Foreign Relations of the United States, 1964–1968, Volume XXV, South Asia

494. Memorandum From the President’s Special Assistant (Rostow) to President Johnson¹

Washington, May 8, 1968, 4:15 p.m.

SUBJECT

• AID Loan to India

Two weeks ago you instructed us to hold up on the $225 million AID program loan proposed for India. This loan would fill out our share of Consortium aid for Indian fiscal year 1968, which ended in April.

As you know, India’s economic performance and prospects are better now than ever. We have tried to use the delay to find ways to use the loan as political leverage with Mrs. Gandhi and to impress on her how painful it is to get these large sums for a country that isn’t always as helpful as we could wish. I am afraid we have come up empty. Bill Gaud and Nick Katzenbach concur in the following analysis and recommendation.

Setting

We must start with two unpleasant but very real facts:

1. From the Indian point of view we would be trying to exert more pressure with substantially less aid. Our total capital aid to India in FY 1968, including this loan, would be about $290 million, about $100 million less than last year. Thus, as the Indians see it, we are cutting back by more than 25%. This is particularly painful now because India is in an economic recovery, led by the bumper harvest, which will cause very serious foreign exchange pressure in the Fall. And the Indians have not forgotten that we were among the leaders in the Consortium who assured them in 1966 that they would get $900 million per year in non-project aid if they agreed to devalue and make other economic reforms. They went through with the reforms. But this year, because of our cut and the delay in IDA replenishment, they will get less than $600 million in non-project aid. This adds up to a poor base for more arm-twisting.

2. The Government of India is in a particularly weak and delicate political position. Mrs. Gandhi presides over a loose confederation of worried politicians. She is not strong enough to crack the whip over them, and they are not strong enough to withstand heavy nationalist pressures from the Parliament. This problem has been aggravated lately by the lobbying on the Non-Proliferation Treaty in which the Russians (or so the Indians say) have threatened to cut off aid unless India signs. Predictably, Mrs. Gandhi and Morarji Desai have responded with a number of belligerent statements, public and private, to the effect that anybody who tries to blackmail India with aid can take a flying leap. Whether we like it or not, we are clearly in a position where the slightest hint of an attempt to use aid as a direct lever outside the economic field will produce an outraged and counterproductive reaction.

Possible Quids Pro Quo

There are three major areas in which we might press the Indians to be more helpful:

1. Indian Military Spending: The Indians keep about one million men under arms. They have made several recent deals with the Russians for aircraft, frigates, submarines, and other equipment to modernize their forces. They argue that this is all needed for defense against China, and they are in fact within their 1964 defense plan worked up with our cooperation. We tried to get them to keep their military budget from rising this year, but they announced an increase of slightly less than 5%. In fact, because of price rises, this probably works out to a very small increase in real terms, but it still causes concern in Pakistan and could lead to another round or reciprocal defense increases in both countries.

We have also been having trouble with India with respect to the Conte Amendment which requires us to cut economic aid in the same amount that poor countries spend on sophisticated weapons unless the President finds the arms purchase vital to U.S. security. To be brutal, the Indians have lied to us twice—once before the Conte Amendment and once after—about what aircraft they are buying from the Soviet Union. Both cases seem to be products of ignorance rather than intentional deception, and the second case does not now appear to be an actual violation of the Conte provision. But we need much better cooperation in the future.

Our preferred solution to this range of problems has been formal Indo-U.S. defense talks in which we would get the information we need to administer the Conte and Symington Amendments. In theory, we might ask for such talks as a quid pro quo for this loan. But this proposal was explicitly and indignantly rejected in March by Morarji Desai during the last go-around on Conte violations—though, characteristically, he informally gave us the information we wanted in the same session. It is Chet Bowles’ judgment, with which we concur, that any new approach now would not only queer any chance for military conversations, but might also derail current plans for general U.S.-GOI policy talks (proposed by the Indians) in Delhi in July where we hope to make some headway on this subject.

