India’s Sterling Assets

ByDr. V. S. KRISHNA, M.A., Ph.D.
(Professor of Economics, Andhra University)

One of the major economic consequences of the present War is the change in the position of India in the field of international finance. She has long been a debtor country and the foreign debt of the Government of India was over Rs. 400 crores before the present War, and every year she had to pay about £30,000,000 to Britain in addition to what the British investors in private enterprises in India were earning in the way of profits. During the present War, the Government has been able to liquidate most of the foreign liabilities and the Reserve Bank of India has accumulated sterling assets worth about Rs. 1,200 crores. Before discussing the question of the utilisation of these assets, it is necessary to describe their origin with a view to remove some doubts entertained by some British publicists regarding the legitimacy of the claims of India in this respect.

II

The obligations of Britain to India during the present War have arisen mainly from two sources. These are:

I. Commodity exports. Since the outbreak of the War, India has lost many of her foreign markets for goods but her trade with Britain and the Empire countries has shown a considerable export surplus. Britain has been obliged to devote most of her resources to the production of war materials and, consequently, her capacity to export goods abroad has diminished. She requires, on the other hand, some essential commodities from India for which she could not pay in kind.

The figures relating to the foreign trade of India published by the Government show the value of the exports on private account only. In addition to these, the Government of India, through its Supply Department, has been placing orders for essential materials required by the British Government in the Indian markets and the Indian Government has been providing, in the first instance, the rupee finance required for this purpose. The British Government pays for these commodities in sterling in London, and as the Government of India requires rupees for further purchases, the sterling thus acquired is transferred to the Reserve Bank and rupees are obtained in return.

2. Recoverable expenditure on the Army in India. According to the recommendations of the Chatfield Committee of 1938, the external defence of India should be a responsibility jointly shared by the Governments of India an Britain. In 1940, an agreement was concluded between the two Governments regarding the apportionment of this expenditure. Under the terms of this Agreement, the Government of India to bear the following items of expenditure:

i The normal effective cost of the Army in India under peace conditions:

ii Additional cost due to rise in prices;

iii The cost of war measures undertaken in the interests of India;

iv A lump sum payment of one crore to meet the extra cost of maintaining India’s
external defence troops overseas.

The rest of the expenditure incurred on defence is recoverable from the British Government. As in the case of purchases made in India, the British Government pays the sums due under this head to the Indian Government in sterling and the latter transfers the sterling to the Reserve Bank.

When a private body or the Government tenders sterling, the Reserve Bank has to purchase it at a rate not higher than Ish. 6 and 3/16 d. per rupee, provided it is offered in amounts of not less than £ 10,000 at a time. If the amount of sterling so purchased is not considerable, payment can be made from the Banking Department. This causes a change in the assets held by that Department, sterling being substituted for rupees. But the amount of sterling that can be so acquired is limited. The Banking Department should have sufficient Indian currency to meet the withdrawals of its depositors, and it is not desirable to keep more sterling than what is required by those who have payments to make abroad.

When the sterling purchased is in excess of what can be taken by the Banking Department, the Issue Department of the Bank comes to its aid. The Reserve Bank Act has laid down that at least forty per cent of the assets of the Issue Department should be in the form of gold or sterling securities and that the amount of gold should not be less than forty crores in value. The Bank is therefore permitted to issue notes without limit with sterling. securities as cover, provided it has the minimum gold prescribed.

The rupee finance required for the operations undertaken by the Government of India on behalf of the British Government is provided mainly by the Issue Department of the Reserve Bank. The British Government pays the Indian Government in sterling and the latter exchanges sterling for rupee notes. These transactions have greatly increased both the note issue and the sterling securities held by the Reserve Bank. In the year 1938-39, the note issue amounted, on an average, to about 210 crores in value and the sterling securities to about 68 crores. In recent weeks they are about 1,000 crores and 900 crores respectively. The sterling held by the Banking Department increased from an average of about 4 crores to about 300 crores. In recent months the expansion of currency has been taking place at a slower pace than during the last two years because the Allied Governments are obtaining part of their rupee finance by the sale of gold through the Reserve Bank.

It is now admitted by most persons that this method of financing the War effort coupled with the difficulty of expanding production, has been responsible for the great rise in prices in recent years. The finance thus provided is not obtained from the voluntary savings of the people, but the saving is imposed on people many of whom cannot afford to reduce their consumption.

