No. E 37/49 CONFIDENTIAL \ . ' I C'.' " ~-···· This study is restricted to those members of 66883 the staff to whose work it direct! relates, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INDIA'S CREDITWORTHINESS Annex I I I Apri125, 1949 Department: Economic Prepared by; Antonin Basch TABLE OF CONTENTS. Page Eo. SU1~Y AND COlWLUSIOlTS - INDIA AS A CREDIT RISK I Ul'TRODUCTI ON i I. B.EHA:BILITATION AliD DEVELOPlOOiT OF INDIAN ::l:COlTOMY 1 II. TEE PRES~'"rOVE.B...ALL FINANCIAL AND ECOiJOl-1IC SITUATION IN I1"DIA 7 III •. BALANCE OF PAYM][~S 18 Appendix 1 " 2 n 3 I. SUiiHARY AND COHCLUSIONS - Il1DIA AS A CREDIT RISK In considering a loru1 to India, one must 11eigh carefully the present unsettled conditions in its economy as uell as the political turmoil in neighboring countries. Yet a certain positive approach is indicated: 1. The service of the Clomestic debt accm.mts for about 12-1/2% of the ordinary expenditure, Except for the dollru."' obligation to the International Honetary Fund, India has practically no foreign debt. On the other hand, she o1.ms substantial sterling balances of nearly '1!,730 million (02,900 million). 2. Hhen the prese~1t eJ.-traorCiinary e~:pendi tures on national de- fense, on food subsidies and on refugees decline, India should be able, not only to reduce its high rate of ta::ation, but even to provide a surplus for development financing. lleal economy in public finance is of the utuost i.111portance. 3. If present anti-inflationary policy continues and no uneJ~ected difficulties interfere, a further lessening of inflationary pressure may be expected since no ne\·T purchasinc pouer is being generated by nonetary authorities. nth increasing dor:lestic production and uith rising imports, even of consumer goods, from the soft currency area, the position should becotle still easier. 4. The restoration of confidence is a prerequisite to an liaprove- nent of the capital market. Only then will capital be available for the investuent needed to increase production in India. The Government is alive to this and is trueing steps to create a more favorable business clinmte, An increase of available savings should supplement public expenditures on development projects, 5. It is expected that the over-all food deficit uould be reduced and that the country may be able to obtain larger food imports from preHar ... II. sources or other parts of the soft currency area. Thus food inports from the hard currency area could be reduced and even, in the not dista..'1t future, eliminated, except in times of failure of the monsoon. 6. Such a change in the food import and production situation 11ould alone substantially lessen the gravity of the dollar problem. Houever, the country must continue to purchase more in soft currency areas and at the same time sell more in the hard currency area. To do the latter, the problem of competitive prices must be solved in order to strengthen and restore the position of Indian goods in foreign markets. 7. The country! s dependence on economic recovery in the U. K.. uill continue. In assessing India's Cl"editworthi.ness, account must be taken of its sterling balances, and especially of the prospects of the u. K. to allou India to dravr on these balances for purchases \dthi.n the sterling area and to provide her 1-r.ith a modest yearly allocation in dolls.rs.. ~lith the con~ tinuous recovery of the Uv K. economy, India should be able to obtain in soft currency areas capital coods and rau materials 11hich are nou available, for the nost part, only in the u. s. or other parts of the dollar area. :ind as the position of the pound improvesj India mc::y use sterling in purchases from an increasing list of countries. Already through the mechanism of the Sterling Area, India is able to pay in pounds for imports from Svreden, Switzerland, Brazil and Peru. 8. Taking into account all these factors and assuming :- (a) That certain conditions concerning public finance, inflation, the capital market, e:;::port commodity price adjustments, and an over- all increase of production uill be fulfilled; III. {b) That a satisfactory over-all trade arrangem:mt 'Hill be reached ,,rith Paldstan; (c) That, in the absence of convertibility of currencies, foreign trade develops along the lines of the prelre.r pattern, and India again achieves a surplus idth the hard currency area; (d) That the development program idll be pursued realistically and vlith first things first, and (e) That, in addition, a modest am1ual release of convertible sterling vdll be available f:oom the U. K. It soems reasonable to e~;:pect that India should 1::e able to provide a yearly loan service of about .. ~~15 t to .;25 million. 11 In vieiJ of the present difficult position a full loan service should begin only after a period of five years. Should some of the conditions mentioned above not materialize, and especially should India's food position not substantially improve, India's ability to provide a yearly service for dollar loans,should not be less than ~;ao to ~~15 million, or about 3 - 5% of her present exports to the United States. '· Indi.<;~.ta prew~ ~:;wort$Urplus \lith the u.s. uas .)140 millioJJ. in 192B c..nd ')28 million in 1935. The yearly service !ndiaf s pr~niarv'debt, wh;i.ch has ~ep. repaid, amounted to ~bout lt20 million~ ~i IV. In that ct::.se it rai;;ht be necessai"''J for Inc:ia to further curtail her hard currency purchases, uhich could l:::e done ui thout serious effect on her economy. 9. The effect of a Bank loan uoulcl 1:::e v::;ry great, economically as vrell as politically. It uould provide a fillip to confidence in the pre sent Goverrnnent, and also restore colli.-"idence on the capital market. It uoulC:. ivork like an initial spark t.o the Indian economy, helping to release for investment some of the hoarded domestic capital and encouraging a flm-1 of private foreign investment for vlhich many opportunities e;dst in India and to '.Ihich the Indian Government is now well disposecl" :1. -_ ....... . ______, . _ ..Introduction _ India has been through serious economic difficulties in the last year. Members of the Government spoke openly of econo:nic crisis in the re- cent budget discussions of the d.ssembly. The reasons for this si tuntion are manifold. The country has been faced I.J"i th conversion of a vrar-\IOr!l ecor'o.OlllY to peace-time production; \·lith a host of pro bler:J.s thrmm up by Partition; and Hi th all the economic and social implications of neuly aclueved inclepcn- dance. The consequences are reflected over nest of tha econonic financial life of the country. The most critical economic "!Jottlenecks have been sl1or- taces of food, aggravated by a se1~es of poor harvests, lc,cl:: of tro.nspor- tation. Transport difficulties uere so serious in 1948 as to prevent Lnpo:i:tant con1.nodi ty e:;~ports and to curb domestic proch.tction th:. ouc;h ine:.bili ty to move 1 roods uithin the country. Inflatic:·,ary pressures inheritGd from ·i:.he war have, until only recently, pushed prices and \·rages stee.c1ily upuards. Friction Hi th Pakistan and ope11 fi&hting in Kashnur and Hyderabad have necessitated a costly :military establishment. tm over-ell balaP.ced budget has been impossible in spite of rather high direct k,:£;;ation. Uncler the neu political re::::;ii:le, VB.rious Gov3rrunent program.s have c..isturbed business confidence and sh;y-ness of capital he.s made flotation of public loans, and even nei·f issues of corrrnon or preferred stock, extreuely difficult. Independence released a great many forces and raised hopes that, in spite of the difficult ovor-all position, the standard of living of the broad masses uould be improved Hi thin a short reriod. The people e:::pected inclepen- dance to bring early fulfillmant of tb? r:!.f'.l"JY promises made previously by the ii. Congress Party. In the flush of hevT hopes, a.:."".bi tious plans for development piled up throughout the count.T'IJ. Government Departments \·ror!