INDIA: ECONOMIC TIES WITH THE USSR LIKELY TO REVIVE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00314R000100080004-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 27, 2016
• Document Release Date: April 6, 2010
• Sequence Number: 4
• Publication Date: May 1, 1984
• Content Type: REPORT

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Intelligence
India: Economic Ties
With the USSR
Likely To Revive
NESA 84-10174
May 1984
401
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Intelligence 25X1
India: Economic Ties
With the USSR
Likely To Revive
This paper was prepared by
Office of Near Eastern and South Asian Analysis,
with contributions from
Comments and queries are welcome and may be
directed to the Chief, South Asia Division, NESA,
Secret
NESA 84-10174
May 1984
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India: Economic Ties
With the USSR
Likely To Revive
Key Judgments India's faltering trade with the Soviet Union is likely to revive in the next
Information available two to three years. Its payments for military purchases from Moscow will
as of I March 1984 rise, perhaps sharply, and its exports to the USSR will recover. Indeed,
was s used in this report.
Indo-Soviet trade may reach a new high as both governments try to
balance bilateral payments.
Moreover, the recent surge in Indian criticism of the Soviet Union will
abate as export opportunities increase. Many Indian exporters and econom-
ic analysts, stung by sharp cutbacks in Soviet purchases of Indian goods in
late 1982 and 1983, will again see the USSR as a reliable trading partner
when India sells Moscow agricultural products and manufactured goods
that it cannot easily market in other countries.
India's overall balance-of-payments position will deteriorate, however, if
military payments to the Soviet Union reach $1 billion a year and if New
Delhi's petroleum exploration continues to be unsuccessful. New Delhi
would then have difficulty balancing the bilateral account through in-
creased exports alone and would probably shift some petroleum purchases
from the USSR to Western suppliers. The increased hard currency trade
deficit would coincide with increased debt service payments to the
International Monetary Fund and to commercial banks and with stagna-
tion in Western concessional aid. Indian officials would probably attribute
the resulting payments strains to US "tightfistedness" toward international
financial institutions rather than to their own military purchases.
iii Secret
NESA 84-10174
May 1984
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Figure 1
India: Trade With the USSR, 1960-83
1960 65 70 75 80 1960 65 70 75 80
a Most military sales are excluded.
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India: Economic Ties
With the USSR
Likely To Revive
Sharp cutbacks in Soviet purchases of Indian goods in
late 1982 and 1983 led Indian exporters and economic
analysts to reevaluate the gains from economic agree-
ments with the USSR. We believe that mounting
payments for purchases of Soviet military equipment
will soon stimulate a growth in Indian exports, how-
ever, and help sustain Indian economic and political
links with Moscow.
India's economic relations with the Soviet Union are
governed by agreement to balance all bilateral pay-
ments for imports, exports, and debt service. All
payments, whether commercial or noncommercial, are
made in Indian rupees through the Indian banking
system. Neither party has any need to pay nor
opportunity to earn hard currency. The current agree-
ment, signed in December 1980, continues through
1984.
The obligation to balance bilateral payments stimu-
lates trade because it obliges Moscow to buy from
India so that India can pay for purchases of Soviet
goods. An unintended rupee surplus by either side is a
liability. It constitutes a loan from the surplus country
to the deficit partner because it cannot be used to
purchase goods from other countries.
To avoid large or persistent imbalances, the two
governments negotiate quantity or value targets for
commodities as part of annual and five-year trade
agreements, according to press reports
The actual value of imports and
exports depends on separate contracts signed and
implemented by public- and private-sector organiza-
tions. Trade targets are not always met, but until
recently payments imbalances were probably small or
temporary.'
Long-Term Trends
Bilateral trade patterns have changed markedly since
the mid-1950s. Initially, machinery and equipment
accounted for one-half to three-fourths of Indian
purchases as New Delhi built up its heavy industrial
base, but Indian manufacturers can now supply much 25X1
of the country's requirements. Officials and business-
men spurn Soviet capital goods for better quality
equipment and more advanced technology from West-
ern suppliers. Growth in bilateral trade was nearly
stymied by the mid-1970s, according to US Embassy
officials, because Indian import payments were not
high enough to sustain a rapid growth in exports.
A new phase in New Delhi's economic relations with
Moscow began in the mid-1970s, in our view, when 25X1
the Soviet Union agreed to sell India more petroleum.
Several increases in the quantity and price of petro-
leum provided Moscow with higher rupee earnings. 25X1
Growth in Indian exports to the Soviet Union is now
determined primarily by Indian purchases of Soviet
crude oil and petroleum products.
