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Crisis and Devaluation, 1963-
The Chinese invasion in October 1962 produced a measure of sympathy and support for India in western capitals, and a modest quantity of defence assistance which the US and Britain agreed would not be counted towards consortium loans. Some British officials even pressed for the initiation of rupee payment arrangements on a small scale as a means of easing India's balance of payments problems, but the suggestion was shot down by the Bank of England. In fact the Bank of England, principally, was engaged during these very weeks in reviewing aid policies towards India. Officials at this institution felt 'various fundamental things' were going wrong in India, 'constructive remedies' were not easy to suggest much less implement, and that the World Bank should be encouraged to carry out a 'fundamental and comprehensive review' of the current third plan position. There was also talk in Whitehall departments of how aid to India could be used as a lever to secure wider British objectives in the region. Although such issues could not be openly aired in consortium talks, some officials noted, efforts should be made before the consortium formally met to consider the 1963 aid package, to persuade India, which was now 'defensively insecure and financially sick', to reconsider its views on matters of strategic interest to Britain and the western world. At the consortium itself, according to this view, India should be asked to 'remodel' the third plan to suit 'realities'. In particular, its government should be encouraged to pause for breath and not undertake any new projects except where these might lead directly to orders for British industries with excess capacity. Other considerations, such as India's preference for pursuing new oil projects in the public sector rather than allowing the Burmah Oil Company to expand its refining capacity, also began to figure in the British calculations about this time. While many in Britain and elsewhere felt a review of India's recent development experiences was called for and the Indian government too, would
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soon carry out such an exercise, the more extreme views did not yet evoke widespread support even in Britain. India felt it needed new aid commitments of $1,255 million for 1963-64, of which $317 million were meant to finance the 'disbursements gap'. British officials urged their Indian counterparts to consider whether they should not give the latter overriding priority, only to be met with the firm riposte that the overall level of commitment should also receive 'its proper share' of attention. For their part, the Americans continued during the early summer of 1963 to press Britain and the other European countries to make aid commitments totalling one billion dollars for 1963- largely in the form of long-term aid with lengthy grace periods and carrying low rates of interest, and were even willing to make approaches at the political level to secure pledges of this magnitude.
R E A P P R A I S I N G A S S I S T A N C E TO I N D I A
Meanwhile, however, an important change was coming over the World Bank's outlook on India. Probably underestimated at the time, this change had important consequences for India's external aid environment during the next few years. Thanks to the Indian strategy, which was not always realized, of not pressing individual donor countries for development assistance at the bilateral political level and relegating the task of mobilizing it to the World Bank, the latter emerged during the Black years as the leading protagonist of consortium assistance to the world's most populous democracy. This approach may have been justified in 1958-59 when western governments tended to be several steps behind the World Bank in wanting to lend large amounts to India. But the inherent paradox in the Indian aid strategy was revealed before long, as the case for assisting India came to rest most strongly on political considerations to which western capitals were more sensitive than a financial institution such as the World Bank. This was a benign paradox so long as both the World Bank and western governments recognized the imperative need to assist India without expecting too much immediately in return. But not only did donors soon begin to insist on elaborate bilateral consultations of a nature which India had earlier hoped to avoid, the World Bank-led consortium approach made the availability of western development assistance hostage to the Washington institution's attitude towards Indian economic developments and policies. There was little the World Bank could do, even should it be so inclined, where consortium members were unwilling to grant assistance. But where the latter were willing and the World Bank was not, it was well placed thanks to its facilitating role, to apply the brakes on assistance to India.
