The Indian Economy Overview

The World Bank and India

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The Bank and 1957 Forex Crisis

Until the foreign exchange crisis of 1957, after the sterling balances accumulated by the country in the post-Korean war boom had plummeted, there was no conservation of foreign exchange. There was no foreign exchange budgeting as the country embarked on the Second Five Year Plan. Nevertheless the heavy import requirements of the private sector and government's liberal licensing policy resulted in a huge trade deficit. Therefore, the government was forced to recognize the foreign exchange shortage. The Government had to approach the IMF for a standby arrangement in February 1957 but even this was exhausted by June 1957. Thereafter, the Government approached the United States and the Bank for loans. In September 1957, Prime Minister, Nehru said that India would welcome a US loan of $500 to 600 million. He sent his finance minister, Mr T.T. Krishnamachari to the US to explore the prospects for such a loan.

Ten days later, a policy directive signed by the Director, USAID announced that no economic aid would be available for the state-owned industrial and mining enterprises except in rare cases.

The World Bank echoed American criticism that the Plan was 'over-ambitious'. The Bank President Eugene Black addressed a letter to the Indian Finance Minister urging the Indian planners to give more scope to private enterprise and more incentives to foreign private investment.

Mr Eugene Black commented :

"The Bank welcomes the arrangements that have been made to associate foreign firms with the construction and operation of a large number of major undertakings, both in the public and private sectors, but hopes that more positive measures will be taken to facilitate foreign investment and that consideration will be given to the suggestions made by the Mission in its Memorandum".

Mr Black further cautioned the government in forceful words:

"In making my own comments, I should like first to emphasize once again that India's interest lies in giving private enterprise, both Indian and foreign, every encouragement to make its maximum contribution to the development of the economy particularly in the industrial field. While I recognize, that the Government of India itself must play an important role in India's economic development, I have the distinct impression that the potentialities of private enterprise are commonly under-estimated in India and that its operations are subjected to unnecessary restrictions there" In response to this criticism by the World Bank President, the Government, sent a high powered team to USA. The team led by Finance Minister Krishnamachari, and which include the RBI governor H.V.R. Iyengar stated in New York: "The 'socialism' contemplated in India does not, by any stretch of imagination mean communism; it does not mean state capitalism......It is a system under which private competitive enterprise has and will continue to have a vital role to play; it is a system which respects private property and provides for the payment of compensation if such property is acquired by the State. I submit there is nothing in the system which should be repugnant to the social conscience of the USA".

The process of diluting the Industrial Policy Resolution continued unabated. Violating the '51 percent rule' (the regulation that majority ownership should be in Indian hands as far as possible) licence was given to Ceat Tyres of India Ltd, in 1958 on a 60 : 40 Italian- Indian basis. In the meanwhile, as desired by the US MNCs, the Indo-US convertibility Agreement was signed on September 19, 1957, and the first of a series of tax concession to MNCs were made affecting salaries (May 1957) wealth tax (July 1957) and super tax (September 1957).

"The socialism contemplated in India, does not by any stretch of imagination men communism; it does not mean state capitalism... It is a system under which private competitive enterprise has and will continue to have a vital role to play; it is a system which respect private property and provides for the payment for compensation if such property is acquired by state. a submit there is nothing in the system which should be repugnant to the social conscience of the USA"

T.T Krishnamachari, India's Finance Minister in USA, 1957.

It is noteworthy that the Bank established its Resident Mission in Delhi to monitor the latest developments in 1957. All these steps were culminated in the formation of Aid India Consortium in 1958 with World Bank as Chairman.

Satisfied with these policy changes, the AIC provided the first large injection of credit to India, more than $600 million from the US, Germany, Britain, Japan, the World Bank and the IMF. And thereafter, the influence of western capital steadily increased.

As a consequence of this, the shares of several companies were sold to MNCs in lieu of machinery, raw materials, patents, know-how, etc., supplied by them and made partners in several existing firms. In addition collaboration agreements both financial and technical proliferated. The total number of foreign collaborations approved in 1948-58 was 550 (i.e., an average of 50 collaborations per annum), it rose to 150 in 1959, 380 in 1960 and 403 in 1961. The MNCs were invited to take up the more profitable state/reserved (based on 1956 Policy Resolution) industries, in heavy electrical equipment, fertilizers, pharmaceuticals and rubber. In August 1958, the largest pharmaceutical firm in India—the Hindustan Antibiotics collaborated with Merck & Co. Inc. of the US.

By the end of 1950s, foreign control in plantation and agro-industries was near total. The most concentrated MNC interest was in the tea industry, 80% of the acreage under tea was foreign (British) controlled, the bulk of this in North-East India. According to an estimate, 13 leading British firms controlled three quarters of North-East Indian tea production. All processing factories were foreign controlled as late as 1960. Two British firms Lipton (Unilever Concern), and Brooke Bond (Finlay) handled 85% of retail distribution of tea within India and the export trade remained very much a British monopoly. In the 50s one-third of the acreage under coffee and three-fifth of the area under rubber was foreign controlled. Regarding agricultural machinery, the entire field was a foreign preserve. Davidson of India (Private Ltd.) subsidiary of Belfast firm controlled tea machinery. In 1960, it was envisaged to produce 10,000 tractors in the public sector. But the task of producing 7000 was entrusted with Tractors and Farm Equipment Ltd., Madras controlled by Massey-Fergusson. International Harvestor Co. of Chicago and Danish controlled East Asiatic Co. (India) Private Ltd., controlled other agricultural machineries like tillers. Mining was controlled by several MNCs like Andrew Yule, Macneill and Barry, Jardine Henderson (Coal), British controlled Copper Corporation (Copper and Krebs and Pennoria of France (Lead), etc.

Total outstanding foreign investment in India more than doubled from December 1956 (the first crisis) to March 1965 (the second), from $1,007 million to $2.014 billion. As a result, the priorities set by the Second Plan were systematically reoriented in favor of industries in which foreign companies were willing to finance.

The Indian Government had become increasingly dependent on large amounts of external assistance from the Aid India consortium to finance its import-surplus strategy. No bones were made about this in the formation of the Third Five Year Plan (1961-66) which was explicitly dependent on huge inflows of fresh aid.

"The World Bank mission headed by Bernard Bell visited India in 1964 and issued a report calling for the devaluation of the rupee and abolition of the many foreign trade controls."

According to a report in Economic & Political Weekly, January 7, 1961 the US Government made available its Development Fund to India in the context of Government of India's announced intention to enlist the co-operation of MNCs in the manufacture of fertilizers. In 1962, the Government of India allowed the Ford Foundation to conduct a campaign for bringing US MNCs and Indian businessmen together to establish fertilizer plants in the private sector. Consequently, over one quarter of target capacity was allocated to MNCs in the Third Plan.

At the request of the Nehru government, in 1960 the World Bank sent a Mission composed of three bankers from US multinational banks. On the basis of the Mission's report, under instructions of the World Bank, in February 1961 the government of India inaugurated the Indian Investment Centre. It was an autonomous high-powered body with branches in World capital markets such as New York, Dusseldorf, London and Tokyo to advise collaboration ventures between MNCs and their junior Indian partners.


For further details contact:PIRG (Public Interest Research Group) 142, Maitri Apt, Plot No 28, Indraprastha Ext. Delhi 110092. India. Ph: 2432054 Fax: 2224233 email: kaval@pirg.unv.ernet.in


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