Soviet economic aid now plays only a minor role in
stimulating trade. As much as two-thirds of imports
in the 1960s were financed by Soviet credits, accord-
ing to published trade and aid data. In recent years,
Soviet aid has financed less than 5 percent of Indian
nonmilitary purchases from the Soviet Union.
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Figure 2
Soviet Share of Indian Trade and Aid, 1970-82
1970-71 71-72 72-73 73-74 74-75 75-76 76-77 77-78
Note: Based on Indian data for fiscal years beginning in
April. Aid estimates are for disbursements of economic
aid and suppliers credits. Military aid and trade are
excluded.
Recent Disruptions
The Boomlet. Soviet trade organizations began a
buying spree in India in 1981, according to trade data
and press reports, when faced with hard currency
shortages but ample rupee earnings from growing
petroleum sales. They splurged on manufactured con-
sumer goods and even paid higher-than-equivalent
world prices for some agricultural products, such as
cashew nuts. Moscow en-
couraged Western suppliers to sell to India for reex-
port to the USSR.
With the explosion in Soviet purchases, the Indian
trade surplus grew much more rapidly than planned.
Indian corporate giants and subsidiaries of multina-
tional firms expanded output of manufactured con-
sumer goods to cater to Soviet demand and take
advantage of export subsidies and production incen-
tives offered by the Indian Government, according to
press reports. In 1982 slippage in the international
price of crude oil restricted growth in the value of
Indian imports from the Soviet Union.
We believe the Indian trade surplus with the Soviet
Union in 1982 was larger than needed to cover
military and civilian debt service. At its peak, some-
time in late 1982 or early 1983, the payments imbal-
ance probably exceeded the equivalent of $500 mil-
lion. India was not receiving anything tangible in
return for increased exports because its surplus earn-
ings could not be used to buy goods from third
countries. Instead, bilateral agreements required New
Delhi to lend large sums of money to the Soviet Union
to cover the payments imbalance.
The Crash. The large payments imbalance provoked
corrective measures by both governments that embit-
tered bilateral economic relations. The trade agree-
ment for 1983, which was negotiated in late 1982,
attempted to reduce the payments imbalance by
targeting a sharp increase in Indian imports and only
a slight increase in Indian exports. Indian imports did
not increase as much as planned and then only with
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Figure 3
Soviet Economic Aid and Exports, 1960-82
Note: Soviet exports to India are based on Soviet trade
data for the calendar year. Indian utilizations of Soviet
economic aid are based on Indian data for fiscal years
beginning in April. Military aid and trade are excluded.
calls for substantial increases over 1983 trade in both
imports and exports. Editorials in the business press
express relief even as they warn that targets may,
again, be missed. The USSR has agreed to maintain
the quantity of crude petroleum exported to India at
the enhanced level negotiated for 1983, although it
has not abandoned efforts to balance payments 25X1
through increased sales of machinery and equipment.
the help of a midyear agreement for additional crude
oil. Indian sales dropped substantially below those in
1982. New Delhi even banned exports to the Soviet
Union for two weeks-a move we attribute to official
interest in obscuring the size of lending to Moscow
during the fiscal year ending March 1983.
The adjustment has been painful for Indian exporters,
who bore the brunt of bringing the accounts into
balance. According to the Indian press, sales of
cashew nuts, pepper, and Virginia tobacco were
sharply, reduced. Industries that had expanded to
serve the Soviet market-especially detergents, cos-
metics, pharmaceuticals, and woolen knitwear-were
forced to curtail output. Exports of cotton textiles also
slumped, though a prolonged strike in Bombay mills
also contributed to the decline. Businessmen com-
plained bitterly about lost sales.
Trade is beginning to revive following partial success
in reducing the payments imbalance. The Indian
surplus may now be less than $250 million, according
to IMF estimates. The bilateral agreement for 1984
Forthcoming Military Stimulus to Indian Exports
In our view, India is entering a third phase in its
economic ties with the Soviet Union. The overall
trading relationship will be sustained not by aid-
financed Indian imports of machinery and equipment
or by Indian purchases of petroleum, but by Indian
military purchases. Sharply rising payment obliga-
tions will generate new export opportunities, assuming
a bilateral payment agreement continues and obliges
Moscow to purchase Indian goods.
By our estimates, annual payments to the Soviet
Union for military purchases will escalate over the
next several years, perhaps by as much as $700
million. Deliveries under agreements signed since
early 1980 and those now being negotiated will
greatly increase the Indian burden of downpayments
and debt servicing, even with the low interest rates
and long repayment terms that Moscow offers.
