oversight

Opportunities for Better Use of United States-Owned Excess Foreign Currency in India

Published by the Government Accountability Office on 1971-01-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

 !D    S7,




             REPORT TO THE CONGRESS
'CCo()UT4




             Opportunities For Better Use
             Of United States-Owned Excess
             Foreign Currency In India _-146749
             Department of State                                         a
             Agency for International Development
             Department of'the Treasury
             Office of Management and Budget


                     FILE COPY - COMP GEN

             BY THE COMPTROLLER GENERAL
             OF THE UNITED STATES


                                                   J        2   -A   I
                                   Zt~~~~lpBL ~~       ~~:: a   1>C~
            COMPTROLLER GENERAL OF THE UNITED STATES
                       WASHINGTON, D.C. 20548




B- 146749




To the President of the Senate and the
Speaker of the House of Representatives

       This report presents the findings and recommendations
resulting from our review of opportunities for better use of
United States- owned foreign currency in India.

      Our review was made pursuant to the Budget and Account-
ing Act, 1921 (31 U.S.C. 53) and the Accounting and Auditing
Act of 1950 (31 U.S.C. 67).

       Copies of this report are being sent to the Director,
Office of Management and Budget; the Secretary of State; the
Secretary of the Treasury; and the Administrator, Agency
for International Development.




                                   Comptroller General
                                   of the United States
COMPTROLLER GENERAL'S             OPPORTUNITIES FOR BETTER USE OF
REPORT TO THE CONGRESS            UNITED STATES-OWNED EXCESS FOREIGN CURRENCY
                                  IN INDIA
                                  Department of State
                                  Agency for International Development
                                  Department of the Treasury
                                  Office of Management and Budget B-146749

DIGEST

WHY THE REVIEW WAS MADE

    The United States has amassed large amounts of Indian rupees through the
    operation of its food and other assistance programs for India. At
    June 30, 1969, Indian rupees available for U.S. expenditure in India
    amounted to the equivalent of $678 million--enough to last 19 years at
    current rates of expenditure. U.S. holdings are expected to increase
    substantially in future years since repayments of principal and interest
    on loans over the next 40 years are expected to exceed present levels of
    U.S. expenditures by a ratio of about 3 to 1. (See chart, p. 101.)
     With few exceptions, U.S. rupee holdings can be used only in India, can-
     not be used to buy goods for export from India, and can be converted to
     other currencies only in relatively small amounts. Considering these
     restrictions, it appears highly unlikely that the United States will be
     able to convert more than a small portion of its total rupee holdings
     into real resources for its own use.
     GAO undertook the review to see if it would be practicable and benefi-
     cial to U.S. interest to make somewhat greater use of its rupee hold-
     ings. Such greater use has been recognized for many years by the execu-
     tive branch and the Congress as a desirable goal. (See p. 18.)

FINDINGS AND CONCLUSIONS

     OveraZZ conclusions

     Important political, economic, and legal factors limit the amount of
     U.S.-owned rupees that the United States can spend in India during any
     period. Even so, considerably greater amounts than are now being spent
     could be beneficially used within the limit. (See pp. 63 to 72.)
     Administrative difficulties within the U.S. Government have also acted to
     restrain the level of excess currency spending.

     The rupees are used for official agency expenses in India; personal ex-
     penses of American employees of the United States while they are in
Tear Sheet
the country; official international transportation; payments to U.S. an-
nuitants resident in India; and sales to U.S. citizens, including busi-
nessmen and tourists.
The United States could use more of its rupees to acquire or replace of-
fice and residential facilities in India, expand distribution of a U.S.
Information Agency publication in India, increase local travel for offi-
cial purposes, and expand the educational exchange program. These are
only a few of the many opportunities that exist. (See pp. 19, 24
and 25.)
The limits on U.S. rupee expenditures make it important to establish pri-
orities for proposed uses of rupees, even though the amounts of U.S.-
owned rupees seem almost limitless. It is important that justifications
for specific uses continue to be subjected to careful scrutiny by the ex-
ecutive branch and by the Congress. (See pp. 20 and 25.)
Administrative barrier to greater use

The form in which authority to use excess currencies is given appears to
be an important administrative barrier to greater use of the rupees.
Agencies must obtain dollar appropriations to use excess currencies.
(They then buy the currencies from the Treasury Department.) In some
cases, the executive branch has not sought congressional approval for
dollar appropriations to buy' all the excess currencies that could be used
productively for Government programs and activities abroad. One reason
is that the budgetary system has pitted excess-currency-funded programs
against regular dollar-funded programs. As a result, excess currency pro-
grams with a low priority have been dropped by the wayside even though
they would have been virtually costless to the United States. (See pp. 26
and 27.)
The executive branch has tried to encourage greater use of excess cur-
rencies by requesting authority to use the currencies without having to
obtain dollar appropriations. Those attempts were not successful because
amounts sought from the Congress were not supported with detailed justi-
fications for proposed uses (for fiscal year 1966) and because the exe-
cutive branch sought direct foreign currency authorizations (for fiscal
year 1967)--a form of authority to use excess currencies that apparently
was not acceptable to the Congress. (See pp. 34 to 36.)
Greater use of foreign currencies could be realized if the executive
branch would seek--and the Congress would provide--funds for well-
documented excess currency projects without regard to agency dollar ceil-
ings. Another way of increasing the use of excess currencies would be
through direct foreign currency appropriations. (See pp. 42 to 49.)
The executive branch has authority to use some of its rupees for certain
purposes, including economic development grants, without appropriation.
Those rupees are derived from Public Law 480 food sales programs and are
generally known as Public Law 480 currencies. The executive branch does

                               2
      not have similar authority to use other excess rupees that are accumulat-
      ing rapidly. (See pp. 70 and 71.)
      Valuation of foreign currency
      Valuing U.S.-owned excess currencies at fixed official exchange rates
      when selling currencies to U.S. agencies is not always useful and dis-
      courages greater use of the currencies. The agencies, in budgetary and
      expenditure decisions, seek the greatest amount of goods and services
      for their appropriated funds and will forego purchase of excess cur-
      rencies if use of an official exchange rate results in a disproportion-
      ately high outlay of their dollar appropriations. Current regulations
      provide for some flexibility in exchange rates; however, GAO believes
      that the regulations do not go far enough and that the agencies do not
      always attempt to use the leeway permitted by the regulations. (See
      p. 50.)
      Possible use of rupees
      Although GAO believes that the United States can spend more Indian
      rupees if these obstacles are removed, it is unlikely that the amounts
      spent would be large enough to make a dent in the balance on hand and
      due in the future. According to U.S. officials, the growing balances
      of U.S.-owned rupees are a political liability to the United States in
      its relations with India, and those officials believe it would-be judi-
      cious for the United States to grant large amounts to India for economic
      development purposes. (See p. 63.)
      Questions concerning whether to make grants, and in what amounts and for
      what purposes they should be made, are matters of policy not within GAO's
      purview. GAO believes, however, that the executive branch's concern
      over the increase of U.S.-owned-rupee balances and its efforts to re-
      duce them are deserving of congressional interest. GAO believes that
      effective measures to reduce the balances would require action on the
      part of the Congress.
      GAO's observations on other matters connected with the accrual, expendi-
      ture, and conversion of excess U.S.-owned rupees are included in chap-
      ter 10. (See p. 90.)

RECOMMENDATIONS OR SUGGESTIONS

      The Office of Management and Budget should
         --ensure that executive branch agencies can seek approval for well-
           documented excess-currency-funded projects without regard to over-
           all dollar ceilings for the agencies (see p. 45) and
         --explore with appropriate committees of the Congress the acceptabil-
           ity of direct appropriations of foreign currency (see p. 47).
Tear Sheet
                                      3
    The Secretary of the Treasury should establish more flexible procedures
    for valuing U.S.-owned Indian rupees in dollars in making sales to U.S.
    agencies to maximize the constructive use of the funds for U.S. programs
    in India without, at the same time, compromising congressional control
    over use of the funds. In essence, this would give U.S. agencies more
    rupees for the same amount of dollars and, all other things being equal,
    would encourage greater use of the rupees. (See p. 62.)

AGENCY ACTIONS AND UNRESOLVED ISSUES

    The Department of State noted that effective use of the rupees was a
    matter of great and increasing urgency and agreed generally with GAO's
    recommendations. (See p. 110.) It also commented:
       "Illustrative of the Department's considerable concern over
       the increasing levels of U.S.-owned Indian rupees, Secretary
       Rogers has instituted a Departmental study, headed by an
       eminent economist, to review the problems and to develop ap-
       propriate, specific solutions. We anticipate that this proj-
       ect will effectively complement the GAO report."

    The Agency for International Development agreed with the recommendations
    contained in the draft report, with the following specific reservations:
       "We believe, and the report demonstrates, that expanded use of
       our excess currency in India could and would be in the interest
       of both the United States and India. At the same time, however,
       we would like to note that any marked revision or expansion of
       our programs for excess currency utilization would have to take
       fully into account both any potential adverse economic effects
       which would run contrary to A.I.D.'s development objectives,
       and any Government of India sensitivities as to the political
       or economic impact of such utilization.
       "In a related sense, it could be noted that one potentially
       limiting factor in the expansion of U.S. research programs
       in India is the possibility that, in areas in which Indian
       research facilities are either scarce or fully occupied
       with development related activities, such expansion might
       tend to divert Indian research resources from high-priority
       Indian programs."
    The Office of Management and Budget directed its remarks primarily to
    that part of the draft report dealing with budgeting for excess-
    currency-funded programs. (See p. 114.) It commented that:
       "We agree with the intent of your recommendation--to ensure
       that executive branch agencies can seek approval for well-
       documented excess currency-funded projects without regard to
       overall dollar ceilings. Office of Management and Budget
       Circular No. A-11 has been revised to clarify its long
       standing policy on this matter. The intent of this

                                    4
        provision is to encourage agencies to include in their budget
        submissions projects to be funded through the use of excess
        currencies, notwithstanding other limitations on agency bud-
        get totals. We do have some reservations, however, about your
        proposal for direct appropriations of foreign currency. ***"
         (See p. 47 for these reservations.)
      The Treasury Department also commented on the draft report. It's com-
      ments were classified and therefore were not included in this report.
      The comments were considered in preparing this final report and ap-
      propriate revisions were made.

MATTERS FOR CONSIDERATION BY THE CONGRESS

      GAO believes that the Congress may wish to favorably consider direct
      foreign currency appropriations as a useful vehicle for providing
      funds to using agencies for the many reasons cited in the report.
      (See pp. 45 to 48.) These appropriations would be additional to
      dollar and special foreign currency program appropriations.
      The Congress may wish to consider if (1)a reduction in the balance of
      U.S.-owned Indian rupees should be made to avoid the deterioration of
      U.S. relations with India, (2)actions by the executive branch in this
      regard are consistent with congressional desires, and (3)legislative
      action should be taken to restrict or facilitate the reduction in the
      balance of U.S.-owned rupees.
      The Congress may wish to consider specifically whether to provide au-
      thority for the President to use non-Public Law 480 excess currency for
      grants in India without appropriations, similar to the authority now ex-
      isting for Public Law 480 excess currency. (See p. 83.)




Tear Sheet

                                     5
                         Contents
                                                         Page

DIGEST                                                     1

CHAPTER

  1       INTRODUCTION                                    6

  2       U.S.-OWNED INDIAN CURRENCY: SOURCES AND
          PROSPECTS FOR FUTURE ACCUMULATIONS              8
              Sources of U.S.-owned Indian currency       8
              Public Law 480 foreign currencies           8
              Dollar loans repaid in foreign curren-
                cies                                      9
              Interest on deposits                        9
              Section 402 sales and loan repayments      10
              Prospects for future accumulations of
                U.S.-owned Indian rupees                 10

  3       PRINCIPAL ARGUMENTS FOR AND AGAINST USING
          U.S.-OWNED EXCESS FOREIGN CURRENCY             11
              Arguments for                              11
              Arguments against                          13

  4       APPROPRIATION CONTROLS OVER USE OF U.S.-
          OWNED FOREIGN CURRENCIES FOR U.S. USES         15

  5       USEFULNESS OF OBTAINING ADDITIONAL RUPEE
          FUNDING FOR U.S. PROGRAMS IN INDIA             18
              Conclusions                                25

  6       PROBLEM: AUTHORITY TO USE EXCESS FOREIGN
          CURRENCY IS REQUESTED IN THE FORM OF DOLLAR
          APPROPRIATIONS                                 26
              Conclusions                                42
              Recommendations                            45
              Matter for consideration of the Congress   48

  7       VALUING FOREIGN CURRENCY IN DOLLARS            50
              Agency comments                            61
              Conclusions                                61
              Recommendations to the Secretary of the
                Treasury                                 62
                                                          Page

CHAPTER

   8       THE QUESTION OF EXTENSIVE U.S.-OWNED RUPEE
           ACCUMULATIONS                                   63
               U.S. holdings                               64
               The political problem                       64
               The difficulty in solving the problem       69
               Economic development projects consid-
                 ered pursuant to the Mondale-Poage
                 amendment                                72
               The economics of foreign currency devel-
                 opment grants                            77
               Legislation authorizing the President to
                 seek an agreement with aid recipient
                 excess currency countries for the use
                 of non-Public Law 480 currencies         80
               Agency comments                            82
               Conclusion                                 82
               Matter for consideration by Congress       83

   9       OTHER EXCESS CURRENCY COUNTRIES                84
               Conclusions                                87
               Agency comments                            88

  10       OBSERVATIONS ON OTHER MATTERS CONNECTED WITH
           THE ACCRUAL, EXPENDITURE, AND CONVERSION OF
           EXCESS RUPEES                                  90
               Acceptance of manganese ore and ferro-
                 manganese in lieu of excess rupees for
                 commodity sales to India                 91
               AID trust fund in India                    93
               Conversions of rupees to convertible
                 currencies                               95
               Purchases of goods for use outside India   96

  11       SCOPE OF REVIEW                                98

APPENDIX

       I   Chart showing projected accumulation of U.S.-
             owned rupees available for U.S. obliga-
             tions in India to end of year 2008          101
                                                          Page

APPENDIX

      II   Developments and circumstances upon which
             the American Embassy has concluded that
             United States rupee holdings are becoming
             a political liability to the United States   102

  III      Letter dated August 4, 1970, from the De-
             partment of State                            110

      IV   Letter dated August 7, 1970, from the Agency
             for International Development                112

       V   Letter dated September 21, 1970 from the
             Office of Management and Budget              114

      VI   Principal officials responsible for the ac-
             tivities discussed in this report            119

PICTURE

           American Consulate General Building in Cal-
             cutta                                         22

                         ABBREVIATIONS

AID        Agency for International Development

GAO        General Accounting Office
COMPTROLLER GENERAL'S            OPPORTUNITIES FOR BETTER USE OF
REPORT TO THE CONGRESS           UNITED STATES-OWNED EXCESS FOREIGN CURRENCY
                                 IN INDIA
                                 Department of State
                                 Agency for International Development
                                 Department of the Treasury
                                 Office of Management and Budget B-146749

DIGEST

WHY THE REVIEW WAS MADE

    The United States has amassed large amounts of Indian rupees through the
    operation of its food and other assistance programs for India. At
    June 30, 1969, Indian rupees available for U.S. expenditure in India
    amounted to the equivalent of $678 million--enough to last 19 years at
    current rates of expenditure. U.S. holdings are expected to increase
    substantially in future years since repayments of principal and interest
    on loans over the next 40 years are expected to exceed present levels of
    U.S. expenditures by a ratio of about 3 to 1. (See chart, p. 101.)
    With few exceptions, U.S. rupee holdings can be used only in India, can-
    not be used to buy goods for export from India, and can be converted to
    other currencies only in relatively small amounts. Considering these
    restrictions, it appears highly unlikely that the United States will be
    able to convert more than a small portion of its total rupee holdings
    into real resources for its own use.
    GAO undertook the review to see if it would be practicable and benefi-
    cial to U.S. interest to make somewhat greater use of its rupee hold-
    ings. Such greater use has been recognized for many years by the execu-
    tive branch and the Congress as a desirable goal. (See p. 18.)

FINDINGS AND CONCLUSIONS

    OveraZZ conclusions

    Important political, economic, and legal factors limit the amount of
    U.S.-owned rupees that the United States can spend in India during any
    period. Even so, considerably greater amounts than are now being spent
    could be beneficially used within the limit. (See pp. 63 to 72.)
    Administrative difficulties within the U.S. Government have also acted to
    restrain the level of excess currency spending.

    The rupees are used for official agency expenses in India; personal ex-
    penses of American employees of the United States while they are in




                                    I
the country; official international transportation; payments to U.S. an-
nuitants resident in India; and sales to U.S. citizens, including busi-
nessmen and tourists.
The United States could use more of its rupees to acquire or replace of-
fice and residential facilities in India, expand distribution of a U.S.
Information Agency publication in India, increase local travel for offi-
cial purposes, and expand the educational exchange program. These are
only a few of the many opportunities that exist. (See pp. 19, 24
and 25.)
The limits on U.S. rupee expenditures make it important to establish pri-
orities for proposed uses of rupees, even though the amounts of U.S.-
owned rupees seem almost limitless. It is important that justifications
for specific uses continue to be subjected to careful scrutiny by the ex-
ecutive branch and by the Congress. (See pp. 20 and 25.)
Administrative barrier to greater use

The form in which authority to use excess currencies is given appears to
be an important administrative barrier to greater use of the rupees.
Agencies must obtain dollar appropriations to use excess currencies.
(They then buy the currencies from the Treasury Department.) In some
cases, the executive branch has not sought congressional approval for
dollar appropriations to buy all the excess currencies that could be used
productively for Government programs and activities abroad. One reason
is that the budgetary system has pitted excess-currency-funded programs
against regular dollar-funded programs. As a result, excess currency pro-
grams with a low priority have been dropped by the wayside even though
they would have been virtually costless to the United States. (See pp. 26-
and 27.)
The executive branch has tried to encourage greater use of excess cur-
rencies by requesting authority to use the currencies without having to
obtain dollar appropriations. Those attempts were not successful because
amounts sought from the Congress were not supported with detailed justi-
fications for proposed uses (for fiscal year 1966) and because the exe-
cutive branch sought direct foreign currency authorizations (for fiscal
year 1967)--a form of authority to use excess currencies that apparently
was not acceptable to the Congress. (See pp. 34 to 36.)
Greater use of foreign currencies could be realized if the executive
branch would seek--and the Congress would provide--funds for well-
documented excess currency projects without regard to agency dollar ceil-
ings. Another way of increasing the use of excess currencies would be
through direct foreign currency appropriations. (See pp. 42 to 49.)
The executive branch has authority to use some of its rupees for certain
purposes, including economic development grants, without appropriation.
Those rupees are derived from Public Law 480 food sales programs and are
generally known as Public Law 480 currencies. The executive branch does

                               2
   not have similar authority to use other excess rupees that are accumulat-
   ing rapidly. (See pp. 70 and 71.)
   VaZuation of foreign currency
   Valuing U.S.-owned excess currencies at fixed official exchange rates
   when selling currencies to U.S. agencies is not always useful and dis-
   courages greater use of the currencies. The agencies, in budgetary and
   expenditure decisions, seek the greatest amount of goods and services
   for their appropriated funds and will forego purchase of excess cur-
   rencies if use of an official exchange rate results in a disproportion-
   ately high outlay of their dollar appropriations. Current regulations
   provide for some flexibility in exchange rates; however, GAO believes
   that the regulations do not go far enough and that the agencies do not
   always attempt to use the leeway permitted by the regulations. (See
   p. 50.)
   Possible use of rupees

   Although GAO believes that the United States can spend more Indian
   rupees if these obstacles are removed, it is unlikely that the amounts
   spent would be large enough to make a dent in the balance on hand and
   due in the future. According to U.S. officials, the growing balances
   of U.S.-owned rupees are a political liability to the United States in
   its relations with India, and those officials believe it would be judi-
   cious for the United States to grant large amounts to India for economic
   development purposes. (See p. 63.)
    Questions concerning whether to make grants, and in what amounts and for
    what purposes they should be made, are matters of policy not within GAO's
    purview. GAO believes, however, that the executive branch's concern
    over the increase of U.S.-owned-rupee balances and its efforts to re-
    duce them are deserving of congressional interest. GAO believes that
    effective measures to reduce the balances would require action on the
    part of the Congress.
    GAO's observations on other matters connected with the accrual, expendi-
    ture, and conversion of excess U.S.-owned rupees are included in chap-
    ter 10. (See p. 90.)

RECOMMENDATIONS OR SUGGESTIONS

    The Office of Management and Budget should
      --ensure that executive branch agencies can seek approval for well-
        documented excess-currency-funded projects without regard to over-
        all dollar ceilings for the agencies (see p. 45) and
      --explore with appropriate committees of the Congress the acceptabil-
        ity of direct appropriations of foreign currency (see p. 47).


                                   3
    The Secretary of the Treasury should establish more flexible procedures
    for valuing U.S.-owned Indian rupees in dollars in making sales to U.S.
    agencies to maximize the constructive use of the funds for U.S. programs
    in India without, at the same time, compromising congressional control
    over use of the funds. In essence, this would give U.S. agencies more
    rupees for the same amount of dollars and, all other things being equal,
    would encourage greater use of the rupees. (See p. 62.)

AGENCY ACTIONS AND UNRESOLVED ISSUES

   The Department of State noted that effective use of the rupees was a
   matter of great and increasing urgency and agreed generally with GAO's
   recommendations. (See p. 110.) It also commented:
      "Illustrative of the Department's considerable concern over
      the increasing levels of U.S.-owned Indian rupees, Secretary
      Rogers has instituted a Departmental study, headed by an
      eminent economist, to review the problems and to develop ap-
      propriate, specific solutions. We anticipate that this proj-
      ect will effectively complement the GAO report."

   The Agency for International Development agreed with the recommendations
   contained in the draft report, with the following specific reservations:
      "We believe, and the report demonstrates, that expanded use of
      our excess currency in India could and would be in the interest
      of both the United States and India. At the same time, however,
      we would like to note that any marked revision or expansion of
      our programs for excess currency utilization would have to take
      fully into account both any potential adverse economic effects
      which would run contrary to A.I.D.'s development objectives,
      and any Government of India sensitivities as to the political
      or economic impact of such utilization.
      "In a related sense, it could be noted that one potentially
      limiting factor in the expansion of U.S. research programs
      in India is the possibility that, in areas in which Indian
      research facilities are either scarce or fully occupied
      with development related activities, such expansion might
      tend to divert Indian research resources from high-priority
      Indian programs."
   The Office of Management and Budget directed its remarks primarily to
   that part of the draft report dealing with budgeting for excess-
   currency-funded programs. (See p. 114.) It commented that:
      "We agree with the intent of your recommendation--to ensure
      that executive branch agencies can seek approval for well-
      documented excess currency-funded projects without regard to
      overall dollar ceilings. Office of Management and Budget
      Circular No. A-11 has been revised to clarify its long
      standing policy on this matter. The intent of this

                                   4
       provision is to encourage agencies to include in their budget
       submissions projects to be funded through the use of excess
       currencies, notwithstanding other limitations on agency bud-
       get totals. We do have some reservations, however, about your
       proposal for direct appropriations of foreign currency. ***"
       (See p. 47 for these reservations.)
     The Treasury Department also commented on the draft report. It's com-
     ments were classified and therefore were not included in this report.
     The comments were considered in preparing this final report and ap-
     propriate revisions were made.

MATTERS FOR CONSIDERATION BY THE CONGRESS

     GAO believes that the Congress may wish to favorably consider direct
     foreign currency appropriations as a useful vehicle for providing
     funds to using agencies for the many reasons cited in the report.
     (See pp. 45 to 48.) These appropriations would be additional to
     dollar and special foreign currency program appropriations.
     The Congress may wish to consider if (1)a reduction in the balance of
     U.S.-owned Indian rupees should be made to avoid the deterioration of
     U.S. relations with India, (2)actions by the executive branch in this
     regard are consistent with congressional desires, and (3) legislative
     action should be taken to restrict or facilitate the reduction in the
     balance of U.S.-owned rupees.
     The Congress may wish to consider specifically whether to provide au-
     thority for the President to use non-Public Law 480 excess currency for
     grants in India without appropriations, similar to the authority now ex-
     isting for Public Law 480 excess currency. (See p. 83.)




