Review of recent economic and financial developments in India

 No. E-92A RESTRICTED port i5> restricted to U5>e withi~ the Bankl 67000 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REVIEW OF RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS IN INDIA June 24, 1950 Economic Department Prepared by: A. Basch W. Gilmartin  Table of Contents Sum1!1ary and Conclusions •••••.•...•••.•••••••••••..•..•.•.••• i-vi I • PROroCTI01T ••• lit • • lit • lit ••• lit ••••• lit • • • • • • • • • lit lit ••••• lit " • • • •• 1 II • IrrTJI:RJ:TAL FI :~Al:ir CES. • • . . • . . . . . • . • . . . • . . . . . . . . . . . . . . . .• :3 III• EKT:!l:RlTAt PO SI TI OF • • • • • • • • • • • • . . . . • • • • • • , . . • . . • • • • ••• 16 IV. TRADE RELATIONS ~flTH PA]lST~~ ••.••....••..........•• 27 APP:!mmr:;: I Index of Production of Selected Industries APPE,i)TDIX II - Capi tal :Budget APPEliJDI:: III - 'Wholesale Price Ind:i.ces • APPEl:rDIX IV - U. S. Trad.e "T1 th India, 1948-50 &?EI!DIl: V - Foreign Assets of the Reserve :Bank of India AP?~.~IX'~ - Central Government Deposits in the Reserve J3anl:: of India, 1945-50 APPE1TDIX VII - I~oney Supply in India, 1945-50  Summary and Conclusions 1. A review of India's economic and financial situation in 1949 and ill the f:i.rst months of 1950 ind.icates some manifestations of improvement and increased stability, but proper account must be taken also of those factors which have injected a substantial de~ree of uncertainty into India's economic outlook. 2. Favorable developments in the Indian economic situation during the past year have been' a. Foreign Trade and Balance of Payments During 1949 India's current balance of payments position swung from a record deficit of around Ra. 1,900 million for the first six months (inc1ucling Pakiste.n accounts) t to a surplus of Re. 74 million for the last six months. The surplus applied not only to the soft currency area excluding Pakistan (Ra. 93 million) but to the hard currency area as well (Ra. 86 million). It was the result of severe restrictions on both hard and soft currency imports after mid- 1949, of an ups\'ring in exports follm'rin.>; devaluation, and a shift in invi a1 hIes from a net deficit to a net surplus. The export surplus which first a})]eared in lTovember 1949. has continued through the first qu.arter of 19.50. The improved. balance of payments l)OS:l. tion (I.uring the last quarter of 1949 was reflected in a. net increase in India's sterlinG' balances by ~ 31 million (Rs. 411 million) compared ,,,1 th a d.ecline of almost b 188 million (Rs. 2,494 million) in the first nine months of the year.  - ii - The balances continued to rise in the first quarter of 1950 but de- clined in April anci May. On June 2 they were still at the July 1, 1949 level. Thus India had no net dralvincs up to this point al thou:;h the c.;:reement with the U.K. provided for drawines up to b 50 million during the period July 1949-June 1950, plus up to an additional!' 50 mllion for commitments incurred under the liberal import licensinc policy prior to rla~r ] 94? b. Domestic Production While industrial out:mt was uneven in 19l.f.9" the over- all level of ~~oduction increased bec.::mse of eains in a larce number of manufacturine industries, increased a~:ricul tural output, amI an improvement in railwa;r transportation. IndustriaJ_ production as a whole declined sliehtly (by about 3%) due to reduced output in the imlJortant jute and cotton textile industries. Increases were recorded in coal, steel, cement, paper, sucar, and the majority of the minin;r" enrrineerJ.nc and lie;ht manufacturine industries. The 1949/50 crain crop is estimated to be 2 million tons creater than the previous year and the production of raw jute, tea: rm\[ cotton and eroundnuts also increased. The "erOY; more food ll Ca'11paic:n has been mOl'e efficiently orSanized and intensified while erain procurement for rationine: purposes in 19).)9 (LI.h) million tons) exceeded the tarcet and is ex:'ected to reach 5.h million tons in 1950. II11?roved rail"my facilities virtually eliminated the post;\"ar' trans~ort bottleneck and permitted the elhdnation priorities on frei:ht shipments.  - iii - c. ~rice Movementli Although hope for a decline in food prices expressed in the March 1949 'budget message did not materialize, the Indian price level was relatively stable in 1949, in spite of the shift from an import to an export surplus and the influence of devaluation in the last quarter of the year. The net increase in the wholesale price index during October 1949-April 1950 was under l~, or less than in many of the other countries which devalued their currencies. 3. The most significant developments on the unfavorable side of the recent economic situation have been: a~ The Budget Position The Government has contimled to operate with a large and unbalanced budget ''lith about 50% of ordinary ex.pendi tures for mili- tary purposes. The revised budget estimate for 1949/50 leaves an overall deficit of Ra. 1,597 million. or Rs. 355 million less than the initial budget estimate. Sav1.ngs have been made primarily at the ex.pense of capital outlays on raihlays, ino.ustrial development, high- ways, and grants and loans to the States for development. Ordinary budget expenditures for 1950/51 are estimatod at about the same level as in 1949/50 with militar:J' items again amounting to about half. Ho'''- ever, the deficit is eXpected to be smaller (Ra. 947 million) chiefly becau~e of further cuts in loans and advances and erants for develo~ ment. The deficit in 1949/50 ,'Ie,s met from Government balances, postal  -'iv - navings, varj_ous de~)Qsit.s with the Governr.lent dnd other small sundry :Ltoms. In 1950/51 the Government intends to cover t.he deficit from theDe same sources tOGether y.pith net lonr;:-term borrovrinz of Rs. 377 million. Governrnent balances are ex;?ected to be reduced by Rs. 170 willian cOffi[lared vdth the estimated decline in 1949/50 of Rs. 968 million. However J the !)resent ;)08i tion of the capital market makes un- likely thE': financing of the deficit accordinC to forecast. b. ----'-_._--- The CaDi tal li;~arket O!):)ortuni ties for market borrowinr: either by the Gov- ernment or private industry in 19!.j.9 ane ea,rl:' 1950 were extremely limi ted. Repaynents on :)ermanent Government debts in 1949 exceeded neil lone-term issues by Es. 113 million. Durine; 1949 Govermnent seCl'cri tv nrices lHere ,.. .... ~n.aintained - ~r throurh more than Rs. BOO million onl '" ,. of open marke+,~)urchases by the Eeserve Ban~(. There was no evidence of :i_m:)rovenent in the accumulat:i.on of money savinc~:. The dovmviard trend in bank deposits since 1947 continued. Governrnent ]Jorrovring in the market at the bud~eted level may be difficult in the current fiscal year imposinS further heavy drains on the remainin:::; Government balances. 'The lack of local financine i~3 becoming a very serious obstacle to economic development. c. India-Pakistan Helations PRrha,s the most disap,ointin:: aspect of reC6nt develop- mcnts in Indict was the deterioration in econolilic relations which followed }lakistan I S decision not to L3value and the subsequent refusal of India  -v- to recognize the Pakistan rupee at a 44% premium over the Indian rupee. The result was a more or less complete break in trade relations between the two countries which has been only partially mended by a lim! ted but important trade agreement concluded in April to cover the period ending July 31, 1950. The unsatisfactory state of trading relations \<ri th Pakistan has far-reaching repercussions. India faces a loss of perhaps $25 million a year in hard currency export income from rai>l jute t raw cotton, hides, and leather becauee of the absence or shortage of suvplies from Pakistan. In addition the effects of raw jute shortages on India's dollar exports of manufactured~ jute are already apparent in a sharp reduction in U. S. imports of jute goods b~r almost ~16 mil- lion in the first quarter of 1950 as compared with the same period in 1949. Furthermore, in the absence of Pa1:istan cotton, India is now buying a substa'lltial l;a.rt of its sUPiJlies for hard currency which may require over $90 million in 1950. (It amounted to $33 million in the first quarter of 1950.) These dollar outlays and losses may be reduced somewhat as domestic production of raw cotton and jute is stimulated. Uovertheless. a stalemate in India-Pakistan relations may 't.rell adversely affect India's dollar balance of payments in the magni tud.e of f?10() mil- lion a year. Furthermore. the intensive .:I.rive in India to keep abreast of the food problem may -be jeopardized by the conflictin~ i1emands on the land arising from simultaneous efforts at self-sufficiency in jute  - vi - and foodstuffs rold increased production of cotton. Although in the long run India may be able to reach self-sufficiency in jute and cotton as '1el1 as grain in normal harvest years, it seems doubtful that this can be achieved in the near future. Perhaps the opening in the India-Pakistan trade barriera created b~! the limited agree:nent of April ,dll be widened by a further and more extensive trace for the latter part of 1950 and 1951.  