INDIA: ECONOMIC PROSPECTS IN 1968

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220032-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 16, 2016
• Document Release Date: December 27, 2004
• Sequence Number: 32
• Publication Date: March 1, 1968
• Content Type: IM

 Approved For Release 2005/01/11: CIA "9M2&#Ik- j j S
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
India: Economic Prospects in 1968
Secret
COPY NO. 49
ER IM 68-30
MARCH 1968
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
EXCLUDED FlIOAI AUTOMATIC
[IOW NUIIAOINO AND
Of.C LASS IVICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1968
INTELLIGENCE MEMORANDUM
India: Economic Prospects in 1968
Summary
in spite of last year's record foodgrain crop,
India's dependence on foreign economic aid is
increasing. The balance-of-payments deficit will
be about $1.8 billion in the fiscal year ending
31 March 1968,* more than $200 million above last
year, and is likely to wise again next year. The
-main causes of this growing deficit are:
(1) The need to feed the increasing
population and to rebuild food stocks
depleted during two years of jevere
drought will keep food imports very
high. Food consumption per capita,
although above last year's near-famine
level, is still less than three years
ago.
(2) The high-priority program to
raise agricultural production requires
large increases in imports of
fertilizer.
(3) The recovery of industrial
production from the recent recession
is bringing a rise in imports of
' The fiscal year used throughout this memorandum
runs from 1 April of the stated year to 31 March
of the following year.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and coordinated with the Office of National Esti-
mates, the Office of Current Intelligence, and
the Office of Strategic Research.
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industrial materials, most of which
were partly freed from quota and
exchange restrictions in 1966.
(4) Meanwhile, exports are
recovering more slowly than imports,
and a part of the increase in exports
is being used to pay for rising debt
service obligations.
India's balance-of-payments deficit has been
covered mainly by aid from the United States and the
other members of the Free World consortium, although
India also has had to draw on the International
Monetary Fund (IMF) and use some of its reserves.
Even with
another excellent crop in 1968-6T-, India probably
will need continued large-scale aid to finance
rising imports of industrial goods under the more
liberal system now in effect and of fertilizer under
the program emphasizing agricultural development.
Without this foreign assistance, India probably will
return to stricter controls over trade and private
economic activity.
Even if increased aid is available, the growth
of the Indian economy is almost certain to be con-
siderably slower in FY 1968 than in FY 1967, when
a record crop raised the gross national product by
nearly 10 percent. Agricultural production could
increase a little over 1967. If so, however, any
increase is likely to be small, since 1967 saw a
record crop. Industrial production should continue
its recovery, but at a slow pace since the govern-
ment plans to prevent inflation by holding down
expenditures on public investment, thereby keeping
the demand for many heavy industrial products
depressed. The continued prevalence of large
excess capacity in heavy industry makes the Soviet
proposals, mainly connected with Kosygin's recent
visit, to buy substantial amounts of India's
machinery and equipment unusually attractive to
India. The USSR has agreed to purchase increased
quantities of steel, but there is no evidence that
any rather such Soviet purchase agreements have been
concluded.
25X1
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Background
1. During the past two years industrial controls
and licensing requirements have been removed or greatly
relaxed in several areas of economic activity. Reduced
controls, together with the June 1966 devaluation and
the relaxation of restrictions on imports of most
materials and spare parts for industry, were designed
to encourage private production and investment.
Although these measures constituted a substantial
step forward, they did not fully eliminate quota
and exchange restrictions. Priority industries
accounting for about 85 percent of industrial pro-
duction were permitted to import their requirements
of production materials, but only if such imports
were not available from domestic production. More-
over, because of the acute shortage of free foreign
exchange, the type of funds to be used for such
import transactions -- free foreign exchange, ex-
change earned in trade with Eastern Europe, and
each of the various types of aid funds -- continued
to be specified by the government.
2. Even with these shortcomings, decontrol and
liberalization measures supported by increased non-
project foreign aid were expected to facilitate a
substantial increase in industrial production and
exports. Before the effectiveness of these measures
could be tested, however, India was hit by two con-
secutive droughts which drastically reduced agri-
cultural production, created near-famine conditions,
and seriously hampered industrial activity. Agri-
cultural shortages led-to sharply increased prices
and to reduced demand for industrial consumer goods.