                                    5
                         CHAPTER 1

                       INTRODUCTION

     To help India achieve its objectives of economic growth
and stable democratic political institutions, the United
States has provided economic assistance on a massive scale.
U.S. assistance helps India mobilize its skills and re-
sources for more rapid development and helps to provide a
critical margin of imports and technical aid needed to com-
plement India's own effort.

     The United States has accumulated large amounts of In-
dian currency through the operations of certain of its eco-
nomic assistance and food aid programs to India. At June 30,
1969, Indian currency owned by the United States and avail-
able for the payment of U.S. obligations in India amounted
to the equivalent of approximately $678 million at the offi-
cial exchange rate of 7.5 Indian rupees to 1 U.S. dollar. 1
Loans repayable in foreign.currency amounted to the equiva-
lent of $2.3 billion at June 30, 1969.

     The amount of U.S.-owned currency in India is growing
rapidly because receipts exceed expenditures by substantial
amounts. Expenditures in future years are expected to be
the equivalent of about $53 million annually. Receipts from
loan repayments and interest earnings on bank deposits are
expected to amount to the equivalent of about $115 million
to $150 million annually until about the year 2008, at which
time all repayments on currently outstanding loans will have
been made. Even at that time, the U.S. balances are proj-
ected to be so large that annual interest earnings alone
would equal annual U.S. expenditures.

     There are important limitations on the use of the cur-
rency by the United States in India. U.S.-owned Indian


1 Thisreport does not comment on Indian rupees, generated un-
der the U.S. aid program, which are owned by the Indian Gov-
ernment. See the scope section on page 98.



                             6
currency is usable under Indian law and regulations only
for limited purposes and in limited amounts. Furthermore,
the currency is generally inconvertible (except in rela-
tively small amounts) and thus cannot be used outside India.

     Certain foreign currency loan agreements state that re-
payments and interest may be used for any U.S. expenditure
or payment in India as long as the U.S. Government takes
into account the economic position of India. Even where
such a requirement does not cover other foreign currency
holdings, it would be unlikely that U.S. administrators
would use U.S.-owned Indian rupees in a way that would seri-
ously undermine.India's economic position since that would
be counterproductive of the effects sought in our economic
assistance and food aid programs to India.

     U.S.-owned Indian rupees can be used to buy and export
some categories of Indian manufactures or material under
certain circumstances; however, successive U.S. administra-
tions have ruled out any substantial purchases of commod-
ities traditionally exported by India because of the ad-
verse effects such purchases would have on India's ordinary
export sales and foreign exchange earnings.

     GAO made a review of the management of U.S.-owned In-
dian currency for two reasons. First, we sought to deter-
mine whether U.S. programs could effectively use additional
rupee funding since large amounts of U.S.-owned Indian cur-
rency continue to accumulate in India. Secondly, the mag-
nitude of U.S. holdings, coupled with the prospects for fu-
ture accumulations of Indian currency, constitute an impor-
tant issue in U.S. and Indian relations.

     This report is submitted to the Congress because (1) we
believe that greater use can be made of excess foreign cur-
rencies in India for programs or activities of benefit to
the United States and (2) we believe the problems arising
from large U.S. holdings of Indian currency are deserving
of congressional interest and will require action by the
Congress for solution.

      The scope of our review is shown on page 98. The
principal officials responsible for the activities dis-
cussed in this report are shown in appendix VI.

                             7
                         CHAPTER 2

                U.S.-OWNED INDIAN CURRENCY:

      SOURCES AND PROSPECTS FOR FUTURE ACCUMULATIONS

SOURCES OF U.S.-OWNED INDIAN CURRENCY

     Prior to World War II, U.S.-owned foreign currency,
other than that purchased with dollars, was acquired pri-
marily through collections of consular fees and other rel-
atively small items and was used to defray U.S. operating
expenses payable in local currencies, principally those of
the Department of State. Following the war, substantial
amounts of foreign currencies were collected from lend-lease
settlements, counterpart deposits under foreign assistance
programs, and other Government activities abroad.

PUBLIC LAW 480 FOREIGN CURRENCIES

     Title I of the Agricultural Trade Development and As-
sistance Act of 1954 ( Public Law 480, 83d Cong., S. 2475,
68 Stat. 454, July 10, 1954, as amended) provided for the
sale of U.S. agricultural commodities abroad for foreign
currencies. As the result of this legislation, commonly
known as Public Law 480, the United States has received
large amounts of foreign currencies.  In India, which has
been the largest recipient of U.S. agricultural commodities
under title I of Public Law 480, the United States has re-
ceived vast amounts of Indian rupees.

     The first title I agreement was signed with India on
August 29, 1956. Since then, nine additional agreements
and 31 supplemental agreements were signed through June 30,
1968. Cumulative collections from these agreements though
June 30, 1969, amounted to a dollar equivalent of about
$3.9 billion.

     Rupees received by the United States from the Govern-
ment of India under Public Law 480 are classified as
country-use and United States-use. Within statutory limi-
tations, the percentage of the total proceeds allocated to
each use is a matter of agreement between the United States
and India.

                             8
     Country-use rupees, which have amounted to about 87
percent of the total, are those available for grants for
economic development and welfare and for loans to both pri-
vate enterprise and the Government of India. The remaining
13 percent of the rupee sales proceeds, plus interest and
repayments on country-use loans, are for official U.S. uses
including expenditures by U.S. agencies in India for pay-
ments of U.S. obligations, U.S. educational exchange pro-
grams, and agricultural market development programs. An
agreed-upon portion of the currencies available for U.S.
uses may be converted to dollars or other hard currencies
for the tourist sales program in India and the educational
exchange and market development programs outside of India.

     Payments of principal and interest by the Government
of India on Public Law 480 loans amounted to the equivalent
of about $206 million as of June 30, 1969. Loans outstand-
ing at that time amounted to the equivalent of about
$1.9 billion.

DOLLAR LOANS REPAID IN FOREIGN CURRENCIES

     The Development Loan Fund, established by the Mutual
Security Act of 1957, was authorized to make dollar loans
repayable in foreign currency.

     The Foreign Assistance Act of 1961 abolished this Fund
and provided that development loans made in dollars there-
after be repayable, both interest and principal, in U.S.
dollars.

      Through June 30, 1969, the United States had received
approximately $331 million in Indian rupees in interest
payments and principal repayments on the dollar loans that
were repayable in foreign currency under the 1957 act.
Loans outstanding at June 30, 1969, amounted to $289.5 mil-
lion.

INTEREST ON DEPOSITS

     Cumulative interest earned on bank deposits through
June 30, 1969, amounted to a dollar equivalent of about
$164 million.


                             9
SECTION 402 SALES AND LOAN REPAYMENTS

     Section 402 of the Mutual Security Act of 1954 (Public
Law 665, 83d Cong.), provided for the sale of surplus agri-
cultural commodities for foreign currencies. Section 402
also provided for the use of foreign currency sale proceeds
for several purposes, including loans within the countries
purchasing the commodities. Through June 30, 1969, the
equivalent of approximately $118 million had been collected
from this source. At that time, about $138.3 million in
loans remained outstanding.

PROSPECTS FOR FUTURE ACCUMULATIONS
OF U.S.-OWNED INDIAN RUPEES

     The United States continues to enter into Public Law
480 agreements with India under which the United States
sells agricultural commodities and for which payment is
made partially in rupees. This program, however, is being
phased out, and no new agreements for payment in rupees are
expected to be entered into after December 31, 1971. Ex-
cept for this, we are not aware of any new U.S. programs
for India that would result in the United States' accumu-
lating additional rupees.

     Public Law 480 agreements to be entered into with In-
dia after December 31, 1971, are expected to provide for
payment in dollars. However, a provision in the agreements
will permit the United States to accept partial payment, at
its option, in local currency rather than dollars if it
should require local currency. Similar arrangements cur-
rently exist on varying portions of payments due under Pub-
lic Law 480 sales agreements entered into with India subse-
quent to January 1, 1967.

     Rupee payment of interest and principal on existing
loans, together with earnings on bank deposits, are expected
to exceed U.S. requirements for rupees to such a degree
that current U.S.-owned Indian rupee holdings are projected
to grow to the equivalent of about $3.5 billion by the year
2008. Interest earnings on Public Law 480 and non-Public
Law 480 rupee bank deposits are credited to the non-Public
Law 480 account. A projection of U.S.-owned rupees is
shown in appendix I.

                            10
                            CHAPTER 3

               PRINCIPAL ARGUMENTS FOR AND AGAINST

            USING U.S.-OWNED EXCESS FOREIGN CURRENCY

     The expenditure of excess-rupees for U.S. purposes, as
well as for grants to India for economic development pur-
poses, has obvious advantages to the United States, as well
as drawbacks.

     Many arguments for and against increased uses of excess
currency have been advanced over the years--and these argu-
ments generally are well known. It is evident that virtu-
ally any proposed use of excess currency has its pros and
cons which must be carefully weighed in arriving at deci-
sions as to the optimum levels of currency to be spent and
the programs or activities on which to spend it. In numer-
ous hearings, the executive branch and the Congress have
recognized the need to steer a middle course between the
legitimate need that the U.S. make effective use of its
holdings and gain financially from them and the potential
harm that indiscriminate expenditure of excess currencies
might do to U.S. foreign policy and economic development ob-
jectives.

     We have listed below the principal arguments for and
against increased U.S. use of its rupee holdings. We have
made no attempt to rank these arguments in order of priority
or importance.

ARGUMENTS FOR

     -- The United States saves dollars to the extent that it
        uses its rupees for official U.S. travel to and from
        India and obtains goods and services in India which
        it otherwise would obtain with dollars; e.g. office
        supplies and equipment, residential and office build-
        ings and furnishings, and clerical and professional
        services.

     --U.S. programs and activities in India are benefitted
       when U.S.-owned rupees are used in their furtherance
       even though the need satisfied isn't necessarily of
  such high priority as to justify the use of dollars
  if excess currencies were not available.

-- To the extent that excess rupees derived from Public
   Law 480 programs are used in lieu of dollarexpendi-
   tures abroad, dollars flow back to the Commodity
   Credit Corporation in payment for agricultural com-
   modities they provide and this reduces the Corpora-
   tion's appropriation request. Use of rupees derived
   from both Public Law 480 and non-Public Law 480 pro-
   grams in lieu of dollar expenditures abroad, in addi-
   tion to reducing the overall U.S. budget, reduces
   the amount of money the United States must borrow to
   meet its obligations and, thus, the amount of inter-
   est it must pay on the national debt.

-- The sale of U.S.-owned excess rupees in India for
   dollars to U.S. Government employees in India, U.S.
   citizens and tourists, U.S. business organizations,
   and U.S. charitable organizations directly benefits
   the U.S. balance-of-payments position by reducing
   dollar expenditures abroad.

-- The conversion of Indian rupees to hard foreign cur-
   rencies (such as French francs and German marks) for
   use in agricultural development programs abroad helps
   increase American export markets for agricultural
   products without adversely affecting our nation's
   balance-of-payments position. In fact, such conver-
   sions should be helpful in this respect.

-- The current use of rupees avoids potential future
   valuation losses through inflation and devaluation.
   Inflationary losses in India rupees have amounted to
   the equivalent of over $500 million.

--To the extent that U.S.-owned rupees can be construc-
  tively used, the political problems inherent in the
  ownership of large amounts of one country's currency
  by another country are avoided. (This problem is
  discussed in ch. 8.)




                        12
ARGUMENTS AGAINST

     -- If rupee funds are used today for lower pribrity re-
        quirements, they will not be available for higher
        priority future needs that will require dollar fund-
        ing.

     -- Lower priority programs started because of the avail-
        ability of excess currencies sometimes are perpetu-
        ated with dollars after U.S. holdings of excess
        currencies are exhausted. For example, the purchase
        of real property, the employment of additional for-
        eign nationals or any other program augmentation
        today with excess currency could establish a contin-
        uing need for resources that might require dollar
        funding when excess currencies are exhausted.

     --The use of U.S.-owned Indian rupees for procurement
       transfers Indian goods and services to U.S. activi-
       ties in India. These goods and services are needed
       more urgently for India and Indians.

     -- To the extent that U.S.-owned rupees are converted
        to dollars or other hard currencies, Indian foreign
        exchange reserves, already insufficient, are reduced.

     -- Increased usage of excess rupees could result in in-
        creased expenditures of U.S. dollars for associated
        costs. For example, justification for the use Of
        excess currencies for erecting a building could be
       accompanied by' an 4'stimatea   dollar cost for U.S.
       architectural services-zi6r building design. (This
       would be an important consideration only when the
       program or activity to be funded with excess cur-
       rencies is of low priority and/or associated dollar
       costs are relatively high.)

     -- Loans or grants of excess currencies to India do not
        provide India with additional real resources but in-
        stead pose a danger of inflation or invite charges
        that the United States is seeking to influence or
        control the use of India's resources or aspects of
        Indian society.


                              13
     --The use of excess rupees in a manner that detracts
       from India's exports or foreign exchange could
       create a need for additional assistance since our
       aid program is designed to assist in bridging the
       gap between India's foreign exchange exports and
       imports. Even if more aid were not extended, India's
       development effort could be hampered and the eco-
       nomic and foreign policy objectives of our aid pro-
       grams could be weakened.

     A number of the points outlined above are discussed in
greater detail in the following chapters of this report.




                            14
                          CHAPTER 4


           APPROPRIATION CONTROLS OVER USE OF

       U.S.-OWNED FOREIGN CURRENCIES FOR U.S. USES

     A large part of U.S.-owned foreign currencies for U.S.
uses were not subject to accounting control, reporting, or
audit procedures until July 1952, when the Congress enacted
section 1415 of the Supplemental Appropriation Act of 1953.
This section prohibited the use of foreign currencies for
U.S. uses except as provided for annually in appropriation
acts.

     With the advent of the Agricultural Trade Development
and Assistance Act of 1954 (Public Law 480) increasing
amounts of local currencies were generated which were
largely exempt from the provisions of section 1415. There
developed a tendency both in the Congress and the executive
branch to consider Public Law 480 currencies freely avail-
able for existing or new programs.

     After extensive study in the executive branch, it was-
decided in 1960 to recommend a system of management over
foreign currencies for U.S. uses that could be effective
without having to change the many provisions of the law then
existing. The primary objectives in the management of the
foreign currencies were, first, to obtain the maximum utili-
zation of foreign currencies as a substitute for U.S. dollar
expenditures and, second, to treat the currencies as a real
fiscal asset to be expended for programs as approved by the
Congress on the basis of annual budgetary review.

     The system   of management and control that was decided
on was put into   effect on July 1, 1960. It required that
the utilization   of amounts set aside for U.S. uses be con-
trolled through   the appropriation process.

     The management system provided for the submission of
appropriation estimates for special foreign currency pro-
grams being financed with foreign currencies which were




                               15
excessl to the normal requirements of the United States. It
was expected that such programs would be justifiable for
inclusion in the agency's regular dollar budget but of lower
priority than projects included in the regular appropriation
estimates. The special foreign currency program requests
are denominated in U.S. dollars rather than in units of
foreign currency.

     Dollars appropriated for special foreign currency pro-
grams are used to purchase the foreign currency from the
Treasury Department. If the foreign currency was derived
from the Public Law 480 program, the dollars are credited to
the Commodity Credit Corporation, Department of Agriculture.
These dollar credits enable the Corporation to seek lower
appropriations from the Congress for carrying on its pro-
grams including the Public Law 480 program. In India, spe-
cial foreign currency programs are funded with Public Law
480 foreign currencies.

     Although the system of management and control is admin-
istratively applied to all U.S. agency programs, appropria-
tions are not required for a few authorizations under
Public Law 480. The amounts to be made available for these
excepted purposes are subject to determination by the Direc-
tor of the Office of Management and Budget, under delegation
of authority by the President. In addition, section 614(a)
of the Foreign Assistance Act of 1961 authorizes the use of
foreign currencies (not to exceed $100 million) for the for-
eign assistance program, when the President determines that
such use is important to the security of the United States.

     In 1966 legislation was passed that provided a partial
exemption from the provisions of section 1415, and from cer-
tain other limitations in the law, when excess currencies
were to be used for the purposes stated in section 104 of



 Excess currencies are U.S. foreign currency balances that
 exceed in amount normal U.S. requirements in a given coun-
 try for a period of 2 to 3 years or more. The Treasury
 Department decides whether or not U.S. balances are excess.
 India was declared an excess currency country in 1961.


                              16
Public Law 480. This legislation, frequently referred to
as the Mondale-Poage amendment, appears as the last proviso
of section 104. It specifically encourages the use of the
authority for acquiring sites, buildings, and grounds for
the use of the United States and for assisting countries to
increase their production of agricultural commodities and
their facilities for storage and distribution of such com-
modities.

     On the other hand, the act appropriating funds for the
State Department for fiscal year 1961, and each annual State
Department appropriation act thereafter, provided that no
part of any appropriation contained therein be used to ad-
minister any program which was funded, in whole or in part,
from foreign currencies or credits for which a specific
dollar appropriation therefor had not been made. The appro-
priation act provided funds also for the Departments of Jus-
tice and Commerce, the Judiciary, and related agencies (in-
cluding the U.S. Information Agency).

     The Mondale-Poage amendment has been interpreted as ap-
plying to any use of excess foreign currencies authorized
by section 104 of Public Law 480, as amended, except those
authorized in 104 (a) and 104 (b), and subject to the prior-
ities specifically stated in the amendment and to the limi-
tations stated in other laws. Thus, legislative authority
now exists for the use of Public Law 480 excess foreign
currencies for certain purposes without appropriation. The
State Department, however, is unable to use such currencies
in its programs in view of the restrictive language in its
annual appropriation acts referred to above. The other
agencies included in the appropriation act are also limited
in the same way. The Agency for International Development
is not similarly restricted since its funds are appropriated
under different acts.




                             17
                        CHAPTER 5

         USEFULNESS OF OBTAINING ADDITIONAL RUPEE

            FUNDING FOR U.S. PROGRAMS IN INDIA

    U.S. programs in India could be benefited if adminis-
tering agencies had authority to spend more U.S.-owned ex-
cess rupees. Potential benefits and problems of increasing
the usage of excess foreign currencies have been debated by
the executive branch and the Congress a number of times
over the years. There have been two comprehensive hearings
held on this subject.

    In November 1963 the Foreign Operations and Government
Information Subcommittee of the House Committee on Govern-
ment Operations held hearings on U.S.-owned foreign curren-
cies. The Chairman of the Subcommittee commented at the
outset that the hearings would cover the use of the U.S.-
owned foreign currencies in India and in other foreign
countries where balances of foreign currencies were excess
to expected U.S. needs in future years. He also stated
that he hoped the Subcommittee could determine whether more
extensive use could be made of these U.S.-owned foreign
currencies.

    The hearings included expert testimony from a wide vari-
ety of witnesses, and a number of issues were explored and
developed in depth. Among the significant issues were
(1) the inflationary effect of spending U.S.-owned currency,
(2) the desirability of buying items in the excess currency
country for export to the United States or a third country,
and (3) the problem caused by the need to request authority,
in the form of dollar appropriations, to spend excess cur-
rencies.

    In its report on the hearings (H. Rept. 199, March 22,
1965), the Committee on Government Operations identified
several ways in which excess foreign currencies might be
used in the future. The Committee recommended that the
executive branch prepare plans and request appropriations
for necessary and constructive programs to be financed by
U.S.-owned foreign currencies where such expenditures would


                             18
advance the foreign policy interests of the United States
without causing undue inflation in the country being aided
and without significantly subtracting from that country's
foreign exchange.

    Hearings on the use of excess foreign currencies were
held between July and October 1965 by the Subcommittee on
Foreign Economic Policy of the House Committee on Foreign
Affairs. As noted by the chairman of the Subcommittee at
the outset, the hearings were held to explore ways of ef-
fectively using excess foreign currencies in the interest
of the United States and for the benefit of the people of
the countries where the balances were held.

    As was true in regard to the prior hearings, much expert
testimony was obtained, and the significant issues again
were explored and developed in depth.

    The U.S. Ambassador to India has proposed many ways to
use more U.S.-owned rupees for U.S. programs and activities
in India. In 1965 over 20 types of uses were proposed and
were estimated to cost the equivalent of about $84 million
in rupees over a 3-year period. In some instances the ex-
panded use of rupees would have required a nominal amount
of associated dollar costs. The dollar costs associated
with the use of the additional $84 million in rupees was
estimated to amount to only about $3 million.

    Some uses would not have required associated dollar
costs. These included (1) increased official travel within
India, (2) English-language training, (3) expanded publica-
tion in India of American college-level textbooks, (4) in-
creased support to the U.S. Educational Foundation in India,
(5) grants to schools and hospitals, and (6) research.
Other proposed uses would have required associated dollar
costs. Theseuses included (1) acquisition of office and
residential real properties, (2) expanded circulation in
India of American oriented and published magazines or peri-
odicals, and (3) purchase of residential furniture and
equipment for the Embassy and consulates,.

    Little of consequence ever developed from these pro-
posals for a variety of reasons (although the Office of Man-
agement and Budget advised us in September 1970 that a

                             19
program has been started for an expanded publication in
India of American college-level textbooks). As will be
noted in chapter 6, the executive branch asked the Congress
for increased foreign currency authorizations for fiscal
year 1966, without any details as to how the currencies
were to be used; and the Congress denied the request. The
executive branch again asked the Congress for increased
foreign currency authorizations for fiscal year 1967, with
supporting justifications; but the Congress denied this re-
quest, apparently on the grounds that it was sought in the
form of authorizations rather than appropriations.

    During 1969 the U.S. Ambassador to India again identi-
fied U.S. programs and activities that, he felt, could be
benefited through increased expenditures of U.S.-owned
rupees. He submitted to the Department of State a listing
of proposed uses totaling the equivalent of many millions
of dollars in rupee equivalents over a 3-year period. In
only a few cases were associated dollar costs involved.

    An Embassy official stated that the Embassy had listed
in its submission only those items which it believed were
the most beneficial to the United States, were of the high-
est priority, and were the most likely to be accepted by
both the Department of State and the Government of India.
The submission also pointed out that many desirable propos-
als were excluded because it was apparent to Embassy of-
ficials that an unreasonable increase in annual expenditures
of U.S. use rupees would cause inflation and could not be
tolerated by the Government of India. He advised us, how-
ever, that the Government of India had not set a limitation
on the amount of rupees the United States could use and
that the Embassy had not attempted to get the Government's
viewpoint as to the maximum amounts of rupee expenditures it
would consider reasonable.

    This is important in that potential additional uses of
rupees in India by the United States exceed in amount what
is considered by the Embassy to be reasonable and prudent
from an economic viewpoint. The significant question, then,



1Exact amount is classified information.

                             20
is not whether we can increase our use of rupees in India,
but rather by how much and on what activities and programs
within the limits established.

    We reviewed certain proposed uses at the Embassy in
New Delhi and other places in India, as appropriate. We
agree with the Embassy that there are additional require-
ments for U.S. programs in India which might be worth funding
with U.S.-owned rupees. To mention just one possible use--
there is need for a new consulate building in Calcutta.
After some delays, funds for constructing this facility have
been included in the Departments' fiscal year 1971 budget.

    In a letter to the Department of State recommending con-
struction of a new consulate building in Calcutta, an Em-
bassy official on January 23, 1969; stated that the existing
building was (1) located on a narrow, one-way thoroughfare
with no parking space, (2) isolated from the mainstream,
and (3) not suitable for a consular building in a metropolis
like Calcutta. He also described the U.S. Information Ser-
vice buildingsas rabbit warrens (partitioned into numerous
cubicles) in which operations were difficult.