I ~ PROIUCTION A slight upward trend took place in India1s production in 1949. The area under rice, wheat, and other grain cultivation was about 5~ greater than in the previous year. The grain production for 1949-50 is estimated at 2 million tons above the 1948-49 harvest. The acreage under cotton was increased about 7~, and the estimated production of 2.06 million bales surpassed ~J 22-l/~ the last year's production. A very substantial increase was achieved in the production of jute ,,,11ich, according to the latest estimate, reached 3.1 million bales compared to 2.1 million bales in 1948-49. Tea production, estimated at 579 million pounds is an a11- time record for the area not..r included in India (the combined production of undivided India amounted to 593 million pounds in 1947). Production of groundnuts has been expanded by 17.4% and reached 3.4 million tons as compared to 2.9 million tons in 1948-49. In mining and manufacturing an increase of production took place in most fields, as is seen from the table below. However, the index of industrial production for 1949 was 119 compared to 122 in 1948. The reason for the lower index figure lies in the reduced production of jute anet cotton manufactures. The production of cotton piece ,~oods at ).9 mil- lion yards remained belo\" the 1948 production of 4~3 million yards. The production of jute manufacture amounted to 94),000 tons during 1949, \'lhich is substantially below the q~a.ntity of 1,091,000 tons produced in 1948. India1 s railway tramroort facilities sho1tJ'ed a marked imDrovement in < - ~ 1949, virtually eliminating the post"lar transportation bottleneck and permitting the removal of priorities on freight shipments. Freip,ht to~ nage carried by broad and ffioter gauge railw8lfs in 1949 was 18~ greater  - 2 - tha~ in the previous year, while ton miles of frei~ht traffic increased by 1M&' Raihrays earnings on frei~ht traffic '-Jere 1/3 greater in 1949 than in 1948. The number of man days lost in industry through industrial disputes in 1949 was 177& than in 1948 and over 60sb below the peak year of labor difficulties in 1947. Man-day losses as a result of d.isputes in 1949 as compared \'li th 1948 were red-uced by 78% on the rn.ih"ays, 49% in the jute industry, 31% in cotton textile manufacture, and 13% in the various engi- nearing industries. Table 1. Production Increases 1/ Ooal 29,700,000 31,400,000 Finished Steel 854,000 922,000 ll>ment 1,560,000 2,060,000 Sul"phuric Acid 80,000 89,000 Superphosphates 21,350 43,250 Caustic Soda 4,380 6,200 Paper 98,600 103,200 AluT1imun 3,362 3,486 Copper 5,843 6,359 Refractories 12.9,200 210,800 No. of Units Electric 9,246,000 13,566,ono Dry Cells 124,OOO,JOO 149,000,000 Electric ~~otors. HP 60,000 69,500 Electric Fans 160,000 165,000 Diesel Engines 1,025 2,048 Bicycles 69,740 71,290 Se,,,ing Machines 20,000 31,200 11 For additional detaiJg see A9pendix I.  - 3 .... II • nrTERJ~TAL FINA.\TCES 1. :Budeet a. 1949-50 Budget. The revised budget estimate for 1949-50 remained wi thil'i 10:& of the fir'st budget esti:nate (see table bela,,!). Instead of an expected surplus of lis • .5 milH on, the Ordi nary Thldget eno,s Hi th a deficit of Rs. 37 millirm. TIle defense expenditure at Rs. 1,700 million, is Rs. 127 million more than "las the original esti:nate. Table 2. Indian Budget Estimates for 1949-~0 and 1?~0-51 (in Rs. million) 1949--::iQ.. _J:.2.2Q-1L First Budget Revised Budget First Budget Prelimi,nar:l;: Estimate Estimate Estimate Revenue 3,230 3.324 3,392 Expenditures 3,225 3.)61 3.379 Balance f 5 -37 f 13 Cap! tal Acco'mts not 1/ met from revenue 1,968 1,622 1,095 E::cess of Total Expendi tu:-e over Ordinary P.evenue 1,96) 1,660 1,082 1/ An amount of Rs. 792 mi Ilion was derlucted; . t representro the issue of non-interest bearing securities to Hl'F and lERD in payment of the addi tiona1 S1:tlll due to them following the devalue,tion of rupee. The entire budgetary pos~, tion "!H,S reviei',ed by the G-overnment ~.n Qctober 1949. and it was decided to effect economies both in the Current a.'1d Capital Budgets. The expencU tures on raihrays w'ere reduced by Rs. 77 million, or. industrial development by Rs. 36 mUUon, and on lo~l,llS  -4- and advances to Provinces by Rs. 117 million. AGding to the capital ac- counts n.ot met from revenue the Ordinary Bttdget deficit of Rs. 37 million, the overall deficit to be covered reached Rs. 1,597 million. Th:l.s deficit . the following manner: JJ An amount of Rs. 629 million was was met J.n obtained from postal saVings, from various deposits and advances, and from govermnent borrowing. 2J The remaining Rs. 968 million was covered by drawir.g on government deposits with the Reserve Bank of India, which "'ere reduced from Rs. 1, million to Rs. 954 million. It should be noted, hO\,lever, that the central government deposits ,.!i th the Reserve Bank stood at Re. 1,248 million on April 7, 1950, mld at Re. 1,277 Million on JtL~e 2, 1950, '\Thich is substantially higher than the closing balance of Rs. 954 mil- lion estimated in the revised 1949-50 budget for the end of March 1950. Tili s has resulted, presu"'lably t from a some1f,hat smaller actual defici tJi and from larger net sales of Gov8rnment securities than estimated in the revised 1949-50 budget. b. 1950-51 :Budget. The total revenue and y 6J.. endi turee of the Ordi- llary (ReVenue) Budget are sUghtly higher than the figures of the revised 1949-50 estimate. !:!mrlever t the estimates for 1950-51 are not comparable "lith those of the previous years because. as a resu.It of federal financial integration, they include for the first time certain revenue and expenQ.~- ture items formerly included in the budgets of the Provinces and Indian 11 For details see Appendix !I. 21 The market borrowings amounted to only Rs. 400 million against the stun of Rs. 850 million expected in the first budget estimate. The Go~ern­ ment repaid Rs. 113 million more on permanent debt than it raised from new loans sold in the market. J./ According to recent inform~tion. the Ordinary :Budget for 1948-49 ended 'fIJi th a su;rplus of Rs. 510 million instead of an expeotec1. defi oi t of Rs. 20 million.  - 5- States. Without this change, the budget figures for the present year would most probably be lower than the figures for the past year. The table below gives the main revenue as ''lell as expenditure items. Table 3, Revenue Budget. Selected Items (in Re. millions) REVENUE r :!ilXPE!'''DI TORE Revised t Revised Budget Estimate :Btl.d.get Budget Estimate :Budget 1949-50 1949-50 1950-'''1 , 19!f9-50 1249-5Q.... 1250-51 Total 3.220 3.324 3,392 'Total J,225 J,J61 21J79 I Corporation Tax 418 406 381 'Debt Service 393 388 365 I Taxes on income, I Defense Ser..;. other than cor- Ivices 1,574 1,700 1,680 poration tax 1,067 1,084- 1,295 I 'Ci vil A<L'!lin- Customs 1,115 1,204 1,065 Itstration 405 409 .501 t Defense services, although slightly below 1949-50, account again for 11 about 50% of total ordinary expenditure. The revenue from corporation and income taxes has been reduced by Rs. 83 million as a result of various reductions in direct taxation. The business profit tax was abolished; the maximum rate of income tax was reduced; although the corporation tax "Iras increased, this, taken in conJunction \,li th the reduction in the maxi- mum income tax rate, results in the total co·poration rate of taxation being reduced. Also reduced was the maximum super-t~ rate; and the die- tinction bat1,reen earned. and unearned income was abolished. The purpose of' these t~~ reductions was to encourage investment, especially in industries, and to improve the si tuation on the ca~9i tal market. 11 The 1950-51 Defense Expenditures include outlay of Rs~ 80 million for the Indian State Forces l!lhich 'ltfere taken over under the integration scheme.  -6- Total expenditures not met from revenue are estimated at Rs. 1,095 million, compared to Rs. 1,622 million in the 1949-50 revised budget. The main reduction representing Rs. 453 million was made in grants and loans and advances for development. Grants to State Governments for development have been slashed from Rs. 241 million to Rs. 96 million and loans and advances by Central Government from Rs. 580 million to Rs. 282 million. The overall deficit is estimated at RB. 947 million. The Govern- ment intends to meet this amount from postal savings and various deposits and advances, and it expects a net income from new loans of Rs. 377 milHon. This would provide a total of Rs. 776 million. The remaining Rs. 171 mil- lion is to be met from government deposits with the Reserve Bank of India. (See Appeno. ix ! I • ) In the total of Rs. 854 million new loans, Rs. 104 million is included on account of the nmn loans, and Rs. 750 million is to come frOM a ne," loan in the Indian l!larket. Du.ring the present fi seal year an amount of Rs. 476 million is required for the discharge of permanent debt so that of the expected Rs. 750 million only Rs. 274 million would be avan~,b1e as new money to meet capital expenditures. Should the Government not be able to borrm\T in the market the expected amount. and at present the pros- pects are ~:rery uncertain, its deposi ts ",i th the Reserve Bank \lTould have to be reduced to a greater extent than expected according to the budget. c. Future Financina: of GovernY1ent Pro.iects. In the 1950....51 budget. the Government has cut the capital expendi ture to 1I1hat are considered as real neoessl ties or to pro,jects to whicl: it has already been committed. 11 A statement giving a rough estimate of the commitments over a period. of five years (1950.... 51 to 1954.... 55) on. iMportant pro.iects already undertak.:en 1/ Prepared by tho Hinistry of Finance for the IERD Mi~;sion.  - 7 ... shows total commitments for this period of around Rs. 7.400 million, o~ nearly Rs. 1.500 million yearly, which is more than the net amount appro- priated for 1950-51. rJ· The matn categories of investments included in these commitments are Eai 1\,ray s Re. 2,370 million Multi-Purpose P~ojeots (Damodar Valley, Hi rakud , and Bhakra) 1,590 Loans to Provinces and States 750 Grants to Provinces 600 Capital O11tlay on Defense 480 Post and Telegraph 250 Roads 195 Various Industrial Projects 123 Total Rs. 6,408 million The Government 'l>rill be confronted wi th the problem of ho,:! to provide for the financing of these projects. Around Rs. 500 r:lillion yearly might be expected from postal savings and. various deposits such as provident funds. The Raihlay Depreciation fund may provide a yearly revenue of Rs. 200 million. This would leave around Rs. 800 million to be covered: The forced saving introduced in 1949, which applies at present only to government employees, is expected to yielCl. around Rs. 30 million yearly. If it "Tere extended to private employees and landholders, it . . TOuld bring in ab01Jt Rs~ 200 million yearly. Not taking into account financing from foreign loans, a minimuM of about Re. 500 mil11(}n . . Tould have to be raised each year in the Indian market for the fi~ancing of these projects alone. The problem might be made easier if, as a result of the settlement of the !{ash.mir dispute, the defense axpGnditure "crere reduced by. let us say, Rs. 300 million so that the Ordinary :Budget cO'l1.1d I)roduce a surplus for the financing of capital expenditure. 17 For 1950/51 this statement envisaged total capital expenditure for these :tlrojects of Rs. 1,295 million, of '\>lh1ch Rs. 370 million for raih,ays.  - 8 .. The development of the capital market in the next few years will be of a decisive importance for the investment program of the Indian Govern- mente 1I Should it become impossible to raise the necessary funds through loa~s in the market, it might be expected that the Govern~ent would resort to unorthodox, that iS t inflationary financing, being convinced that the projects which have a high priority and to which it is already committed. must be carried out. As in the past, the effect of it might be mitigated by import surpluses financed by sterlin~ balances. 2. Iv!oney and Banld.ng. Prices. a. The Position of The Reserve Bank, of India, The main change in the position of the Reserve Bank of India duri~ the calendar year 1949 \-,as a very substantial decline in foreigIl assets to the amount of Rs. 1,989 million, which continued from January until October. This mJ)vement 1;'!aS accompanied by a decline in the central government deyosits and in the note Circulation (see table below). These two items have decreased by Rs. 1.301 million. Notes in circulation were reduced by Rs. 817 million; the lO\-lest point ,.,as reached in October, and since then an up'oJ'ard trend in the note circulation has started. The decline in foreign assets was not fu1ly reflected in a contraction of the money sup~)ly because of an In his budget speech on February 28, 1950, the Finance Minister, Dr. ~!atthai. made the fo1lo,,,ing statement: liThe position in the long- term market was one of continued stagnation •••• The position of the investment market Call be fully and intelligi bl~r explained wi th ref- erence to such factors as increased costs, reduced margin of profits and unstable economic and psychological conditions l1!hich. if they had prevailed in any other country. would have resulted in exactly the same situation in the investment market; •••• One of the reasons why the genuine investor is holding aloof is that he has not got the meagure of confidence ';Jnich '''ould justify hi s puttin,q' 'lThat little he has into investment. Here again, India is by no means in a peculiar position. The result of the \-'ide d~.stribution of current national income ",hieh has occurred since the war in many countries of the '''orld is having thi s effect that 1ar@:e n1J~'!lbers of p60ple no"! are havinR: a sma1l margin of savings in their hands •••• Therefor~ •• , it is necessary that the spirit of confidence should be fostered by every means in our po\-rer."  - 9 - increase by Rs. 742 million in Reserve :Bank holdings of Indian Govern- ment securities held by the Issue Department. This increase was largely the result of open market support operations by the Reserve :Bank. Table 4, Posi tio;g. of the Reserve :'8syll1: of Ind:i,a in 1999 (in Rs. million) 31 December 30 December LIA:9ILITIES 1948 1949 Qhanges Notes in Circulation 11,882 11,065 - 817 Deposi.t~ Oentral Government 2,145 1,520 - 625) ~ Provincial Governments 156 224 68) :Banks 669 751 82) Total Other 648 639 9) -484 ASSETS Gold coin and bullion 413 400 13 Foreign Assets (a) Foreign Securities 7,689 6,103 -1,585) ( b) Balances held abroad 2,564 2,160 - 404) -1,989 Btlpee Securities (held by the Issue Department) 3,432 4,152 + 720 Investment (:Banking Depart- ment) 903 906 Percentage of cover of total notes is~ed by gold and foreign semlrities. 67.6(  - 10- The position of the Reserve Bank in 1950 has so far developed d.ifferently. (See table belo\,I.) Table 5. Position of The Reserve Bank of India ;[ap,uary - June 1950 30 December June 9 LIABILITIES 1249 ;1.250 Notes in Circulation 11,065 11,913 .J. 848 Deuosits Oentral ~overnment 1,520 1,257 263) Provincial ~overnment 224 164 60) Banks 751 529 222) Total Others 648 593 55) - 600 ASSETS Gold coin and bullion 400 400 Foreign Assets (a) Foreign Securities 6,103 6,382 279) .f. 28 (b) 3alances held abroad 2,160 1,909 251) Rupee Securities (held by the Issue Department) 4,717 Investment (Banking Department) 906 584 322 From the beginning of the year to June 9, foreign assets increased Oy Rao 28 million. and deposits decUned "DY Rs. 600 million. Notes in cir- eulation increased by Rs. 848 million. This increase resultecl, first t from an increase of Rs. 565 million in holdings of Government of India rupee securities in the Issue Department and, second, from a decline of deposits. Insofar as bank deposits are concerned, the decline in the past months can be considered as seasonal, and an increas~ in these deposits during the slack season might "Oe expected. There is, hO\>Tever, a significant difference between the changes in 1949 and those in the  - 11 - last six months. In the previous period, the money volume '\Tas reduced mostly as a result of a trade d.efici t and correspondin,Cl" reduction in foreign assets. Since November 1949 until March 1950, India had an export Burylus and an increase in foreign assets. This movement should automatically result in a~ increase in money volume, which indeed took place since November 1949. Dv.ring this period, the purchases of the government securities have resulted in a further increase of the expandinG money volume rather than, as in the previous period, offsetting a declining money volume. The movement of the money volume since December 1948 "Tas as follo'l:!s: MQ.,ney Vol'tJ.me (ell-rrenay nlus Del')osit r1oney) (in Rs. million) December 1948 20,570 April 1949 20,200 November 1949 18,590 December 1949 18,750 March 1950 19,660 April 1950 19,730 The continuous open market purchases of the government securities 11 by the Reserve :Bank ca.'1 be explained 'by persi stent lethargy in the capital market. by stringent conditions in the money market, and by a policy of supporting the price of government securities. It should be 11 Since January 1949 up to June 9, 1950, the Reserve Bank holdil~S of the government securities held by the I 39ue DeIlartment have increased by Rs. 1,285 million.  - 12 - noted, however, that the Reserve Bank has reduced the price at which it has been purchasing the 316 paper from Rs. 99. 4 .0 in January 1949 to Rs. 97.3.0 in February 1950, so that the yield has increased from 3.02% to 3.08%. There is reason to believe that the Reserve Bank has not been in full agreement with the Mini stry of Finance 111th regard tn the cheap money policy. The opinion has been expressed at various times that the market position of the gover!~ent bonds might be improved if the rate of interest were raised. b. The Posi ti on of the Schedu.1ed 13al1Y:s. The demand as well as the Ume deposits of the schedulod banks continued to decline during 1949, reaching the lowest point in December. Since then total deposits have slightly ~ncreased, probably in connection with the expanding money volune during the last months. During the period from the end of March 1949 to the end of March 1950, total deposits declined by Re. 660 million (see ta"ble belo;.,). Advances and bills discounted wore reduced by Rs.268 million, and cash and balances '"ith the ReservG Bar.k of !ntUa by Rs. 39 minion. The bw.ks thus had to provide about Rs. 350 million to finance their cr8cHts, an.d it may be assumed that trey unloa(1.ed on the m"lrket government aecuri ties which in turn were purchased by the Reserve Bank, Table 6. Scheg,uled Bar.ks (in Rs. million) Harch 31. 19~q. March 31. 1950 Deposi ts: total 9,208 8,548 - 660 Demand Deposits 6,340 5,934 - 406 Time Deposits 2,868 2,614 - 254 Advances and bills discounted 4,891 4,623 - 268 Cash and balances with the Reserve BarJr of Innia 8/)9 830 39  - 13 - c. Snal1 Savings. '1!he total increase in postal savings (savings bank deposits and national savings certificates) was·Rs. 261 million durlng 1949 against an expected minimum of about Rs. 300 million. d. Stock Exchan~. On the stock exchange the price index of variable dividend industrial securities continued to decline in the first part of the year from 127.8 in January to 110.2 in July. Tm.rarcls the end of the year, the index went up to around 118 in the erpectation of fiscal neasures favol"able to business, and it stood at 116 tmrlards the end of Febnlary 1950. The index of Government of India securities declined fro~ 101.7 in January 1949 to 101 at the end of Febnlary 1950. Attempts have 'b een !:lade to promote sales of Government of India Treasury Deposit Receipts. ~ A total of about Rs. 100 !:lillian of these Receipts "TaS placed during the period January 1949 to March 1950. Of the outstanding Rs. 138 nillion of Treasury Deposi t Receipts, Rs. 132 ni Uion are six r.lollths 1 Receipts. The result of the sale of these special bonds has been considered disappointing. Official circles han expected that a much greater ~ount "lOulr'l be sold and. that a broac1. J'!1I),rb3t \10u1d be created for this new t;ype of government securities, e. Prj.~. For 1949 as a whole, internal prices in !nc'Sa remained relatively stable in s~ite of some fluctuations during the year and diver- genee in price movements ~ong con~odity groups. The general index of wholesale prices in December 1949 averaged 381.6 (1938-39 = 100) as com_ pared with 383.6 in December 1948. COBt of I i v1.ng indexes in various l! The rates of these receipt" are 1%, 1-1/4%, and 1-1/2% respectively for six months, nine !:lonths, and one year.  - 14- cities showed small declines for the year in Bombay, Ahmedabad, Kanpur, and Nagpur: and slight increases (averaging less than 2%) in Delhi, Oalcuttn, and Madras. The wholesale price index decline0 by 3.6% during the first quarter of 1949, rose by 6% through October, and again declined by 3~ in the last t,'lO r'lonths of the year. Another increase of about 3% occurred bet\>J'een December 1949 and the third ''leek in May 1950. (For details of the whole.... sale price index movements, see Append~_x tn.) The rise in the wholesale price index during March--October was largel;T the result of increased food prices and, to a lesser extent, of manufactures and miscellaneous prices. The food index, after a decline in the first four months of 1949, rose from 374 in April to a peak of 407 in October. This, hO'l!rever. '<las due not so much to rising cereal prices, but to sub- stantial increases in ':prices of tea, sugar, and gur. Asi0_6 fro!"! largely sea.sonal increases in mid-year, cereal prices as a "'hole remained fairly stable after March and dropped in Dece':lber and in January 1950. Wheat prices declined consi stently during 1949. Because of a gooel. harvest, the prices of grain in the free market are reported lower than in the previous yeDx. krailable cost of livi!l.g indexes in various cities in India all show slight declines during the first quarter of 1950. The generally dot'lmrard trend in the -price level, Gxcept for ra", ~ateria1st in the last months of 1949 occurred in spite of devaluation. Significant domestic price increases fol1o"Jin~ devaluation \'fere confined largely to (a) cartain raw naterials mostly i!:lported fro'!'! hard currency countries; (b) goods "Ii th subs":;a...l1tial hard currency ex})ort markets such as skins, !:lang-anese and pepper; (c) i terns ,.!i th a strong export demand in  - 15 - the last part of 1949 due to other reasons as well as devaluation, e.g. tea and oilseeds; and (d) Pakistan goods such as ra1rT cotton and r8.\'j jute, the sup]lies of ,·,hich "Tere reduced by the India-Pakistan trade. deadlock ,...11ich followed devaluation. The Government t s economic program, adopted in October, helped to cotL~teract the inflationary influence of devaluation. In addition to the reduction of government expendHure, especially on development, ceilings '''ere impos.sd on rmr jute rrices, and internally con- trolled prices were reduced on cloth and yarn (ex mill), rationed cereals, coal, and coke. Ex-:)ort duties \'lere increased on tea, burlap, and raw cot- ton and were applied to mustard oil, iron and steel, and pepper. The Government was also empowered to impose export duties on other articles including vegetable oils and seeds, shellac, and tobacco; and re~llations were introduced to curb COI'l'Tlodi ty speculation. Devaluation may have been a factor in the rising price level in the first r:lonths of 1950. Furthermore, durin? this yeriod money supply has increased partly as a result of an export surplus r.md partly because of the Roserve Ba.'l"lk purchases of Inrlian government securities. This is in con- trast i!1i th the same period in 1949 ,.,hen India ,..ras runninp: a heavy im-nort surplus \'fhich exerted a d01>,mmrd influence in nrices o.ncl. result en. in a ree.ueti on of the Doney sUlJply.  - 16 - III. EXTEHNAL POSITION . 1. Over-all Trade Position India's balance of trade showed a marked im;:>rovement after June 1949, followine the heavy trade deficits that were incurred in the last half of 1948 and es,ecially in the first half of =1-949. The import surplus was sharply reduced in the third quarter of 1949 and an export surplus was achieved in the fourth quarter of 1949 and the first quarter of 1950. India's trade figures (excludinr trade \~th Pakistan) for 19)..t.8, 19h9 and early 1950 are shown below in millions of ru;:>ees: Table 7 --- Surplus (.j.) Imnorts ,. .... Exports or Deficit (-) 1948 January-June 2,,2L6 2,469 1-223 July-December 2,599 1,868 -731 Total 1948 4,845 4,337 -=~ 1949 January-June -1,,703 July-December .j. 60 Total 1949 -1,643 1950 J anuaI"J-~!Iarc h 998 1,400 I- h02 Source: . . For 191)8, 19i.J9, Reserve Bank of India, based on exchange con- trol records. For 1950, :;?reliminary customs returns, which exclude the figure for Government gr.ain irr~orts in February. These l:ave been estimated on the basis of known volume figures of Frain arrivals in February at about • 35 million.  - 17 - In 1949 an export Sllr?lU5 '!'iaS achieved only in the last two months of the year which was sufficient to offset deficits in the precedina 4 uonths by Rs. 60 million. India 1 s trade with Pakistan showed deficits of • 344 million durinE July 1948-June 1949, Rs. 192 million durinc July-September 1949, 17 and Rs. 70 million during October-December 1949.- 2. Import Restri9t~ Imports were cut through a restrictive GoverrlIoont licensing policy. Soft currency items eligible for open eeneral import license "Ii.ere curtailed in May 1949 and further restricted in August. Licen8- ing of private hard currency imports /as completely sus2/ended in July, 2 and was not resurood until Se~)tember.- As a result the rupee value of im:?orts in the second half of 1949 was 8% below the same period in 1948 and almost 35% bel~l the level of the ?receding 6 Inonths. They have remained below the 1949 rate in the first quarter of 1950. 3. . Exports in 1949 and Early 1950 The increased value of e)~orts in the latter part of 1949 and early 1950 reflected not only a rise in the rupee prices of nearly --------------------------~~---------- 11 Reserve Bank of India Bulletin, February 1950. - 2/ Indian officials are inclined to discount devaluation as a significant factor in explainine the low ir:port level of the :;Last quarter of 1949. They state in an official memorandum to the Bank that by t.he time of devaluation import restrictions had already limited foreign purchase A to essential requirements.  - 18 - all major exports but also a larger export volume of many of the prin- cipal commodities including cotton textiles, tea, raw cotton and jute, frounmluts, mica, lac, hides and skins, and manganese. The volume index of Indian exports rose from an average of 94 in the third quarter 1/ to 124 in the fourth quarter (April 1948-March 1949 - =100)7 The major 2/ excer.>tion to the increase in ex~.")Ort volume was manufactured jute7 De- valuation appears to have been an important export stimulant although it was not the sole explanation for the rise in exports, for example, in textiles and tea which were the major contributors to the export in- y crease. Taking 1949 as a whole, India t s exports rel"!lained at about the 1948 level, the spurt following devaluation havine offset the ~")revious lag in exportse A comparison of 191+8 and 1949 8x:?ort volume fie;ures for major commodities shows significant increases in tea, cotton textiles, ----------, ~-----. _._------ Y United Nations, Monthly Bulletin of Statistics, June 1950. g; The rise in rupee export values of jute goods after September was entirely attributable to the post-devaluation increase in export prices. The volume of jute goods exports in the last quarter of 19!19 was about 8% belOl'T that of the third quarter and almost 18% s than durins October ...December 1948. Y Exports of Indian cottons had been rising prior to devaluation follOl'dne the removal of export duties in June and an improvement in cloth qualities. In the case of tea, the export position was strong throuehout the year.  - 19 - and maneanese and to a lesser extent in linseed and pepper. The export volmne of other leading items fell in 1949, the most significant de- cline s beine in manufactured jute, raw jute, and raw cotton which were below the 1948 volume levels by 16%, 23% and 43;; respectively. The first tviO months of 1950 show further increases in the eXDort volume of raw cotton, cotton textiles, manganese, and lac and a sub- stantial j'1.1l71P in groundnut ShiPments.!! However, tea shipment.s dropped . off, and manufactured jute exports sagEed further because of the raw jute shortage. Preliminary data indicate a substantial drop in total exports in April with reductions in the export volume of nearly all major cow~odities. 4. Trade by Curren~y Areas The trade balance with both the hard and soft currency areas improved in the latter half of 1949 as shown in the following figures (in millions of rupees): Table 8 Hard Currency Area Soft Currency Area ExportS- 1iil'::>orts • Bai~mce' Exports -'Import-s-Balance Value (% of Value C% of Value Valt:e (% of Value (% of Value Total) Total) Total) Total) 1948 Jan-June 839 (34) 652 (38) -13 1,629 (66) 1,394 (62) ,l235 July-Dec. 564 (30) 851 (33) -287 1,304 (70) 1,749 (67) -445 1949 Jan-June 516 (27) 1,005 (28) -489 1,)-1.12 (73) 2,626 (72) -1214 July-Dec. 719 (29) 608 (25) fIll 1,733 (71) 1,784 (75) - 51 ------------ ----,---,--------- !I Since February, groundnut exports have been banned in view of in- ternal shortages and rising prices. Linseed e~)orts have also been restricted.  - 20 - The increase in the rupee value ex,orts to the hard currency area occurred almost entirely in the last three months of the year fol- lowing devaluation. Actually> in dollar terms" the value of hard cur- reney eX';:)orts durine: July-December Yfas only slightly creater them durtnG the same period in 1948, while the dollar value of hard currency imports was 38% less. It is a!)parent, theref are, that the inmroved hard cur- reney trade balance was almost entirely due to the severe dollar import restrictions of the period. U.S. trade statistics show U.S. imports from India during July-December 191-19 at about the same levol as in July-December 1948 while U.S. exports to India were reduced by 50%. For the first four months of 1950 the U.S. trade balance with India shov'led a net deficit of about ·)3 million. Durine: 1949 there was a shift in the relative im};ortance of India IS trade with the hard and soft currency areas. The percenta:e of hard cur- reney imports to the total fell from 35% in 1948 to 27% in 1949 while the relative importance of hard currency exy)orts declined from 32% to 28%. The relative importance of soft currency trade increased correspond:Lnc1y. 5. The QY~:all Balance of P~~~en~~ The improvement in Indials trade balance, toeether with a shift in invisible items from a deficit to a surplus in the latt'er half of 1949 J are reflected in a favorable movement in India's over- all balance of payments on current acC"Ount. For July-December 1949 as 1/ a whole there '·"las a current account surplus of Es. 179 million; compared - - - -___---....,....----..- t==.... _-... ___ .___ . _ _ _ _ ~ _ " . ~ _ . . . _ Y A deficit of Rs. 239 million during July-September offset by a surplus of Rs. 418 million in October-December.  - 21 - with a deficit of Rs ~ 1776 million in .January-June 19t~9 and a deficit of Rs. 1417 million in July-December 1948. These nc:ures exclude I~diats current balance of payments deficits with Paldstan of Hs. 338 million during July 191+8-June 1949 and Rs. 105 million durinC July-Dec8r.lber 1949. India's balance of }!ayments in 1948 and 19h9 by six month ~eriods (oxcludinc: Pakistan) are shown belovl in millions of rU1_~ees : Table ,. 9 1948 1949 Jan-June July:Ife'C': . TotaI Jan.:,:June --:TUl3T::'l)ec'~ ---Totar Current Account Herchandise f223 -731 -508 -1703 f 60 -1643 Invisibles, dona- tions, misc. a/ y etc. ..::.32 -686- -718.. ,tD9 ,t h6 --- 73 - Total f191 -1417 -1226 -1776 f179 -1597 Net chane:e in external assets f166 -1453 -1287 -1551 - L~ -1555 Errors &. Omissions - 25 - 36 61 ,t 225 -183 f 42 ~ Incl udes pavments to the U.K. of Ro. 600 million in JulV-DCCC1:lber 19h8 and Rs: 119 l'lillion in January-June 19h9 arisine o~t of the over-all U~K.-India financial settlement. Source: Reserve Dank of India. Invisible receipts remained a:ll'lroximately the same in the first and second halves of 1949 but pa;yments declined on most items in the last half of the year'. The :?rinci!)al reductions vrere in payments on  - 22 - foreign investments which fell by • 28 million, €l.nd in miscellaneous 1/ Government payments which dropped by Re. 95 million,- A stricter ad- t1inist~al;ion of exchange controls after m:i_d-19h9 probably also con- tributed to the decline in invisible payments. On capital account, a net outflCJ\'f of private long-term capital" ::;>robably resulting chiefly from repatriation of capital to the U.K., amounted to Rs. 160 million in 1949 in spite of new private foreign investment of Ra. 61 million. Uost of this outflow took place between January and June. Long-term official and banking capital showed a net 2/ inflow of • 156 million in the last six months of 19)..i9- as compared vnth a net outflow of Rs. 96 million in the precedinc six months. For 1949 as a whole there was a net long-term ca::;>i tal Qutflovi of about Hs .. 100 million (equivalent to about ~)hO million). A breakdown of India 15 balance of payments on current account. by currency areas (excludine Pakistan)shows deficits durin::: January-June 1949 of Rs. 1,282 million (I:, 96 .. 