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politically-charged debates surrounding the issue, many in India recognized the pressing need for larger investments to boost agricultural production and strengthen the infrastructure. Headed by Woods, who had earlier been a trustee of the Rockefeller foundation, the World Bank would soon make agriculture one of its main priorities in India. But the first major initiative Woods took on India-in the form of a letter he wrote to Finance Minister Morarji Desai in June 1963-did not dwell upon agriculture. The letter spoke of the low rates of growth in recent years of the Indian economy and about promoting exports, improving the climate for private investment, pricing policies, the necessity for relaxing import controls, increasing domestic interest rates, and tackling the population problem. Indian ministers and officials appear initially to have been baffled, even bemused, by Woods's intervention. But Desai responded politely to suggest that the Indian government kept the planning process under continuous review and that it was willing to discuss the situation in greater detail in the winter. Thanks to the challenges they posed and the increasingly adverse economic and security environment, the Indian government was inclined to subject third plan outlays to continuing review. T.T. Krishnamachari, who was soon to become the Finance Minister, even compared the plan to a child about whose changing needs a father could not be dogmatic or inflexible. But the government could not afford to suspend the plan pending the review, and Desai's letter to Woods emphasized the importance of avoiding any break in development assistance which, if anything, would have to be larger than at the beginning of the third plan. Besides meeting India's needs for non-project assistance, Desai argued, the next consortium round should make fresh commitments for development in basic sectors. The latter was a euphemistic reference to the need to step up outlays on agriculture and infrastructure. Woods's letter, which some officials of the World Bank and western governments soon began describing as a demarche, spoke of the difficulties he expected in persuading members of the consortium to address themselves to a further aid request when questions were being raised about the results of past aid, the government's future intentions, and the steps it was taking to tackle the present position. In spite of aid pledges from the consortium having exceeded amounts originally contemplated, Woods pointed out, the growth of the Indian economy had fallen far short of expectations, and there was no sign yet of reduced dependence on external support. Nor did the consortium, according to the World Bank chief, have a clear idea of the Indian government's economic programmes and policies for the next three years and into the fourth plan. Declaring his interest in addressing donors' purported misgivings about continuing assistance to India, Woods sought from the government an
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outline report on these issues. Whatever its overt concern, this letter was seen within the World Bank as a way of putting India 'on notice' and signalling the institution's displeasure with the government for not having responded adequately to its earlier reports. The World Bank President's remarks about donor fatigue may not have been altogether misleading. Even in April 1962 when he was in India at the head of a World Bank team, Peter Wright spoke to I.G. Patel, Chief Economic Adviser at the Finance Ministry, about the critical attitude donor countries were more and more disposed to adopt towards 'economic conditions in India'. But the warning, however well meant, was issued so far in advance that it was almost certainly premature. It is worth noting, for example, that the US attitude as evident in its approach towards the consortium process remained highly supportive until at least 1964 while even in Britain, alarms began to be raised only from the spring of 1963. Attention has already been drawn to the expressed American determination to ensure that India received one billion dollars in the form of consortium assistance in 1963-64 and its willingness to use political levers to achieve this target. In the consortium meetings that took place over June-August 1963, aid pledges totalled $1, million (against an Indian indent for $1,255 million). Half of the former amount was expected to be lent at 'nominal interest rates', almost 90.per cent of it was on long-term, lengthy grace basis, and about two-fifths of the pledges were expected to translate into 'general purpose' assistance for maintenance imports whose financing had recently become a source of some anxiety in India. Although officials in some countries privately- voiced misgivings about the prevailing economic conditions in India, the only recorded critical tone in the 1963 consortium deliberations was adopted by the World Bank representative, who drew the donors' attention to the contents of Woods's letter to Desai and proposed a full meeting of the consortium at the end of the year to consider the results of the government's review of the third plan. To a great extent, therefore, the World Bank at this stage was engaged in crystallizing donors' attitudes towards India rather than merely reflecting it. Some may be tempted to suggest that the Finance Ministry and the Reserve Bank saw the consortium approach as a means of bringing greater financial discipline to bear on the country's planners. There is no evidence that such was the case. The Bank blended unobtrusively into the background so long as the going was good, and was only indirectly involved with aid negotiations or strategies. As for the Finance Ministry which played the principal role in these affairs, it is worth noting that some of its officials, including notably B.K. Nehru, were widely credited with promoting the idea of a 'big' third plan dependent for its success on large annual aid flows. Whatever their
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some notable achievements, but was frank in admitting the slippage which had arisen because of bad harvests, poor resource mobilization by state governments, their diversion of project funds, and the shyness of private investors. India's inability to finance the faster than expected growth in maintenance imports had also led to substantial unutilized capacities in industry. Exports, on the other hand, were not as buoyant as hoped, while the decline in invisible receipts worsened the position. Finally, the appraisal referred to the administrative and managerial challenges of implementing plans and plan projects. Its medium-term forecast was however less gloomy than its evaluation of the recent past, and the appraisal anticipated higher rates of growth, if not necessarily a reduction immediately in external imbalances, over the next two or three years if harvests lived up to Indian hopes. The mid-term appraisal, in formulating whose sections on finances, balance of payments, and foreign aid forecasts and receipts, the Bank played the major role, was published in November 1963. Thereafter until March 1964 when the consortium met in Paris to consider the report, officials of several western governments and the World