Foreign Relations of the United States, 1958–1960, South and Southeast Asia, Volume XV

221. Memorandum of a Meeting, Indian Ministry of Finance, New Delhi, October 9, 1958¹

New Delhi, October 9, 1958

PARTICIPANTS

• United States
  • Ambassador Bunker
  • Secretary of the Treasury Anderson
  • Under Secretary of State Dillon
  • President Waugh—Export-Import Bank
  • Ambassador McIntosh
  • Director, OIF, Treasury—Mr. G. H. Willis
  • ICA—Mr. J. Bell
  • Special Assistant to Secretary of the Treasury—Mr. Lennartson
  • Special Assistant to Under Secretary Dillon—Mr. Leddy
  • Minister—Winthrop G. Brown
  • Director of TCM—Mr. H. E. Houston
  • Counselor for Economic Affairs—Mr. J. Robert Fluker
• Government of India
  • Finance Minister Desai
  • Planning Minister Nanda
  • Deputy Chairman, Planning Commission—Sir V. T. Krishnamachari
  • Additional Secretary Planning Commission—Mr. Tarlok Singh
  • Governor of Reserve Bank of India—Mr. H. V. R. Iyengar
  • Reserve Bank of India—Mr. Madan
  • Commerce and Industry Secretary Ranganathan
  • Special Commerce Secretary—Mr. L. K. Jha
  • Finance Secretary—Mr. A. K. Roy
  • Finance Additional Secretary—Mr. S. Jaganathan
  • Advisor to the Planning Commission and Finance Ministry—Dr. Anjaria

Secretary Anderson opened the meeting with a reference to the complementary benefits of this Bank and Fund Meeting, and the visit to India which has given him and his colleagues an opportunity for brief first-hand observations of India. Mr. Anderson thanked Mr. Desai for the meeting with him today and observed that it would be extremely helpful to him and his colleagues to have India’s own thinking on economic development and India’s problems in general.

The Secretary observed that the American people were very much interested in aid programs, particularly aid to India. He noted, however, that since the war, costs in general had risen and that the U.S. taxpayer was becoming more critical in terms of his desire to understand the results of our aid programs. The Secretary commented briefly on the fact that American taxpayers also noted that there were underdeveloped regions in the United States which also needed more dams and the like.

The Secretary stressed American reliance upon private initiative and illustrated his point with the fact that the capital of his own state had been built by private British interests in return for about one million acres of land. He noted that some of this land was still held by private British owners.

Finance Minister Desai said that conditions in the United States and India were different except for the common basic elements of democracy. He cited the area of the United States as 2½ times that of India, with a population one-half of India’s. He observed that the United States had begun development as a young country whereas India had begun its true democratic development as an old and poverty stricken country. He said that as much as a million acres were not available in India to pay for specific construction, [sic] In evidence of the low standard of living Mr. Desai said that India had a literacy rate of about 10 percent.

Mr. Desai went on to say that while in India full fledged democracy had sprung from this background it still left a poor base for the economic development which was essential to India’s future. He said that India must build a prosperity—from this base of poverty—a prosperity which could not of course equal that of the United States. He believed that India’s economic progress must aim for prosperity in the sense of giving employment to everyone, with enough to eat and an opportunity for basic education. At the same time India must increase its income so as to get more savings and investment.

Mr. Desai cited the division of India between India and Pakistan as a great initial difficulty for independent India, in creating certain grave economic imbalances. He cited dislocation of agricultural production (and particularly cotton) as a case in point.

Mr. Desai said that food was the basic need in India—that India was, and will be for some time to come, an agricultural country. He noted that the First Plan put emphasis on agriculture but that it had also been necessary to invest in Industry in the First Plan. At this point Mr. Desai referred to the problem of semantics in the development of even better understanding between our two countries. He observed that in the United States “free enterprise” was the applicable term but that the government controlled a larger percent of industrial production in the United States than did the government in India.

In response to Secretary Anderson’s statement that talk of state ownership in India raised serious problems in the minds of potential American investors, Mr. Desai said that India’s prime problem was that of helping people and that in some cases this meant that the state must enter an industry. He emphasized, however, that India would not nationalize established firms in any industry. He said that India needed all of its capital for new development rather than using it to compensate for nationalization of established firms. He observed that private enterprise seemed to have done well in India in that in the last ten years the value of private enterprise in India had quadrupled while foreign capital in India had doubled.

