THE ECONOMIC WEEKLY March 18, 1061 India's Balance of Payments, 1921-22 to 1938-39 Estimates of Current and Long-term Capital Accounts Aran Banerji An attempt is made in this article to estimate India's balance of payments' daring the inter-war years. Compared to the few existing estimates, many new items have been assigned magnitudes and others revalued. Over the 18 years India imported over Rs 200 crores of long-term capital, but paid four to five times as much by way of interest charges. During the pre-war years, 1898-1913, too, capital imports fell short of debt services. For a complete assessment of the cost of foreign capital, to debt services must be added other remittan ces including coastal freights, remittances by exchange banking and out of incomes and accumulated savings of the foreign business and professional community temporarily resident in India.
THE estimates of India's balance debit (or credit) for the exchange tive forces. These offset the first of payments submitted by the of evidences of indebtedness. movement and/or affect the current Government of India to the League and/or long-term capital account(s) This method perhaps found its of Nations from 1923-24 omitted first major use in Hobson's "The and are thus reflected in one or certain items in both the current Export of Capital" (London, 1911). more of the above categories. and, capital accounts, and covered Viner (''Canada's Balance of Inter We adopt Viner's threefold divi other items very inadequately. They national Indebtedness 1900-1913." sion of the current account, but not related only to British India, ex Harvard. 1921), defined it more his method of estimating individual cluding the sea-borne foreign trade precisely, dividing the current ac items. Thus, owing to lack of data of the French and Portuguese pos count to indicate separately the and to allow, even partly, for the sessions in India and the Maritime balance on commodity account, ser close association of foreign capital States of Kathiawar and Travan- vice account and on account of non with productive and distributory core, as also, during 1937-39. of commercial transactions. The last, activities within our country, we do Burma, the international transactions now termed donations, include un- not estimate the remittances of re of which were then. a part of those requited international transfers, compense received by foreign capi of British India. The Indian rupee mainly associated with migrants. tal on the usual basis of the size of was their common currency and Over a series of years, the ends foreign capital employed and the unit of account, and the same bank relatively free from abnormal move average returns on such capital in ing system as in British India ments of short-term funds, the esti managed their international ac (a) coastal-carrying trade, lb) life mated net cumulative position of and general insurance business, (c) counts. These shortcomings of the all the three balances reflects, sub estimates, which vitiate the capital foreign exchange banks, and (d) ject to errors of estimation, the net the distribution of exposed foreign account also, justify a fresh esti movement of long-term capital. mate of India's balance of payments films, but instead attempt indepen for those years. Viner's Three-fold Division dent direct estimates. If Gr. Sr, Ur and Cr stand for Every transaction between two Our general treatment of returns India's receipts from abroad on countries involves a receipt by one on foreign investments marks a basic goods, services, unrequited remit party of the payment made by the departure from Viner: he estimated tances and long-term capital ac other. Thus if no intermediaries them indirectly, from the net defi counts respectively, and Gp, Sp. Up intervene — or, if they do, we cits in the current account for all and Cp stand for payments by her know their share in the transactions other items. This method concen under the same heads, then. Gr + -the totals of the two sides of an trates on this crucial item and exag Sr +Ur + Cr +Cp + Sp + Up inventory of all receipts and pay gerates the returns if portions of + Cp. Or, (Gr -Gp) + (Sr- ments must agree, provided double previous investments are repaid Up) Cp — Cr. Over any speci counting is avoided and cash recei during the period under study. We, fied period, the algebraic sum of pts and disbursements as well as therefore, make a direct estimate, the balances of transactions in the exchange of evidences of in constructing a suitable dividend goods, services and unrequited debtedness are taken account of. If, series. Also, one need not estimate transfers equals the net balance of then, we estimate credits and debits the interest