No. E-6oA RESTRICTED 66967 This report is restricted to use within the Bank INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT RECENT ECONOMIC DEVELOPMENT IN INDIA August 12, 1949 Economic Department §ununSIT .. • • • • • • • • • • • • • • « « • ,« • i-iii I. Balance of Payn:.ent,2= The Deficit • • • • « • • .. • • .. .. .. 1-4 Balance of Payments • • • • • « « • , ... II. ~op'd Program • • • • • • • • • • • • • • g-ll IV. ~ney and Prices: Honey Volume • • • • • ... .... 12-13 Capi tal Harket • .. .. . ... . .. 13-:"4 Prices ••• • • • • • • It « • • « • • 14-15 v. Public lina~. • • • • .... 15-16 0 •••• 0".<1. 16-18 FH':\HCE HIFISTER'S :ErT on TH~ RECZFT Il:DO-BRITISH STZRLI[G AGREEl:ENT. i. Summa:r;y: 1. The latest developments in India show a further improvement in indus- trial production, in rail service and in the labor situation; conti~~ed controls on distribution and pro(urement of food and essential industrial products; a degree of stability in mO!1.ey supply and prices; a tendency t01:1ards central1.za- tion of the Indian Union's administration, and of development programming; and a clearer realization on the part of both India and Pakistan of the economic issues involved in Partition--although perhaps not yet a meeting of minds. The impact of food imports on the balance of trade has brought about a new drive for self-sufficiency in a.ddition to the long-term food raising progralll, On the other hand, the Government is faced vii th serious problems: both in relation to its balance of paJ~ents and in rel~tion to the rapid decline of the Indian sterling balances. The reduction of Government ouned rupee bala.."1ces may mal<:e the financing of the capital program as at present envisaged soroevlhat difficult in a year or t1tl0. 2.. In the first half ye8.r, 1949" India is expected to have a trade deficit of Rs. 1,670 million (~~507 million) compared to Rs. 690 million «(/2.07 million) deficit for the \lhole year 191.;3. The trade deficit uith the dollar and other hard currency areas has been, as previously forecast, about ~;126 million. Since the middle of 1948 India has, however, developed a deficit lJith the Sterling Area which is expected to reach Rs. 1,280 million for the first six months of 19/+9. 3. To meet this deficit India had to dravT heavily on her sterling balances which have been reduced by .,144 million from January-June 1949. In the neU' agree- ment between India and the United Kingdom siGned July 191+9 it uas agreed that for each of the years 1949-50 and 1950... 51, ~50 million l10uld be transferred from the Number 2 to the Number 1 Account with an additional .,SO or ~60 million as i1. contingency for meeting contractual imports!/ during the 1949-50 period. It is not unlikely that India 'tim: draw on her sterling balances an amount around 1:, 100 million in 1949-50. This would finance both her sterling and her dollar deficit. 4. The balance of payments deficit with the hard currency countries is estimated at $148 million for July 1949-June 1950, which compares with $223 million deficit for the same period 1948-49. It will be met from the Central Reserves of the Sterling Area so that India will obtain a dollar amount roughly equal to that which she received during the 1948-49 period (around $150 million). 5. At the 1948-49 rate of drawings India would use her remaining balances of b 630 million in a few years. Consequently, the Goverrnnent has tightened the liberal import policies introduced in July 1948. This affects her over-all imports both from hard and from soft currency countries. However, a reduction of imports will not be enough and an over-all export increase is necessary to improve the balance of trade. This appears feasible, if it is considered that the export volume has reached only around 60% of the prewar. But the diffi- culties arise from a number of sources including lm.[er production or slower '" deliveries in certain fields, greater home consumption in others, and last but not least, present bigh prices. 6. A new intensive "Grow More Food" Campaign has been launched with the objective of stopping grain imports after 1951. This Campaign is considered as an emergency action and all efforts of the Central and Provincial Governments are focused on it. In addition the Government pursues its medi~.'ll- and long··term projects towards increasing production of food to meet the long-run problem due to the continuous increase in population. Tilis is do.signed to reduce I the country's foreign exchange needs substantially. 