Anti-inflationary fiscal and monetary measures
included a reduction in public sector investment
which in turn reduced demand for many products of
heavy industry. Large excess capacity developed in
some sectors such as steel, machinery, and railroad
equipment. National income increased only about 2
percent in FY 1966 following a decline of almost 5
percent in FY 1965. The balance of payments worsened
as exports of agricultural products fell because of
the drought, and a rise in food and agricultural
development imports more than offset a decline in
imports of industrial goods.
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3. In 1967, agricultural production was at a
record high, mainly as a result of excellent weather,
and industrial production has been improving. As a
result, national income increased 9 to 10 percent in
real terms. The balance-of-payments deficit increased,
however, while new foreign aid commitments declined.
Agriculture
4. The adverse weather conditions of the past
two years have ended, and agricultural production
will probably increase by from 16 to 20 percent
during crop year 1967-68 in comparison with 1966-67.
Foodgrain production will be at least 95 million
metric tons, about 25 percent above the level of
1966-67 and about 7 percent above the previous high.
Principal commercial crops, other than sugarcane,
are also likely to be substantially better this crop
year. The production of raw jute is expected to
increase by more than 20 percent; of raw cotton, by
more than 15 percent; and of groundnut, the principal
oilseed, by 34 percent. Tea is expected to remain
virtually the same, while the output of sugarcane has
been adversely affected by some diversion of land
to foodgrains, the relative profitability of which
has increased. This improvement in agriculture has
been principally responsible for the 7-percent gain
in exports estimated for 1967.
5. A key element in India's agricultural policy
for crop year 1967-68 is the accumulation of a
buffer stock of 3 million tons of foodgrains. The
public distribution system with rationing at con-
trolled prices is also being continued but with a
somewhat reduced coverage. This distribution will
require about 10.5 million tons of foodgrain in 1968,
compared with between 13 million and 14 million tons
per year in 1966-67. To meet stock and distribution
targets totaling 13.5 million tons of foodgrain,
India plans to procure 6 million tons domestically,
compared with 3.5 million tons during the past two
years, and to import 7.5 million tons, compared with
9 million tons in 1967. Domestic procurement prices
for 11068 have been established about 10 percent
higher than last year. Although free market prices
are still above the procurement price, they have
begun to decline and will probably continue to fall
during 1968. The government has announced that it
will purchase all foodgrains offered at the present
procurement price.
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6. India now is giving priority to agricultural
development. Tentative targets for FY 1968 include
provision of 2.8 million tons of fertilizer, nutrient
content (650 thousand more than in FY 1967), planting
of 8 million hectares (about 2 million more than in
FY 1967) to high yielding seed varieties, and treat-
ment of 55 million hectares (an increase of 4 million
hectares) with crop protection materials such as
pesticides. Increases in agricultural inputs raised
the import bill by about $150 million in FY 1967 and
will probably add another $100 million or so in FY
1968.
7. Foodgrain consumption data are little more
than educated guesses, principally because of the
lack of information regarding farmers' emergency
stocks and storage and transit losses. Available
data suggest that per capita grain consumption de-
clined in 1966 and 1967 and increased in 1968, but
remained below the 1965 level (see Table 1). Imports
at or near the 1967 level will be needed in 1968 to
maintain the rationing system and to provide for
government reserves of 2 million to 3 million tons.
The excellent crop in prospect will be used to a
substantial extent to replenish farmers' emergency
reserves and to improve the rural diet. Some of the
grain will move to urban markets, of course, but the
increase will be much less than the increase in out.-
put.
Industry
8. A large portion of the industrial sector has
been in a recession since mid-1966. Food processing
fell sharply as a result of a decline in supplies of
agriculture materials. Output of nonfood consumer
goods, especially cotton textiles, was adversely
affected also by a decline in demand -- in rural
areas because of reduced incomes, and in urban areas,
because the sharp rise in the price of foods cut
sharply into incomes available for spending on items
other than food. Demand for transport services
also fell. in turn, heavy industry suffered from
the indirect effects of reduced rural incomes and
also from reduced government orders. Output ex-
panded in a few industries, such as fertilizer (which
benefited from the agricultural programs), petroleum,
and some ol' the newer export industries.