on India's sterling pub capital transactions, i e. of transac- over a period of time for all items lic debt: Government accounts con- tions to acquire or repatriate claims of a country's international ac lain full data (see, however. Pan on assets abroad, and to deliver or counts, except the exchange of such dit. "India's Balance of Indebted repatriate foreigners' claims on evidences, the net cumulative cre ness. 1897-1914.". Allen and Unwin). assets in India. dit (or debit} for the first set of Lastly, while, like Viner. we com items must equal the net cumulative Short-term capital movements are pare the indirect estimate of the net excluded in this method, as a con import of long-term capital with This is a rigorous abridgement of a detailed work on the subject awaiting sistent movement in any one direc direct evidence on the annual flows publication by Asia Publishing House. tion tends to set in motion correc of such capital, we compare it also 475 March 18, 1961 THE ECONOMIC WEEKLY with the net accretion to foreign in ing of values, only the quantities of (d) profits, etc, remitted by ex vestments in India between 1921 the trade in selected articles at cer change banks, (e) funds remitted by and 1938 (no data could be collect tain rail-heads near the more im foreign insurance companies work ed of the net change in foreign in portant trade routes were published. ing in India and Indian companies vestment by India in that period From 1927-28 the Government some working abroad, (f) coastal freights, except Indian subscriptions to loans, how evaluated this trade, and re (g) cinematograph royalties, (h) etc. floated in London). ported to the League of Nations. We tourist account, and (i) interest on II have to accept these figures despite sterling public debt and other foreign Balance of Commodity obvious defects. investments in India. Table 2 Transactions Certain gaps in trade returns are shows that these items account for a filled by us on the basis of the trend cumulative deficit of Rs 1487 crores Commodity transactions, goods and in the respective sectors in adjacent during the period. treasure, on private account yielded years—(a) land-frontier trade dur a surplus of Rs 1489 crores during ing 1925-27, (b) trade of Kathiawar Item (a) was explained above. 1921-22 to 1938-39 (Government and Travancore during 1921-26, and Item (b) is taken at one-third of the stores are included in Section IV be Travancore's trade during 1931-35, gross freight earning of foreign ships low). These include (a) the sea (c) trade of French and Portuguese in carrying our imports. A direct borne foreign trade of British India Possessions during 1921-23 and estimate of such expenses was sought (including Burma), French and Por 1921-26 respectively when these to be made but the tonnage of ships tuguese possessions, Kathiawar ami seem to be recorded imperfectly. in India's foreign and coastal trade Travancore, (b) the land-frontier Other adjustments are made for the being inextricably mixed in Govern trade, and (c) the air-borne trade. inclusion in the trade returns of im ment returns, the attempt was aban This study makes no allowance for ports of passenger baggage and sam doned. For pensions, civil and the alleged under-valuation of im ples which should not enter inter others, averaging Rs 8.3 crores a ports for lack of evidence; tariffs national accounts, and the addition year, Government accounts are used. were relatively low in this period, of export duties realised to total ex As already stated, items (d) to and our customs keep no record of ports. To present the pure commo (g) are not estimated on a capital total imports, subject to the two sub dity balance in Table 1, we de employed-times-return basis. For sections of Section 30 of the Indian duct from import values, including exchange banks, the only data are Sea Customs Act, 1878, which lay treasure, 5 per rent for freights and their consolidated end-of-year Indian down the norms for evaluation of 1½ per cent for insurance and com deposits (even these need allowance imports by customs. mission; these are included in the for Burma for 1921-31), and the Even a superficial probe into cus service balance below. size of imported funds as on 31st toms returns is rewarding, e g, the December 1929, as they were fur Table 1 shows the totals and an mode of conversion of other curren nished to the Indian Central Bank nual averages on this account for 18 cies into rupees has introduced in ing Enquiry Committee, 1931. We years. The treasure account was in determinate errors. During 1921-24 made a vain attempt to collect fur overall deficit, but it had unequalled when the rupee-pound rate was fluc ther data from the