1/ Liabilities entered into under the old Open General License before it was cancelled in May, 1949. iii. 7. According to the 1949-50 budget, the Government is expected to use its rupee balances with the Reserve Bank for capital expenditure to the tune of over balances Rs. 1,000 million. By the end of the fiscal year 1949-50 the lare expected to be only Rs. 550 million, so that the Government will be confronted with the im- ~rlan.t problem of finding means to finance the various development proj ects. There has been a slight improvement on the capital market in recent weeks, making possible a conversion of a 1949-52 Government loan to the extent of Rs. )20 million and also some small private issues of capital. The Government, however, must continue its efforts to improve the conditions on the capital market. This underlines India's need both for foreign loans and for foreign 8. A new trade and payments agreement has been signed with Pakistan cover- ing the period July 1949-June 1950 and providing for the exohange of important commodities on both sides. Some improvement bas been achieved in India's finan- cial and eoonomic relations with Pakistan but more substantial progress still depends on the final solution of the Kashmir problem. In the meantime prices for jute manufactures have undergone a 20-25% reduction during the first months of 1949 with a slight recovery during the last weeks. A comprehensive agreement between the two countries on the producti~n and supply of raw jute as well as jute manufacture is vitally important in view of the growing and aggressive competition which jute manufactures are encountering, especially in the United states, from ~~per packaging material. 9. The present difficulties demonstrate that vigorous and comprehensive action by the Government is required in practically all fields to improve sub- stantially the present unsettled conditions, if economic development is not to encounter serious obstacles. RECEHT ECONOlrrC DEVELOPl:EHT I!l INDI! I. Balance of Pa)~ents The Deficit: 1. The balance-of-payments deficit has remained a very important feature of the present economic situation in India. It was substantial in 194$ and reached an extremely high level in the first half of 1949. 2. Figures for 191$ compiled from the Reserve Bank of India Exchange Con- trol Statistics show an over-all trade deficit of Rs. 690 rrdllion for 1948, and a balance-of-payments deficit on current account of Rs. 370 million. Table I *948 Balance of Paymentsll (in Rs. millions) Receipts Expendi tures ------------------~----------.------------.------.~..-..-....-------------- Exports 4,370 Imports 5,060 Trade deficit -690 (of which Govt. food : imports) (1,030): Invisibles Govt. Expend! tures 260 Other Invisibles 740 Invisible surplus 1320 ----------------------------- Total 5,690 Total 6,060 Current Account -370 _________________.__~___________________._.____________~____~De~f~i=~£~~~t_______ 11 Compiled from Reserve Bank of India Exchange Control Statistics and exclud- ing pa~~ents position 1tlith Pakistan. 3. The revised balance-of-payments estimate for the first half of 1949, based on actual results for the period January-April 1949, hotTever, shaHS a trade deficit of Rs. 1,670 million, which is more than double the deficit for the ",hole of 1948. Exports covered only about 56% of imports. 2. Table 11 . 11 Revised Balance of Payments Est2Nate First Half of 19 9 in Rs. millions) Receipts Expend! tures Balance Exports 2,140 . Imports 3,810 . Trade Deficit ..1,670 (of which Govt. food . imports) ( 700): Invi sible s 690 Govt. Expenditures 80 other Invisibles 330 Invisible Sur?lus !-2'60 .. '" ---- . -- ~ .... Current t>.ccount Total 2,830 Tot~ 4,220 Deficit -1,390 --- p .....-. , .......- 11 Based on actuals for the period Jano-April 1949. Compiled from the Reserve Bank of India Exchange Control Statistics and excluding payments position uith Pakistan. 4. The above estimates do not take account of the payment position \-lith Pakistan. It is usually assumed that the 1948 deficit both on trade account Its. and on over-all current account uould be about/300 lnillion greater if the over- land trade 1:1ith the neighboring Dominion were recorded. 5. The SUbstantial increase of the trade deficit is due to the change in the trade position ,d th the Sterling Area and other soft currency countries \<1hich has taken place since July 1948. At that time imports from soft currency coun- tries were liberalized in order to increase the supply of goods in the Government's efforts to check inflationary pressure. Thus, whereas trade Hith the Sterling Area and other soft currency areas showed an e:xport surpl1;.s of Rs. 230 million in the first half of 1948, it turned into an import surplus of Rs •. 460 million in the second half of 1948. This import surplus is e;:)cpected to reach Rs. 1,280 million (Z~384 million) in the first half of 1949. The rapid increase of imports '·lhich went far beyond the Government t s eJcpectation inclicates a strong pressure for large purchases abroad arising from continuing scarcities of a '!Tide variety of consumer goods, and from shortages of capital Goods both for existing industries and development projects. 6. The deficit \'11 th the dollar and hard currency area has also almost doubled during the period considered. For the full year 1948 trade i'lith the dollar area ShO\'led a deficit of Rs.420 million ($126 million) equal to food r,ur- chases in the area. Taking invisibles into account the over-all deficit amounts to Rs.490 million($147 million). Durin~ the first half of 1949 only the over-all deficit is expected to amount to $126 million. This trend is illustrated by the fact that U. S. trade statistics sho';! a deficit for India of $L~O million during the first five months of 1949 instead of a small surplus ($4 million) durin~ the same period of 1948. 