4 million) with the soft currency area and Rs. 495 m.i.llion (~~149 million) vd th the hard currency area. In the --------------~--- ----------------.--~. Y The larger Govermuent ,ayments in the first half of the year "rere due to the final payment of Rs. 119 million to the U.K. for the purchase of defense stores under the agreement of July 1948. g; Including drawines on the IBRD railway loan equivalent to Rs. 70 million. The dra1<'rings included U.S. ~j12.4 million and Can. f:52.3 million.  - 23 - last half of 1949 there was a current surplus with both areas amount- ing to Rs. 93 million (t 7 million) vdth soft currency countries and Rs. 86 million (about $10 million) in hard currency. These surpluses ceveloped only during the last few months of 1949: however, but they "ll'rere large enoueh to offset deficits v'li th both the hard and soft cur- rency areas in the third quarter~ 6. ~erline Balances Deficits in the first half of 1949 reduced Indiats sterline balances by I, 162 million (Ro. 2160 million) between December 31, 1948 and July 1, 191+9. Rs. 11717 million of this de was accounted for by the balance of payments deficit, exclusive of Pakistan (which in- cluded the larEe payments under the over-all financial settlement with the U.K.) v,hile the remainder was transferred to Pakistan partly under the agreement concerning the return of Indian currency notes, and ~artly in settlement of the balance of payments deficit in accordance with the Indo-Pakistan trade and payments agreement. The drain on the sterling balances continued through SG~tGmber 1949 but during October 1949-:March 1950 there was an increase of over I:, 53 million (Rs. 708 million). Since :March there has been a decline. Foreign assets of the Reserve B~nk (consistinc essentially of Indiats sterling balances) from December 1948 throuch A;:ril 1950 are shown below millions of rupees:  - 24 - 1948 December 31 10,,253 1949 March ' 25 9,h41 June 24 8,281 Sept.ember 30 7,894 December 30 8,,263 1950 1.1arch 31 8,588 June 9 8,290 For the period from July 1, 1949 up to the becinnins of Jurye 1950, 1/ then, India had not made net drawinzs on the sterlinG balances: Furthermore" according to information furnished the Bank" thore were no net withdrawals by India from the central dollar reserves of the sterlin!;: Area for the period July 1949 throue;h i\larch 19S0,; durinc this period India had drawn on loans from the IDRD to the extent of U.S. $20.8 million" plus Can. f>S.1 million. In s~ite of the current balance of payments sur?lus during the last half of 1949 and an eXlJort surplus in the first 3 months of Y Under the U.K.-India acreement of July 1949 India is entitled to draw on the sterlinf. balances durin£: July 19h9-June 1950 for cur- rent transactions UD to 1:, 50 million 1Jlus an additional amount UD to I, 50 million to ;over oblieations raHine due after July J, 1949 which were incurred under the liberal oryen rreneral imnort license which was abolished in l.iay 1949. These'rel;ases:':laY be dravm in convertible sterling to the extent of India I shard currenc:r deficit for the period,) in return for which India has acreed to cut hare. currency imports by 25% of the level in 1948. 1I.ccordinc to a state- ment of the Indian Finance Minister in Aue;ust 1949 it was estimated. that this would ':)ernut India to draw on central dol1ar reserves of the sterling area durinC 19h9....19S0 up to '::ilho to ')150 million.  - 25 - 1950, the Government's latest revision (Februar~y 1950) of the foreign exchanC8 budeet for the :?eriod July 1949-June 1950 still estimates a heav-:' over-all deficit. Ho\yever, since trade durins three quarters of the J}eriod covered b:r the budeet has shown a sur:?lus" the ent1.re budgeted trade deficit would have to be incurred. in the rema:.i.nine quarter (April-June 1950). Trade deficits during A,ril-June are probable in both hard and soft c~/enCies because of (a) plans for large purchases of dollar cotton, - (b) the b~c~log of hard currency commercial imIJort licenses carried over from 1949" and (c) a more liberal licensing polic:" for soft currency im!)orts necessary because of the depletion of stocks of 2/ various commodities.- Furthermore, preliminary ficures for April Indian officials stated Barch that the Government intends to purchase about 600,000 bales of dollar cotton by AUGust 1950 at a cost of rou.e;hly Rs. 440 million (092 million). Dollar cotton im;lOrts in 1949 were neeligible. In the first quarter of 1950 u,s. cotton ex:?orts to India totalled ":>33 ;nillion. Purchases of dollar cotton in accordance with theso nlans would offset a sub- stantial .. Dart of the eXDocted ... hard currenc v savinrs ~ 19~O . "'-' which yvould be realized if the Government adheres to its announced in- tention t.o limit n-rain to 1.5 million tons (com:?ared with 3.7 million in 1949) all of which is expected to be available in soft currency or barter areas. Hard currency c;rain expenditures in 19!~9 amounted to over Rs, 500 million (ovel" )150 mil1ion). IJicensing policy was liberalized in February for a number soft currency import items includine various raw materials, machinerJ and equirnnent, and druS's, medicines, and surGical instrument.s.  - 26 - SUGCest the possibili t:r of a reduced level of Indian ex~orts during April-June. A recent adverse balance of current )a:iJnents is a1[;0 :Ln- dicated b~r a decline in external assets of the Reserve Bank of India by Rs. 298 million (~,63 million) between £.larch 31 and Ju.."'1e 9. Nevertheless~ the Reserve 3ank's foreiGn assets were still at about the same level on June 9 as at the beeinnine of the year July 1949-June 1950 and it seems unlikely that any deficits which India may incur for July 1949-June 1950 as a whole 11\1.11 even a:!proach the levels indicated in the foreien exchange budGet. This will mean that at least a substantial :part of the acreed maximum releases from India's sterlinc balance will remain unutilized.  - 27- IV. TRADE REMTIO!TS 'nTH PAKISTAN 1. A measure of the importance of India-Pakistan h'ade to the economies of both countries "TaSthe trade agreement in operation prj.or • to deva.lua.tion. This provided for a.n exchange during July 19L~9-Jul1e 1950 of the following goods: From Paltistan, 4 million bales of raw jute, 450,000 bales of raw cotton, 1,200 million pieces of hides, 1.5 million p~eces of skins, 15,000 tons of rape and ~stard seed; from India, 2,040,000 tons of coal, 2 million pounds of tobacco and various manufactures such as 1,50,000 bales of cloth, 100,000 bales of cotton yarn, 50,000 tont? of jute manufactures, around 70,000 tons of edible oils. 64.000 tons of steel and various chemicals. In addition it ,.,as provided that India 1!rould have the first claim to purcha.se any surplus of v!hea.t available in PDJcistan which might have amounted to several hundred thousand tons. The significance for India of trade "rith Pakistan has extended beyond the direct exchange of goods. Hard currency export receipts from such items as ra1l1 jute. ra,,, cotton, hides and leather ,and especially mannfac- tured jute have depended to a large extent on raw material imports from Pakistan. Even with the large increase in India's rat" .jute l)roducttoT". in 1949-50 (from 2.1 million bales 1n 194 8-4 9 to over J million bales), domestic production was still adequate for about half of consu.mption requirements of the jute mills under normal operations. Furthermore. Pakistan produces some high quality varieties of jute not availa.ble in India which are used in manufacturing of a special kind of hessian cloth. In addition, ·India's ability to purchase medium staple cotton in Pakistan avoided until 1950 dollar cotton imports. Finally, supplies of Pakistan wheat in normal years would reduce the extent to ,..,hiah India might haye to purchase hard currenoy grains.  - 28 .. 