INTELLIGENCE MEMORANDUM INDIA: SOME ECONOMIC CONSEQUENCES OF THE WAR

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030032-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 22, 2016
• Document Release Date: November 1, 2010
• Sequence Number: 32
• Publication Date: March 1, 1972
• Content Type: IM

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t rya ~P -3:z Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
India: Some Economic Consequences of the War
Secret
ER TM 72-32
March 1972
Copy No. 6 `5
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GROUP I
(Ouded from aulom otit
downgrodtng and
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1972
INTELLIGENCE MEMORANDUM
INDIA: SOME ECONOMIC CONSEQUENCES OF THE WAR
Summary
I. The war has not significantly altered New Delhi's short-term
economic prospects. Foodgrain production, which has increased rapidly
since 1966 and will hit record highs again this year, was not affected.
Industrial production already was in the doldrums when the war started,
principally because of government investment policies, raw material
shortages, and labor and management problems, and pi-ospects have not
worsened. Increased military expenditures of $165 million -- up about
15% - were financed largely from new government revenues. About 9
million of the estimated 10 million refugees in India have returned to
Bangladesh, sharply reducing refugee costs. Moreover, the war has enhanced
New Delhi's future export prospects by perhaps 5%, or $100 million,
annually by allowing for substantial sales to Bangladesh, although most
shipments will have to be aid-financed by India for awhile. New Delhi
already has authorized about $176 million of economic aid to Bangladesh.
2. In addition, the impact of the US aid suspension has not yet
been felt and could be delayed for a year or so because New Delhi's highly
favorable international liquidity position was not substantially altered by
the war. Foreign exchange reserves are currently about $1 billion -- the
equivalent of about six months' imports - and substantial commodity aid
remains in the pipeline. Moreover, other aid donors are continuing to provide
economic aid, and for fiscal year (FY) 1971 * new aid of almost $600 million
has been authorized. Nevertheless, a continued suspension of US aid will
deprive India of a major source of commodity financing that the country
* Beginning 1 April of the stated year.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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needs to support agricultural and industrial production. Over the past several
years, US aid has provided about one-sixth of New Delhi's commodity
imports, including such critical items as fertilizers, nonferrous metals, and
special steels.
Discussion
India's Economy on the Eve of the War
3. Primarily as a result of record foodgrain crops since 1966, India's
economy was relatively buoyant before the war - althoigh not without
problems. National income growth during FYs 1969 and 1970 averaged
about 5% annually, compared with an average of 3% during FYs 1961-68.
Exports, which had virtually stagnated throughout the 1950s and early
1960s, increased moderately in FYs 1969-70, reflecting New Delhi's
liberalized export policies. At the same time, imports were deliberately held
well below earlier levels to conserve foreign exchange, and the trade deficit
declined to only about $120 million in FY 1970, compared with deficits
exceeding $1 billion in the mid-1960s* (see Figure 1). By December 1971,
foreign exchange reserves had increased to $1 billion - the equivalent of
about six months' imports.
4. A counterpart of low imports and reduced trade deficits, however,
was sluggish industrial and investment performance. The industrial growth
rate declined from 7% in 1969 to 5% in 1970 and to only 2% during
January-September 1971. Raw material shortages and, in some areas,
increasing labor unrest caused some plants to close and others to produce
far below capacity. At the same time, investment expenditures were
declining.
5. The massive influx of refugees from East Pakistan - reportedly
numbering 10 million by November - had placed a strain on India's
finances. On the eve of the war with Pakistan, New Delhi claimed that
the $300 million from its own funds spent caring for the refugees - about
4% of planned central government expenditures in FY 1971 - had forced
cuts in expenditures on other programs. Moreover, the sum was rising by
about $50 million monthly. At that time, less than half of the $250 million
in refugee aid pledged by foreign donors had !peen delivered.
6. India's military expenditures had been increasing only at a
relatively moderate pace before the war. Spending grew at an average annual
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India: Foreign Trade
Million US $
3500r
0L I I I I I I I I I
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
"Beginning i April of the stated year.
513252 3-72
rate of about 7% during FYs 1968-70, somewhat more rapidly than national
income, and was budgeted to increase an additional 5% in FY 1971, to
$1.7 billion. The prewar confrontation with Pakistan during April-November
1971 did not substantially increase military expenditures. Only small
additional costs were incurred in transporting troops and prividing
temporary quarters, and other housekeeping expenses were held down as
the armed forces were increased by only about 5% in November. The foreign
exchange cost from additional arms deliveries -- mainly from the USSR,
Czechoslovakia, and Poland - were financed by credits, aside from small
downpayments.
Immediate Costs of the War
7. Hostilities with Pakistan began on 3 December and halted on
17 December, following a cease-fire agreement. Indian economic activity
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generally continued without disruption during the war; indeed, industry's
chronic labor disorders virtually ceased as the war temporarily unified labor
and management. Emergency rationing and price control measures were
introduced but no shortages developed, principally because of the war's
brief duration.
