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April 1, 1965
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Approved For Release 200~1~t1 `:ETARDP7~T01003AO02200210001-3 INTELLIGENCE BRIEF CIA/ RR CB 65-21 April 1965 Copy No. INDIA'S CRITICAL SHORTAGE OF FOREIGN EXCHANGE DIRECTORATE OF INTELLIGENCE Office of Research and Reports . CONFIDENTIAL GROUP 1 Excluded from automatic downgrading and declassification Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 This material contains information affecting the National Defense of the United States within the meaning of the espionage laws, Title 18, USC, Secs. 793 and 794, the trans- mission or revelation of which in any manner to an unauthorized person is prohibited by law. Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 Approved For Re lean 00 0 1 CI P T9 TO 00 A002200210001-3 INDIA'S CRITICAL SHORTAGE OF FOREIGN EXCHANGE India's foreign exchange reserves are at an all-time low. At the end of February 1965, total gold and foreign exchange reserves had fallen to $480 million from $620 million a year earlier. Because the statutory requirement for currency backing is $420 million, India has only about $60 million available for use -- roughly enough to finance about 10 days' imports at the current rate. An immediate threat, however, is posed by the need to repay $200 million to the International Monetary Fund (IMF), $75 million of which was due on 31 March 1965. If India receives the additional $100 million standby credit that it has requested from the IMF, the funds will have to be used principally to service this debt and will not substantially improve reserves. . The decline in reserves was caused by a variety of factors, including: increased commercial imports of foodgrains as a result of reduced PL 480 shipments of surplus wheat from the US because of the dock strike; an increased share of exports destined for rupee-payment countries; a shortage of foreign private investment; and rapidly increasing foreign debt repayment obligations. The immediate likelihood of India's improv- ing As foreign exchange position without external assistance is slight because: (1) the decline is occurring at a time when foreign exchange reserves are normally at their peak as a result of the traditionally high rate of export earnings during the preceding 6-month period (October- March), (2) debt-servicing charges are expected to have increased by about 30 percent in Indian fiscal year 1965 (1 April 1964 - 31 March 1965) and are expected to continue to increase rapidly during fiscal year 1966, and (3) there are no immediate prospects for increasing the inflow of private foreign investment. It appears that in the short run India's foreign exchange reserves cannot be improved significantly unless foreign debt repayment obliga- tions are further liberalized or unless substantially increased amounts of future foreign aid commitments are designated as "nonproject aid" and thus usable to finance imports required for th.e maintenance of the Indian economy. 1? Foreign Exchange Reserves India's foreign exchange reserves include gold holdings of the Government of India plus gold and other foreign exchange assets of the C-O-N-F-I-D-E-N-T-I-A-L Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 C-O-N-F-I-D-E-N-T-I-A-L Reserve Bank of India (RBI). The government's gold holdings normally are not used to satisfy statutory reserve requirements. Because the usual increase in RBI reserves failed to materialize during the October- March period, however, government gold had to be transferred to RBI reserves to keep them above the statutory minimum of $420 million (including minimum gold reserves of $240 million). The transfer of gold to the RBI in January 1964 was the first since the partition of India. Additional transfers of gold in January and February 1965 have amounted to $33. 5 million, and it is estimated that by the end of February the remaining gold holdings of the Government of India amounted to only $31.6 million. Because the RBI's foreign reserves are now only $448. 