-:ed feverishly on schemes for q_uick economic ad.vancenent Hhile Provinces and States uere in open competition for priority to proceed ui th their mm projects. These development e.mbi tions, together vd th pent-up demand from the 1:.rar and the need to replenish stocks and replace i·.rorn-out machinery crer.ted a huge demand for imports. On the basis of large accumulations of sterling and a belief, during the early months of independence 1 in the converti ~:>ili t~~ of the pound, the country pursued a liberal import policy. Large sums of dollars and ste:ding uere spent, o;ften on non-essentials. Changed Financial a11d Economic Policy in Sur:uner of ~. By the suramer of 1948 1 hm.rever, it 'Loecar;!e vary clear that India, like most other countries, was faced ui th a dollar shorta.ce. Since that time the Government has becon;e increasingly auare of the serious econo~irl.c and fi- nancial situation ancl. ·che necessity for mE?asures to cope -vdth it. The Government has embar~:ed upon a compreheJ::sive anti-inflc.tionary policy affect- ing all sectors of the nationa.l econony. Import, e:::::port and foreic;n e:::change policies have 1::een revised. Reduction of: various expenc1i t<..ll"e including some for develop:nent projects 1 is in process to ixnp:rove the budget si tuc:.tion. Neasures are bein;; taken to check inflation anc~ labor unrest, Recent state- ments from high Goverm.1ent officials have aimed at reassuril:g the 1Jusiness co:n:u"mlni ty and alleviating the shyness for neu inve stnents which is one of the country's major economic pro:)lens. Efforts have berm intensified to rc.ise the level of food production anc~ increase r.unerc.l and inciustrio.l output, and to improve internal transport. iii. The Govern1rent is curbir..g dollar imports and encouraging dollar e:}:ports. It is also attemptinc; to hold the price line ui th the help of price control and rationing of grain and cloth, and even to recuce food prices as a means to check Hage increases and at the same time maintain lt~bor peace. It has nou oocm realized - although the process \las not '.lithout dif- ficulties - that in view of the dollar and bl1dget position and the shyness of capital, ambitious schemes for speeay development must be tailored to realistic possibilities; thc.t various projects must be postponed; and that others must be spaced ove:Jr longer periods. The alternative of an excessive rate of development, financed from inflationary sources and Hi thout e.dec.:,uate provision for foreign exchange rec:uirements, uould endanger the Hhole struc- ture of India's economy. A. strong and determined ~:olicy is necessary to coordinate the acti- vities of Govern.'llent t\gencies, both at the Centre and in the Provinces; to reduce unproductive public expenc'litures; to e::1::pand agricultural and indus- trial outp-u.t; to relieve the shortage of doll2rs c'.r..d to res.ch a satisfactory long-range economic settlement uith Pal:istan. I. REH£~BILITATIO:N AED DEVELOP?Ji:HT OF IUDIAlJ ECOfTOHY 1. Rehabilitation of Railvrays and of Industrial Equipment A.t present India is faced uith serious bottlenecks, especially in transportation and food. Raili-Iays and industrial equipment are uorn out and run dmm as a result of the Har. The condition of transport has hampered the flo111 of goods and slovred production anc1. eA.-ports. Raihte.y rehabilitation is therefore high on the list of India's reCJ.uirements.Y During the :war machinery in industry -vtas badly \·torn and replc.cenent cr renewal vms impossible. Since 1947 intensive efforts have been macl:a to replace the vrorn-out equipment and to moQ.ernize India 1 s industrial plants. (The total value of machinery imported from April 1947 to the end of 1948 is about ~.310 million) 2. The Food BottlemcJs The food bottleneck is reflected in substantially increased imports of food vThich reached 2.S million tons in 1947-1$ (compa.red to pre1.·mr imports of around 1:~- million tons) and for uhich the 191,..9 target envisages 3.8 mil- lion tons. The reasons for the present food situation are manifold: (a) [\. series of poor monsoons in succession e.nd other adverse '.reathar factors have seriously reduced domestic production since 1945-46· {b) Burma has been unable to resume rice e:;cports at anything approach- ing preuar levels. (c) The separation of major food surplus areas from the Dominion of India by the creation of PaJdstan. 1/ For details see the Report by the Raihiays' Consultant. 2. (d) Population increase. (e) The improvem::mt in f._:rm incor::e over the past fe1-1 years has, as one of its conse~uences, increased food consumption in the rural areas and 10\Iered sales to the urban areas. (f) Finally, the policy of the neu Government to provide feed even on a limited scale, for the •Ihole population of Inc'ie.; at the same tir1e, the Government is reluct::mt to enforce compulso~r food procurement. Concern over India's ability to !~eep c:.breast of food l~equirc:nnents of its increasing population is probably great8r no'.J than at any time since the last quarter of the 19th century. The Gover!1..tu9:"it is approaching the pro~)lem on a national scale uith a threefold objective: (a) to cover existing deficits at current nutl"i tional levels; (b) to provide for the increase in rec;~..1.irements e~::;_oected frora grov.rth in population; and (c) to improve the general standard of food cons1.:unptio:"·• A. statement of the Ninistry of :~griculture on Narch 1.3, 19/;..9 assurnes the total population of India at 395 million by 1960. Compared to total food grain production in 1947-LJ3, i.e. I;-7. 7 million tons, the deficit to 1:e rnac.e up rett.reen 194$-60 i!OUld be 9.5 million tons. (It should be noted, houever, that there is a general consensus that tho official food procuction statistics underestimate the actual production tw about 15>~). In its statement the Ninistry refers to the various multi-purpose river valley projects; a net increase in food prot:1ction as a result of these schemes uould be of 3 million tons cy 1960. The program of Land R.eclc'J'lation and Tube"~rrell Construction is e~cpected to add another 2.5 million tons. The Hinistry has under consideration, hoHever, the intensification of the ttgrou- more-food" program and certain other measures from Hhich it is e:cpectec~ that the over-c.ll deficit in 1961 Hill be con.pletely overcome t·rell in adv~:,nce 1960. It seems to re of the hic;he st importance to gain mt.:::::irm.t.'l'Jl renefi t :::'ron 11 normal crops". Since yields in India are among the louest in the uorld the potentialities of increased efficiency in agriculture are great. Co:r..tinuous efforts to increase yields and inprove storage facilities (the al'l..nual uaste of stored grain is estimated at uell over one million tons) uill be necessar;;;', but if they are made there may 1:;;e rea.sor:able confidence that th3 gap in ;:':'ood requirements Hill re filled except in times of fa1.lu:L-.e of the 1nonsoon. ). ]:ndustrializati..Qn In aC'iii tion to the rehabili te.tion of tl~al:'sportrtion anc~ inc~ustri2.l equipment, ancl the 1-.e storation of the pr-J'J<:r situation in focc1 S'clPllY ~ it m:ust l::e eJtpected ths.t India 1·Jill continue its preuc.r trend in developing and enlarc;- ing industries based on c'.omestic raH materials. tl ·uide field rems.ins open for industrialization. E::'J::,a.nsion of industrial and midng !Jroc:uction is necessr.: y 1 to mitigate the population pressure on land and also to increc.se the nc:tional income .11 During the vTar India started production of various metallurgic goods, machine tools, aluminu.m, ferro-alloys, various chemicals and others. In the last tuo years neu L1dustries uere built or the e:d.sting units 1.