Common wealth credits from 1931-32 when India tuating, Calcutta customs issued a Relations Office, London. The pre public notice directing conversion of started to export gold. The large sent estimate applies to their esti sterling import values into rupees at overall surplus of Rs 1489 crores mated tolal resources (local and im rates determined by the exchange could not meet our payments abroad ported), the relation between their banks' selling rates for demand for "invisibles", leaving a deficit of resources and profits as disclosed drafts. It laid down working rates Rs 200 odd crores. for certain post-World War II years, for rupees for ranges of its market Ill suitably modified to take into ac rates, the working rate intervals be Balance of Service Transactions count the features of the pre-War ing as much as half-rupees! This This includes (a) freight, insur years. As these banks handled system distorted the position, though ance and commission on merchan almost all of India's exchange busi it was convenient administratively. dise, (b) expenditure in India of ness, the estimated annual remit Land-frontier trade was recorded foreign ships engaged in her over tance of Rs 3 crores as profit, ser in quantities and values up to 1924- seas trade, (c) pensions disbursed by vice charges to Head Office, etc, per 25. Later, due to defective record- the Government of India in U K, haps errs on the low side. Table 1 : India's Balance of Commodity Transaction*, 1921-22 to 1938-39 (Rs Lakh*)
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Like exchange banks, little is thereon, and the relative shares of enquiry into British overseas invest known about foreign insurance com- Indian and foreign ships in the ments (Economic Journal, 1929-39) panies in India before 1939. The 1930's as obtained from the premier by Lord Kindersley, and the Eco present estimate of insurance remit Indian company, Scindia Steam Navi nomist (1930). Column (xii) of tances rests on data relating to their gation (P & O Steam Navigation, Table 2 shows the average interest Indian business from 1928-29, espe which controlled British India Steam as Rs 18 crores. It remains almost cially premium and interest and Navigation, the biggest British line steady, varying between Rs 20 crores other incomes (former adjusted on the Indian coast, were approach in 1931-32 and Rs .15.6 crores in conservatively for re-insurance). De ed for some relatively innocuous 1921-22, in a period when export ductions have been made from this data but they regretted their inabi earnings from merchandise fluctuated for expenses, claims and build-up of lity to help in any manner). These sharply. assets. Foreign companies had a remittances are estimated here at Other foreign investments in India monopoly of insuring the lives of about Rs 3.5 crores net annually. are estimated below at Rs 336 crores Europeans in India on which claims Net average annual remittance of in 1921 and Rs 439 crores in 1939. were largely met abroad. The resul cinematograph royalties is estimat To estimate their earnings the least tant estimate yields an average year ed at Rs 2,2 crores on the basis of tractable part of the enquiry was to ly remittance of Rs 2.98 crores dur the imports of feature films, obtained determine a time series of their ing 1929-39. For 1921-22 to 1928- from the Boards of Censor, and their average rates of returns. This per 29, it is estimated at Rs 2 crores average remittable earnings, taken at haps explains why both Viner and yearly. The small inward remittance Rs 0.5 lakh, based on a memoran Pandit relied upon one or more al from Indian companies is put at 40 dum submitted to the Indian Cine ready existing series, often construct per cent of their premium income matograph Committee, and on some ed with very different aims. Here abroad. data obtained from the Indian Mo the returns are estimated with refer in inter-War years, our large tion Picture Producers' Association. ence to two dividend series specially coastal trade (annual exports of some Foreign distributors were approach constructed by us for two statistically Rs 100 crores) was mostly carried ed, but in vain. valid samples of rupee and sterling by foreign, largely British, ships. Earnings of Foreign Investments companies, selected from the exten- Freights and passage fares earned by sive industry-wise enumeration of them, less expenses here, were re The interest on sterling public units with likely foreign capital mitted abroad. We estimate these debt is obtained from Government which we had to do to estimate the remittances with certain data relat accounts. Of the total interest bill, volume of these investments. These ing to the size, of coastal cargo (coal, 91 per cent are taken as due to series revealed that the earnings of salt and general cargo) freight rates foreign holders, on the result of an both rupee and sterling companies
