In a reversal described by its officials as extraordinary, the World Bank has halted a previously approved $250 million loan to India because of a controversial decision by Prime Minister Indira Gandhi's government to take away an initialed development contract from an American firm.
The decision to revoke the contract came against the advice of India's own experts.
Gandhi denounced the bank's withdrawal yesterday as interference in India's affairs, and government spokesmen said New Delhi would look elsewhere for financing that part of the $1.5 billion project for production of fertilizer needed to increase India's vital agricultural output.
The dispute, which has become a political controversy in India, matches the normally soft-stepping World Bank against the country that has become its largest single borrower, with more than $11 billion in loans since the bank began operations in 1946.
The bank's decision to halt the six-month-old loan accord before any funds were even transferred was believed to mark the first time such a step has been taken against India. It was described by bank officials as "very unusual" for any country.
U.S. diplomatic sources said it was likely to fuel further attacks against Gandhi's government by opposition politicians, who already have accused her of impropriety in the affair.
The disagreement stems from a decision last fall by a committee of the Gandhi government to overrule recommendations by two expert committees that consultancy contracts for design of two ammonia plants in the project go the Alhambra, Calif., firm of C. F. Braun & Co. Sources said the World Bank regards the Gandhi government's explanation for the switch as inadequate.
A World Bank spokesman, announcing the loan halt yesterday, declined to elaborate on what the bank's experts found wrong with the Indian switch. He pointed out that the halt covers financing for only two of the four proposed plants, and that negotiations for a loan to finance the second two will proceed.
Based on the first committee's recommendations under the previous Indian government, C. F. Braun had initialed a contract in December 1979 with a government-owned Indian firm for two of the plants to be built near Bombay at a cost of about $800 million. Last February, a company official said, it initialed a second contract, this one with a firm partially owned by the government and partially cooperatively owned, for two more plants to be built to the north in Gujarat State for approximately the same price.
But in the meantime, Gandhi had returned to power in January 1980 and ordered a review of all contracts awarded to foreign firms, citing the need to check on possible corruption under the previous government. A new expert panel formed on her orders, however, upheld the recommendation that C. F. Braun do the design work as agreed on the first pair of plants. But it was unable to agree on who should design the the second pair.
Armed with these findings, a special Cabinet committee named by Gandhi -- and excluding the Indian minister for petroleum, chemicals and fertilizers -- dropped C. F. Braun altogether. Instead, it awarded the contract for the first two plants to Haldor Topsoee, a Danish subsidiary of SNAM-Progetti, an Italian company. A contract for the second two plants went to a British subsidiary of the Houston, Tex., company Pullman Kellogg.
"This is unique in our experience," said Jack Cortright, C. F. Braun's vice president for international sales. "This is the first time we have ever bid on exports of our technology, and proceeded to the point of contractual agreements, and then it reversed."
Responding to accusations of scandal in the Indian press, the Gandhi government issued an explanation soon after its decision, citing what it called Braun's outdated technology and lack of experience in India. In addition, the government statement said, Braun recently had been purchased by a petroleum company and therefore would not be concentrating its attention on the ammonia technology needed to design and operate the plants.
Charges in the Indian press that political considerations had motivated the reversal were dismissed by the government as "scurrilous propaganda" from Gandhi's political opponents.