-rere In the abse1-:.ce of official figures on the national inco1:1e of Indis,, the Hinistry of Fil~anco estimates the national income for 19.!J3 at around Rs 50,000 million, uhich uot1.ld be eq_ual to about Rs 155 per hec.d conpa.red to preuar estinates of Rs 62-64 for 1931-32. £-my increase of real income per capita:has been slight. expanded in the follo"ring fields: electric motors, diesel engines, electric lamps, motor car batteries, paper, c~stic soda, plywood, industrial alcohol. The number of '110rkers employed in factories has reached 3 million. Construction of new plants and expansion of those existing continues: For example, the Government's great ammonium sulphate plant at Sindri, with a capacity of 350 thousand tons, which is expected to start production late in 1950. Cement production is being substantially expanded. A net'1 soda ash factory and a caustic soda factory are being erected. Three rayon factories are being buult. Railway coach production has increased. Expansion of aluminium production is being prepared. 4. GovernmeQt's Projects, Although India does not have an over-all development plan, the various industrial as well as irrigation and power projects which the Central and Provincial Governments contemplate at present would require an investment of around Rs 10 billion ($3 billion) over a period of 5 to 7 years (or about 3 to 4% of national income). Rough~y, 20% would be needed in foreign exchange and a substantial part of it in dollars. The major governmen~ industrial schemes include: two new steel mills, each with a capacity of 500,000 tons of steel; a factory for the production of heavy electro~technical machinery; a further expansion of cement industry; a machine tool factory; a locomotive factory: synthetic oil production and an exPSnsion of Indian shipping. Since requirements of coal will automatically rise \'lith the increasing over-all industrial production an increase of coal production by 5 million tons to 35 million tons is expected within the next five years. Some of the multi~pu~ose government projects (irrigation, flood s. control and hydropower) would greatly increase the generation of electric power which is in short supply in various parts of the country, and '~Thieh in turn Will help in establishing new industries. The execution of the various public and private projects presupposes that the present transportation bottleneck is solved and the increased trans- portation need satisfied, and., at the same time, that en.ough food '"ill be pro- vided for the whole population whose income may be expected to be slowly but constantly rising. The activity of planning of new industries and of development as a whole has been so feverish in the last years that the necessity for coordination and a system of priorities has become evident. Various Departments of the Central Government have prepared plans of their O'l.m which at times are conflict;ing and eaoh Province and State has tried to establish industries in its own territory without considering the over-all situation in the country. In order to coordinate planning of new production and transportation, an Economic Committee of the Cabinet was organized and a Secretariat of this Committee was established on February 15, 1949, With the aid of this committee, future development, both in the Government and private sectors of the oountry 1 s economy will be controlled and coordinated by the Central Government. It will allot priorities to development schemes both of the Centre and of the Pro- vinces. Further development of industries in private sector ~nll become sub- ject to Central licensing. Thus. not only '~Till . uncoordinated nrivate develop- . ment not be possible, but through con.trols "'hich are already in existence, e.g,, the control of capital issues, the control of essential raw materials such as 6. cement, iron and steel, etc., and consequently foreign exchange eontrol,l/ it is possible to regulate the pace of implementation of new projects. Further, it is impossible for Provincial Governments to embark on any large seale development plans without permission of the Central Government, since most of them have not the financial resources available and have already borrowed from the Centre. Under the Consti~1tion, they cannot in such cir- eumstances, have resort to the capital market withm1t the permission of the Government of India. There is in existence, therefore, administrative machinery which can and does coordinate the development plans of the country as a whole. This administrative machinery implements its decision through the statutory powers which the officials of the various Ministries exercise through control orders. It can be said that, for all practical purposes, India is a controlled economy. What is needed is real coordination of these various controls. The new machinery should enable the r-overnment to make sure that the nation's limited resources are used strategically. first things coming first. 6. O~stecles to Ra~d Development• There is no doubt as to the need and basic feasibility of the various development projects in India. However, there are three major obstacles to a rapid development: (a) Shortage of skilled labor and managerial personnel. The 1/ The Government also controls the allocation of ra~lway transportation; 9o% of the available space is reserved for priority goods: food, cloth, coal, steel and cement. Government is well aware o'f this 'factor and is trying to overcome the di'f'fioulties by extensive training of skilled labor, by its friendly attitude toward the work of foreign experts in India, and by trying to obtain technical assistance from abroad. (b) Insufficient annual accumulation of domestic savings. (A dismlssion of this point is found in Chapter II). (c) Dollar shortage, "'hich is discussed in Chapter III. II. THE PRESENT OVER-A.LL FIHi\HCLlL tV.TD ECOI!OiqC SITUti.TION IlJ II!D;rA 1. Public Fil!Clf.!ru!! (a) 19/.J2-k9. Budg~. The revised estimate for the 19/.$-49 budget U.pril 1, 1948 - Haroh 31 1 1949) shoifS, {af$ seen from the table belou) substantially higher figures than the original estimate: I. Ordinali{ Bugge~ II. papi ta;L Budgej: in millions of rupees) Budget Revised Budget Revised Estirr~ fu!.timate £!~tt~ ---·- Estimate Revenue 2,552 3,383 935 3,135 Expenditure ~ :2,39? 2,06]. ~ Deficit 21 15 1,126 1,8.56 Principal i terns of addi tion~~~di tshre over estimate uere: Defense Rs 350 million Pre-Partition liabilities Rs 2D7 million Relief and rehabilitation of refugees Rs 94 million Food subsidies and bonuses .......... Rs 120 million ~-- Total Rs 771 million s. Hhile the ordinary budt;8t uas c.Jj·nost "balanced, the capital buc~get deficit amounted to Rs 1,850 million, ca:~po.rec~ to the estimate(~ deficit of Rs 1,120 rnillion. This deficit, hmrever, uas due to over-all settlenent :1i th the u. K. 1rhich resulted in paynent of Rs 21 8/-:-0 Hilllon for finanding the pur- chases of sterling pensions, defense installJ.tions and stores left in Incli.o. by the U. K. at the end of the war, and. from the Govc;rnment purchase of grc~in paid for in sterling)/ Therefore, the 1948-1~9 b .cdget deficit iJG.S net from the accwnulated sterling balances ancl not by an expansion of crec'it. It did not have any direct inflationary effect. HoHever, the stl"llcture of 1:1onetm1' reserves of the Reserve i~ank v1as affected, as sterling balances ·He:i.'e repl2.cad by Indian Government Eonds. The ratio of cover of total notes issued by gold and foreign securities declined from 87.3% in July 191$ to 67.4% in September 1948. Because of the above-uentionec'. excess of e:cpenc1.iture over budget esti- mates, and because of inr,'Jility to raise any substantial capite,]. in the mar~.;:et, although a loan o:f Rs 1, 500 million uas eontenplatecl, tl:e Ce::tral Governrent Has indt1ced to reduce grants to Provincial Governnents for c~evelopnent from Rs JOO to Rs 1$0 million anc: loans and ac,_vances by the Central Gov::Jrmnent to Provinces from Rs 502 to Rs 405 rdllion. (b) 19/.8-5.0 B-udget. The budget estimate for 19/+9-50 shoHs total e:::pendi- ture s of Rs 31 225 nillion and revenues of H.s 3, 229. The oroj.nr::n;r budc:;et thus should be hal,:nced. Defense S3rvices 1.n11 account for Rs 1, 573 rillion (49% of ordina!"'J expenditure), food subsidies and bonuses for fooc~ procux·er.1ent 1/ A. breaJccloun of the 191~-49 and 1949-50 budget in its rupee cu'lcl foreign e;~chanze compon:3nts vJt".S prepared by the Inc1ir.n l;Inistry of Finance. 