8 million -- an excess sufficient to finance only about 5 days' imports -- another transfer of gold from the government appears to be imminent. l/ During the first few years after partition, India's total foreign exchange reserves remained at a level of about $1. 6 billion to $1. 7 bil- lion. These reserves declined steadily throughout the 1950's but stabi- lized somewhat during the period 1960-63 at around $600 million to $650 million. Since February 1964, when reserves were $620 million, they have been declining steadily. 2/ Reserves in September 1964 were about $515 million, roughly $100 million less than in April 1964. 3/ A seasonal decline during these months is normal, but this decline was almost twice as large as that in the same period of 1963. Although Indian reserves usually are replenished during the period 1 October - 31 March, the decline has continued. Thus the current level is more critical than the level in September 1964 because it occurs on the eve of the seasonal decline in exports. 2. Foreign Trade India's trade deficit in 1964 increased by about $45 million to $871 million, compared with $826 million in 1963. Exports increased by $106 million, but imports increased even faster by about $151 million. Available trade data for 1963 and 1964 are.shQwri in the accompanying table. 4/ Contributing further to the decline in foreign exchange reserves was the fact that about 70 percent of the increase in Indian exports was to Bloc countries, with whom resettlement is made in rupees and therefore brings no free foreign exchange. Accordingly, early this year the Govern- ment of India made an important change in the existing export promotion Approved For Release 2001C107 ?2N&iaJR T -0'63A0622JD0210001-3 Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 C-O-N-F-I-D-E-N-T-I-A-L India: Estimated Trade 1963-64 1963 1964 Imports Exports Balance Imports orts Communist countries 223.0 191.1 -3 N.A. / 268.8 N.A. USSR 128.0 100.8 -27.2 147.0 157.5 +10.5 Czechoslovakia 33.6 29.4 -4.2 44.1 35.7 -8.4 Poland. 16.8 18.9 +2.1 31.5/ 25.2 -6.3 b ~ Other 44.6 42.0 -2.6 N.A. b 50.4 N.A. b Free World 2,250.8 1,456.9 -793.9 N.A. l#85.2 N.A. Us 848.4 264.6 -583.8 987.0 298.2 -688.8 Other 1,402.4 1,192.3 -210.1 1,638.0 J 1,187.0 -182.2 C/ total Grand 2 473.8 648.0 1 -825.8 21625.0 1,754.0 -871.0 . , , a. Excluding imports under long-term credits. b. the total for other Free World. countries. c. Also including the total for the Communist countries. Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 C-O-N-F-I-D-E-N-T-I-A-L :regulations, which formerly provided for the issuance of special import licenses to exporters on the basis of their performance. In the future, import entitlements will not be granted against exports made to "rupee trade account" countries. 5/ It also is hoped that nonessential imports, which already are subject to rigid import licensing controls, will be reduced even further by the recent imposition of an import surcharge of 10 percent. 3. Foreign Capital Net inflow of private capital into India during recent years has been negative -- an average of about $10 million more in private capital funds left the country each year than came in. This outflow has contributed to the decline in foreign exchange reserves. Although immediate sub- stantial increases in private investment inflow are doubtful, the Govern- ment of India recently has shown a willingness to discuss investment opportunities in industry with private investors, and prospects are fairly good for some investment inflow, especially in fertilizer, petro- chemical, and possibly steel projects. Project-oriented investments of this type offer only long-term prospects for improving India's foreign exchange position. In the short run, increased investment inflow, ear- marked for specific industrial projects, will not provide India with the foreign exchange it currently needs to purchase maintenance goods and equipment to keep existing industrial and agricultural sectors of the economy operating at peak levels. In the past, .India's shortages of foreign exchange have been covered primarily from a net inflow of official foreign capital. In 1964 the Aid- India Consortium