INDIA DEBT RESCHEDULING

• Document Type: CREST
• Collection: Library of Congress
• Document Number (FOIA) /ESDN (CREST): LOC-HAK-537-8-8-9
• Release Decision: RIPLIM
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: January 11, 2017
• Document Release Date: January 2, 2013
• Sequence Number: 8
• Publication Date: September 14, 1972
• Content Type: MEMO

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MEMORANDUM
NATIONAL SECURITY CO
SECRET/SENSITIVE
MEMORANDUM FOR:
FROM:
SUBJECT:
NCIL
ION
ternber 14, 1972
liganormiftwinmw3/4440,
We now have a formal proposal from State that we p
debt rescheduling exercise for India this year to the''
million (Tab A). This would be less than the current
posal that we agree to two years at this amount, but is
as much as we were willing to agree to at the abortive c
meeting last spring and would involve some technical con
burden sharing. In short, it is a forthcoming U.S. positio
played right, could be an important step in the normalization
with India.
rticipate in the
e of $29.12
orld Bank pro-
ore than twice
sortium
ssions on
which, if
-r`JP4
f relations
We would be all set to move as soon as you are ready but for the fac
that in your absence In Indian shipment of
wheat to North Vietnam (see Tao ii;. ne picture that emerges is that
late last month the Indians -- in full knowledge of the consequences
(they had been warned by embassyeAcials twice)-. shipped about half
a million dollars worth of wheat/Co Vorth Vietnam on a North Vietnamese-
chartered ship (USSR flag). This raises some very serious legal and
political questions about our aid relationship with India.
On the legal side, the Foreign Assistance Act includes the following pro-
hibition (Section 620, N):
"No loans, credits, guarantees or grants or other assistance shall
be furnished under this or any Act, and no sales shall be made
under the Agricultural Trade Development and Assistance Act of 1954,
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STAT
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SECRET /SENSITIVE
to any country which sells or furnishes to North Vietnam or
which permits ships or aircraft under its registry to transport
to or from North Vietnam, any equipment, materials, or com-
modities, so long as the regime in North Vietnam gives support
to hostilities in South Vietnam."
We would have to get an authoritative legal judgment from the AID
lawyers before reaching any final conclusions, but at a minimum this
would seem to mean:
--No new development aid to India is possible.
--No new PL-480 assistance is possible.
It is also very possible, depending on past precedents and legal inter-
pretations, that:
--The "suspension" of the $87 million in irrevocable letters of
credit cannot be lifted;
--Debt rescheduling may now not be possible under our law. This
is because by some interpretations debt relief is a form of "new" aid
since an equivalent amount of Indian resources are at least temporarily
released for spending which otherwise would have gone to us for debt
service. Rescheduling would also seem to fall under the "other assis-
tance" clause in the prohibition.
In short, what this boils down to is that the Indians may well have tied our
hands for us on future aid, including debt relief through the consortium.
There is no escape clause in the present legislation, even if we wanted to
exercise it. What we need to do now is to check out the full legal consequences
and then determine how we wish to play the results through diplomacy.
Recommendation: That no action be taken on any aid issues concerning
India?including debt relief--pending the results of a full clarification by
State/AID of the legal consequence of the Indian shipment of wheat to North
Vietnam.
Approve
Disapprove
V.
Concurrence: Robert Hormats
SECRET/SENSITIVE
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WASHINGTON
September 14, 1972
SECRET/EXDIS
MEMORANDUM FOR THE PRESIDENT
Subject: India Debt Rescheduling
Background
Since July, when the World Bank postponed the
planned August 4 meeting on Indian debt, the Bank
has made progress in working out substantive issues
with other donors and now believes that no further
postponement can be made in reaching a conclusion.
During this time there has been a moderation in the
public stance of the Government of India toward the
US. Pressure to reach a conclusion on debt relief
will culminate September 25 with the opening of the
annual Bank Fund meeting, attended by world Finance
Ministers. I believe that we should announce our
position by then.