III

The claim of India for the sterling assets so accumulated has been questioned in some quarter on the ground that they are the result of India’s inadequate contribution to the common war effort. Where the gain from an action cannot be estimated in terms of money and the interests of the co-operating parties cannot be separated, there is no other equitable basis for the distribution of the burden except that of ability to pay. This is the accepted principle in the matter of internal taxation and this principle has been accepted in connection with the organisation to be set up for giving relief to the inhabitants of the areas devastated by the War.

The ability of a country to pay for a war depends mainly on two factors, viz., the extent to which its production can be increased and the difference betweenits peace-time income and the amount necessary for satisfying the minimum customary needs of the people. To these another circumstance might be added, viz., the efficacy of taxation and loans for transferring surplus resources from the civilian to the war use.

The productive power of Britain increased considerably during the War and so part of her War expenditure is met by increased production. Due to the wardness of India with regard to industrial development, she has to depend on foreign countries for the supply of some essentials. Till 1,942 her industrial production showed some increase, but since that year some of the major industries have been producing less because of the difficulty of obtaining certain essential products. When the War has reached her borders and when, therefore, she has to make her maximum effort, India’s productive capacity has diminished.

It is a well-known fact that the national income of India is not sufficient to provide even the bare physical needs of her total population. Recent investigations in Britain have shown that when there is normal employment even the lowest paid working class family does not suffer from want except in cases were the size of a family is more than the average. Thisshows that the normal incomeof the people ismole than what is necessary to provide for the physical needs of the people.

It has been calculated that the per capita income inBritain ismore than 15 timesthe income in India. This does not take into account the differences inthe purchasing power of a unit of income inthe two countries, and itshould not therefore be concluded that the enjoyment that an average Englishman is able to command is15 timesthe enjoyment which an Indian gets. An Australian statistician, Collin Clark, has compared the purchasing powers of money indifferentcountries, and on the basis of hiscalculations, it may be stated that, roughly, an Indian enjoys about one-fifth of the purchasing power commanded by an Englishman.

Britain issaid to be devotingabout 60 per cent of her national income to war purposes. It is notpossibleto make an accurate calculation in the case of India but a rough idea of the magnitude of her effort may be given.

The estimated war expenditure of the Central Government for the year 1,944-45 isover Rs. 300 crores, and past experience shows that the actual expenditure always exceeds the estimated amount during the War years. As the cost of the recent operations inAssam isto be borne by India, theactual expendituremightbe nearly 400 crores. It has been calculated that the purchases made on behalf of the UnitedNations, for whichwe do notget the equivalent ingoods during the War, are of the value of about 300 crores per year. To these two figures we have to add the donations to the various War Funds and the expenditure of the Provincial and Central Governments on A. R. P. and other measures whichare not shown under War expenditure. The total contributionis therefore not less than 700 crores.

The National income of BritishIndia was estimated to have been about Rs. 1,760 crores in1931-32. Priceshave risenby about 250% duringthe War but unless wages, salaries, rents, interest and profits rise proportionately, thetotal money income of the country does not increase to the same extent. As it can safely be assumed that these have not risenproportionately and as thephysical volume of production has been falling lately, itcan reasonably be assumed that the present money income of BritishIndia is about Rs. 3,500 crores. Indiaistherefore devotingabout 20% of her national incometo war purposes, assuming that most of the contributionismade by British India. The sacrifice of the Indians who have to forego one-fifth of theirpeace-time enjoyment isgreater than the sacrifice of the Englishmen who have given up three-fifths of their five-fold income.

The burden on some sections of the people has been made heavier by the methods adopted for transferring real income from the civilian to war purposes. Loans and tax have not yielded the required amount and so the instrument of inflation has been resorted to. This has hit some important sections of the community very hard and the consequences are too well-known to require special mention. It is said that in Britain health conditions have improved during the War and the mortality rate has fallen. The common people might not have such a variety of food stuffs as in peace-time, but they have a sufficient quantity of wholesome food. The statistics relating to public health and famines in India reveal quite a different picture.