    An official of the Embassy further advised the Depart-
ment as follows:

    "The land acquisition, the architectural fees and
    at least 75% of the construction costs will be a
    total rupee expenditure. Building commodities
    have become increasingly available in India over
    the past few years and it is possible that the
    75% rupee figure could be even larger. All of us
    appreciate the difficulties encountered in obtain-
    ing excess U.S.-owned rupee appropriations for
    general and program expenditures; however, we feel
    that this project is of sufficient urgency to sat-
    isfy the basic needs of the USG [United States Gov-
    ernment] in Calcutta that it justifies a concerted
    effort to obtain a special rupee appropriation for
    this purpose. It is a perfect way for the USG to
    benefit directly from our PL-480 expenditures. To
    my knowledge the USG has never lost a dollar in
    land or building acquisitions and this one involves
    excess rupees."

                            21
             FRONT VIEW OF CONSULATE BUILDING, CALCUTTA, INDIA




      REAR VIEW OF AND ENTRANCE TO CONSULATE BUILDING, CALCUTTA, INDIA
Photos furnished by State Department

                                       22
     An official of the Department of State responded on
February 26, 1969, by stating that it would not be possible
to construct the building at this time. He advised that:

    "I find no one who disagrees that a new office
    building would be desirable for Calcutta. How-
    ever, the likelihood of forward movement in a
    time-frame that would relieve USIA [U.S. Infor-
    mation Agency] leasing and other problems is re-
    mote. ***

     "As you know, FBO [Foreign Buildings Operations]
     must obtain authority for acquisition, construc-
     tion or capital improvements from a Sub-Committee
     of the Foreign Affairs Committee and then obtain
     funds from the Appropriations 'Committee of the
     Congress. In the past, the Department has perhaps
     not been as meticulous as the Chairman of the Com-
     mittee feels that it should have been in proceed-
     ing with capital projects within specific authori-
     zation by the Committee. The pressures that have
     been brought to bear have resulted in a firm pol-
     icy enunciated by Under Secretary Rimestad, viz:
     There will be no project started until the author-
     ization has been obtained from Congress, even
     though funds might become available by some other
     method, such as proceeds of sale. On top of these
     instructions, the President froze new construction
     (with few exceptions) and reduced obligating au-
     thority in FY 1968. A similar situation, but
     based on the Administration economy measures,
     prevails in FY 1969. As a result, no funds are
     available for new construction or capital improve-
     ments during these years.

     "A new office building for Calcutta has not been
     authorized. Funds have not been requested and
     are presently not available. Consequently, the
     best that can be done is to request FBO [Foreign
     Buildings Operations] to include the project in
     its next budget submission. This we have done.
     In practical terms, however, this means that a
     new building for Calcutta is some years down the


                             23
     road. Consequently, to be realistic, planning at
     the post should be based on this situation."

     We visited and inspected the consulate building and
the two U.S. Information Service buildings in Calcutta and
found them to be substantially as described in the letter
dated January 23, 1969.  In fact, we found that, subsequent
to the demolition of part of the building, there were no
toilet facilities in the portion remaining. Consequently,
all U.S. personnel working in that building (including the
consul general) were required to use the facilities attached
to the exterior of an adjacent building.

     We also inspected other governments' consulate build-
ings in Calcutta and found them to be generally better.
Discussions with representatives of those governments indi-
cated that they also were attempting to secure better ac-
commodations.

     With regard to the type of funding required, we were
advised by consulate officials and the Foreign Buildings
Operations representative in India that construction of a
new consulate building could be financed completely with
rupees. However, the Foreign Buildings Operations repre-
sentative also stated that the costs of construction would
be somewhat higher in India because of the higher costs
of first-quality items.

     We were advised by the State Department in August 1970
that the Department expected to commence construction of a
new building in Calcutta before June 30, 1971.

     In addition to the need for a better consulate build-
ing in Calcutta described above, other programs in India
which the Embassy believes would benefit from increased
foreign currency expenditures include:

    -- Residential dwellings in New Delhi. As of January
       1969, families of about 238 American Government em-
       ployees were living in leased housing even though
       Embassy officials generally believed that Government-
       owned housing would better fulfill the needs of the
       Embassy.



                            24
     -- Promotion of U.S. exports.

     -- Expanded circulation of the most influential U.S. In-
        formation Service publication.

     -- English-language training.

     -- The stockpiling of emergency relief supplies.

     -- Increased official travel within India for State De-
        partment and U.S. Information Service employees.

     The increased uses for foreign currencies proposed above
are similar in nature to those which have been identified as
possibilities by the Embassy and by congressional committees
for many years.

CONCLUSIONS

     1. The problems and issues involved in using excess cur-
rencies in India and elsewhere have been thoroughly identi-
fied and debated by the executive branch and the Congress.

     2. In the Embassy's opinion, there are many more possi-
bilities for increased U.S. uses of rupees in India than
can be expended without adversely affecting the Indian econ-
omy.

     3. The United States should make more effective use of
its rupees in India. Congressional authority and appropri-
ations should be sought, as required, in order that addi-
tional funds could be used for its activities and programs
when such increased usage will not place an undue strain on
the Indian economy. Programs funded and carried out to date
have not reached the upper limit that the Embassy considers
economically prudent.

     4. Despite the fact that the United States owns what
seems to be a virtually unlimited amount of rupees, the eco-
nomic constraints on the use of rupees make it important
that the executive branch continue to rank proposed addi-
tional uses in order of priority.



                              25
                          CHAPTER 6

    PROBLEM:   AUTHORITY TO USE EXCESS FOREIGN CURRENCY

     IS REQUESTED IN THE FORM OF DOLLAR APPROPRIATIONS

     At the same time that the United States Government
owns immense sums of Indian rupees, some of its programs in
India have not received all the rupees that could be used
effectively.

     There is substantial evidence that some of the execu-
tive branch departments and agencies have not asked the Con-
gress for all the special foreign currency dollar appropri-
ations that they believe they could use productively. Rea-
sons for this vary from agency to agency and from time to
time and are difficult to pinpoint. However, it is clear
that one important reason is the requirement that agencies
obtain authority to spend rupees in the form of dollar ap-
propriations, rather than in the form of rupee appropria-
tions.

     Conceptually, there would seem to be no valid reason
why the special foreign currency appropriations program
should be an impediment to the optimum use of excess for-
eign currencies. Executive branch officials conversant
with the program apparently are aware that dollars appropri-
ated to buy excess currencies from the Treasury do not af-
fect the overall level of Government dollar expenditures
and therefore should not be in competition with regular
dollar-funded programs.

     Nevertheless, in some cases the use of excess U.S.-
owned foreign currencies has been placed in direct competi-
tion with the use of regular dollar-funded programs. The
result has been that programs or projects which could have
been funded with excess currencies at little or no real
cost to the United States have been dropped because the




                             26
alternative would have been to drop higher priority regular
dollar-funded programs or activities.1
     Illustrations of this follow.
     Department of Health, Education, and Welfare
     The Department carries out various excess foreign
currency-funded projects in the fields of educational re-
search and training, public health, and social and rehebil-
itation services.
     For fiscal year 1970, projects valued at the dollar
equivalent in local currency of $57,645,000 originally were
proposed by the Department for funding, including projects
for India valued at $14,147,000. Executive branch appropri-
ation requests to the Congress for fiscal year 1970, how-
ever, amounted to only $9,455,000, including projects for
India valued at $2,323,000. Thus, reductions in the use of
excess foreign currencies (dollar equivalent) by the execu-
tive branch totaled $48,190,000 overall; reductions for
India totaled $11,824,000.
     In explaining reasons for the slashes in requests for
dollar appropriations needed to carry out special foreign
currency projects, the Secretary of Health, Education, and
Welfare had this to say:
     "*** While on a Government-wide basis appropria-
     tions of dollars for the purchase of counterpart
     currencies may be viewed as a bookkeeping trans-
     action, the same does not hold true in evaluating
     the level of appropriations for individual Depart-
     ments such as Health, Education, and Welfare and
     its constituent agencies. In terms of the con-
     gressional appropriations process, the budget re-
     quest for special foreign currency funds *** must
     compete on an equal basis with all other programs
     of the Department. From the standpoint of the
     Congress, the fact that the monies appropriated
     are merely transferred between accounts in the


1 Chapter
        5 shows that agencies are quite willing to propose
additional uses of foreign currencies provided that dollar
appropriations to acquire the foreign currencies are not
needed.
                            27
     Treasury is immaterial, and this appropriation is
     treated the same as any other HEW [Health, Educa-
     tion, and Welfare] appropriation; it is included
     at each step of the congressional appropriations
     process in the overall dollar totals for the De-
     partment of Health, Education, and Welfare.

          "Under these circumstances, and with the ne-
     cessity to reduce Federal spending as a curb to
     inflationary pressures, the budget request for
     special foreign currency programs had to compete
     with the budgets for already hard-pressed domes-
     tic programs of the Department such as aid for
     elementary and secondary education or public as-
     sistance payments. We felt in this situation
     that the foreign currency programs must be re-
     duced."  (Underscoring supplied)

     Department of Agriculture

      Agriculture Research Service, Department of Agricul-
ture, provides for numerous research programs abroad. Some
of these programs are carried out in excess currency coun-
tries and are funded through a special foreign currency pro-
gram.

     As a result of overall budget reductions imposed by
the Bureau of the Budget, the special foreign currency pro-
gram in 1970 was reduced within the executive branch from
$14,300,000 to $8,287,000; in 1971 it was reduced from
$7,313,000 to $5,000,000. These total reductions of
$8,326,000 apply to all excess currency countries. We were
informed that the canceled projects were probably for India,
Israel, and Yugoslavia.

     Agriculture Research Service officials informed us
that, when a budget cut has to be made, the special foreign
currency projects are the first to be cut because such proj-
ects are usually of a lower priority than regular dollar
projects and requests for special foreign currency program
funds must compete equally with the requests for dollars.




                             28
    Department of State

     The Office of Foreign Buildings Operation, Department
of State, had initially requested $2,436,000 for its 1970
special foreign currency program. As a result of reduced
budgetary ceilings imposed by the Bureau of the Budget,
this amount was reduced by $250,000 to $2,186,000. (As
noted on p. 38 of this report, the fiscal year 1968 and
1969 requests had amounted to $5,025,000 and $3,050,000,
respectively.)

     State Department   personnel informed us that this reduc-
tion had applied to a   proposed construction program in Cal-
cutta, India, and had   been made to accommodate higher prior-
ity needs elsewhere.    (This is discussed in greater detail
on p. 40.)

     Other departments and agencies

     During our review at other departments and agencies,
we observed that significant cuts in special foreign cur-
rency programs proposed by operating-level officials were
made within the executive branch. Agency officials with
whom we spoke informed us that the cuts had been made to
arrive at lower overall budget levels or stated that it had
been agency policy not to provide reasons for the cuts.




                               29
Prior comments on the budgetary system

      Numerous reports have identified the budgetary system
as an obstacle to the effective use of excess foreign cur-
rencies. As early as August 1958, in a special report to
the Director of the International Cooperation Administration,
a group of consultants pointed out that,since it was diffi-
cult to secure appropriations from Congress, there often was
an excess accumulation of foreign currencies with which U.S.
buildings could be erected but for which the agencies were
unable to get dollar appropriations. It also was pointed
out that the method then in use (under which each using
agency reimburses the Treasury with appropriated dollars)
tended to subject proposed uses of foreign currencies to the
same rigorous tests as those used for proposed uses of U.S.
dollars. The report recommended

     "that in those cases where there is an excess
     accumulation (as determined by the Bureau of
     the Budget) the Congress be requested each year,
     over and above whatever dollar appropriations
     may be warranted, to authorize, in an appropri-
     ation measure the use of specified local cur-
     rencies for justified purposes."

     A similar conclusion later was reached by a group of
consultants to the Department of State on international fi-
nance and economic problems. A report by the group to the
Under Secretary of State, dated April 4, 1960, stated:

          "Misconceptions concerning the value of
    local currency, when joined with the tradi-
    tional Legislative prerogative for controlling
    Federal expenditures, have led to the legal re-
    quirement that in order to use a certain part of
    these local currencies, the U.S. Government agen-
    cies have to obtain Congressional approval. The
    specified procedure for obtaining such approval
    is for the agency to request a dollar appropria-
    tion, even though only local currency is to be
    spent. Inasmuch as the Bureau of the Budget
    sometimes refuses to approve such dollar appro-
    priation request, and Congress sometimes refuses
    to appropriate the dollar funds requested, a

                            30
     number of useful projects have gone by the board,
     even though no further dollar expenditures were
     involved."

     The report recommended that U.S. agencies be permitted
to use excess currencies without appropriation committee
procedures provided that the uses were within the statutory
or authorized responsibility of the agency and provided that
no appropriation of additional dollars were required.

     An appendix to that report contained two excellent case
summaries illustrating the problems of obtaining dollar ap-
propriations for the purpose of purchasing and using U.S.-
owned foreign currencies.

     In November 1963, during hearings on U.S.-owned foreign
currencies before the Foreign Operations and Government In-
formation Subcommittee of the House Committee on Government
Operations, the restraint on use caused by the need to have
dollar appropriations was again discussed. A member of the
Subcommittee expressed his view that part of the problem in
making greater use of excess foreign currencies was the fact
that it was necessary to go through the dollar appropriation
route to do so.

     In its report on those hearings (H. Rept. 199, March 22,
1965), the Committee on Government Operations made the fol-
lowing comment under the section dealing with recommendations:

          "Because the foreign aid agencies now ask
     Congress to appropriate dollars which are used
     to buy U.S.-owned foreign currencies from Trea-
     sury accounts, the agencies often are reluctant
     to seek the appropriations. Instead, the ad-
     ministration should request the direct appropria-
     tion of U.S.-owned foreign currencies to finance
     programs authorized by law to further the inter-
     national interests of the United States."

     During the period July to October 1965, the Subcommit-
tee on Foreign Economic Policy of the House Committee on
Foreign Affairs held hearings on the utilization of excess
U.S.-owned foreign currencies in certain countries. The
problem in respect to obtaining dollar appropriations to use

                            31
excess foreign currencies was again discussed, and reference
to the Committee on Government Operation's hearings and re-
commendations was made.

     During these hearings, the specific problem of having
regular dollar appropriations cut when excess foreign cur-
rency appropriations are increased was discussed at length
by a State Department official responsible for educational
and cultural affairs programs. He said that appropriation
committees traditionally have looked at the separate requests
for regular dollar appropriations and for special foreign
currency dollar appropriations in total and that the com-
mittees have tended to reduce the amounts of regular dollar
appropriations requested for use in nonexcess currency coun-
tries as amounts requested in excess currency countries in-
creased.

     During the same hearings, the Deputy Under Secretary of
State for Administration also presented this viewpoint. He
commented that the Department could use substantial addi-
tional amounts of foreign currencies if, among other things,
"it were not necessary to obtain dollar appropriations for
their purchase which in reality constitutes an 'add-on' to
regular appropriations."

     A member of the Committee discussed this matter with
the Deputy Under Secretary at length with particular refer-
ence to the desirability of purchasing land in excess cur-
rency countries. A paraphrase of part of the exchange which
took place follows:

     Committee Member. I can't understand why you should
have any difficulty being permitted to use excess foreign
currencies for the purchase of land for future embassy use--
something you would anticipate that the Department would
need within the next 5 or 10 years.

     Witness. The problem is that, in our regular foreign
buildings program which runs approximately $20 million a
year, we have a great many really difficult situations that
demand immediate attention. These aren't in excess foreign
currency countries.



                             32
     In this regular $20 million budget, we wouldn't be able
to include the requirements in an excess foreign currency
country of which you speak. The priorities are so low there
that we wouldn't even get to them in planning the use of our
money under the regular budget. Such requirements must con-
stitute an add-on because, if you put them in the regular
budget, you are putting in secondary needs. No matter how
useful it is to use excess currencies, the things you would
be buying are of lower priority than the things we need to-
day.

     The problem of adding on excess currency requirements
is, I think, not an illusory problem. It is a real problem
of appropriation totals involving the question of whether
the State Department appropriation for a year or several
years should have 5, 10, 15, 20, or how many millions of
dollars that we would add on for purchases in excess cur-
rency countries. The increase looks bad in other words.

     Committee Member. Is there no distinction made between
purchases made in countries where there are local currencies
in the possession of the United States, excess or nonexcess?

     Witness. Yes, sir; we have our special foreign cur-
rency program for foreign buildings.

     Committee Member. In view of this distinction, why
should the Department be hindered in using excess currencies,
say to buy land in Israel, which is an excess currency coun-
try, or in Pakistan, India, or Yugoslavia? It just doesn't
make sense to me and I would appreciate a more detailed ex-
planation. Incidentally, if this Committee can help in mak-
ing apparent the undesirability of restricting the Department
in the use of these excess currencies for necessary purchases,
we would be pleased to do so.

     Witness. The problem is basically'one of being able to
convince the Congress that the purchase of land is not spec-
ulative, that it is useful, and that it is not going to re-
sult in a pressure on our part, later on, to add people to
use the buildings or to occupy the space.

     There is a feeling that meeting excess currency re-
quirements only increases other demands that will come to

                            33
the Congress for other expenditures; that if you keep the
bureaucracy squeezed a little bit on land, on buildings,
and on housing, this will be a deterrent to their effort
to get more people and more facilities. I think there is
this feeling in the Congress.


     During the same meeting the Deputy Under Secretary of
State for Administration presented the following statements
as.paraphrased by us:
     Witness. There has been a limit on special foreign
currency appropriations that we have been able to get. I
think this means that maybe we, in the executive branch,
have gone about it the wrong way. We are now pretty well
convinced that what we need is a total excess currency pro-
gram for the whole Federal Government that would be supple-
mental or additional to regular budgets.

     Committee Member. You mean, instead of appropriations
of dollars--which must then be used to purchase foreign cur-
rencies--there would be a separate budget; when it is de-
termined that foreign currencies can be used, they would be
budgeted without any connection with regular agency appro-
priations for hard U.S. currencies?

     Witness. That is right. Also, the budget wouldn't
treat agency requests individually. It would be a total
overall request with the money being used by agencies to
carry out the programs that relate to their own responsi-
bilities abroad. It would be one overall foreign currency
budget.

     Committee Member.   It would includethe U.S. Informa-
tion Agency?

     Witness. Yes, sir; and the foreign buildings abroad
and all the ideas that we have put together.

     Committee Member. These all come under the aegis of
the State Department? This is what you intend?

     Witness. No, sir; not in terms of being sort of a su-
per director, but in terms of exercising leadership to get
agencies to plan for these kinds of things, to think of
                             34
programs and insure these programs are in support of U.S.
objectives, we would develop this role. But the appropria-
tion would no doubt be made to the Office of the President,
rather than the State Department, and there would be a dis-
tribution made by the Bureau of the Budget to agencies,
rather than the State Department having the whole appropria-
tion.

     In view of the difficulty of increasing the use of ex-
cess foreign currencies obtained through dollar appropria-
tions, the Bureau of the Budget requested a special foreign
currency authorization to be made to the President for fis-
cal year 1966 that would have provided the expenditure of
about $82 million without a dollar appropriation. Hearings
were held on this request before the House Subcommittee on
Departments of State, Justice, and Commerce, the Judiciary,
and Related Agencies Appropriations, on March 24, 1965.

     In reporting the appropriation bill out, the House Com-
mittee on Appropriations did not approve the request because
uses of the currency were not adequately justified in the
request, and the witness at the hearing was not able to spe-
cifically tell the Committee what would be done with the
money if it were made available.

     For the following year (fiscal year 1967) the Depart-
ment of State requested an excess foreign currency authori-
zation amounting to the equivalent of approximately $26 mil-
lion. We were informed that six other agencies made similar
requests totaling about $60 million.

     If these requests had been approved, the foreign cur-
rencies would have been used without dollar appropriations.
Unlike the fiscal year 1966 request, the fiscal year 1967
request identified proposed amounts and uses of excess cur-
rency, by country, for specific activities. Hearings on the
Department of State request were held in February 1966 by
the same Subcommittee as in the previous year.

     In reporting the appropriation bill out, the House Com-
mittee on Appropriations did not approve the request appar-
ently because of the language requesting authorization rather
than appropriations. In this regard, questions about the
constitutionality of authorizations without appropriations

                             35
were raised during the hearings in both years. The issue
revolved around the Constitutional requirement that: "No
Money shall be drawn from the Treasury but in Consequence
of Appropriations made by Law; ***."

     Efforts to use foreign currencies without dollar appro-
priations were not made for fiscal year 1968 and thereafter.
It should be noted, however, that in fiscal year 1968 (as in
all preceding years back to fiscal year 1962) special foreign
currency program appropriations, denominated in dollars, were
requested and approved. 1

     The significance of distinguishing between authori-
zations and appropriations in making larger amounts of for-
eign currencies available to the Executive Branch, and the
Subcommittee's willingness to approve justified requests for
foreign currency, are shown in the following exchange which
took place during the hearings on the fiscal year 1967 re-
quests (paraphrased):

     Committee Member. In this proposed language that the
committee is confronted with, you use the language "foreign
currencies owned by the United States are authorized to be
used." Why do you use this language instead of making a
direct appropriation?

     Witness. The language reflected in our submission was
prescribed for us by the Bureau of the Budget. We are



It should be noted that regular dollar appropriations also
are used to buy excess foreign currencies since agencies
spending foreign currencies in these countries are required
to use excess currencies to the extent feasible.




                            36
somewhat uncertain as to precisely why the word "appropria-
tion" or "appropriated" was avoided. 1

       Committee Member.      This is an appropriation bill, is it
not?

     Witness. This is an appropriation bill, where we hope
the request will be considered, because we think it would
be responsive to section 1415 of the act of July 15, 1952.

     Committee Member. Are you not asking for the same type
of projects and the same sort of thing in the requested spe-
cial foreign currency appropriation as well as in this new
approach?

     Witness. Yes, sir; in general, that is correct. There
is, one might say, a relative band of priority in the pro-
jects that have been proposed.

      Committee Member. Do you consider these foreign cur-
rencies as money and/or valuable assets of the U.S. Govern-
ment?

       Witness.   Yes, sir.

     Committee Member.        They cost the taxpayers $26 million
plus, did they not?

     Witness. We do not know precisely the cost of the com-
modities that generated these currencies, but obviously they
are of real value.


 We sought the answer at the Bureau of the Budget. Officials
 informed us that the requests were authorizations rather
 than appropriations to distinguish them from dollar appro-
 priations. The term authorization to spend foreign currency
 receipts had been used in previous budgets to describe au-
 thority to spend foreign currencies without charge to dollar
 appropriations. Dollar appropriations are included in bud-
 get totals and result in credits to the Commodity Credit
 Corporation or to Miscellaneous receipts of the Treasury.
 Direct foreign currency appropriations would not be included
 in the budget totals.

                                  37
      Committee Member. Then why should they not be appro-
 priated and made available in a businesslike manner?

     Witness. We think they should be made available in a
businesslike manner. Whether the appropriation carries a
dollar mark is for the Congress to decide. If this is appro-
priated, you can be sure a businesslike method will be used
to account for these currencies in a manner similar to that
for dollar appropriations.

     Committee Member. Was not the State Department--and as
far as I know all the executive departments involved in
this--given every cent asked for? This was certainly true
of the Departments of State, Justice, and Commerce, the Ju-
diciary, and related agencies bill when you had a specific
program to submit for these excess foreign currencies. Is
that not a fact?

     Witness.   Yes, it is a fact.

     Committee Member. We have never turned down a request
for an excess foreign currencies appropriation after having
taken testimony as to what would be done with it. That is
a fact is it not?

     Witness.   I think it is a fact.

     In March 1969, the following exchange took place during
a State Department appearance before a House Appropriations
Subcommittee in regard to the Department's fiscal year 1970
appropriation request for its special foreign currency pro-
gram for acquisition, operation, and maintenance of buildings
abroad (paraphrased):

      Committee Member. I note that in 1968, the last fiscal
year, you used $5,025,000 in foreign currencies in this pro-
gram.

     Witness.   Yes, sir.

     Committee Member. In the present fiscal year you have
$3,050,000 for the same purpose. In the coming fiscal year
you ask for the amount of $2,186,000.


                             38
       Witness.   Yes, sir.

     Committee Member. To what do you attribute the decrease
in use of these foreign currencies?

     Witness. The decrease in 1969 and 1970 was the result
of the President's request to reduce expenditures.

     Committee Member. But these are foreign currencies.
Does this help the taxpayer and his budget?

