Anxiety is growing in the Indian government over the potential impact on the national economy if the Reagan administration succeeds in holding down International Development Association assistance to poorer countries to $3 billion a year and reduces the U.S. contribution.
Coupled with an expected drain on IDA funds by China's emergence as a major recipient of assistance by the World Bank's concessional lending affiliate, the rollback would retard development in India, increase the deficit in the balance of payments and force the government into heavy commercial borrowing at a time when debt payments are coming due on old loans by the International Monetary Fund, according to Indian officials.
Moreover, government economists said cuts in IDA aid could force India to retrench on its program of liberalizing its economy by relaxing its import policies, encouraging foreign competition and placing a greater emphasis on private-sector initiative.
The economic liberalization was put into motion largely at the behest of the World Bank and its industrialized donor nations, including the United States.
"We are on the brink. If our worst fears materialize, I don't see how we can maintain the same level of imports and the same level of development," said L.K. Jha, India's leading international economist and a key economic adviser to Prime Minister Indira Gandhi.
The source of Jha's anxiety and that of officials of the Finance Ministry is the first round of negotiations by IDA donor nations that ended July 21 in Tokyo.
The World Bank proposed $16 billion for IDA's seventh replenishment, to cover the three-year period beginning next July. But the United States has said it is not willing to go beyond $9 billion for three years or $15 billion stretched over five years. The Reagan administration is also seeking to reduce its share of IDA assistance from 27 to 25 percent.
In the Indian view, the U.S. proposal would cut IDA low-interest "soft" loans to two-thirds of the current $1 billion level in real terms. While this ostensibly would result from U.S. budget restraints, the Indians say it reflects the Reagan administration's position against Third World borrowing generally, and specifically a desire to "graduate" India out of IDA.
India is the most active borrower from the World Bank group, drawing a total of $2.1 billion in the fiscal year ending in June, according to Finance Ministry officials. India traditionally has received 40 percent of the IDA concessional loan total. IDA loans, however, have declined from an average of $1.5 billion to $1 billion a year, Jha said.
Jha estimated that regardless of the outcome, China is certain to receive half of India's share. If other IDA donor nations follow the U.S. lead in holding down the contributions, the result will be "catastrophic" not only for India but for the poorer African nations and South Asian nations with marginal economies, such as Bangladesh, he said.
Alarm among Indian economists was heightened with the release of statements made in Tokyo by IDA special representative Andre De Lattre that the poorest African countries alone require IDA assistance of $7 billion to $9 billion, leaving practically nothing for India.
If the new IDA annual replenishment was held to $3 billion and even if India and China shared the 40 percent that traditionally has been India's share, then the flow of funds here would drop to $600 million, according to Indian Finance Ministry projections.
Jha noted that nearly 38 percent of India's cumulative borrowing from IDA has gone to agriculture, irrigation and rural development, and another 8 percent to population control, health, education, water supply, urban development and sewerage. These are development categories, he said, that normally cannot be financed by commercial borrowing.
Since India is an agriculture-based economy, the gross national product could be expected to fall by more than 10 percent annually as a result of such cuts, according to World Bank economic projections.
This would return India to the snail's pace of growth it has struggled to accelerate, and the slowdown could be worse because of such imponderables as monsoon rains and crop yields, Jha said in an interview.
The World Bank has said that some progress would still be made in reducing poverty, but that the number considered to be absolute poor would be 240 million in 1995 instead of the 180 million forecast under the $16 billion IDA replenishment proposal.
The alternative to a slower growth rate, Jha said, would be increased commercial borrowing, which would be "dangerous and unsafe and would repeat the tragedy of Latin America in south Asia." He noted that heavy Indian borrowing from the IMF over the past two years will require first repayments next year, just when the IDA assistance would drop.
Officials have estimated that if India makes up for the shortfall by borrowing at commercial interest rates, its debt payments could climb to an unhealthy 23 percent of export earnings by 1995.
If India opted to restrain its commercial borrowing, Jha said, then it would be forced to tighten import controls and pull back on the economic liberalization policies it has adopted in the last year because of the drain on foreign exchange.
It has been estimated that the $600 million to $700 million a year that India will have to repay to the IMF until 1986-87, coupled with the reduction in IDA assistance, would deplete foreign exchange reserves by almost $2 billion a year in real terms.
Exacerbating the situation, according to Indian officials, is the Reagan administration's adamancy against India borrowing $2 billion from the Asian Development Bank in increments of $500 million spread over four years.
The Reagan administration has sought to discourage India from tapping the Asian Bank because it already is a major borrower from the World Bank and IMF, and because of the prospect of China becoming a major drain on the Asian Bank's resources.
Jha said that if the United States does not change its approach to concessional lending, it will be the responsibility of other developed donor nations to fill the gap.
"If there is a change in philosophy in one country, should that be reason for an ongoing program to come to a halt?" Jha asked. "I say to the other countries, 'Contribute your full share to IDA regardless of the U.S. position, and if you can't do it through IDA, do it bilaterally.' But the U.S. attitude has a significant effect on the other countries.
"The United States holds the key to the answer. It is a pioneer in the field of aid to developing countries. Today it is leading in the opposite direction."
Jha said that although the first round of IDA talks in Tokyo ended on a "negative note," he does not regard the outlook as hopeless. He said he was encouraged by his talks here with U.S. Secretary of State George P. Shultz last month, and that he thinks that Shultz, as an international economist, understands India's difficulties.
"But I can't say that I'm optimistic," Jha added.