349. Memorandum From the President’s Special Assistant (Rostow) to President Johnson 1

Mrs. Gandhi has taken the first big step in the economic program Mehta worked out with George Woods. She has devalued the rupee. This has triggered strong opposition within her own party, from the Left, and from Indian business men.

She needs the prompt response of aid donors to permit import liberalization and to underscore the positive part of her program. That is why George Woods is pressing the consortium hard for prompt action.

The politics of our bargain are in pretty good shape.

  • —She is angling through diplomatic channels for another meeting with the Paks. Gene Locke is working the other end of the line. While this will probably not produce anything dramatic, it should keep the Tashkent process going.
  • —The effort to get a grip on military spending is less advanced. But George Woods is working actively on this, as you know; and State is pressing the Indians to take our concern seriously. We are pleased with Mrs. Gandhi’s boldness; a bit worried about the tightrope she’s on; and feel we should go ahead now with our part of the economic deal.

Woods has promised to let her know by 15 June—next Wednesday—how much the consortium will contribute toward the World Bank target of $900 million in non-project aid. She has committed herself to announce further steps on import liberalization by about 20 June. She cannot do this without the Woods package. The consortium meets on Tuesday.

Dave Bell accepts the World Bank’s $900 million target and would like your approval:

To put in a U.S. planning figure up to $335 million at the consortium negotiating session Tuesday. This is in addition to the $100 million you approved for the Vice President to take with him in February. Our planning figure would include: (a) an immediate new program loan of $150 million available from FY 66 funds and (b) up to another $185 million to be made contingent on Congressional approval.

Bell would start bargaining with a low U.S. figure of $280 million (plus the earlier $100 million) to press other donors to give more and would go up to the full $335 million only if necessary to get the maximum [Page 678] out of the others. AID can handle the higher figure with what it has already asked of Congress.

Woods is pressing the Germans to increase the $62 million they plan to put into the consortium; and to increase within that figure the present amount (about $45 million) of their program lending. We shall be on to the Indians to press home George’s point.

Bell recommends the package2 and has consulted the Congress.

State concurs.

Bureau of the Budget concurs in an attached memorandum.3

Secretary Fowler is in dissent as his attached memorandum4 to you indicates.

He makes three points:

  • —He believes 42 percent rather than 48 percent is the “Appropriate share” for the United States;
  • —He regrets that the debt rescheduling for India will be delayed by the World Bank until the fall;
  • —He generally opposes continued non-project lending to India unless we can establish a more favorable bilateral trade balance with India. I have looked carefully into these points.

With respect to shares, the 42 percent is an historically accepted figure covering both project and non-project lending. It is not the relevant figure for this package, which is wholly non-project. In fiscal 1965—the last year for a full consortium package—the non-project share of the United States was as high as 35 percent. It is, thus, true that in the sensitive area of non-project lending we are making progress in getting others to do more.

Moreover, our share looks bigger than it is. We are being allowed by the World Bank to count the $100 million non-project loan to India which we granted via the Vice President, as part of this year’s consortium package, although it represents funds which under normal circumstances we would have lent India last year. The other members of the consortium did not break off the assistance to India as we did during the war period. They are not getting credit this year for the contributions they made last year.

Therefore, on this point I conclude that our share in this non-project package is “appropriate.”

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With respect to debt rescheduling, all of us would like to see that take place as soon as possible. It requires, however, complicated prior negotiation. George Woods believes he cannot get it organized until the fall. He has, however, accepted and will try to press on the others, a principle greatly to our advantage; namely the principle that we will take the debt rescheduling “off the top.” This means that those who, in the past (mainly Europeans), lent on hardest terms will bear the greater burden in the rescheduling; we will deduct this from the $900 million; and we shall divide up the balance according to the agreed percentages. It is just that this principle be accepted; but it is also to our advantage. And it is worth our while to let George Woods fight this battle for us between now and the autumn, which is his recommendation.

With respect to the commercial balance, it is true that we buy more from India than they buy from us. However, this does not bear directly on the present loan package. All of it is tied. We are working hard—and should work harder—to increase our exports to India. We are making some progress. But we cannot count on having even bilateral trade balances with every country. Moreover, of the other major trading partners of India: the pound is in worse trouble than the dollar; the Germans are no longer building reserves; and we have good balance of payments arrangements with Japan. The Indians trade little with the French.

I conclude, therefore, that while we wish to go further in increasing our exports to India as to other countries, there is no balance of payments pain in this loan package; and there is not even much pain in India’s favorable trade balance with us.

Therefore, I concur in the recommendation of AID, State, and the Bureau of the Budget.

The $900 million is the minimum necessary to carry Mrs. Gandhi over import liberalization and her political crisis.

Economically, our balance of payments will not be damaged.

And we are getting about as much equity from the consortium as one is likely to get in an imperfect world.

I recommend you approve the AID package as presented.

Walt

pprove AID package5

Disapprove

See me

  1. Source: Johnson Library, National Security File, Country File, India, Vol. VII, Memos & Miscellaneous, 1–8/66. Confidential.
  2. Memorandum from David E. Bell to the President, June 10. (Ibid., NSC Histories, Indian Famine, August 1966–February 1967, Vol. II)
  3. Reference is to a June 11 memorandum from Charles L. Schultze to the President.
  4. Reference is to a June 11 memorandum from Henry H. Fowler to the President.
  5. Johnson checked this option.