Announcement of the Bank Granting Loan to India on August 18, 1949

• . ,&, ~··· fOOc , /> 11-S -- jul - ~~>1. I 1RECONSTRUCTION PJ-ID DEVELOPMENT -4' /0 :;i..,{;;, ~ I INTE.ftNATIONAL BANK FOR Washington FOR THE PRESS ]'OR IMMEDIATE, RF~J.iF,J.SE Press Relea~e No. 145 August 18, 1949 'J}he International Bank for Reconstruction and Development today gra;nt.ed a loan of $34 million to I~dta foT the reconstruction and development of the railways owned and operated by the State •. The p:i;-oceed.s of this loan will be used to finance part of the purchase price of locomotives, boilers and s~are parts. The loan is for a term of 15 years and carries an interest rat~ of 3%, '. plus comm:j.ssion at the rate of 1%, which, in accordance with the Bank's Articles of Agreement, is allocated to its special reserve fund. Amortization payments, caleulated to retire tpe loan by ~£turity, will start on August 15, l950a • This loan is the first loan granted by the lnternational Bank to a membe~ country in As.l~, and is the third loan granted by tne Bank in the ~ast month. On July 29, l949, ~he Bank announced a $15 million loan to the Finance Corpo~a- tion for National R~construction (tterstelbank) of the Netherl~nds, and on August 1, l949, a $12,500,000· loan to the Bank ot Flnland - making a total of $61.500,000 in the three loans. The loah will help to rehabilita.te and improve India's transport syste:(ll, a key faQto:r· in he:r entire economy, and thu~ 1,o ~lleviste her balance, pf ~j1ne;rits diffic.tU.ties. Before the 1,,1ar, India's current balance of payments was normally favors ble. Since the eno. of th~ war, hoYev·er, India has had considerable deficits. +heee deficits resulted l.~:r$ely frQm heavy imports ot grain, machinery, e,nd equipment f o:r Indian i11dustry, ·muc.b of which could be • obtaiJ;'led only from. the na:rd currency a:rea. ln ijddit!Lon, lndian exports have not re$ched tnei:r prewar volume. To fin~noe the dollar deficit, India ha.s drawn on  " • tne central-reserves of th.e· sterling area and has had recourse to the International Monetary Fund, from which she has pu:;:-chased about $100 million •. To remedf·her balance of payments position with the hard currency area, India has recently tighten~ i~~ort controls and is increasing her imports from oth$r ~ources. lhis policy has become possible because of the increased availability or supplies from these other sources. The present balance pf payments situation on current account is somewhat difficult •. An important .favorable factor, however, is that India repai.d dur;lng· the war almost a11 or he~ foJaign debt of ,350 million (equiv$lent to about $1,400,000,000) and became a credttor· vis-a.-vis the United nngdom. Dr~w!ngs on the sterlj.ng balances thus ac·cuinulated helped India to finance her current 'balance of payments deficits • .... ·- . . There have been some intet-gQVermnental transe.etions with the United • States but India nas n.ever borrowed 1,n the Alner:i,~an ca:pital market.. She has ne;)ver defa~lted on any of her debt,. e~ernal or internal. The railways are the mqst important means of t;ran$pO:i."t in Ind:i.a·.. The:f,.r motive power has considerably deter:iorated as~ reeult of normal wear and tear, whi'ch could not· be made good, and heavy use for rnilita;ry transport during the war. Th~ quickest way to remedy the deterioration is to provide the railways w~th new locomotives, thus meetin! the urgent need to speed the distribut~on of gQods within the country and thij movement of e~ort products. The benefits I' from th~ new motive :power will b~ re.!n:t'orced by meas~es of an administrative, operational and fina~cial character being introduced by the Government of IndUa, and designed to imp,;-9ve the operating ~ffici~nQy or th~ railways •. The loan is in ~ccordance wlth the Bank's policy of assisting the reconstruction and develop- ment of prodtietive facilittes of memb~r countries •. The total dollar cost or the r~ilway 1m.prove~$nt p~ogram, which involves th~ iznport of 653 locomotives with epare bo~lers, lo~omotiv~ spare parts, and  •3- • 350 tank