[Attachment]
RECOMMENDATIONS FOR UNITED STATES ACTION TO ASSIST
INDIA IN REALIZING ITS ECONOMIC DEVELOPMENT OBJECTIVES
Background
The report by an interdepartmental study group entitled “The Economic
Problems of India”,4
together with recommendations for action submitted by the Department
of State, was discussed by the Operations Coordinating Board on July
26, 1957, and referred to the Working Group on South Asia on July
30, 1957, for review and development of recommendations in order
that an agreed position can be developed prior to the visit to the
United States of the Indian Finance Minister the last week of
September.
The problem as outlined and analyzed in the report remains
essentially the same.
India’s development effort is going forward vigorously. The private
business sector especially has shown unexpected expansionist
activity. India’s total effort, however, requires more resources
than India has or is currently obtaining from foreign sources.
Since the report was prepared, therefore, the Indian foreign exchange
situation has deteriorated even further. On August 13, the Minister
of Finance announced that the minimum foreign exchange reserve
requirement of the Reserve Bank was lowered from $840 to $630
million, as permitted by law, and it is anticipated that additional
action will have to be taken shortly either to reduce or abolish the
minimum reserve requirement. Inflationary pressures also continued
and wholesale prices rose nearly two percent in July. Action taken
by the Government of India to deal with the problem has included
revision of its tax structure to raise additional revenues and
concerted efforts to cut down on less essential imports and expand
exports.
The estimate in the report is that the gap between foreign exchange
requirements of the Second Five Year Plan and foreign exchange
availabilities, after taking into account foreseeable assistance
from all available sources, would total $700–$900 million for the
entire period of the Plan (i.e., through March 1961). The IBRD Staff has also made an estimate
of the minimum uncovered foreign exchange
requirement for the next two years alone, based only on the needs of
the “hard core” projects on which the Indian Government
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is now planning to
concentrate. This estimate comes to $3–$500 million. Substantial
additional foreign aid, over and above that which can now be
projected, appears to be necessary if India is to salvage the “hard
core” of the Second Five Year Plan.
Any additional reduction in the Indian development program would
result in a slower rate of economic expansion and presumably less
relief to the Indian unemployment situation. A sharp reduction in
the development program would result in a loss of the momentum that
has been gained in both the public and private sectors. A failure to
achieve a rate of economic development acceptable to the Indian
people would tend to weaken moderate elements in India and increase
the chances that extremist elements would eventually come to
power.
It is in U.S. interest that India should substantially achieve the
broad aims of the Five-Year Plan in terms of increases in output and
employment, and should continue to make an effective assault upon
its development problems. The U.S. should not, of course, engage its
prestige in the success of the program. The U.S. should be prepared
to consider sound loans, PL 480 arrangements, and other measures
sufficient to give substantial help in achievement of the broad aims
of the Plan, including the private investment necessary for its
realization.
Recommendations
Although United States aid resources of the magnitude which the
Indians believe necessary to carry out the Plan are not available at
this time, the following measures are recommended as a feasible
course of action within present budgetary limitations. It is
recognized however that the following recommendations will not cover
India’s projected requirements and that the Indian economic problem
should be kept under continual review by the U.S. Government.
- 1.
- Advise the Government of India that the U.S. is prepared to
consider providing about one million tons of wheat5 under a
further PL 480 sales agreement this fiscal year to meet actual
urgent shipping requirements through August 1958, and request
the Indian Government to provide the necessary information as to
the extent and timing of Indian requirements. The information
presently available does not seem to indicate any additional
need during this period. If sufficient new PL 480 authority is
granted by the Congress for FY
1959, consider, in the light of the previous situation, the
conclusion of another PL 480 agreement. (The Government of India
has requested, in addition to the present PL 480 agreement, a
new
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agreement which
would involve a substantial increase in the present rate of
shipments for the end of FY 1958
and FY 1959).
- 2.
- 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. Even if Indian project submissions prove
sound and well documented, development financing from the Fund
is unlikely to be at a higher rate than in the past, in view of
the cuts made by Congress in the Fund.
- 3.
- Encourage the Government of India in its own interest to adopt
measures to improve the climate for U.S. private investment in
India with particular reference to the granting of favorable tax
treatment to private investors and technicians, to more rapid
and liberal procedures for the screening of the entry of foreign
capital, to removal of reserve deposit requirements, to a more
realistic attitude toward royalty arrangements, and to avoidance
of competition between government and private sectors. To the
extent that investment conditions permit, encourage responsible
private U.S. firms to undertake projects in India. Advise the
NAC that from the standpoint
of national security, it would be appropriate to support the
legitimate requests of such firms for credit assistance from PL
480 local currency funds, the Export-Import Bank and from
private financial institutions. Consideration should also be
given to financing requests from responsible private Indian
firms.
- 4.
- Advise the NAC that, from the
standpoint of national security, it would be appropriate to
support acceptable Government of India applications for
loans—both in the public and private sectors—from the
International Bank for Reconstruction and Development.
