FOREIGN EXCHANGE CRISIS — THE WAY OUT

Summary

This Forum of Free Enterprise booklet collects three talks delivered in Bombay, Bangalore and Ahmedabad in the last quarter of 1962, all diagnosing India’s foreign exchange crisis at the threshold of the Third Five-Year Plan. The contributors — A. D. Shroff (President of the Forum), R. V. Murthy (Chairman of the Press Guild of India, editor of Records and Statistics) and Dr. Lanka Sundaram (former M.P., editor of Commerce and Industry) — converge on the verdict that the crisis is not a transient shock but a structural product of careless planning, gross underestimation of the foreign-exchange component of the Plans, and the dependence on external assistance that the planners had concealed from themselves and from the public.

Shroff traces the collapse of the Second Plan’s foreign balances from Rs. 746 crores to Rs. 140 crores despite double the anticipated foreign aid, and unpacks the implications of P.L. 480 and “tied” loans. Murthy surveys remedial proposals — IDA loans, export-promotion machinery, mobilisation of private gold hoards — while warning that none will save the country unless the intensity of the problem is honestly recognised. Sundaram, the most polemical of the three, attacks the unreliability of government statistics, the camouflaging of Plan documents, and the absence of parliamentary scrutiny over treaties such as those tied to P.L. 480, P.L. 665, GATT, the E.C.M. and the Treaty of Rome, calling for a non-political National Committee on Budget reforms before “our economy will be a runaway horse”.

Essays

I [Foreign Exchange Crisis — The Way Out]

By A. D. Shroff

Shroff opens the booklet by declaring that the foreign exchange crisis is “a built-in crisis in our Plans”. Recounting the Second Plan’s experience, he shows that the planners had assumed Rs. 800 crores of foreign assistance and a Rs. 200-crore drawdown of London balances; instead India received Rs. 1,600 crores of assistance but its balances still collapsed from Rs. 746 crores to Rs. 140 crores. He attributes the wreckage to the import spree of 1955–56 ordered under Commerce Minister T. T. Krishnamachari’s anti-inflation theory that imports would mop up Plan-induced purchasing power.

He then walks the reader through the political economy of foreign assistance — the gradual conversion of accumulated sterling balances after Bretton Woods, the rise of P.L. 480 surplus-commodity loans (the largest single source of relief), the trap of “tied” and “untied” loans, and the maintenance-imports problem of the three steel plants. With Rs. 500 crores of repayment due in the Third Plan and India not yet able to export enough, Shroff warns that the day may come when India is “compelled to declare its inability to repay or meet its obligations”.

• The foreign exchange crisis is structural, not accidental — built into the planners’ underestimation of the Plans’ foreign exchange requirements.
• Despite receiving Rs. 1,600 crores of foreign assistance (double the anticipated Rs. 800 crores), India’s London balances fell from Rs. 746 crores to Rs. 140 crores by the end of the Second Plan.
• The 1955–56 import spree under Commerce Minister T. T. Krishnamachari — justified as anti-inflationary mopping-up of purchasing power — is identified as the real genesis of the crisis.
• P.L. 480 is the largest single source of relief but creates a long-term repayment-in-rupees liability that mortgages future generations.
• Distinguishes “development imports” from “maintenance imports” of components and raw materials; the three steel plants will idle without continued maintenance-imports, even though installed capacity has grown.
• Warns that with Rs. 500 crores of loan repayments due in the Third Plan, India faces the prospect of being unable to honour its external obligations.

II

By R. V. MURTHY

Murthy, opening with an R. K. Laxman cartoon — “The situation is not dangerous, though serious now. Now, the situation is not serious, but pretty dangerous” — argues that the foreign exchange position is what it has always been: a persistent adverse trade balance worsening since the First Plan. He prints comparative reserve figures for West Germany, the United States, France, Britain and India to show that India alone must build infrastructure by drawing on a meagre Rs. 3,000-crore reserve, financed largely through tied loans of dubious utility.

