The debt that ran the other way

At the end of August 1939 the Reserve Bank of India held £48 million of sterling, or Rs 64 crores.¹ By the end of 1945, on the figure in the Bank’s own official history, India’s sterling balances stood at £1,254 million.² In 1937 the Government of India had owed London a funded sterling debt of £357.3 million.³ Within eight years the direction of the debt had reversed.

How the balances were built

Britain bought stores in India and paid for Indian forces serving abroad. It settled in sterling, credited to the Reserve Bank in London, while the Bank issued rupees in India to meet the bills. The Lok Sabha Estimates Committee’s 1967-68 report named two sources: India’s export surplus, and British purchases of stores and materials in India together with Indian spending on behalf of the Allies. Both were financed by the Reserve Bank’s obligation to buy any sterling offered.⁴

The price was fixed. From January 1940 the Bank bought sterling at 1s 6d to the rupee and held that rate for the rest of the war.¹ Sterling payments by His Majesty’s Government on India’s account came to £151 million in 1941-42, £233 million in 1942-43 and £274 million in 1943-44. The Bank’s sterling assets rose from Rs 144 crores at 31 March 1941 to Rs 511 crores (£383 million) in 1943 and Rs 945 crores (£709 million) in 1944.¹

Part of the inflow went to retiring old debt. The Reserve Bank’s report for 1950-51 puts the sterling debt repatriated since 1937-38 at £328.83 million.⁵ The Estimates Committee gives “about £300 millions (Rs. 400 crores)” for the war years.⁴ The two cover different periods and are not reconciled.

What 1943 shows, and what it does not

Notes in circulation rose from Rs 225 crores in September 1939 to Rs 1,218.77 crores at 29 March 1946, and by 37.12 per cent in 1943-44 alone.⁶ Meanwhile the Economic Adviser’s general index of wholesale prices went from 125.6 in 1939-40 to 236.5 in 1943-44.⁷ The Reserve Bank recorded a Calcutta wholesale index of 248 in September 1943, on a 1929 base of 100.¹

On 25 January 1943 the Governor, Sir James Taylor, sent his Central Board a memorandum titled Sterling Balances and Inflation in India. In it he argued: “It is obviously not the form in which we receive credit from Britain that releases purchasing power in India but the rupee disbursements that have to be made for war supplies.”³ The Bank’s official history later judged that its efforts to combat inflation “met with limited success”.³

The record connects war spending to more rupees and higher prices. It does not connect it to the Bengal famine of 1943. The data behind this paper hold no famine mortality figure, no Bengal food-price series and no study attributing the famine to war finance. That argument is made elsewhere; it is interpretation, and these records neither establish nor refute it.

How large was the claim?

There is no single answer. The Financial Agreement of 14 August 1947 said the Reserve Bank’s sterling assets “shall be taken at the figure of £1,160 million”.⁸ The Reserve Bank’s history gives “over £1,134 million (Rs 1,512 crores) on the eve of independence”.² A United States Treasury memorandum of May 1947 estimated “about £1,250 million”.⁹ On 7 July 1947 the Financial Secretary to the Treasury told the Commons that the Bank’s latest published figures showed £1,178.4 million.¹⁰

Britain also questioned whether the sum was a debt at all. On 10 February 1947 the Chancellor, Hugh Dalton, told the Commons that the Government “reserves the right to present a counterclaim for the defence of India during the war”.¹¹ On 15 July 1948 Winston Churchill said “we were said to owe India approximately 1,200 million sterling as a result of defending her from invasion and conquest by Japan”.¹² The Estimates Committee took the opposite view: the balances “were not an inter-Governmental war debt in any sense of the term but were the property of the Reserve Bank of India”.⁴ The counterclaim was kept open in 1948 and was never exercised.¹²¹³