9. Rs .329 million, anct e~cpend.i ture for the relief anc1 rehabilitation of refugees Rs 98.5 million. These three croups represent more than tuo tli'.irds of total orclinary e~endi ture. In ac~.c1i tion, a provision of Rs 232 millior., has been made in the capital budget for rehabilitGtion of refug~es. On capital account. the budget a:;D.in shous a deficit of Rs 1,.31~ million {Receipts Rs 627 million an(]. e~enc.1i ture Rs 1, 968 million). It inclt:.des Rs 268 million for grants and Rs 492 million for loans to Provinces :Lor c1evelop- oent. Together ui th the Central Govern.ment expenc'i ture on developnent m:.d reconstruction, more than Rs 1,000 million Hill be sper~t for these purposes. The total budget broken dovm into its rupee c.nd foreicn e=:cllange compo11ents shous a foreign e:;~change deficit et".L1.dvelent to Rs 1,870 nillion, arising mainly from eJcpected c;over:nment gre.in and otl1er purchases abro::~d. The rupee budget shmrs a surplus o:".' Rs G20 r:UJ.lion (this ir..cludes net receipts from loans, p. o. Savings DaJ'I]~s c.nd Certificates c.nd Tre~>.SU!"'J iJe~"OSi t r~eceipts totalling about Rs 540 million) • The total budget, accc:i. c':J.Eg to a sts.tet.1ent 1 of the Hinistry of Finance, uould end '.Jith a de:Z'icit of Rs 1,050 million or R.s 290 million less tl1an is the estinated capital bud~,et deficit. T~1e deficit is sup~osed to oo met by us:!nc; the rttpee surplus nnd 'b;~ clraui:ng on the Govern- ment bc:.hmces uith ·::.he Reserve Ban.k; it is expecte6. thcct ti1ese balances uould be reduced from Rs 1,630 million to 579 million in 191~9-5C. E>.e :.·ednct::ton of these balances 11hich uould l::e use0. for the purchc::se of forei:,n exche.::Jc;e \:oulc1• not be i:1fL.tionary and vroulcl e.t the saJ,J.e tiL-:e renove a da.r:.ger of a potential ir£1ationary e~q_)arsion in money volun.e. Thus, as a uhole the c~efidt ~!OUld be covered ~::W drn':int; en the Goverm1ent' s rupee be.l::.nces th the I~e serve Jal'l..:~ and on ste:;.~lL1G bc:,L,r:ces. 10. For the coming year the Government expects to borroi·l Rs S50 million in the market, of uhich Rs 670 million uill be used for the repayment of the 3% 1952 loan, The scale of borrowing \·dll be raised if conditions on the capital market improve. {c) I}1e Outlook. Although the budget in rupees is balanced, and the deficit is being met from sterling balances, the over-all level of expenditure is considered high and direct taxation too heavy, forming an obstacle to busi- ness activity and accumulation of savings. High taxation induces many people to withhold profit declarations, to operate through the black market, and to hoard money rather than to pay high taxes or buy Government securities. It may be said that the Government is aware of the necessity of balancing the budget and the urgency of providing some relief in direct t~xes: In his budget speech the Finance Hinister ventured a forecast that :- the time comes to consider tl1e budget for 1950-51 11~fuen our finances tlill oo definitely more comfortable than they are today. If it happens that the budget shous a substantial surplus next year then it is possible to provide for substantial tax relief and to contribute much more for the develo11roent of the essential national building activities." It may 1:e expected that the defense eXl:;endi ture l·dll 'be reduced by Rs 350 million to Rs 400 million if the Kashmir situation improves. G~q_;endi- ture on refugees is bound to decline. Loifer prices for imported .food, c,re.:.:.ter domestic production and larger grain procurement uould reduce the a;·ilount paid on food subsidies. {d) Debt Position of the Government of In~~ The outstanding public debt of the Government of Indj.a is expected to amount to Rs 20,300 million at the end of I:arch 1949, and Rs 20,490 million at the end of Narch 1950, compared toRs 9,500 million on liarch 1, 1939. In 11. addition, the Government is liable for the h.lc.nce in the various Provident funds, Post Office Savings Barucs, the depreciation and reserve funds of the raih.rays, etc. Thus, the total outstanding debt vtould stand at Rs 25,710 million on Harch 31, 1950. The debt service during 1949-50 of Rs .393 rnilHon accounts for 12--:-% of orC!inary expenditure. Total interest yielding Government assets are given at Rs 14~311 million, the most important item being capital at charge on raihrays Rs 6, 925 million and debt due from Pakistan Rs 3,000 mil- lion. (e) Prgvincial Fina~. In 1948-49 the revised ordinary budget deficit of all the Provinces combined amounted to Rs 137 million and a deficit of Rs 117 million is expected for 1949-50. The financing of this deficit has been included in the Central Government Budget. There is, hol.Jever, little dan- ger that Provincial financing might become an inflationary force because the Centre has several effective avew~es of fiscal control over the provinces. Indebtedness of all the Provinces to the Centre prohibit them from floating market loans uithout Federal consent, and, moreover, they have to obtain the approval of the Reserve Baruc for any borrouing in the market. 2. Honey Volume, Prices and Production (a) !:!Q.n~..Y.JT,.alue In the last year no new purchasing pouer has been created by the mone- tary authorities. l1ote circulation continues to conform to the pattern in evidence since the initiation of the Government's anti-inflationary program in the sum.'ner of 1948. Potes in circulation dropped from Rs 12,698 million on July 2, 1948 to Rs 11,647 on Februe.ry 25, 1949 (it Has Rs 3,400 million in 1939). If Rs 822 million representing note-s returned to India from Pakistan are deducted, 12. the net decrease in note circulation -vras Rs 229 million, to Hhich should be added a return of Rs 50 million in one rupee coin uhich uere ·uithdravm. from circulation. The clemand liabilities of the Scheduled Banks declined from hs 6,961 million in July 1948 to Rs 6,450 million in January 1949; time deposits from Rs .3, 115 to Rs 2, 9 31 million. The total money supply (currency, dene.nd de- posits of the Reserve Bank, the Scheduled Banks and the IJon-scheduled Dariks less deposits of the Central Government and all banks 1dth the Reserve Barile) ubich stood in July 1948 at Rs 21,020 million declined to Rs 20,410 million by February 1949 (it uas Rs 4,910 million in 1939). It is the opinion of the ltl.nistry of Finance, that the quantity of active money in the economic system cannot be measured exactly by money in circulation and bank deposits; an appreciable amount of money has gone under- ground. The amount of hoarded currency is estimated at Rs 3,000 million. The velocity of circulation of deposits calculated ;::zy- the Reserve Bank uas 9 • .3 in January 1949 compared 1.dth 15 before the vmr. An increase in the velocity of circulation and the use of hoarded currency in the market may have unfavorable effects on prices, if the supply of commodities does not substantially improve. (b) Prices In spite of the fact that no new purchasing power 11as created by mone- tary and fi seal authorities, the Government is still concerned ui th il".i'lationary pressure. The over-all price situation is not yet considered as settled and balanced. A steady rise in prices occurred throughout 1947. The general index of uholesale prices (base: year ended A.u:ust 19.39 = 100) climbed from 290.5 at the beginning of the year to 314.2 at the end of December. Price control was practically abolished in December 1947. The first seven months of 13. 