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We estimate that India has ordered more than $14
billion in arms from the USSR and Western suppliers
since 1970, nearly $10 billion since Prime Minister
Gandhi's return to power in 1980. The more recent
orders indicate, in our view, a strong government
commitment to building a more modern and powerful
military, concern about deficiencies in Indian defense
industries, and a reaction to US arms sales to
Pakistan. Orders from the USSR have included
aircraft, helicopters, missiles, armored fighting vehi-
cles, artillery, and warships.
Although New Delhi remains willing to purchase
limited quantities of selected high-technology arms
from the West, our analysis indicates that India
continues to rely on the USSR for most of its military
imports. Of the nearly $10 billion in purchases since
early 1980, 70 percent were from the Soviet Union,
India's total military exports have been small-only
about $28 million in 1982, according to a press
statement by India's Defense Minister. Our research
indicates that such sales consist largely of small
arms and ammunition, light artillery, trucks, and
various quartermaster supplies. Until recently, New
Delhi had not, in our view, aggressively sought to sell
arms and military equipment abroad because of the
high priority of satisfying large domestic defense
needs, the low level of production, and the poor
quality of many Indian products.
New Delhi decided in late 1981, however, to try to
increase India's military exports in view of its bleak
foreign exchange prospects, according to Indian press
accounts. New buyers are being sought largely from
traditional markets in the Middle East, Africa, and
Increased Indian exports of military equipment could
help balance part of the increase in military pay-
The Political Impetus for Trade
ments. According to press reports
New Delhi is seriously considering plans to
develop its aircraft industry to export MIG-21 compo-
nents and spare parts to the USSR and its clients. A
prompt decision to proceed could produce earnings of
$500 million a year within several years. This esti-
mate of potential export earnings, obtained from the
Indian press, is consistent with our estimate of the size
of the world market for MIG-21 parts. India's new
Defense Export Promotion Council is also looking into
other ways to increase military exports.'
India's economic agreements with the Soviet Union
provide a symbol of mutual cooperation as well as a
mechanism for regulating trade. Until recently, in our
judgment, most Indians have viewed longstanding
bilateral payments arrangements as evidence of Soviet
support. For Moscow, the political benefits of being
seen as a friend of India probably outweigh any
economic disadvantages.
Much of the propaganda value to Moscow, in our
analysis, is based on a misunderstanding. Indians
typically talk of the right to pay in rupees and
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erroneously infer that it is easy to pay the Soviet
Union. Until recently, the obligation to adjust trade
flows to balance payments was rarely highlighted.
The political overtones of bilateral trade induce both
governments to try to achieve the required payments
balance by expanding imports or exports. A planned
cutback would be interpreted by the Indian press as
evidence of a souring political relationship.
In our view, trade benefits are a strong but secondary
aspect of India's overall relations with the Soviet
Union. The core of the relationship, according to US
Embassy officials, lies in the conviction that the most
immediate danger to Indian security comes from
Pakistan. New Delhi feels assured of a powerful ally
to help deter Pakistan from attacking or to provide
military supplies and political support if there is
another Indo-Pakistan war. We believe that looser
economic ties would attenuate the widespread percep-
tion that the Soviet Union is a friend of India and
could eventually lead to cooler political relations.
Close ties will persist, however, so long as India
perceives a threat from Pakistan and to a lesser extent
from China.
Disruption of Indian exports has led Indian business-
men and economic journalists to reassess the gains
from trade with the Soviet Union. Improved prospects
for 1984 have not curtailed the debate. According to
our analysis of press reporting, the tenor of extensive
comment is that India got a good deal until recently
but may be handicapped in the future by the need to
balance bilateral payments.
Advantages for India
Markets. Access to additional export markets is the
principal benefit India receives from its economic
agreements with the Soviet Union, in our judgment.
noneconomic activities.
Trade helps finance Soviet political and propaganda
activity in India, according to Embassy and Consul-
ate General assessments and press reports. Part of the
purchase price for commodities such as tea has
sometimes been returned to Indian traders for dis-
bursement to political parties. Press reports in 1983
contend that the Soviet Union willingly accepted
lower quality rice than ordered-with most of the
price difference going to the coffers of the Communist
Party of India. In our judgment, opportunities for
such payoffs are a byproduct of the overall economic
relationship. We doubt that Moscow alters the types
or quantities of items in trade agreements to finance
We doubt that Indo-Soviet trade agreements inten-
tionally facilitate Moscow's efforts to obtain ad-
vanced technology in violation of Western export
controls. The commodity protocols attached to trade
agreements are probably too general to identify sensi-
New Delhi obtains goods it really wants in exchange
for products, some of which are of little interest to
other countries. A director of the Cotton Textile
Export Promotion Council noted that "our product is
just not competitive for the hard currency areas."
