176. Memorandum From the Executive Officer of the Operations Coordinating Board (Staats) to the Board 1

SUBJECT

  • Recommendations for United States Action to Assist India in Realizing its Economic Development Objectives.

The attached paper has been revised2 and is distributed herewith in accordance with the action of the Board on the memorandum, “Recommendations for United States Action to Assist India in Realizing its Economic Development Objectives,” on September 18, 1957, at which time the Board agreed that:3

a.
The facts relative to the second five-year plan, the steps being taken or which would be taken by India relative thereto, and the amount of the foreign exchange gap and how it is arrived at, are not yet adequately known.
b.
A very large gap in foreign exchange will exist in any event whether India stretches out its second five-year plan programs to a minimum hard core.
c.
There are not available U.S. assets (including possible World Bank loans) to approach closing this foreign exchange gap.
d.
Under these circumstances, the Board is unable to approve the memorandum as a talking paper for use with the Indian Finance Minister during his forthcoming visit; however, the revised memorandum, together with this Board action, should be circulated for the information of the interested agencies.
e.
The facts with reference to the future carrying out of the second five-year plan and the net requirements for external financial help in connection therewith should be accurately established as a basis upon which a policy determination could be made by the President as to the advisability of approaching Congress at its next session for a special long-term loan to India.
f.
A way accurately to establish these facts should be agreed upon promptly.

Elmer B. Staats
[Page 384]

[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 [Page 385] 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 [Page 386] 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.
  1. Source: Department of State, OCB Files: Lot 61 D 385, India. Confidential.
  2. The earlier September 13 draft was attached to a memorandum to the OCB from Acting Executive Officer of the Board Roy M. Melbourne, dated September 16. (Ibid.)
  3. During the discussion of the paper, Cutler suggested a fact-finding mission to India led by someone of a stature comparable to Clarence Randall. The General Counsel of the Department of the Treasury, Fred C. Scribner, Jr., however, was concerned that the Indians might interpret such a mission as a U.S. aid commitment. Thus the composition of any committee was left for further consideration, (Ibid., Lot 62 D 430) At its October 3 meeting, the Board reached no decision regarding its next move on the question of aid to India though Cutler once again suggested the desirability of a “prestige” mission. (Ibid.)
  4. See footnote 3, Document 165.
  5. The cost to the U.S. Government about $114 million. [Footnote in the source text.]