Bank PropoPal
The Bank now proposes two years of debt relief
of $183 million a year and offers Consortium lenders
a choice between two formulas, one dividing relief
largely proportional to debt service due as favored
by harder lenders, and a second with a greater degree
of discrimination in favor of the US and other lenders
who have provided more favorable loan terms in the
past. United States' share of relief under the
latter formula -- which we would select -- would be
$29.12 million a year out of a total of over $260
million of official debt repayments due the United
States from India this and next year. The Bank
proposes that relief be provided on uniformly soft
terms.
SECRET/EXDIS
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Status of US-India Relations
Secretary Connally told Mrs. Gandhi if there was
to be an improvement in US-India relations, there had
to be a reduction in the public criticism of one
country's policies by the other. He made specific
reference to Vietnam. Since this conversation there
has been a muting of Indian public comments about
the US, including those on Vietnam. India has largely
shifted to a standard language which, while expressing
sympathy for the people of Vietnam, calls for the with-
drawal of "all foreign troops" and omits any specific
mention of the US. Despite the forum provided by a
session of the Indian Parliament, Mrs. Gandhi and
members of her government in recent weeks have dealt
with questions regarding US-India relations in a more
restrained and factual manner.
India has currently taken some moderately
positive steps. Mrs. Gandhi made a statement strongly
condemning the Munich terrorist attacks. Indian
President Gin i sent an unusually warm response to
your message on the 25th Anniversary of Indian
Independence. We know that this
was intended as a signal to reciprocate the spirit of
your message. Finally, India has continued to show
moderation in dealing with Pakistan in the quest of a
peaceful settlement.
This has come since the jarring farewell conversa-
tion of Ambassador Keating with Mrs. Gandhi. I believe
that while our private disagreements with India are
unresolved, the Indians may have begun to moderate
somewhat the public tone of our relations.
Status of Economic Issues
Sharing. Other Consortium countries are now
prepared to agree to $147 million relief in debt to
India this year under the formulas for burden-sharing.
Among these France and Italy, however, fall short by
about $7 million below the minimum targets recommended
by the Bank.
SECRET/EXDIS
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Quality_pf Relief. France, Italy and Japan offer
relief on somewhat harder terms than the Bank proposed,
but the Bank and other Consortium countries do not
consider this a significant obstacle and are prepared
to proceed with the exercise as proposed by the Bank.
Japan has offered a marked improvement over its past
terms and has said it would endeavor to further improve
in the future.
Non-Consortium Relief. Following World Bank
representations, India appears prepared to seek
equivalent relief from non-Consortium creditor
countries (i.e. the Soviet Union and the Eastern
European countries).
Discussion of Options
I. Non-Participation. We could refuse to
participate so long as two members failed to meet
their share and three failed to meet the recommended
quality standard. We could buttress this position by
indicating that debt relief is not essential, since
India does not face an imminent balance of payments
crisis.
Despite this economic posture, the Government of
India would undoubtedly interpret the US position as
politically determined and consider the US responsible
for breaking up a multilateral debt relief effort.
Such an approach would also create strains within
the Consortium and weaken it as an instrument, valuable
to us, for securing some degree of concerted action on
assistance. As the world's largest creditor, we have
an interest in retaining a meaningful voice in the
growing problem of international debt management which
we would hazard by non-participation.
II. Participation on a One-Year Basis. We could
agree to provide the US share of $29.12 million for
one year only as opposed to the two years recommended
by the Bank.
SECRET/EXDIS
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Limitation to one year would take into account
the economic shortcomings of the Bank proposal. Our
agreement to participate would constitute a moderately
positive indication to the Government of India of our
desire to avoid new problems in our relations and look
for an improvement.
Recommendation
In view of the recent turn - I am willing at this
time to take a chance and adopt the more responsive
posture contained in Option II. US participation in
debt relief would be only a small step on our part -
our economic aid would remain suspended. As a minimum
it would help keep our options open to work for an
improvement later. It is possible it might start
some progress now toward the kind of a relationship
based on mutuality, which we desire, but this obviously
will be slow in coming.
I recommend therefore that you approve US
participation in debt relief for India for one year
only with a United States share of $29.12 million.
The Treasury Department concurs with this
recommendation on the understanding, which we share,
that it is not a precedent for participation in
future debt relief. This caveat will be conveyed
to the World Bank.
William P. Rogers
SECRET/EXDIS
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