Bank were closely engaged in studying and commenting on its analysis and projections. L.K. Jha represented India at the Paris meeting, and with the appraisal already on the table, used the opportunity to press for untied aid and loan negotiation procedures which enabled some global consortium evaluation of the quality of pledged aid. He spoke of the costs of tied aid, and the World Bank representative supported Jha by pointing out that imports financed by tied aid often cost twice or three times their price in the world market. According to the record maintained by one donor participant, Jha was alternately 'conciliatory, thoughtful, adroit, and evasive' and he reportedly left his audience with 'mixed feelings of admiration for him as a performer and discontent with the net product'. There was little discussion of fourth plan assumptions and outlays other than the suggestion that the latter should be determined with abundant caution. But a notable feature of the meeting was that unlike even in 1963, there was no explicit discussion of the period over which India's development needs would have to be met, and no member dissented from the US view that 'everyone must be prepared for a long haul'. As commitments went, the Paris meeting was not a failure. Nor was donor fatigue much in evidence yet, as pledges totalled over $1,000 million against India's total estimated needs of $1,150 million. In fact as late as October 1964, John Lewis the newly arrived head of the USAID mission in India who was believed by knowledgeable diplomats in Delhi to be 'close to President Johnson', is reported to have disclosed to them his view that 'India's importance was such that the volume of American aid would not fall off'.
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As well as its longer-term financing needs, by the autumn of 1964 attention in western capitals began to focus increasingly on India's emerging debt repayment and servicing problem. This issue came to the fore partly because of Indian preoccupations with framing the fourth plan. Annual debt servicing and repayment obligations during the third plan years were believed to be in the region of about $300 million, and were expected nearly to double during the fourth plan. Although the problem was not yet imminent, the absence of any definite knowledge about how these liabilities would be financed, clouded the outlook for the fourth plan and the possibility of even working towards reasonable ranges of possible investment outlays. Indian officials canvassed with their western counterparts the idea of donors 'undertaking', rather than yet 'committing', to make available net aid of $1,000 million each year during the fourth plan. Initial exercises about the feasibility of securing more than $1,500 million each year in the form of gross aid led to proposals for rolling over repayments falling due. The World Bank and the United States had recommended that practice to some consortium members in the early 1960s, and while not explicitly invoking this precedent, Indian officials hoped to use it to gain some breathing space and a better outlook on fourth plan financing. Repayments owing to Britain and the World Bank were the cause of the hump immediately facing India. In fact its officials expected-wrongly as it later turned out-a doubling of the country's debt repayment obligations to Britain even between the penultimate and concluding years of the third plan, and London was therefore the first western capital at which they raised the possibility of rolling over maturing debt. British officials, who tended generally to look askance at debt roll-overs, did not demur at the principle underlying the Indian proposal. It became immediately clear to them that, however it was used, gross assistance of amounts committed or disbursed during the third plan would not go very far in the fourth, and debate centred mainly on whether these maturities should be rescheduled or debt repayments 'refinanced'. Officials in London preferred the latter because the former implied a default, but Indian officials resisted the idea for fear that the resulting increase in gross aid commitments would further fuel the resentment other developing countries were reported to feel about the size of concessional aid flows to India. The wider differences over how to handle the Indian debt servicing problem related to timing, i.e. whether it should be taken up at the consortium level after the fourth plan was ready sometime in October 1965 or it should be tackled first to enable a clearer outlook for the planning exercise. Opinions were divided on this, and though there was some suspicion that India advocated the latter course because it wanted the debt servicing problem out of the way to better apply pressure on consortium members to make large aid contributions
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suspicion that Indian officials were not cooperating with his Bell mission. Speaking to London officials who insisted on tackling the subject with him when they met in December 1964, Woods expressed himself dissatisfied with the help the mission received from the Indian government and announced his intention to 'use his willingness to assume the lead in the indebtedness discussions to secure the full cooperation of the Indian authorities' in its work. Woods also apparently informed his hosts that his 'own approach to the fourth plan would be a severe one' and not be confined to 'endorsement or purely academic comment'. Besides, while acknowledging the political arguments of the US, Britain, and the others against 'any major change of policy', he declared that the World Bank's examination of the fourth plan 'might be the occasion for something of a showdown' with India. Woods also confided to officials in London that he wanted to examine World Bank loans to India in a 'very critical' manner. Among Bell's many suspicions in December 1964 was that Indian officials hid balance of payments figures from him because 'defence imports were the source of the trouble', and speaking to L.K. Jha in London over lunch the same month Woods insisted that his approach to the debt problem and to aiding the fourth plan would depend on an annual assessment of the balance of payments implications of Indian defence expenditures. As matters turned out, however, the explanation for Bell's failure to get the latest payments estimates in Delhi was that the Reserve Bank was still compiling these figures and forecasts in November 1964 from information on import licences which was in some disarray, and it would be several more weeks before they could be conveyed to his mission with any degree of assurance. While western donors were no doubt less enthusiastic in 1964-65 than before about extending assistance to India, the World Bank appears to have been the only donor afflicted by 'fatigue' until the spring of 1965, when US resistance to aiding India became palpable. The US refused for the first time to increase its aid commitments that year, yet total consortium commitment came up to $1,027 million, or nearly the same amount as that committed the previous year. That a large part of the commitment was not translated into credits, among other factors because of the suspension of US aid to India after September 1965, is another story.