2. This important trade between the two countries which represented about one fourth of the total foreign trade of India c~ne to a virtual sta!ldstill in the latter months of 1949 and early 19.50 "'hen Pak~'..stan decided not to devalue its currency and India refused tl') recor.r..ize the Paki stan rupee at a prerdu'!l of 44% over the Indian rupee. The f~).r reach~ ing implications of this break in trade relations are already apP!:',rent. The most significant of these may be noted as follo",s! a. Although the Indian jute industry hall purchased 1-1/2 millic)l1 bales of Pakistan ra", jute prior to rl.evaluati ,m (of which more tl1[l,n a million bales ,!;lere (leli vered prior to April 1950) it becon8 clear th8,t capacity l1roduction wHhout Pakistan supplies ':!as il11J,1ossi b1e. A1)m.lt 12% of the jute l00ms have remainBc!. sealed anflc wl")rking hl')urs ho,v..') bElen reduced frn'U 48 to 42. Manufactured jute exports in the last quc;,rter of 1949 i.,ere 18% less thnn in the same perino. in 1948 and have f'lllen further in the first months of 19.50. b.. Largely beCaUf:6 of ~hortages of sUPl)1ies frf'l1D Pakistan, In(lia l s exports of ra1,'1 jute, hi(les and leather, and ra"r c')tton "Iill dE3cline. c. Lar,;e hard currency expenditures ')11 raw c')tton ha'18 beem plan'1ed for 1950 whereas no dollar cotton was imnorted in 1949. d. The Government's targets under the II grow more fo(')(1 tt camp[,jr;n have been jeopardized by an increased emphasis on self-sufficienc:r in ra1,., jute and a l!3,rge expansion in cott0n production, follmqinl? the trade deadlock "Ti th Pa!d stan. The present pl'nr::rem is to expand jute "l)rl")(!uct:i.rm to .5 millior~ bales in 1950... .51 plus 1 r.1illiOll bales of r.18sta (a fiber sio1- lar to jute). This would give the Indian mills a dOJ11esUc s,\lP::'Jly ()f 6 million bales compared to 6...1/2 r.1illi()n needed for capilci ty operat::Con.  - 29 .. The target for cotton production in 1950-51 has been set at 860,000 bales or an increase by more than 40%. Part of these increases in jute and cotton are e~ected through the diversion from food crops of lands whioh in 1948-49 produced about 150,000 tons of rice, 5;0,000 tons of other grain (millet), and 400,000 tons of o11seeds. As a result. the target for increased grain production of 2.3 million tons by 19S0~51 has been reduoed, very optimistically, to 1.8 million tons. It is very unlikely that the targets for increased jute and cotton production 'IIfill be reached in the near future. A jute crop in 1950-51 close1' to 4 than to 5 million tons seems more probable. Even this "Tould mean a 30% increase over the 1949-50 crop. In cotton, an increase by somewhat more than half the planned target seems likely on the basis of reports that acreage has increased by only some 1.6 million aores as com- pared ,,,ith the planned 3.25 million acre increase. As a. result of this diversion of land from food crops, grain imports in 1950 and 1951 may have to be greater thanpreviouely envisaged and the volume of Indian oilseed exports is likely to be reduced. e. India ,"as obliged to !ind alternative markets for Roods exported to Pakistan. This problem has not been too difficult so far, esnecially since exports of cotton pieoe goods to other areas have increased Slib- stantially since devaluation. RO"lever, India, has not eX"}')orted coal to the extent provided for in the 1949-50 trade agreement with Pakistan. 3. Although the first quarter of 1950 might be too short a period and not a representative one on which to reach general conclusions. the effects of the Pakistan trade s1 tuation on India t shard cu,rrency balance  - 30 ... balance of payments position, ar, revealed in a c~mparis0n of U. S. trade statistiCB for the first que,rters of 1950 ane 194';;1, is i:!1.struc- tivG. India l s total imports frn'(1 the U. ·S. ~.vere reduced. by $22 million (fro::n $88 million to $66 :!lillion) •. Imports were reduced in practico..lly , the drop in machinery and vehicles the smallest. Raw cotton imports, however, ~ounted to $33 million whereas no ra"r cotton 'tlas importer1 from the U. S. In.st year. India's exports to the U. S. declined much less. by $5 million, frl)m $67 million to $62 million. Exports of pepper, tea, ane, mica increaped sUDstantially but thi s ,,,as nt"lt enough to offset the $17 milli(lU dr(l:::l in exports of jute and jute manufactures 1l (from $'7 millior. to $20 millil)n). Thus, in spit", of the im~l?rovement in India l s trac.e balance ''lith the U. S. in these t\,/o periods, the situation wrJUld have bef.m RtiJ,l better had. not the change in the cotton and jute trade produced. an e,dverse effect of about $.50 milli,",n (a $33 million purcr.aaeof cotton fro:o the U. S. anet a $17 million drop in exports nf jute gnods to the U. S.). It ':'light b3 flaj,(i. "Ii thout on that this adverse chan~e nf $50 :nilliou ':ms cue r~') to the unsettlec\ trade relations with Pakistcm. If the trace of Ju..'Il6 1949 had been carried out, India l s trade ::':J0sitir'l1l "lith the U. s. eQuId have been different, She could have reached. a sl1bst'U1t~,nl GX:;Jort surplus andlor increased iMports of various c om]"': odi ti8S 'I..!h1ch nrG ne(,ded for the Indian eCOllOr:lY. 4. Recently there has beon S0me improvement in relat4,o!'..!'l bet1rT8on India and Pakistan, a..'Ild a temp0rary trade agret3l:'1ent 1ms arrn,nged on 11 U. S. burlap imports from India declined fron 121,000 tons to 79~OOO tons during these periods,  - 31 - April 21. 1950, to cover the period until July 31. The India..'1 jute manu- facturers, as well as the Pakistan Jute Board, were tzreatly j.nterested in reaching at least a partial aGreement on jute exports from l'nkhtan to India.. According to thi s agreenent, the Pokistan Jute Board will arr·!:'1.ngr: to supply to the Indian Jute !fl.ills Associa.tion 800,000 bales nf ra\'I jute. In exchange, the Government of India undertook to arrange the S"J.]:lply of 20; 000 tons of jute manufa.ctures to the Pal<:j.stan Jute llr)ard. In ~0j. t5. 011 , the pu.rchase by Pakistan from India, through nomal trade channels, of the followinG commodities shall be faeili tated: 45,000 baIt's of cottar!. te:x:Ules, 5,000 bales of cotton yarp., 7,000 tons of mustard oil, 500.000 pounds of tobacco, 50,000 tons of cenent, and a few other cOm'~1od1.ties. The total value of this trade is estimated at Ea. 130 million on each side. The value of commodities purchased by pakistan shall be equal to the value of jute purchased by India. All transactilms v:ill be in Indian rupees, for which a sep[\rate account shall be maintained by the State 3ank of Pald stan \'1i th the Reserve Bank of India, The t,\>lO governnents further agreed to open the d,o'lr to barter tra.de on a large.· scale by provid~ng that trade in vari ous other CGr:1T'locB. ties shall be perl:!i tted without import, export, and exchange restricti0)'lS on either side to the extent that traders in either country are able to finance e~'change of goods without an:1 assi stance fr0m e1 thar GO"lernnent in the she.pe of releases of foreign exchanf;:e. 11 TIle agree1!lent cloes not inclu~de export of cott()n fro!] Pa...1dst·9.!i. alld export of coal from India. It has, hOlAle'tar,. a prOVision according to iJ Among the goods to be importer! by India are; hides and skins, cotton seed, soda ash, vegetables, fruit, fish, eg€,~EIJ nille, and milk products. Goods froTI India to PaJ-::istan, in addi tion to v9r':.!:etables, fruits, mUk, and fish, are especially leather,. set-ring machines, paints and. varnishes, soaps, cigarettes and matches,. d~~s. chemicals, and bauxite. which Pakistan agrees to supply 150.000 tons of wheat to the Government of India at a price to be settled between the two governments. The time since the agreement has been signed has been too short to assess its effect on trade between India and Pakistan. The jute mills in Calrnltta expected to be able to in.orease the weekly ",orking hours to 45, 'but accord- ing to the recent information, the movement of jute ne',·rly purchased has been very slow. 5. The existing trade agreement can be considered only as a tem- porary stop-gap. If, however, it leads to a more comprehen~ive and stable trade situation between the two oountries whioh will reduce the present emphasis on mutual self-suffioiency, its importance cannot be minimized. In the longer run, India's targets of a substantial increase in the production of cotton and self-suffioiency in jute may perhaps be technically feasible. It has to 'oe noted, hO'Ylever, that if these targets are added to that of food self-sufficiency, the strain on India's a~ri­ cultural and finanCial resources \'1111 be increased to an extent which creates doubts that all three objectives can be pursued successfully at the same time. It must also be noteo that even this increase in cotton production would not make unnecessary imports of medium staple cotton from Pakistan or from the United States. With re~ard to jute, in the undivided India the greatest part of jute was produced in Pakistan. probably because of comparative advantage in production. Even if India achieves its target for increasing production of jute plus mesta to 6 million bales, 1 t is to be expected that Pakistan -"till continue  - 33 - producing jute, let u~ say, to the eytent of 4-5 million bales. As the Port of Chittagong is developed. providing Pakistan td th the poesiblli ty of directly ex-gorting its raw jnte, it is certain that the ra.