THE RUPEE INDIA FINALLY TAKES THE PLUNGE TO DEVALUATION

Press, Volume CVI, Issue 31094, 24 June 1966, Page 10

THE RUPEE INDIA FINALLY TAKES THE PLUNGE TO DEVALUATION

'By

CHRISTOPHER JOHNSON,

Foreipn Ediior of the •■Financial Times”)

I Reprinted from the “Financial Times” by arrangement >

The devaluation of the Indian rupee by the fairly drastic rate of 36.5 per cent must have taken even the World Bank and the Americans by surprise, although they were the strongest advocates of such a step. Every member of the Indian Cabinet was against devaluation, and successive Finance Ministers put out their denials as though they really meant them—and yet India has finally taken the plunge.

Until last summer, the arguments for devaluation had a somewhat academic ring. Controversialists such as Professor B. R. Shenoy, formerly India’s International Monetary Fund representative. have been writing for years that the rupee had become overvalued, but their, advice was consistently ignored in New Delhi. The decisive change came last July when the World Bank sent a mission under Mr Bernard Bell to assess India’s economic prospects. In August, soon after the mission’s visit, the IndiaPakistan war broke out, severely disrupting India's trade, and causing foreign exchange losses estimated at some S2OO million. Worse still, the United States Administration—unlike the British Government suspended aid. apart from ‘P.L. 480” wheat for famine relief, in order to try to force, a political settlement in Kashmir.

Advice Rejected It was in the depressing aftermath of the war, last autumn, that the Indian

Government received the Bell mission’s report recommending devaluation of the rupee if the best use was to be made of future aid from the World Bank consortium. Mr T. T. Krishnamachari, then Finance Minister, was known for his fierce opposition to devaluation: he indignantly rejected the mission’s advice, and relations between India and the World Bank reached the lowest point ever. “T.T.K.’s” case was based partly on the fact that the rupee already was as good as devalued by the elaborate system of import licences and tariffs and export subsides and incentives. This “de facto” devaluation has been reflected in the free market rates for the rupee—-recently over half the official rate—and for gold, which has just gone to about twice the U.S. fixing price of $35 an ounce. The Indian Government’s reason for preferring this

cumbersome apparatus, which 'has been the despair of the i Indian and foreign business icommunities, was that it was thus enabled to retain more control over the development of the economy than it would have if it freed the market for foreign exchange at a realistic rate. Left-wing opinion in : Congress has supported this view as being more in line [with its Socialist principles, ! and “T.T.K.” was also able to appeal to nationalist sentiment against any attempt by foreign bankers to subvert the prestige of India’s currency. “T.T.K.” resigned from the Government on the last day of 1964; it was ostensibly on a personal issue, but Mr Shastri’s acceptance of his resignation may have been due to his loss of confidence in his Finance Minister’s handling of relations with India’s main aid donors. His successor. Mr Sachindra Chaudhuri, is a company lawyer and former director of

the Reserve Bank, who is regarded as far more favourable to business. Mr Shastri’s Death

The World Bank now saw an opportunity to push its views again, although Mr Shastri’s death at Tashkent, only a few days after the change of Finance Ministers, was bound to delay any radical economic measures: but at least Mrs Gandhi kept Mr Chaudhuri at his new post. By the earL months of this year, India’s reserves had sunk to only a few million rupees more than the statutory R 5.2000 million backing for the currency. Exports in 1965 stuck at about SI7OO million while imports went up SIOO million to $2900 million. It was in early February that Mr P. C. Bhattacharya, the Governor of the Reserve Bank of India, went to Washington to resume talks with the World Bank. The significance of this is that Mr Bhattacharya has been, surprisingly, the main advocate in New

Delhi of devaluation. The Bell mission returned to India in March to resume the argument. This time, they were prepared, if necessary, Ito settle for a compromise in the form of a devaluation by 'stages, so that the new exchange rate would initially apply only to certain “strategic sectors.” Mrs Gandhi's [new Government, feeling its way, and faced with the projspect of famine, was still in no mood for any kind of devaluation. I The mission returned to Washington, and was able quickly to arrange an injec- ; tion of $lB7 million from the I.M.F. to prevent India’s foreign exchange crisis getting completely out of hand. But the consortium of aid donor countries, meeting early in

April, refused India’s request for a moratorium on the current year’s $3OO million debt servicing obligations.

Hopes Dashed Mrs Gandhi’s visit to Presi dent Johnson at the end of March raised Indian hopes; but they were dashed again when it was announced early in April that the United States had wiped the slate clean of all existing aid pledges to India—this time not for political reasons connected with Kashmir, but in order to force the devaluation which the United States, together with the World Bank, was convinced must take place if further aid was not to be wasted. This sent Mr Asoka Mehta, former Deputy Chairman of the Planning Commission, and recently appointed Minister of Planning, to Washington for urgent talks in mid-April. Meanwhile, Britain brought forward £l7 million of her aid, for almost immediate use, to make good the critical shortages of imports essential for Indian industry, which a British industrial mission under Sir Norman Kipping had found in February to be working at only 60-70 per cent of capacity for lack of foreign exchange. This was small consolation for Mr Mehta, who had already had to agree to postpone the next Five-Year plan —originally due to begin in April, 1965—owing to the payments crisis. He was now ask- ! ing the aid consortium to 'raise its stake from the usual $lOOO million a year to some ! $l6OO million a year to make [up for time lost during the war with Pakistan and the food crisis—yet America, the main donor, was reluctant to give any aid at all.

The Only Answer Mr Mehta’s three weeks in Washington evidently convinced him that devaluation was the only answer. The Indian Government had already tried to meet the Bank’s wishes on some points by liberalising essential imports at the end of March, and adopting a more favourable policy towards foreign private investment in midApril. The Bank’s officials appear to have convinced Mr Mehta that these elements in the Bell mission's package could not be fully effective if the main one—devaluation—was omitted. Mr Mehta returned to New Delhi early in May. In what must have been a month of anguished argument, he and Mr Bhattacharya between them evidently convinced their colleagues that devaluation was a necessary evil. Mrs Gandhi has shown great political courage in going the whole hog. Will her Finance Minister now have the skill to turn the opportunity, such as it is, into achievement?