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

178. Memorandum From the Deputy Under Secretaries of State for Political Affairs (Murphy) and Economic Affairs (Dillon) and the Assistant Secretary of State for Near Eastern, South Asian, and African Affairs (Rountree) to the Secretary of State¹

Washington, October 16, 1957.

SUBJECT

• Financial Assistance to India

Discussion

We met, together with U/MSA and S/P representatives, last Friday² to discuss the Indian aid problem. This memorandum summarizes our conclusions and recommendations.

1. Basic Decision—The executive branch should decide now that it favors approaching the Congress for funds to be loaned to India on a scale which would enable that country to complete the hard core of the Second Five Year Plan. The considerations underlying this conclusion are set forth in the attached background statement.³

2. Means—Once this basic decision has been taken, more detailed consideration can be given by the Department to the question of how these funds should be sought. E now estimates the gap between the foreign exchange available to India from all sources other than the United States and the foreign exchange required to fulfill the Second Five Year Plan at over $1 billion for the period through March 1961. Two methods of filling at least a substantial part of this gap have been envisaged:

a. We could request special legislation which would authorize re-lending to India over the next three years some or all of the annual dollar repayments on past United States ECA and other loans. These repayments run to around $350 million annually—not, of course, counting Export-Import Bank repayments. We were urged by some members of the Congress last year to use these repayments for development lending, and we promised to consider this use in requesting FY 1959 mutual security legislation. These re-loans might be earmarked for financing imports for the private sector. Use of some of these repayments for such balance of payments loans could be supplemented by moderate project-type loans to India from a Development Loan Fund of the presently authorized size.

b. Alternatively, we could request a substantial increase in the Development Loan Fund from the presently authorized $625 million for FY 1959 to a higher figure, which would be justified to the Congress explicitly on the basis of the Indian need and which would permit India’s needs to be met largely from this source. Under this alternative we could not, of course, give India the same assurance of continuing assistance over the three-year period as we could under alternative a. Maximum use of the Development Loan Fund would have the advantage, however, of enabling us to make loans which were repayable in local currency, whereas under alternative a the loans would have to be repayable in dollars, albeit over a very long period.

An executive branch choice between these methods (and any others which may be devised) should be based on further inter-agency consideration. To ensure that inter-agency consideration at this stage would be profitable, however, it is advisable that a decision in favor of substantially increased aid to India be taken at the highest levels of the Government.

Once an executive branch decision and a tentative choice as among methods has been made, it will be necessary for the President to discuss the matter with the Congressional leadership. Any proposal for aid to India will be most likely to receive favorable consideration by the leadership if it has the full and open backing of the President. If the leadership advice is strongly against the particular method which we have chosen, the choice of that method can always be reconsidered in the executive branch.

3. Pakistan Aid—Whichever means of providing funds to India is chosen, we believe that Pakistan must at the same time be assured of continuing substantial United States assistance, in order not to weaken our ally’s allegiance to the Baghdad and SEATO pacts. The means of doing this will, of course, vary according to the method used for aiding India. If special legislation is to be requested, it might possibly embrace both countries—although the assistance to Pakistan might have to take a somewhat different form than that to India, since Pakistan is not in a position to incur any sizable dollar indebtedness.

4. Indian-Pakistan Disputes—We believe that our aid, while not tied to resolution of disputes between India and Pakistan, should be used to assist our efforts to achieve such resolution. We should, for example, explain to both parties that the Congress would be more likely to react favorably to our intended aid proposals to the extent that there were improved prospects of an agreement to halt the arms race and or progress on the Indus water, and Kashmir problems.⁴ This would not be attaching political “strings” to our aid but rather explaining the situation facing the Executive Branch in the Congress.⁵

5. Governmental Status—The current Departmental mutual security submission to the Bureau of the Budget includes provision for $350 million in FY 1959 aid to India, in addition to $625 million for the Development Loan Fund. The proposal for Indian aid has not been discussed at the Secretarial level with the Treasury Department.

Recommendation

(a) That you authorize Mr. Dillon to discuss this matter in a preliminary fashion with the Secretary of the Treasury.

(b) That you then meet with the President and the Secretary of the Treasury to seek a Presidential decision that the executive branch will request substantially increased aid to India at the next session of the Congress, with the understanding that the means for providing such assistance will be the subject of further executive branch consideration and Congressional consultations.⁶

1. Source: Department of State, Central Files, 791.5–MSP/10–1657. Confidential. Drafted by Bartlett and Owen and cleared with Barnes, Mathews, and Claxton. A handwritten notation on the source text, presumably by Murphy, reads: “Believe we should also explore eventual impact of this on Turkey”.
2. October 11. (Memorandum of conversation by Bartlett; ibid., 891.00–Five Year Plan/10–1157)
3. Not printed. Among the considerations were the appropriate portions of NSC 5701 (Document 5) and NIE 51–57, “Consequences of Economic Crisis in India,” approved on October 8 (Department of State, INR–NIE Files), as well as the impact of the visits of the Indian and Pakistani Finance Ministers.
4. Dulles circled the words “an agreement to halt the arms race and of progress on the Indus water, and Kashmir problems” and wrote on the source text “Suggest also talks with Pak–Iran–Turkey, & with India on.”
5. On October 7 Eric Johnston, then President of the Motion Picture Association of America and formerly a U.S. emissary in the Middle East, met with representatives of SOA to convey Amjad Ali’s opinion that the United States should use its aid to India as a tool to bring about a resolution of the Kashmir and Indus waters problems. (Memorandum of conversation by Smith; Department of State, NEA/SOA/E Files: Lot 60 D 449, Working Group on India—1957) On October 9 Smith wrote to Fluker in New Delhi as follows:

   “Probably the most important and the most challenging development in our thinking has to do with the possibility that the situation may present an opportunity for consideration of an over-all settlement of problems between Pakistan and India which would have the effect of lessening tensions, reducing military and other expenditures and improving the over-all security of the subcontinent.”

   After outlining the Ali–Johnston discussion described above, he went on to say:

   “Obviously if progress could be made on this, it would be much easier to justify large federal assistance to both countries. Do not misunderstand me. Consideration of this possibility is not delaying action on India’s loan request. We are, however, cognizant of the fact that the time may be appropriate for an imaginative and constructive use of U.S. influence in this direction.” (Ibid.: Lot 62 D 43, Indian Economy—June–December 1957)

6. Dulles initialed his approval of both recommendations.