7. Trade ''lith the United States remains of consioerable imnortance. t'Jhile be- fore the "~Jar i t only represented 9% on the export side and 756 on the import side, in 1948 it amounted to 19~ of seaborne exports and 23h of seaborne im~ortR - second only to trade i11 th the U. K. (23% of' exports and 28% of imports). Grain Hnd flour imports from the dollar area represent a substantial proportion of this increase, so does machinery and equipment, vehicles, chemica,ls and Oil. On the export side jute and jute manufactures remain the main items, representing roughly 6o~ of Indie,l s dollar export. There seems to be some hope for a further im:provement in this field, given satisfactory business conditions in the U.S.A. Manganese is still a relatively small portion of Indian exports, but improved transport condi- tions could speed u~ deliveries substantially_ There are also possibilities of an expansion of tea exports to North America. 8. The hard currency deficit in the first half of 1949 "las far in excess of the sum of India. t s remaining dollar balance in the Central Reserves of' the Ster- ling Area at the beginning of the year ($4 million), and dollar purchases from the Fund during the half year period ($32 million). As a I'esult, up to June 4. 1949 India had overdrawn her dollar account with the Central Reserves by :)34 million. The soft currency deficit l-las rr.et by a hea'vy overdraft on current releases from the sterling balances, \-lhich until the end of June 194.9 l'eached I.55 million. 9. Thus India's sterling balances have been rapidly reduced, falling by I.144 million in the first half of 1949. They stood at I.6.30 million at the begin- ning of July 1949, and at the 1948-49 rate of dra\Ullgs India l-lould use the remaining amount in a fe\-1 years. The Government has realized that tIns' rate of depletion of the sterling balances "lOuld be most damaging to the economy of the country, and, therefore, has tightened the liberal import policies introduced in July 191+$. Since !.'fay 5 soft currency imports under Open General L:tcense noVl have been restricted to about 20 categories, chiefly covering industrial mater- ials and other essentials. Balancq of Pa}rments ProsEects 10. i·Ii th tr.e abnormal use of her sterling balances India has reached a turning point in the development of her balance-of-pa~~ents position. Before the recent Sterling {trea talks in London the Government prepared a rough fore- cast of India's balance-of-payments position for July 1949-Jm:e 1950, compiled completely on information furnished by various Hinistries. {i.ccording to tbis forecast, ,·]hich can provide no more than an indication of India ' s potential import demand, the trade deficit for this period Has estimated at Rs. 1,820 mil- lion «(;;546 million) compared \-lith Rs. 2,440 million ((;732 million) for July 1948- June 1949, Rs. 680 million ((~244 million) being a deficit '-lith the d.ollar and other hard currency area as against Rs. 690 million (0247 million) in the pre- vious period, and RSe 1130 million with other areas, as against Rs. 1,750 million in the previous period. 5. 11. It teca"l1e clear that SllCh deficit could hardly be met i·lith the avail- able foreign exchange resources of India, \Thich consist of gold reserve of 0247 million and the remaining sterling balances of ~6.30 million «;;2,520 w.illion). For the release of sterling balances for current use, hO,\.Jever, India must nGgo- tiate \nth the United Kingdom. Under the agreeraent of July 1948 ;I;,,40 million per year i.Jere to 'Je released to her Number 1 (I.ccount (for current transactions) dur- 1949-50 and 1950-51. In viell of the Indian overdraft in 1948-49 the l~ei-1 agreement of July 1949 betilJeen the United langdom and India provides that for each of the years 1949-50 and 1950-51 t.50 million imuld be transferred from the Number 2 Account to the Number 1 Accom:t, with an additional - ;I;,,60 ;;1i11io11 if necessary for meeting liabilities entered under the Open General License before it Has cancelled in Hay 1949, during the 1949-50 perIod. These figt.l_res indicate that the of a possible trade deficit for India during this period may \-Jell reach around ~lOO million. The pounds released for current transactions are also to cover dollars obtained from the Central Reserves of the Sterli~g A.rea. Limitations on converti bili ty of sterling in the l:um1::er 1 £.\.ccount have nml been removed in principl$ beginning July 1, 1949. India has agreed, houever, to cut hard currency imports by 25?b 0010\-1 the 1948-49 level and she is supposed to r:aidain such imports at a minimum ""vri thout jeopardizing the vital inte:r-ests of her economy. n.Ji 12. In the light of this decisj_on the 1:1h01e balo.nce-of-pc.yments forecast for July 1949-June 1950 'lirill now t'6 revised by the Gover:r..ment of India. It is understood that India will take a figure of (;;429 million as a basis for the 25% 11 the attached statement of the Finance flinister of India of August 4, 1949. 6. import cut, thus bringing the dollar imports to around 0322 million. A.ddi tional dollar imports lIQuld be possible only to the extent of India's hurd currency borrolling abroad (including borro\-1ing from the International Bank), or as u result of private foreign investment. An important factor in this estimate :Ls the e~~ectation that India will be able to reduce her dollar grain imports from the previously anticipated ~~l.38 million to ~36 mil1ion. V Horeover, with fur- ther recovery of production in the United Kingdom and other European countries, India should be able to buy a larger proportion of various import requirements from them than in the past tHO years. 