~·! jute from Pal~i stan will cal)ture most of the raw jute markets outside of India, '\f111l stimulate production of jute manufactures es,ecially in Eurol1e, a:.ld ;.;ill subsequently :tncrease world competition in jute manufacture, particnlarl:;r in the United States. Although a relati va shorta~e of raw jute e:z7. ",ted in the first postwar years, the policy of India, aimed at equalling Pakistan in the production of raw jute, may easily result in a relative over-production of jute and jute ~)roducts, and a SllbstRntia.l decline in prices of both. However, a moderate price decline might benefit the jute producing countries if i t could prevent a further inroad. of the paper substitutes into the packaging material. It should also be kept in mind that the uncertain sit\Lation pre- vailing in the jute market since develuation has further weakened the posi tion of jute manufactures and has provided a good opportuni t~r for an increased use of other lJacking material, in :9articular paper. 6. The economic and fin~~cial situation in India is bOlL,d to remain full of uncertainties until a sati sfacto!"".! trade arra.nge~;lent ltri th Pakistan is reached. The longer the unsettled conditions continue the stronger will become the forces \'lhich are at 1.'Tork in both countries to reduce their mutual economic de:')enaence, and to promote self-sufficiency. Even \1i th a !'lati sfactory trade agreement, it can be ta..1{en for granted that India will continue to increase the production of jute and ra1:! cotton, and Pakistan ,."ill develop ,iute mills, further expand cotton mUls, and establish various other industries. Nevertheless, the continuance of economies complementary to a substantial degree of these two countries would be likely and \-,ould provide an anple scope for ver~' extensi va trade and a gocd basis for a mutually satisfactory trade arrangement.·  APPENDIX I. Index of Production of Selected Industries - 1947 Cotton Textiles (a) Yarn 94.8 105.9 (b) Cloth 96.2 110.5 Jute 96.6 100.2 86.9 Coal 103.9 10).2 108.9 steel 97.1 97.1 101:.6 Cement 93.9 100.7 136.3 Paper and Paper Boards 87.8 91.6 97.4 Matches 11,3.0 129.4 127.3 a/ Sugar 102.6 111.0 115.7- Other..... Industries --~- Salt 107.8 132.7 116.2 Caustic Soda 11!.~.3 151.1 217.3 Soda Ash 113.5 242.9 Chlorine Liquid 113.7 120.0 176.6 !!:I Fi:~ures incom?lete and subject to revision.  - 2- other Industries ~~~try 1947 1948 1949 SUDerp. hosphates 111.1 h7h.6 1,038.2 . ~ b/ a/ Sulphuric Acid- 100.0 133.3 132. 7~* Bichromates 110.8 141.2 82.1 Alumin~ 99.h 103.9 107.9 Copper 94.1 92.6 101.3 Gold 130.3 136.6 122.2 Electric Lamps 124.) 150.8 222.3 Electric Motors 82.8 1)0.8 148.3 Diesel Engines 144.8 216.7 438.9 a/ 1.1~chine Tools 50.3 60.0 51.6- Power Transformers 82.1 210.3 279.0 Storaee Batteries 258.7 Lf06.3 395.2 Industrial and Power Alcohol 'EI 100.0 119.2 98.8 a/ Bicycles 127.8 185.7- b/ CiO'arettes- 100.0 115.6 116.3 - c/ Tannin£:- 100.0 c/ Leather Footwear- 100.0 91.~.1 Rubber Footwear 129.8 122.9 Yfoolen }lanufactures 7.5.1 ----~~-------" ...........- .. - - ...... . ... __.--........._- ... .... " -- a/ Fif,ures incomplete and subject to revision. b/ Base year 1947. Sf Base year 1948. Source: Ministry of Industry and Supply: Monthlv Statistics of the ~ct1~~ Selected Industries o.L2:ndi~~ January-19)o:-  APPENDIX II. Canita1 Budget Revised - .. 1949-50 . r:r::: . ,. 1950-51 :r-~ \J.n Rs. ~!al~lonl Total Capital Accounts Not N~t from Revenue ,OIl. 1~622 Budget deficit .j. 37, sury1us - ~3 Total 1,659 1,082 Deductin~: Sale proceeds of American and Lease-Lend Su~plies 3 7 Armrooriation for reduction or a~~id~nce of debt (net) 50 50 Remittances 9 Transfer of Cash between England and India 10 Depreciation and other Reserve Funds -68 - 62 135 -----,.-~.-.- ..---. ---------~--~ Deficit to be covered Permanent debt (net) 377 F10atine debt (net) 69 7 Unfunded debt 297 31+6 Miscellaneous Deposits and Advances (net) 263 46 (provident funds t advanced tax }JaYTl1ents t and othersl ... 629 776 Remain to be met from government deposits with the Reserve Bank of India w., ........ ,_......-.~ 968 1'71 Opening Balance 1,922 ('--'4 ,:l;:> Closinc Balance 95h --.l~ 968 171  A?PEi:TDIX III. WhQ1esa1e Pric~ Indices Seml- General ~ 1,1at eriaJ.s Manufactures Ma.nufactur~~ M,iss,. IndE.'x • (Weights) (31) (18) (17) (30) (4) (100) 1947 December 321 395 260 284 45Lr 314 1948 December 398 458 328 3L}7 537 384 1949 Uarch 377 463 322 344 515 370 June 382 460 326 349 502 378 September 403 469 335 351 547 390 December 374 478 334 344 610 381 1950 March 396 489 338 347 631 392 April 398 484 333 348 620 391 Ma.y 20 401 486 335 348 640 393 Source: Government of India, Office of the Economic Adviser.  APPENDIX IV. u.s. T~ade With India J 1948-1950 (In millions of dollars) 1/ U.S. - EXDorts -... -....::.- U.S. ImrlOrts- -- s -_ Balance ..- 1948 1st quarter 63.7 66.9 - 3.2 2nd quarter 86.5 83.4 !- 3.1 3rd quarter 71.5 53 .. 6 !-17.9 4th quarter 76.4 -.- 61.8 .fl·4•6 • Total 298.1 265.7 !-32.h 1949 1st quarter 88.2 66.1 ';'22.1 2nd quarter 88.7 62.0 ';'26.7 3rd quarter 43.3 47.8 - h.5 4th quarter -.l~ .63.4 .........-,~- ...;::]2.-.2- Total 251.3 239.3 !-12.0 1950 1st quarter 66.7 60.6 !- 6.1 A!">ri1 15.0 24.2 - 9.2 Y Im;?orts for consUInl,tion. The amounts for the 11rst quarter's of 19h9 and 1950 are sliChtly less than shovm in J'i.rwe.ndix IVa, which are ceneral im~orts. Source: U. S. Dept. of Comnerce, Bureau of the Censu.s.  U. S. Trade ,d th India I. U. S. Exports ~ In $ Nipion) First Q;ua.rter First Quarter of 1949 of 195q Animal & animal products (edible) 0.9 0.04. -0.86 Animal & animal products (inedible) 0.28 0.02 -6.26 Vegetable food products & beverage (grain) 23.7 0.06 ·23.68 Vegetable products - inedible (except fibres and wood) 4.i 0.4 -3.7 Textile fibres & manufactures 0.6 33.7 1-33.1 1,/ood and paper 0.9 0.1 -0.8 Non-metallic minerals 7.4 3.2 -4.2 Metals and manufactures 11.2 3·5 -7.7 Machinery and vehicles 29.4 21.9 -7.5 Chemicals 6.9 2.5 ....4.4 Miscellaneous 2.4 0.9 -1., Total 66.4 -23.4 II. U.S. Imports First Q.uarter First Q.ua.rter of 1942 of 1950 Animal & animal products (inedible) 2.8 3.4 /-0.6 Vegetable food products & beverage 8.8 18.3 f9.5 (pepper) ( 2.3) (8.8) (1-6.5) Vegetable products. inedible (except fi bres and '~rood) 4.6 3.1 -1~5 Textile fibres & manufactures 42.8 28.1 -14.7 (Jute & manufactures) (:37.6) (20.7) (-16.9) Non-metallic minerals 3.5 5.5 /-2.0 Metals and manufactures 4.0 3.2 -0.2 Total 67.0 62.0 -5.0 Source: U.S. Department of Commerce, Bureau of the Census.  APPEJ:IDIX V Foreign Ass~ts of the Reserve Bank of India 11 1945-195..0 (In millions of ~lpees) 16,677 1946 16,227 1947 15.185 11 1948 Harch 15,279 June 15,354 September 11,000 December 10,253 lvtarch 9,4l.~1 June 8,281 September 7.894 December 8,263 19.50 ~,farch 8.588 June 8274 11 Figures are for last Friday of period. Sterling balances of Pakistan are includeci. through June 1948 but excluded therea£ter. Source: Weekly Statement of the Affairs of the Reserve Eank of India.  Oentra1 Gov~rnment Dep:sits ~n the Reserye :sap}!; of India. 1945-50 if (In millions of rupees) 1945 4.808 1946 4 •.576 1947 3,1.,L60 1948 }~e,rch 3,200 June 2,859 Scgtember 2,297 December 2,145 I'I1arch 1,839 June 1,252 September 1,456 December 1,520 1950 I>.{arch 1,293 June 1,407 11 Figures are for last Friday of period. Deposits of Paki ftte.n are included throurS-'.'h June 1948 but excludecl thereafter. Source: i1eeldy Statement of Affairs of the Reserve :Bank of India. ',... APPE1lDIX VII ,Monel SUBE1l 1nlndia 1945-1950]) (Inmi11ions of rupees) CurrencyY :DeEosi t f4one;y Total 1945 13,090 7,430 20,520 1946 13,370 7,980 21,3.50 1947 13,370 8,0)0 21,400 1948 March 14,160 8,270 22,4)0 June 14,220 8,700 22,920 September 13,120 7,840 20,960 December 12,920 7,650 20,570 1949 March 12,800 7,420 20,220 June 12,630 6,890 19.520 September 11,890 7,080 18,970 December 12,070 6,680 18,750 1950 March 12,7)0 6,930 19.660 April 12,910 6,820 19.730 11 End of period. Y Figures for Narch and June 1948 include Pakistan notes.· Currency in circulation at the end of July 1948. exclusive of Pakistan notes. was Rs. 1),440 million. The reduction in the circulating currency during July 1948-June 1949 does not represent a net reduction in India since about Ra. 820 million of the decline Nas due to the ret~n of Indian notes from Pakistan. Source: International Monetary ~d, International Financial Stat.istics, May 19:50. i