India.
Support generally Government of India applications for loans—both in the public and private sectors—from the International Bank for Reconstruction and Development.

Consideration has also been given to a request of Congress for special legislation to provide additional resources in the form of a long term loan to the Government of India. Such a request is believed to be infeasible at this time. In order, however, to provide the basis for a request at the next session of Congress, if it should be decided to make such a request, the Department of State intends to undertake necessary preparatory studies.4

Sincerely yours,

C. Douglas Dillon5
  1. Source: Department of State, Central Files, 891.00/7–1557. Confidential. Drafted by Turnage and Dillon and concurred in by the Office of South Asian Affairs, Bureau of Economic Affairs, and Policy Planning Staff, whose views it represented. The ICA did not request concurrence though FitzGerald “found no particular trouble”. The Departments of the Treasury and Agriculture did not share the Department of State’s conclusion, but produced no written dissent.
  2. See footnote 3, Document 165.
  3. The Department of Agriculture was not ready to make any firm commitments to allot to India any of the new $1 billion authority under Title 1 for the current fiscal year. (Memorandum from Turnage to Dillon, July 9; Department of State, Central Files, 791.5–MSP/7–957) The Indians, however, were already pressing for additional amounts of surplus commodities due to recent floods and drought, population growth, and increased per capita consumption. (Memorandum of conversation by Jones, July 19; ibid., Secretary’s Memoranda of Conversation: Lot 64 D 199) Jones wrote Bunker on July 22 that he hoped for approval of a P.L. 480 program for India in 1958 of as much as $100 million. (Ibid., NEA/SOA Files: Lot 62 D 43, India—June–December 1957)
  4. The Department of the Treasury wished to delete the last sentence referring to the preparatory study. See the memorandum from Turnage cited in footnote 3 above.
  5. Printed from a copy which bears this typed signature.