13. The bElance-of-payments deficit uith the dollar area and other hard currency countries is estimated at ::;>148 rnil1ion for July 1949-June 1950 ".lhich compares \6 th (.)223 rnillion deficit (after deducting some offsetting items) for the same period 1948-49. Fo11Qi.·r.ing the arre.nLrements recently negoti.ated this derici t will be met from the Central Reserves of the Sterling hrea. India \Jill therefore obtain from the Central Reserves a dollar amount nearly e(~ual to that uhich she received during the July 1948-June 1949 period «<:>144 million). This alone '(.Iould absorb about I..37 million of her sterling b21ances. If sterlings which lr.i.ll be needed to meet the Sterling Area deficit increased by the expected sldtch of food purchases to the Sterling Area and the Soviet Unio# are c.dded, it is not unlikely that India again Hill drml on her sterling balances an amount of about ~100 million in 1949-50. 11j.0 The Governr:lent of India intends to reduce this abnormal dx'avTings on sterling balances in 1950-51 and hopes to remain uithin the c.greed upon nmount V Thi s 'Would 1::e due both to decrecsed grain imports and to an increase in the proportion purchased from the Sterling Area (Australia). 21 An agreement just arranged "Ii th the Soviet Union increase s 1949 i-lheat imports from that country to 400,000 tons to be paid for in sterling. 7. of ~50 ITQllion; therefore, the most serious efforts must be made to reduce the trade deficit. Over the past years India has been in a favorable position, teing able to use her sterling balances for meeting her balance-of-pa~nents deficit. Insofar as these imports really are helping in rehabilitation, reoon- struction and development of Indian economy and in replenishing the stocks depleted during the \Var, India has been in a better position than many other countries because she has been able to finance her huge trade deficit from for- eign assets accumulated during the war and not from borrouings (except for (0;;100 million purchased from the IIW). 15. The 1948-49 eJ~erience has clearly demonstrated that mD.ch stricter L~port controls must be exercised over both soft and hard currency imports and that the dollar import restrictions have not been as effective as had teen expected. Reduction of imports, hOHever, ui11 not be enough and increased exports are necessary to improve the balance of trade and to supply India uith goods uhich are required for her economic development and her current needs .. In 1948 the volume index eJ~orts averaged only 58 (1937 =100) and reached 60 in the first two months of 1949. Y The volume index of imports ,·[hich was 83 on the 1948 average reached the postl.V"ar high ,-lith 116 in IvIarch 191..9. The Gov31'runent of India has established a special Export Advisory Council \-I11ich should help in promoting exports and it is its policy to increase exports not only to the dol- lar area but to all marke·t.s. It is steadily expanding the net\1ork of commercial treaties and has recently commercial agreements uith Austria; Poland, Finland, Hungary, Svlitzerland, Egypt, Iraq and the U.S .S.R. It is endeavoring to find markets for new e~~orts such as for iron are (Japan), coffee (Finland), sugar (U.K.) ----_.. - - Y Rouever this index understates soraewhat the current volume of exports com- pared i·lith prel.V"ar since exports ;from Pakistan a.re excluded after hUgust 1947. 8. 16. To stimulate eA~orts, India must increase production and remove various obstaelessueh as lack of transportation, export duties and high price S,_ Trans- port difficulties have kept certain exports, such as manganese and other !ilinerals, at a lO\{ level and current and prospective improvements in rail services ui11 improve her export potential. It is expected that manganese e:l..1'orts uill double during the present yenr and exports of other minerals are also moving at a higher rate. Some of the export dutie s were abolished in 1948 and others have been reduced or eliminated this year. (For example on manganese, oil seeds, arn cot- ton textiles). Reduction of further export duties requires examination. High prices are undoubtedly also an obstacle to India's exports.. This appears clearly if the present Indian vlholesale price index (about 3.7 times prellar) is compared to the rises of 90% and 120% '-Ihich took place in the U! S. and the U. K respec- tive1y. But reduction in price does not necessarily mean an increase in the volume of exports. The drop of 20 to 25% recently experienced in jute manufac- ture prices actually failed to increase substantially exports to the U~ s. T+ ... v rather seems to have prevented a drop ,'rmcn might have been brought about tlf strong competition from paper and other substitutes at a time of receding business activity. 