Blocked in London

The 1947 agreement was signed for Britain by Sir Wilfrid Eady of the Treasury and for India by V. Narahari Rao. It divided the balances into a free No. 1 Account and a blocked No. 2 Account at the Bank of England, and released £35 million plus a £30 million working balance for the rest of 1947.⁸ Six days later, on 20 August, Britain suspended the convertibility of sterling.¹⁴ According to Sir Stafford Cripps, the bulk of the balances earned “one-half per cent”.¹²

The July 1948 settlement tightened the arrangement. There was to be no release from the No. 2 Account in the year to June 1949 and up to £40 million a year after that. Drawings of hard currency were capped at £15 million.¹² The balances were then charged £100 million for British defence stores and fixed assets taken over on 1 April 1947. The Estimates Committee records that these had an “estimated book value of the order of £375 million (Rs. 500 crores)”.⁴ The repository holds no inventory and no statement of how either figure was reached.

Even the price of the pension annuity is recorded three different ways.

The pension annuity was also bought with the balances, and even its price is recorded three different ways. The exchange of letters gives £147,605,125 for India and £8,166,848 for Pakistan, a total of £155.77 million.¹⁵ Cripps told the Commons £176¼ million.¹² Against these charges, Britain agreed to pay £55 million owed under the Indian Defence Expenditure Plan.¹²

Divided at Partition

None of the five instruments examined for this paper states what percentage of the £1,160 million went to Pakistan. The Partition Council minute of 1 December 1947 (Case No. PC/218/20/47) provided for separate negotiations with London from 1 January 1948 and a separate Pakistan account at the Bank of England.¹⁵ A letter of February 1948 gave Pakistan a working balance of £10 million plus a further £6 million.¹⁵

Vakil (1950) gives Pakistan’s formula share of the Reserve Bank’s sterling assets as Rs 101 crores from the Issue Department and Rs 86 crores from the Banking Department. Both figures are reported, from scanned text.¹⁶ In May 1950 India transferred a further Rs 12 crores of sterling to the State Bank of Pakistan, because the stores and pension payments had come in below the provisional estimate used at Partition.⁵ The economist Marcelo de Paiva Abreu puts the total transferred to Pakistan at about £180 million by mid-1949, a reported figure from secondary work.¹⁷

What India spent them on

Between 1946 and 1949 India ran a balance-of-payments deficit of Rs 415 crores, which Vakil says was met by releases from the balances and by nearly $100 million of purchases from the IMF.¹⁶ When sterling was devalued in September 1949, the rupee stayed at 1s 6d.⁷ The Reserve Bank’s history says the devaluation “extinguished nearly a third of their dollar or gold value”.²

By the end of 1949 the balances were down to £621 million. The history attributes more than half of the £633 million fall to the pension annuity, the stores payment, Pakistan’s share and capital outflows.² India then had no need to use its 1949-50 releases, “owing to the favourable balance of payments position during the year”.⁵

The Colombo Plan of December 1950 set £211 million of India’s balances against its development needs.⁵ The settlement of February 1952 moved £310 million into the free account as a currency reserve and allowed up to £35 million a year until June 1957.¹⁸ The First Plan was to draw Rs 290 crores from the balances and the Second Plan Rs 200 crores.¹⁹ In 1956-57 they fell by Rs 219 crores, to Rs 529.1 crores at 29 March 1957 and Rs 456.8 crores at 28 June.²⁰

That is where the record stops. The blocked account was due to be closed on 30 June 1957, but the paper’s sources do not give the final balance or the total India finally drew.