cars, amounts to approximately $84·million., of which about $50 million is being financed by India out of' her own resoµrces and $34 !n!lllon is being financed out of the proceeds of the Bank's loan. Out of the total amount of the loan, approximately $10 million will be spent for orders already placed by India with United Statas suppliers and approximately $17 million for o~ders placed with Cana~ian suppliers. The balance represents the amounts reserved for additional orders fQr spere parts, and for payments of rail and oeean freight and incidental costs. This first loan g~anted by the Eank to Indie completes the first phase of negotiations with India which are now under way. The Bank will shortly complete invest,1.gations or an electric power develop- ment project at Bokaro in the Damodar River- Valley; and of a p:rojeet for the purchase of agricultural machinery to be used for the cl~arance of weed-infested • land. If the final investigations oop;f':i.rm the results of the p;reliminary studies already made, it is e}q)ected that loans for these projects will be made in the near futU!'ee It is estimated that loans to India in the·irnmediate future, including the railway lean, will total approximately $75 m:\.llion. Aft~r being approved by the Ba.nk' s Exe cu.ti ve Directors, the Loan Agreement was signed today by Eugene R. Black, Fresident, on behalf of the Internat;io!'lal Bank ±"'or Recon~truction ~nd Development; and by Vijaya Lak;shmi Pandit, Ambassador for In~ia, on behalf of lndiao •  -4- • SUPPLEMENTAI:, STATEMENT_ ON THE INDIAN.LOAN India's . Economic . Position India, c~mtaining ~bout one-sixth of the w1,rld.' s population, has an economy still largely underdeveloped. The greater part of her economic activity is devoted to primary industry, and th~ majority of the large population is dependent on agriculture. The etandard of living is generally low even with regard to food requirements. The country has a wide variety of miner~ls. Coal reserves are estimated at about 60 billion tons, of which workable deposits are placed at approximately 20 billion tons. About 38% of India's coal conaumption is used by tha railways, about 20% by the iron and steel and engineering !ndustries, and about 12% by cotton and jute m11is. India has large deposits of e~cellent iron ore, and manganese is one. of her prinqipal ITdneral products. The potential hydroelectric power resources are large Qut actual development nas been small. ~t the outbreak or World War II India was almost self-su.ffic~ent in textiles, ~ugar and cement, and produced nearly half its finished steal requirements. Since tlie wai· lndian indu,stry has 'been unable to maintaiµ the high leve;ls of wartime production. Ne.arly all industries have suffered from inab!lity either to obtain adequate supplies or to malte shipments becijuse of transportation diff'icul ties. · • Recently Indir:m industrial production h~s made a substantial recpvery, helped in part by an improvement in the railway system. On the average one new lQcomotive is now being put into servic~ every day. For the five months from iugu.st tnrough Pecember 1948, 2~231,000 cars were loaded compared to 1 1 951,000 tn the eame period of 19471 repres~nting a~·i~crease of aL~ost 15%. An increase· !n India~s industrial production during the first half of 1949 - by 12 to 15% over the same period in 1948 - has recently be~n announced by the Govern:pient. Puring the C"Urrent f!scai year the ordinary budget, which includes approxi- matelry 50% for defense services, j,s expeQted to be balanced. Tne financ!ng of the deficit on capital expenditures through the utilization of accumulated sterling reserves quring the last two years has not been inflationary.. On March 31, 1949, the o~tstan~ing public debt of India W$S 20 1 300,000,000 rupees (about $6,090,000,000). Of the total less than 2% repre~erits external obligation$. India's sterling t~Qebtedne~s has been reduced from a 1939 total of about 1i,so million (about $1,400,000 1 000) to a debt of lest1 them 1,3 miJ.lion (about $12 Jnillicn) which is s-q.bject to se:rvice. To