SCRAPING THE BOTTOM O F THE BARREL, 1965-
In the mid-sixties, India owed substantial repayments not only to the World Bank and other members of the consortium, but also to the International Monetary Fund. Under an agreement reached with the Fund in June 1964,
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India was committed to repurchasing $200 million in three half-yearly instalments between the end of March 1965 and the end of March 1966, and a further $25 million at the end of July 1966. Unlike the previous year when they were more or less steady between June and December and rose towards March 1964, external reserves fell steeply between June and December 1964 from about Rs 278 crores to Rs 237 crores, and it became clear to the Indian authorities early in the winter of 1964 that they would not be able to adhere to the repayment schedule agreed with the Fund. About this time, Anjaria, who was now the Indian Executive Director at this institution, invited Bhattacharyya's attention to the uneasiness in Fund circles about India's economic situation and the rupee's viability. The closing months of 1964 were a turning point also for the Reserve Bank's own role in India's external economic diplomacy. Its officials provided technical support, prepared papers for government negotiators, compiled the data on which to make decisions and projections, but contributed relatively little until this point directly to aid or external policy negotiations. The danger of external reserves breaching the minimum currency cover in the summer of 1962 spurred the government into consultations with the Bank, which was also involved in drawing up the Indian strategy for the July 1962 agreement with the Fund. Once the immediate crisis passed or officials in Delhi learnt to live with it, little time was lost in relegating the Bank to its earlier supporting role. When the World Bank left it to India to prepare the country brief for meetings of the consortium in 1964 (and 1965), the Reserve Bank deputed a senior official to help the government fill the breach. As the crisis intensified from the winter of 1964, the profile within the Indian economic policy establishment of the Governor, if not that of the Bank itself, grew considerably sharper. Bhattacharyya's intervention grew more effective and assured after TTK's star began to wane in the summer of 1965, and thereafter for the next two years, he became the key member of the small core group of officials coordinating India's external economic policies. It needs however to be stressed that few others at the Bank were directly involved in the exercises leading to the rupee's devaluation in June 1966. To return to the main themes of this chapter, Anjaria's letter led Bhattacharyya to ask officials at the Bank to examine whether it was possible to refinance in some way the debts owing to the Fund. In a brief note, M. Narasirnharn pointed to the difficulties of repeating a refinance operation, and instead suggested approaching the Bank of England for a short-term line of credit that would enable India to meet its repurchase commitment. As pointed out above, thanks to Woods's resistance, Jha's recent efforts to secure some debt refinancing assistance from Britain had largely drawn a blank. But
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September. This alternative, it was expected, would necessitate a letter of intent from the government conveying its assessment of the future outlook of policy and trends in India. The extreme option was to seek a standby before the Fund team visited India in March 1965, but the catch here was that such a request would signal a deeper disequilibrium in the economy, necessitate 'special consultations', and entail stiffer and quantifiable terms and conditions. Initially, Bhoothalingam and Jha were in favour of the second alternative. But with the payments situation showing no signs of improvement and reserves continuing to fall despite the export season being well under way, Bhattacharyya held a meeting at the Bank with the Secretaries of the Finance Ministry in December 1964 at which it was decided to approach the Fund forthwith for a standby, advancing the consultation, should one prove unavoidable, from March to January 1965. The Bank and the government also decided that if the reserves position became really critical, the former's gold holdings should be temporarily augmented by stocks of confiscated and indigenously produced gold, and the corresponding amount of foreign exchange released for current deployment. Thanks to a transfer of confiscated and domestically-mined gold valued at Rs 16 crores from the government's stocks, India's official reserves of gold coin and bullion went up from Rs 117.76 crores in December 1964 to Rs 133.76 crores in February 1965. But holdings of foreign securities continued to fall, and despite the busy season having got under way, there was little sign of any sustained improvement