2. The NPT: Most Indian politicians are frightened of the NPT. They overstate the public sentiment against the Treaty (Morarji likes to say that 99% of Indian public opinion opposes it), but they do know that nobody who counts is really strongly for it and they are afraid that anybody who gets out on a limb will have it chopped off. The Cabinet has taken a formal and public decision against signing the Treaty “in its present form.” But the Indian UN Representative is not lobbying with other countries against the Treaty; he is sitting quietly and observing.²

It is conceivable that we could try subtly to tie this loan to the Treaty. But again our judgment is that this tactic would hurt us far more than it would help. Mrs. Gandhi and Desai have staked out their position on Russian blackmail; we could expect them to be at least as tough with us. Indeed, a frontal attack from us might well make it so juicy a political plum to oppose the Treaty that it would tip the final balance against it.

3. Economic Reforms: The Indians have done every major thing we have asked them to do in the economic sphere. They made agriculture their top investment priority. They devalued and liberalized imports. They are holding to the import liberalizations in fiscal year 1969 despite the prospect of serious foreign exchange shortage. They are building food buffer stocks and have agreed to make the Food Corporation into the CCC-like entity we advised. They have moved to keep farm prices at incentive levels despite the bumper crop. They have begun to relax the food zones which separated states. In short, we simply don’t have any major changes in economic policy to which we could tie this loan even if the loan would provide enough leverage to get them adopted.

On the other hand, if the Indians do not get this loan, economic conditions will force them to turn away from the rapid-growth, free-market track we have urged them to take. Their present balance of payments prospects are very bleak, even assuming this loan is made promptly available. If it is not, they will very soon be forced to put the clamps back on imports and put a damper on what could be the best economic year since Indian independence. We cannot say that this loan will guarantee the economic success we seek. We can say that success is impossible without this loan—and soon.

Conclusions:

We conclude that we can find nothing to be gained from delaying this loan. We have all learned many a lesson from you in years past about dealing with India. But this time there is nothing we want from her which we haven’t already received or could possibly receive if we needle her with this loan. (I think this is true with respect to Vietnam negotiations as well.)

On the other hand, there are very great costs to delay. The economic recovery led by the bumper grain crop is the most hopeful event in the developing world in at least five years. If the Indians can find the foreign exchange to take advantage of it, we could get sustained growth in the subcontinent on a scale we have only dreamed about in the past. If they cannot find the foreign exchange, we will not only have missed a great economic opportunity, we will have discredited the economic policy line we have worked many years to sell; we will face serious economic stabilization problems in India; and we will have aggravated the current political unrest by adding a host of potent economic issues.

The Aid/India Consortium meets in Washington May 23–24. Only the U.S. has not formally announced an aid pledge for the Indian fiscal year just ended. (This meeting is actually supposed to be about next year’s money.) It will be very embarrassing for our representative if we have not announced this loan before then. But our problems will far transcend embarrassment. The other Consortium members have maintained their contributions at historical levels despite the fact that it was obvious that the Congressional cut would force us to cut back. If we don’t come through now with even our reduced contribution, we will (1) undermine efforts to raise the necessary funds for next year, and (2) make it crystal clear that we are holding out for some quid pro quo which the Indians will assume is political and may hotly denounce—probably with the support of the other Consortium members.

None of this denies or excuses the fact that the Indians can be irritating and uncooperative. Nor does it excuse the fact that they have often been less than helpful on Vietnam. But I think that this is one of those times when we must swallow our discontent and go ahead with the treatment despite the patient’s behavior. I recommend that you approve the loan.

W. W. Rostow ³

Loan approved⁴

Let’s hold off a while longer

Loan disapproved

Call me

1. Source: Johnson Library, National Security File, Country File, India, Vol. XI, Memos and Miscellaneous, 2/68–10/68. Secret.
2. Telegram 13839 from New Delhi, May 7, reported a conversation with Homi Sethna of the Indian Atomic Energy Commission and Babha. Sethna expressed his objections to the inspection provisions in the Non-Proliferation Treaty and commented that he “did not foresee an Indian signature to NPT ‘unless Mrs. Gandhi wants to commit political suicide.’” (National Archives and Records Administration, RG 59, Central Files 1967–69, AE 6 INDIA–USSR; also available on the Internet, National Security Archive (www.gwu.edu/—-nsarchiv), Electronic Briefing Book No. 6, “India and Pakistan—On the Nuclear Threshold,” Document 17)
3. Printed from a copy that bears this typed signature.
4. Johnson checked this option.