17. Improving India's foreign trade balance is not an easy task. Houever, if the Indian Government pursues its present energetic foreign trade policy of fostering exports and curtailing unnecessary imp')rts, and especially if India is able to carry out her ne'l-l food program, there is a fair prospect that equilibrium in the current dollar payrnents position may be achieved by 1952. II. The Food Pr.q,gr~ 18. In vieu of the heavy burden imposed on India's balance of paYl:,ents by large imports of food, the Government of India has declared that it dces not intend 9. to continue grain imports reyond 1951. Increased production of food which is imperative is not.)' highest on the list of priorities. The GoYernment, in addi- tion to pursuing the reclamation of procurable waste land, has decided to con- centrate its program on the lIDprovementof yields, especially in areas 'iv-moh have a perennial or assured Hater supply. Theoretically, the potentialities for an increase in grain production are enormous because of the present 1m'1 yields in India. Hany obstacles must be removed hmrever. Advances in the yields presuppose increased supplies of fertilizers, improved seed and a vast agricul- tural educational program.' The Government is pursuing this objective '\:lith the utmost energy. It anticipates that the declaration of no more grain imports after 1951 \-lill force the Provinces and states to increase their efforts tOVlards producing more food and especially ,dll make the procurement system nru.ch more efficient. 19. The commissioner of food production has been given special pm1ers to carry out the ne\.)' program. These include the initiation of measures necessary for coordinating and revising the f~od plans of Provinces and states, sactioning grants and loans from Provincial and state food production schanas, and making available to Provinces and States all controlled materials as irell as other resources for production. A block grant uill be placed at the disposal of the commissioner for the purpose of subsidies to Provinces and States for approved schemes of production. 20. To implement the Government t s policy, Provinces and states have made the following recommendations: all land reclaimed through Government efforts should be under food crops r further reclamation of waste land should be stimulated by granting land revenue exemptions, provided such land is devoted to food pro- duction; farmers should be compelled to utilize all available falloH land for grO\dng food; 10% of the sugar cane area. (.340,,000 acres) should be diverted to 10. basic food production; provision of supplies of iron, steel, cement and bricks for agricultural purposes shouad te expedited and the results of agricultural re- search should be disseminated widely, It may be expected that these recorr~enda­ tions ,-lill be accepted. 21. It is too early to assess the scope and probable results of the ne\J "Grow-Hore-Food" Campaign. The Government is confident that - given favorable \-leather conditions - it should allo\-l for the cessation of grain imports in 1951, while in 1949 the proposed imports vnll reach from 3 to 3...1/2 million tons. This is not an impossible target since, besides its present immediate progr~" the Government continues to follotf its long-range food production program, comdsting of irrigation of perhaps six million acres over 10 to 15 years as the result of the prepared major multi-purpose projeots and the installation of tube lrells. 2.2. This wide and long-range program is due to the faot that in planning for food self-sufficiency, the Government must take into account the growing popula- tion of India. In the last four years the net population increase i-las about O.S% to 0.9% per annum as compared to l:t% dUring the 1931-41 decade and 1% during the 1921-31 decade. The population growth uill 1::e determined by a num1::er of competing and complementary forces: a decline in the proportion of vTomen in the child1::earing ages to the total Indian population, legal restrictions on minimum marriage age, the program of planned parenthood, as well as urbani3ation an4 innustrialization of the country, 1.-lill exert pressure in the direction of a l!!QJ;l9what re:!uctrt'l_ '!::li.:rth rate. On the other hand, improvements in pub:J.i9 health should serve to reduce thill. mortality rate. On the basis of these factors it seems a fair assumption thet the population increase uill not be more than 1% per annum over the next decade and that the total may reach some\-lhere l:;.etHeep 365 and 380 million, against aro \md 335-342 million today. 23. Through all these efforts it should not be :i,.mpossible over the rex:' decade to add a further six milllen tons of grain and substantial quantitie;:3 of other food to India l s normal food output. The increa~e in food production other than grain must be added whioh bas been oontinuing in India. over the last period 11. and which is , now being pushed ahead much more forcefully. The 194$ grain imports amounted to around 3 million tons for a total consumption of some 42-46 million tons. If the six million target could 1::e reached in 10 years, it IlCuld both eliminate the present defioiency and al101.