in reserves. More than once in the past two months, the Bank and the government had considered suspending the official reserve requirement since the gold and foreign currency assets of the Issue Department barely amounted to Rs 203 crores during these weeks, but held off for fear of the impact of the move on public confidence in the rupee. The task of restoring reserves could no longer be postponed, even if it required recourse to a Fund standby accompanied by tough conditions. This recognition was followed by a frenzied exchange of cables between Bombay, Delhi, and Washington, the upshot of which was a decision to announce a few corrective measures before the proposed Fund mission arrived in India. The Finance Minister would also make a statement on the critical external payments position when Parliament opened for its budget session. As in the past, the merit of adopting such a course was that it would make it easier for the Fund management to support India's request while enabling the government to truthfully argue that these measures were not the handiwork of agencies in Washington. The Finance Minister's statement in the Lok Sabha on 17 February 1965 underlined that the foreign exchange holdings of the Reserve Bank
stood at their lowest level since independence at Rs 78 crores, and that a
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suspension of the official reserve requirement was averted by transferring additional gold to the Issue Department. Shortly before the Finance Minister rose to address the Lok Sabha, the Bank put up its lending rate by one full point to 6 per cent. With a repayment to the Fund imminent, TTK told the House, further recourse to its assistance and immediate fiscal and monetary measures were unavoidable. The situation facing India was so serious that 'even with temporary relief from the Fund', it would be necessary to maintain the 'strictest discipline on all fronts' to avoid the 'periodic repetition' of similar situations in the future. The two-member Fund team arrived in Delhi four days after TTK's parliamentary statement and held discussions with officials of the Bank and the government, chiefly on the letter of intent containing a list of measures the Indian government had taken or would take to deal with the payments crisis. The technical sessions covered the government's plans for market borrowing, the quantum of credit expansion during the busy season, the projected increase in money supply, and some details of export promotion measures. With the help of their latest payments forecasts, Indian negotiators convinced the team that a standby of $150 million would merely result in a 'shoestring' operation and that a standby of $200 million was more in line with India's immediate payments needs. These negotiations resulted in some broad agreements on the letter of intent. But a consensus did not altogether prove easy. The Indian effort from the outset was to take whatever fiscal and monetary measures appeared necessary. Apart from the Bank rate which was put up successively in September 1964 and February 1965, the accommodation regime introduced at the beginning of the busy season was also intended to make credit dearer to private sector borrowers. Nor were there differences between India and the Fund on the need for fiscal restraint or on fresh efforts to promote exports. A monetary budget to guide action in the forthcoming months was not as welcome to the Indian authorities, but in the end they and the Fund team worked out a mutually agreed programme. A Fund stipulation requiring fresh consultations and agreements before making further drawings in the event of India departing from agreed policies proved more contentious. In particular, Indian officials resisted the link the Fund sought to forge between the net domestic assets of the Reserve Bank being held within agreed limits and the country's eligibility to make a drawing under the standby. As Bhattacharyya wrote to Schweitzer at the beginning of March 1965 about the divergence between the Indian and Fund views on the subject, a 'direct link between credit limits only and further drawings' was unnecessary when there was already prior agreement to initiate consultations before any changes were
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instructed Anjaria in Washington on 20 April to ensure that a Fund drawing was 'effectively transferred to the Reserve Bank on or before the 25th'. The government hoped the ceiling would remain intact until the drawing was made. In order to ensure that it could remain so, the State Bank of India was instructed to repay a portion of the accommodation it had earlier availed of from the Reserve Bank. Besides leading possibly to new conditions, fresh consultations necessitated by the breach could prove to be prolonged, and time was a luxury Indian policy-makers could not afford in managing the country's precarious external finances during these months.
