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

174. Memorandum of a Conversation, Department of State¹

Washington, September 25, 1957

SUBJECT

• India’s Need for Economic Assistance²

PARTICIPANTS

• The Secretary
• C. Douglas Dillon, Deputy Under Secretary of State
• T.T. Krishnamachari, Indian Finance Minister
• G.L. Mehta, Indian Ambassador
• William V. Turnage, OFD
• Frederic P. Bartlett, SOA

Appointment with President

The Finance Minister inquired when the President might be returning to Washington since he hoped that he would have the privilege of seeing him. The Secretary indicated that the President hoped that he would not have to come back until the end of his vacation, which the Secretary explained would not be for several weeks. The Secretary certainly sympathized with the President’s wishes to have as complete a rest as possible. However, the Secretary added, if the President should come back before the end of his vacation, the Secretary would inform Ambassador Mehta.

Basic Request

Mr. Krishnamachari stated that it was the Secretary’s recent press statement regarding aid to India³ which had led him to presume to have talks here on that subject although Mr. Krishnamachari explained that he did not know how far the Secretary’s press statement might indicate it appropriate for him to proceed. The Secretary recalled his statement to the effect that, if the Government of India presented a request for assistance, it would be sympathetically considered. He stressed, however, that he had also indicated that the United States also faced certain financial problems. For instance, although the Executive had asked the Congress to appropriate $500,000,000 for the new development loan fund in fiscal year 1958 and to authorize an additional $750,000,000 for fiscal year 1959 and a similar amount for fiscal year 1960, the Congress had only appropriated $300,000,000 for the current fiscal year and had only authorized a total of $625,000,000 for next year. The Department did not know when Congress might be willing to appropriate the remainder of the authorized total. In addition, the Secretary said that he understood that the Secretary of the Treasury had already pointed out to Mr. Krishnamachari some of the financial difficulties facing the United States Government such as current inflationary pressures, high interest rates, mounting claims against the dollar, and the legal debt limit. Indeed, if the British withdrew the entire $500,000,000 recently made available to them, it would bring us right up to the ceiling.

The Secretary, however, would be very glad to have the views of the Government of India regarding its general situation, its needs and the minimum amount to carry through its Second Five Year Plan.

Indian Economic Problems

The Finance Minister then referred to several facets of India’s economic situation:

1. Foreign exchange difficulties had forced a cut in the plan but the most important problem remained that of financing “normal” imports. Unless additional funds could be made available, raw material imports might have to be cut by forty to fifty per cent and this would cause the private sector to suffer. Indeed, he had explained to the President of the Export-Import Bank that loans to private enterprise, which the Government of India would very much welcome, would cause increased demands for raw materials.

2. The private sector in India had increased very rapidly during the first year and a half of the Second Five Year Plan. The sector required $100,000,000 to cover its outstanding commitments in foreign exchange and with another $100,000,000 would be able to complete its physical targets. Power projects, however, which were basic to continued expansion of the private sector, had had to be cut out of the Plan. This meant that further expansion of the private sector naturally would be limited. For the longer term expansion of this sector it was absolutely necessary to improve railroads and other transportation facilities.

3. In its planning India kept constantly in mind its capacity to repay obligations incurred. Its present debt, in relation to its resources, was certainly not large, thanks to the liquidation of the British debt which it was able to effect during the war years. India was also attempting to phase its debt commitments so that the servicing of them would reach its peak only ten years hence. Payments would then be spaced out for fifteen years after that period.

4. The crucial time, foreign exchange-wise, would be the next eighteen months to two years.

5. U.S. exports to India had totaled $187,000,000 for 1955, rose to $266,000,000 in 1956 and were running at the annual rate of $472,000,000 during the first half of 1957. This showed where part of India’s difficulties arose.

6. India was trying to push its exports. Tea and burlap were expanding rather steadily but slowly. On the other hand, textile exports traditionally fluctuated, with Japan presently ahead of India in this field.

7. In conclusion, Mr. Krishnamachari indicated that if India received only “normal” aid, its economy would have to run at seventy-five per cent of capacity. Actually, what India needed to fill its foreign exchange gap was $1,400,000,000. It did not expect to be able to obtain all this from the United States, but anything would be helpful.