     Witness. They are included in the calculation of the
expenditures, Mr. Chairman. As such they do affect us in
terms of the ceilings we try to maintain.

     Committee Member. In other words, the Bureau of the
Budget is responsible for not using less dollars and more
foreign currency. Is that correct?

       Witness.   I wouldn't want to say they are responsible,
sir.

     Committee Member.        Why don't you stand right up and
say so?

     Witness. In establishing budget ceilings and in estab-
lishing expenditures ceilings for this year and next the Bud-
get Bureau made no distinction between dollar appropriations
and foreign currency appropriations.



     In April 1969, we discussed with officials of the Bu-
reau of the Budget whether the Bureau seeks reductions in
special foreign currency programs as well as regular dollar
programs in order to meet reduced budget ceilings. We have
been informed that Bureau officials do make the proper dis-
tinctions in their review processes between special foreign
currency programs and regular dollar programs. These offi-
cials have informed us that:

       -- The Bureau does not accept reductions in special for-
          eign currency programs as proper reductions to meet
          reduced budgetary ceilings.

                                   39
      --The Bureau does not expect special foreign currency
        programs to compete with regular dollar appropria-
        tions.

      -- If, in the past, the Bureau did accept a reduction
         in a special foreign currency program to meet a re-
         duced budgetary ceiling, it did so in error or as an
         expedient rather than as a matter of established prac-
         tice.

     In reviewing the records and interviewing appropriate
State Department personnel, we found that:

     -- In November 1968, the Bureau of the Budget requested
        the State Department to reduce its original 1970 bud-
        get allowances by $3 million and suggested where the
        reductions might take place.

     --The Department of State, in making the reduction,
       elected to make the reduction in a fashion different
       in some degree than that suggested by the Bureau.

     --Part of the total reduction was made by State in the
       Foreign Buildings Operations Special Foreign Currency
       Program by eliminating the $250,000 planned for re-
       habilitating a Calcutta building. This reduction was
       not proposed by the Bureau.

     --The Bureau accepted the cut as made by the State De-
       partment which included the $250,000 for the Calcutta
       building.

     In July 1969, the Bureau of the Budget informed the De-
partment of State that budget allowances provided for 1971
were adjustable as far as special foreign currency programs
were concerned. We were informed by the Bureau of the Budget
that similar information was provided other departments at
about the same time.

     Essentially, we were told that an agency's budget ceil-
ing might be exceeded by increasing special foreign currency
programs. We were also informed, however, that these in-
structions did not constitute a new procedure; this procedure
has been in effect since special foreign currency programs
have been available,
                             40
     The State Department requested $6,690,000 for its fis-
cal year 1971 special foreign currency program for acquisi-
tion, operation, and maintenance of buildings abroad. This
request included $1,750,000 to build an office building in
Calcutta and $1,520,000 to build an office building, Marine
guard quarters, and 12 staff apartments in Nepal. Construc-
tion in Nepal is financed with U.S.-owned Indian rupees.

     On May 12, 1970, the House Committee on Appropriations
reported out the bill carrying the appropriation. In doing
so, it reduced the requested amount for the appropriation
by only $190,000, and it appears from the hearings that the
reduction applied to funds requested for two senior officer
residences in Rabat, Morocco, that were priced out of line
with other senior officer residences.

Agency Comments

     In commenting on a draft of this report on September 21,
1970, the Office of Management and Budget informed us that:

    "The draft report recommends that the Office of
    Management and Budget insure that executive branch
    agencies seek approval for well-documented excess
    currency-funded projects without regard to over-
    all dollar ceilings for the agencies. Although
    this has long been our policy, we recognized the
    need for clarification. Accordingly, our Cir-
    cular No. A-11, Section 13.2, has recently been
    revised to state:

          'Projects to be proposed should be of a
          quality justifiable for inclusion in the
          agency's regular dollar budget. Since these
          amounts do not affect overall budget totals,
          agencies may include items of lower priority
          than projects included in their regular dol-
          lar budget.'

      (underlining indicates clarifying instructions)"




                            41
CONCLUSIONS

     1. The Congress has encouraged and has favored greater
use of U.S.-owned excess currencies for worthwhile programs
and projects.

     2. The budgetary system has been an obstacle to greater
use of excess currencies. Although executive branch agencies
realize that dollars appropriated to buy excess currencies
from the Treasury do not affect the overall level of Govern-
ment dollar expenditures, individualagencies have had to
live within an overall dollar limitation on their programs.
When proposed programs or projects have exceeded the overall
limitations, the agencies have had to choose between reduc-
ing their requests for special foreign currency dollar ap-
propriations or reducing their dollar requests for regular
dollar-funded programs. The result has been that some pro-
posals for potentially advantageous uses of excess currencies
of a lower order of priority have been deferred or foregone.

     3. The obstacles to greater use of excess currency
have been discussed and debated at length over the years
but have not been resolved satisfactorily. One method used
by the executive branch to remove disincentives to greater
use of excess currencies has been to request approval from
the Congress to present budget requests in the form of "au-
thorizations to use foreign currencies," denominated in
foreign currency units rather than in dollars. This form
apparently has not been acceptable to the Congress.

     4. As long as the executive branch permits excess for-
eign currency programs to compete with regular dollar-funded
programs, the United States (in the absence of an alterna-
tive procedure) will continue to lose the benefits available
through increased use of its excess foreign currency holdings
in India and elsewhere.

     5. Conceptually, there is no valid reason why the
special foreign currency program should be an impediment to
the optimum use of excess foreign currencies. Nevertheless,
the long history of problems in providing for optimum use
of excess currencies with this approach indicates that a
new approach may be desirable.


                            42
     In its comments on a draft of this report, the Office
of Management and Budget stated that:

     "We strongly feel it is not appropriate to con-
     clude that 'The budgetary system has been an ob-
     stacle to greater use of excess currencies.'  On
     the contrary, we believe the budgetary system ef-
     fectively carries out the policy of the Office of
     Management and Budget as correctly stated in ***
     your report.

     "It should be recognized that there are occasions
     when Members of Congress substitute foreign cur-
     rencies for dollars in regular appropriations.
     The President's 1971 Budget contained a request
     for the State Department's Mutual educational *and
     cultural exchange activities appropriation of
     $40 million. However, the House Appropriations
     Committee in cutting this amount to $36.5 million,
     included a limitation stating, 'not less than
     $6,000,000 shall be used for payments in foreign
     currencies which the Treasury Department deter-
     mines to be excess to the normal requirements of
     the United States; ***' This has the effect of
     limiting the flexibility of the program. In fact
     in one case--Ceylon--it may result in no funding
     at all. This is because Ceylon is no longer con-
     sidered an excess currency country. One fact
     should be remembered; Office of Management and
     Budget Circular No. A-20, Revised, requires all
     agencies to make every effort to see that obliga-
     tions in excess currency countries are made pay-
     able in the currencies of the countries, rather
     than in U.S. dollars, no matter what appropria-
     tion or fund is to be used for payment. Thus,
     the excess currencies would have been used even
     without the excess currency limitation in the ap-
     propriation language, to the extent of expenditures
     in those countries."

     For the many reasons noted in this chapter, it is our
belief that the budgetary system has in fact been an obsta-
cle to greater use of excess currencies in at least two ways:
(1) amounts requested have been denied "to keep costs down"

                             43
and (2) foreign currencies have not been requested because
it is believed that, as foreign currency requests go up,
regular dollar requests are cut.




                           44
RECOMMENDATIONS

     For programs or activities abroad funded with excess
foreign currencies, we recommend that the Director, Office
of Management and Budget, ensure that agencies can seek con-
gressional approval for well-documented projects without re-
gard to overall dollar ceilings for the agencies. Recent
specific instructions permit agencies to exceed their bud-
get ceilings by increasing special foreign currency programs
and should, if followed by the agencies, go a long way in
this direction; however, the Office of Management and Budget
has advised us that this is not a new procedure. Thus, the
question arises as to whether, in the absence of follow-
through action by the Office of Management and Budget, these
instructions will suffice to ensure an optimum U.S. use of
excess currencies.

     The historical internal budgetary problems in making
optimum use of excess currency lead us to propose, as an
alternative, another system of seeking appropriations for
the use of excess currencies. This approach would be, in
effect, a compromise between that sought by the executive
branch in the past and the objections expressed by the Con-
gress; and would provide for both:

     1. A special foreign currency program submission, de-
        nominated in dollars, for programs and activities
        of the same general order of priority as those now
        being funded through the special foreign currency
        programs.

     2. A submission for "appropriations of excess foreign
        currency," denominated in units of foreign currency
        without reference to dollar equivalents. This sub-
        mission would include programs and activities which
        are not of as high priority as those funded through
        the special foreign currency programs, yet which
        could and should be undertaken because they would
        serve a beneficial purpose.

     Dual submissions along the above lines would appear
to overcome the problems hitherto encountered in making max-
imum use of excess foreign currencies. For example:


                             45
1. Congressional control over appropriations would not
   in any way be diminished. The executive branch
   would have to justify all proposed uses of foreign
   currencies.

2. Constitutional problems of providing "authorizations"
   to use foreign currencies would be avoided. (See
   p. 35.)  The foreign currencies would be "appropri-
   ated."

3. The fears of the executive branch that increased for-
   eign currency use might reduce dollar appropriations
   would be lessened. There would be a positive incen-
   tive to make maximum productive use of excess foreign
   currencies since their use would not compete with the
   level of dollar appropriations.

4. In evaluating proposed "appropriations of excess for-
   eign currencies," the Congress could give greater
   consideration to varying conditions existing in each
   of the excess curiency countries. As noted in chap-
   ter 9 of this report, one country is only marginally
   in the "excess currency" category and another is
   committed to converting "excess currencies" to dol-
   lars over a period of time. Obviously, proposed
   low-priority uses of our foreign currency holdings
   in these countries would merit a different degree
   of consideration than similar proposals in a country
   such as India.

5. The potential problems of continuing relatively low-
   priority programs or activities abroad even after
   our balances of excess currencies are exhausted
   would be minimized. As excess currencies are ex-
   hausted, the executive branch would have to justify
   ongoing programs on the same basis as any other
   dollar-funded activity.

6. The Commodity Credit Corporation would continue to
   receive dollars to its credit for programs and ac-
   tivities funded from Public Law 480 generated cur-
   rencies through the special foreign currency program.



                         46
     In addition to the foregoing matters, the problem of
valuing excess foreign currencies in terms of dollars would
be minimized. This problem is discussed in the following
chapter.

     We recommend that the Director, Office of Management
and Budget, explore the acceptability of direct appropria-
tions of excess foreign currency, as a form of budgetar .
submission, with appropriate committees of the Congress.

     In commenting on a draft of this report in September
1970, the Office of Management and Budget expressed some
reservations about the use of direct appropriations of for-
eign currencies. These reservations, which are included in
detail in appendix V to this report, are summarized and
evaluated in the following paragraphs.

     The Office stated that agencies would find it difficult,
if not impossible, to justify two orders of lower priority
programs. We believe that priority systems result in iden-
tifying several orders of priority, and we do not see why
it would be difficult to identify two orders of lower pri-
ority.

     The Office did not understand the reference to consti-
tutional problems. This question was raised by a congres-
sional committee, as noted in the report (see p. 35), and
not by us.

     The Office has stated that the reference to executive
branch fears about reduction of dollar appropriations be-
cause of competition from foreign currency appropriations
is not well founded. We believe that this chapter offers
rather compelling evidence to the contrary.

     The Office has pointed out, correctly, that dollar ap-
propriations permit the use of excess foreign currencies in
any excess currency country whereas direct foreign currency
appropriations limit the use of the appropriated currency
to the country of issuance. From an agency viewpoint, this
inflexibility is undesirable. However, this inflexibility
may be desirable from a Government-wide viewpoint because
of the very substantial differences in amount of U.S. owned
excess currencies in the various countries involved.

                              47
(See ch. 9.) Language could be devised that would permit
appropriated units of foreign currency to be used in coun-
tries other than that of issuance if that were desirable.
The Treasury Department could sell, for example, Indian ru-
pees to the using agency in exchange for appropriated Polish
zlotys. Whether or not this would be useful is another mat-
ter. The point to be made is that there may be ways to over-
come the inflexibility involved in the direct appropriation
of foreign currency. In our view, this isn't a major problem
in any event.

     The Office has also stated that it cannot subscribe to
a proposal that has the effect of favoring projects where
the only discernable benefit is to use excess currency. We
agree with this position. The projects should not be under-
taken unless they are beneficial to the United States.

     Lastly, the Office of Management and Budget correctly
points out that the use of direct appropriation of foreign
currency presents a problem in the legal requirement to
reimburse Commodity Credit Corporation in dollars for Public
Law 480 currencies so used. The language used in direct
appropriations of foreign currency could waive this require-
ment if that were thought useful. Of more interest, however,
direct appropriations of foreign currency could involve the
use of non-Public Law 480 currencies. As the report notes,
non-Public Law 480 currencies are accumulating at a faster
rate in India than Public Law 480 currencies. Ample quan-
tities of both kinds of currency are currently on hand in
India; both kinds will probably remain on hand for sometime
yet to come.

MATTER FOR CONSIDERATION OF THE CONGRESS

     We believe that appropriate committees and the Congress
may wish to favorably consider executive branch requests
adequately justified for direct appropriations of U.S.-
owned foreign currency.

     If the Congress were to appropriate excess foreign cur-
rencies directly, use of these currencies by certain agencies
would require that the Congress except these appropriations
from the requirement of the recurring provision in the


                            48
appropriation act for the Departments of State, Justice,
and Commerce, the Judiciary, and related agencies that

     "No part of any appropriation contained in this
     Act shall be used to administer any program which
     is funded in whole or in part from foreign cur-
     rencies or credits for which a specific dollar
     appropriation therefor has not been made."




                            49
                         CHAPTER 7

            VALUING FOREIGN CURRENCY IN DOLLARS

     The current practice of using fixed official exchange
rates to value in dollars U.S.-owned excess foreign curren-
cies for sales to U.S. agencies is not, in many cases, use-
ful. If changes in the practice were made to provide for
valuation at varying rates of exchange, more extensive use
of U.S.-owned excess foreign currencies would, in all like-
lihood, follow.

     When viewed from a broad perspective, a Government
agency's purchase of U.S.-owned foreign currencies from the
U.S. Treasury Department merely transfers dollars from one
Government agency to another and has no economic effect on
the overall level of Government expenditures. On the other
hand, when the transaction is seen from an agency's view-
point, there is no particular advantage in buying excess
foreign currencies in one country from the U.S. Treasury
Department over buying nonexcess currencies from commercial
sources in another country since agency appropriations are
charged in either case.

     It is in this latter context that spending decisions
are made, and, as a consequence, U.S. officials tend to fa-
vor purchases from sources offering the lowest dollar costs
to their appropriations, irrespective of whether the dollars
would be used to purchase excess foreign currencies from the
Treasury or whether they would be disbursed to sources out-
side the Government.

     In our view, an appropriate rate of exchange for trans-
actions between U.S. Government departments and agencies
would be one that best serves the interests of the U.S. Gov-
ernment. To use any other rate could result in lost oppor-
tunities to use excess currencies in lieu of dollars.

     In January 1969 the chairman of the U.S. Advisory Com-
mission on International Educational and Cultural Affairs
transmitted a special report to the Congress prepared by a
professor of economics from Michigan State University. This
special report, prepared at the request of the Commission,

                             50
deals with the use of U.S.-owned excess foreign currencies.
The report is available as House Document 91-67, dated Jan-
uary 27, 1969.

      One point in the report relevant to the discussion here
is that valuing U.S.-owned rupees in terms of equivalent
dollars is misleading. In this respect, it comments as fol-
lows:

          "*** A unit of foreign currency has no mean-
     ing by itself; it is an abstract notion. We solve
     any exchange problem by making rough calculations
     of dollar equivalents. Perhaps, the meaning of
     'a dollar' is just as abstract, but it is a more
     useful concept because to us it is a familiar one.

          "In the major European economies this calcu-
     lation is a fair practice because there is a
     known, fixed exchange rate for dollars and the
     local currency. In excess-currency countries,
     however, free exchange is usually impossible and
     we face the question of what conversion price to
     use. This is no trivial matter. The answer to
     this question could unfold the 'solution' to the
     excess foreign currency problem.

          "On August 12, 1968, the Wall Street Journal
     quoted the following bank prices for Indian
     rupee-U.S. dollar exchanges:

                                            Per rupee
          "Bank transfers----------------   $0.1331
           Buying rupee notes------------     .0800
           Selling rupee notes-----------     .1100

          "In addition, we have the official rate of
     about $0.1333 per rupee. The different rates re-
     flect varying degrees of risk in holding rupees
     for any length of time. These are the problems
     confronting a person who wants to make a rupee-
     dollar exchange. A bank will buy rupee notes for
     $0.08 each and sell them for $0.11. The differ-
     ence is 37 1/2 percent of the buying price. What
     is'noteworthy is that the official exchange rate

                             51
     does not reflect the value of the rupee; there-
     fore, to use the official rate for conversion, as
     the Treasury does, is very misleading.

          "To compound the difficulty, the rupees owned
     by the United States are not convertible into dol-
     lars in any case; and they cannot be used for just
     any purpose the United States may desire. Use of
     the official rate here is even more deceiving, for
     if the Treasury is going to value the rupee hold-
     ings in dollars, the dollar figure should reflect
     the dollar value of the rupees in the uses to
     which they can be put. It is neither sufficient,
     realistic nor desirable to simply multiply by an
     official exchange rate. In the case of India the
     official rate overvalues the rupee, overstating
     its worth to *** Government agencies. Indeed, if
     there are no uses to which the rupees may be put,
     because foreign policy demands they not be used,
     their dollar value is really zero. This remains
     true although the official rate is $0.1333 and
     rupee notes can be sold to a bank for $0.08 each."

     The report recommends the revaluation of excess for-
eign currencies to encourage increased agency use and more
liberal appropriation. It also suggests that, if attempts
to secure better exchange rates fail, one alternative would
be to request direct foreign currency appropriations from
the Congress, which would discourage conversions to "equiv-
alent dollars" and would encourage a better judgment of the
value of the foreign currency.

     Under the direction of the President, the Treasury De-
partment is responsible for establishing dollar values for
U.S.-owned foreign currencies under the authority of sec-
tion 613 of the Foreign Assistance Act of 1961, as amended.
We do not know of any legal requirement that would prevent
the Treasury Department from utilizing varying rates of ex-
change to achieve various purposes. In fact, and as noted
on page 59, the Treasury Department now offers foreign cur-
rency at preferential exchange-rates under some conditions.

     Preferential rates should be considered in two situa-
tions: (1) when goods and services have to be used in the
                             52
country where purchased, e.g., real estate and local na-
tional services and (2) when goods and services can be pur-
chased in the United States and transported to India for
use there, e.g., automobiles and air conditioners.

     An example of the first situation involves the contin-
uing decisions by the State Department to purchase residen-
tial property abroad for its employees. State Department
officials have informed us that, because the rupee is over-
valued in terms of the dollar, because the demand for hous-
ing in India substantially exceeds the supply, or because
of a combination of these and/or other factors, suitable
residential accommodations in India are more expensive in
dollar terms than similar accommodations in certain other
countries. As a consequence, and because the State Depart-
ment appropriations available for acquisition of housing
are limited, needed residential property in India which
could be purchased with rupees is not being obtained. In-
stead, scarce appropriations are used in other areas where
the local currency value in terms of the dollar provides
the State Department with suitable accommodations for less
money.

     With regard to the second situation above, we observed
several cases in which executive agencies in India pre-
ferred to spend dollars to buy items from U.S. commercial
sources rather than to buy the items from Indian sources
for excess Indian rupees. .The underlying reason for favor-
ing dollar purchases was to obtain the most goods for the
least cost to agency appropriations--e.g., it would cost
more in appropriated funds to buy foreign currencies to
purchase higher cost Indian goods than it would to pay dol-
lars to U.S. commercial sources.

     For example, in our letter of May 2, 1968, to the Di-
rector of the AID Mission in India, we pointed out that
(1) every effort should be made to utilize U.S.-owned ru-
pees, instead of dollars, to the maximum extent possible and
(2) for many good reasons, including the use of rupees in
lieu of dollars, the U.S. Mission in India should use lo-
cally manufactured vehicles rather than U.S. vehicles.

     In its reply to our letter, the AID Mission stated,
among other considerations, that it "must get the best for

                             53
the least cost," and that locally manufactured, passenger-
carrying vehicles cost the equivalent of $3,000 whereas the
U.S. sedans were limited in cost to $1,500 plus transporta-
tion.

     The AID Mission also noted that locally manufactured
trucks were generally adequate for its operations in India,
but that they were more expensive than U.S. trucks. The
AID Mission pointed out that it planned on "purchasing lo-
cal trucks in those areas where price is not a problem,"
such as procurements with Government of India-financed
trust funds which are for AID administrative costs in India
(see p. 93). The AID Mission pointed out, however, that
"All other Agencies must have the flexibility of obtaining
the most for the dollars spent."

     Paradoxically, and for the reasons discussed in chap-
ter 6, an agency's decision to economize in this manner op-
erates in the opposite fashion for the U.S. Government as a
whole.

     Pertinent comments in our May 2, 1968, letter to the
AID Mission Director follow.

          "During our review we noted that a potential
    exists for saving dollars and providing assistance
    to the Indian motor vehicle industry by procuring
    United States Mission vehicle requirements locally
    using United States owned excess rupees. We be-
    lieve that consideration should be given to pro-
    curing the [U.S.] Mission vehicle requirements lo-
    cally because (1) the United States has excess ru-
    pees available, (2) the Indian motor vehicle in-
    dustry has excess production capacity which is not
    being used and, (3) the type of vehicles being
    produced in India appear suitable to meet the
    [U.S.] Mission requirements."



         "In view of the large United States holdings
    of Indian rupees reserved for United States uses,
    we believe that every effort should be made to


                            54
utilize these rupees instead of dollars to the
maximum extent possible."



     "The United States assistance to the vehicle
manufacturers has been in the form of project
loans for modernization of equipment and to in-
crease the manufacturing capacity, and non-project
loans for raw material, components, spare parts
and tools. A total of seven project loans have
been made to three vehicle manufacturers totaling
$77 million. The amount of non-project assistance
is not readily available, however it has been es-
timated to amount to as much as $50 million per
year for all vehicle manufacturers including the
ancillary manufacturers."



     "Although the above loans did modernize and
increase the production capacity of the motor ve-
hicle manufacturers, this increased capacity is
not currently being used. There are a number of
reasons which cause the manufacturers to operate
at less than full capacity. The main reason for
automobiles not being produced at full capacity is
the lack of raw materials, namely sheet and alloy
steel. This situation is caused by the failure of
the Indian steel industry to produce the type and
quality of steel needed by the vehicle manufactur-
ers and the restrictions placed on the importation
of steel for automobiles by the Indian Government.

     "The reason for trucks not being produced at
full capacity is the lack of demand for trucks.
The motor vehicle manufacturers simply can not
find buyers for their products. The lack of de-
mand is caused by many factors, such as the cur-
rent recession, high taxes, inadequate credit,
poor roads, government restrictions on interstate
commerce, etc."



                        55
          "While the Mission [U.S. Mission including
     Embassy, AID, and others] requirements of a 100 or
     so vehicles each year will not solve the problem
     of unused vehicle capacity, their procurement lo-
     cally will nevertheless provide the industry with
     some financial benefits and will increase the
     utilization of United States financed machinery.

          "The [U.S.] Mission's current inventory of
     American made United States Government vehicles in
     India is about 350, which includes sedans, station
     wagons, carryalls, jeeps, trucks, delivery vans,
     etc. The acquisition cost of this inventory is
     about $800,000 not including transportation costs.