8. Indian officials estimate total war-related costs at 2 billion to 3
billion rupees ($265 million to T400 million), including additional costs
of military operations during the confrontation and the hostilities, the value
of equipment lost, and eventual compensation for damage in affected border
areas. Military hardware losses alone may total $150 million. The USSR
probably will replace much of the more sophisticated equipment lost -
such as planes, missiles, and tanks - through long-term credits repayable
in rupees. The domestic armaments industry can replace all of the small
arms and some of the heavy weapons and ammunition losses.
9. In an action related to the war, the United States suspended $88
million (about 40%) of unused aid that had been previously committed
to New Delhi. The $132 million of US aid still in the pipeline was already
covered by irreversible letters of credit and could not legally be suspended.
Commodity aid accounts for almost all US aid still in the pipeline, as shown
in the following tabulation:
Million US $
Project
Aid
Commodity
Aid
Total
Aid available before
suspension
11
209
220
Suspended aid
3
85
88
Remainder available
8
124
132
Aside from a temporary suspension by Japan, which was rescinded after
the war, India's other donors did not withhold economic aid.
Impact of War on Economic Prospects
10. The war has not altered New Delhi's short-term economic
prospects significantly. Military expenditures have increased sharply, but
refugee costs are diminishing, and New Delhi has enacted new revenue
measures to offset most war-related expenditures. Only a very small share
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of aid to Bangladesh involves hard currency loans; most of the aid consists
of food grants and rupee loans to purchase Indian commodities. The US
partial aid suspension has had little impact on India's economy because
of the aid still in the pipeline.
11. We estimate that military expenditures for FY 1971 increased
by about 15%, compared with the budgeted increase of 5%,. The anticipated
additional expenditures of about 1.2 billion rupees, or $165 million, reflect
extra imports of equipment and the added salaries and other expenses
generated by the war. Further sharp rises in defense spending in FY 1972
will greatly depend on the magnitude of the expansion in indigenous defense
production and the level of foreign arms procurement. Aside from these
contingencies, however, a further rise in military spending of only 2% to
3% is expected. War-related replacement costs for arms in FY 1972 are
estimated at $85 million, but total military spending will increase little if
there is a cutback in the armed forces, as seems likely. A similar leveling
off occurred in 1966 following the sharp increase generated by the 1965
war with Pakistan (se' Table 1).
Military Expenditures
Fiscal Year
Million Rupees
1964
8,058
1965
8,848
1966
9,086
1967
9,684
1968
10,332
1969
11,009
1970
11,828
1971 budget
12,417
1971 projected
13,657
1972 projected
14,000
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12. By late February 1972, New Delhi had authorized about $176
million for economic aid to Bangladesh, including $32 million for food
and cash payments to returning refugees. Soon after the war, New Delhi
granted Dacca about $34 million to finance purchases of urgently needed
commodities from India. Sugar, salt, baby foods, and drugs were provided
promptly; petroleum, fertilizer, cotton yarn, cement, steel, motor vehicles,
and power generation equipment were to be delivered as soon as transport
facilities would allow. New Delhi also loaned Dacca $13 million in hard
currency to meet immediate foreign exchange requirements. Other loans
to Dacca since the war include $69 million for foodgrains, $14 million
for railroad rehabilitation, and $14 million for civil aircraft and ships. Of
the total aid, about $70 million was expected to be used by the end of
FY 1971, and the remaining $106 million during FY 1972.
13. Indian officials estimate total expenditures on refugees at about
$480 million in FY 1971. About $200 million was covered by foreign grants
and the remainder by India's own funds. About 9 million of the estimated
10 million refugees in India on the eve of the war had returned to
Bangladesh by late February. Spending for refugees probably will be
negligible in FY 1972.
14. New Delhi already has issued new defense bonds and imposed
new taxes to finance the additional expenditures generated by the war.
A defense loan of $133 million was floated in December, and customs duties
and other taxes have been increased sufficiently to yield an expected $86
million in FY 1971 and $180 million in FY 1972. The Minister of Finance
also announced that improved tax collection procedures would yield a
windfall of approximately $200 million in FY 1971. The anticipa :ed new
revenues would offset about 85% of the estimated additional war-related
expenditures in FY 1971 and 95% in FY 1972, as shown in the following
tabulation.
Million US $
FY 1971
FY 1972
Additional expenditures
515
191
Military
165
85
Refugees
280
Negl.
Bangladesh aid
70
106
Additional revenues
441
180
Defense loan and other
defanse receipts
155
--
New taxes
86
180
Improved tax collection
200
--
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Moreover, according to the Minister of Finance, the war-related increase
in the budget deficit in FY 1971 also would be partly offset by a reduction
in other expenditures.