Failure to fill Western textile quotas despite idle
Indian looms bears him out. Even those optimistic
about export prospects doubt that Indian pharmaceu-
ticals would succeed in other markets. Press analysis,
which may reflect a few outdated academic studies,
estimates that only 20 to 25 percent of Indian exports
to the USSR could be sold readily in Western mar-
kets.
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In our view, Moscow probably would not buy so much
from India if it were not obliged to balance bilateral
payments, although purchases of some agricultural
commodities would continue under any payment re-
gime. Moscow would probably curtail purchases of
manufactured consumer goods if it had to pay hard
currency. The USSR, however, has a political interest
in sustaining a trading presence in Third World
countries, especially India.
Ease of selling to the Soviet Union is an important
advantage for Indian suppliers with weak export
promotion skills. For some products, including tex-
tiles, Soviet buyers come to India to negotiate bulk
purchases. They are not fussy about quality, accord-
ing to Indian officials and businessmen. Indian manu-
facturers do not have to seek out customers or keep
abreast of changing tastes. For industrial products,
long-promised Soviet help with sales to third countries
is apparently under way at last. An article in Decem-
ber 1983 attributed to the Soviet Deputy Minister of
Foreign Trade notes that Moscow has begun to
import equipment from Soviet-aided industries in
India for use in Soviet-aided projects in Bulgaria and
Turkey.
Useful Imports. Indian imports from the Soviet Union
have been goods that New Delhi considers essential-
aid-financed equipment to develop public-sector in-
dustries at first, wheat briefly in the early 1970s, and
petroleum recently. Fertilizer and newsprint pur-
chases have relieved domestic shortages, and military
equipment has been supplied on favorable credit
terms since the early 1960s. Protracted and some-
times fruitless negotiations indicate that New Delhi
resists sales offers, even aid offers, that do not fit its
policy preferences.'
On several key occasions New Delhi has turned to the
Soviet Union only after access to Western supplies or
financing was curtailed. Moscow's support for the
Bokaro steel plant followed US refusal in 1965 to aid
a public-sector industry. Soviet military supplies filled
' In 1966 Prime Minister Gandhi caved in when the USSR insisted
on using Soviet rather than Indian consultants for the Bokaro steel
plant. This was a highly publicized exception to the general pattern
of Indian sales resistance. Several Soviet-aided industrial projects
have performed poorly, but New Delhi wanted them when it
the void caused by virtual cessation of Western
military aid to India after the 1965 Indo-Pakistan
war. Similarly, when US economic aid was curtailed
after the 1971 Indo-Pakistan war, Indian licensing
regulations encouraged importers to turn to the Soviet
Union. The USSR supplied wheat in 1973, when the
Indian harvest was poor and world supplies tight. The
Soviet offer of additional petroleum in 1980 came
when the Iran-Iraq war made New Delhi uncertain
whether it could maintain deliveries from traditional
suppliers.
India gets a bargain on its military purchases.
Moscow also assists India with domestic military
production, including some advanced equipment. In
our judgment, Indian officials believe that Soviet
deliveries are less likely to be disrupted in case of war
with Pakistan than those from other suppliers.
Disadvantages for India
Instability. Risk of a sharp decline in sales is a major
disadvantage of trade with the Soviet Union, accord-
ing to press reports of Indian business opinion. Soviet
purchases of commodities such as tobacco, jute, cot-
ton textiles, and storage batteries vary widely from
year to year. Producers who cater primarily to the
Soviet Union are especially vulnerable. Several press
articles counsel against expanding capacity to meet
increased Soviet demand lest a subsequent curtail-
ment lead to idle capacity and unsalable stocks.
Impressed by recent cutbacks, Indian exporters ap-
parently believe that the Soviet market is even more
unstable than markets in other countries. Sales to the
USSR, unlike those to other countries, must be
curtailed when Indian imports of Soviet goods slow
down. Even when bilateral trade is growing, Indian
exporters cannot influence Soviet purchasing deci-
sions.