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India: Estimated Consumption of Foodgrains
1965-68
1965
1966 1967
1968
Million Metric Tons
Production a/
89.0
72.3
76.0
95.0
Change in government stocks
Imports
1.1
0.1
-0.4
-3.0
Subtotal
84.6
'99.5
Change in farmers' and
merchants' emergency stocks b/
-6.0
6.0
-6.0 c/
Less feed, seed, and waste d/
Total avaiZabZe for
11.1
9.0
9.5
11.9
human consumption
80.5
79.8
75.1
81.6
Kilograms
Per capita consumption
165
160
Million
147
156
Population (midyear)
487.0
498.9
511.3
524.0
a. Foodgrain production is normal y reported on a crop year
(1 July-30 June) basis. To estimate consumption by calendar
year, it was assumed that foodgrain produced in any one crop
year is consumed during the calendar year that comprises the
last half of that crop year (for example, production in the
1967-68 crop year is consumed in 1968).
b. No precise information avaiZabZe.
C. Minimur:^
d. Estimated at 12.5 percent of production, but it may be
higher.
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9. The recession in the engineering and steel
industries can be attributed primarily to the govern-
ment effort to bring public finance into better
balance by reducing (in real terms) public sector
investment in the past two years. These industries
nave been increasing their capacity in the expectation
that investment would continue to increase rapidly.
The cutback in investment has created large excess
capacity,
10. Although industry has not yet fully recovered
from the impact of the recession, industrial pro-
duction has been stimulated somewhat by higher agri-
cultural incomes, by larger availabilities of industrial
raw materials, and, with the fall in food prices, by
increased demand for such products as cotton textiles.
Increased production of cotton textiles should encourage
investment for the modernization of textile plants and
thereby increase the demand for textile machinery.
Production of commercial vehicles should benefit from
the larger demand for road transport services to move
crops to markets. The process of import substitution,
which has been encouraged by the June 1966 devaluation,
the advance orders placed by the government for rail-
way equipment, and the selective liberalization of
credit effected by the Reserve Bank for capital goods
and exports should also contribute to higher
industrial production, During January-March 1968,
total industrial output will probably be some 5 per-
cent higher than in the corresponding period of 1967,
whereas for the entire fiscal year ending 31 March
1968 the increase will be somewhat less than 3 per-
cent, The recovery can be expected to continue
through 1968. Much of heavy industry, however, prob-
ably will remain depressed because of lack of demand.
Planned resources for public sector investment will
be less in 1968 than in 1967.
Development Expenditures and Plans
11. Because of the two successive droughts and
the economic slowdown that ensued, India scrapped the
draft fourth five-year plan, which was to have begun on
1 April 1966. A new five-year plan is being prepared
for the period beginning 1 April 1969. Until then,
India will operate on the basis of annual plans. To
reduce deficit financing and help check inflation,
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the government has attempted, without much success,
to keep development expenditures at a level con-
sistent with available resources. In FY 1966,
deficit financing by the Reserve Bank amounted to
3.4 billion rupees (Rs) ($450 million equivalent),
or about one-seventh of total expenditures. Despite
plans by the central government to hold the deficit
to Rs 140 million (about $18 million equivalent) in
FY 1967, the deficit will probably be considerably
larger than that in FY 1966. The large above-plan
deficit estimated for FY 1967 will result principally
from imbalances in state development plans. States
do not have to comply with the central government
policy of monetary restraint, and they continue to
accumulate excessive overdrafts with the Reserve
Bank.
12. Even though the government has not been
successful in eliminating inflationary deficit
financing, the proposed public sector development
plan for FY 1968 once again attempts to hold such
financing to a minimum -- the annual development
plan proposed by the Minister of Finance calls for
expenditures of only Rs 20.72 billion compared with
Rs 22.5 billion, Rs 22.2 billion, and Rs 22.5
billion (Plan) in FY's 1965, 1966, and 1967,
respectively. Although this year's record crop
will have a beneficial effect on the economy, sub-
stantially increased resources for public sector
development will not be immediately or automatically
forthcoming. Proposals by the central government,
for example, to impose income taxes on the rural
sector to mop up a portion of the added agricultural
incomes from this year's good crop have been rejected
by the states. Pressure from industry for the govern-
ment to formulate a plan that will substantially
increase public sector demand for capital goods,
together with pressure from the states for larger
local expenditures, will probably result in a larger
development plan than that proposed and in continued
inflationary deficit financing in FY 1968. Neverthe-
less, expenditures for public sector development are
not likely to be a strong stimulus to the economy
in 1968.
13. Private sector investment also has been
depressed. The generally difficult economic con-
ditions, political and economic uncertainties, and
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more recently, a deterioration in labor relations in
some areas, especially in West Bengal, have been
important adverse influences. In addition, the higher
rupee cost of imported capital goods after the June
1966 devaluation made certain marginal projects
unprofitable. Devaluation has had some favorable
effects on the incentive to invest in export and
import-substitution industries, but so far this
positive effect has not been great because of the
generally pessimistic attitude toward investment.