With regard to the Second Plan Mr. Desai said that certain heavy industrialization was and is a necessity; he stated that the Indian economy would fall further behind if for example certain heavy machinery plants were not developed in India. He said that much of this heavy industry was needed to achieve an increase in agricultural production and improved distribution.

Mr. Desai said that India’s Plan had been termed very ambitious. He felt that this was not a correct evaluation at the time of the drawing up of the Plan although it might be so termed now, in retrospect. He noted that the deficits originally anticipated in the Plan had generally been met. He said that it was the unforeseen added deficits that had caused the great difficulty in the Second Plan. Mr. Desai cited the drought which had last year subtracted 6.7 million tons from the total foodgrain harvest, after food production had increased by some 16 million tons since the beginning of the First Plan. He also referred to the recent recession in the United States and its effect upon India’s export earnings in terms of trade, as another cause of unforeseen deficits.

Mr. Desai observed that much of the difficulty under the reduced Plan had been alleviated by help from India’s friends; he noted that most of the help of course, came from the U.S.

Mr. Desai then turned briefly to the matter of the latest reappraisal of the Plan, noting that India’s problem was one of adjusting to resources. He said that India’s original public sector Plan expenditure of Rs. 48 billion had through increased costs risen to Rs. 54 billion and that the latest reappraisal had lowered the Plan expenditure to Rs. 45 billion. He stated that India’s total public and private Plan expenditure of about Rs. 60 billion had to meet a heavy burden in India’s population increase which he cited at approximately 1.25 percent per year. In what was obviously a lapse in his thinking, he observed that 2 percent of India’s national income must be drawn from the increment resulting from economic development in order to take care of the increased population.

With regard to the Third Plan Mr. Desai said that India was now taking stock to see what it could do. He said that the basic problem was one of estimating India’s own resources and the possibilities of help from abroad. He said that such help should not be taken lightly by India; that India could not take loans and then say later that it could not repay them. He felt that this was a vital consideration in working on the Third Five Year Plan. After reviewing again the emphasis on agriculture in the First and Second Plans, Mr. Desai said the Third Plan must also stress agriculture—but that there must also be, within the limitations of available resources, concentration on necessary industry. Mr. Desai said that although the Third Five Year Plan is now being studied, the primary problem, of course, is completion of the Second Plan.

Sir V. T. Krishnamachari gave a brief summary of national income and investment goals. He said that India’s annual investment before the First Five Year Plan was about five percent of national income, which had risen to almost 8 percent by the beginning of the Second Plan, and should (he hoped) rise to 11 percent by the end of the Second Plan. In response to Secretary Anderson’s query about the annual accumulation of savings outside of taxes, Dr. Anjaria and others referred to various broad measures of such savings. Dr. Anjaria at one point noted that public savings amounted to about three-quarters of one percent of national income and that annual total savings were approximately 8 percent—leaving private savings therefore at about 7 percent of national income. The 8 percent annual savings figure was derived roughly from the fact that total investment in India was running about 10 percent of national income, while about 2 percent was financed by external assistance or savings from abroad.

The Secretary asked where a firm would go for credit or other financial assistance in attempting to start a business in India. Mr. B. K. Nehru replied that businessmen would go to (1) commercial banks, (2) loan institutions such as the Industrial Finance Corporation (a government-sponsored institution), (3) the private Industrial Credit and Investment Corporation of India, and the new, mixed institution known as the Refinance Corporation. He also observed that they could go to the market with bonds or stocks.

In response to the Secretary’s questions about the assets of private banks as compared with the State Bank, Mr. Iyengar stated that the State Bank’s deposits were about 25 percent of total bank deposits in India. He observed that the State Bank deposits included PL 480 receipts held in the U.S. Treasury account.

Secretary Anderson referred again to the problem of semantics and the fact that India suffers because potential investors in the United States have some doubts about India as a safe place of investment and India’s welcome of foreign private capital. He noted that India’s wealth tax was widely misunderstood in the United States. He said that capital must be given a feeling of welcome, that investors must make a profit and that potential investors must be led to anticipate cooperation between private capital and government.

Mr. Desai referred to the political problem of great stress on private capital and noted the similarities of India’s problem with those of Canada where political campaigns may be waged on such topics as “Wall Street domination”.

Mr. Anderson noted his concern over the amount of unproductive military expenditure, which in gross terms he said amounted to almost 85 cents out of every dollar being spent by the United States [Indian?] Government.