          "The [U.S.] Mission's current inventory of
     American made vehicles by Agency is as follows:

                                        Number
                                          of      Acquisition
               "Agency                 vehicles      cost

Peace Corps                                68     $183,200
USIS [U.S. Information Service]            58      147,777
State Department                           57      114,000*
AID-United States owned                   136      296,739
AID-Contractor owned [should be held
  rather than owned]                       34        81,581
ODRI [Office of Defense Representa-
  tive, India]                              5         7,470

    Total                                 358      $830,767

*Estimated ($2,000 per vehicle)"



          "The locally produced vehicles appear to be
     suitable for the [U.S.] Mission needs. At least
     one Agency in the Mission prefers locally produced
     vehicles to ones made in America. The Peace Corps
     obtained 36 Jeep Wagoneers, 1966 model, from the
     United States which were not satisfactory for the
     conditions in India. The Peace Corps informed

                             56
     their Washington office in November 1967 that they
     considered the locally produced Jeep station wag-
     ons as being the best suited for their overall
     need and proposed that they be permitted to pur-
     chase their future vehicle requirements locally.***

          "To further illustrate that locally made ve-
     hicles can be used by the [U.S.] Mission in India,
     we cite the recent purchase of three Hindustan
     Bedford 120" wheel base, 20-passenger, luxury type
     buses for use as a shuttle by the AID Mission in
     New Delhi. In addition, sedans and jeeps have
     been purchased locally for use by AID contractors
     in India. We were informed that the buses and the
     vehicles for the AID contractors were purchased
     with Government of India trust funds, and title to
     the vehicles is in the name of the Government of
     India."



          "There are many other advantages which would
     benefit the [U.S.] Mission if vehicles were pro-
     cured locally, such as (1) spare parts could be
     purchased with excess rupees, (2) the spare parts
     inventory could be reduced as the parts require-
     ment could be fulfilled locally, and (3) mechanic
     skill and tools for repair and maintenance are
     available locally and would be easier to obtain."

     The AID Mission responded to our letter by memorandum
dated May 16, 1968. Pertinent comments to the above were:

    "We have bought quite a number of local vehicles
    to-date and have found them generally satisfactory
    for certain purposes. To-date we have purchased
    four Bedford buses, 21 jeeps of different configu-
    rations and 7 Ambassador sedans. We are now pro-
    ceeding with procurement documents for two Bedford
    trucks. Accordingly, we are well under way to im-
    plementing certain aspects of your findings.

    "It must be borne in mind that locally produced
    vehicles have certain limitations. In general, we

                             57
agree that our requirements for jeeps and trucks
can be adequately met locally. The cost is gen-
erally higher than for State-side procurement even
when the freight is taken into consideration and
the quality of the vehicle is generally lower.
Nevertheless, locally produced vehicles can be
used for certain purposes.

"Passenger carrying vehicles are ruled out by the
statutory limitations of 1,500 dollars for U.S.
titled sedans. An Ambassador costs the equivalent
of $3,000. Furthermore, where appropriated dol-
lars are used to defray the cost even if the stat-
utory limitations were waived, we must get the
best for the least cost. All locally procured se-
dans have a load capacity of three passengers and
driver. Our pool operated vehicles require a
5 passenger and driver capacity to give us the
flexibility necessary for effective utilization of
drivers and vehicles. Furthermore, the capacity
of Indian manufacturers is not adequate to satisfy
local demands. The delivery back log for rupee
purchased Ambassadors is now between 3 and 4 years.
Thus, we would be taking sedans from Indian Na-
tionals if we were to procure locally produced se-
dans. AID has purchased some sedans from the
Trust Fund which are GOI-titled [Government of
India] and, therefore, do not come under the stat-
utory price limitations. We do this since mainte-
nance is much easier for our outlying posts.

"Jeeps are built on a truck chassis and do not
come under the statutory price limitation. We
have found that these vehicles can be effective in
rural areas where the maintenance of more sophis-
ticated imported models is difficult and we can
eliminate the necessity of maintaining an inven-
tory of imported spare parts. There are some in-
stances, particularly in the central pool, where
greater carrying capacity is required than the lo-
cal jeep chassis and fabricated body will provide.
Therefore, we intend to use some Chevy carryalls
and sedans for the central fleet.


                        58
     "In the area of trucks, our preliminary findings
     are that local models are generally adequate
     though more expensive. We plan on purchasing lo-
     cal trucks in those areas where price is not a
     problem, i.e., AID procurement where the Trust
     Fund can be used. All other Agencies must have
     the flexibility of obtaining the most for the
     dollars spent.

     "In summary, greater emphasis will be placed on
     local procurement and the fleet will change as re-
     placements are required. Unless local production
     changes, we do not envision a situation where we
     can go completely to local vehicles. This policy
     will be subject to review and modifications as the
     vehicle industry changes in India."

     There are adequate administrative procedures currently
in effect which provide for agencies to seek Treasury ap-
proval to buy Indian vehicles or other relatively high-cost
items with excess currencies at a reasonable charge to
their dollar appropriations. These procedures are set
forth in Bureau of the Budget Circular No. A-20, revised,
dated May 21, 1966, which states that:

         "The Treasury Department will establish
    'selling rates' for charges to appropriations,
    generally based on rates at which the currencies
    would have to be purchased through commercial
    channels. Agencies should consult with the Trea-
    sury Department in cases where the use of this
    rate for excess or near-excess currencies would
    result in materially increased charges to the us-
    ing agency's dollar appropriations, as compared
    with the expenditure of dollars. Where it is de-
    termined to be of benefit to the U.S. balance of
    payments, special arrangements may be made to pro-
    vide additional foreign currencies in amounts nec-
    essary to avoid the increased appropriation charge
    to the using agency. In excess currency coun-
    tries, such special arrangements may also be made
    when justified for other reasons."



                            59
     In view of these procedures, we believe that the high
rupee cost of locally produced vehicles should not prevent
the U.S. Mission from obtaining them locally. With regard
to the legality of purchasing Indian-manufactured vehicles,
section 636(i) of the Foreign Assistance Act of 1961, as
amended, provides as follows:

     "*** none of the funds made available to carry out
     this Act shall be used to finance the purchase,
     sale, long-term lease, exchange, or guaranty of a
     sale of motor vehicles unless such motor vehicles
     are manufactured in the United States: Provided,
     That where special circumstances exist the
     President is authorized to waive the provisions of
     this section in order to carry out the purposes of
     this Act."

     AID is the only agency shown on page 56 which has a
vehicle inventory that is financed through the Foreign As-
sistance Act of 1961. Consequently, that act would not re-
strict any of the other agencies from purchasing Indian ve-
hicles. In the case of AID, a waiver was obtained in De-
cember 1969.

     In March 1970 an AID Mission order was issued, stating
that all types of vehicles manufactured in India would be
purchased for administrative, program, or contract use to
the maximum extent that operational requirements permit.
We analyzed current AID Mission vehicle procurement plans
and found that six 2-1/2-ton trucks and four sedans were on
order or would be ordered from Indian manufacturers, re-
placing procurement from the United States. The cost of
equivalent U.S. vehicles, including shipping charges, would
be $45,864.




                            60
AGENCY COMMENTS

     In commenting on a draft of this report on August 4,
1970, the Department of State said:

     "The internal U.S. Government sale of excess cur-
     rencies to using agencies at official rates estab-
     lished by foreign governments does constitute, in
     our view, a deterrent in some cases to the maxi-
     mum use of currency. We favor the establishment
     of more flexible procedures for determining
     charges to U.S agencies for currency expended.
     However, such procedures would have to be consis-
     tent with the obligations which the U.S. Govern-
     ment has assumed as a member of the International
     Monetary Fund with respect to observing exchange
     rates established by other IMF [International Mon-
     etary Fund] member countries. Additionally, such
     procedures would have to avoid creation of pres-
     sures for the devaluation of the foreign curren-
     cies involved and the resultant weakening of ex-
     change stability."

     We believe that the use of varying rates of exchange
for purposes internal to the U.S. Government can be made con-
sistent with these important considerations.

CONCLUSIONS

     We believe that the Treasury Department's current prac-
tice of valuing U.S.-owned excess foreign currencies at of-
ficial rates of exchange when selling to U.S. agencies is
neither useful nor desirable. The practice forces the U.S.
official contemplating an expenditure in one of several
countries to consider U.S.-owned foreign currencies as
though they were available to the United States only through
commercial purchase.

     On the other hand, if U.S.-owned foreign currencies not
directly appropriated in foreign currency units were avail-
able to agencies and departments without charge, with only
nominal charge to dollar appropriations, or with only nominal
charge to authorizations stated in dollar equivalents, then


                              61
the authorization and appropriation control processes would
be effectively circumvented. Of course, this difficulty is
eliminated whenever foreign currency is appropriated to us-
ing agencies in foreign currency units, as suggested in
chapter 6 of this report.

     In the case of special foreign currency program dollar
appropriations and regular dollar appropriations, we believe
that action is needed to provide more useful exchange rates
for U.S.-owned Indian rupees.

RECOMMENDATIONS TO THE
SECRETARY OF THE TREASURY

     We recommend that the Secretary of the Treasury estab-
lish procedures additional to those provided by the Bureau
of the Budget (see p. 59) that will provide U.S.-owned In-
dian rupees to using U.S. Government agencies at varying
rates of exchange. These procedures should be established
to maximize the constructive use of U.S.-owned excess for-
eign currencies, taking into account the need to continue
the congressional control processes. In our opinion, the
present language of section 613 of the Foreigni Assistance
Act of 1961, as amended, provides the Secretary of the
Treasury with sufficient authority to carry out this rec-
ommendation. If the Secretary of the Treasury believes ad-
ditional authority is needed for this purpose, however, we
recommend that he seek it.




                            62
                         CHAPTER 8


                 THE QUESTION OF EXTENSIVE

              U.S.-OWNED RUPEE ACCUMULATIONS

     The executive branch is actively seeking out ways to
reduce the level of available U.S.-owned Indian rupees be-
cause of its belief that the magnitude of these holdings is
a political liability to the United States in its relations
with India. The Government of India has expressed concern
at the size of the U.S. holdings and has urged the United
States to develop measures to liquidate them in an orderly
way. The executive branch believes that it has the needed
authority to effectively use, and thus reduce, large portions
of holdings arising from Public Law 480 sales. According
to the executive branch, similar authority does not exist
for the non-Public Law 480 holdings which are accumulating
at a rapid rate.

     GAO is offering comments on this matter for the follow-
ing reasons.

     1. At current rates of accumulation and expenditure,
rupee holdings are expected to increase substantially in
future years and any political problems are bound to in-
crease as well. The nature of the problem and the issues
involved in finding acceptable solutions are matters which
should be of interest to the Congress.

     2. We believe that the need to make more effective use
of U.S.-owned excess currencies in India, as presented on
pages 18 through 25 of this report, can be fully appreciated
only when viewed in the light of this other problem. How-
ever, the maximum amount of rupees that the United States
reasonably could expect to convert into real resources for
its own purposes is insufficient to make a dent in the to-
tal of U.S. currencies on hand and scheduled to be repaid
in the future.




                            63
U.S. HOLDINGS

     As noted in chapter 1 of this report, U.S.-owned In-
dian rupees available for U.S. uses amounted to the equiva-
lent of approximately $678 million at the official exchange
rate of 7.5 Indian rupees to 1 U.S. dollar. Also noted
there, these holdings are rising at a rapid rate and may
reach $3.5 billion by the year 2008 unless action is taken
to alter the trend.  (See chart, p. 101.)

THE POLITICAL PROBLEM

     As early as August 1958, possible problems of exces-
sive accumulations of foreign currency were identified. A
special report to the Director of the International Coopera-
tion Administration, l entitled "Accumulation and Administra-
tion of Local Currencies," 2 set forth the following three
major conclusions.

         1. There is no present worldwide problem of excess
            local currencies owned or controlled by the United
            States, but rather a problem in a few countries.

         2. During the course of the remainder of the century
            there may arise a serious problem of excess accumu-
            lations.

         3. Continued unrestricted accumulations of local cur-
            rencies by the United States should be avoided.



1The predecessor organization to the Agency for Interna-
 tional Development.
2 Thisreport was prepared by three distinguished men ap-
 pointed by the Director of the International Cooperation
 Administration. One of the appointees was a Director of
 the International Bank of Washington; another was the di-
 rector of Bristol Myers Company and Board Chairman of its
 International Division; the third appointee was a member
 of the board of directors of R. H. Macy & Co., Inc.




                                64
     In April 1960, a report on the problem of excess ac-
cumulation of U.S.-owned local currenciesl submitted to the
Under Secretary of State stated:

          "The excess accumulation of certain curren-
     cies is producing increasingly serious problems
     for the foreign relations of the United States,
     problems which seem likely to become acute unless
     corrective action is taken."

     Other comments in the report were:

         "Among the damaging consequences is the al-
    ready evident political reaction in certain under-
    developed countries against the excessively large
    claims on local resources which are represented by
    the size of the country's indebtedness to the
    United States ***.

          "*** The inevitable reaction is already in
     evidence in certain Asian countries--not always
     from the governments themselves but from the Com-
     munists and from the opposition parties, both of
     whom embarrass governments friendly to the United
     States by questioning the size of the indebtedness
     and speaking in terms of U.S. imperialism.

          "*** It is the size of the accumulation which
     creates U.S. domestic pressures to remove visible
     cash balances from the books; it is the effort of
     the foreign country to avoid such pressures which
     leads to conflicts with U.S. foreign policy in-
     terests."

     The political problem caused by the large U.S. hold-
ings of rupees is discussed in a book published in 1962 by
the Brookings Institution. The author, who served as a
member of the senior staff of Brookings' Economic Studies



1This report was prepared by four distinguished consultants
 appointed by the Under Secretary of State.



                             65
Division while doing the fieldwork for the book, later be-
came the Director of the AID Mission to India. In that book
he pointed out that:

     -- Legally, the Government of India exercises a veto
        power over the uses proposed for American rupee bal-
        ances, and this constitutes a complete defense
        against U.S. "excesses" in the use of rupees.

     -- But as a matter of practical politics, the Indian of-
        ficials fear that members of the U.S. Congress may
        propose and members of the Indian parliament may agree
        to uses for the rupees inconsistent with the real
        value of the rupees and that the proposals may be
        adopted for one reason or another with consequent
        harm to the Indian economy.

     During hearings before the Subcommittee on Foreign Eco-
nomic Policy of the House Committee on Foreign Affairs, the
Deputy Administrator of AID commented in July 1965:

          "The existence of large holdings of one coun-
     try's currency by another can cause political prob-
     lems. I have in mind accusations of potential Ameri-
     can interference in the basic internal policies of
     other countries. This is understandable; if a for-
     eign country held U.S. dollars to the same extent
     that the United States holds Indian rupees, its
     holdings would amount to roughly $10 billion."

     In its justification to the Congress for an excess for-
eign currency authorization for fiscal year 1967, the Depart-
ment of State included the following comment:

          "*** large holdings of the currency of one
     country by another, such as the U.S. holds in India,
     Pakistan, and the United Arab Republic, can cause
     problems in foreign relationships. The mere exis-
     tence of such large holdings controlled by a for-
     eign power, however benign, has the potential of
     creating great apprehension. These foreign cur-
     rencies constitute a claim on the country's re-
     sources. If used in ways that subtract materially
     from the country's foreign exchange earnings, or

                             66
    that create domestic shortages and inflationary
    pressures, they have the power to damage the eco-
    nomic and monetary systems of the country. This
    possibility, however latent, can sow seeds of dis-
    cord internally and externally, and possibly re-
    sult in accusations of potential, undue American
    influence in the basic internal policies of other
    countries. The utilization of these foreign cur-
    rencies, and the consequent reduction in the size
    of U.S.-held balances, will minimize the possibil-
    ity of friction in our relations with the other
    countries involved."

     A study published in 1968 by the Organization for Eco-
nomic Cooperation and Development on the subject of the lo-
cal currency proceeds of foreign aid put it this way:

          "Politically, *** excess accumulations of
     counterpart can become uncomfortable for the recip-
     ient and affect his relationship with the United
     States. The excess currency balances represent a
     standing invitation for domestic and *** U.S.
     pressures to spend them. Legally, the U.S. can
     support recipient governments in resisting such
     domestic pressures put on them, by vetoing pro-
     posed expenditures. Vice versa, recipient govern-
     ments can legally veto U.S. pressures for spending
     the counterpart. However, this puts a strain on
     international relations. In the meantime, the
     U.S.-owned counterpart assets are compounding. In
     India, they are already exceeding the equivalent
     of one-third of the money supply. This situation
     is becoming curiouser and curiouser. The U.S. has
     become the largest single local currency creditor
     in the country, but with no voice in the manage-
     ment of his assets, the growth of which, though
     unwanted, nobody stops.

         "The principal and basic drawback of the sta-
    tus quo is that, far from being a solution, it per-
    petuates and aggravates U.S. proprietorship of the
    counterpart - a legal fact but an economic fiction -
    and with it enhances the risk that future men hold-
    ing power in the United States and in recipient

                             67
     countries may want to treat it like an economic
     fact. ***

          "The alternative to the status quo is, of
     course, the institution of a deliberate and effec-
     tive policy to extinguish this legal fact, to
     diminish and eliminate the spurious and dangerous
     U.S. proprietorship of excess counterpart. Such
     a policy could take many forms but, in substance,
     it would mean giving up claims of questionable or
     no value to the U.S., i.e. where no reasonable
     future U.S. need for them can be assumed."

     We asked the Embassy to supply evidence that it might
have which would point to the existence of problems in
United States-Indian relationships over the issue of ex-
cessive U.S. rupee accumulations. The Embassy, in re-
sponse, pointed to specific instances where the fact of U.S.
ownership of large amounts of Indian rupees had been used
as criticism of the Indian Government. Also, the Embassy
pointed out that a high official of the Indian Government
had broached the subject with the United States Government
in July 1968. (See app. II.)

     On December 12, 1968, an Indian Government-initiated
report was published on the subject of the monetary im-
pact of Public Law 480 transactions. This report was pre-
pared by four distinguished Indians referred to as the
Public Law 480 Expert Group.

     In that report, no reference as such to any political
problem was made; but, in reference to the inflationary ef-
fect of U.S.-use expenditures, the report stated:

         "In view of the large sums involved and con-
    sidering the large expenditure effects as well as
    the wealth effects of these sums, a solution ac-
    ceptable to both Governments needs to be explored
    urgently."




                           68
THE DIFFICULTY IN SOLVING THE PROBLEM

     It is difficult to reduce the amount of U.S.-owned ru-
pee balances appreciably because of certain economic and le-
gal difficulties. Economic difficulties arise because of
the nature of our rupee holdings which have led to the lim-
itations that are understood to exist on their use. Legal
difficulties arise because of statutory requirements for
their retention and usage.

Economic difficulties

     Under the Development Loan Fund, the United States fi-
nanced foreign exchange (dollar) costs of needed imports of
raw material, machinery, spare parts, and other commodities
into India. The terms of the loans-entered into in 1961
and earlier years provided for repayment of principal and
interest to the United States in rupees. Under the Public
Law 480 program, the United States sold to India agricul-
tural products for rupees.

     Under both programs, the commodities entering India
amounted to transfers of real resources from the United
States. Since the transfers were made on concessional
rather than commercial terms, the transfers are properly
viewed as aid from the United States to India.

     If the United States were to try to assist India with
its rupees that accumulated to its credit from these pro-
grams of aid, the United States would then be attempting to
make a given amount of assistance do "double aid duty."
This it cannot do (although the United States might in this
way influence in some useful fashion the Government of In-
dia's allocation of rupees).

     Actually, the subsequent use of U.S.-owned rupees by
the United States Government for its own purposes represents
a transfer of resources from India back to the United States.
Thus, any use of U.S.-owned rupees for U.S. consumption de-
nies the use of resources to India for Indian consumption.
This is a fundamental difficulty in making greater use of
U.S.-owned rupees for U.S. programs in India, and it explains
why a "generous" U.S. donation of several million dollars


                            69
worth of U.S.-owned rupees is not a bonanza to the Govern-
ment of India. It also explains why U.S. officials believe
that the use of U.S.-owned rupees for U.S. purposes in India
must be limited to "reasonable" amounts.

     At June 30, 1969, U.S.-owned rupees amounted to the
equivalent of $886 million. Of this amount, the equivalent
of $85 million was in commercial banks in India and the re-
mainder, amounting to a little over 90 percent of the total,
was "held" in the central bank--the Reserve Bank of India.

     Although of little practical significance, it should be
noted that U.S.-owned rupees in the central bank actually
take the form of bonds. We have been informed that the cen-
tral bank cannot legally pay interest on deposits. Since
U.S. law requires interest to be earned on the foreign cur-
rency deposits, the Government of India invests U.S-owned
currency in interest-bearing special securities created for
this purpose.

Legal difficulties

     Public Law 480 rupees may be granted to the Government
of India pursuant to the last proviso of section 104 of Pub-
lic Law 480, as amended through July 29, 1968. This proviso,
commonly known as the Mondale-Poage amendment, permits ex-
cess foreign currencies to be used for certain purposes with-
out appropriation. These certain purposes include any of
the uses authorized by Public Law 480 with the exception of
those authorized in sections 104(a) and (b) of the law, ac-
cording to the executive branch interpretation. One such
use authorized by Public Law 480 is to promote trade and ag-
ricultural and other economic development by loans or by use
in any other manner which the President may determine to be
in the national interest of the United States.

     According to the executive branch, there is no similar
legislation which would permit the granting of non-Public
Law 480 excess rupees without appropriation. These rupees
are accumulating more rapidly than Public Law 480 rupees
(see app. I.)

     The newly created Overseas Private Investment Corpora-
tion (sec. 231, Foreign Assistance Act of 1961, as amended

                             70
by the Foreign Assistance Act of 1969, approved December 30,
1969) is authorized to use U.S-owned excess foreign curren-
cies, Public Law-480 and non-Public Law 480, for loans to
firms privately owned or of mixed private and public owner-
ship without regard to section 1415 of the Supplemental Ap-
propriations Act, 1953 (sec. 234(c), Foreign Assistance Act
of 1961, as amended through December 30, 1969). This au-
thority to lend excess foreign currencies without dollar ap-
propriation permits the constructive use of moneys that may
otherwise remain idle, but the authority does not permit a
reduction in the balance of U.S.-owned excess foreign curren-
cies. Only authority to grant foreign currencies permits re-
ductions in the balances. In fact, if the rate of interest
on loans exceeds inflation-caused value reductions, the use
of excess foreign currencies for loans acts to increase the
amounts of excess currencies on hand in the long run.

     Section 613(d) of the Foreign Assistance Act of 1961,
as amended (22 U.S.C. 2363(d)), requires the Secretary of the
Treasury to provide for the receipt of interest income on
U.S.-owned foreign currency balances. These earnings on ru-
pee holdings add to the accumulations. This requirement may
be waived by the Secretary of State whenever he determines
that to do so would be in the national interest.




                             71
ECONOMIC DEVELOPMENT PROJECTS CONSIDERED
PURSUANT TO THE MONDALE-POAGE AMENDMENT
     The United States has provided many millions of dollars
worth of rupees to the Government of India and private orga-
nizations in India under the provisions of the Mondale-Poage
amendment and is now considering additional economic devel-
opment projects.
     By far the largest of these projects is a rural elec-
trification program intended to double the number of vil-
lages which had been reached by electricity at that time in
India. The first of a series of grants has been made to
help the Government set up the Rural Electrification Corpo-
ration. The first grant amounted to $9.2 million equivalent
and total U.S. contributions over a period of 5 years are
expected to be about $140 million equivalent. The corpora-
tion is Government-owned and will provide capital from a
revolving fund to state electricity boards, rural electric
cooperatives, and other ventures to spread rural electrifi-
cation, extend irrigation facilities and assist the "Green
Revolution."
     An agricultural credit guarantee and rediscount fund
has been proposed to be funded with U.S.-owned rupees
amounting to about the equivalent of $26.7 million. The
grant to the Government of India is awaiting the establish-
ment of an organization. The grant is to be used to provide
initial capital for the fund which will make available to
farmers, through guarantee and rediscount operations, credit
to finance increasing demands for agricultural items, pri-
marily fertilizers and pesticides.
     Rupees valued at $8,060,000 were granted for a medical
college, three hospitals, and a school for specialized
training in management and industrial relations as follows:
          St. John's Medical College, Bangalore, India, re-
     ceived the equivalent of $6,500,000 to increase the
     facilities for clinical teaching by constructing a 500-
     bed hospital, an outpatient department, a kitchen, a
     laundry, a hostel for sisters and nurses, and a hostel
     for postgraduate students. The Georgetown University
     School of Medicine is the permanent U.S.-sponsoring
     body of the St. John's Medical Center and College of



                             72
     Medicine. Three U.S. citizens are members of the in-
     stitution's governing board.

          Miraj Medical Center, Miraj, Maharashtra, founded
     in 1894 by the Western India Mission of the United
     Presbyterian Church in the United States, received
     the equivalent of $423,000 to provide an additional 102
     beds and to expand and improve administrative, surgical,
     and pathology facilities.