Also, in some cases investment intentions have been
frustrated by the unavailability of capital funds.
Industrial profit margins have been squeezed by
rising wage:, and the new issues market has been in
a slump for some time.
Exports
14. The most discouraging aspect of the recent
performance of the Indian economy has been that of
exports. They declined by about 7 percent in FY
1966 principally because of reduced supplies of
agricultural raw materials and adverse foreign
market conditions, including lower world market
prices for such important Indian exports as tea and
jute manufactures. Exports dropped most sharply in
the last half of 1966. They began increasing in
mid-1967 but still have not fully recovered, and the
prospects are for only about a 5-percent increase in
FY 1968. Total export earnings are expected to rise
to about $1,650 million in FY 1967 (ending 31 March
1968), about 7 percent above the low level of FY
1966, chiefly in response to the growth in supplies
of agricultural products. Despite the gain, total
export earnings in FY 1967 will only be slightly
higher than in FY 1965, and will remain below the
$1,686 million level achieved in FY 1964.
15. Primary products (tea, vegetable oils, oil
cakes, tobacco, coffee, and cotton), plus jute goods
and cotton textiles, normally contribute almost 60
percent of export earnings and are supposed to
provide about one-half of a planned annual increase
of 8 to 10 percent in export earnings over the next
two or three years. This goal is not likely to be
achieved, however, because of continued slack world
demand, low prices for the two leading exports (tea
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and jute), and the fact that the substantial export
taxes introduced at the time of devaluation have
more than offset its beneficial effects.
16. The prospects for exports of other manufactures
are better. Some manufactured goods, including iron
and steel, sugar, and engineering goods, have been given
export subsidies of up to 25 percent. These subsidies,
along with devaluation and the incentive to export
arising from depressed domestic demand (especially in
the case of steel), have resulted in some increase
in exports. Developing profitable new exports on a
large scale and finding foreign markets for them
will be difficult, however, and will require much
ingenuity and sustained efforts by private business-
men. This is bound to take a long time. Increased
exports of Indian manufactures are also hindered by
the Indian import policy of protecting even the most
inefficient domestic manufacturer. Imports of almost
all domestically produced products are banned. This
raises manufacturing costs and makes it more difficult
for Indian producers to compete in foreign markets.
Balance of Payments and Foreign Aid
17. The poor performance of exports together
with the effects of the drought on imports are the
main causes of India's worsening balance-of-payments
problem. Total imports declined in FY 1966. Imports
of machinery and equipment tied to particular foreign
aid projects were cut sharply. This cut was mainly
attributable to redactions in government investment
for internal budgetary reasons. There was sufficient
foreign project aid available to maintain higher
levels of deliveries, but declines in project-tied
imports meant equivalent declines in foreign project
aid and so did not save on foreign exchange. Ex-
cluding project-tied imports, total imports went up
slightly in FY 1966 and grew by more than $300 million
in FY 1967. The increase in 1966 consisted of food,
not all of which was covered by PL-480 and other
emergency aid, and of fertilizer; imports of
materials for industry fell. In FY 1967 food
imports leveled off, those of fertilizer rose, and
imports of industrial materials recovered. In
addition, expenditures for debt service have been
rising by some $50 million a year. These trends
combined to create growing deficits, as shown in
Table 2.
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Exports
India: Estimated Balance of Payments
Fiscal Years, 1965-67 a/
Imports
Food
Project-tied
Fertilizer
Other imports b/
Other transactions
Overall deficit
Financed by:
Food aid and other
PL-480
Project aid
IMF drawings
Use of reserves
(decrease +)
1965
1966
1967
1,642
1,535
1,650
2,803
2,693
2,960
598
743
720
729
560
520
82
127
280
1,394
1,263
1,440
-1,161
-1,158
-1,310
-267
-434
-512
-270
-320
-370
-75
-57
-57
78
-57
-85
1,428
1,592
1J822
526
586
510
729
560
520
137
187
90
-101
-9
N.A.
a. The fiscal year runs from 1 April of the
stated year to 31 March of the following year.
b. Consisting principally of maintenance
imports -- that is, raw materials, spare parts,
and the like, plus a small amount of capital
-goods not financed by project-tied aid.
C. Including invisibZes, autonomous capital
movements, errors,and omissions.
d. Residual.
