THE balance of payments has

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1 THE balance of payments has nowadays become one of the principal economic barometers of a country. It indicates in the last analysis, the spill-over of domestic demand to foreign markets, and the effectiveness of the financial and fiscal policies of the Government in keeping this spill-over within reasonable limits. So the interest in the balance of payments must needs be much wider than that of assessing the draft on foreign balances or the direction of trade during the accounting period If this is borne in mind, the magnitude of adverse balance of payments during the last calendar year, 1951, will not cause surprise or apprehension. For, the deficit was planned in the real sense of the term, as pointed out in the Reserve Bank of India Bulletin for May "Taking into account the need to ensure development with a steady rate of consumption both the Colombo and the Five Year Plans have actually planned for a deficit in the balance of payments throughout the planning period." It is needless to add that the deficit can only be pre-determined to the' extent that receipts of foreign exchange in the form of aid or loan, in addition to the programmed releases from the sterling balances, can be anticipated and that import and export magnitude can be determined to leave an import surplus just matching the available foreign exchange. The deficit on trade and service items can obviously be only to the extent of the foreign loans that we can raise, donations or aids we can get and/or the foreign balances we can draw upon. During 1951 we resorted to all these. Balance of Payments T. V. Jayaraman The deficit on trade account in 1951 was due largely to the planned import of 4.7 million tons of food at a cost of Rs 200 crores. Arrangements had also to be made for imports of cotton on a very liberal scale in order to attain production targets in textiles. The conclusion of the trade agreement with Pakistan and the imports of jute resulting therefrom were not factors which had not been anticipated. The resumption of trade with Pakistan was expected to produce a big deficit, and that was' what happened. In regard to the general trade policy, with the objective of a deficit prominently in view, import liberalisation was pursued. Increased allocations of foreign exchange for essential commodities were made and the scope of the open general licences was widened to include a larger number of goods from a wider area. However, imports of consumer goods from the dollar area were still limited only to essential goods. On the export side, there were two main objectives guiding policy. First, heavy export duties were imposed whenever it was apprehended that the external stimulii to prices of exports would lead to an unhealthy development to the domestic economy. That is, the net returns to the industries concerned were sought to be reduced to a level where only a reasonable amount of profits could be had and spendable incomes controlled. Examples of this policy are the raising of export duties on hessian, sacking, and cotton textiles. Secondly, quota and destinational restrictions were tightened up in the case of commodities required either by domestic industries, or by the general consumer; this was also in conformity with the trade agreements made by the government with other countries. Amongst the commodities which were affected by this policy the important ones were oilseeds, cotton textiles, and hides and skins. In the second half of the year, however, there was a slight liberalisation of quota and destinational restrictions, as it was becoming clear that these restrictions were hampering the realisation of the export targets. There were also movements of prices of imports and exports which had to be constantly watched, to sec how far the deficit could be limited to the extent planned. Since the second quarter of the year there has been a worsening of the net terms of trade, arising from a steep rise in import prices while export prices were either laggard or declining. True, the net terms of trade for the greater part of 1951 were more favourable than in 1950; but since the beginning of the last quarter of the net terms of trade have become less and less favourable. The Reserve Bank Bulletin calculates that by the end of 1951 India's terms of trade had not only deteriorated below the position in September 1950, when the rise began, but had reached the level of , which was approxi- 580

2 June. 7, 1952 mately 10 per cent lower. Currently, the situation seems to have improved somewhat with a fair degree of stabilisation in export prices. The general price index of imports, after declining from 143 in December 1951 to 137 in January 1952, moved up to 154 in February. On the other hand the general price index of exports steadily moved down from 174 in December 1951 to 167 in January in 1952 and to 166 in February, The net terms of trade in February was thus 108 against 122 in the previous month, and the trend last year was as follows: 123 in the first quarter, 133 in the second quarter, 120 in the third quarter and 116 in the fourth quarter. The precise manner in which the deficit on current account in 1951 was adjusted may now be detailed. The table on page 580 shows the current transactions leading to a net deficit of Rs crores. Before proceeding to describe how this deficit was met by capital transactions some explanation is needed in respect of certain items included in this table. 