          Creighton-Freeman Hospital, Vrindaban, founded in
     1898 by the United States Methodist Church Women's
     Foreign Mission Society received the equivalent of
     $421,000 to construct three hospital buildings and to
     expand nursing school, hostel, and hospital residential
     facilities. Two Americans are senior staff members,
     and five American Methodist bishops have visited the
     new building site.

          Mercy Hospital, Jamshedpur, was granted the
     equivalent of $190,000 to construct an additional hos-
     pital building to provide needed isolation areas. The
     hospital was founded in 1962 by the Philadelphia Sis-
     ters of Mercy. Forty percent of its patients receive
     care, including needed surgery, entirely without cost.

          Xavier Labour Relations Institute was established
     by the Maryland Province of the Society of Jesus in
     1949 to serve India's need for specialized training in
     management and industrial relations. The Institute,
     with the continuing support of the Maryland Province
     and backed by a consortium of five American universi-
     ties, rapidly is becoming recognized as the center for
     industrial relations studies and research in India. A
     grant of the equivalent of $526,000 was made for the
     construction of a library-research-classroom building
     and faculty residences.

     A grant of U.S.-owned rupees amounting to the equiva-
lent of $7,894,000 was made to the Government of India to
purchase locally made vehicles for use in the family plan-
ning program. Transportation has been identified as a
principal bottleneck in the present family planning program
especially in getting services and commodities out into the
rural areas.
                             73
     A grant of rupees equivalent to about $2.7 million was
provided to the Government of India to construct grain
storage facilities. Excellent grain harvests have created
unprecedented storage and transportation problems in India.
As a solution to the shortage of adequate storage, the
Government has requisitioned schools (available during the
summer months) and even theaters. The Government of India
has instituted a crash program to build new storage facili-
ties which will permit protection of the grains and enable
the building of buffer stocks. The U.S. Government strongly
supports this, since adequate buffer stocks of grain are
needed to support the move toward a free market system for
distribution of grain at stable market prices.

     A grant of $2,632,000 equivalent to the Sevagram Medi-
cal College in the State of Maharashtra has been proposed.
The grant will finance the construction of buildings and
the establishment of teaching and research facilities at an
existing rural hospital which will then become a teaching
hospital for Sevagram College, a rural medical college.
This has important implications for family planning since
lack of adequate rural health services is currently a criti-
cal impediment to the acceptance of family planning.

     In 1968 a grant of rupees equivalent to $2 million was
made to the Government of India to initiate a science text-
book program by providing advisory assistance and for sub-
sidizing the reprinting and dissemination of U.S. textbooks
in sciences, especially agriculture. The 1968 funds were
the initial-year funding for a 3-year program.

     In 1967 a grant equivalent to about $1.6 million was
made to three U.S.-sponsored health education facilities,
the Ludhiana Christian Medical College, the Notre Dame Sis-
ters Society, and the Holy Family Hospital. It is believed
that the efforts of these private health and educational
organizations serve in a measurable way to improve the so-
cial and economic conditions of the people in the areas
where the organizations are located.

     A grant of rupees equivalent to about $660,000 has been
proposed for the Rajendra Memorial Research Institute of
Medical Sciences for construction of new facilities and ex-
pansion of existing facilities. The facilities will enable

                             74
the Institute to provide postgraduate medical teaching and
research on an all-India basis. It is the only institution
in the state of Bihar which is primarily devoted to medical
research.

     A grant of rupees equivalent to $537,000 was made to
finance the local currency costs of continuing and expanding
family planning activities of the Pathfinder Fund in India.
The Fund has carried out an aggressive family planning pro-
gram in India and currently has 10 projects in operation
such as (1) introducing contraceptive techniques and motiva-
tional materials to more than 400 hospitals and clinics in
India, (2) investigating the use of midwives and teachers
in the oral contraceptives program, and (3) encouraging
village leaders to take an interest in and support three
model clinics where the acceptance and continual use of oral
contraceptives is unusually high.

     A grant equivalent to $38,200 was made to the Society
for International Development to help pay transportation
costs of international economists to the Society's World
Conference held in New Delhi in November 1969. The grant
matched contributions from other sources. An interchange
among the Indian participants, estimated at 350, and non-
Indian participants, estimated at 150, all of whom are eco-
nomic development professionals, was expected to be one of
the most valuable aspects of the meeting, enabling those
from outside India to learn in depth about Indian development
experience while permitting Indian professionals to be in
contact with leading development scholars and practitioners
from all parts of the world.

     The Government of India has refused, on at least one
occasion, a grant of rupees for a proposed project that
would have involved active participation by the United
States. The project was the proposed binational Indo-
American educational foundation which was tabled indefi-
nitely by the Indian Government due to strong opposition
from various factions in India. The foundation would have
involved the use of a dollar equivalent of about $300 mil-
lion in U.S.-use rupees to establish a trust fund, the in-
come from which would'have been used to finance expenses of
the foundation. In this connection, the November 16, 1968,
issue of "Commerce" (an Indian magazine) included the

                            75
following statement pertaining to the now-dormant educa-
tional foundation:

     " *** the US Government's proposal to utilise
    a part of these funds for establishing an Indo-
    US educational foundation must now be ruled out.
    This proposal which was mooted about four years
    ago has been in cold storage following strong
    opposition to it from educationists and others
    in this country."




                             76
THE ECONOMICS OF FOREIGN
CURRENCY DEVELOPMENT GRANTS

     The United States does not provide additional resources
when it lends or grants rupees to India, as pointed out on
pages 69 and 70 of this report. Thus,-there is no economic
benefit in terms of new resources when the United States
provides the Indians with U.S.-owned foreign currency in
India. A grant of U.S-owned foreign currency is akin to an
agreement whereby the United States and Indian Governments
simply decide to attribute to the U.S. Government the fi-
nancing of a project that actually is financed from current
Indian resources.

     When economic development "grants" are made from Public
Law 480 currencies at the same time that Public Law 480
commodities are delivered and sold in India, some economists
suggest that the real resources provided by the United
States and represented by the commodities do pay for the
economic development project.

     The following discussion appearing in a Brookings In-
stitute publication in December 1962 is relevant to this
matter (the author subsequently became the AID Mission Di-
rector in India):

          "*** the Indians recently have rediscovered
     a way to play strictly according to the P.L. 480
     rules and yet virtually to by-pass any effective
     United States direction of indigenous development
     activity. And the Americans have been acquiesc-
     ing readily. Since mid-1959 the appropriation of
     P.L. 480 funds to jointly agreed uses has consid-
     erably accelerated. The procedure basically has
     been for the Indian government to present to the
     United States authorities a long list, drawn
     from the next phases of its development plan, of
     projects requiring local financing and to say, in
     effect, 'These things are going to be done any-
     way. Which ones would you like to finance?'
     American officials have selected certain projects,
     and agreements have been made. To be sure, the
     United States has sometimes secured modifications
     in selected projects and occasionally has

                              77
     persuaded India to accept alternatives to those
     on the list, but it has not exercised any major
     initiatives as to project choice.

          "*** I suspect that *** sophisticated Indian
     officials have come to the view that very little
     in principle is lost by letting the United States
     get the credit for some earthen dams, godowns,
     and other rupee-expense projects that are going
     to be built anyway."

     This is important in evaluating whether grants made
pursuant to the Mondale-Poage amendment are, as required by
that legislation, for measures additional to those which
would be undertaken without such assistance. The Mondale-
Poage amendment is not generally available for country ef-
forts that are not additional to measures that would be un-
dertaken without assistance under that amendment. There
might, therefore, be a question as to the propriety of its
use in a case where all that is involved is an attribution
to the U.S. Government of'something that would have happened
without regard for the action of the U.S. Government.

     In a report published in 1968 by the Organization for
Economic Cooperation and Development dealing with the local
currency proceeds of foreign aid, the point is made that:

         "*** the Government of India has succeeded
    not only in keeping exclusive control over the
    utilisation of most PL 480 funds, but also in
    maintaining the facade of usual PL 480 counter-
    part negotiations and loan agreements with the
    U.S. Thus,counterpart is 'attributed' to spe-
    cific sectors and projects in the Indian budget.
    This satisfies the letter of PL 480, and provides
    the window dressing the American administration
    needs for its congressional relations, but it is
    without any economic significance."

     There is substantial evidence that any project funded
with U.S.-owned rupees is, in fact, funded from current rev-
enues by the Government of India, and this is necessarily
true in view of the economic realities pertaining to the
transactions involved.

                             78
     With regard to using excess Indian rupess for institu-
tional endowment the following comments in the same 1968
study are interesting:

         "Another attractive possibility which could
    absorb large amounts of excess currencies on a
    grant basis would be to establish foundations in
    the fields of health and education, and to endow
    them with excess currencies. To avoid inflation-
    ary effects, the major part of the endowment
    would be invested in recipient Government securi-
    ties, and the foundation would largely depend on
    the investment income to pursue its objectives.
    One major proposal of this sort almost came off,
    but political opposition, first in the U.S.,
    later in the recipient country,'caused it to be
    shelved, at least temporarily.

          "It is doubtful that ingenious and construc-
     tive devices of this nature can do the trick by
     themselves. The sheer magnitude of the problem
     tends to preclude it. Only a determined policy
     in accordance with present law - to write off ex-
     cess currencies - could do the whole job - quickly,
     simply and effectively. So far, however, the con-
     siderable advantages of such a policy to U.S. re-
     lations with excess currency countries have not
     appeared to the Administration worth the risk of
     antagonising important elements in Congress. By
     the same token, the chances of overhauling the
     law, and to put it on a straight grant basis,
     a la Marshall Plan, thereby getting rid of ***
     Section 104, which details the permissible uses
     of counterpart, are virtually nil. Real solutions
     appear politically neither acceptable to the U.S.
     Congress, nor essential to the U.S. Administra-
     tion."




                             79
LEGISLATION AUTHORIZING THE PRESIDENT TO
SEEK AN AGREEMENT WITH AID RECIPIENT EXCESS
CURRENCY COUNTRIES FOR THE USE OF
NON-PUBLIC LAW 480 CURRENCIES

     Section 612(d) of the Foreign Assistance Act of 1961,
which was added by the Foreign Assistance Act of 1969, ap-
proved December 30, 1969, provides that:

          "In furnishing assistance under this Act to
     the government of any country in which the United
     States owns excess foreign currencies as defined
     in subsection (b) of this section, except those
     currencies generated under the Agricultural Trade
     Development and Assistance Act of 1954, as amended,
     the President shall endeavor to obtain from the
     recipient country an agreement for the release,
     on such terms and conditions as the President
     shall determine, of an amount of such currencies
     up to the equivalent of the dollar value of as-
     sistance furnished by the United States for pro-
     grams as may be mutually agreed upon by the re-
     cipient country and the United States to carry
     out the purposes for which new funds authorized
     by this Act would themselves be available."

     In the House Committee on Foreign Affairs report on the
bill containing the language which became section 612(d)
above (H. Rept. 91-611, Nov. 6, 1969, on H.R. 14580), the
following information is provided:

         "This section requires the President to en-
    deavor to obtain from all recipient countries in
    which the United States owns excess foreign cur-
    rencies (other than those generated under the
    Agricultural Trade Development and Assistance Act
    of 1954) an agreement to release such currencies
    in an amount equivalent to the dollar value of
    assistance furnished by the United States for
    mutually agreed upon programs to carry out the
    purposes for which funds authorized by this act
    would be available.



                            80
          "The object is to use excess foreign curren-
     cies to promote development rather than having
     them remain idle. The United States owns large
     amounts of foreign currencies in a few countries
     which are major recipients of U.S. assistance.
     In some instances these countries have shown a
     greater interest in development programs financed
     with U.S. foreign assistance funds than in devis-
     ing and carrying out projects or programs which
     could be financed with local currencies which the
     United States would be prepared to make available.

          "Although increased use of local currencies
     may not bring about a corresponding or immediate
     reduction in U.S. assistance, since U.S. aid pro-
     vided under the Foreign Assistance Act consists
     largely of goods and services procured in the
     United States, it is hoped that the stimulation
     to local production resulting from using local
     currencies for development will reduce the need
     for dollar assistance.

          "The relating of the amount of U.S. aid to
     the magnitude of the development effort financed
     with local currency should however, by providing
     an incentive for governments receiving U.S. as-
     sistance, give a higher priority to the effective
     utilization of such currencies.

          "The United States would benefit by having
     excess currencies which are not now being utilized
     spent for purposes which would promote U.S. for-
     eign policy objectives."

     We have been informed that AID requires either an ap-
propriation of foreign currency or a waiver of section 1415
of the Supplemental Appropriations Act of 1953 (see chapter
4 of this report) before it can use excess foreign currency
pursuant to this amendment; i.e., the amendment provides
authority, it does not make the foreign currency available.

     Additional information on this amendment, sometimes
called the Wolff amendment, may be found in the Committee
Print entitled "Report of Special Study Mission to Asia,"

                             81
dated April 22, 1970, prepared for the use of the House
Committee on Foreign Affairs. The Study Mission Chairman
was Congressman Lester L. Wolff.

AGENCY COMMENTS

     In commenting on a draft of this report, the Depart-
ment of State said:

     "In any actions to facilitate reduction in our
     Indian rupee balances by the Congress or the Ad-
     ministration, we believe U.S. interests require
     the broadest feasible use of excess currency for
     primary benefit of the U.S., and maintenance of
     balances adequate for these purposes in the fore-
     seeable future, should be assured. Specifically,
     we feel that in planning the increased utilization
     of these holdings, first priority should go to
     those uses which help the balance of payments
     through expenditure of local currency in lieu of
     U.S. dollars abroad; second priority to those
     lower priority uses for which dollars would not be
     expended, but which provide significant benefits
     of primary value to the U.S.; and third priority
     to uses of primary benefit to the foreign coun-
     try."

     In our opinion, this is a proper order of priorities.

CONCLUSION

     It appears that the large U.S. rupee balance in India
is causing some problems in Indo-United States relations
because of (1) Indian anxiety over potential difficulties
that may arise as a result of misunderstandings regarding
the nature of U.S. holdings and (2) representations by
Indian politicans who wish to embarrass the United States
by claiming that the United States through its rupee hold-
ings is somehow largely controlling the Indian economy.

     In our opinion, the decision to reduce substantially
outstanding balances of U.S.-owned rupees in return for im-
proved foreign relations is a policy matter deserving con-
gressional attention.
                             82
     If the decision is made to do so, one way would be to
attribute planned Indian Government economic development
expenditures to U.S.-grant rupee financing. Through a ju-
dicious selection of projects with which our Government
would like to be associated, the United States could re-
ceive credit for having helped finance worthwhile endeavors
while allaying Indian fears that our rupee balances some-
how would be misused.

     The Mondale-Poage amendment to Public Law 480 provides
authority to grant Public Law 480 rupees for economic devel-
opment purposes without obtaining specific appropriations.

     For U.S.-owned rupees accumulated other than through
the Public Law 480 program, the executive branch believes
that it lacks the authority to grant its rupees for economic
development projects without appropriations.

MATTER FOR CONSIDERATION BY THE CONGRESS

     We believe the Congress may wish to consider:

     1. Whether a reduction in the balance of U.S.-owned
        Indian rupees should be made to avoid the potential
        for damaging relations with India.

     2. Whether actions by the executive branch in this re-
        gard are consistent with congressional desires.

     3. Whether legislative action may be desirable to re-
        strict or facilitate the reduction in the balance of
        U.S.-owned rupees.

     Specifically, the Congress may wish to consider whether
to provide authority for the President to use non-Public Law
480 excess currency for grants in India without appropria-
tions similar to the authority now existing for Public Law
480 excess currency.




                              83
                         CHAPTER 9

              OTHER EXCESS CURRENCY COUNTRIES

     There are 10 excess currency countries. They are
listed on page 88, together with the amount of U.S.-owned
excess currency in each. On page 89 we have attempted to
provide some meaningful indicators by which to judge the
significance of U.S. holdings in each country.

     The schedule on page 88, which shows the amounts of
U.S.-owned foreign currency available, also shows that in
some countries annual receipts of U.S.-owned foreign cur-
rency exceed annual expenditures. These receipts arise al-
most wholly as a consequence of old loans and interest earn-
ings rather than of current programs, Furthermore, but not
shown on the schedule, these annual receipts are scheduled
to continue at about the same level for many years. We
made a rough estimate of expected receipts, by country,
from 1969 through 1978 and found that the level was rela-
tively constant in each year.

     The schedule on page 89, which presents U.S.-owned for-
eign currency balances in terms of selected economic crite-
ria applicable to the excess currency country, is subject
to a number of qualifications.

     In the first place, and most significantly, foreign
currency availabilities should be viewed in terms of future
accruals as well as balances on hand.

     Secondly, it is not very meaningful to compare balances
of U.S.-owned foreign currency in India, and perhaps in
other countries as well, with gross national product, money
supply, and exports if the United States ultimately is un-
able to convert the currencies to real resources for its own
use or is unable to spend the money on projects or activi-
ties that the Indian Government would not have undertaken
in any event. Thus it is of little relevance to note that
U.S.-owned excess currency in India at June 30, 1969, is
equivalent to about 10 percent of the money supply.




                            84
     Lastly, the indicators themselves may not be too useful
for two reasons: (1) bases for aggregate economic statis-
tics in developing countries are not necessarily adequate to
provide reliable data and (2) country-to-country comparisons
are not meaningful because

    -- with regard to money supply, some countries have a
       larger degree of barter trade with a corresponding
       smaller need for money and

     --with regard to exports, some countries are larger
       traders than others.

     Notwithstanding all these limitations, the information
is included since it does provide some insight into the size
of U.S.-owned foreign currency balances at June 30, 1969.

     For example, if India were to deliver to the United
States export commodities valued at the amount of U.S.-owned
rupees at June 30, 1969, India would deprive itself of about
40 percent of its annual export earnings. Of course, India's
export earnings are inadequate already, which is a primary
reason for the U.S. aid program to India and for the United
States' owning so many rupees.

     A comparison of U.S.-owned rupees in India at June 30,
1969, with India's gross national product (about 2 percent
of the annual gross national product) or with the amount at-
tributable to each Indian ($1.29 per capita) would suggest
that the United States does not own very much in Indian cur-
rency. However, if even these seemingly nominal amounts
were to be converted to real resources for U.S. use, they
would be very significant to India since India is poor. Its
current per capita gross national product is under $100.

     Here are some overall observations relative to U.S. ex-
cess currency balances in other countries.

     1. Pursuant to Public Law 480 agreements with the United
States, Poland is converting U.S.-owned Polish currency to
dollars. Public Law 480 agreements, which were more in the
nature of long-term credit sales for dollars, provided for
the sale of agricultural products at an exchange rate of 24
Polish currency units to each U.S. dollar. The agreements

                              85
provided also that Poland would buy back in U.S. dollars the
unused U.S.-owned Polish currency at the 24-to-1 rate over
a relatively long period of time. Thus decisions by U.S. ad-
ministrators today to use U.S.-owned excess currency in Po-
land must be evaluated in terms of losing a definite dollar
repayment at some future period.

     2. In Israel our supply of local currency is so limited
in terms of present and future requirements plus unfunded po-
tential uses that it is questionable whether Israel should
even be considered an excess currency country. Decisions to
use U.S.-owned Israeli currency should be evaluated almost
as stringently as though the expenditures were to be made in
dollars.

     3. Ceylon1 and the United Arab Republic present a good
contrast. In Ceylon, where the U.S.-owned foreign currency
balance at June 30, 1969, amounted to only a 1.6-year re-
quirement and where our receipts of foreign currency in fu-
ture years are estimated to be less than our expenditures,
the decision to use U.S.-owned foreign currency should be
evaluated much more carefully than a similar decision in the
United Arab Republic. In the latter country the amount of
U.S.-owned excess currency at June 30, 1969, is estimated to
be equivalent to a 54 years' supply, and the rate of accumu-
lation based on the projection for fiscal years 1970 and
1971 exceeds the rate of use by 6 to 1. There seems to be
little need at present to worry about depleting our excess
currency balances in the United Arab Republic. This substan-
tial excess, as measured by current rates of use, reflects
the sharp reduction in expenditures following the 1967 break
in diplomatic relations.

     4. The U.S. position in each of the excess currency
countries differs in many important respects. In some of
the countries, the United States has extensive economic aid



O1 n July 20, 1970, the Office of Management and Budget
 dropped Ceylon from the list of excess currency countries
 for fiscal years 1971 and 1972. Thus, there are now 10 ex-
 cess currency countries.



                             86
programs; some countries are of greater importance than
others in certain respects; two of the countries have Commu-
nist governments; and one country does not currently.ex-
change ambassadors with the United States. These and simi-
lar matters necessarily influence decisions on how best to
manage and use our excess currency holdings.

CONCLUSIONS

     Although opportunities may exist for using more excess
foreign currencies in countries other than India, in each
country there are numerous considerations involved which
would have to be weighed in deciding how much currency to
spend and on which activities and programs to spend it. The
circumstances in the excess currency countries differ to
such an extent that generalizations would be unwise; there-
fore proposed uses of excess foreign currency should be scru-
tinized in terms of the specific situation existing in each
country.




                             87
AGENCY COMMENTS

         In commenting on our report, the Department of State
said:

         "Although the report reflects the fact that the
         GAO study was made only on the use of excess In-
         dian rupees, the recommendations in the report re-
         late to procedures which apply to all excess cur-
         rencies. We would like to emphasize statements in
         the recommendations of Chapter 6 and the conclu-
         sions of Chapter 9 which refer to the varying con-
         ditions existing in each of the excess currency
         countries which merit differing degrees of con-
         sideration, and which would make generalizations
         unwise. Proposed uses of excess foreign cur-
         rency, under either existing or amended procedures,
         should be reviewed in terms of the specific situa-
         tions in each individual country. Actions recom-
         mended in the report are not equally valid for all
         excess currency countries, and may not be appli-
         cable at all in some."

                                U.S.-Owned Excess Foreign Currencies
                             Expressed in the Equivalent of Millions of
                                 U.S. Dollars at Treasury Department
                                Prescribed Rates of Exchane (note a)

                    U.S.-owned
                      foreign                     Number       Loans             Receipts for
                    currency at       U.S.-use   of years    repayable             U.S. use
                      6-30-69         expendi-   require-   in foreign             (note b)
                            U.S.        tures     ments     currency at   Actual        Projected
                   Total      use      FY 1969   on hand      6-30-69     FY 1969   FY 1970   FY 1971

Burma               19.1      11.1       1.4        7.9          38.1        2.3         2.3     2.4
Ceylon (note c)      4.6       3.6       2.3        1.6          15.8        1.0         1.2     1.3
Guinea              28.7       6.2        .25      24.8             .9        .5          .6       .8
India              897.5     678.1      35.5       19.1       2,347.9      120.7       117.4   130.5
Israel              19.7       8.9      23.5         .4         244.4       21.1        21.7    25.8
Morocco             24.7      11.7      11.8         .9         223.8       10.6        12.2    16.5
Pakistan           209.5     140.4      14.4        9.7         654.1       40.4        36.9    39.1
Poland             438.7     438.7      14.4       30.5          -           -          -        -
Tunisia              24.3     15.8       3.3        4.8          87.9        5.5        7.0      8.9
United Arab Re-
  public           259.9     200.3       3.7       54.1         347.1       22.2       22.8     23.5
Yugoslavia          66.8      58.3      14.1        4.1         296.6       16.1       19.1     21.2

aTable prepared by GAO on the basis of data compiled by AID and Treasury Department.

bReceipts exclude Public Law 480 title I collections since existing law will eliminate additional
 excess collections after December 31, 1971. Thus, annual receipts shown may be considered broadly
 representative of annual receipts for several years subsequent to fiscal year 1971.