194B brought a steep rise in the \vholesale lJrice index by as Duch as 76 points to 389.6 in July. In the smnmer of 194B the Government announced the inmediate necessity to aurb the spiral of rising prices. The most important immediate measure \-tas the re-introduction of price control and rationing of food grain and cloth in September 194B. Since October 1948 prices have be£Un to decline. The general price index decreased by around 10 to 11 points bet,.reen Hovember 194$ and Uarch 1949. The average index for February 1949 stood at 372 and declined further to 370.2 for Harch. Index movements of cost of living ( uorl:ing class) vrhich are calculated for various Provinces separately also indicate a check of the rising trend around September-October 194$. This decline, or leveling off of prices, is considered a result of the taken various anti-inflationary measures/by the Government. In addition to the re- introduction of price control and rationing, the Government decided to curtail all avoidable and unproductive expenditure, both in the Centre and in the Pro- vinces. Limitation of dividends of corporc.tions was introduced and the repay- ment of Excess Profit Tax deposits t-tas postponed for a further period of three years. Campaigning for small savings has been intensified. Heavier taxes on luxury goods, and higher import duties have been introduced. In order to increase the supply of consumer goods, imports from soft currency countries have reen liberalized. Import restrictions no1tr apply only to commodities subject to internal controls vhich are mainly to insure equitable distribution. (c) Production ;;..;;:;...~:.:;,:-._ The policy of the Government has been to combat i1~lationary pressure by providing a more ample supply of consumer goods; this is to redress the imbalance between the supply of goods and the accumulated purchasing povrer and pent-up demand carried over from the vTar. In order to increase the sup- ply of food grain, imports of food liere stepped up and the system of food procurement has been extended and improved, Houever, a satisfactory supply of food remains one of the main problems of the Government policy. Industrial production, the inde::' of vThich reached 126.8 in 194.3-/..4 (October 1939 : 100) dropped to 105 in 1946-47. Since the end of 1947 indus- trial production has begun to recover and the index reached 119.• 9 in September 1948, Figures for 1948 shou an increase in the majority of industries; only production of coal and steel fell a little short of the production in the pre- vious year. Recovery of industrial r:roduction has been facilitated by some improvements on the railways uhich by the early part of 1948 uere a~proaching a serious break-dmm in the movements of s::oods. Various measures have been introduced to encourage neH industries and to aid existil1g industries to step up production. i:..lthough the trend of industrial production continues to move upward, it is still too early to say '1.-lhether the Government has really sue- ceeded in chacl{ing the inflationary pressure and reversin5 the trend. Opinion has been expressed offici.o:.lly that a dmm-vra;r:"d trend in prices o;f food grains Hould not occur until the spring harvest about the end of fl.pril. In Provinces and States 111hich have fixed the procurement price of grain since the re- • imposition of food controls, the prices set in April for the current spring grains are below previous levels, in most cases by 4 to 15%. F\lrthennore, additional areas have not-T established controlled prices for grain procurement well under the previous uholesale levels. In vieu of the prospects for an excellent spring harvest, the Government should 1:e able to maintain food pur- chases at these reduced prices \Jithout serious difficulty. The importance of 15. food grain prices is indicated by the fact that they represent more than 50% of the cost-of-living index. The labor situation Hhich was very unsettled in 1947 also has shoun some improvement. The total number of man-days lost through industrial dis- putes amounted for January-Fovember 1948 to 7,120 million, compared to 16,1.30 million in the same period of 1947. It is also significant that of the total industrial disputes, the proportion in uhich \..rages uere the principal issue was much smaller during the latter part of 1948 than in the previous years. If the present financial and moneto.ry policy continues, and if the supply of consumer goods, especially of food grain and cloth, is naintained on a satisfactory level, there is reason to believe that the price and wage situation in India may become stabilized vdth some hope for a further decline of prices of food grain. 3. Accumulation of SavipJ[~ The situation on the capital marl';:et has been unfc:,vorable throughout the last year. 11 0idng to the stagnation of the capital mar!;:et it has not been possible to borrou more than Rs 550 million this year against Rs 1,500 million provided in the budget, II sazrs the E~qJlal~atory J:.lemorandunl on the Government Budget of 1949-50. Postc.l Savings and other sr·,all savings Hill not exceed the original estimate of Rs 312.5 Billion. The accumulation of ne\..r reserves of the large insurance companies a::'G not e::::pected to reach more than Rs 150 million. Of course there has been investment from current produce in the private sector; in industry, mining and agriculture. Unofficially, the H.eserve Ba:rtJc has esti- mated this, perhaps too optimistically, at as high as Rs 2,000 million. Trueing all of these items together, savings in the 1948-49 fiscal year \Wuld amount to about 2,500 - 2, 700 million rupees, or about 5% of national income, compared to the estimated 8 to 9% in the prewar period. Savings and the capital market 11ill continue to l::e affected by the poll tical and social changes vrhich have taken place since independence. Income of the agricultural population has increased but most of these people are not used to monetary savings and prefer to buy consumer goods or to hoard gold and ja\velry. The changed status of the Princes, the vreakened position of the Zamindar (for all practical purposes large land otmers) and the nervous attitude of the business community may affect the accumulation of savings and the capital market for sor,le time to come. A.t present capital is shy in India. One reason is that the business community has become v1ary at the prospect of nationalization. A.nother reason is the high rate of direct taxation already mentioned. Indian industrialists also have stressed the fact that because of reduced profit margins they are unable to maintain the level of neu investment. It is doubtful 'hether the Government could float a major loan in the 1.. market at present, and private business 'Hould also find it difficult to do so. Therefore, one of the most urgent problems for the Central Government is to re-establish confidence of investors and to stimulate savings. The Governm.ent seems a\-lare of this difficult situation. In recent months nearly all menoors of the Goverl"'J'llent have emphasized that no industries 1-lill be nationalized 1lithin the next ten yeal's, not even those the nat.ionalization of vhich Has a 17. part of the Government program)/ The GovGrnment has repeatedly emphasized that there l.dll be a uide scope for private enterprise in India. It is clear that the Government, in addition to the rr~asures to re~ store confidence, lv.ill have to intensify its efforts to stimulate and mobilize savings and to channel them properly into productive purposes. Unless the country is able to save yearly an amount substantially greater than in the 1948-49 fiscal year, it \·r.i.ll not be possible to carry out a development pro- gram on anything like the envisaged