Prices. India probably suffers a slight price disadvan-
tage in its nonmilitary transactions with the Soviet
Union. The Soviets bargain hard when negotiating
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purchases of manufactured products that India has
difficulty selling elsewhere. A large contract for Indi-
an railway cars fell through in the 1960s over a price
dispute, and some Indian suppliers resent the low
prices offered for cotton textiles. Several studies
estimate that India has paid higher than world prices
for machinery imports from the Soviet Union or paid
lower prices only when quality was also lower. Most
studies judge that the prices India receives for its
agricultural exports, however, are equal to or higher
than world levels, and the USSR purchases tea at
competitive auctions. Academic investigations of In-
dia's terms of trade are inconclusive because t
cannot take full account of quality differences
Information about petroleum prices is also inconclu-
sive. The unit price for Soviet-supplied crude deliv-
ered to India in 1981/82 was slightly higher than the
average price from other countries; in 1982/83 it was
slightly lower. India's Petroleum Minister announced
in 1982 that India pays a 5-cent-per-barrel surcharge
on Iranian or Iraqi crude supplied by the Soviet Union
but pays lower than world prices for Soviet crude. F-
Soviet economic aid does not compensate for any price
disadvantage. The USSR contributes less than 2
percent of the total economic aid India receives. In
addition, Soviet credits are much more expensive than
near-grant loans available from the International
Development Association and some bilateral donors.
Since 1977 government-to-government credits have
been for a term of 20 years including a three-year
grace period, with interest at 2.5 percent. Soviet
suppliers credits, which are provided for equipment
not covered by project aid, finance 85 percent of the
purchase price with interest at 4 percent of the
outstanding balance. Similar credits offered by West-
ern governments are more expensive but are available
in larger amounts.
Scarce Indian Government funds have been used to
promote exports to the Soviet Union. Export and
investment subsidies helped stimulate sales of manu-
factured products during 1981 and 1982, according to
press analyses. The surge in processing at Kandla
Free Trade Zone was a response to tax waivers as well
as to increased Soviet demand. Other suppliers benefit
from tax concessions, preferential import licenses, and
cash payments that are offered for export sales but
not for sales in the domestic market. Government
export promotion policy, however, does not give any
preference to the Soviet Union.
Hard Currency Spillover. The USSR has long been
accused of disrupting Indian markets by reexporting
Indian products-particularly tea, tobacco, and oil-
cakes-to third countries at a discount. Academic
studies of trade data conclude that Moscow probably
has engaged in some "switch trade," but the amounts
have been minor and caused little reduction in India's
export earnings.
India spends some hard currency in order to export to
the Soviet Union even though all bilateral transac-
tions are conducted in rupees. For example, it imports
raw cashew nuts from hard currency suppliers so that
it can sell processed nuts to the Soviet Union. Exports
of manufactured goods also have a high import
content-as much as two-thirds of ex ort value for
industries located in free trade zones.
We disagree with the judgment of many journalists
that India is always harmed when it spends hard
currency to earn rupees from the Soviet Union. India
did lose when rupees accumulated in late 1982 and
early 1983 and were not spent on imports. Normally,
however, the additional hard currency import expend-
iture helps produce goods that are exchanged for
commodities that would otherwise be purchased with
hard currency. It also generates some employment
and income in India.
Technology. India risks technological obsolescence as
a result of trade ties with the Soviet Union. Public-
sector officials have become acutely aware of the
danger of basing industrial expansion on inferior
Soviet equipment. They have turned to Western sup-
pliers for major components of industrial plants origi-
nally established with Soviet support. Economic aid
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tied to Soviet equipment is now sought primarily in
areas such as thermal power plants and some aspects
of steel production where Soviet quality is competi-
tive. Much of the criticism of Soviet equipment comes
from Indian suppliers who want to sell their own
products or from bureaucrats who are partly responsi-
ble for the poor performance of Soviet-supplied fac-
tories. Nevertheless, the complaints seem valid. Most
Soviet equipment is poorly made, outdated, energy
inefficient, ill suited to Indian humidity, and, in
addition, the supply of spare parts is irregular.F_
The temptation to buy Soviet remains even though
purchasers clearly prefer Western technology. Soviet
trade officials are now dangling tentative offers of
credit and long-term buyback contracts to increase
sales of machinery and equipment to the Indian
private sector. If an acceptable price can be negotiat-
ed, Indian textile manufacturers may yet buy Soviet
textile machinery to obtain a long-term order for
cloth, even though they believe that the quality of the
resulting product would preclude sales in Western
markets.