15. India's export prospects are enhanced by the resumption of trade
with Bangladesh, which will consist largely of items previously traded
between Bangladesh and West Pakistan. Excluding raw cotton, rapeseed,
and paper, which are in short supply in India, West Pakistan's exports to
Bangladesh averaged roughly $90 million during the past two years. Sales
of this magnitude would increase India's export earnings by about 5%. In
addition there is scope for trade in other items, although the trade structure
will differ greatly from what it was before partition in 1948. Bangladesh
then had virtually no manufacturing industry. Exports of jute and tea were
shipped through Calcutta, and most manufactures, mainly consumer goods,
were purchased from India. Since then, however, demand for investment
goods and raw materials in Bangladesh has increased, and the country will
probably buy crude steel, coal, and some machinery from India. On the
other hare, Bangladesh has developed its own jute manufacturing industry
in competition with India, while the latter grew some raw jute. Moreover,
the two countries must compete in world tea markets, and both have
shortages of rice, vegetable oils, and raw cotton. In any event, the extent
of Indo-Bangladesh trade over the next year will depend heavily on Indian
economic aid, principally food shipments to Bangladesh. For FY 1972,
India's exports to Bangladesh probably will amount to more than $100
million, mostly financed by commodity aid already authorized but not
delivered during FY 1971. Some further Indian aid authorizations are likely,
but may be small because Bangladesh stands an excellent chance of receiving
economic aid from other nations as well.
16. Reestablishing trade routes through Bangladesh into India offers
the incidental benefit of improving development prospects for northeastern
India (see Figure 2). The region produces more than half of India's tea
and one-fifth of its jute and contains one-third of the nation's hydroelectric
power potential, half of its petroleum reserves, and two-thirds of its natural
gas reserves. Transport costs between the region and Calcutta, its usual link
with the rest of India and the world, will be reduced by as much as half.
Rail lines previously severed at the border are already being reconnected.
Moreover, reduced insurrection by tribal groups previously supported by
the West Pakistanis has enhanced the region's political stability. Recognizing
the region's changed potential, New Delhi in January 1972 upgraded three
previous territories - Meghalaya, Tripura, and Manipur - into states and
established two Union Territories - Mizoram and Arunachal Pradesh.
17. Additional foreign exchange payments generated by the war were
insignificant, and New Delhi still has a relatively strong international
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India: Reorganization in the Northeast
Figure 2
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financial position. Annual payments for military imports - approximately
$300 million in recent years - probably have been raised by only about
$20 million-$25 million. The hard-currency loan to Bangladesh of $13
million raises the total to roughly $35 million. Even this relatively small
foreign exchange drain has been offset in part by refugee aid receipts of
about $15 million in hard currency from Western donors because New Delhi
in general has supplied refugee requirements from domestic production.
18. The suspension of US aid to date has had relatively little impact
on India's economy because of the substantial aid pipeline, some of which
remains unutilized. Moreover, India's favorable international financial
position will enable New Delhi to weather a continued aid suspension for
the next year or two. Although over the past several years US commodity
aid shipments - principally fertilizers, non-ferrous metals, and special
steels - have provided about one-sixth of India's imports of raw materials,
semi-manufactures, and spare parts, New Delhi has alternative sources of
financing for these critical requirements. Foreign aid authorizations from
other donors are continuing (new aid of about $600 million has been
authorized in FY 1971), pipeline commodity aid of about $400 million
is available for use, and foreign exchange reserves are about $1 billion.
19. In response to the partial US aid suspension, Prime Minister
Gandhi has placed increasing emphasis on India's need to depend less on
foreign aid. This dependence has been declining for several years. New
Delhi's total net aid receipts had fallen from a peak of $1.4 billion in FY
1965 to about $450 million in FY 1970 (see Table 2). Debt service
payments increased while gross aid receipts declined, especially
concessionary food imports under PL 480. Moreover, the US share of
India's economic aid receipts declined from about two-thirds in the early
1960s to less than half in FY 1970. Despite Mrs. Gandhi's almost daily
criticism of the United States, indications are that New Delhi would
welcome a resumption of US non-food economic aid.
20. In spite of its favorable foreign exchange position New Delhi has
been taking no chances. Indian economic and financial policy continues
to be highly conservative. Apparently in reaction to reduced aid levels and
the partial aid suspension, New Delhi has imposed additional restrictions
on imports to conserve foreign exchange. The Ministry of Industrial
Development has initiated a study aimed at identifying indigenous
substitutes for a broad range of imports currently imported from hard
currency countries. The USSR and East European countries, which conduct
their trade with India in rupees, are also being studied as possible alternative
trade sources.
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India: Economic Aid
Million US $
Receipts
Fiscal
Debt
Year Total PL 480
Other
Payments
Net Aid
1961
714
185
529
214
500
1962
922
258
664
186
736
1963
1,241
389
852
224
1,017
1964
1,536
458
1,078
254
1,282
1965
1,637
503
1,134
263
1,374
1966
1,509
480
1,029
318
1,191
1967
1,594
456
1,138
444
1,150
1968
1,203
210
993
500
703
1969
1,155
226
929
550
605
1970
1,035
210
825
580
:55
21.
In the aftermath of the military victory. Mrs. Gandhi is in an
excellent political position to take strong measures to accelerate economic
growth in the short run. She is expected to lead her party to victory in
the state elections in March, thus reinforcing her power and influence. She
could raise more revenues to support development, for example, by taxing
agricultural incomes, c::."ently a function of individual states. It is doubtful
that accelerated growth can be achieved, however, because of the shortages
of imported materials, which may worsen as a result of the restrictive
measures recently introduced.
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