Basic Request—Continuation Of

The Indian Finance Minister then returned to the question of American assistance. It has been said, he noted, that hitherto India has never asked for aid from anyone. “Now, I can make a formal request.” The Secretary interjected that this should only be done if the Minister knew in advance that the request could be favorably acted upon. Nevertheless, the Secretary continued, we can explore the possibilities without waiting for such an assessment. Ambassador Mehta at this point noted that he had talked with Mr. Dillon several months ago and that the latter had counseled him to wait in raising the question of American assistance for India until the Congress had completed action on the then pending Mutual Security legislation.

There is nothing inappropriate, the Secretary replied, in raising the question informally at this time, for this is the time when we should be considering what we are in a position to request from Congress. From a political stand-point, the Secretary continued, there was no objection to aid to India, for the United States would like to help India carry forward its plan. Although the two governments might differ in their approaches to several matters, it was important for India to demonstrate economic progress under freedom and democracy. Indeed, the United States believed that it had already been helpful in this respect. The Finance Minister agreed with the latter statement and expressed his country’s sincere appreciation for such American assistance.

In respect to India’s basic economic aspirations, the Secretary noted, India and the United States are in agreement. We both want to see the living standards of the Indian people raised and the country’s industrial base developed. To the extent that this has been accomplished in Communist countries, it has been only through the use of forced labor and the denial of individual freedom. The pyramids, the Coliseum, and other monuments are witnesses to similar use of slave labor in the past.

We are, the Secretary warned, up against some hard facts, however, because in the United States as in India we too have a democratic society. There is growing opposition among the American people to our Government’s assumption of additional commitments accompanied by a growing demand for a reduction in taxes in order to ease the existing inflationary pressures. The Secretary believed that this situation had been reviewed for Mr. Krishnamachari at some length by the Secretary of the Treasury. This, said the Secretary of State, is what he had in mind in his press conference statement to the effect that we too had our financial problems. Indeed, the Secretary did not think that it would be possible for the United States Government to be able to provide sums of the order of magnitude suggested by the Indian representative. We will, however, be discussing among ourselves if, when, and how to go to the Congress for help to India. The Secretary felt dubious at the moment if the Executive Branch could gain the necessary support. He was also uncertain what the Treasury and the Bureau of the Budget might do even if the State Department decided that the matter should be taken up with the Congress.

The Secretary concluded that we would like to find ways to be helpful. The United States’ interest in India’s economic development took precedence over differences existing between the two countries.

Private Investment

The Secretary was interested to know that Mr. Krishnamachari was going to New York to see what could be done to enlist the support of American private finance. The Finance Minister explained that he would face some difficulties because, always in the past having relied upon British sources for needed capital, India had never cultivated foreign markets. It is the normal state of affairs in the United States, the Secretary explained, for private sources to make loans, noting the great progress that such loans had enabled Canada and Venezuela to make.

The Indian Finance Minister entirely agreed, but noted that in Canada at least there was some fear that American investment might have gone too far. Mr. Waugh, he continued, had made some helpful remarks during the Finance Minister’s talk with him on the role of private enterprise in economic development. In India the Government itself had gotten over its original fears, born from its colonial period, of foreign investment. Now it was unfortunately Indian private businessmen themselves who were afraid of foreign competition within India. Indian business was not unaware that foreign concerns enjoyed a preferred position with the average Indian investor.

1. Source: Department of State, Central Files, 891.00/9–2557. Confidential. Drafted by Bartlett.
2. Memoranda of conversation by Turnage, dated September 25, and by Bartlett, dated September 27, related to the same subject. In the first instance Krishnamachari met with various people including Dillon and George H. Willis, Director of the Office of International Finance at the Treasury Department. In the second meeting he discussed India’s plight with Herter. Dillon suggested that if India encouraged private investment then it would generate additional investment and stimulate a more positive attitude toward India on the part of the U.S. business community. (Ibid., 891.00–Five Year/9–2557) Herter stated that Congressional attitudes might be controlling and pointed to the unfortunate emphasis in the U.S. press on the differences between India and the United States. He did promise a sympathetic consideration of India’s problems within the limits of what realistically was available. Krishnamachari confessed that it was “difficulty” and “embarrassing” to have to raise the issues he had, but that was the principal reason he had come to the United States. (Ibid., 891.00/9–2757)
3. At his September 10 press conference Dulles stated:

   “We have known for some time that there was a developing gap in the foreign exchange aspects of the second five-year plan. This has been giving concern in India and it gives concern to all of us who want to see that plan succeed. Now, there has been no formulation of any request from India. When it is made it will receive sympathetic consideration. Of course, we have some financial problems of our own.” (Department of State Bulletin, September 30, 1957, p. 529)