Popular Indian View of the Future. The balance of
gains and losses from bilateral economic agreements
is now shifting to India's disadvantage, in the view of
many businessmen and economic journalists. Un-
aware of the magnitude of forthcoming military pay-
ments, they counsel looser economic ties with Mos-
cow. According to a consensus emerging in the Indian
business press:
? Petroleum imports cannot sustain continued growth
in bilateral trade. Increased domestic production of
crude oil will probably reduce import requirements.
In any case, the Soviet Union will probably not be
willing to curtail its hard currency sales of petro-
leum to offer additional supplies to India. It may not
even be willing to sustain deliveries at current levels.
? India does not need other products the Soviet Union
is willing to offer. Expansion of domestic production
will reduce fertilizer import needs. More important,
Indian industry has outgrown its Soviet mentor. It
can absorb advanced Western technology to in-
crease domestic production and compete successful-
ly in world markets. Technical links with Western
companies are already growing in response to liber-
alized economic policies.
? The obligation to balance bilateral payments means
that exports to the Soviet Union cannot grow if
imports stagnate or fall. To sustain sales, India may
have to import inferior Soviet machinery and
equipment.
? There is a way out of the dilemma. India can break
the link between imports and exports by revising
bilateral agreements with the Soviet Union and
settling any payment imbalances in hard currency.
Most observers doubt that sales to the Soviet Union
would fall very much; they expect India to run a
payments surplus. Others are willing to endure
short-term losses to avoid permanent technological
inferiority.
The business community's scenario is incomplete be-
cause it ignores arms purchases that will increase the
scope for growth in Indian exports to the Soviet
Union. Policymakers have not attempted to correct
the analysis, probably because they are reluctant to
highlight the growing magnitude of Indian military
payments. So far as we know, however, no senior
Indian official has endorsed the call for elimination of
bilateral payments agreements with the Soviet Union.
Closer Ties With the USSR
Increased military payments will strengthen India's
economic ties with the Soviet Union, in our judgment.
They provide an opportunity to increase Indian ex-
ports within the framework of balanced bilateral
payments and will help overcome the problems busi-
nessmen anticipate. At a minimum, producers of low-
quality consumer products will increasingly value the
Soviet market.
New Delhi risks increased dependence on Moscow's
policy whims if military components become a signifi-
cant part of Indian export earnings. The USSR would
probably retain a veto over the destination and quanti-
ty of Indian military exports produced under Soviet
production licenses.
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The new trading patterns will tend to limit mounting
criticism of the USSR, which has barely begun to
jeopardize business support for political cooperation
with Moscow. India will not need to abandon the
rupee payment agreement, which symbolizes Soviet
friendship, to increase sales. Business complaints
about irregular Soviet purchases and inferior industri-
al machinery will be heard less frequently as Indian
exports increase and the Indian payment surplus
vanishes. The bitter experience of late 1982 and 1983,
when cutbacks in Soviet purchases led to disenchant-
ment with the benefits of trade with the USSR, will
probably not be repeated in this decade.
In the scenario most favorable to US interests, New
Delhi could strengthen ties with both Moscow and
Western countries. If our lower estimates of military
payments prove correct and if petroleum exploration
efforts are soon very successful, savings in the oil
import bill will permit India to pay for increased
purchases of Western technology while it balances its
account with the Soviet Union. We are not confident,
however, that New Delhi will be able to reduce its oil
import requirements. Domestic production is leveling
off, expensive exploration efforts have not yet yielded
new discoveries, and consumption is still growing.
Balance-of-Payments Strains
The financial burden of military payments is more
likely to lead to a deterioration in India's overall
balance-of-payments position and impinge on trade
with the United States. If military payments to the
Soviet Union approach $1 billion a year, New Delhi
may have difficulty balancing the bilateral account
through increased exports. It could transfer some of
the financial burden to hard currency accounts in any
of several ways:
? New Delhi could balance the cost of military pur-
chases by shifting petroleum imports from the Sovi-
et Union to other suppliers. The adjustment could
be made quickly and with a minimum of adminis-
trative complications. India imported more than
$1.1 billion of petroleum from the Soviet Union in
1982; annual payments for military imports will not
exceed $1 billion in this decade, according to our
estimates.
? New Delhi and Moscow could agree to revise their
bilateral payments agreement. We believe that any
revision would continue to permit the use of rupees
for most transactions. Only imbalances beyond an
agreed high amount-probably the equivalent of
about $150-250 million-would be settled in hard
currency.