COn July 20, 1970, the Office of Management and Budget dropped Ceylon from the list of excess cur-
 rency countries for fiscal years 1971 and 1972. Thus, there are now 10 excess currency countries.




                                                 88
                   U.S.-Owned Excess Foreign Currency Balances Available
                        For U.S. Use at June 30, 1969, Compared with
                       Selected Excess Currency Country Data (note a)

                   U.S.-owned                                     U.S.-owned excess currency
                     excess                                       available for U.S. use at
                    currency                                            June 30, 1969,
                  available for                                        as a percent of
                   U.S. use at    Population                  Annual gross       Money    Annual
                  June 30, 1969   (millions)     Amount     national product    supply    exports
                   (millions)      (note b)    per capita       (note c)       (note d) (note e)

Burma                $ 11.1           26.4       $ 0.42           0.55           2.27     10.13
Ceylon (note f)         3.6           12.0          .30            .19           1.12      1.04
Guinea                  6.2            3.5         1.77           2.36           (g)       (g)
India                 678.1          523.9         1.29           1.49           9.57     39.17
Israel                  8.9            2.7         3.29            .53           1.07      1.39
Morocco                11.7           14.6          .80            .39           1.25      2.60
Pakistan              140.4          109.5         1.28            .97           6.13     19.66
Poland                438.7           31.5        13.93           1.76           (g)       (g)
Tunisia                15.8            4.7         3.36           1.54           4.70      9.94
United Arab Re-
  public              200.3           31.7         6.32           4.49         15.46      41.13
Yugoslavia             58.3           20.1         2.90            .64          2.58       4.61

aTable prepared by GAO from data compiled by the International' Bank for Reconstruction and
 Development, the International Monetary Fund, and AID.

bPopulation is for 1968 except Guinea's and Poland's, which are for 1965.

CGross national product is for 1968 except Guinea's, Poland's, and Yogoslavia's, which are
 for 1965, and the United Arab Republic's which is for 1967.

dMoney supply is at December 31, 1968.

eExports are for 1968.

fOn July 20, 1970, the Office of Management and Budget dropped Ceylon from the list of ex-
 cess currency countries for fiscal years 1971 and 1972. Thus there are now 10 excess cur-
 rency countries.

gNot available.




                                                 89
                        CHAPTER 10

     OBSERVATIONS ON OTHER MATTERS CONNECTED WITH THE

   ACCRUAL, EXPENDITURE, AND CONVERSION OF EXCESS RUPEES

     During our review in India, we became aware of a num-
ber of specific situations pertinent to the subject matter
of this report, which we have not discussed elsewhere. They
are discussed in some detail in the following sections and
involve:

     -- Loss of an opportunity to trade American food to In-
        dia in return for manganese ore and ferromanganese.
        Instead, the food was sold for unneeded rupees.

     -- Rupee costs of certain project and administrative
        expenses funded through the use of a trust fund ar-
        rangement rather than through an appropriation pro-
        cess.

     -- Delays in converting large amounts of U.S.-owned ru-
        pees to hard currencies for use by the United States.

     -- Limitations on the amounts of Indian goods which can
        be bought by the U.S. Government for use outside In-
        dia.

     We are presenting these matters in this report because
they amplify some of the problems discussed earlier and en-
lighten in other ways.

     The point dealing with manganese ore and ferromanganese
shows how and why the United States rejected an offer to
trade food for potentially useful raw materials and instead
accepted more unneeded rupees.

     The trust fund arrangement illustrates how AID can le-
gally use excess rupees in India without appropriations, in
contrast with the procedures that other agencies are re-
quired to follow in obtaining authority to use rupees.




                             90
     The conversion situation illustrates another aspect of
overall Indo-United States problems involving the impact of
excess currencies on India's dollar reserves.

     Lastly, the discussion on the limitations in amounts
of Indian goods which can be bought by the U.S. Government
for its own use outside India deals rather specifically
with an often-asked question: "Why can't we use our rupees
to buy furniture or other items in India for use by U.S.
Government agencies outside India?"

ACCEPTANCE OF MANGANESE ORE AND
FERROMANGANESE IN LIEU OF EXCESS RUPEES
FOR COMMODITY SALES TO INDIA

     In November 1967 the Government of India offered to the
United States ferromanganese and manganese ore in exchange
for wheat. The U.S. Government has not accepted the Indian
offer which it valued at about $20 million to $22 million
because the materials in the U.S. strategic stockpile are
already surplus to requirements. The decision not to ac-
cept the offer was also influenced by the depressed state
of the domestic ferroalloys industry.

     The United States would be better served in two re-
spects if it could barter agricultural products for com-
modities available in India. In the first place, the United
States would obtain a commodity of value rather than more
excess rupees--although storage and transport costs for
commodities would have to be considered. Additionally, the
problem in Indo-United States relations caused by the large
accumulation of U.S.-owned rupees would not be as aggravated
by the barter arrangements as it would be by additional ac-
cumulation of U.S.-owned rupees.

     Barter arrangements similar to that offered have been
made in the past. Pursuant to an agreement made on March 3,
1959, India delivered to the United States 112,000 tons of
ferromanganese, 155,000 tons of manganese ore, and 230 tons
of thorium nitrate. In exchange, the United States deliv-
ered to India 450,000 metric tons of wheat.

     Under an agreement made on June 27, 1963, India pro-
vided the United States with 128,000 tons of ferromanganese,


                            91
300,000 tons of manganese ore, and 6,000 tons of beryl ore
in exchange for cotton. The manganese ore was converted
to ferromanganese in the United States and, along with the
ferromanganese delivered by India, was put in the U.S.
strategic stockpile.

     The Government of India proposal which was not ac-
cepted by the United States would have provided India with
wheat in exchange for ferromanganese and manganese ore. In
India we were informed that the Indian Government proposal
contemplated 120,000 tons of ferromanganese and 450,000
tons of manganese ore. The U.S. decision contemplated
about 75,000 tons of ferromanganese, 160,000 tons of manga-
nese ore, and beryl ore to the extent available. It is the
amounts contemplated by the U.S. decision that were valued
at from $20 million to $22 million.

     In our review of the U.S. Government's decision not to
accept the Indian proposal, we found that the U.S. decision-
makers were aware that additional rupee accumulations were
of no value to the United States. The proposal was consid-
ered on the basis that useful material was more advanta-
geous than more rupees.

     As noted above, however, the offer was not accepted by
the U.S. Government because the United States had no re-
quirement for the materials in its strategic stockpile.
This decision was also influenced by the depressed state of
the domestic ferroalloys industry. Available evidence sug-
gests that the U.S. Government might accept a proposal
which included alternative materials.

     It seems to us that inventory levels for the U.S.
strategic stockpile are predicated on levels of minimum
need rather than of maximum need. We can agree that the
Government should not use dollars to commercially buy mate-
rials for the stockpile when such materials are at or above
established requirements levels; but, when the United
States has an option to receive such materials in lieu of
unwanted rupees (or long-term dollar credits), we believe
that the option should not be rejected because the stockpile
levels are already met.



                             92
AID TRUST FUND IN INDIA

     AID is constructing 30 staff apartments and is financ-
ing the local currency cost of its operations in India with-
out charge to its appropriations. This is accomplished
through a trust fund agreement negotiated with the Govern-
ment of India. As a result, AID has been able to use
U.S.-owned rupees in India, unhampered by the funding re-
strictions which affect other U.S. agencies in India.
(These U.S.-owned rupees are categorized as country-use
funds.   See p. 8.)

     Prior to 1966, AID/India used U.S.-owned rupees, gen-
erated under section 402 of the Mutual Security Act, to fi-
nance certain local currency costs of AID's technical assis-
tance program. Expenditures by AID/India of,rupees from
this source amounted to the equivalent of over $60 million
from 1959 through 1965, when funds in the section 402 ac-
count were substantially expended. Since funds were re-
quired to continue to pay the rupee cost of programs for
which section 402 rupees had been used, AID/India entered
into an agreement with the Government of India to make
available, under a trust fund arrangement, country-use Pub-
lic Law 480 rupees for this purpose.

     At present, all of AID/India's local currency costs,
including administrative costs, are paid from the trust
fund. In addition, AID has used about $2.4 million in
trust fund rupees for construction of a warehouse/office
building complex in New Delhi and has programmed about
$1.4 million in trust fund rupees for the construction of an
apartment/staff house complex adjacent to the office build-
ing.

     The following table shows the amounts of appropriations
and trust funds used on AID technical assistance projects
in India in fiscal years 1967, 1968, and 1969.




                             93
                               AID/India project costs
                                        Actual
                                      trust fund       Total
                          Actual     obligations   obligations
                          dollar       (dollar     (dollar and
                       obligations   equivalent)   trust fund)

                                       (millions)

Fiscal year 1967          $ 8.4           $11.3       $19.7
      "     "   1968       13.2             8.1        21.3
      "     "   1969       1 4 .0a         11.3        2 5 .3 a


    Total                 $35.6           $30.7       $66.3

aEstimated as of September 1968.

     The $30.7 million in trust fund rupees utilized or
programmed for utilization during fiscal years 1967-69 for
these projects was not appropriated by the Congress since
no appropriation was required. Included in the above is
technical support (the project financed by trust fund ru-
pees to the greatest degree), which represents almost 50
percent of the $30.7 million in trust fund obligations.
Costs charged to this project include the administrative
costs formerly paid with U.S.-use rupees purchased with
dollars from the administrative expenses appropriation and
rupee costs of the previously mentioned construction work.

     Under the trust fund agreement, all buildings financed
from the trust fund become the property of the Government
of India and revert to the Government of India when no
longer needed for the AID program.

     Under the trust fund arrangement in India, U.S. Gov-
ernment employees and others who normally would be required
to use U.S. air carriers have been permitted to use the
Indian flag carrier for international travel. It has been
established Government policy for some time to require U.S.
Government official air travel on U.S. flag air carriers
except when travel on other aircraft is essential to the
official business concerned or is necessary to avoid unrea-
sonable delay, expense, or inconvenience.

                                  94
CONVERSIONS OF RUPEES TO
CONVERTIBLE CURRENCES

     The Embassy has maintained a policy of keeping to a
minimum its rupee conversion requests, to preserve India's
scarce foreign exchange. Public Law 480 provides'that
limited amounts of sales proceeds be converted to "hard"
currencies of other countries for agricultural market de-
velopment and educational exchange. Public Law 480 also
provides that Public Law 480 local currency sale proceeds
may be sold to U.S. citizens in exchange for dollars; Pub-
lic Law 480 sales agreements with India limit the total
amounts that may be sold.

     Actual amounts converted at the time of our review
had been less than provided for in the sales agreements
and less than requested by the United States. As a result,
backlogs had developed in convertible rupees, most of which
related to requests made as far back as August 1967. This
is illustrated by the following table which shows the sta-
tus of convertible rupees at March 15, 1969.

                                Amount        Amount
                              authorized    converted   Backlog

                                           (millions)

Sales to U.S. tourists,
  citizens, and founda-
  tions--section 104(j)         $15.5          $ 8.1     $ 7.4
Agriculture Market Develop-
  ment--section 104(b)(1)          41.9         17.4      24.5
Educational Exchange--sec-
  tion 104(b)(2)                   14.6         11.4       3.2

    Total                       $72.0          $36.9     $35.1

     During fiscal years 1967 and 1968, about $1.2 million
and $2.6 million, respectively, were converted under sec-
tion 104(j); about $1.3 million and $1.2 million, respec-
tively under section 104(b)(1); and about $2.6 million and
$2.7 million, respectively, under section 104(b)(2). On
March 14, 1969, an additional $7 million in rupees was con-
verted under 104(b)(1).

                              95
     On November 29, 1968, the Embassy advised the Depart-
ment that there was an upper limit in conversions that the
Government of India should be persuaded to accept. This
upper limit would be sufficient to cover conversions re-
quired in new agreements as well as some of the backlog.

     Subsequent to our review, we were informed that the
Embassy and the Government of India had made arrangements
whereby the conversion backlog would be eliminated over a
3-year period.

PURCHASES OF GOODS FOR USE OUTSIDE INDIA

     The Government of India was requested on December 4,
1961, to give to the United States blanket authority to ex-
port furniture, furnishings, fabrics, and live birds pur-
chased by the United States with Indian rupees. This au-
thority was sought to alleviate the burdensome and time-
consuming procedures required to obtain export permits on
an individual basis. The Government of India granted this
request on December 9, 1961, by stating as follows:

     "*** although as a normal rule under our Exchange
     Control Regulations, exports must be paid for in
     foreign exchange and not in rupees, in the cir-
     cumstances explained by you, we are as a special
     case authorizing the Reserve Bank to allow furni-
     ture, furnishings, fabrics and live birds pur-
     chased by the U.S. Government from the U.S. Em-
     bassy account up to the equivalent of $10,000 -
     per month (average) to be exported for the use of
     U.S. Government missions or offices outside
     India."

     The $10,000-a-month average export limitation which
is the equivalent of $120,000 a year is still in effect.

     During a recent Embassy study of possible additional
uses for U.S.-use rupees, the Administrative Officer ad-
vised that reasonably priced quality office and household
furniture was manufactured in India and that an interest in
purchasing this furniture had been indicated by the Foreign
Buildings Operations in the African, Asian, and East Asian
American Embassies. He also advised that, if it were not

                            96
for the $120,000-a-year export limitation, he believed that
it would be possible to use the dollar equivalent of about
$2.63 million over a 3-year period for this purpose.

     Therefore it appears that, for furniture items alone,
the export limitation precludes the United States from ad-
vantageously using additional rupees valued at about
$2.27 million ($2.63 million less $360,000 now allowed)
during the same 3-year period.

     The Treasury Department informed us that the Indians,
of course, must agree to the use of rupees for this purpose
and that the United States could not proceed unilaterally.
The Department also said that it was with some reluctance
that the Indians even agreed to the $10,000-a-month figure.
The Department also informed us that it was currently in
the process of negotiating a procedure with the Indian Gov-
ernment for Department of Defense procurement of various
items in India for use in post exchanges, whereby payment
would be made partially in rupees and partially in dollars.




                             97
                       CHAPTER 11

                      SCOPE OF REVIEW

     This review was made at the Embassyand AID Mission in
New Delhi, India, and at other appropriate locations in In-
dia. Work was also done in Washington, D.C., at the Agency
for International Development, at the Department of State,
and to a limited extent at the Department of the Treasury;
the Office of Management and Budget; the Department of
Labor; the Department of the Interior; the Department of
Agriculture; the Department of Commerce; the Department of
Health, Education, and Welfare; the Library of Congress;
the Smithsonian Institution; and the National Science Foun-
dation.

     We reviewed agency files and records and the printed
testimony of agency officials appearing before congres-
sional committees. We conducted extensive interviews in
India and Washington. We also made rather substantial use
of the large body of literature available on the subject of
U.S.-owned foreign currencies, including special studies
examining into ways to increase the use of such currency.

     This report is concerned with foreign currencies owned
by or owed to the United States. The matters discussed in
the report do not include Indian-owned funds generated un-
der commodity import programs and generally referred to as
counterpart funds.

     With regard to chapter 9, which comments on   the bal-
ances of U.S.-owned excess currencies around the   world, it
should be noted that our observations were based   on a lim-
ited review of summary data in Washington, D.C.    We made no
in-depth review of potential uses for U.S.-owned   excess
foreign currencies other than in India.




                            98
APPENDIXES




99
I
                                                                                                          APPENDIX I
MILLIONS OF U.S. DOLLAR EQUIVALENTS
3800
                      PROJECTED ACCUMULATION OF U. S.-OWNED RUPEES                                       $3.5 BILLION U.S. DOLLARS
3600                  AVAILABLE FOR U. S. OBLIGATIONS IN INDIA TO                                        WORTHOF RUPEES IN
                      END OF YEAR 2008 (ACTUAL IS SHOWN FROM
                      JUNE 30, 1957 THROUGH JUNE 30, 1968)

3200 -

                      AMOUNT ISSHOWN IN TERMS OF PUBLIC LAW 480
3000                  AND NON-PUBLIC LAW 480 ACCOUNTS

                      THIS CHART WAS PREPARED FROM DATA
2800 -                COMPILED BY THE U.S. AID MISSION IN INDIA

                      FOR THE PURPOSES OF THIS CHART.
2600
                      ONE U. S. DOLLAR IS EQUIVALENT
                      TO 7.6 INDIAN RUPEES
2400                                                                                                               PL 480 ACCOUT
                      AMOUNTS SHOWN HERE COULD EVENTUALLY BE                                        i!l                             I
                      LARGER. THE CHARTED ACCUMULATIONS ARE
 2200    -            BASED ON EXISTING AGREEMENTS. THE PROJECTION
                      IS UNDERSTATED TOTHE EXTENT THAT NEW
                      PROGRAMS ARE FORMULATED OR NEW AGREEMENTS
         2000 ARE MADE.
 2000


 1800
                                      ACTUALEA
                                      PROJECTED
 1600 -


 1400 -

                                                                                                                   $2.3 BILLION IN
 1200



                 LOSS DUE TO
                 DEVALUATION
  800        -   $242 MILLION                                                        N


  600


  400        -


  200
                                                                    PLANNEn    NNUAL RATE OF EXPENDITURE $53 MILLION



                 59         63        67        7i        7s         7        83     87        91    '    5         99          20'03 2007
        57             61        65        69        73        77         81      85      89        93        97         2001       2005
                                                                    END OF FISCAL YEAR


                                                                         101
APPENDIX II                         COPY
     Page 1
       DEVELOPMENTS AND CIRCUMSTANCES UPON WHICH THE AMERICAN EMBASSY
         HAS CONCLUDED THAT UNITED STATES RUPEE HOLDINGS ARE BECOMING
         A POLITICAL LIABILITY TO THE UNITED STATES
         (Prepared by the U.S. Embassy, New Delhi)



        It is clear that the Government of India [GOI] is seriously, though
not acutely, worried about the present level and prospective accumulation of
U.S.-uses rupees arising from Public Law 480 and other rupee repayable trans-
actions. The Indian delegation raised this question during the general talks
held with Under Secretary Katzenbach in July and urged that measures be de-
veloped to liquidate these holdings in an orderly way. GOI concerns have to
do with possible misunderstandings, either in the U.S. or in India, to which
these holdings might give rise; the GOI has given no indication that it fears
the direct effects of the holdings or of their use at any realistically fore-
seeable rate for bona fide U.S. Government purposes in India.

        There are two main dangers which might concern the GOI relating to
misunderstandings within India of the nature of these accounts. The first is
that the public may become apprehensive that U.S. holdings of these very large
monetary claims mean that the GOI is in some sense subject to U.S. dictation
or control--that the U.S. is in a position to disrupt India's monetary or
economic plans and dictate internal GOI policies. Unscrupulous or unsophis-
ticated opponents of the government can, and indeed have, suggested that the
government has bartered away its sovereignty, or that the very existence of
these large accounts is intrinsically and unavoidably damaging.

        The second danger is that confusion may arise between these claims on
resources and real additional resources. Such confusion might create pressure
for dangerous policies and undermine the government's efforts to generate real
resources for development and restrain inflation. Conceivably, for instance,
willingness to accept necessary tax burdens might be weakened if the illusion
were to become current that drawings on or against U.S.-uses accounts are an
alternative source of development finance. The GOI has made repeated efforts
to correct public misapprehension of this sort and handles the U.S.-uses ac-
counts in its public financial reports in a manner designed to reflect eco-
nomic realities. Nevertheless, it is perfectly clear that public understand-
ing is far from perfect and even fairly sophisticated pundits continue con-
fused.

        On the U.S. side, there are also two types of misunderstandings which
may well worry the GOI. The first is that the quite clearly understood limits
on the purposes for which these rupees are to be used may be forgotten or
called into question by new actors on the U.S. scene. This might result in
demands that they be used for purposes representing a heavier burden on real
resources, and particularly on foreign exchange resources. At best, this
could lead to friction and resentment on the part of such groups or individ-
uals in the U.S., or it might actually result in serious additional economic
burdens on India, if the GOI felt obliged to accept such demands. Second,




                                  102
                                                               APPENDIX .I I
                                                                    Page 2

there is always the danger that the rupee illusion will be used, wittingly or
unwittingly, to muddy the waters and create confusion about India's current
need for foreign exchange aid.

        These fears are technically illfounded; the dangers need not neces-
sarily result from the existence of the U.S. rupee holdings. We can certainly
testify, however, that the misunderstandings outlined above do arise and that
it is not always possible to dispel them easily and quickly. Annex B lists,
some of the attacks which have been dignified by public notice and indicates
the widespread public interest on the subject.




                                 103
APPENDIX II
     Page 3



                                                  ANNEX B



1. Our rupee holdings, their size, our every expenditure of them, receive
continual critical attention from all parts of the Indian political spectrum:

     a. From the Right

     In November, 1967, Professor B.R. Shenoy, Director, Economic Research
Centre, Gujarat University, organized a seminar in Delhi to examine the in-
flationary impact of use of PL-480 funds. He was successful in persuading
the Deputy Prime Minister, the Governor and other senior officials of the Re-
serve Bank of India, senior officials of the Ministry of Finance, USAID and
US Embassy officers, Swatantra Party Members of Parliament, N. Dandekar and
J.M. Lobo Prabhu, and private bankers to attend the seminar. Although the
participants were unanimous (with the sole exception of Professor Shenoy) in
concluding that the use of PL-480 funds was not inflationary, the Government
has since appointed a Committee, which is now examining Professor Shenoy's
contention.

     b. From the Center

     At the All India Congress C6mmittee meeting in Bombay in May 1966, former
(then, but 5 months out of office) Finance Minister T.T. Krishnamachari
charged publicly that Rs. 47 crores [a crore is 10 million rupees] of United
States Government expenditures out of PL-480 funds had not been accounted for
to the Government of India. Subsequent denials and explanatory comments by
the Embassy and the Ministry of Finance undoubtedly convinced most responsible
newspaper readers that the charge was false, but also contributed to the ever
closer public scrutiny our uses of these funds receives today.

     c. From the Left

     Following the 1967 general elections, many Members of Parliament includ-
ing, to name but one, Madhu Limaye, SSP, [Samyukta Socialist Party] charged
that the USG [U.S. Government] had used PL-480 funds to influence the elec-
tions, generally, and specifically to try to ensure the re-election of
S.K. Patil, and to defeat V.K. Krishna Menon. (See, for example, Lok Sabha
Question 109 and the subsequent discussion on March 29, 1967.) Reacting to
this charge, the Minister of Home Affairs ordered the Central Intelligence
Bureau (Ministry of Home Affairs) to investigate all the allegations concern-
ing the use of foreign money from sources during the elections. While the
Home Minister has apparently received a report on this, he has refused, in
Parliamentary statements, to release the report.

2. Political criticism covers every aspect of our use of rupees:

     a. Administrative expenses



                                  104
                                                               APPENDIX .II
                                                                    Page 4

     The following exchange occurred in Parliament on May 3, 1968:

     Shri H.N. Mukerjee [Cpmmunist Party of India] (CPI/Right): "The Home
Minister may not be unaware that out of PL-480 funds the expenses of the US
Embassy in India and its branches amount to a great deal more than the budget
expenditure of the Ministry of External Affairs and the expenses of the US
Information Service here amounts to more than the budget of the Ministry of
Information (excluding Broadcasting). In view of this, is the Home Minister
not impelled to make a very special study as to how the different agencies
of the US Embassy here operate when they spend moneys preternaturally exces-
sive of the requirements of a normal diplomatic agency?

     Shri Y.B. Chavan: It is a very interesting suggestion he has made; I
will certainly take it into account."

     b. Cooley Loans

     The following exchange occurred in Parliament on July 28, 1966:

     Shri Renu Chakravartty: Of this amount, that disbursed as Cooley loans
to joint Indo-US enterprises in India is mentioned as Rs. 44.75 crores [a
crore is 10 million rupees].  I would like to know whether in other PL-480
agreements, this Cooley loan was not inserted, as in the case of Yugoslavia,
and whether we can still get out of this and get all this amount of money for
our public sector?