'The net deficit on account of foreign travel with an entry under ' payments' only is difficult to understand unless this implies that there was no expenditure by foreigners coming heir (which could normally only be to the extent they surrendered foreign exchange to an authorised dealer in foreign exchange) or that they resorted to the black market to obtain the necessary rupee finance for their expenditure in India, the figure in the table would make no meaning. Possibly, foreign exchange surrender by travellers in India is in receipts under the item ' unclassified ', where a substantial receipt of Rs 43.0 crores is entered. Secondly. the position of net receipts under ' transportation ' and ' insurance ' may seem contrary to the common opinion that India is not on balance a net recipient under these heads. The explanation seems obvious and simple. Transportation and insurance payments on imports are included under ' merchandise ' where imports are valued c.i.f. And since exports are valued f.o.b. net receipts arise in respect of transportation and insurance charges on exports realised from the overseas importers along with the cost of the goods. But even this explanation is not quite complete. The Bulletin itself states that in respect of these items 1 receipts ' are more or less complete while only a portion of the payments is accounted for. If theretore the full figures for payments under these items can also be given, the net position even as understood in the limited sense here could well be different. Further it is necessary to explain adequately what the ' payments' under these items represent. If they represent payments to overseas firms, their relevance to balance of payments ran be understood as also their incompleteness. But it would also be necessary to find on what part of our imports insurance and/or transportation is arranged by the importers here, and whether such transactions involve expenditure in foreign exchange or only in rupees. There is scope for a thorough examination of the foreign exchange component of the earnings of our transportation and insurance services. Transactions on capital account during 1951, which shows the manner in which the deficit on current transactions was financed are described in the table on this page. It must incidentally be mentioned that in these tables no attempt has been made to correct the several arithmetical errors contained in the statements given in the Bulletin. These are probably due to rounding off, and they are generally of meagre proportions. But mention must be made of at least one error where the explanation of rounding off does not seem plausible. This is in respect of short term capital movement on private account, in respect of which a net receipt of Rs 0.1 crore in the summary table while in the fuller table (reproduced here) it is given as a net receipt of Rs 0,9 crore. It is readily seen that more, than 30 per cent of the deficit on current account has been met by utilising the loans received by the Government of India Rs 58.5 crores from the US Wheat Loan of $190 million (Rs 90 crores) and Rs 4.8 crores drawing on the World Bank's agricultural a n d Bokaro-Konar loans. The rest of the deficit has been met from the sterling balances which were drawn upon to the extent of Rs 46.7 crores. There were also other transactions of the Government of India such as amortization payments to the World Bank on account of the Railway loan for which resources had to be found. It may also be seen that aids in connection with the Colombo Plan from Australia, New Zealand and Canada were not drawn upon during the year nor that from the USA under the Technical Co-operation Agreement which was signed only in last January. These do not, therefore, enter the balance of payments picture for A regional analysis of transactions in 1951 given in the table below shows that the deficit resulted entirely from transactions with nonsterling countries. With the sterling

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4 area the surplus was in fact larger than in the previous year. The increase in the surplus with the sterling area was in spite of a heavy deficit of Rs 46,9 crores with Pakistan in 1951 (as against Rs 2 crores in 1950). Thus excluding Pakistan the surplus with the rest of the sterling area was Rs crores in 1951 against Rs 61.3 crores in This was because the sterling area countries particularly Australia could not supply food to the same extent as in the previous year. Besides there was an increase of Rs 13.1 crores in net invisible receipts. On the main trade account, larger shipments of jute goods (at higher prices) and other exports were more than offset by the fall in cotton textile exports from Rs 103 crores in 1950 to Rs 77 crores in The following table shows the position with the sterling area excluding Pakistan. Imports c.i.f Exports f.o.b ,4 Trade balance Invisibles (Net) +37' (Net) With Pakistan, trade was of meagre proportions in the first quarter because the trade agreement including the recognition of the Pakistani rupee's exchange rate, at 2s, 2d. was signed only towards the end of February Considerable trade took place in the second and third quarters. Payments for imports from Pakistan rose sharply from Rs 6.0 crores in the first quarter to Rs 25.6 crores in the second and to Rs 29.8 crores in the third mainly as a result of large purchases of jute at rising prices. The fourth quarter, however, recorded a reduced tempo of trade, with payments for imports amounting to Rs 17.9 crores only. This is interesting because usually purchases from Pakistan are heavy in the last quarter of the year during harvest time. The smaller offtake by India in the fourth quarter of 1951 is explained by the developing recession in international demand for jute manufac- tures from India, Exports to Pakistan on the other hand gradually improved over the year from Rs 4.5 crores in the first quarter, to Rs 6.0 crores in the second quarter, Rs 6.8 crores in the third and Rs 8.6 crores in the last quarter. Whether this represents a continuing trend is more than can be said now. But in order to achieve a balance with Pakistan, we shall have to reduce our dependence on Pakistan as a source of raw jute, for the huge deficit with Pakistan since the partition has almost solely been due to the imports of this commodity. The following table gives the position with Pakistan in Imports c.i.f Exports f.o.b Trade Balance Invisibles (Net) +6.6 (Net) Almost the whole of the deficit was settled by transfer of sterling. With the hard currency areas the huge deficit of Rs 76.7 crores in 1951 compared with a surplus of Rs 23.2 crores in 1950 was mainly due to heavy purchases of essential goods, particularly food, which were obtained from the US and Canada. The following table summarises the transactions with the hard currency areas. (The figures for the two years are not strictly comparable because the coverage of 'hard currency ' countries in 1950 was wider than in 1951.) Imports c.i.f Exports f.o.b Trade balance Invisibles. (Net) (Not) The major portion of this deficit was met by withdrawals from the US wheat loan and the World' Bank loans. 