? New Delhi could buy goods for hard currency for
reexport to the USSR. 25X1
The additional hard currency expenditure would in-
crease strains on India's international financial posi- 25X1
tion. Indian policymakers may be unable to obtain
more concessional aid and unwilling to seek more
commercial loans to ease balance-of-payments prob-
lems. In the scenario most unfavorable to Indian
growth prospects, they may impose new curbs on
imports needed to modernize and expand Indian
industry.
Role of Concessional Aid
Military payments to the USSR could increase fric-
tion between Washington and New Delhi over the use
and adequacy of concessional aid. Loans and grants
provided by Western aid donors indirectly help fi-
nance Indian military payments to the Soviet Union 25X1
by easing India's overall balance-of-payments posi-
tion. With international lending agencies strapped for
funds, questions about India's need for concessional
aid would probably intensify. Indian policymakers
would argue that balance-of-payments strains would
be even more severe if New Delhi turned entirely to
more expensive Western suppliers of military equip-
ment.
Soviet Union-would lose.
Indian officials will probably accuse the United States
of contributing to any balance-of-payments strains by
reducing support for Indian borrowing from interna-
tional financial institutions. The rise in military pay-
ments to the USSR will coincide with increased
payments to the IMF and to commercial bankers.
Total debt service could rise to more than $3 billion in
1987 compared with $1.9 billion at present, while
concessional aid receipts are likely to stagnate. We
believe that Indian officials are far more likely to
blame their economic problems on the United States
than on their own military purchases. In the propa-
ganda battle in India, the United States-not the
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Appendix
Arrangements for Bilateral
Trade and Payments
The Principle of Bilateral Balance
Since substantial trade began in the 1950s, India and
the Soviet Union have agreed to balance all bilateral
payments for imports, exports, and debt service. Pub-
lished agreements provide that all payments be made
in Indian rupees through the Indian banking system.
An informal understanding-and probably an explicit
commitment-requires both governments to adjust
trade each year to achieve a balance in payments. The
published agreement is less specific. It merely re-
quires that any rupee balances or debt remaining
when the five-year agreement expires be used to
purchase goods within the next year or be "settled in
such other ways as may be agreed upon." We believe,
however, that unpublished agreements supplement the
published text.
Trade
Targets. India and the Soviet Union plan their trade
to avoid a large or persistent imbalance in bilateral
payments. According to press reports
such as: tea, including processed tea; medicines and
pharmaceutical preparations; spectacle frames; poly-
graphic equipment; and machinery and equipment
manufactured at industrial enterprises built in India
with the assistance of the USSR. Planned Indian
imports from the USSR are in 42 categories such as:
crude oil; diesel oil; urea; and power and electrotech- 25X1
nical equipment, turbines, generators, and spare parts.
Press reports, which are probably based on official
briefings, list several commodities included in annual
trade protocols and note the projected value of Indian
imports and exports. We do not have the text of any
annual trade protocols.
Detailed trade projections are not published.
business in their area of responsibility.
and sales, trade associations need to know-and
apparently do know-the targets relevant to private
lar commodity. To provide guidance about production
We are confident
that isi pied because press
reports occasionally mention the target for a particu-
Some transactions are excluded from trade agreement
targets. Published commodity lists
o not mention trade in
services or in military equipment.
annexes to the five-year trade agreements
and annual protocols set quantity or value targets for
exports by each country. In recent years, the target
for total Indian exports has been slightly higher than
the target for Indian imports; a merchandise surplus
is necessary to earn rupees to repay Soviet economic
aid. According to press reports and official state-
ments, midyear negotiations sometimes provide for
additional trade quantities or commodities-a rice-
for-oil "barter," for example.
Commodity lists and projected trade totals are public
information. The text of the current five-year agree-
ment calls for India to export 93 categories of goods
25X1
25X1
25X1
25X1
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25X1
25X1
25X1
25X1
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25X1
25X1
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Trade targets are a statement of intention, not a
commitment to buy or sell. Shipments are arranged
only after contracts for specific quantities, prices, and
delivery dates are signed, according to observed trade
practices, the text of agreements, and press accounts.
Target negotiations are nevertheless meaningful, in
our judgment. We believe that Indian officials consult
extensively with public-sector organizations and with
trade associations before agreeing to export and im-
port targets.