Table 2 : India's Balance of Service Transactions (Rs Lakhs)
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478 THE ECONOMIC WEEKLY March 18, 1961 fell sharply after 1929, the latter investments, and U S and other Indian State Railways, covering more heavily. But sterling companies foreign investments (we deduct an passenger arrivals at Indian, Ports, generally fared better than the rupee estimated Rs 25 crores from such by nationalities and purpose of ones; their average total returns investments for exchange banks and visit, from 1930-31. For (iii) (i e, on ordinary shares and prefer insurance companies), the returns are fairly, and (iv) reasonably, re ence, and debenture capital) for the calculated at the average of the divi liable data for numbers and average entire 18-year period, and during dend series for rupee and sterling expenditure are available; for (iv), 1921-29 and 1930-38 are 10.2, 12.0 companies. Column (xiii) of Table Government scholars are excluded. and 7.8 respectively; corresponding 2 shows that the total returns on in We allow another Rs 50 lakhs an rates for the rupee companies are vestments excluding sterling public nually for tourists and business visi 8.3, 9.9 and 6.8 respectively. As debt averaged Rs 32 crores. 1923-21 tors from India to the U S, Europe, compared with returns elsewhere, the to 1929-30 are the most prosperous Japan, etc, including the large ex relative stability of these rates des years. penditure by the Hiding Chiefs, nor pite the Great Depression may he The broad divisions of the tourist mally and on occasions like the due to the employment of foreign account are those with (i) the U K Hound Table Conference, Silver capital in specially high-yielding lines and (ii) other countries; (iii) Haj Jubilee of King George V, etc. and the weight of fixed-interest-bear- Pilgrims and (iv) Indian Students. IV ing obligations in these investments. These add up to an average annual Balance of Non-Commercial Thus, in the rupee companies we debit of Rs 1.85 crores. The Indo- Transactions selected for the dividend series, fixed- U K account" is estimated to have interest-bearing obligations, i e, pre been an average debit of Rs 1.09 The balance of non-commercial ference shares and debentures, crores, on the basis of the British transactions, which shows a deficit of amounted to 24 per cent in Hoard of Trade returns of "British" Rs 222 crores (Table 3), is domi 1921 and 32 per cent in 1938 passengers and long-term migrants' nated by Government transactions, of their total capital. For simi (the difference between them being which we take from Government lar sterling companies the ra tourists, who were divided into tour returns. To accord with our me tions are higher— 37 per cent in ists inward and outward, and adjust thod, we exclude, from both receipts 1921 and 33 per cent in 1938. For ed to include passengers via the and disbursements of India Govern estimated investments other than Continent), and an estimated expen ment in the U K, all transactions those for which company-wise de diture per capita. Item (ii) is based relating to (i) Council bills and tails were available, viz. managing on certain data we discovered in the sterling purchases which only trans agencies, other rupee and sterling old Central Publicity Bureau of the ferred to Government part of the
Table 2A : Annual Returns on Foreign Investments in India Other Than in Her Sterling Public Debt (Rupees lakhs, except columns v-viii) March 18, 1961 THE ECONOMIC WEEKLY favourable balance of private ac Migration data are seriously in savings on retirement. The Indian count, and (ii) permanent debt. The complete for our period. Migrants' Census, 1921 and 1931, collected the residue, after excluding interest on funds may move (a) through the numbers (recognised as not fully sterling debt and pensions (which post office—we have "data on this, correct) and occupational distribu -accounts for surpluses in some years) which we adjust for the estimated tion of workers of European and has already been considered and is two-way payments through the post allied races in India. From these taken into the current account. Large office for the goods to arrive at non and the abnormal age distribution of year-to-year changes arise mainly commercial remittances; (b) through the European British subjects in from changes in short and long-term banks no data are traceable; (c) India as compared with the distribu borrowings, imports of stores, etc. by being physically carried—we tion