IV

As the accumulation of these sterling assets involved great suffering which has taken the form of malnutrition, deterioration of sanitary conditions and even actual starvation in some parts, it is but natural to suggest that they might be utilised to relieve the suffering immediately. Several Indian public men and economists are stressing the need for inducing Britain to release these assets immediately, so that goods may be purchased with them and imported into India. If consumers’ goods are imported the price level might fall immediately, and if producers’ goods are got, production in India might increase. It may take time to effect a decrease in prices but it would be more advantageous from a long-term point of view. A similar result might be obtained if Britain and other Allied countries are asked to pay in kind for the commodities which they buy from now onwards. This will decrease the growth of sterling assets and further expansion of currency would not be necessary.

There are certain factors limiting the use of these measures. The industries of the United Nations are fully engaged in production for war purposes and those countries may not be able to spare goods for civilian consumption in such large quantities as we require. Further, the goods that these countries could supply are not those that are most urgently required by the common people of India, viz., the staple foodstuffs. Importation of goods consumed by the higher classes might reduce the general price level but this would not help the common man.

The full utilisation of these assets is therefore a post-War problem. When normal trade connections are re-established after the War, India would be able to obtain some of the essential commodities in exchange for her exports and the use of sterling assets for providing the deficiency in the matter of foodstuffs might not be necessary.

During the post-War period there will be many competing claims on these sterling assets.

In the first place, there is the monetary requirement. The Reserve Bank hasto keep a certain amount of foreign exchange to meet possible adverse foreign balances but this does not require a large proportion of the present assets. Before the War, when the foreign liabilitieswere high, the Reserve Bank was keeping only about 40 crores in gold and 70 crores in sterling. Theseamounts mightbe sufficient after the War.

Secondly, the assets mightbe utilisedfor liquidating the remaining foreign obligations of India, like the payment of pensions to retired Government servants, etc., and the liquidationof foreign capital invested in private undertakings inIndia. These twoitems are expected toclaim about half thepresent balances, but itistobe considered whether itisdesirable to liquidate these in view of thefact that for other purposes India mighthave to run intodebt again, even ifthe whole of the present balance isuitilised for these purposes.

Thirdly, there isa large deferred demand for foreign comsumers’ goods and at least in the first years of peace India may importmore on thisaccount than what she could export. There isa widespread view, especially among the industrialists, that the sterling assets should not be utilisedfor thispurpose. When there islikelyto be a large demand for producers’ goods, itisnotconsidered desirable to add to this the demand for consumers’ goods also for which substitutes mightbe found in India.

Control and rationing are necessary in the matter of importsfor some time after theWar, but itmay not be desirable to prohibitthe importation of all consumers’ goods. If any scheme for rapid industrialisation is put intooperation, which wouldmake itnecessary to give preference to the development of basic industries, we might have to draw upon foreign countries for some consumers’ goods till our industries are in a position to produce those goods in required quantities. The increased investment in basic industries leads to an increase in the income of the factors of production, whichwould increase the demand for consumers goods. As, inthe first stages of industrialisation, these goods would not be coming into the market in required quantities, there would be an inflationary risein prices. As the Indian economy is already subjected to a great strain by war-time inflation, schemes for economic reconstruction would not have the willingco-operation of the people ifthey involvefurther inflation. This isa point which the Bombay Plan has not taken into account. If the importation of consumers’ goodsis necessary, then itdoes not make much difference whether we use the existing sterling assets or raise foreign loans for thispurpose.

Fourthly, after the War India might have to make herown arrangements forthe defence of the country. This will require large equipment, a major part of which has to be imported from abroad. This will impose a great strain on the foreign trade position of the country. It may, however, be safely assumed that after the War there would be a long peace. Organisation and equipment of fighting forces might therefore be done gradually as the country becomes industrialised.

Lastly, it is the schemes forraising living standards in India that will make a heavy demand on the foreign balances of India. The problem of abolishing want has become prominent since Roosevelt made his pronouncement on the Four Freedoms. In countries in which production has reached such a level as to provide the required necessaries for all people, the question one of fairer distribution of income and of guaranteeing a minimum income during non-earning periods. In countries like India where the total national income is not sufficient to provide even the bare necessaries, the question is one of increased production and better distribution. Industrialisation is considered to be the primary objective of future economic policy, and if any comprehensive scheme for this purpose is adopted, India would have to import equipment in large quantities from foreign countries. An idea of the magnitude of the requirements may be obtained from the Bombay Plan which requires external finance to the extent of Rs. 2,600 crores of which a little less than half is covered by the present sterling assets.

The Bombay Plan takes into account the external finance required for importing capital goods only and it does not include the other claims. As was argued above, the other claims have to be met to some extent. It is desirable to have a single authority which will mobilise all the sources of external finance and distribute it among the different objects according to a scheme of priorities.