scale. If the Government cannot borro-vr in the market, it may be under pressure to finance various projects from nevr or increased taxation or even from inflationary deficit financing. lf Resolution on industrial policy of April 6 1 1948 stated that the Government has decided that the manufacture of arms and amnruni tion, the production and control of atomic energy, and the mmership and management of raihrays transport should be the exclusive property of the Central Government. In addition, in the case of the follmr.i.ng industries the State uill be exclusively responsible for the establislunent of any new unCertakings except uhere in the national interests the State itself finds it necessary to secure the cooperation of private enterprises: coal, iron and steel, aircraft manufacture, ship builcling, manufacture of telephone, telegraph and vdreless equipment; mineral oils. A.t the same time it vras decided to let existing undertakings in these fields develop for a period of 10 ;years. At the end of this period the \vhole matter v.rill be revieHed and a decision taken in the light of circumstances obtaining at the time. 18. III • BALAl~CE OF PAY~1ENTS. 1. Balance of Payment§ f9r 194?-48. The most imnortant features of India1 s balance of payments for the - import last two years are an over-all/surplus and a great dollar deficit as compared to the usual export surplus and dollar surplus before the war. The figures given below for the balance of payments for the second half of 1947 and the first half of 1948 have been supplied by the Hinistry of Finance. Estimates for the second half of 1948 have been prepared by the same l.finistry. In addition, a balance of payments statement for 1948 has been prepared by the Reserve Bank of India from the quarterly returns of the Exchange Oontrol.l/ (See Appendix 1). (a) Balance of - Jyly~Decemger 194?. PftYWent~ (In Rs Millions) Exports 1,920 l. Im:gorh a, Commercial 1,700 b. Government: Food 500 Other 160 Invisibles 420 2. Government Expenditure 50 3. Invisibles ' 'lQ Total ?,340 Total 2a6ZQ .,.._ Balance of Payments deficit: Rs 280 million Balance of Trade deficit: Rs 440 million l/ India does not have proper balance of p~ents statistics. The Reserve Bank has only recently organised a balance of payments division which is trying to improve the balance of payments statistics. It should be noted that the Government food purchases for the second half of 1947 were greater than the balance of payments deficit. (b) Balance o~ Payment~ - Jangary-June 1948, · (In Rs l-iillions) Exports 1. Imnorts: a. Commercial 1,350 b.~ Government: Food 700 Other 200 Invisibles 590 2. Government Expenditure 150 3. !nvisibles 360 Total 2,970 Total 2,260 Balance of Payments surplus: Rs 210 million Balance of Trade surplus: Rs 130 million Balance of payments and balance of trade sh~r a surplus in spite of the Government 1 s large food imports. (c) Balance of PaYffients - July~December 1948 (3stimates) (In Rs i'iillions) Exports 2,2?0 1. Imnorts: a. Commercial 1,?60 b. Government: Food 560 Other 410 Invisibles 490 2. Government Expenditure 220 J. Invisibles 160 Total 2,260 1,110 Balance of Payments-estimated deficit: Rs 550 million Balance of Trade-estimated deficit: Rs 460 million The over-all deficit of Rs 550 million in. the second half year is only slight- ly lower than the Government food imports of Rs 560 million. 20. The Dollar Doficit. The over-all balance of payments position is not too unsatisfactory, especially in view of the fact that India has been able to meet its deficit with the Sterling Area and some countries not belonging to the Sterling Area by drawing on Sterling balances. The dollar position ho1.orever is very diffi- cult. According to the Government's statement, the dollar deficit \'Tas: In the period July 1-December )1, 1947 (presumably for und.ivided India) $ 162.8 million January 1-June )0, 1948 58 It 11 July 1-December )1, 105 Deficit from July l, 1947 until the end 1948 was § 125.8 II The main reason for the dollar deficit is the fact that India had to turn increa.singly to the hard currency area since countries td th economies disrupted by the war could not meet her requirements. This has been particular- ly true of food 'IIThich is tod~ the largest single item in India's foreign ex- change expenditure. Burma could not supply all the rice India needed because of the ravages of the "'ar and its aftermath. Australia could not provid.e as much wheat as India wanted because the U. K. had priorities in supplies. In 1948 around $150 million "ras spent on imports of food \•rhich compares \•.ri th the total estimated dollar deficit of $16) million in that year. But increased food imports have not been the only reason for a change in India's balance of trade ~~th the hard currency area, especially with the u. s. At the end of the 't-tar a huge pent-up demand for all kinds of goods e:x- 1 sted in India. Industry needed new machinery to replace that \'rorn out during the war. Many American consumer and durable goods l•Tere in demand and .American 21. machinery was also preferred for various new projects. European countries were not yet able to supply many of the requested goods and, moreover, two of the prewar important suppliers of India (Japan and Germany) have started to export only recently. Furthermore, the rater liberal import policy followed by the Indian Government at the end of 1947 made possible increased imports from the hard currency countries with the repercussions continuing into the first half of 1948. Finally, account has to be taken of the decrease in dollar earnings as a consequence of Partition. India's trade deficit with the hard currency area amounted to Rs 482 million for the second half of 1947 and Rs 87.5 million for the first half of 1948, or Rs 569.5 million ($172 million) for this period. The estimated deficit for the second half of 1948 is equal to Rs 300 million ($90 million). According to these figures the total trade def~cit with the hard currency area for the period July 1, 1947 to December 1, 1948 was $262 million. Trade with the U. S. shows a deficit in the second half of 1947 of Rs 550 million ($166 million). During this period Government purchases accounted for Rs 274 million ($83 million). The deficit for the first half of 1948 ''Tas Rs 232 million ($71 million) with Government purchases amounting toRs 207 million ($63 million). 22. According to the Indian statistics of seaborne trade the deficit tori th th~ U. S. amounted toRs 234 million ($70 million) in the.fi!'st eleven months of 1948 with total exports at Rs 715 million and total im~orts at Rs 949 million.ll The changed trade position of India with the u. s. is reflected in the trade statistics for the first 11 months of 1948. Imports from the U. s. accounted for 23% of the total compared to only 7% in the prewar period. Ex- ports to the U. S. increased from 9 to 18% of the totalo 2. The 1949 Foreign Exchenge Budget ~nd Measures towardtt Reducing the Dollar Def~cit. (a) Foreien Exchange BuG~~t for 1~49, ' The foreign exchange budget for the first half year of 1949 ends with an over-all deficit of Rs 850 million. The trade deficit is estimated at Rs 1040 million. The deficit 111i th the dollar area is put at Rs 320 million, and other hard currency areas at Rs 100 million. (For details see A~endix~). The Ministry of. Finance planned, according to its statement, to meet the whole hard currency deficit of $129 million in the foll~1ing way: $30 million would be provided from the cash balance with the Indian Supply Mission and the Central reserves of the Sterling Area at the end of December 1948; $47 million would be purchased from the IMF during January/June 1949. 