finance the dollar deficit, the Government ha~ draw e>Jl th~ Inter~ation•:J. Monet,;ry Fund for $l.OO ~111on dur!Qg 1948 and 1949. During the war, th~ U.S. Governt11ent transferred to India 226 mill!on ounQ~, of silver under the Lend~Lea~~ Act. The IndJan Government has taken steps to pialce-'this silver available for retUfll• Efforts have been mscle during and aince the w.r to e~pand feeilitiet rox- • vooatio~l education. For :Ln~tanee in the fhlds of m~ch~niqal and eivil engineering alone, th~re a:+e. ~ow 450 technical anq ,,ocational traim,.ng centets in ·operatton with nearly 20,,000 atw:tent{?. The Government a],.so propo,e~ to double tbe a,,~tlSl number of professional. en~i~eef~ng gf$dua.tes b.y 1952, Th~ • -5- wartime practice.of' sending. students abroad for higher technical training and praQtical experience is being continued on an increasing--e~ala. The ~ask of raising the st~pdard of living is a d1ffic'11t one beca~se· of India's dense and st~adily growing population. The national ineome;must increase yearly by ~bout 1%, the rate. at which the population is expected,,· to increase, in order to avo1~ a decline in the present standard or living. India's known resources are ample to make possible a substantial incr~ase of real na tion,1 income, but the7 need to be mobill zed·.· Highest on the list or prioritiee is the increased pr•oduction or food needed ·to reduce high iniports of grain which, since the war, have been as higb as 2,860.;oo~ _.to1,La : in 1948, and to ~prove the low standard or nutrition, T.he Gove~ent· hrt.s. drawp up pl,an~ to ,dic~=~-:!~ue grain imports ·arter 195l,•. To achieve greater production of rood an tntegrated program h~$ been pr~~red compris·ing .short., '. medium- and long term projects. During the short t$~ it is planned to inc1~~~sEV yiel~s 1Qy the more 1nten$ive use of fertiU.zers, improved seeds,· and the· · e~isting irr~gation facilities; ov~r the medium term projects tor the ~eclama~ tion of·weecl-infested and jungle l~ds of about 6,000,000 acres are prop<;>s~d; whicb·wo14d result in arldittonal annual food output of 2,000,000 tons·of foo~ grains. In the long term, :iarge multi-purpose scnemes co!Jlbining tl'rigation ,.. and power ra~i:Uties ar.e planned t.o add another 2,000,000 tons of fo.od gra!n~ · annually., In all it is expected that at t,he e+id of the next decade· food • produQtion will be increased by about l0,000,000 tone annually.· ~ . ·The Qover:nment is engaged in prepari~g an over-all:·pi.an of int~grated. . developznent for 'both the p\lblic and private sectors of the economy, l;?ut total investment req~rements are not yet finally known.· It is now est~ted that req,ureme11ts for pub:i.ic projects will be of the orde;r or Rs 10 billion .. ·r -,:. ($3 billion) during the ~ext five to seven ye~rs, To thi~ amount shoul~ be:· added p~ivate j,nvestm~nt lle.eda in indus~:cy and ~griculture. It is recognized· that, in view of tne limited aavings av&il&ble tor fineneing development, a system of prioriti~~ will be necessary. . · Development in many countrie, h~s been greatly JS$isted by foreign capital either as investment~ or -l0$ns. U$v!.ng almost no f9reign debt and i,mder,- · develop~d reso~ca~, India offers considerable opportunities for foreign invest- ment. Balang, of fu;ments fosition: Befo~e.Wprld Wa; ll India bed.an over-all trade surplus wh~ch was utilized to make SP?l'1al payments abroad for tnterest, dividend,e, govenimer.it accounts and o~ner cµrre~t a.ervice transactions. . World War II S'1bstantially altered t~ prewijr payrpent~ p$ttern. Almo:it the enttre foreign debt was liquidllted ~d Indi,a ~terged a crea.itor of th~ United KingdoJn.t At tt,ie end of July, 1949, ~ndia's. sterling assets amounted to· about ,,9.3 m!llion ($2~:372,000 1 000). · · · The:, most.,.uportant :feat-ures of lndia I s postwar t~!~=~e or payments nav$ · • been an over...all.import surplus j.ncl\lding ~ ~~bs'f;iantial dollar def:lQit, Qompared with the e:,cpo;rt.