The main sources of external finance are sterling balances, loans that might be raised, export of commodities and hoarded gold, and external finance will be demanded by producers for capital goods, consumers for consumers’ goods, Government for equipping the fighting forces and for development of public utilities, and, lastly, the Reserve Bank for monetary reserve. Generally speaking, it is not necessary to earmark the finance obtained from a particular source for a particular purpose. The total finance may be apportioned according to the importance of the demand, irrespective of the source from which money is obtained. In this matter it is however necessary to take two points into consideration:

I. Borrowing from foreign countries will mostly be done in future through the International Capital Bank. According to the recent agreement, loans will be granted through this source for productive purposes only. It is therefore necessary to earmark the loans to be raised for industrial purposes.

2. The sterling assets are now part of the cover against the notes in circulation. If a deflationary crisis is to be avoided, the volume of notes should not be reduced unless the velocity of circulation of money increases. In giving effect to any scheme for the utilisation of the sterling assets, its effect on monetary circulation should be kept in view. The evils that are caused by inflation cannot be corrected by adopting the opposite policy of deflation.

If the sterling assets are liquidated some other assets prescribed by law have to be substituted. According to the Reserve Bank Act these are: gold, sterling securities, rupee securities, rupee coins, bills of exchange and promissory notes. Under the existing money market conditions the only alternative cover for notes are rupee securities of the Government until the use of the right type of bills becomes general. The question to be considered therefore is whether the mechanism by which the purchases of foreign capital or consumption goods by private individuals or corporations are financed, would automatically substitute rupee securities when the sterling securities are withdrawn and cashed.

When India imports more than what she exports and when the excess is greater than the foreign balance held by the Banking Department, notes will be tendered to the Issue Department, and when sterling is provided, notes of an equivalent value would be cancelled. This will reduce the money in circulation unless the Government issues its pronotes and borrows from the Reserve Bank, and spends the amount thus obtained. The Bank will have an eligible cover and the currency will get into circulation. If the new industries to be started are State-owned, this method would solve the difficulty, but it is not yet clear what role the State will play in the post-War industrial development.

If private enterprise continues to play an important role and if finance for new enterprises is to be raised from private investors, the State should spend considerable amounts on public works or defence. Only then the monetary mechanism will work smoothly. The view held by some economists that during the period of industrialisation the State should not spend much on public utilities is tenable only in so far as those works are concerned which require large external finance. Unless it undertakes works which require mainly Indian resources and which should be financed through loans, deflation might follow and defeat any scheme of industrial advancement.

V

Public attention has recently been devoted not so such to the problem of proper utilisation of the sterling assets as to the possibility of converting the assets into goods of the right type and at the time we require It is also feared that Britain might try to reduce her liability by depreciating her currency in which our assets are expressed.

The question whether we shall get an equivalent for the sacrifice we have made, cannot be answered easily. It is natural for every State to try to reduce the burden of foreign obligations but the question is whether Britain will find it advantageous to reduce her obligations to India through currency depreciation. The obligations to several Empire countries are expressed in sterling but her obligations to outside countries are in terms of other units. If Britain depresses the pound, the burden of the latter would increase.

Another factor in policy of Britain is being stressed at present. For an old industrial country, the problem of finding suitable openings for the use of savings made when there is full employment is a difficult one. For such countries the building of an export surplus is very important and this may be done either by raising loans abroad or discharging past obligations. The existence of foreign obligations acts as a stimulus to business activity and Britain will be able to maintain full employment successfully so long as these foreign obligations exist. It is not therefore the danger of reducing the obligations that we have to fear but that of keeping them for an unduly long period.

There is another point which is of importance in this connection. India and Britain can come to a mutually advantageous agreement with regard to the settlement of this question if Britain is in a position to supply goods required by India at competitive prices. If any scheme for rapid industrialisation is put into operation, this country would have to get commodities by exploiting all the available sources of external finance within a period of 10 to 15 years. The demand for goods in the early years will be specially heavy, and in these years, Britain may have to devote all her resources to the reconstruction of the devastated areas. Further, an agreement like this will restrict the choice of the Indian producers and consumers and it may retard the growth of multilateral trade, the establishment of which is desired by most countries. It may therefore be necessary to convert a part of the sterling into other currencies and every scheme for the liquidation of the present balances should make provision for this.

