Created: 7/1/1968

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Intelligence Memorandum

India: Some Implications

of Moscow's Large Rupee Holdings


N! G3

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8


India: Some Implications of Moscow's Large Rupee Holdings


India is now Moscow's leading trading partner of all the less developed countries of the Free World, and much of this trade is generated by-Moscow's military and economic aid program. , aboutercent of India's Imports from the USSR were economic and military aid deliveries, and aboutercent of exports were for economic and military debt repayment. Although India is not in arrears on repayment of Soviet military and economic credits, the merchandise trade balance* has generally been in Moscow's favor. esult, the USSR has accumulated substantial holdings of rupees which can only be spent on Indian goods and services. These rupee holdings, probably now the equivalent of as much0 million, increased sharply7 and are likely to go higher.

Recent efforts by the USSR to achieve sharp increases in its purchases of Indian goods reflect Moscow's growing concern with New Delhi's mounting commercial payments deficit in trade between the two countries. Soviet interest in stepping up imports

Thia ia normal commercial trade and exoludee deliveriea of eoonomio and military aid goods and aommoditiee shipped in repayment of aid.

Soto: Thie memorandum wae produced eolely by CIA. It wae prepared by the Office of Eoonomiond waa coordinated with the Offioe of Strategic Research, the Offioe of Current Intelligence, and the Office of Rational Betimatee.


from India was highlighted during Premier Kosygin's January visit;umber of Sovietto India concluded several trade contracts and began negotiations on others.

Moscow has agreed to increase purchasessteel and railroad cars. The USSR mayIndian railroad cars per year, butdeliveries will not begin before

Moscow, however, would also like to increase its imports of the type of goods that India now sells to the West for hard currency. Indian negotiators, however, will probably insist that Moscow restrict its additional purchases to engineering andgoods and will not agree to pay the Soviet trade debt with the same goods as those exported to the West for hard currency. Although Indian exports to the USSR will increase, it seems likely that Moscow will have to continue to build up its rupee holdings until atnd the USSR's holdings will decline after that date only if it begins purchasing greatly increased numbers of Indian railroad cars.



Indo-Soviet tradeaid transactions Indian exports

to the USSR to repay economic and military debts and Soviet exports under long-term economic credit agreementsand normal commercial-type transactions. Soviet statistics, however, do not explicitly in-ajc^ide military deliveries. If the aid shipments and repayments are excluded, the remainingtrade balance has continuously been in Moscow's favor. esult, India has experienced adeficit, which probably has been financed by transferring rupees to Moscow's trade account. Indian press statements which imply that India has generallyavorable balance in its trade with the USSR are misleading because they frequently ignore the fact that exports are used in part to repay existing Soviet credits and are based on Indian trade statistics which generally exclude all aid deliveries from imports.

now is the USSR's largestof all the Free World less developedtrade increased rapidly from onlyS to5 million of Indian exports to the USSR,changed very little and consists ossentiallysame types of goods India also exports to Moscow has not increased purchases ofand industrial goods significantly. of India's imports from the USSR has

not changed drastically: machinery and equipment continue to make up over SO percent of imports; the share of metals and manufactures has declined and the share of petroleum products has increased (see Figure

j^oyiet Aid and Indian Repayments

several years, Soviet economichave accountedubstantial,share of Indian imports. On thean increasingly large share of India'sused to make scheduled economic andrepayments. During the sixccounted forercent offrom the USSR, but the proportion foil to

- 3

india: percentage compositon of trade with the6


us i

Raw Tobacco Chemicals

Consumer Good*

1 Other

Metals &Petroleum Product*


Raw Material!

Jute Manufacturer*





Including principal and interest.

an average ofercent6ilitary and economic repayments, which averagedercent of India's exports.ecordercent during the last two years (see esult of past aid deliveries alone, India now owes the USSR0 million (excluding interest). Exports of Indian goods over the next year or two at the rata of0 million* will be used to repay part of the military and economic debt to the USSR. Moreover, while India is repaying current debt, additional debt is accruing becausen economic aid0 million in military aid remains to be delivered under the current Soviet aid program (see

economic aid to India underamounts to aboutillion, of whichmillion has been delivered. Economicaveraged more5 million Because of India's industrialNew Delhi was unable to finance its shareSoviet aid projects. esult,deliveries fell sharply6 andonlyillion per year, which

was less than economic aid repayments. Sovietaid to India (including cash sales) amounts to0 million, of which0 million has been delivered.

aid deliveries8 but will not exceed economicby very much. Indian economic debtto the USSR has steadily increased sinceprogram began,illion inwill probably continue to rise eacheak ofillion indebt repayment to the USSR averagedmillion per year. Annualhowever, will reportedly increaseillion Military andrepayments, which will probablyercent of India's exports to the USSRare shown in the following tabulation:

Million US $




Balance of Payments

6. India has consistentlyalance-of-pay-ments deficit with the USSR. Excluding Soviet aid deliveries and Indian shipments to repay debt, imports from the USSR have regularly exceeded exports. he USSR probably built up substantial rupee

holdings, ostimatod at0 million0 million.* Soviet rupee accumulations were derived from balance-of-payments computations shown in the Table, based principally on published trade and aid delivery data, with estimates only of freight charges and debt repayments. Other data that would also affect the balance of payments such as Soviet expenditures on embassy operations and expenditures on technicians are not available. Thesehowevor, would not reduce Soviet rupeeby very much.