for the home population of the know only of the sums brought by U K, we estimate that money may Other noncommercial items are: Indian emigrant labourers returning have been remitted annually at £250 missionary donations, expenditure by from the colonies—estimated here by each (based on fees in some English foreign consules etc. in India, and multiplying their numbers by the schools) to support no less than, per migrants' remittances received average sums brought by those re haps, 6,000 persons, mostly school through Post Office, savings brought children. back by returning Indian emigrants, turning to Calcutta. But we are ignorant of the movements of cash and estimated outward remittances by For remittances of savings on re with migrants across the extensive foreign immigrants to India. Dona tirement, we get some indication of land frontier. For a large part of tions from missionaries are estimated the likely number of people involved (b). i e remittances from India, we at about Rs 1 crores a year, with from the British Board of Trade re make a rough estimate. Even that certain data from authoritative sour cords of movements of British mi cannot be done for inward remit ces and a 13-year series obtained grants between the U K, and India from the International Missionary tances from Indian traders. We as and Ceylon, occupation-wise. These Council, London. Annual consular sume, perforce, that the latter more are processed to arrive at the esti expenditure is put at Rs 5 crores for or less offset the outward flow to mated numbers which could have the 100-odd foreign consulates etc countries like China, across the land sizable savings. On savings, through in India as reported to us by Govern- frontier and through banks. Exclud courtesy of some companies we ment for 1931. This excludes re ing these, we estimate remittances by obtained figures for 42 Europeans ceipts, if any, by the French and non-Indian. largely British, tempo who left certain occupations in the Portuguese possessions for which no rary immigrants to India under: re 1930's. In these, sums receiver! from data are yet available. mittances for their families, and of employers or partnership firms on
Table 3 : Balance of Non-commercial Transactions, 1921-22 to 1938-39 (Rs lakhs)
480 THE ECONOMIC WEEKLY March 18, 1961 retirement ranged from Rs 0.31 lakh Rupee (Table 5 (6) ) : Foreign capital, etc of some 700 companies to Rs 10 lakhs. We put the average holdings in (i) Rupee joint-stock have been collected, including agency at a modest Rs 0.5 lakh. Multiplied companies; (ii) Rupee loans of Gov houses and classified into 10 groups. by the numbers estimated as having ernment, ports, etc; and (iii) pri As before, untraceable rupee hold some savings, we arrive at the average vate firms and partnerships, mainly ings are allowed at 15 per cent in minimum savings remitted at prominent managing agencies. 1921 and 20 per cent in 1938 of the Rs 10.56 crores during 1921-38. Foreign holdings in rupee companies traceable amounts. The evidence before 1939 have always been an recorded by the Indian Industrial obscure subject. The present estimate Commission, 1916-18, the Indian Final Balance on Current assumes that such holdings would be Fiscal Commission, 1921-22, and Pat Account perhaps largely in companies ma Lovett in "The Mirror of Invest Table 4 brings together the above naged directly by foreign boards or ment" leads one to believe, that, three balances. (The commodity indirectly by British or other agency over a very large sector of these balance differs from Table 1, being houses. On this basis, data about investments, foreign holdings predo- credited here with Rs 3.24 crores to allow for the estimated imports of Table 4 ; Final Balance of India's International Transactions on postal articles for which India made no payments, i e samples, gifts, etc). Columns (v) and (vi) show the net credits and debits, the net cumulative debit being Rs 217 crores. By de finition, this measures the net im port of the long-term capital in this period. The present estimate of foreign investments in India is based on a currency wise classification. Sterling (Table 5(a) ) : Sterling loans of (i) the Government, includ ing Railway Annuities; and (ii) Corporations, ports, etc; (iii) invest ments in companies functioning in India with sterling capital, and sterling debentures of rupee com panies. From the London Stock ex- change Year Rooks, capital and de bentures of over 200 companies were recorded industrywise. The "Bri- tish-held" portion is taken at 91 per cent as already stated. The untraced other portions are assumed to be 15 per cent and 20 per cent of the traceable portions in 1921 and 1938 respectively.