The British, American and Canadian schemes for Post-War International Monetary Organisation referred to the problem of the abnormal war balances. The British scheme merely, mentioned that it was desirable to devise a plan for making these balances liquid without imposing great strain on the debtor countries, but the other two schemes suggested a specific plan for settling the debts. The schemes imposed obligations on both the creditor and the debtor countries–on the former, the obligation of purchasing goods from the debtor countries with part of the balances, and, on the latter, the obligation of building up an export surplus with non-creditor countries and placing their currencies at the disposal of the creditors. A restriction was placed on the amount of the debts that could be settled in this way through the monetary organisation but the principle suggested in the schemes was a reasonable one.

The Monetary Conference held at Bretton Woods refused to consider the question of the abnormal War balances in connection with the scheme for establishing an International Monetary Fund. It was argued that the Fund would deal with problems arising out of current trade transactions only and the widening of the scope of the Fund might make the new organization unsuccessful. The question is therefore to be settled through negotiations between the creditors and debtors.

It is true that the new experiment in world monetary co-operation should not be burdened with unnecessary complications but it is to be considered whether the exclusion of this problem would ensure the success of the new organisation.

The working of the League of Nations has shown that if member countries are allowed to settle important questions independently of, and not through, the international organisation, few questions would be settled through it. The abnormal war balances, provision of long-term capital to industrially ward countries, and other important problems which affect international trade are outside the purview of the monetary organisation. In the case of many countries the quantity of imports or exports on these accounts may exceed the quantity on current account and therefore the monetary organisation would not be concerned with the major part of the international trade transactions arising immediately after the War. This would weaken the organisation.

Further, it is one of the aims of the International Monetary Fund to discourage bilateral trade agreements and encourage the growth of multilateral trade transactions. If the abnormal war balances are to be settled by agreements between creditor and debtor countries, bilateral trade agreements cannot be avoided. The decision of the Conference is therefore not accord with one of the major objectives of the Fund.

As things stand at present, the question of the liquidation of the sterling assets of India is to be decided by negotiation between India and Britain. Britain would naturally press for the acceptance of goods spread over a large number of years, while the interest of India requires the conversion of at least a part of the balance into other currencies. As Britain isindebted in a similar way to several other countries, it is not possible for her to concede this to all her creditors but it should be emphasised that the case of India is a special one. Accumulation of sterling assets by countries like Australia and Canada did not involve so much suffering as in the case of India. The accumulated balances do not represent the voluntary savings of the Indian people and they are due to the encroachment on the consumption of the people which is already low. The only way in which this could be made good is by helping India to have an economic organisation that would ensure adequate living standards.

It has been suggested that India could borrow through the International Capital Bank an amount equivalent to the sterling assets and this loan might be guaranteed by both India and Britain. There are certain objections to this proposal. Both India and Britain would have to borrow heavily after the War for reconstruction purposes. There is already a plan under consideration for the grant of a big dollar loan by the U. S. A. to Britain. India needs external help in addition to the sterling assets if the efficiency of her economic system is to be raised. It is to be considered whether the Capital Bank would be prepared to arrange such large loans to the two countries. Further, the sterling assets of India are in the form of short-term paper which carries a low rate of interest. The long-term loans to be raised would carry a higher rate. It is not advantageous to India to take a loan at higher rate of interest on the security of assets which carry a lower rate. The transaction would be advantageous only if Britain would undertake the repayment of the loan with interest to the Capital Bank.

The problem could be solved only with the co-operation of the U. S. A. Her productive power has enormously increased during the War, and if she follows a policy of full employment, she has to maintain an export surplus till the consumption of her people rises to a much higher level than at present. After the War she will be the only country, besides Britain, which can supply the goods which India wants. If she grants a big loan for the industrial development of India, goods which are more urgently required might be purchased from her and those that could be spread over time might be taken from Britain in exchange for the sterling assets.

Thus a satisfactory solution of the question depends on the co-operation of not only India and Britain but also the assistance of other countries like the U. S. A. The United Nations have decided, rightly or wrongly, that different international economic problems should be dealt with by different bodies after the War. They have agreed to have one body for Rehabilitation, another for monetary problems arising out ofcurrent trade transactions and a third for long-term lending. The settlement ofwar-time balances is one ofthe essential conditions for reconstructing world economy after the War, and so another international a agreement is necessary on this question.