7. Although Soviet export statistics include all economic aid deliveries to India, it is clear that they do not include all military aid deliveries, although they may include some. For example, during theoviet export statistics contain an unidentified residual which totaled0 million. This residual could represent someaid deliveries. If it does, the estimate of Soviet rupee holdings on cxxmmercial accounts of0 million at the end6 would beby aboutercent.** ho estimated

Whereas mutually agreed upon restrictions have been imposed on the use of the large US olaims of more thanillion of Indian rupeee whioh arose principally from maeeive US eurplue food ehipmente to India under therogram, there are no euah restrictions known on the use of the Sovietrupeee.

** Although the annual unidentified residual in Soviet export statistics generally paralleled the sharp inoreaoe in Soviet military deliveries to India that occurred duringeriod, the relationship did not hold In that year, the unidentified export residual wasees than military aid deliveries. Moreover, during theeriod, the total unidentified Sooiet export residual was at0 million less than Moscow's military deliveries to India. imilar examination of Soviet export statisticsIndonesia and the UARboth of which have also received substantial military deliveries from ths USSRhows that the unidentified Soviet export residual to each of these countries was muoh too small to account for military shipments,


annual increase in Soviet rupee holdings was the highest0 million. Ifillion in military deliveries7 aro included in the Soviet export data, Soviet rupee holdings would increase by onlyillion. Soviet rupee holdings at the endere0 million if military deliveries are not included in the Soviet export data0 million wif military deliveries are included. Ont seems likely that Soviet military deliveries are not included in the residual.

Recent Efforts to Increase Trade

soviit-kldid bhilailant


8. Although neither Moscow nor Now Delhi has acknowlodged Soviet rupee holdings, their behavior is consistent with the existence of large Soviet rupee holdings. Moscow apparently is increasingly concerned with this mounting trade debt which rose sharply When Soviet Premier Kosygin visited India ine found some Soviet-aided projects operating belowercent of capacityof slack demand. Kosygin urged Indianto make these plants more export oriented, and reportedly said that the USSR was willing to increase greatly imports of Indian heavy industrial products and engineering goods (principally railroad cars and steel) as well as commodities such asproducts (including jute) which now make up the bulk of India's exports to the USSR. The USSR as early asad agreed toons of steel, valued at morerom the Soviet-built Bhilai steel mill.

9. Following Kosygin'sumber of Soviet delegations arrived to review the operations of certain Soviet projects and to examine thefor purchasing more Indian goods. As athe USSR agreed on8ons of steel valued atin addition toons contracted for Moscow also ordered iron ore valued at x% 9 illion. The steel supplied by the Bhilai Steel Plant was to be deliveredith the first shipment ofons valued atillion scheduled for delivery It was also widely publicized that the USSR would place an immediate order0 Indian railroad cars. Accordingrotocol signed onarch, however, Moscow will purchasears for delivery next year, with the number rising0 annually. India, however, is attempting toirm five-year contract reportedly valued5 million to supply the USSR0 railroad cars* These would be gondola-type general-purpose open freight cars built to Soviet It is far from certain, however, that India can meet the exacting Soviet railroad car standards which have been submitted to them.

A high-level Soviet delegation visiting India in8 was charged with appraising the financial feasibility of establishing Indo-Soviet joint industrial projects devoted to producing goods for export to the USSR. The delegation was also concerned with increasing Soviet exports from India. Following lengthy discussions, Indian and Soviet officials agreed to conduct detailed studies and to make specific recommendations by. Thus it appears that no new Soviet agreements to import substantial quantities of Indian industrial goods are likely before the end of the year.

The USSR still seeks to purchase someheavy industrial goods from India, especially goods that will lead to increased production by those

7 in8 indo-soviet trade agreement concluded innlyillion va* allocated to soviet imports of all engineering goode.

public sector industries constructed with Soviet aid, but probably not in as large quantities as initially reported. Moscow now seems to besomewhat from the initial widely publicized offers, and in recent negotiations has questioned India's capacity to deliver.

USSR will probably now try harderimports of the traditional Indian goods

tea, jute products, and leather goodsthat are also sold to the West for hard currency. India, however, is not anxious to repay its debt with increased exports of these items, because it would mean diverting exports from the West. Moreover, these sales will not benefit the Indian economy as much as sales of heavy industrial and engineering goods, which wouldpurt to the Indian economy by boosting industrial output and providing employment where plants have been operating well below capacity. To offset any increased Soviet purchases of traditional exports, India is trying to increase its imports from the USSR of scarce materials such as copper, nickel, phosphates, fertilizer, and sulphur to increase industrial and agricultural output. Although the USSR has generally resisted such efforts, India hasons of fertilizer valuedillion for delivery this year, aboutillion more than


is little chance that the USSRits rupee holdings in India by Indeed, these holdings areto increase, except in the unlikelyIndian exports to the USSR increase abovelevels faster than the recently concluded

^afx-eements indicate. Moreover, India will be

facing serious balance-of-payments stringency in the West in the next year or two, and the Indians are unlikely to export to the USSR goods that can be sold in the West.

oviet holdings shouldas already completed new trade dealsIndia's exports to the USSR by less thanabove present levels. These agreements also


9 -


ocjjxi; i

call for purchases of Indian industrial goodsncrease byillionut the increase will be too small to curb the accumulation of Soviet rupees. It may be athen Moscow may begin purchasing greatly increasedof Indian railroad carsbefore Soviet rupee holdings on current account begin to be reduced.

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