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18. The balance-of-payments deficit, excluding
project aid, rose by about $300 million a year, from
about $700 million in FY 1965 to more than
$1 billion
in FY 1966, and around $1.3 billion in FY
1967.
The
trend is unaffected if food aid and other
PL-480
aid
is deducted -- the deficit rises from less
than
$200
million in 1965 to more than $400 million in FY
1966
and _..early $800 million in FY 1967. The Free World
aid consortium covered most of this deficit through
aid commitments of $900 million in FY 1966 and $350
million to date (including debt-deferrals) in FY
1967. Because much of this aid is tied not only to
the country extending it but also to particular prod-
ucts, deliveries have been slow, and an estimated
$400 million to $500 million remain to be used. To
cover the remainder of its deficit, India has had to
borrow from the IMF to the extent of $275 million in
the past two years and use some of its foreign
exchange reserves, which fell by $37 million betwe :1
November 1966 and Novemhcir 1967, when they amountec.
to $563 million, or about two months' imports.
19. According to the World Bank, India in FY's
1968 and 1969 will need new aid commitments averaging
about $800 million annually, excluding both project
aid and US PL-480 aid, the latter of which is assumed
to remain around $400 million. As indicated earlier
a slow growth in exports is to be expected. Food
imports may decline a little in FY 1968, but this
decline will be more than offset by increases in
imports of fertilizer and other agricultural inputs.
Imports of materials for industry should continue to
rise at a moderate rate. The balance-of-payments
deficit in FY 1968, excluding imports financed by
project aid and PL-480, is likely to amount to between
$800 million and $1 billion. The prospective deficit
would have been much greater if the IMF had not agreed
to postpone until some time in FY 1970-71 certain
repurchase obligations totaling $387 million originally
due in FY 1968.
20., India's foreign exchange deficit in the
latter part of FY 1968 and especially in FY 1969
will, of course, be affected by the weather for agri-
culture. Another year of good weather, together with
the effects of increased inputs of fertilizer, should
enable India to begin reducing its dependence on food
imports. But the foreign exchange thus saved could
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be used to import substantially more industrial
materials and other goods only if foreign aid is not
cut. Foreign aid does not ensure that India will
continue present policies liberalizing trade, encour-
aging private investment, and giving priority to agri-
cultural development. But lacking sufficient foreign
aid India probably will encounter an increasingly
severe foreign exchange bottleneck and will. thus be
tempted to return to a system of tight controls over
all imports and private activity.
Soviet Trade and Aid
21, In the recent past, India's economic relations
with the USSR have not been contributing to the solution
of the Indian balance-of-payments problem. Indo-
Soviet trade (excluding Soviet military exports) has
expanded rapidly from about $12 million, or less than
1 percent of India's total trade, in 1955 to about
$384 million, or 9 percent of total trade, in 1966.
During 1961-65, India's imports from the USSR ($892
million) considerably exceeded its exports to the
USSR ($577 million+, reflecting substantial deliveries
under Soviet. economic aid agreements. India's bilateral
trade deficit with the USSR declined rapidly after 1963,
however, as Indian exports rose while Indian imports
declined, and Indo-Soviet grade in 1966 was about
balanced, The closing of the gap was caused by
increased repayments by India of earlier Soviet
economic and military credits and by a decline
in 1,966 in Soviet aid deliveries.
xcluding a.i deliveries tana p ,
India had a substantial trade deficit with the USSR
in both 1966 and 196'7, which probably resulted in
an accumulation 3f Indian indebtedness o.i clearing
account.
22, There- is little that the USSR can do to ease
India's balance-of -payments problem through its
existing economic aid program, which consists almost
entirely of project aid. Deliveries of Soviet aid
have been restricted mainly because of India's own
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domestic budget problems. Moreover, India's growing
repayments of Soviet credits are made principally
with the same kinds of products that it sells on
world markets (for example, jute products and tea).
It is possible, however, that the USSR will begin
to import larger quantities of Indian industrial
products, such as railroad cars and steel which are
difficult to sell on world markets. Following Premier
Kosygin's visit to India in January 1968, there were
reports of Soviet offers to greatly increase purchases
of Indian heavy industrial products. One agreement
for the USSR to purchase some 600,000 tons of steel
during the next three years has recently been con-
cluded. Although it is not known whether any
additional agreements were signed, substantial Soviet
purchases of such products would help to stimulate
recovery of India's heavy industry from its current
recession, while directly aiding the performance of
industrial projects built with Soviet aid.
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