Created: 4/1/1965

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DIRECTORATE OF INTELLIGENCE Office of Research and Reports

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India's foreign exchange reservesat an all-time low. At

fotal gold and foreign exchange reserves had fallen0 million0ear earlier. Because the statutory requirement for currency backingmillion, India has only about

million available for useoughly enough to finance aboutays' imports at the current rate. An immediate threat, however, is posed by the need to0 million to the International Monetary Fundillion of which was due on If India receives the0 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. .

he decline in reserves was causedariety of factors, including: increased commercial imports of foodgrainsesult of reducedhipments of surplus wheat from the US because of the dock strike; an increased share of exports destined for rupee-paymenthortage of foreign private investment; and rapidly increasing foreign debt repayment obligations. The immediate likelihood of India'sits foreign exchange position without external assistance is slight because: he decline is occurringime when foreign exchange reserves are normally at their peakesult of the traditionally high rate of export earnings during theonth periodebt-servicing charges are expected to have increased by boutercent in Indian fiscal51nd are expected to continue to increase rapidly during fiscalhere are no immediate prospects for increasing the inflow of private foreign investment.

3It appears that in the short run India's foreign exchange reserves cannot be improved significantly unless foreign debt repaymentare further liberalized or unless substantially increased amounts of future foreign aid commitments are designatednonprojectnd thus usable to finance imports required for the mainfenarice'of the Indian economy.

I. Foreign Kxchtngu Reserves

A- India's foreign exchange reserves include gold holdings of the Government of India plus gold and other foreign exchange assets of lhe

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^minimum0 million (including minimum gold reservesmillion). The transfer of gold to the RBI in4 was the first since the partition of India. Additional transfers of gold in January and5 have amounted JtiV illion, and it is estimated that by the end of February the remaining gold holdings of the Government of India amounted toillion. Because the RBI's foreign reserves are nown excess sufficient to finance onlyays' v importsnother transfer of gold from the government appears to be imminent.

5"During the first few years after partition, India's total foreign exchange reserves remainedevel ofillion These reserves declined steadily throughouts_butized somewhat during thet0 million to million. Sincehen reserves0 million, *" they have fa^jen declining steadily. 27 Reserves in4 weremillion, roughly SlOfJ./nUlion less than ineasonal decline during these months is normal, but this decline was almost twice as large as that in the same period Although Indian reserves usually are replenished during thearch, the decline has continued. Thus the current level isritical than the level in4 because it occurs on the eve of ':

the seasonal decline in exports.

2. Foreign Trade

(ff India's trade deficit4 increased byillion1 million, compared6 million Exports increased6 million, but imports increased even faster by1 million. Available trade data34 are.shown in the accompanying tabic. Al

Contributing further to the decline in foreign exchange reserves was the fact that aboutercent 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 theof India made an important change in the existing export promotion


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. 57 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 ofercent.

3. Foreign Capital

*^ Net inflow of private capital injo India during recent years has beenn average ofillion 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 immediateincreases in private investment inflow are doubtful, theof India recently hasillingness to discuss investment opportunities in industry with private investors, and prospects are fairly good for some investment inflow, especially in fertilizer,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,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 primarilyet inflow of official foreign capital. 4 the Aid-India Consortium8 million, and in4 the US agreed to provide India with an0 million in surplus agricultural products. Alsoecause of India's shortage of raw materials and difficult foreign exchange position, tho US included for the first5 million in aid of the nonproject type in5 million pledge to India through the Aid-India Consortium. To helpossible financial crisis, India has requested further such contributions from the Consortium, which is now considering5 aid commitment to India.

Thus far during India's Third Five Year Planhe Free World has extended Indiaillion in aid (includingnd tho Bloc has extendedillion. India's annual obligation to service this debt (principal and interest) is increasing. It is estimated that the debt-servicing charge amounted


5 million in Indian fiscal4 and will have increased (based on the debtfboutercent to an estimated totalft'milHon in fiscal Future debt-servicing requirements are expected to exert an increasingly greater

.rain on Indian foreign exchange reserves. To service the present debt ano'-rmllion will be required during the Fourth Five Year Plan1, 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 orderillion.illion. If Consortium aid continues at about present levels, roughlyercent of it will be needed to service India's external debt.

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