-1 for a 10% increase in over.. a11 needs due to increased population on the habit of present diets. Deficiencies would then appear only in case of bad monsoons .. III. . Industrial Production ; 24. The increase in industrial production ",hieh began in the second part of 1948 has continued in 1949. A further increase during the first half of 1949 by 12 to 15% over the same period in 1948 has recently been announced by the j:·::inis- try of Industry and Supply, and is confirmed by a 14% increase of oar loadings on Indian railways for the first three months. The increase in production has been spread over most of India's industries as is evident from the following table comparing production in the first quarter of 1949 uith the 1.1hole of 194$: Production in %of 1st Q,tr. 1~48 installed capacitx 19L&. 1942 Coal 99.1 107.2 Steel 67.5 92.6 Cement 71.65 84.7 Ferro-alloys 52.4 112. Soda ash 52.2 66.6 Sugar 71.4 83. Tires 79 .. 5 91.8 Diesel engines $0 .. 3 110. Increased production was achieved by a better use and by expansion of the exist- ing capacity as well as by the erection of neH plants, '\Iir.dch continues. The labor situation also showed considerable signs of improvement in the first months of 1949. V 25. In the past months foreign oapital has become more interested in indus- trial enterprise in India. Fol1014ng an agreement of the Government of India with two French firms, a plant for the proQessing of monazide sands ,,,rill be established in TraDancore with a yearly capacity for processing 1,500 tons of monazide sand. British business is introducing a new production of dyes, of oombustion engines for industrial use, and mass production of small and medium- II From January to June 1, 1949, 539 industrial disputes, involving 337,045 workers, resulted in the loss of 2,872,915 man days. During the same period in 1948, there \vere 851 disputes \-lith 6.35 J .346 Horkers involved and vlith 5,041,546 man days lost. 12. sized electric motors.; A textile spinning machinery manufacturing ph nt vdll be started in conjunction with a British firm. These are only examples of net" enterprises started or to be started in India. In recent months the Governrc.ent of India in its varioUs statements has encouraged such investment and there are indications of growing interest of private foreign investors in India. Private foreign investment could undoubtedly be of significant assistance to India's industrial development. 26. Legislation at present before Parliament is, however, dra\dng strong criticism from business circles. The Government, pursuing its policy touards the coordination of industrial development and establisr~ent of a system of priorities, has introduced a bill in Narch 1949 \..rhich provides for broad pouers of gover~~ental operation including registration of most e~dsting industrial establisbm.ents. He',J industrial undertakings or a substantial expansion of erlst- ing facilities Hould be subject to licenses issued upon agreement to comply uith prescribed conditions including location and minirrruu~ standards of size, eQuipment and technique. IV. Honey and_Prices 2 '1. M.,o.,.neX Volume. Honey volume has continued to decline. The total money supply (currency and demand deposits) ,,,moh \Jas at Rs. 20,550 million at the end of December 1948, dropped to Rs. 19,520 million by the end of June 1949. Currency in circulation shmlS a decrease from Rs. 11,882 million to Rs. 11,492 rdllion, or by Rs. 390 million during the sarne period. 28. The table below shows the changes in the important items of the Reserve Bank of India during the period Decenber 31, 1948-July 8, 1949. £.I.S the result of the reduction of sterling balances the ratio of gold and foreign securities to liabilities was reduced from 67.59% to 00.70%. A.s may be seen from the table, 13. foreign securities held in the Issue Department declined by Rs. 886 million, whereas rupee securities increased during the same period by Rs. 755 ml1ion. The previous trend towards substituting rupee securities for foreign exchange in the note cover has tws continued. The effect of the import surplus, (i.e. the use of sterling balances) on the money volu.-ne \-las offset to a substantial degree by the open market purchases of Government bonds. The operation of the Banking Department ,.,rhich lost Rs. 800 million in sterling balances 1:!hile Government rupee balances declined by Rs. 848 million equally had no deflationary effect and at the same time has removed in part a potential danger of ip~la- tionary credit expansion. Isgue Depar~e~ (Rs. llillions) P,ecember 31, 19~ July 8: 1949 Di:ffe!!?}lC~ Notes in circulation ll,882 11,492 -390 Gold 413.5 400 - 13.5 Foreign securities 7,689 6,803 ..sS6 Rupee securities 3,432 4,187 ;'755 Rupee coins 453 475 ;. 