DEVALUATION
The March 1965 standby arrangement proved rather more difficult to negotiate than earlier ones. But one of its more noticeable features was that the arrangement made no explicit reference to a devaluation. At almost the same time, however, the World Bank campaign, which led directly or indirectly to the rupee's devaluation in June 1966, was well under way. Intended as a lasting solution to India's nearly chronic external payments problems, the devaluation's positive effects were immediately swamped by those of two successive droughts and a liberalization experiment which foundered on the western inability to deliver the assistance promised to India to facilitate the reform's success. For much of the 1950s, the rupee was a stable currency. India, it will be recalled, followed the sterling when the latter devalued in September 1949. But the boom in the prices and exports of primary products arising from the Korean war and the intensification of domestic inflationary pressures in 1951 led to calls in India to revalue the rupee. Pakistan's refusal to devalue in 1949 had had the effect of disrupting trade between the two neighbours, and the exchange rate between their rupees became another item in the growing list of disagreements between them. Consequently, many in India also saw revaluation in 1951 as an opportunity to restore India's trade with Pakistan, particularly that between West Bengal and East Pakistan. The demand for revaluing the currency in 1951 was not confined to India or to the rupee. Governments of several European countries faced similar pressures in some form or another in the early 1950s. Preferring trade liberalization to revaluation, the International Monetary Fund opposed any change in par values, but revaluationists received powerful support from the United Nations Economic Commission for Europe. In the early stages particularly, the demand for a higher rupee was voiced most strongly in India by the Eastern Economist. The suggestion was considered at some length at
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the Bank by B.K. Madan, who felt it was 'devoid of economic justification'
and would, if adopted, harm India's trade. While the devaluation of 1949 was
a 'compulsive necessity', revaluation in 1951 was not. The government
accepted Madan's argument for the time being. But it also appears to have wished to keep its options open, with Finance Minister C.D. Deshmukh underlining that unlike devaluation, a 'revaluation ... could be considered at leisure'. Indian policy-makers were inclined to suspect a degree of special pleading
in the Eastern Economist's campaign. The latter gathered some momentum
after John Matthai, Finance Minister in 1949 when the rupee was devalued,
lent his support to it. Matthai saw revaluation as a 'powerful defence against steadily mounting inflationary pressures'. Apart from lowering the prices of imported foodgrains and the capital goods needed to implement India's development plans, a higher rupee would also reduce costs and prices in two of India's major industries, jute and cotton textiles. The Bank's Department of Research and Statistics, however, preferred to focus on the external
arguments. Madan maintained in April 1951 that the international price and
demand outlook was now uncertain. Export prices had probably hit a plateau,
and the improvement witnessed in India's balance of payments in 1950 could
prove temporary. Though embarrassed by his public advocacy of a dearer rupee, neither Deshmukh nor Rama Rau could make much impact on Matthai, who continued to stress the domestic arguments in support of his view. But Madan's prognosis was borne out with unexpected swiftness within days of a
dinner meeting between Rama Rau and Matthai in June 1951 at which they
agreed to disagree, when trade figures for April 1951 showed a deficit for the
first time in several months. With inflation a major source of anxiety at home and relations with Pakistan on the mend, Deshmukh too, appears at this time to have been attracted by the domestic advantages of a higher rupee. But apart from adverse trade effects, the Bank was also concerned that the rupee might be unable to withstand speculative bear pressures which would be more intense if it alone was revalued. If at all India wanted to revalue, Rama Rau advised the government, it should do so only after countries such as Australia and Ceylon whose financial positions were stronger, made the first move. Important as they were, nor should the Indian response be dictated solely by the need to restore economic ties with Pakistan. The latter's non-devaluation remained an aberration and although recent events might obscure the fact, its current parity
would not be sustainable in the long run.
