ECONOMIC WEEKLY. April 15, 1950. No Himalayan Blunder! THE article is our
unfavourable balance of trade disastrous or transient?" in the issue of The.
ECONOMIC WEEKLY
A p r i l 15, 1950
Letter to the Editor
No Himalayan Blunder! THE article is our unfavourable balance of trade disastrous or t r a n s i e n t ? " in the issue of The Economic weekly of M a r c h 25 attempts to throw a challenge to a l l who believe that the devaluation of the rupee vis-a-vis the dollar last September w a s at a l l necessary or desirable. I h a d m y s e l l decided to keep a w a y from all polemics concerning this issue—not that I thought d e v a l u a tion was an altogether good thing—but felt it was better to accept w h a t w a s for the country at large a fait a c c o m p l i , a n d to concentrate on how best to maximize its benefits a n d m i n i inise its evils. But the confusion that the article in question might create compels me to protest. The m a i n burden- of y o u r contributor's thesis, as far as i have been able to get it, is as follows; D u r i n g the w a r w e w e r e able to r e p a y m u c h of our sterling debt w i t h the a c c u m u l a t e d sterli n g balances. In the years that he a h e a d we expect to embark u p o n a p r o g r a m m e of extensive i n d u s t r i a l development; this, together w i t h the relief to our i n t e r n a t i o n a l accounts under the heading 'Debt Services' a n d the very l a r g e amounts of foreign c a p i t a l that your contributor is so optimistic of receiving, w i l l m e a n that we have to develop a l a r g e import surplus on c o m m o d i t y account. To put it in his o w n words, "the era of f a v o u r a b l e balance of trade in foreign trade is definitely a thing of the past". Therefore, he admonishes us for "the u n w a r r a n t a b l e phantoms b u i l d i n g on fears of g r o w i n g unfavourable b a l a n c e of trade". The d e v a l u a t i o n decision w h i c h was m a i n l y to p u t a b r a k e u p o n the m o u n t i n g unfavourable balance of recent years ( financed l a r g e l y b y r u n n i n g d o w n our sterling balances) has therefore been a " H i m a l a y a n blunder". Q. E. D . . O u r u n f a v o u r a b l e trade balance is older than the last one or t w o years. If Government i m ports be included, as t h e y must, for a p p r a i s i n g the over-all p a y -
ments position, f r o m a favourable balance of Rs. 78.4 crores in 194344, we s w u n g r o u n d to unfavourable balances of Rs. 3 crores in 1944-45 a n d Rs. 25.7 crores in 1945-46. If b u l l i o n imports on p r i v a t e a n d G o v e r n m e n t account are also considered, the total visible trade b a l a n c e turned from plus Rs. 80.4 crores in 1943-44 to minus 22.2 crores a n d 26.7 crores in 1944-45 a n d 1945-46 respectively. Secondly, I do not quite gather the sense in w h i c h an unfavoura b l e trade b a l a n c e arising out of the inflationary situation w i t h in the c o u n t r y c a n be described as a "fortuitous" p h e n o m e n o n . T h i r d l y , on p a g e 302, the author claims that our imports as a result of the O G L a n d sterling releases have b e e n influenced chiefly by erratic consumer preference a n d nervous creditors' psychology. This m a y be true but o n l y upto a p o i n t . An a n a l y sis of our imports in the last t w o or three years w i l l show the v e r y m u c h enhanced position that c a p i t a l e q u i p m e n t of various sorts h a v e n o w come to occupy in our imports. There have, of course, b e e n considerable deviations— due to the weakness of the G o v ernment to resist sectional pressures a n d to the attempts to reestablish p r e - w a r trade channels. These h a v e often b r o u g h t i n i m ports w h i c h m a y be classified as inessential a n d l u x u r y . M u c h has b e e n m a d e of this issue in the country, b u t I believe that considered in r e l a t i o n to our total imports, this waste of foreign exchange has b e e n needlessly exa g g e r a t e d a n d p u b l i c attention has tended to d w e l l on r e l a t i v e l y minor issues. Fourthly, h o w e v e r much I m a y try, I fail to b r i n g myself to share y o u r contributor's optimism r e g a r d i n g the flow of foreign c a p i t a l into I n d i a . He envisages imports of "stupendous quantities of equipment a n d r a w materials from a b r o a d " . Perhaps, it is in this light that he is able to say that the m a g n i t u d e of our imports in future w i l l d e p e n d upon our 364
propensity to i m p o r t . Further, if r e a l l y our l a r g e imports surplus is g o i n g to be financed by foreign borrowings, sterling balances, a n d g o l d exports, I see no need for " m i t i g a t i n g the unfavourable balance b y e x p o r t i n g sufficiently to catch up w i t h our imports." Fifthly, your contributor seems to buttress his arguments by s h o w i n g that not o n l y the supply but even the d e m a n d for most of our exports is g e n e r a l l y inelastic, i m p l y i n g thereby that d e v a l u a tion is not l i k e l y to achieve that increase i n exports w h i c h w o u l d help u s i n b r i d g i n g the g a p i n our external payments. But is it not exactly under these circumstances, n a m e l y , w h e r e the dem a n d a n d supply functions are b o t h inelastic, that d e v a l u a t i o n is l i k e l y to be beneficial? Sixthly, e q u i l i b r i u m i n foreign trade is not a t h i n g of the past. We cannot afford to let our price structure get out of gear w i t h the price structure a b r o a d if we are not c o n t i n u a l l y to l i v e on borrowed m o n e y ; even for that, a time w i l l come w h e n w e must repay w h a t we have b o r r o w e d from foreigners. It is not true that we have not to p a y n o w a n y service charges on foreign capital, Our sterling r e p a t r i a t i o n has been p r e d o m i n a n t l y a r e p a t r i a t i o n of the p u b l i c debt of the country. Foreign commercial investments are still w i t h us. In the Reserve Bank's estimates of our balance of p a y m e n t s for 1948 a tentative figure of no less than Rs, 30 crores has been set d o w n as " i n terest charges p a y a b l e abroad". We shall also shortly h a v e to start p a y i n g interests a n d equated payments on the loans f r o m the Bank and the Fund. Lastly, your contributor fears that we m a y be u n a b l e to create conditions w h i c h w i l l permit the stupendous imports that he is env i s a g i n g . But deliberate action to create an export or an import surplus as an accommodation to export or import foreign c a p i t a l must proceed a l o n g lines w h i c h he has not i n d i c a t e d . I fear this is a l r e a d y a l e n g t h y letter. There are no doubt some solid a r g u ments w h y I n d i a should not have d e v a l u e d . But y o u r contributor has missed them a l l o u t — "Barun"