583 In the transitions with other countries, the deficit in 1951 was Rs 82.4 crores as compared with a deficit of Rs 25.0 crores in About one-third of this deficit was with EPU countries; India's balance of payments position worsened in 1951 with all these countries excepting France. The largest deficit of Rs 15 crores was with Western Germany with which India had a surplus prior to This was mainly due to the removal of Western Germany along with some of the EPU countries from the hard currency list in the middle of 1950 and the extension to them of soft currency facilities and import liberalisation. Their exports to India consequently increased. The positions in 1950 and 1951 were as follows: Imports c.i.f Exports f.o.b Trade balance Invisibles (Net) (Net) What India's balance of payments position will be in the current year will naturally depend on the export prospects and the export policy followed by the Government much more than on the possible volume of imports. This is because neither food imports nor the requirements of raw materials and capital goods which have been projected for tine year leave much scope for major changes. Compared to last year, provision has also to be made for higher imports of jute and cotton for the bulk of the cotton imports were contracted at the higher prices prevailing in the last quarter of the past year. On the other hand, though the volume of jute imports will be higher, prices are likely to be considerably lower. There may also be some saving on freights on food imports, as the general trend of shipping freights has been downwards. Indeed, lower freight rates are a factor in our favour, both in relation to imports and exports. Allowing for all this, food imports may be taken roughly at Rs 180 crores and raw materials at about the same figure; capital goods will need another Rs 100 crores. These three alone will require Rs 460 crores. Not much saving is likely in the other items, so their total imports will probably be of the same order as in On the credit side, we have to provide for a reduction in export

5 earnings despite the steadying up in recent weeks of industrial raw material prices. It will be sometime before the turn in raw material prices noted from the middle of March find a reflection in the balance of payments figures. The most hopeful feature in the export outlook is the steadying of export prices for jute goods and the manner in which the volume of jute exports has kept up. Horn February onwards, many export restrictions have been removed or modified, and limited exports permitted in the case of sugar and gur where no exports had been permitted before. The net effect of all these on exports cannot be estimated. Even so. it would only be safe to provide for a per cent drop in export earnings, i.e. from say Rs 730 crores to Rs 550 crores or so. As against the Rs 150 crores drop in export earnings, the scope of reduction of imports is limited, say to only Rs 100 crores, leaving a deficit of Rs 50 crores m addition to the deficit recorded last year, to be made good. But on the plus side, there is the balance of the wheat loan and assistance from the Commonwealth countries under the Colombo Plan not taken into account in the balance of payment for There is, besides, the Rs 24 crores of American assistance under TCA already granted and further aid expected from the 150 million assistance recommended by President Truman for India, Pakistan, Burma, Ceylon and Nepal for The known sources for financing the deficit are, therefore;.balance of Wheat Loan. 35 Aid under Colombo Plan 14 Aid under TCA. 24 Further, from the sterling balances, the carry over of some 50 million from 1951 and part of the 35 million releases for the next exchange year (July '52-June '53) would be available. With the foreign financial assistance promised or in the offing, in addition to the spendable sterling standing to our credit, paving for a deficit of the magnitude now envisaged will not be a serious problem. But in view of the decision of the Commonwealth Ministers in London that all Commonwealth countries should aim not only at an overall balance individually but at a balance with the dollar area, what adjustments might be necessary in the ordering of our imports by currency area it is difficult to forecast. It does appear probable, however, that we shall either have to reduce our gap with the EPU countries, if our dollar earnings show a substantial fall, or cut down dollar imports to that extent. The wider implications of the balance of payments position outlined above, however, are extremely important. These may have farreaching influences on our financial and economic polities which have not been fully appreciated yet by the wider public, nor even by the Government. For, we have seen that the Government are ' planning' a big balance of payments deficit. Without such a deficit, we cannot absorb all the foreign aid we have asked for and received, nor can we fully utilise the sterling balances that have been released to us, and for which we have steadily and constantly fought. Now what about the country's capacity to absorb imports on this scale? For, Government have at the same time been following a policy of surplus budgeting on revenue account and of dearer money and credit restriction. Revenue surplus and credit contraction have, between them, already absorbed all excess liquidity in the economic system. Further, 584 the Government have decided to cut down food subsidy also, which will reduce the capacity of the consumers to buy and pay for food imports. Alternatively, if people have to pay more for food, they will have less money to pay for other consumer goods. A situation is soon being reached, if it has not been reached already, where the monetary and taxation policy of the Government are coming to a headlong clash with their wider economic policy of planned import surplus and planned economic development. The Government had to come to the assistance of the cotton importers to enable them to finance cotton imports. What about the other imports on the contemplated scale? If the private sector has to pay for a second year in succession for an excess of imports, the process of monetary contraction it will involve will seriously undermine its capacity to absorb further imports. If the Government want development to go on and excess of imports to come in, they will have soon to resort to a more liberal credit policy and planned budget deficit, by reduction of taxation, preferably, to offset the deficit in the balance of payments. There is no other way'