212. Memorandum of a Conversation, Department of State, Washington, July 12, 19581
SUBJECT
- Indian Financial Situation
PARTICIPANTS
- Mr. Eugene Black, President, IBRD
- Mr. Burke Knapp, Vice President, IBRD
- W—Mr. Dillon
- W—Mr. Whitehouse
Mr. Black called on Under Secretary Dillon on July 12 at his request to discuss the Indian financial situation.
Mr. Black stated that in the course of several talks with B. K. Nehru, the latter had explained India’s predicament and that it was “quite a predicament”.2 He expressed the hope that the next 5 year plan would be less ambitious than the present one but that he wanted to talk about the immediate problem and India’s needs over the next 3 years. He stated that this was a situation that involved the US, the UK, the Canadians, the World Bank and possibly the IMF. There were some questions he wished to ask Mr. Dillon and some suggestions he wanted to make.
His first point was that B. K. Nehru is hoping for $100 million from the DLF next fiscal year and for assistance through special legislation in the amount of $150 million. Did Mr. Dillon envisage India getting about a quarter of next year’s DLF appropriation? Mr. Dillon [Page 438] recalled that he had earlier informed Mr. Black that about $75 million from DLF might be contemplated and explained the considerations which had led to our not requesting special legislation at this session.
Mr. Black said he wanted to work very closely with us on this problem and that B. K. Nehru was asking the Bank for $300 million. If worst came to worst and the DLF received only $400 million in FY 1959, would Mr. Dillon put a quarter of this sum into India. Mr. Dillon repeated that he was thinking in terms of $75 million and explained that there were other important needs to be met by the DLF. He cited the Philippines and Turkey. He estimated that the DLF would be no lower than $450 million and that if it received substantially more he would hope to be able to raise the Indian program to between $75 million and $100 million.
Mr. Black then inquired whether the DLF could pick up past disbursements pointing out that the Bank was willing to do so. Mr. Dillon replied that the DLF in order to be of maximum assistance to India might well have to do the same.
Mr. Black next expressed the hope that the Department would be mindful of the Bank’s position if consideration were given to loans repayable in dollars either from the Eximbank or as a result of special legislation.
Mr. Dillon stated that he was well aware of the problem which would be caused for the Bank if the Indian Government undertook additional dollar obligations. In this connection he mentioned the rescheduling of repayments of the Indian wheat loan and informed Mr. Black that final Congressional consultation regarding this change was still taking place but that no opposition had been raised by the Senators or Congressmen who had been contacted so far.
The conversation then turned to the reserves of the Indian Government. Mr. Black stated that according to their figures the Indians expect to have to draw down $155 million, but the Bank estimates that they will have to draw down from $250 to $270 million. India’s reserves at this time are $800 million including $240 million in gold. Mr. Black stated that B. K. Nehru was very concerned lest the Indian reserves be reduced to $500 million or less. This is the equivalent of three months’ imports and although this figure does not alarm Mr. Black, B. K. Nehru foresees that a reduction of reserves to this level would bring on capital flight. If this is the case, Mr. Black reasoned that it would be wise for the Indians to draw down their third tranche from the IMF. The trouble would be that this sum would have to be paid back and the Indian ability to pay would depend on using US loans.
Mr. Dillon confirmed that use of the IMF was in the back of his mind. Mr. Black commented that B. K. Nehru thought that a $100 million loan from the Eximbank in anticipation of special legislation [Page 439] might be very helpful to India. Mr. Dillon replied that this was out of the question as special legislation would be unobtainable if India’s needs were met in this way.
Mr. Black then summarized the Bank’s situation. He said that the Indians were asking for $150 million this year and that the Bank had agreed to spend $25 million on the Damodar Valley project in the course of the next three years. If he were assured that the DLF would extend $75 to $100 million and if we agreed to the Indians eventually drawing down their third tranche from the IMF, he felt he would promise the Indians $75 million now and hold back $75 million to see what happens. He said that B. K. Nehru was talking to the UK, Canada and Germany and that the United Kingdom was granting India a balance of payments loan of 20 million pounds.
Turning to the suggestions he wished to make, Mr. Black asked Mr. Dillon what he thought of holding a “creditors’ meeting” at which no Indians would be present but to which the British, Germans, US, Canadians and representatives of the IBRD and IMF would be invited. Mr. Dillon said this was a good idea but that he would have to check with other senior officials of the Government. Mr. Dillon asked whether in his talks with the Indians Mr. Black could urge the Indian Government to cut down on its military expenses. Mr. Black replied that he had already done so and agreed wholeheartedly with the great importance of reducing India’s military budget. He stated that he would also try to encourage the Germans to play a greater role in providing assistance to India and that he felt the 20 million pounds balance of payments loan that the UK had promised was less than the British should do. Since the meeting of Commonwealth Finance Ministers is to take place September 15, he felt the “creditors’ meeting” could be around August 25 and added that he understood the Indian Finance Minister planned to come to Washington in early September. It was agreed that if such a meeting were held it would be under the auspices of the Bank and would be handled very circumspectly.
Mr. Knapp pointed out that in the discussion no mention had been made of P.L. 480 and Mr. Dillon replied that the United States will do what it can to meet India’s food needs.
At Mr. Dillon’s suggestion, Mr. Knapp agreed to compare the Bank’s figures on India’s financial situation with those available in the United States Government, and Mr. Dillon promised that Mr. Turnage would get in touch with the Bank shortly.
At the close of the meeting, Mr. Black obtained Mr. Dillon’s permission to say to Mr. Nehru that he had met with Mr. Dillon who was deeply interested in India’s problem, that the sums which might be available from the DLF were unknown at this time, and that special legislation for India would certainly be considered by the U.S. Government. Speaking only for the Bank, Mr. Black would suggest to B. K. Nehru [Page 440] that the Indian Government consider drawing down its third tranche at the IMF. He would also mention to B. K. Nehru that the Bank was considering having a small meeting with those countries most interested in India’s problems.
- Source: Department of State, Central Files, 891.10/7–1258. Confidential. Drafted by Charles S. Whitehouse, Special Assistant to Dillon.↩
- B. K. Nehru was in the United States for a series of discussions with U.S. and IBRD officials on India’s financial difficulties. On July 2, he met with Dillon. During their conversation, Dillon informed Nehru that the United States had worked out a satisfactory arrangement with the IBRD for the postponement of payments due under the 1951 wheat loan. A memorandum of that conversation, drafted by Rufus Burr Smith, is ibid., 891.00–Five Year/7–258.↩