[Page 172]

68. Action Memorandum From the Assistant Secretary of State for Near Eastern and South Asian Affairs (Atherton) and the Acting Administrator of the Agency for International Development (Nooter) to Secretary of State Vance1

Bilateral Aid to India

Issue for Decision

In view of the changed situation in India,2 we need a position on a possible resumption of bilateral development assistance to India.

Background/Analysis

We have not had a bilateral development lending program with India since 1971 when we suspended this type of aid. We have, however, continued PL 480 programs and these totaled $225 million in FY 1976 and $150 million in FY 1977. (The amount dropped because the Indians did not need U.S. wheat.) We have also contributed substantial assistance for Indian development indirectly through the World Bank’s soft money window, IDA. At the present lending level under IDA IV, India is receiving $600 million annually of which about $200 million is attributable to the U.S. share of overall IDA funding. With the full IDA V replenishment, the U.S. indirect lending might increase to over $300 million annually.

Case for Bilateral Aid. While the Indian economy has substantially improved in recent years, basic long-term problems remain: low per capita income, inadequate agricultural growth rate, high unemployment and underemployment, a substantial debt burden and inadequate domestic capital formation. The Desai Government has stressed the need for more rapid development emphasizing fuller employment and increased production in agriculture and small scale industry. These objectives are consistent with A.I.D.’s Congressional mandate.

In addition to a clear developmental requirement, offering to resume aid would be a positive political signal. It is also appropriate that we give recognition to a country like India that improves its human rights stance.

[Page 173]Case Against Bilateral Aid. The argument against a resumption of aid rests on the history of past problems. Our large-scale assistance program of the 1950s and 1960s created frictions because of Indian sensitivity to what they perceived as U.S. intrusion into Indian domestic economic policy and their resentment about the debtor-creditor relationship.

The Indians are unlikely to prove any less prickly on aid matters in the future. An argument can be made that our overall bilateral relationship would be strengthened by concentrating on helping the Indians with multilateral assistance, PL 480 and trade concessions without resuming bilateral lending.

Size and Tactics. The Development Coordinating Committee (DCC) reviewed the India aid question and agreed we should be willing in principle to resume bilateral development aid at a modest level in FY 78 (at about the $60 million level), and design a sharply focused, low profile program. A dialogue with the Indian Government is essential to be absolutely certain that a mutually satisfactory program can be designed and also to see whether the new government really wants us back in the bilateral aid business. Treasury believes we should not pursue the aid question in an aggressive manner.

At the same time, the Development Coordinating Committee agreed that in terms of our North/South strategy and bilateral relations with India, the IDA V replenishment should have the highest priority in terms of trying to mobilize support on the Hill. State, AID and NSC hope it will be possible to obtain the full IDA V appropriation without any implied USG commitment to seek a cut in India’s 40 percent share and believe that this level is reasonable in terms of absorptive capacity and economic criteria. Ultimately, India’s share of IDA V commitments will depend on the Bank Board’s review of lending criteria. Treasury does not wish to prejudge the outcome of this review and believes that it would be premature to attempt to arrive at a justifiable share for India before studies of IDA lending criteria now in progress within the USG and the World Bank have been completed.

We do not need to take any action on the Hill at this time on bilateral aid. Although we have not included India in our FY 1978 AID budget request, there is a good chance Congress will, on its own initiative, authorize an Indian program of about $60 million within our existing FY 1978 request. Our ability to accommodate a $60 million program will depend upon the size of Congressional cuts and their impact on AID’s existing programs. Thus, if we discuss FY–78 AID with the Indians, we will say that we are prepared to consider a program at the $60 million level if they are interested, but that the actual amount would, of course, be subject to adjustment as a result of final Congressional action on the AID appropriation request. A budget supplemental [Page 174]later in the year is possible although we will have to judge whether it is practical at the time.

We have considered the question of India’s nuclear reprocessing capability as a possible bar to bilateral aid under the Foreign Assistance Act (Section 669). Concerned offices in AID and State agree that the Indians are not in violation. Since Section 669 was passed in June 1976 they have not delivered or received, to or from any other country, any “nuclear processing or enrichment equipment, materials or technology.” Before entering into a bilateral program with India, we would acquaint them with this provision in our law in view of their possible future potential to produce and export the proscribed item.

Options

Basically, there are two choices:

—We can leave matters as they are, and not resume a bilateral program. We would, however, continue our PL 480 aid and our assistance through multilateral lending agencies.

—We can decide in principle to resume a bilateral program if India wants one.

State (NEA and EB) AID, NSC and Treasury all concur in our resuming a bilateral program. With regard to size, there is agreement that we should have only a medium sized program for FY 78 (presumably at about the $60 million level, subject to adjustment based on actual appropriation levels). We do not have to decide now on the size of a FY 79 program.

Recommendation:

That you approve our willingness in principle to resume bilateral lending to India should the Indians be interested, with a program for FY 1978 tentatively estimated at about $60 million, subject to the caveat on actual appropriation noted above. Informal technical discussions could commence in Delhi after Ambassador-designate Goheen arrives (in mid-May) but we would pace these carefully to avoid creating problems for IDA V on the Hill.3

ALTERNATIVELY, that we stay with the status quo, and not resume bilateral assistance for India.4

  1. Source: National Archives, RG 59, Central Foreign Policy File, P850085–1790. Confidential. Sent through Richard Cooper, Under Secretary of State for Economic Affairs. Drafted by Kux and Priscilla Boughten (Office of Bangladesh, India, and Sri Lanka, Bureau for Asia, AID); cleared by Thornton, Hoopengardner (Department of the Treasury), Deputy Assistant Secretary of State for Economic Affairs Paul Boeker, and Atwood.
  2. A reference to the new government; see Document 64.
  3. The recommendation was neither approved nor disapproved. Minnies drew an arrow from the Approve option to the bottom of the page where he wrote: “Cooper & Vance discussed issue. Cooper subsequently held meeting & it was agreed that instructions should be drafted that approved resumption of discussions—at a slow pace—on bilateral assistance for India. Todd Minnies 5/19.” Minnies also noted that Kux, one of the drafters of the action memorandum, “was at above meeting.”
  4. The alternative was neither approved nor disapproved.