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

175. Memorandum From the Director of the Office of South Asian Affairs (Bartlett) to the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Rountree)¹

Washington, September 30, 1957.

SUBJECT

• India’s Request for Substantial Economic Assistance

Background

For the last six years our Ambassadors in New Delhi, Chester Bowles, George Allen, John Sherman Cooper, and Ellsworth Bunker, irrespective of their differing backgrounds and affiliations, have stressed India’s economic needs and the interest of the United States in helping that country overcome them. During this period the United States Government has responded by a loan of $190,000,000 to purchase wheat, by technical assistance grants in the amount of $56.8 million, by economic development loans and grants (in last three years mostly loans) in the amount of $342.9 million, and by a $360,000,000 PL 480 program (with a very small grant element). During this entire period, however, the Government of India has scrupulously refrained from formally requesting assistance. Indeed, in the case of the 1950–51 wheat deal, Mr. Nehru himself insisted on its being in the form of a loan repayable in dollars, rather than as a grant.

Now at last, forced by the acute need for foreign exchange to carry through even the hard core alone of its second five year plan, upon whose successful completion Mr. Nehru and the Congress Party count for the continued existence of democratic government in India, the Indian leaders have sent their Finance Minister to Washington to seek substantial assistance in the form of a long-term loan, repayable in dollars from the United States.

Anticipating that India might be forced to seek United States help, working levels of the Department have been examining the magnitude and nature of India’s requirements and the availability of US resources.² While it is obviously impossible to forecast India’s total financial position for the next three and a half years with absolute precision, there is remarkable unanimity as to the overall magnitude of the problem. If India is to meet her outstanding commitments, maintain essential imports and salvage the “hard core” of her development program in transport, power, irrigation and steel, new US aid of $500–800 million is required.³ Full account has been taken of potential non-US aid—including the IBRD, UK, West Germany, and Colombo Plan.

Two Basic Decisions

1. By the NSC. Possibly also foreseeing this situation, the NSC in January of this year decided that it was in the national interest of the United States to see the second five year plan substantially succeed and that toward this end the United States should consider giving substantial assistance.⁴

2. By the Secretary. During his conversation with the Indian Finance Minister on September 25,⁵ the Secretary told Mr. Krishnamachari that there was no political obstacle, although there might be financial and practicable obstacles, to the Government of the United States assisting India in connection with its foreign exchange needs. Our interest in seeing India carry through its second five year plan outweighed any political differences existing between the two countries.

A Third Basic Decision Still Remains

A third basic decision still remains to be taken. It is whether, and if the decision is in the affirmative, in what amount and in what forms the Executive Branch of the Government is prepared to attempt to implement the NSC and the Secretary’s decisions. This will presumably require further consideration of the whole problem by the Secretary and eventually by the President himself. It will require weighing the financial and other practicable difficulties mentioned by the Secretary against the advantages to the United States which might reasonably be anticipated to flow from assistance to India and, conversely, against the disadvantages to the United States which might be expected to occur if no assistance were forthcoming.

Factors Involved in Arriving at the Third Decision

To assist in making the difficult evaluation suggested above it might be helpful to restate the arguments for and against aid to India.

Fundamental argument for assistance. This is simply that no American wants to see the Communists take over India and that, if assistance given in time and in the right amount can substantially contribute to forestalling this, it would be a reasonable investment from the point of view of the national security of the United States. Once a country, like China, comes under Communist control it is lost to the free world; no amount of dollars can buy it back.

That there is danger of the Communists assuming control in India seems clear from the fact that the Communists doubled their popular vote from five percent in the 1951–52 elections to ten percent in the 1957 elections, that in the most economically depressed state of Kerala they secured a working majority and are now in control of its Government, that in Calcutta City—harassed with refugee and other economic problems—the Communists elected two of the four members of Parliament from Calcutta and ten of the twelve Calcutta members of the West Bengal Assembly, and that the Communists are right now playing up economic grievances of the Calcutta citizens so successfully that they can and do paralyze life in that important city whenever it is to their interest to do so. It does not seem too gloomy to forecast a Communist victory or at least a Communist access to power in the populous province of Bengal in the 1961 elections if economic progress is slowed down, instead of speeded up, between now and then.

Nor does any American want to see India disintegrate through the play of divisive forces based on ethnic, lingual, or religious differences. Yet these lie very close to the surface in India (which only under British rule was ever truly a single political unit) and could erupt if Nehru, his Government, and the Congress Party lost the respect of the Indian masses. One way for this to be almost assured would be for Nehru to prove himself incapable of fulfilling the minimum economic aspirations of these masses. A large scale scrapping of the second Five Year Plan, such as would be unavoidable in the absence of increased external financing, would be taken as dramatic proof of this incapacity.

Thus the basic argument for aid is that, if the Free World as a whole (for not only the United States is involved) wants to keep India’s 380 million people, its considerable iron and coal resources, and its strategic communications position out of the Soviet orbit, realizing also that if India went so would go almost all of Asia, the Free World must do its best to help the present Government of India do its best. This best may not be very high in our eyes, but it must hold out some prospect of improvement to politically active elements in India. It must also be at least equal to China’s economic development into which it is reported that the Soviets are committed to investing something like the equivalent of $2 billion.