     Shri Sachindra Chaudhuri: I am not aware of what is or is not included
in the loans granted under the agreement to Yugoslavia. Therefore, I cannot
answer that part. So far as the other part is concerned, Government have not
thought of getting out of this agreement and asking the US Government to allow
us to use these funds in the public sector.

     c. Research Grants

     The following question and answer were discussed in Parliament on
July 29, 1968:

     GRANTS FROM PL-480 FUNDS

     QUESTION

SHRI K. RAMANI,
SHRI VISWANATHA MENON:

Will the Minister of Finance be pleased to state:  (a) the names of individ-
uals and organizations which received grants from PL-480 funds in India in
1966 and 1967;

(b) the amounts received by each individual and organization quarterly in
1966 and 1967;

(c) whether the grants given were used in the last General Elections;


                                   105
 APPENDIX II
      Page 5

 (d) if so, whether Government have investigated into this matter; and

(e) if not, the reasons therefor?

     ANSWER

(Deputy Prime Minister & Minister of Finance)
(Shri Morarji Desai)

(a) The US Government gives grants from the US-use portion of PL-480 funds
to institutions and organizations in India to support research activities
in various fields, such as agriculture, health, science and education. Pro-
posals for grants received from applicant organizations are considered by the
Government of India before they are sponsored to the US authorities. A list
of grants cleared by the Government of India during 1966 and 1967 is laid on
the Table of the House.

(b) After the Government of India have conveyed their clearance, the US agen-
cies process the requests at their end, authorize grants where they consider
them suitable and settle details with the institutions direct. Hence, the
information asked for in part (b) of the question is not available with the
Government of India. It is felt that the time and labour involved in col-
lecting it from the recipient institutions will not commensurate with the
results.

(c), (d) & (e):- The grants are iot intended to be spent for any purpose or
activity other than that for which they are authorised. It has already been
stated in answer to Starred Question No. 818 on 21.12.1967 that the Report
of the Intelligence Bureau on the use of foreign funds submitted to the Home
Ministry does not disclose any information about the mis-use of PL-480 funds.

(A list of 82 research grant proposals was tabled.)

     d. USIS [U.S. Information Service]

     The following question was asked in Parliament on July 27, 1966:

     Shri Bhupesh Gupta: I just now got the statement. It shows--I am not
going into the past--that the expenditure of the US Information Service was
Rs. 15 crores [a crore is 10 million rupees]. Then expenditure on other ad-
ministrative and programmes expenditure Rs. 24.50 crores. Here we get an idea
about Rs. 40 crores. It is Rs. 40 crores. It is Rs. 40 crores under two
heads spent by the US Information Services and for other expenditure--God
knows what they are. May I know whether the Government is not considering
that Rs. 40 crores is too heavy a sum, almost equal to the budget of Nepal
or some such countries or very near it? This much has been said here. Why
is the Government not asking for details as to what they mean by adminis-
trative expenditure and so on? Why should they not ask in order to satisfy
themselves that these monies are spent or part of it is spent properly for
their normal diplomatic activities because the amount is far too big for their
normal requirements? May I know why the Government is not at the same time
comparing this expenditure with the expenditure of the UK [United Kingdom]


                                    106
                                                               APPENDIX II
                                                                    Page 6
Embassy or other Embassies in order to find out what should be the normal re-
quirement for the functioning of diplomatic missions in this country includ-
ing the Information Services.

     Shri Sachindra Chaudhuri (Minister of Finance) I am afraid this Govern-
ment is not in a position to dictate to another Government as to how to main-
tain their Embassies or how much their High Commission or Embassy can spend.

     Shri Lokanath Misra: May I know from the Finance Minister whether these
cultural programmes include direct negotiations and purchase of cultural
centres like film studios? My information is that one of the film studios
of Madras has been purchased by the US Embassy and I am told that it is
Gemini. Is there any truth in it and for such direct negotiations with par-
ties in India is it necessary that the US Embassy should take the permission
of the Government of India or can they do it on their own without the per-
mission of the Government?

     Shri Sachindra Chaudhuri:   If there was a question of sale or transfer
of Indian assets, then there would be a question of permission from the Gov-
ernment of India or the Reserve Bank. Therefore I am not sure that my
friend's information is correct.

In all the above cases, the questions and answers in Parliament received
extensive press coverage in India.

3. The criticism is not limited to Parliament; the US use of PL-480 rupees
has also been debated in State and Local political bodies.

The Delhi Corporation discussed on October 11, 1966, the allegation that
PL-480 money was being used to provide denominational literature for free
distribution in Indian schools. The left-wing Patriot (admittedly a very
biased source) carried a detailed report on the debate, which touched on
many aspects of our alleged uses of rupees.

4. The Government takes this criticism very seriously.

     a. At the highest levels

     In addition to Parliamentary statements by Cabinet Ministers, such as
those cited above, public criticism of the proposal for an Indo-American
Foundation, to mention only one example, was a major factor in the Govern-
ment's failure, to date, to accept it.

     b. At the working level

     It is not only the large schemes which are affected. Negotiations of
far less important matters are frequently delayed by officials' concern over
the potential adverse political reaction. A considerable administrative
waste results. One example would be our sales of rupees to US citizens and
foundations in accordance with PL-480 (Section 104(j)) and our agreements
with the Government of India. Such sales are running at present at about




                                 107
APPENDIX II
     Page 7

 $3 million annually. Perhaps $60,000 worth of rupees is sold annually to
US travel agencies, who buy rupees to pay Indian firms for services rendered
 to tourists booked, say, on round-the world tours. The Ministry of Finance,
 the Embassy, and the US Treasury have had to consider ways to cover the
possibility that a US travel agent might use PL-480 rupees to pay for the
 travel of a tourist who was not a US citizen. While such a possibility
would, in fact be contrary to the spirit, although not perhaps the letter,
of our PL-480 agreements with the GOI, it is certainly a rather remote, and
financially, insignificant possibility, involving, say $300, out of 104 (j)
sales of $3 million annually. The interminable questioning by RBI [Reserve
Bank of India] officials of the most minute details of our rupee payments
for air travel provides another example. Only the ever-present possibility
of political criticism necessitates such concern on the part of GOI offi-
cials. To repeat, this concern results directly in a very significant ad-
ministrative cost to all concerned.

5. One final point. It is not going to be possible to solve this matter in
confidence, rather it is likely that every step of the way toward a mutual
solution of this problem will be exposed to public scrutiny; and, in gen-
eral, this is proper; both India and the United States are democracies. The
following item appeared in the November 16 issue of Commerce, a weekly maga-
zine published in Bombay:

     Rupees That Cause Concern                              New Delhi:

The Union Government has asked the US Administration to find ways of liqui-
dating the rupee funds that have accumulated in the American Embassy's ac-
count as a result of the sale proceeds of PL-480 imports.

Consequently, the US Government's proposal to utilize a part of these funds
for establishing an Indo-US educational foundation must now be ruled out.
This proposal which was mooted about four years ago has been in cold storage
following strong opposition to it from educationists and others in this
country.

Subsequently, it was proposed that in addition to the educational foundation
the funds at the disposal of the US Embassy might be utilised for the devel-
opment of agricultural co-operatives in India. Other proposals were also
under consideration. All these will now have to be written off.

The question of liquidating the US Embassy's share of PL-480 rupee funds is
understood to have been raised at the Indo-American talks in New Delhi last
June. The leader of the US delegation, Mr. Katzenbach, is reported to have
humorously interjected that he did not know when in the future it would be
propitious to raise in Congress the issue of liquidation of PL-480 rupee
accumulations with the US Embassy.

Out of the sale proceeds of PL-480 imports, about 12 per cent are earmarked
for US Embassy uses and the rest is given as loans and grants for specific
projects in India and for private sector schemes under what is known as the




                                 108
                                                               APPENDIX II
                                                                    Page 8
Cooley Fund. The Government of India feels that the accumulation of rupees
in the US account from this source over the next five to 10 years will create
problems in Indo-US relations. It is convinced that if this money continued
to be spent in India it will have an inflationary impact. Further, it be-
lieves that proposals such as the educational foundation implied a continuing
long-term US involvement in Indian affairs on the basis of these funds, which
would not find favour with Parliament.




                                 109
 APPENDIX III
       Page 1


                         DEPARTMENT OF STATE
                             Washington, D.C.   20520




                                             August 4, 1970


Mr. Oye V. Stovall
Director, International Division
U.S. General Accounting Office
Washington, D. C. 20548

Dear Mr. Stovall:

The Department appreciates the opportunity of commenting on the draft
General Accounting Office report entitled "Use of Excess Foreign Cur-
rency in India", as transmitted to Secretary Rogers by your letter of
March 24, 1970.

A detailed review of this comprehensive report by the interested offices
within the Department, and consultation with other commenting agencies
as appropriate, have now been completed. Informal, detailed comments
and suggestions have already been provided under separate cover to assist
in improving the clarity, accuracy and completeness of the report. Our
general comments follow.

We consider the report a significant contribution to the understanding,
and hopefully resolution, of a problem that has concerned the Department
increasingly for many years: the continuing escalation of the U.S. Gov-
ernment's Indian rupee holdings. We believe the effective utilization
of these balances and future accruals is a matter of great and increasing
urgency, and we concur generally in the constructive recommendations of
the report to facilitate their use.

The internal U.S. Government sale of excess currencies to using agencies
at official rates established by foreign governments does constitute,
in our view, a deterrent in some cases to the maximum use of currency.
We favor the establishment of more flexible procedures for determining
charges to U.S. agencies for currency expended. However, such proced-
ures would have to be consistent with the obligations which the U.S.
Government has assumed as a member of the International Monetary Fund
with respect to observing exchange rates established by other IMF mem-
ber countries. Additionally, such procedures would have to avoid crea-
tion of pressures for the devaluation of the foreign currencies involved
and the resultant weakening of exchange stability.

In any actions to facilitate reduction in our Indian rupee balances by
the Congress or the Administration, we believe U.S. interests require
the broadest feasible use of excess currency for primary benefit of the


                                       110
                                                           APPENDIX III
                                                                 Page 2

U.S., and maintenance of balances adequate for these purposes in the
foreseeable future, should be assured. Specifically, we feel that in
planning the increased utilization of these holdings, first priority
should go to those uses which help the balance of payments through ex-
penditure of local currency in lieu of U.S. dollars abroad; second pri-
ority to those lower priority uses for which dollars would not be expend-
ed, but which provide significant benefits of primary value to the U.S.;
and third priority to uses of primary benefit to the foreign country.

With respect to the references in Chapter 5 of the report to the Consu-
late building in Calcutta, the sum of $250,000 for rehabilitation of the
building was eliminated from the Department's excess currency appropria-
tion request for FY 1970 prior to submission to the Congress, as stated
in the report. However, the Calcutta project was included in the FY 1971
Congressional appropriation request and the Department expects to com-
mence construction of a new building before the end of the fiscal year.

Although the report reflects the fact that the GAO study was made only
on the use of excess Indian rupees, the recommendations in the report
relate to procedures which apply to all excess currencies. We would
like to emphasize statements in the recommendations of Chapter 6 and the
conclusions of Chapter 9 which refer to the varying conditions existing
in each of the excess currency countries which merit differing degrees
of consideration, and which would make generalizations unwise. Proposed
uses of excess foreign currency, under either existing or amended pro-
cedures, should be reviewed in terms of the specific situations in each
individual country. Actions recommended in the report are not equally
valid for all excess currency countries, and may not be applicable at
all in some.

Illustrative of the Department's considerable concern over the increas-
ing levels of U.S.-owned Indian rupees, Secretary Rogers has instituted
a Departmental study, headed by an eminent economist, to review the prob-
lems and to develop appropriate, specific solutions. We anticipate that
this project will effectively complement the GAO report.

If you should wish to discuss any aspect of this complex matter further,
we will be happy to meet with you at your convenience.

                                        Sincerely yours,




                                         sep F.    nean ,     ,
                                        eputy Assistant SecYetary
                                         for Budget and Finance




                                  111
APPENDIX IV
     Page 1
                          DEPARTMENT OF STATE
                    AGENCY FOR INTERNATIONAL DEVELOPMENT
                             WASHINGTON, D.C.   20523




                                                        AUG 07 1970



Mr. Oye V. Stovall
Director
International Division
General Accounting Office
Washington, D. C. 20548

Dear Mr. Stovall:

Thank you for your letter to Dr. Hannah dated March 24, 1970, which trans-
mitted your draft report on excess foreign currency in India and which
requested review of the report and comment by A.I.D.

The report has now been carefully reviewed by those elements of A.I.D.
concerned both with India and with foreign currency management. We find
the report to be comprehensive and constructive; and with some reserva-
tions we would concur in the specific recommendations contained in the
report, both to the executive agencies and to the Congress.

We believe, and the report demonstrates, that expanded use of our excess
currency in India could and would be in the interest of both the United
States and India. At the same time, however, we would like to note that
any marked revision or expansion of our programs for excess currency
utilization would have to take fully into account both any potential
adverse economic effects which would run contrary to A.I.D.'s development
objectives, and any Government of India sensitivities as to the political
or economic impact of such utilization.

In a related sense, it could be noted that one potentially limiting factor
in the expansion of U.S. research programs in India is the possibility
that, in areas in which Indian research facilities are either scarce or
fully occupied with development related activities, such expansion might
tend to divert Indian research resources from high-priority Indian problems.

Subject to the constraints noted above, we believe it would be in keeping
with the report to suggest another means of increasing the use of excess
currencies through the authority contained in Section 612(d) of the Foreign
Assistance Act. That authority is limited, however, as it does not pro-
vide for a waiver of Section 1415 of the Supplemental Appropriations Act
of 1953. You may wish to consider recommending the modification of
Section 612(d) to provide for a waiver of Section 1415, or the addition
of enabling language to the Foreign Assistance Appropriation Bill.


                                     112
                                                          APPENDIX IV
                                                               Page 2

Mr. Oye V. Stovall               - 2 -

In addition, we have a number of specific observations and suggestions
on the report which we would like to make a matter of record: a few
questions of fact; some necessitated by developments which occurred
subsequent to the original drafting of your report; and some suggested
as a matter of clarity. These comments, because of the detail involved,
are included as an attachment to this letter.    [See GAO note.]

                                   Sincerely,


                                                       ( 'a,--/ Lt
                                   Edward F. Tennant           t'
                                   Auditor General



Attachment:   a/s


GAO note:     These comments have not been included in the re-
              port. Changes have been made in the body of the
              report where appropriate.




                                 113
 APPENDIX V
     Page 1

              EXECUTIVE OFFICE OF THE PRESIDENT
                OFFICE OF MANAGEMENT AND BUDGET
                          WASHINGTON, D.C.   20503




                                                     SEP 21 1970



Mr. Oye V. Stovall, Director
International Division
General Accounting Office
441 G Street, N.W.
Washington, D. C. 20548
Dear Mr. Stovall:
This letter responds to your request for comments on the pro-
posed report to the Congress on the use of U.S.-owned excess
foreign currency in India. We welcome the opportunity to
review this draft report and are especially appreciative of
its positive and constructive orientation.
Office of Management and Budget staff have been concerned
with the problems discussed in the draft for many years.
Nevertheless, excess Indian rupees have accumulated, and can
be expected to continue to accumulate at a rate much greater
than our ability to find valid uses for them. This situa-
tion has presented a dilemma. If these currencies are used
in large amounts, the Indian Government would be faced with
an unacceptable rate of inflation (which conflicts with our
foreign policy objectives). On the other hand, if no use is
found for large amounts of these currencies there may be
pressures to write off these balances, which would be equally
unacceptable.
In our opinion, one of the most significant statements in the
report appears on the first page:
    "...GAO believes it highly unlikely that the U.S.
    ever will be able to convert more than a relatively
    small portion of its rupee holdings into real resources
    for its own use..."

We can only concur that there is not much immediate hope for
making serious inroads on the accumulation of U.S.-owned
Indian rupees. For example, the Indian Government, constantly
aware of the effects of large scale use of our balances of
Indian currency, has not permitted ready access to the balances.
In lieu of holding such balances in immediately available
bank accounts, the GOI invests them in interest bearing bonds


                                      114
                                                   APPENDIX V
                                                       Page 2

which are reduced as the U. S. Government uses the rupees covered
by the bonds. This practice permits the Indian Government to
keep abreast of the U. S. use of U.S.-owned Indian rupees, in
relation to developments in its economy.

The "Findings and Conclusions" in the "Digest" of the report ***
                    recognizes the requirement that foreign
currencies are not available for expenditure by U.S. agencies,
except as provided for in annual appropriations acts. Congress
has reiterated this requirement many times since it was first
enacted as Section 1415 of the Supplemental Appropriations
Act of 1953. Exceptions have been granted, the most signifi-
cant of which was the Mondale Amendment to Public Law 480.
This had the effect of permitting use of excess foreign cur-
rencies without appropriation for specified purposes.  Thus
the intent of the Congress is quite clear.

We agree with the intent of your recommendation--to ensure
that executive branch agencies can seek approval for well-
documented excess currency-funded projects without regard to
overall dollar ceilings. Office of Management and Budget
Circular No. A-11 has been revised to clarify its long standing
policy on this matter. The intent of this provision is to
encourage agencies to include in their budget submissions
projects to be funded through the use of excess currencies,
notwithstanding other limitations on agency budget totals.
We do have some reservations, however, about your proposal
for direct appropriations of foreign currency. These, as well
as other comments and suqqestions, are included in the enclosure
to this letter.   (See GAO note.)

Staff of the Office of Management and Budget will be pleased
to discuss the draft report'further, and to provide any
additional information which you may require.

                                i cerely,




Enclosures



  GAO note:   The reservations on the proposal for direct ap-
              propriations are on the following pages. These
              reservations are summarized and are included on
              page 47 of this report along with our evalua-
              tions. The other comments and suggestions are
              shown as appropriate in the report or have re-
              sulted in changes.


                               115
APPENDIX V
    Page 3

Page 47, second paragraph. We have some difficulty with
the basis for your recommendation that the Office of Manage-
ment and Budget explore the acceptability of direct appro-
priations of




                             116
                                                      APPENDIX V
                                                          Page 4
excess foreig.n. currency, as a fo.rm -of budgetcary submission,
with appropriate comi-tcts of th3e Congress. .

On page 45, the rrcpcrt proposes that this request would be for
"programs and activi'Lties whlich a:re not of as high priority
as those funded through the speci.al forein currency programs;
Yet which could and should be u-nderl.aken because they woulcd
serve a beneficial purpose."      AgI-,encies would: find it difficult,
if not impossible to jus'tify t.wo orders of lower priority
programs. The provisions of Ci.rcular No. A-i11, section 13.2,
encourage the i.nclusion of ]owr priority itens within araounts
requested for special fo.:ei'g-n curre.incy programs. We do no-t
see any advantage to cstabl..ishl.n     an even .lower order of
priority on the premise of a vaguely defined "ben!e:icial
purpose."

In connection with the ratJionale presented on page 46 for the
above mentioned recomlml-Lenrda-tion, we have the following further
cormnent:

     Item 2. We do not understand the refererce to constitu-
     tional problems. Article 1, Section 9 of ihe Constitu.-
     tion uses the word "Appropriat.ion,'  but common iunder-
     standing over the history of this coun-ltry has construed
     this to mean appropriations of dollars. The submissions
     in 1966 and' 1967 to Congcress were for A';uthorizations"
     to use foreign currencies to distingui.sh them from dollar
     denominated appropriations. The submissions were. part
     of the President's Budget and action was required to be
     taken by the appropriations committees; thus the
     "authorizations" if passed by the Congress, would have
     been appropriations in every sense of the word.

     Item 3. The reference to executive branch fears about
     reduction of dollar appropriations because of possible
     competition fro- foreign currency appropriations is not
     w6ll founded. If the Congress feel.s that the projects
     or activities to be financed by foreign currencies are
     of too Jow an ,Qrder of priority, then they rightfully
     should not support them. Likewise, the President will
     not propose financing in his budget for any projects
     which do not produce fairly well defined benefits. We
     do believe, however, consistent with our international
     agreemnents and with the existence of justifiable require-
     ments, that special foreign currency programt appropriations
     will continue to provide the best facility for use of
     excess foreign currencies.

     Item 4. This item concerns Congressional eval]uat-ion of
     proposed "appr:opri.ations of excess foreign currencies."
     Currently, e>:ccut-i.ve branch requests for special foreign

                                117
APPENDIX V
    Page 5


currency program appropriations are not specified by
country, but upon enactment are available in all excess
currency countries.  This is of benefit to the executive
branch agencies since it provides the same flexibility
to shift obligational authority between countries as
would be provided in regular appropriations.  The advantage
to the Congress is that there would not have to be
routine country by country presentations and evaluations
for what in many cases are relatively small requests.
Agencies in all cases, however, are prepared to discuss
and justify their plans on such a basis should the members
of the appropriations committees so request.

One further thought on this item is that the last sentence
seems to say that low priority uses merit greater consid-
eration according to the amount of currency available.
We cannot subscribe to a proposal that has the effect of
favoring projects where the only discernable benefit is
to use excess currency.

Item 6,refers to the fact that the Commodity Credit
Corporation would continue to receive dollar credit for
programs funded through the special foreign currency
program. We assume this refers only to foreign currencies
generated under Title I of Public Law 480.  But more
importantly, since the GAO--proposed appropriations of
excess foreign currency are not dollar denominated, it
is difficult to understand just where the dollars for
these credits will originate.  If conversion to dollar
denominations is intended, then the spending agency
appropriation would be charged in dollars.  This would
return us to the situation we presently have with respect
to special foreign currency program appropriations.

It must be recognized that the foreign currencies generated
by P.L. 480 from the sale of agricultural commodities
resulted from dollar expenditures.  Section 105 of the law
requires that reimbursement be made to the Commodity
Credit Corporation from the using agency appropriation.
This could not be done when the agency's appropriation is
denominated in foreign currency units.




                            118
                                               APPENDIX VI
                                                    Page 1

            PRINCIPAL OFFICIALS RESPONSIBLE

       FOR THE ACTIVITIES DISCUSSED IN THIS REPORT


                                                    Appointed

                   DEPARTMENT OF STATE

SECRETARY OF STATE:
    Christian A. Herter                         Apr.     1959
    Dean Rusk                                   Jan.     1961
    William D. Rogers.                          Jan.     1969

AMBASSADOR TO INDIA:
    Elsworth Bunker                             Nov.     1956
    John Kenneth Galbraith                      Mar.     1961
    Chester E. Bowles                           June     1963
    Kenneth B. Keating                          June     1969


          AGENCY FOR INTERNATIONAL DEVELOPMENT
        (International Cooperation Administration
                 prior to November 1961)

ADMINISTRATOR:
    James W. Riddleberger                       Mar.     1959
    Henry R. Labouisse                          Feb.     1961
    Fowler Hamilton                             Sept.    1961
    David Bell                                  Dec.     1962
    William S. Gaud                             Aug.     1966
    John A. Hannah                              Mar.     1969

DIRECTOR, MISSION TO INDIA:
    Howard Houston                              Feb.  1957
    C. Ty ler Wood                              Nov.  1959
    John P. Lewis                               Sept. 1964
    Leonard J. Saccio                           Oct. 1969




                              119
APPENDIX VI
     Page 2

              PRINCIPAL OFFICIALS RESPONSIBLE

       FOR THE ACTIVITIES DISCUSSED IN THIS REPORT
                                       (continued)


                                                 Appointed

               DEPARTMENT OF THE TREASURY

SECRETARY OF THE TREASURY:
    Robert B. Anderson                          July      1957
    Douglas Dillon                              Jan.      1961
    Henry H. Fowler                             Apr.      1965
    Joseph W. Barr                              Dec.      1968
    David M. Kennedy                            Jan.      1969


             OFFICE OF MANAGEMENT AND BUDGET
         (Bureau of the Budget prior to July 1970)

DIRECTOR:
    Maurice H. Stans                            Mar.      1958
    David E. Bell                               Jan.      1961
    Kermit Gordon                               Dec.      1962
    Charles L. Schultze                         June      1965
    Charles J. Zwick                            Jan.      1968
    Robert P. Mayo                              Jan.      1969
    George P. Shultz                            July      1970




                                                U.S. GAO Wash., D.C.


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