Footnotes

1. Reserve Bank of India, Report on Currency and Finance for the year 1943-44 (Bombay, 1944), https://archive.org/details/india.history.resource.109622. Verified. ↩ ↩² ↩³ ↩⁴

2. Reserve Bank of India, official history, “The Problems of Plenty, 1947-56”, https://web.archive.org/web/2020id_/https://rbidocs.rbi.org.in/rdocs/content/PDFs/90037.pdf. Verified. ↩ ↩² ↩³ ↩⁴

3. Reserve Bank of India, History of the Reserve Bank of India, Vol. I (1935-1951) (Bombay, 1970), https://archive.org/details/bmshri.historyofreserve0000unse. The 1937 debt figure and the Taylor memorandum are verified; the “limited success” judgement is quoted from the same volume. ↩ ↩² ↩³

4. Lok Sabha Estimates Committee, Thirtieth Report (1967-68), Foreign Exchange, ch. II.2, https://archive.org/details/eparlib.nic.in.57701. Verified. ↩ ↩² ↩³ ↩⁴

5. Reserve Bank of India, Report on Currency and Finance, 1950-51, https://archive.org/details/in.ernet.dli.2015.52065. Verified. ↩ ↩² ↩³ ↩⁴

6. Reserve Bank of India, Report on Currency and Finance for the year 1945-46, bound with the 1943-44 report, https://archive.org/details/india.history.resource.109622. Verified. ↩

7. Reserve Bank of India, Report on Currency and Finance, 1949-50, Statement 13(A), https://archive.org/details/dli.ernet.52019. Verified. ↩ ↩²

8. Financial Agreement between the United Kingdom and India, London, 14 August 1947, UN Treaty Series vol. 11, No. 176, https://treaties.un.org/doc/Publication/UNTS/Volume%2011/v11.pdf. Verified. ↩ ↩²

9. A. F. Blaser, US Treasury Representative in London, “The Problem of the Sterling Balances”, 5 May 1947, FRUS 1947 vol. III, doc. 6, https://history.state.gov/historicaldocuments/frus1947v03/d6. Verified. ↩

10. Hansard, HC Deb 7 July 1947, vol. 439 cc1771-2. Verified. ↩

11. Hansard, HC Deb 10 February 1947, vol. 433 cc1383-4, https://api.parliament.uk/historic-hansard/commons/1947/feb/10/sterling-balances-negotiations. Verified. ↩

12. Hansard, HC Deb 15 July 1948, vol. 453 cc1404-10, https://api.parliament.uk/historic-hansard/commons/1948/jul/15/india-sterling-balances. Verified. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

13. This paper’s claim check “The balances were in fact scaled down or written off”, drawing on Hansard 15 July 1948 and the RBI reports for 1949-50 and 1951-52. Verified. ↩

14. Memorandum on the Palestine sterling balances, 20 February 1948, FRUS 1948 vol. V pt. 2, doc. 48, https://history.state.gov/historicaldocuments/frus1948v05p2/d48. Verified. ↩

15. UK-India and UK-Pakistan exchanges of letters, 1948 and 1949, with the Partition Council minute of 1 December 1947 annexed, UN Treaty Series vol. 134, Nos. 1796 and 1797, https://treaties.un.org/doc/Publication/UNTS/Volume%20134/v134.pdf. Verified. ↩ ↩² ↩³

16. C. N. Vakil, Economic Consequences of Divided India (Bombay, 1950), ch. XIII, https://archive.org/details/in.ernet.dli.2015.59421. Reported: the scanned text has damaged digits. ↩ ↩²

17. M. de P. Abreu, “India as a creditor: sterling balances, 1940-1953”, PUC-Rio Texto para Discussão 643, citing the RBI history. Reported; secondary source. ↩

18. Reserve Bank of India, Report on Currency and Finance, 1951-52, https://archive.org/details/in.ernet.dli.2015.52066. Verified. ↩

19. As recorded in this paper’s claim check on repayment, drawing on G. Kaushal, Economic History of India 1757-1966, https://archive.org/details/in.ernet.dli.2015.132880, and the RBI reports for 1951-52 and 1956-57. These are planned drawings, not amounts spent. ↩

20. Reserve Bank of India, Report on Currency and Finance, 1956-57, https://archive.org/details/in.ernet.dli.2015.52068. Verified. ↩