Fundamental difficulties involving assistance. It is evident that available sources of US aid cannot provide the sums needed by India in the time required. If India’s request is to be met, special Congressional authorization would appear to be necessary since no combination of Mutual Security assistance, Export-Import Bank loans, PL 480 programs or other US available resources can provide funds adequate to permit India to proceed confidently on her minimum program. There is, on the other hand, strong public and official pressure to reduce Government expenditures.

It is already abundantly clear that Pakistan will react adversely to any special Congressional assistance to India. Although presumably the US Government will not wish to have Pakistan or any other government dictate how the US should handle its relations with a third country, Pakistan’s attitude will have to be taken into account. Perhaps as the situation develops assistance to India might be broadened to include presently projected economic aid to Pakistan in a single program package. We might also, as suggested recently by the Pakistan Finance Minister,⁶ mount an effort to bring about a voluntarily accepted moratorium on further arms expansion by both Pakistan and India and eventually to secure progress on other India-Pakistan disputes. A separate paper is being prepared at your direction which will discuss the pros and cons of such an approach.⁷ At this time, however, it would appear to be necessary to consider India’s needs on their own merits. After we decide whether it is in our interest to meet these needs, we can consider how this decision could most usefully be presented and exploited to achieve our other goals in the subcontinent.

One might, as a lender, wish to make certain of the borrower’s long-term ability to repay his obligations and still accomplish the objectives for which the debt is being incurred. This raises the question of whether India’s population growth is so great that the country can never hope to expand its economy rapidly enough to keep ahead of it, i.e., to assure an increasing per capita standard of living. Perhaps all that one can say is that some economists believe that this is possible provided India receives on credit enough capital to permit her to break what has been called the “economic sound barrier”. This barrier, representing the rate of capital accumulation, faces all underdeveloped countries before they reach the point where capital accumulation from internal resources can be sufficient to assure ever upward-spiraling industrial output. Apparently the World Bank has enough confidence that this is possible in India to be prepared to invest quite a few hundreds of millions of dollars of its lenders? money in helping India crash the barrier.

The question has at times been raised of what may happen to India, and by implication to United States interests in India, when Nehru leaves the stage. No one can prophesy at this time how the transition between the Nehru and the post-Nehru era will be effectuated, except to point out that an orderly transition will be much more difficult to assure if at the time of Nehru‘s death the people of India have little hope that they can advance themselves economically under democracy.

Conclusion

In short, our final decision would appear to hinge on the evaluation as to whether the free world can take the risk of letting India sink or swim on its own, with the limited aid that is now contemplated from both the US and other free world sources.

Those who make this decision must weigh the risks of this course against the costs of greater assistance.

They may also wish to consider whether, if the decision is to provide increased aid, the United States and the free world will not receive the most value for their investment in India’s future:

(a) If this investment’s timing and amount are adequate; i.e., if it is made early enough to permit sound planning and implementation of its use and in sufficient amount to assure the desired objective,

(b) If it can eventually be associated with a halt to the arms race and some progress on India-Pakistan economic problems. (We will presumably not be able to “buy off” either India or Pakistan in regard to Kashmir.)

Recommendation

It is suggested that you arrange to meet with Messrs. Murphy, Dillon, Mathews, and Barnes, who are the senior officers primarily concerned and all of whom are acquainted with the essential facts, for a full discussion of the position to be taken on India’s informal request in a jointly supported recommendation to the Secretary.

1. Source: Department of State, Central Files, 791.5–MSP/9–3057. Secret. Drafted by Smith and Bartlett and cleared with Mathews, Turnage, and Henry David Owen of the Policy Planning Staff.
2. Following receipt of Document 172, Dillon set up a Working Group consisting of representatives of E, H, NEA, S/P, and U/MSA to consider the problem of aid to India. (Memorandum from Turnage to Dillon, September 23; Department of State, Central Files, 791.5–MSP/9–2357)
3. On October 4, Turnage sent Dillon a comparison of the estimates the Department of State had secured regarding India’s aid requirements. (Ibid., 791.5–MSP/10–457)
4. See Document 5.
5. A memorandum of this conversation, by Rountree, is in Department of State, Central Files, 891.00–Five Year/9–2557.
6. Seyid Amjad Ali, who was also in Washington for the IMF meeting, made this suggestion on September 18.
7. Rountree intended to send a memorandum to the Secretary on this subject. A copy of the proposed memorandum, drafted by Owen, Smith, and John F. Buckle of SOA and dated October 15, was an enclosure to a memorandum from Owen to Dillon, dated October 22. (Department of State, Central Files, 690D.91/10–2257) Before he sent the memorandum to Dulles, Rountree wanted to have the views of the Embassies in India and Pakistan. Telegram 1030, Document 63, was based on the draft memorandum.