1/ These figures differ. however, from u. S. trade statistics for 1948. According to U. s. statistics U. S. exports to India totalled $297o5 million, imports from India $267.7 million, the U. s. trade surplus amounting to about $30 million. No explanation is yet available for the discrepancies between the u. s. and Indian statistics. 23~ (Since January 1, 1949 $31•5 million has been purchased). Hope was express- ed that a Bank loan would finance a railw~ project of about $50 million before the end of June 1949• The official statement s~s 11 if progress with the negotiation of a loan from the Bank does not proceed according to expectations, it ,.,ill be necessary to adjust the provisional budget accordingly," The estimated foreign exchange budget for the whole of 1949 shows a total deficit of Rs 9?0 million and a trade deficit of Rs 1240 million. The expected Government food imports are estimated at Rs 1150 million (for details see Appendixi). The deficit with the hard currency afeas is given at Rs 600 million \•rhile food purchases amount to Rs 350 million. Thus, the second half year estimate assumes a smaller deficit with the hard currency area than is shown in the foreign exchange budget for the first half year 1949. (b) Meages towarcia reducing tlle DglJ.m.r Dfffici t. (i) Shiftinc Jmporta tp soft currflncy countries,. In reviewing India's balance of trade position, the Government rightly places more emphasis on the prospect for import reductions from the hard currency area than on expansion of exports which is considered rather as a long-term possibility. Early in July 1948, imports from soft currency countries \if materials and some manufactured articles; and 3'7P were essential con.- sumer goods, mainly food grains. Im:norts of luxury and semi-luxury goods accounted for only 27i of the total imports. Licenses for imports from the 24. dollar area are given only for plant, machinery, industrial raw materials and a few essential consumer items. It is the policy of the Government to con- tinue shifting imports to soft currency areas, in particular to the Sterling Area, and hope has been expressed that it will be possible to reduce commercial imports and Government imports from the dollar area by about 10% in 1949. The Government is particularly endeavouring to switch imports of food grains to the non-dollar area. The Ministry of Food has submitted a revision of estimated grain imports for the period 1949-53 (dated Harch 31, 1949) torta have in- creased in 1948, volume has not yet reached the pret-rar level. In order to increase exports, various other measures \•Jill have to 'be taken. Trans,ortation difficulties. for instance, were the chief reason why exports of manganese and other minerals in 1948 \lrere so low. It m~ 'be necessary to re-examine the various export duties \·rhich form obstacles to sales to the hard currency area. Some of these duties ,.,ere abolished in 1948. Others were reduced just recently. Moreover, the country is endeavouring to ex,and its trade relations to find new sources of supplies of various commodities and is 26. arranging a great number of trade agreements. Trade agreements have already been signed with Switzerland, Argentina (a barter agreement), the Bi-Zone, Yugoslavia, Czechoslovakia, Iran, Siam, Poland, and Afghanistan, and negotiations have advanced ,.,i th Belgium and the Soviet Union. (iii) The nrice problem. Finally, the price problem seems to be ripe for a close examination. India too is under the impact of a dual price system, and the prices of various goods are too high to be sold in the dollar area. Importers, especially of capital goods, prefer to purchase in the hard currency area very often because they maintain that not only is the delivery period shorter but the prices are cheaper. On the other hand, exporters prefer to sell to the soft currency areas because they can often obtain higher prices than in the hard currency area. The price level in India, judging from the vrholesale price index alone, may be considered too high as compared - on the basis of the present exchange rate - "'i th the price level in the U. S. or in the U. K. This would raise the question of t•Thether a devaluation of the rupee may not be necessary in order to improve the balance of trade. The Government, t;rhile examining this problem, t•rould pre- fer to try other measures to overcome the difficulties originating in the dual price system. It is possible that the Government may suggest the introduction of multiple exchange rates. (c) Monetary Reserves. India is facing a serious position in meeting its dollar needs. This alone should be a strong factor in directing its foreign trade policy. India 1 s allocation of dollars from the Sterling Area Central reserve was exhausted by the end of February. The working balances amount only to about $10 million. Gold 2?. holdings of the Reserve Bank were Rs 401 million at the end of February, 1949 compared to Rs 444 million at the end of February 1948.11 The decline was due mainly to the gold transfer to Pakistan. Further small amounts will be transferred to Pakistan as India's notes are being returned. It is evident that in the present circumstances the Government expects a further conversion of its Sterling balances in dollars. For the period July 1, 1948 to June JO, 1949, a total amount of ~15 million was to be released in hard currency. Subsequent hard currency drawings are to be the subject of negotiations to be opened before the end of June, 1949. For the PaYment of its deficit with the Sterling Area and through the Sterling payment agreements also, for instance with S"ri tzerland and S'ltreden, India can draw on its Sterling balances. The total amount of Sterling balances at the end of February 1949 was ~729.5 million. The Sterling balances in the No.1 Account (available for current transactions) '·rere reduced from .;r..so.5 million on July 2, 1948 to ~22.6 million on February 25, 1949. For 1949-50 and 1950-51 new releases up to a yearly maximum of ~0 million in amounts of ~5 million have been agreed upon, provided that the balance in the No.1 Account falls belo'" J:.6o million. The No.2 Account Sterling balances declined from ~90 million on July 30, 1948 to L706.9 million on February 25, 1949. The biggest drop from ~90 million to ~727 million oc~~rred in August 1948 when the i/ The gold reserve valued at the par value ~old content agreed upon vri th the I~W (.268601 grams per rupee) is about Rs 700 million or substantially high- er than is the amount 't'rhich appears in the weekly statements of the Reserve Bank. It seems not to be in the interest of the present financial situation in India to proceed now "'i th the re-valuation of the gold holdings of the Reserve Eank. 28. over-all financial settlement bet,reen the u. K. and India was made. Beginning with the second half of 1948, India has been making substantial use of its Sterling balances and intends to continue using them. It has how- ever been re~eatedly stated that these balances should not be used for imports of unnecessary commodities but be reserved for purchases of needed goods. 29t J. .lli!!ance of Payments J.rospects (a) 1§ the Dollar Shortage a Permanent Feat~? In vie'tv of the present critical dollar position the question must be ans-vrered whether the dollar shortage is temporary or permanent, As explained previously the dollar deficit has been largely due to food imports. If India succeeds as intended in reducing food imports from the dollar area, by st·Iitching its purchases to the Sterling Area or by con- siderably increasing its domestic production and the procurenent of food- stuffs, its dollar position uill be substantially improved. Some postvmr imports may be considered of a teaporary cha:..