Table 5a : Sterling Investments (Traceable)
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minated in the 'twenties. Conserva pose arc Rs 149 crores. Of other Table 7 presents estimates of tively, we assume that, in our repayments, in the data collected by imports and repayments of foreign period, managing agency houses us, private Railway capital was pro- capital. The net import is placed at and individual non-Indians held 50 minent. Rs 183 crores. per cent of the capital of these companies. Table 5b : Rupee investments in 1921 and 1938 Other Foreign Investments: Based (Rs lakhs) on certain U S Government data, U S investments in India are put at Rs 10 crores in 1921 and Rs 20 crores in 1938. Other foreign in vestments are assumed to be 15 per cent in 1921 and 20 per cent in 1938 of the total rupee and sterling (excluding public debt) investments. Total foreign investments in India are thus, Rs 708 crores in1921 and Rs 885 crores in 1938. This shows a net rise of Rs 177 crores during 1921-1938. It may be stated that the hulk, viz, traceable parts of (A) and (B), is in terms of par values of the equities; their mar ket values would be larger by per haps a quarter, judging from the values of their dividend series. This will raise the totals and, to a smaller Table 6 : Annua] Borrowings |on the London Stock Exchange extent, the net rise over the period. (£ 000) Flow of Foreign Capital Table 6 shows the issue prices and par values of annual borrowings on the London Stock Exchange by India Government, and by other public bodies ano1 joint-stock companies working in India (source : Econo mist). Government loans predomi nate, and are concentrated in 1921-24 and 1927-34. Among "Other" bor rowings are: Ports and Corporations, 19.98 mn; Oil Companies, £9.76 mn; Electricity, Trams, Gas, etc, £8.8 mn; Railway and Navigation, £3.74 mn, etc. As much as 79 per cent of "Other"' borrowings are fixed-in terest-bearing. The foreign-held part (91 per cent) in these borrowings is Rs 278.8 crores. Having no such data for other current borrowings, we dis tribute the Rs 75 odd crores increase between 1921 and 1938 of "Other Sterling Investments", "Rupee In vestments" and "Other Foreign In vestments" among different years as in column (iii) of Table 7, based on the trend of traceable borrowings. During 1921-38, Government re paid Rs 164 crores of sterling debt, especially from 1931-32 when gold exports yielded a large favourable balance and interest rates in London favoured conversions. Excluding 9 per cent Indian holdings net repay ments for balance of payments pur
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Comparison of Direct and Indirect Estimates
We have now three estimates: (i) Indirect: net current account deficit— Rs 217 crores; (ii) difference be tween foreign investments in 1921 and 1938—Rs 177 crores; and (iii) cumulative net annual inflow—Rs 183 crores. A particularly close agreement among these is unlikely with the wide range of data of vary ing pedigree used for these estimates. Also, the net import of capital being small as compared with India's to tal international transactions in this period, even small errors of estima tion in the latter will tend to mag nify their impact on the capital balance. A further point may, how- ever, remain. In estimating debt services, we assume a one-year lag between investment and remittance of returns; it may have been larger for fresh industrial ventures, though such ventures were rare in India's fresh borrowings in London in this period. However, if this is allowed for, the indirect estimate may come nearer the direct estimates by another Rs 8-10 crores. 1914, Pandit estimated debt services the 7 years' gap 1914-21, during at Rs 249 crores—an underestimate, 1898-1938 debt services on extent The annual deficits/surpluses in we feel; his direct and indirect esti foreign investments always exceed the current account may be com mates of the capital account are Rs ed the net annual imports of foreign pared with the net in-(out-) flows 150 crores and Rs 200 crores res capital except in 1900-01, 1905-06, of long-term capital. Within the pectively. The limitations of Pan 1908-10 and 1922-23. In inter-War limits of our estimates, the gap be dit's and our estimates are not of years the gap between the two tween the two is bridged by short- an order of magnitude as precludes streams widened more compared to term capital. Of the 11 years when the broad conclusion, that, barring the pre-1914 years. the current account had deficits, in 9 years these are associated with varying surpluses in the capital ac count. Of the 6 years when the current account had surpluses (ex cluding the minor one in 1933-34) in 4 years these are associated with de ficits in the capital account. The private sector may have financed the deficits in 1937-39 from its foreign balances and/or by incurring short debts to stockpile, anticipating the War. For the unmatched current surplus in 1925-26, there is at least one explanation — the Secretary of State used some of it to augment his reources in the U K which he ran down in 1926-27. It is significant to compare the long-term capital balance and debt services on foreign capital during 1921-38. The former is around Rs 200 crores while Table 2 places the latter at Rs 905 crores (excluding remittances by exchange banks, in- surance companies and coastal and foreign shipping). During 1898. 484