22 Ratio of cold and foreign securities to liabilities 67.59% 60.70% - 6.89% Banking Department -- - Central Government balances 2,145 1 , 297 -848 Balances held abroad 2,563 1,363 -800 Loans and advances to Governments 70 29 - 41 Inve stme nts 967 1,091 f 74 29. CaRital Mark~. Activities on the capital market have remained haru- pered by a lack of confidence on the part of the bUsiness community. The index of common stocks (1937 =100) has declined from 140 in Decemeer 1948 to 111 111 Ju~ 1949. The yield of Government bonds has re111ained around 3% bt1.t certainly 14. only uith the help of sizeable open market operations by the Reserve Bank. During the past month however the situation on the capital market seems to have taken a more favorable turn. Stock markets have shovm price increases on a broad front. Furthermore, the l'l\.Ull.ber and the amount of neH issues of capital for industrial purposes has been increasing. This accompanied a sizeable con- version operation. The Government floated a convers:ton loan for the Rs. 670 million 3%, 1949-52 loan. Bondholders were offered the option of convel~ing their holdings into 2-1/2% loan due 1955, or into 2-3/M~ loan due 1962. According to the latest news about Rs. 250 million have gone into 2-1/2% loan of 1955 and Rs. 70 million into 2-3/4% loan of 1962 or a total of Rs. 320 million. It may be presumed that the remainder of the loan is being held by the Heserve Bank or other Government institutions. ~. Price.§. The situation on the COFuIllOdity market remains unsettled. The general index of uholesale prices '\:lhich dropped slightly from 389.6 in July 1948 (August 1939 : 100) to 383.6 at the end of December 1948 has remained stable around 378-379 during recent months. It was 384.8 on June 25, 1949. In ~larch 1949 the opinion vTaS expressed that a dowmTard trend in food prices could be expected after the spring grain harvest sometime in npri1. Procurement prices for spring grains in Provinces and States Hhich have fi:xed such prices i-lere reduced in most cases by 4% to 15%. The uho1esale index of cereal prices fell from 468.2 in the last Heek of I'larch to 458.1 as of April 30. Since April, however, in spite of a fair spring harvest, grain prices have again been creeping upHard and the cereal index on June 11, 1949 again reached the Iyments arrangements for India., The provision of t.he 1948-49 agreement allm,ring for settle- ment of balances due in excess of Rs.250 m., from the lIQ.2(blocked)SterIing Account 11 As against a large import surplus into India in 1948 (a.bout Rs.300 mill:ton). 17. has 1:een eliminated; the tt-l0 countries have noV! agreed to hold each other's as heretofore currency up to Rs. 150 million,S but balances in excess of this amount must be Illet from the Number 1 Sterling Account. It should therefore be expected that India will attempt to reduce her substantial trade deficit l:lith Pakistan, be- cause otherwise she would have to continue to pay Pakistan from her current sterling balances. No exchange control now exists betv1gen the tHo countries. India has removed her export duty 011 cotton textiles, and some mutual conces- sions regarding rebate of excises and the elimination of export duties on a fell items has been arranged. 3~. In spite of a gradual improvement in the economic relations bett-leen the t\10 countrie 5, the fact remains that an old economic unit "TaS split into two parts and that a new trade pattern is elr.erging, especially in Pakistan. As one of the results of Partition, India's dollar earnings have been reduced by about ~;;50 million yearly. It is most doubtful that close econonlic cooperation in the form of a customs union could be organized in the near future. The most important problem on ",hich the ttvO Dominions l ..r.ill have to reach an early a,gree- ment is the production of ra,,, jute and jute manufactures. Almost three fourths of the jute-grmdng areas are in Pakistan and all of the jute mills in InCia. Pakistan has introduced export duty on rau jute (Rs. 6 per bale on cuttings and Rs. 2J per bale on all other grades), \-lMch has added to the rail material costs of the Indian jute mills just "lhen the other costs were increasing. In the past tt10 years India made intense efforts to expand her ra\l jute acreage and the current crop is estimated at about 3.2 million bales compared ,dth last year t s production of 2.4 million, but Pakistan is preparing meamlhile to estab- li6h her Oim milliBs capacity, and is reported nOll to be negotiating in the Uni ted Kingdom for .3 jute mills of 1,000 looms each. If the policy started 18. in the two countries continues, production of ral.l jute and jute manufactlll'es may in the near future reach a level higher than reQuired by the market. 39. Substantial changes in the market of ra"l jute and jute manufactures have taken place in the first half of 1949, during llhich the price index of jute manufactures declined from 536 (1939 = 100) to 449 in Hay, and the average price index for ra"l jute from 534 to 5ll. During the last weeks, hO\.Jever, the market situation and prices for both rm.1 jute and jute manufactUl.'es ha.ve soms"\.Jhat im- proved. The price reduction for raw jute had met \-lith heavy protest in Pa.1dstan, \-lhose Government is reported to be preparing a prics stabilization scheme for this product. The 5ute industry in India realizes, however, that it \-1ill be able to maintain its export volume to the hard currency area only if it can compete ,·lith other packing material, especially paper. The jute problem uhich has already become acute emphasizes the urgent need for an over-all economic agreement 1::etvleen the t1.J"O countries. FI~NCE MINISTERI~_STATEMENT ON THE RECENT lND~ITISH_ST~ING AGE~~! Doctor John Matthai, Finance Minister, speaking at a press conference in New Delhi on August 4, 1949, described the terms of the Indo-British sterling agreement reached last month. Matthai stated the effect of the agreement is: (A) to release b 81 million