He surveys remedies: a separate Ministry for International Trade and Export Promotion; emulation of Japanese export adaptability; more IDA (50-year, near-interest-free) loans from the World Bank, citing Eugene Black; a reappraisal of “tied” loans whose actual project cost exceeds the credit; restriction of foreign-investment and technical-collaboration agreements to truly essential sectors; standby IMF credit; rupee-payment agreements with East European countries; and the gold-hoard mobilisation idea (which he rejects as politically impossible and certain to drive private gold to the black market). His verdict: no single device will rescue India unless the seriousness of the situation is honestly recognised.

• Frames the crisis with R. K. Laxman’s cartoon — “not dangerous, though serious” / “not serious, but pretty dangerous” — to ridicule official complacency.
• Contrasts India’s reserves (Rs. 3,000 crores, ~2.6 months of imports) with West Germany (6.8 months), the United States (14 months), France, the Netherlands, Belgium-Luxembourg, Britain and Denmark.
• Cites three problems of utilisation of tied IDA aid: leeway between estimated and actual project cost, the political economy of remittance of profits, and the slow drawdown rate.
• Argues for a separate Ministry of International Trade and Export Promotion and for emulating Japan’s export adaptability while keeping prices and quality competitive.
• Rejects compulsory acquisition of private gold hoards on grounds of administrative infeasibility, political unpopularity, and likely diversion to black markets and exchange auctions.
• Endorses standby IMF credit and rupee-payment agreements with East European countries while warning that even these have severe limitations.

III

By DR. LANKA SUNDARAM

Sundaram delivers the most polemical of the three addresses, repudiating the “facile assumption” that the foreign exchange crisis is a “built-in” feature of the Plans. He argues instead that the problem is “the result of a completely runaway system of economics and economic policy” and that even the available figures lack validity — the Reserve Bank Bulletin, the Report on Currency and Finance and the Economic Survey give materially different totals for the same years’ adverse balance.

Drawing on his long parliamentary experience (he chaired processing committees for both the First and Second Plans), Sundaram dissects the absence of accountancy in Plan documents — gross under-estimation of revenue, concealment of revenue, gross over-estimation of expenditure — and the politically motivated camouflage of project costs and unutilised loans (Rs. 1,386 crores carried forward from earlier Plans according to the latest Economic Survey, 42 per cent of received aid still unutilised). He details the lack of parliamentary scrutiny over treaties: India has had no Treaty of Friendship, Trade and Navigation with the U.S.A. for fifteen years despite GATT, no proper debate on the European Common Market (E.C.M.), no review of Commonwealth Preferences. Citing Eugene Black, I. J. P. Arnold and Klaus Billerbeck on Soviet bloc aid, he closes with the demand that a non-political National Committee of competent people be set up to bring about Budget reforms, lest “our economy will be a runaway horse”.

• Rejects the official line that the foreign exchange crisis is “built-in”; insists it is the product of a runaway system of economics and policy.
• Documents discrepancies between the Reserve Bank Bulletin, the Report on Currency and Finance and the Economic Survey on the adverse balance of trade for 1956–57 and 1958–59, with figures differing by hundreds of crores.
• Attacks the practice of treating aid and investment as interchangeable, citing I. J. P. Arnold (Federation of British Industries) and Klaus Billerbeck on Soviet foreign aid.
• Reports that Rs. 1,386 crores of external assistance had been carried forward, unutilised, from First Plan to Second to Third — alongside the planners simultaneously demanding Rs. 2,200 crores more.
• Decries the absence of parliamentary ratification of treaties — no Indo-American Treaty of Friendship, Trade and Navigation for fifteen years; no debate on E.C.M. or the Treaty of Rome; the GATT review of Commonwealth Preferences blocked in the Lok Sabha.
• Demands a non-political National Committee of competent people to reform the Budget and restore reasonable honesty in the presentation of facts.
• Recalls C. D. Deshmukh as Finance Minister conceding that compilation of Budget documents is “a race against time” — a confession Sundaram says would be unacceptable in any parliament elsewhere.