pledged $1, 028 million, and in late 1964 the US agreed to provide India with an additional $400 million in surplus agricultural products. Also in 1964, because of India's shortage of raw materials and difficult foreign exchange position, the US included for the first time $275 million in aid of the nonproject type in its $435 million pledge to India through the Aid-India Consortium. To help avert a possible financial crisis, India has requested further such contributions from the Consortium, which is now considering its 1965 aid commitment to India. Thus far during India's Third Five Year Plan (1 April 1961. - 31. March 1966) the Free World has extended India some $6. 6 billion in aid (including P.L 480), and the Bloc has extended some $1. 1 billion. India's annual obligation to service this debt (principal and interest) is increasing. It is estimated that the debt-servicing charge amounted C-O-N-F-I-D-E-N-T-I-A-L Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 C-O-N-F -I-.D-E-N- T-T-A-L to $275 million in Indian fiscal year 1964 and will have increased (based on the debt outstanding as of 10 October 1964) about 30 percent to an estimated total of $358 million in fiscal year 1965. Future debt- servicing requirements are expected to exert an increasingly greater strain on Indian foreign exchange reserves. To service the present debt an additional $700 million will be required during the Fourth Five Year Plan (1 April 1966 - 3'1 March 1971), and if India continues borrow- ing abroad on the same scale and pattern as in recent years, service payments during the Fourth Five Year Plan are likely to be on the order of $2. 5 billion to $3. 0 billion. If Consortium aid continues at about present levels, roughly 50 percent of it will be needed to service India's external debt. 1. State, State, New Delhi. Bombay. Airgram A-924, 5 Mar 65. OFF USE. T-356, 29 Jan 65. OFF USE. 2. State, New Delhi. Airgram A-1134, 8 May 64. U. 3. Ibid. , A-482, 18 Nov 64. U. 4. New Delhi. Eastern Economist, 19 Feb 65, p. 396-397. U. 5. State, New Delhi. Ai.r. gram A-878, 23 Feb 65. C. Analyst: 25X1A C-O-N-F-I-D-E-N-T-I-.A-L Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 Approved For Release II;DgY} 2ppA1T01003A002200210001-3 Approved For Release 200c61 12`: Ut7X=RDF}l9`l J1'003A002200210001-3 CONTROL RECORD FOR SUPPLEMENTAL DISTRIBUTION 25X1A SERIES NUMBER CLASSIFICATION OF REPORT DISTRIBUTION TO RC IA/RR GB 65-21 Confidential 50 DATE OF DOCUMENT NUMBER OF COPIES NUMBS IN RC !V / `5 A ril 1965 280 _! DATE COPY NO. (Si RECIPIENT SENT RETURNED 32 AD RR 5 Apr 65 33 DAD/RR II 97 St/P 9 Ar 65 175 OCR 7 Apr 65 176 177-181 182 183 184-186 187 188 // 189 190 25X1 C 191 192 193 sf 194 195 196 197 198-200 201 CGS/HR/O s 1G81 H. 9 Apr 65 202-230 Filed in St/P/C 11 25X1A _, 4- 1 t A 25X1 A . 5X 1 C J7- a3 1 -/ ~a = o S` Gs r ,V 25X1A 25X1A _ Approved For Release 2001/07/12 CIA-RDP79TO10 - Analyst: 1/A (Project 46. 5237) A roved For Release 2001/07/12 - FORM 2353 (13) 2.65 COPY Approved For Relep 2 j/07/12: CIA-RDP79T010 a E NO.(S) SENT RETURNED Approved For Release 2001/07/12 : CIA-RDP79T01003A002200210001-3 G 61 FW . fl Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 SUBJECT: Distribution of Current Support Brief No. Copy No. Recipient 1 O/DDI, Room 7E32, Hdqtrs. 2 - 3 NIC 4 - 12 OCI Internal 13- 14 ONE 15 - 20 St/CS/RR 21 NSA/ 22 - 30 NSA 31 NSAL 25X1A 32 - 280 ORR Distribution, St/A/DS, Room GH0915, Hdqtrs. @out direct to St A . 7 Apr (Distributed by OCR) 25X1A CROLP I a Excluded irom automatic t ,a.. do~rg.wrading aad Approved For Release 2001/0/12: CIA-RDP79 f 2 210001-3 CONFIDENTIAL Approved For Release 2001/07/12 : CIA-RDP79TO1003AO02200210001-3 St/A/DS Distribution of Current Support Brief No. 65-21, India's Critical Shortage of Foreign Exchange -- April 1965 (CONFI 3ENTI ) Copy No. 34 35 37 - 42 43 - 48 49 - 54 55 56 - 60 61-66 7 68 - 76 77 - 78 79 - 80 81 82 - 87 88 89 90 91 92 93 94 95 96 98 99 100 101 102 - 103 104 105 - 107 108 109 110 - 111 112 113 114 - 115 116 - 154 155 - 158 159 - 170 171 - 172 173 - 174 97 &175 - 230 231 - 280 Recipient SR Ch/E St/PR D/A (1 each branch) D/MS (1 