INDIA'S ECONOMY AND THE SINO-INDIAN CONFLICT

Created: 12/14/1962

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CENTRALTELLIGENCE AGENCY

INDIA'S ECONOMY AND THE SINO-INDIAN CONFLICT

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JFK LIBRARY MANDATORY REVIEW

LK-_lZl2Z.

SEkWRET

OCI No.

2

CENTRAL INTELLIGENCE AGENCY

MEMORANDUM: India's Economy and the Sino-Indian Conflict

emergency defense effort willdemands on an economy already faltering under

an unwieldy economic development program. The economy was lagging when the border crisis broke in October, at least in terras of the economic growth charted by Indian planners under the Thirdear. Serious lags in production and shortages of domestic resources had developed during the second year of the plan; India's chronic foreign exchange shortage, moreover, seemed to be getting worse rather than better. Indian estimates of the foreign aid needed underillion plan were being raised fromillion to more thanillion.

planners now must add the costs ofmilitary buildup to the costs of Neither can be shortchanged, forbelieve that progress in basic development

is not only an economic and political necessity in itself but is as essentialound defense as men and guns.

The core of the problem, however, does not lie in the foreseeable increases in direct outlays for defense, even though these expenditures are likely6 to total someillion more than New Delhi had planned to spend before the Chinese attacked. The bulk of this additional directcould be met in theory from domestic resources, and if the present upsurge of wartime patriotic fervor is maintained and properly channeled such resources could, in fact, become available.

The real problem is the indirect, gradual effects of the reallocation of Indian resources and stepped up defense production on normal economic activity

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including government planning. The Indian economyhole ls only slowly emerging fromore modern industrialized state. The size and the religious, cultural, and linguistic complexities of India's population make it difficult to coordinate the activities necessary to carry out successfully the programs outlined in the government's Five Year Plans. Planning for new factories has tended to overlook the necessity of supplying them with raw materials and of carrying away manufactured goods. Any plan to add further capacity to alrea dy underemployed factories would only complicateroblem. The immediate need ls to enable existing defense plants to be put to more effective use. Here, however, we believe that India's planners will run into at least two areas where India's resources are inadequate even under present conditions:and industrial power.

5. India depends on rail shipment for the bulk of its commodity distribution, and the railparticularly the supply of rollingnever been adequate to absorb an overload on one part of the system withoutubstantial cutbackelse. During the next few years India still will not be able to. produce the locomotives and rolling stock necessary to cushion its distribution system from the effectrolonged shift in the peacetime patterns of use of railways, and its road system will remain Inadequate to permit tho use of trucks on the required scale were motor transport to be triedubstitute. Even the present strain resulting from abnormal shipments over the single-track link to Assam and the fighting front should soon produce significant dislocation in some other part of the system. Such dislocation can spell trouble in one or more of India's food deficit areas.

Regarding Industrial power, railagainajor factor where coal is Electricity too is in shortshort that even an extension of the work week to utilize fully existing defense production capacity would require rationing of olectric power andislocation of other Industrial production.

Indian Government officials have already announced that the government intends to concentrate on hoavy industry, transportation, and military

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production and that there will probably be cutbacks in the fields of public health, education, welfare, and non-essential goods. The Congress Party's executive committee, probably concerned over the impact this austerity program will have, recentlytatement emphasizing the role of "the people" in gearing the whole economy to the needs of the new emergency. It stressed the necessity of intensified programs in rural areas to construct minor irrigation works, improved water supplies, and roads as part of the "war effort."

8. In the present flush of patriotic fervor, the Indian peasant may respond to these exhortations and engage energetically in programs of village uplift. Re may also volunteer for various activities in the hope of obtaining employment and two scuareay. To some extent, as in the case of the already heavily subsidized but still underemployed handloom weaver, he may be provided with the means of increasing his production. For the most part, however, the next year may find many ofdd peasants discovering that they are expected to construct their irrigation works without cement, that theirvillage health unit will not materialize for lack of drugs and medical personnel, that their new school teacher will not arrive, and that the fertilizer and improved tools they had ordered will not reach them because fertilizer factories have been converted to war production, and iron and steel are no longerfor village use.

9. All this does not necessarilyecline of Indian living standards. Growth will continue, but probably not as fast as the Indianthe awakeningcome to expect. An eventual drop in morale therefore seems likely, especially if there is no new fighting on the border. Behind the danger of declining village morale lies the possibility of losses of food production. The complications that could ensue in India from this danger need noon.

10. The outlook Is not good. Whether the actual situation becomes as grim as the possibilities suggest dependsajor way on the amount of foreign exchange the Indian Government has available to buy foreign goods to fill the gaps that reallocation and dislocation

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seem certain to make in the country's economic structure. The prospect in this area is noteither.

India's foreign exchange holdings have been dropping steadily As of2 they stood at5ecline of0 million in the past year. The immediate impact of the fighting has been to depress prospectivefrom tea, and the defense program is likely to reduce exports of cotton textiles and Jute, two other major foreign exchange earners, through increased domestic consumption. In the case of tea, the damage may last for the next several years, becausepersonnel were evacuated from the plantations in northeastern India, and maintenance will not be up to par. Meanwhileillion worth of tea is spoiling while awaiting shipment because of processing problems and lack of transport.

India's chances ofignificant increase in foreign aid beyond needs envisaged for the lagging Third Five Year Plan are uncertain. The United States and other members of the Aid India Club have committed5 billion for the first two years of the Third Plan, but previouslyforeign exchange requirements for the same period are still greater than this by0 million.

NOTE: Attached are five charts illustrating the recent development of the Indian economy.

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FIVE-YEAR PLAN

UBLIC SECTOR" I RIVATE SECTOR

{BXion current US Ooiitn)

(Estimated)

6 Billion

SOl pubitc sector expenditures art Imraiimanii andtnl ut cuuent outlays lor economic ddaktpmtrit

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7

0'

INDIA: NET DEFENSE EXPENDITURES

II MAT ItU

4Hi_ 1M-

200

100

1

6 A

BO II ION MHO ON SumiMINTART AmOttlATIONlFtACCNT Of lOIAC KJOCCT

nu sim ruiiHii won nm it haiouau.

1^0

:onj*^nTi

iial

india's foreign debt, foreign exchange poshon, and annual debt service obligations (millions of us dollars)

6

foreign dcbi payable In foreign cytrenciei Or

9

Foreign exchange or year

end

irimered os of

obliaofion payable in foreign currenclei or(on loam negotiated 'hru

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