Rama Rau's suspicions of a speculative movement were reinforced by the
large spot and forward sterling purchases (aggregating to nearly Rs 220 crores)
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The relatively easy availability of long-term external assistance diverted attention from major corrective measures until the middle of 1962 when there was a renewed sense of crisis. As pointed out in the last chapter, though pledges were still in accord with requirements, there was a lag in disbursing assistance. There was a mismatch besides, between project assistance and that to finance maintenance imports, and finally a slump in India's invisible receipts. In this background and partly in anticipation of a searching examination by the Fund of the appropriateness of the prevailing exchange rate, the Bank conducted a study of devaluation as a possible solution to India's external problems. This study, which Pendharkar completed in June 1962, was largely dismissive of the benefits of a parity change. Apart from the doubts about supply and demand elasticities Madan voiced in 1958, Pendharkar pointed out that Indian manufactures whose exports could benefit from a devaluation were subject to quota restrictions in the developed world. Pendharkar was also concerned about the terms of trade effect of a rupee devaluation and its potential for triggering 'beggar-thy-neighbour' responses by India's competitors. A rupee devaluation in the present circumstances made sense only if competitors such as Ceylon or Pakistan embarked on parity changes, and not otherwise. If India devalued 'ahead of its competitors, ... she may be obliged to do it again'. Further, as L.K. Jha at the Finance Ministry elaborated on Pendharkar's note, by cheapening India's price-inelastic exports, devaluation might actually reduce and not increase India's foreign exchange earnings. Selective subsidies, both Pendharkar and Jha agreed, offered the better course to higher exports than a general instrument like devaluation which would also disrupt the third plan by putting up domestic prices and debt servicing charges in rupee terms. The Bank of England too, appears to have thought at this time that rupee devaluation was a 'course of despair' capable of producing little beneficial effect in a planned, mixed economy in which tradable goods were pre-empted by the State to achieve plan targets. London's arguments partly reflected the fear that a rupee devaluation might inaugurate a prolonged period of instability of sterling area currencies, but appear in this instance to have helped reassure the Fund. For several months thereafter, devaluation was not actively canvassed or debated in official policy circles or in the international agencies. The Fund mooted a suggestion in February 1963, though more in the context of Pakistan than of India, for a joint devaluation of the so-called 'rupee countries' to ensure that no single country derived any competitive advantage at another's expense. But little was heard of the idea subsequently. Visiting India several months later, the Governor of the Bank of England reiterated that the proper time to consider a change in
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the par value of the rupee would be when there was 'enough production in the
country ... [to] generate an export surplus ....'
Despite the Fund's silence on the exchange rate in March, speculation about an Indian devaluation assumed significant proportions by the summer of 1965. To some extent it was sparked off by the Bell mission which was currently engaged in preparing its report. Although supposedly a secret, Bell missed few opportunities to make his preference for a devaluation more widely known in India and elsewhere. Moreover, despite drawings from the Fund of nearly Rs 24 crores in the first quarter of 1965-66 and nearly Rs 12 crores in the second, reserves continued to fall until September. India was forced to seek the postponement of its obligation to repurchase $25 million at the end of September 1965, and this request was approved by the Executive Board of the Fund without event only because Schweitzer, who did not place it on the formal agenda, managed to see it through on a 'lapse of time' basis. Meanwhile, early in June 1965, Bhattacharyya, Bhoothalingam, and Jha (now the key official in Shastri's secretariat) submitted a report to the Prime Minister signed by several other senior officials of the Government of India including I.G. Patel, outlining a further series of measures to restrict imports, and monitor remittance of export receipts and invisible outflows to check disguised capital flight. As well as a response to the immediate crisis, this memorandum reflected the official Indian response at this time to the Woods- Bell devaluation campaign. The prevailing sense of uncertainty over future Indian policies led to the Fund postponing a Board meeting called for 7 July 1965 to discuss its Art. XIV consultation report on India. About the same time Bernard Bell and Andre de Lattre-a former French civil servant George Woods roped in to strengthen the World Bank in its negotiations with the Government of India- were busy presenting the mission's findings to officials of the Indian government. Bell and de Lattre pressed hard for a devaluation, but did not greatly enhance their case by threatening a cut off or reduction in assistance should India refuse. With T.T. Krishnarnachari rejecting the advice and Prime Minister La1 Bahadur Shastri still supporting his Finance Minister, there was little immediate prospect of India heeding the World Bank's counsel. But the markets, if not public opinion, remained uncertain, and following discussions with Shastri and the approval of the Union Cabinet, TTK went on the air on 17 July 1965 to rule out a devaluation which he said was merely an 'opiate' and not a lasting answer to India's 'problem of living within ... [its] means'. He underlined the government's determination to 'restore strength' to the balance of payments by 'selective deployment of the instruments we have already forged'. To argue the case for a general instrument like devaluation