each branch) D/R (1 each branch) MRA D/P (1 each branch) D/F (1 each branch) St/PS D/I (1 each branch) D/GG D/GC D/GX/X RID/SS/DS, Unit 4, Room 1B4004, Hq. St/P/A St/FM Analyst/Branch GR/CR BR/CR FIB/SR/CR, Room 1G27, Hq. Library/CR IPI/CR Chief, OCR/FDD CD/OO OCI/SA/R, Room 5G19, Hq. DDI/CGS, Room 7F35, Hq. DDI/CGS/HR, Room 1G81, Hq. DDI/RS, Room 4G39, Hq. OSI OBI / IN T T S 25X1A 25X1A p DJ-j/S& OTR/IS/IP, Room 532, Broyhill Bld . , 1000 Glebe (1 - OTR/SIC) NPIC/CSD/REF, Room 1S518, Commandant National War Col ege, Leslie McNair, Attn: Classified Records Section, Room 26, National War College Bldg., Washington, D. C. Assistant Secretary of Defense, ISA, Room 4D825, Pentagon Defense Intelligence Agency, DIAAQ-3, A Building, Arlington Hall Station USIA, IRS/A, Room 1002, 1750 Pennsylvania Avenue, N. W., Attn: Warren Phelps State, INR Communications Center, Room 6527, State Dept. Bldg. Dr. Neilson Debevoise, NSC, Room 365, Executive Office Bld . Frank M. Charrette, Agency for International Development, Chief, S at'stics and Reports Division, Room A-204, State Annex # 10 StIP/C / RR, Room 4F41, Hq. (held in St/P/C, 7 Apr 65). Records Center DROOP 1 Approved For Release 20t { n 7 #"d"~ 0210001-3 dQgr~b?gj(jC~tl9n I/A) Approved For Release 2001104N. IJAIFOI 003A00220021 0001-3 ! April 1965 MEMORANDUM FOR, Chief, Dissemination Control Branch, DD/CR Chief, Publications Staff, ORR Transmittal of Material It is requested that the attached copies of CIA/RR CB 65-21, India's Critical Shorta .e of Foreign Exchan April 1965, confidential, be forwarded as follows: State, INR Communications Center, Room 6527, State Dept. Bldg. Suggested distribution for Embassies in Bern, Bonn, Brussels, Geneva, The Hague, Landon, Wellington, Mani*, Canberra, Melbourne, BW,19koks Djakarta, Hong Kong, Rangoon,. Kuala Lpur, Saigon, Seoul, Singapore, Taipei, Tokyo, Vientiane, Phnom Penh, Colombo, Kabul, Karachi, New Delhi, Tehran, Baghdad, Tea. Avi$4, Beirut, Amman, Jidda, And Ottawa 25X1A AttacbmentaI - X, Copies Aft - AWL of CB 65-21 cc: CGS/RB his r r~ r~i~ n. has been complet0dt ay: -A 0L Date: "d Approved For Release 2001/07/12 : CIA-RDP79TU1003AO02200210001-3 CONFIDENTIAL Approved For Release 200 Project No. 46. 5237 79T01 003A002200210001-3 Report Series CIA/RR CB 65-21 Title India's Critical Shortage of Foreign Exchange (CONFIDENTIAL) Responsible Analyst and Branch I/A 25X1A RECOMMENDED DISTRIBUTION TO STATE POSTS Berlin, Germany Bucharest, Romania Budapest, Hungary Moscow, USSR Prague, Czechoslovakia Sofia, Bulgaria Warsaw, Poland Europe Belgrade, Yugoslavia '-K ern, Switzerland e---Sonn, Germany ~, Brussels, Belgium Copenhagen, Denmark Geneva, Switzerland ..Helsinki, Finland -'The Hague, Netherlands Lisbon, Portugal London, England Luxembourg, Luxembourg Madrid, Spain Oslo, Norway Paris, France Rome, Italy Stockholm, Sweden Vienna, Austria t-W ellington, Manila, Philippines i Canberra, Australia " angkok, Thailand -'Djakarta, Indonesia --Hong Kong Z~R.angoon, Burma Kuala Lumpur, Malaya Saigon, Vietnam Seoul, Korea f1Singapore, British Malaya 1-Taipei, Formosa Tokyo, Japan 6Vienti.ane, Laos Phnom Penh, Cambodia "olombo, Ceylon Near East & South Asia Ankara, Turkey Athens, Greece Cairo, Egypt amascus, Syria ~,r~abul, Afghanistan /' arachi, Pakistan New Delhi., India Nicosia, Cyprus ehran, Iran Bel aghdad, Iraq Aviv, Israel tJBeirut, Lebanon .Amman, Jordon ./Ji.doa, Saudi Arabia %tta.wa, Canada ARA Mexico Guatemala Panama Brazillia, Brazil Buenos Aires, Argentina Bogota, Colombia Santiago, Chile La Paz, Bolivia Montevideo, Uruguay Caracas, Venezuela Yaounde, Cameroun Leopoldville, Congo Addis Ababa, Ethopia Accra, Ghana Abidjan, Ivory Coast Nairobi, Kenya Monrovia, Liberia Tripoli, Libya Rabat, Morocco Lagos, Nigeria Mogadiscio, Somal Khartoum, Sudan Tunis, Tunisia Pretoria, South Africa Algiers, Algeria Cotonou, Dahomey Dakar, Senegal Bamako, Mali Melbour ROF t pp r 1 t 'Felease 200 ~P ` 7-,,,C 7 s T J a R P I e ~ d6dLXCrtl;a~ and SECRET ADDrovQd For Pala cn gnnj jAZ5% 1M%d rii4-Zn?9T8 883A8 22002 100 i RECORD OF REVIEW OF ORR PUBLICATIONS FOR SECURITY/SANITIZATION APPROVAL FORM 2.64 2358 10001-3