Actual Trade. According to press reports and trade
data, imports and exports usually differ, sometimes
substantially, from trade targets. Unanticipated
changes in prices, requirements, or availabilities af-
fect performance. Disputes over price sometimes de-
lay the signing of contracts, and scheduled delivery
dates are not always met accordin to press reports,
Embassy comment In
addition, the mechanism for monitoring trade seems
Government organizations arrange much of the trade
with the Soviet Union. Petroleum trade and distribu-
tion is a government monopoly in India. According to
press reports, public-sector industries arrange imports
of aid-financed equipment that they use. The Miner-
als and Metals Trading Corporation handles trade in
fertilizer as well as minerals and some metals. Anoth-
er government agency, the State Trading Corpora-
tion, serves as middleman in exports of many private-
sector agricultural and manufactured products.
Negotiations for exports of cotton textiles-which are
manufactured in both the public and private sectors-
are coordinated through a trade association, accord-
ing to press reports, but contracts are signed with
individual suppliers or trading firms.
The private-sector role in bilateral trade is growing, in
our judgment. Indian brokers have long bought tea at
auctions on behalf of the USSR and now also arrange
exports of high-quality rice. The Soviet Union sells
computers through an Indian trade organization, ac-
cording to press and Embassy reports. The USSR
recently authorized a private Indian firm to open a
general trade office in Moscow, according to press
reports. High-ranking Soviet officials met with dele-
gations of leading Indian industrialists in 1983 and
proposed-in very general terms-long-term orders,
technical cooperation, and credit. The major private
business association in India is studying the potential
for imports of machinery and equipment from the
Soviet Union, according to press and Embassy
reports.
Trade Data. Trade targets and bilateral trade data
include some third-country goods supplied on Soviet
account. This is especially important for petroleum.
Middle Eastern crude purchased by the Soviet Union
and shipped directly to India is recorded as an export
to India in Soviet statistics and an import from the
Soviet Union in Indian statistics. Agricultural attache
reports indicate that some Indian rice sales recorded
as exports to the USSR were shipped directly to
Southeast Asia.
countries is less than $100 million.
grain, we estimate annua bilateral trade accounted
for by goods that are not physically handled by both
Indian and Soviet trade data tell the same story but
do not match exactly. Most discrepancies can be
explained by the time goods are in transit, freight
charges on Indian imports, and our conversions of
rubles and rupees to dollars. Neither country publish-
es military trade data. Soviet export data may include
some dual purpose items, such as trucks, that are not
included in published Indian data.
The analysis in this paper is based primarily on Soviet
data because they are far more current and less
subject to major revision than Indian data. We have
also used older Indian statistics and press reports of
partial or preliminary Indian data announced by
government officials or compiled by trade associa-
tions.
Payments
Bank Accounts. The Bank for Foreign Trade of the
USSR maintains accounts with Indian commercial
banks and with the Reserve Bank of India, India's
25X1
25X1
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central bank, to handle bilateral transactions. All
receipts and payments for goods and services, with the
possible exception of military transactions, are han-
dled initially through commercial banks. When Soviet
funds at a commercial bank are greater than neces-
sary for current operations, the surplus is transferred
to the Central Account at the Reserve Bank. When
funds in a commercial account are inadequate, they
are replenished by transfers from other commercial
banks or from the Central Account.
Some Soviet funds are always held in the Central
Account at the Reserve Bank to facilitate payments
throw h commercial banks.
Technical Credits. When funds in the Central Ac-
count are inadequate to replenish accounts in com-
mercial banks and pay for Soviet purchases in India,
the shortage is covered by a "technical credit"-a
loan from the Government of India. Published trade
agreements and Indian Government budget docu-
ments mention technical credits but do not explain
credit are recorded in the Indian budget as govern-
ment expenditure. Repayments are recorded as gov-
ernment receipts. The net balance adds to the bud et-
ary deficit for the fiscal year.
Military Payments. Indian military payments are
taken into account when planning trade adjustments
to achieve an overall balance, in our judgment. Prime
Minister Gandhi's principal secretary, who is in a
position to know, told US Embassy officials that
rupee.
25X1
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25X1
25X1
Exchange Rate. The ruble-rupee exchange rate is 25X1
determined by the value of a specified basket of
currencies. In 1978 Moscow and New Delhi agreed to
change the rate whenever the value of the currency
basket changes by more than 3 percent, according to 25X1
official statements. The main provisions of the 1978
agreement are probably still in effect. We do not
know whether minor changes have been made to
widen the 3-percent band or change the composition 25X1
of the currency basket in line with revised arrange-
ments for determining the international value of the 25X1
long-term contracts and for debt servicing.
in the purchasing power of rupees India pays under
The exchange rate affects bilateral payments even
though all transactions are in rupees. The amount of
Soviet aid and the prices for some services and
military items are negotiated in rubles. A variable
exchange rate helps protect Moscow against a decline
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