for the year 1948-49 for which year the 1948 agreement did not provide any release.!! (B) to increase the annual releases for the 12 monthly periods ending June, 1950 and 1951 from the original amount of b 40 million to b 50 million, and (C) to cause to be released an additional but unspecified sum sufficient to meet liabilities entered into under the old Open General License before it was cancelled. Continuing, the Finance Minister stated that convertibility negotiations cease to be bilateral and were merged with discussions of the Commonwealth Finance Ministers' Conference. As a result India was re-admitted to all rights and duties of full membership of the sterling area and quantitative limitations on her right to draw hard currency from central reserves were removed. Limita- tions on her right to spend hard currency are now the same as those which apply to other members of the sterling area as accepted by the Commonwealth Finance Ministers' Conference. The effect of these limitations in the case of India is explained below. Irrespective of her export earnings, which, however, she has undertaken to increase without limitations as to amount, India is required to limit her imports -~---- 1! This is equivalent to settling the overdraft. 2. from the dollar area to 75% of the amount she spent on imports in 1948. This, however, is exclusive of any imports she may finance by loans from the Inter- national Bank for Reconstruction and Development. The dollar area for this pur- pose is defined as the U.S.A., Canada and Newfoundland and other American account countries which are mostly countries of Central America. The effect of this agreement is that India will have the right to draw central reserves to the extent of about $140-$150 million as compared to $60 million as per the last agreement. Further, it has been agreed that dollar overdrafts of the previous year need not be reimbursed. Dr. Matthai said the terms of the agreement, both as regards converti- bility and as regards sterling releases, are considerable improvement in the present situation. Though our imports from the dollar areas in 1949-50 will be less than in the previous year, the reason for this lies not in the arrangements regarding convertibility but in the heavy fall of our export earning, the con- sequences of which cannot be ignored. It is hoped, however, that some relief may be given to our dollar import program by switching our wheat purchases from North America to Australia, discussions towards which end are now in progress. Obligation of full membership in the sterling area, Dr. Matthai added, is a s~feguard to increase gold and dollar reserves of the sterling area by taking every possible step to increase exports to hard eurrency area and keeping import from that area down to a minimum. RevieWing the Conference of Commonwealth Finance Ministers, Dr. Matthai said that during six months of the current calendar year 1949 a number of causes, the most important of which was the fall of exports from sterling to hard cur- rency areas, resulted in exceptionally heavy drain on central reserves of 3. sterling areas as a whole. By June, 1949, the position had become so serious that it was clear if the drain continued at current rates reserves would be com- pletely exhausted within not much more than twelve months, leading to the collapse of the sterling area with serious repercussion on world trade as a whole. The British Chancellor of the Exchequer therefore considered it necessary to consult the Finance Ministers of Commonwealth countries who, accordingly, met in London on July 13, 1949. The Chancellor indicated that if central reserves were to be maintained at adequate level it was estimated that a saving of approximately $700 million on expenditure on imports would have to be effected in 1949-50 as compared with total sterling area'imports during the calendar year 1948. This would represent a cut of about 25% on 1948 import figures. The proposition was discussed at considerable len~th and Commonwealth Ministers present eventually agreed to recommend to their governments that aotion should be taken which would be comparable by its results to that already decided upon by the United Kingdom. India urged that in allocating resouroes, both in dollar areas and in the sterling area, the principle of equality of sacrifice should be borne in mind, that endeavours should be made to meet the outs which India would have to make in her dollar import program by making available equi- valent imports from the sterling area, that standing machinery should be set up by which Commonwealth Governments could be kept informed of each other's require- ments and which would enable the needs of countries within the sterling area to be met by resources of the sterling area without the expenditure of dollars, and that a review should take place as soon as practicaDle in order to determine whether the cuts made could not be restored. These reoo~~endations were in 4. general aooepted and the Government of India have indicated to other Common- wealth Governments conoerned that they are willing to aocept a 2~ cut on 194B dollar imports provided that other Commonwealth countries also agree to do so. (Official release of the Indian Government.)