213. Memorandum of a Conversation, Department of State, Washington, July 16, 19581
SUBJECT
- India’s Economic Situation and Its Need for Economic Assistance
PARTICIPANTS
- Under Secretary Dillon
- Mr. B. K. Nehru, Indian Secretary of Finance
- Mr. Govindan Nair, Economic Minister, Embassy of India
- SOA—Frederic P. Bartlett
This meeting was arranged at the request of the Indian Embassy. Mr. Nehru opened the conversation by stating that he would be leaving Washington Saturday,2 but would be back soon. Since his last meeting with Mr. Dillon, Mr. Nehru explained, the working party had had several meetings, but that no amount of analyzing of figures could change the serious facts underlying India’s economic position. On the assumptions that (1) India must keep its economy going and (2) India must complete at least the presently truncated core of a Second Five Year Plan, the figures were just not compressible. He had discussed them also with the UKG and the IBRD who had argued that perhaps India could reduce its expenditures under the Plan. This would be impossible politically for India although, of course, if the Plan’s goals cannot be met, they cannot be met, and India will have to live with the consequences thereof. With the current rate of drawdown of its foreign exchange reserves, Mr. Nehru said that by the end of September India would be face to face with disaster. What India needed was some sort of a statement that the USG would in one form or another help to see India through its current emergency. Without such a statement, the flight of capital would mushroom, with India unable to effectively control it. The last three months’ drawdown was truly most serious from this point of view.
[Page 441](At this point Mr. Nehru presented tables of India’s needs and resources for the periods April 1958 to March 1961, and July 1958 to June 1959. Copies of these tables are attached.)3
After reviewing the tables Mr. Dillon inquired whether, in addition to the estimated desired reserve of $420 million by the end of March 1961, India would not have in addition $240 million in gold. Mr. Nehru confirmed this, but indicated that in his Government’s opinion the reserves by the end of March 1961 should not be any lower than $420 million, nor lower than the $325 million shown by the end of June 1959. The reason why India felt it necessary to build up its reserves from the latter figure to $420 million by the end of March 1961 was that it faced very heavy debt obligations during calendar 1961 and had to have funds ready to satisfy them.
Mr. Dillon inquired whether additional assistance from the IMF had been considered. Mr. Nehru replied affirmatively, but indicated that the drawback in this case was the short term for repayment of any additional IMF drawings. He believed that the only possible solution to India’s needs was special legislation and that it would be harder to justify special assistance for repaying short-term credit extended by the IMF than it would be for development purposes.
Returning to the tables noted above, Mr. Dillon explained that, based on anticipated resources, for the most part DLF, $125 million for the period July 1958–June 1959 appeared high. There were many other countries, including Turkey, Iran and Lebanon, which were also urgently in need of assistance from the DLF. Even if Congress were to appropriate a total of $500 million in new funds for the DLF this year, it would be difficult to contemplate 25% of this total going to one country. We had been thinking, Mr. Dillon continued, more in terms of from $75 million to $100 million. As far as special legislation was concerned, no decision had been reached. Its feasibility would depend upon the circumstances existing at the time. It might be suggested to Congress. Congressional feeling had been fairly satisfactory up to now, but of course it could change in the future. We would have to restudy the possibility of special legislation this fall. Mr. Dillon could not say whether it would be impossible to obtain such legislation, but neither could he say that it would be possible to do so.
Again Mr. Nehru noted that no matter how one juggled the figures, there remained a most serious foreign exchange gap and that India needed a reassuring statement from the USG along the lines suggested above although it would not need to be, of course, an absolute commitment. Mr. Dillon replied that perhaps it would be better to discuss this in a month since everything was now in flux. With this Mr. Nehru agreed, noting that he had not expected such an [Page 442] important decision to be made immediately, but that he hoped that it could be made before the September Commonwealth Economic Conference. He argued that the results which the USG would obtain from substantial assistance to India’s economic development at this crucial time would be much greater than the results which might be obtained by expenditures which it was now incurring in connection with the Middle East and there would be no question of morality involved. Mr. Dillon assured Mr. Nehru that there was certainly no question of morality involved other than in a positive sense in the United States Middle East actions. Speaking frankly, Mr. Dillon said, Congress would be influenced as a matter of hard fact by India’s actions in connection with the developing world situation. To this Mr. Nehru replied that India would certainly do all that it could short of changing its foreign policy. There would certainly, however, be a great deal of public criticism of the United States actions in the Middle East, for India could not control the right of free speech by its countrymen.
Once again Mr. Nehru explained India’s need for a word of sympathy and support which he hoped might be forthcoming at the August “creditors’” conference and again hoped that the USG would be able to set aside 25% of any new DLF funds for India’s needs, noting that India constituted in population 40% of the underdeveloped world and, from the point of view of influence, 60%. Even before DLF, India was receiving between 27% and 30% of development assistance funds.
Since he had been questioned, Mr. Nehru stated, by both the UKG and the IBRD regarding India’s defense expenditures, he wished to make it clear that the forecast of India’s needs set forth in the tables referred to above did not include the cost of any additional armaments. He could only hold this line, however, if the USG did not give additional arms to Pakistan. Mr. Dillon replied that he was happy that Mr. Nehru had raised this subject since someone had told him that India had been spending almost $200 million a year on purchasing arms. It had occurred to some of us, Mr. Dillon continued, that the UKG should not expect immediate payment in cash for the arms which it was selling to India, but could stretch out such payments a bit. Mr. Nehru replied that this would be difficult for the UKG to do since it regarded the sale of arms as a purely commercial “deal” and could not discriminate in favor of one Commonwealth country over other Commonwealth countries which were also purchasing similar equipment from the UK. It would be far better for the UK to give assistance, therefore, to India without tying it to any particular use. This would constitute a sort of “overdraft” by the UK, which had for years been India’s principal banker.
[Page 443]Mr. Dillon inquired whether Mr. Nehru felt that it might not be possible to obtain more aid from West Germany. In response Mr. Nehru explained that he did not know, that he really had not developed a “feel” for the German situation, but perhaps he would have a better understanding of it after his forthcoming visit to the country.
In connection with what might be planned for the period after the Second Five Year Plan, Mr. Nehru stated that many people in India were tinkering with fantastically high figures for continued development, but in responsible quarters, such as the Planning Commission, there was no thinking along these lines. He and all responsible persons in the Government of India recognized that the Third Five Year Plan must not be designed along lines which would require anything like the present scale of assistance from abroad. Mr. Nehru knew that Mr. Dillon would appreciate how much the Government of India resented having to go abroad to beg for funds. His Government was determined that they would never put themselves in a position again which would force them to do this. It would of course mean a slower rate of development than perhaps might otherwise be possible, but this was realistically being regarded as an unfortunate necessity. Mr. Dillon said that such a realistic approach to a Third Five Year Plan would have a favorable effect upon Congressional deliberations should special legislation have to be considered.