INDIA'S CRITICAL SHORTAGE OF FOREIGN EXCHANGE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01003A002200210001-3
• Release Decision: RIPPUB
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• Document Page Count: 15
• Document Creation Date: December 9, 2016
• Document Release Date: March 19, 2001
• Sequence Number: 1
• Publication Date: April 1, 1965
• Content Type: BRIEF

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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
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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.
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 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
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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
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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. Includ.ed.in the total for other Free World. countries.
c. Also including the total for the Communist countries.
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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
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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:
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