·acter, especially the pent- up demand carried over frou the uar for all kinc~s of goods. The country must, hOlTever, continue to try to buy even vcrious capital goods in the non-dollar area in exchange for its comi:lodities. In doing so it can also take advantat;e of its sterlinr; balancec, of 11hich ~:D million Hill be neuly released on July 1, 1949. As Greet Britain's recovery progresses anc1 as the use of sterling in international payments is further enlarged, or at least naintained as at present, India ilill be in a position to im- port more goods by using its sterlin[; oolances. Horeover, the shifting of imports to ·tihe soft currency area uould also assist in the re- distribution of sterlinG of uhich a shortage is being felt in some European countries, In stunnary, although India must atteupt to increase exports to the hard currency area, quicker relief in the present difficult dollar situation r.my be expected by reducing purchases from the dollar area. The problem cannot be settled immediately but the dollar deficit need not be considered as permanent, lt should be noted that India's foreign trade position \dth the u.s. is on the uhole more fc.vorable than that of many other countries as Jd: uns shown in the pret.rar period. India 1 s e:::portr. to the U.s. consist mostly of rau materials or cor:unodities uhich do not conpete directly uith u.s. products, and vrhich have nn old established market in the u.s. If jute manufactures should maintain their position on the u.s. market, and 'Ghere is goocl reason to believe that this -vrould be the case for sor11e years to come if prices tTere reduced, then India may hope to regain at least its preuar e:lqJorts' voltUne to the U.S. Rec~uction of e::ports due to Partition may be substitut;ed by increased exports of other cor:un.oCli ties, ::mch as: manganese, mica, l:ynite, chromite, lac, ilmenite, tin and cashew nuts. Once the large imports of grain from the u.s. are substnntially reduced, or completely eliminated, India should again achieve m1 export surplus uith the u.s. India's imports from the u•.s. are :~ather flexible end may be recluced or increased accol~ding to the doJ~ar SUl)lJlY. (b) Long Range Pl~ospec~s India uill continue to i.rnport various col.'!Iilodities, especially capital ::_,oods needed for its developnent. It also may need to import food for a longer period than is assumed by the Indian Goverr.,uent. As the com1- try develops, houeve:c', it uill be able to reduce iL1ports of vo.rious com- modities Hhich uill be proc1uced in India. This can be said for instance of fertilizers soon to be producec.1, of steel if neu p;tants are erected, of altnnintUn, of soda ash and other chemicals, the production of uhich is being expanded. The increased production of paper and planned production of neus- l)rint may reduce inports of these coDl"lodities. In the process of develop- ment and increasing productive r,1achinery 1 a country usually needs foreign capital. India is better off than many other com1tries because she possesses substantial sterling balances vrl1ich may be used for the purchase of needed capital equipment. India should be able to expand its exports uhich, as mentioned, have not yet reached the prewar volume. It should be possible to increase exports of ra1-r materials, including iron ore, for uhich a good market '\.·Till exist, for instance, in Japan. Export of manganese, chror,lite, kynite, ilmenite and other minerals could be stepped up. In addition, India has a cood chance of exporting various manufactured goods includinr; textiles, shoes, leather goods, and ironuare to Far Eastern and l.iidcUe Eastern countries, thus continuing a trend uhich started even before the uar. Therefore, in addition to the rather favorable trade structure Hith the u.s., India should develop a substCtntial trade uith neic;hboring countries and expanc~ its old established trade uith the Sterling !trea and the European Continent. To achieve all this, Indials productive machinery uill need to be modernized and the cost of proC:uction brought doun to a competitive level. In assessing India's balance of paynents prospects it should be noted that as a result of lrlorld War II almost the entire foreign debt uas repaid and Inc1ia has become a substantial creditor of the U.K. The ex- tern2.l sterling debt of i.350 million in 1939 has been red.uced to only ~ JGo ;5 million, uhich rec;,uire external servicinc;. JJ E::ccept for the dollar oblir;ations of C'99.98 nillion to the International iionetary Fund, India has practically no foreign debto Private foreign inves·cmen-'G in India is substantial, the major part of it being o1-med by the British. Estimates of the total value of .British investment in India varies from ~200 to ~00 million. A census of private fcreicn investraent is e:::peoted to be completed sometine in the fall of 1949. For the first half of 1948 profits anQ interest paid to the Sterling Area are civen as Rs 26 trlllion (around ~2.2 million). This payr!lent is --------------------------------- 1/ Furthermore the remuinine sterling municipal obligations total about i.8 million, of 1rhich approJdmately ~.3 Hill be due in 1952, ~2 million in 195.3 and *-.3 million thereafter to 1969. '32\ c:>ffset by the 3/4 of 1% interest uhich !ndia is receiving on its sterling balances (about ~5 million yearly), (c) Attitude tm~Q. ..Pr.ivate foreign i1:1vestment The Indian Government realizes that uith the aid of private foreicn capital the country could be developed more quickly~ In his speech on l.iarch 16 in the Assembly the Finance Hillister mentioned that the country uould be very wise to lool: to private foreign investors and experts of a b1mm skill to participate in the developnent of India, The Prirne Hinister said in his statement in the Assembly on .April 6: nrndian capital needs to be supplemented by foreign not only because our national savings uill not be enough for 1•apid development of the country on the scale ue vdsh, but also because in many cases scientific, technical and indus'Grial knowledge and capital equipnent cctions 73 73 Unclassified __222 61Q Total Total 7,582 Deficit Rs 1,238 million; Trade deficit Rs 507 million. Hote: Prepared by the Tieserve Banl: of India from the quarterly return of the J!bcchange Control. Dated 27th Ja:nua;rx._ 1949 A:wen@_~_g FQ@IG]'! E_XCHA.N@ B~ E.Qr the Dominion of India For the jl_o.l:f~ar_ Janua:,1~-Julle.t- 1949 (in millions of r1.:1.pees) Other hard Other RECEIPTS Dollar currency Si.dtzer- Japan currency Total area areas land areas I. E::qJorts 600 60 10 JJ 1150 1850 II. Invisible a 30 560 590 Total 630 60 10 JJ 1710 2440 Deficit 320 70 40 30 770 1230 ]2educt Savings on account of (1) Petrol 90 90 (2) Infructuous licensing (20%) 290 290 Net Deficit 320 70 30 390 850 Other EXPElTJITURE Dollar currency Sui tzer- Jcp.:::.n currency Total area areas land areas I. Imyort.,s \a Com.rnercial 450 120 40 60 1470 W,O 'b) Government (i) Food 210* /,.60 670 (ii) Civil 200 10 120 330 (iii) Defence 30 100 130 • Go~e...rt'1TJ'lent _e.,?gJendi ture (a) Pensions - 50 50 (b) Other 30 30 III .Invisibles \Account No.1) 60 10 250 320 --- Total 950 130 50 60 2.4BO 3670 ------------------------------------------------ •~Exclusive of Rs 90 million under the barte:c arrangements. Sou~: Hinistry of Finance, 11evl Delhi Dated 22nd January, 1949 Appendix 3 ESTH:tii.TE OF FOREIGH EXCH;\IJGE BUDGET FOR THE P,PiiiEIOE OF Il1DB. FOR THE TEA.R 19!;,..9. (in nullions of rupees) Other hard Other RECEIPTS Dollar currency S"tdtzer- Japan currency Total area areas land areas I. Exports 1200 150 20 80 2600 4050 II. Invisibles 60 1000 1060 Total 126o 150 20 80 ;3600 5110 Deficit 570 30 50 .320 970 Other hard Other EXPEUDITUHE Dollar currency Suitzer- Japan currency Total area areas land areas ___ ......_.._ I. I~Trts fa COinmercial 1000 160 60 80 2100 3400 (b) Government (i) Food 350 800 1150 (ii) Civil, Rail- l.·Jays Cc Defence 360 20 360 740 II. Government e;;:mencl.i ture (a) Pensions 100 100 (b) Other 60 60 III .Invisibles Account Ho.l 120 10 500 6.30 -- Total 18.30 180 ______ -.......... __ ..... ___70 ....__...._ ..._ _. . _____ - 80 3920 , ___________ 6080 .