$1.Wplusea before the war-, when lndia bed a favo:rable trade b$lanc.e with the Uru,ted s~-tes. • -6- The current account deficit with the dollar and other hard eurreney areas in the year 1948 is estimated to have amounted to Rs 490 million ($147 million). For tha first half of 1949, it is estimated to have amounted to Rs 420 million ($126 million). The hard c'U':rency deficits were covered by dr~wing on the central reserves or the sterling area as well' as by purchas~s of dollars rr·cm the International Monetary Fund. o·overnment food purchas~s in 1948 total~d Rs 1,130,000,000 ($3.3~ .million) which·was 21% or total imports. Hard currency food imports came to about $120 millione The principal export items are ma':'lufactured jute, tea, cotton yarns and textiles, raw jute and cotton, vegetable oils andailseed~, hides and skins, gum, resins and lac, tobacco, coal anq minerals. Manufactured jute alone constitutes about a third of the tot,1 exports and about 60% or hard QU~rency export earnings., Majo:r imports include ra~ jute, machinery, grains, raw cotton., :rninera.l oils, metals, vehicl.es, chemicals, and yarn. The main reason for the continuing dollar deficit has been India's increasing dependence for imports on the hard currency areas, since he~ traditional sources of supply have not been able to meet her requtrements due to disruption of their economies by the var~ This ~s been particularly true of food, but at the end of the war the::re was also a huge demand for eapital goods for rehabilitation and replacement. With the improvement in the supply position of soft curreney areas, Indj.a plana to obtain~ larger proportion • of bar requirements, pl;lrticularly food, from those. areas. To expaud trade relat~ons apd find new sources of supplies India has already concluded trade agreements with Argentina, Bi-Zone Germany, P,kistap, Switzerland, and the u.s.S!lR,.; ~nd negotiations have 'been con4ucted with Afghanistan, Austria, Belgium 11 Czechoelovakia,. Egypt, Finland,· Hungary, Irap, Iraq~ Poland, Thailand., and Yugoslaviao Traoe with the United States is of consi4erable import~nce. While before the war it represented only 9% on th~ export ~ide and 7% on the import side, in 1948 it amounted to 19% o:f Indi,a 1 s t;;eaborr1e exports and i.3% of h~:r sea borne imports - seeond only to tTade with the United Kingdo~ (23% of e;xport~ ~nd i8% of imports)~ Jute and jute manufactures. rematn the main items or expe,rt1:. Export of mangane~e is still reiattvely s~ll, but improved transport o~n-- di tions could speed up d.eliverie~ sub~tant!ally. Gr1;1:in and flo'Ql· imports from the doll1;1r area aecount for 1;1 {3ubstantial propc;,rtion of the increaae in i:rnpo:rts; other increased imports include machinery and equipment, vehicles, chemicals a.nd eilo India's export position·with the United P.tates is on the whole good. u.s. purchases in India eons.1st mostly of raw rnater!ale and commodities whteh do not compete direct,ly with Americ~n products and have an established ~rke·t in the U.So An expana;i,on or dollar export volume should be po~sible.. Reduced volume of exports of jute products to the UeS. could be offset by incr~ases in other items, e.g.,, mineral~, lac, tea, and cashew.. nuts. Imports of manufactured jute have been encountering some :resistance in the u,s. 'because • of competition from paQk~ging substitutes. If sat~sfactory arrangements are reached with Pakht.an with regard to the supply and price of raw jute and the  _.,., .... • price of jtite manufactures'. fs·lowered,· it·shoulc;l be possible to maintain the u.s.- markets. Should.this be t'he cf;(se·lndia may reasonably·expect to regain her·prewar export· volume to the u.s. Er:r~ct ot' the .Rafiway_.ProJe~. · Railways are the· key t:o India I s urgent transpor·i problem.. The. project which the Bank's loan will help finance consists of the rehabilitation, improvement and incre$se in the capacity, and more effective utilization,. of' the railway property and equ:tpment owned and· operated by the Government. Th~ Bank i·s financing part of the purchase price or 653 looomotivea, 62 spare boilers, and spare parts for locomotives ordered in the United States and Canada11. The