Under Secretary Dillon referred to Mr. Desai’s earlier statement concerning the different meanings of words to different people. He said that in the United States the average man sees India as more socialistic than is actually the case. He noted that he and other United States Government officials understood the true situation because Mr. Desai and others had placed the facts before him. He noted, however, that private capital must come to a better understanding of government policies if India is to get the full support of private capital. He noted that the United States Government could help improve this understanding but that the Indian Government must also attempt to spread understanding more broadly.

The Under Secretary referred to Mr. Desai’s statement at the Bank-Fund Meeting, that private capital tends to go to the countries which are already making more progress. Mr. Dillon said that he believed India was in the category of countries making progress, that it is making progress particularly in the infrastructure needed for further rapid progress. He said private capital must be made welcome (and he noted that firms have been welcomed inasmuch as foreign private capital in India had doubled according to Mr. Desai), but people must understand India’s tax and other incentives. He also observed that potential foreign investors must feel free to talk frankly with a minimum of misunderstanding attributable to the problem of semantics.

Secretary Anderson commented on India’s great opportunity to educate a large group of prominent bankers who were attending the Bank-Fund Meeting at Delhi. He noted the concern of potential investors in understanding the government’s attitude on such matters as government competition with private enterprise.

Mr. Desai explained that the government has gone into some industries in competition with private industry but that this competition was healthy in his opinion. He said that government enterprises were required to operate as private firms and to show business profit. He stressed the fact that government-owned firms pay the same taxes as private firms. Mr. Dillon noted that this was a favorable point which should be made clear to potential investors.

Mr. Waugh observed that the tax situation in India is far better than most people realize. He observed, however, that the tax structure was complex. He said that a simplification of India’s tax structure on business would make it much easier to explain to, and better to attract, foreign private capital. Mr. Waugh said that all present at this Bank-Fund Meeting had been impressed with the ability of the World Bank to take care of the public sector needs in India. Mr. Waugh made a plea for some emphasis on private business and said that if there were such emphasis the Export-Import Bank would be able to help. He noted that the Export-Import Bank did not require a government guarantee.

Mr. Desai and Mr. Nehru referred to Export-Import Bank policy of purchase in the United States and high costs in the United States. Mr. Waugh noted that prices might be higher in many cases but that the quality was there as well as the ability to replace worn parts and the ability to deliver rapidly. Mr. Waugh said that of course private Indian capital should not be forced to go to the United States; he said that U.S. suppliers must be competitive and carry their own initiative in this respect.

Mr. Dillon referred to the IBRD report and its table on place of expenditure under IBRD loans. He noted that 38 percent was spent in the United States last year, while the next highest country of expenditure was only 18 percent. Mr. Dillon felt that this indicated that U.S. prices were competitive.

Secretary Anderson noted that all the discussion this afternoon was not critical; rather it was the belief on our part that growth and industrialization must come from men who are willing to invest—with Indian collaboration of course.

Mr. Dillon referred to Mr. Sudhir Ghosh’s talks in the United States which had apparently given the impression that India would seek assistance from the Soviet Union for a fourth steel plant if United States private or government assistance were not forthcoming. Mr. Dillon noted that he had been concerned about this statement because it seemed to contradict the statement made by Mr. Desai in his talks with Mr. Dillon a few days earlier. Mr. Desai said that too often there was a tendency to get different statements from different people and that he would look into the matter of Mr. Ghosh’s statement. He went on to say that India did not contemplate any additional steel plant in this Second Plan. Mr. Dillon said that at such time in the future as India was ready the U.S. would of course be willing to talk with Indian officials about possible assistance in the fourth steel mill. Mr. Dillon went on to stress the fact that a fourth steel mill might well be constructed with foreign private capital, know-how and assistance.

With some further reference to the fourth steel mill, Mr. Desai observed that the Third Plan could not help but be short of foreign exchange. He said, however, that after further consideration of resources, India would come up with certain schemes and at that time would have a firmer view of the contents of the Third Plan.

Sir V. T. Krishnamachari noted that India would first draw up a schedule of repayments of loans for economic development. Mr. Desai added somewhat seriously that India was more concerned about its credit than its progress.

The meeting concluded with an exchange of good wishes and expressions of thanks by Secretary Anderson and Under Secretary Dillon.

1. Source: Department of State, Central Files, 891.00/12–1158. Confidential. Transmitted to the Department of State as an enclosure to despatch 605, December 11. The U.S. delegation was in New Delhi for the annual joint meeting of the IBRD and the IMF, held October 6–10. This meeting took place in Finance Minister Desai’s office.