locomotives are rieeded· to overcome a shortage of' motive pot,rer in order that the Indian Railways may be able to mov~ all the freight offered for transpor"t and improve their passenger serviceo The spare p~rts and boilers are needed not only to maintain the 653 new locomot:i,ves but also to reactivate cannibalized engines now out of usee India does not at present manufacture loeomotiv~s. Hence, to correct a postwar shortage of motive power, the Indian Government began placing Qrders. late in 1947 for 863 locomotives, spare boiler~, and spare parte in the United States, Canada, the United Kingdom, a11d France., All these locomotives are coal-fueled steam engines for ro~d haul work. Tbey·are p~rt of a program to increase the supply of motive power throygh the replacemont of old by • new engines and the simultaneous reduction in the diversity of engine types •. Through June 30, 1949, 308 locomotiv~s,. '-6 boilers and appropriate spa.re part~ were delivered from Csnada and the u.s •. They have relie-ved to some extent the insufficiency of motiva power with the result that 75-80% of the freight offered for transport is now being moved, as compared with 60% in 1947-1948; both fre1,ght car load~.ngs and to:n miles have increas~d considerably; and there is much better engine utilization in freight service. Accordingly, the transport authorities nav·e been able to relax and simplify freight priori ties, but have not been able to abolish them completely. Of the equipment ordered in the u.s. and Canada, thex·e remained to be delivered a~ June 30, 1949, 345 iocomotives,- ·26 spare boil.era,. and a con- siderable volume of' spare parts~ Except for some spare parts, deliveries shoul~ be completed by March, 1950~ After delivery of t~e remai~ng ~quipment on orde~ in Canada and the u.sfi,. additional locomotives may be required to realize the plan for the complete replacenient of obsolete by modern engines4 These additional ~otives wo~d probably be procured in Europeo The Bank :ls· lending $34 million toward the total dollar cost of' equipment f.or .the railway imp1·ovement. program ~bich amounts to $8;i:.,300 1 000. Specific~lly, the loan covers paymente since Juiy l, 19490. · All 65J locomotives incl\lded in the proje~t w1:ii expand India; s effective· capacity ~or ~he +ail haulage ot graij.>,.1 ooal, m~nganese, i~on ore, jute and other essenti~l goocla. The )33. freight engines will do s·o dtrectly. The other • 340 engil}ee are passenger e~gines and will do so ind!reotlY, -not only by  ; . V' ·. . '1 • ; .', disengaging tor· fretght ~rk varlous· :r!eig~t · en~pes · whi~h are i:io.w ·. assig~eci to urgent passenger· service but. also l?Y ·eas!ng· the P!8Sstu-e of ya-rq., line, and 1 terminal CQnge·etion.. .The pas~eng.~r engin~s w1.i1 also-. release shop ~nd shed · faciliti~s tor pro~pter r~pa1:r of frE;light engi'1es., follo1,1ing t.he '4,thdrawal. of over~ge; obsolet~ passenger engines. · . . · . .. . . · The benefits from the new moti1J'e -powe:r ¢.11 b~ ..greatly rei,nforceq. ·thro,igh ' measures desigqed to get .the best .use of all equipment' old as well as new. . : .I The Indian Railways are .taking aetjon to imprQve.the·utilizatiQn of engines, freight cars, and other faQilit!es, an~ are tlso carrying out operationa1 and •dministrative reform$ recently suggested by the Indian Railways Inquiry ; Committee. · .) ' • ·' :·.  August 18,. 1949 Her Excellency the Ambassador for India, Vijaya Lakshmi Pandit, is adcompanfed by the following members of her staff. to the :Sank .tod.q .. .- for the signing of the Indian Loan Agreerqent:: 1. Mr. :B. R. Sen,. Minister 2. Hr. T. N. Kaul,. First Secretary and Ch~f de Protocole 3. Colonel Unni· llfayar,. Public Relations Officer and the Ambassador 1 s Private Secretary. Also in attendance: Hr. K. R. r:. Menon, Finance Secretary, Government of India Mr. Keith C. Roy, Deputy Secretary of Finance,. Government of India •.. • I Attending for the International :Sank: Eugene R. ~lack, President Wm. A. B. Iliff, Loan Director Joseph Rucinski, Loa.ll Of.fice·r Davidson Sommers, Assi.stant General Couns~l.