Ever since I saw Narendra Modi on TV raising his index finger, his trademark gesture, and blaming Pandit Jawaharlal Nehru for starting the slide of the rupee in the 1940s, I was curious to understand if he is stating the facts or is simply bullying a dead man who can’t defend himself. According to Modi, Nehru wanted foreign aid from World Bank and IMF, which demanded a devaluation of the rupee.
Some digging into old Economic Weekly editorials and documents from RBI archives that described the events of the 1940s helped.
Circa 1945: The Second World War came to an end. Winston Churchill who had serious doubts about Indians ruling themselves was trounced in the historic post-war elections. Clement Atlee, the newly elected British prime minister, had other plans for India. An election was held.
In September 1946, an interim government of the undivided India was formed under the leadership of Jawaharlal Nehru. Though still under the crown, this government started the process of drafting the constitution and began forging diplomatic relationship with foreign countries including United States.
Meanwhile, even as the war was drawing to a close, delegates from the US and its allies met at Bretton Woods, New Hampshire to chalk out the roadmap for the post-war global economy. The meet which went on for three weeks in July 1944 gave birth to two institutions: International Monetary Fund (IMF) and International Bank for Reconstruction and Development (World Bank).
History of Reserve Bank of India (1935-1951), the account published by RBI prepared under the supervision of Chintaman Deshmukh deals extensively with the events that led to India joining the two institutions. It is available in easy to cut paste pdf format at www.rbi.org.in/scripts/history.aspx. Deshmukh was the governor of RBI during crucial period of India’s independence.
“Though the Articles (of IMF and IBRD) were adopted as early as July 1944, the Government of India did not seem to be in a hurry to take up for consideration the question of India’s joining the two institutions; their intention was to wait till the attitudes of the USA. and the U.K. were known,” the book says.
The US Congress ratified the agreements in July 1945, the UK fell in line by that December. In India, the Legislature had been dissolved on October 1, 1945. “However, with a view to securing for India the advantages of original membership, the Government of India decided to adhere to the Agreements before the close of 1945 and then place the matter before the Legislature for its approval,” the book says.
In consultation with the Reserve Bank, the Government of India also issued, on December 24, 1945, an Ordinance to provide themselves with the necessary legal authority for the assumption by India of the obligations imposed by the Agreements.
The International Monetary Fund and Bank Ordinance, 1945, empowered the Central Government to make necessary payments out of its revenues to the Fund and the Bank.
When it was ready to begin exchange transactions IMF had to notify members to communicate within thirty days the par value of their currency. The fund’s request was sent on September 12, 1946. At this point, Nehru’s interim government was in place.
Though much before this request, there was some informal understanding within the RBI and the government that status quo will be maintained, the government had not yet officially taken a decision on its membership of these institutions.
In July that year, a Bretton Woods Committee set up to evaluate the pros and cons of India’s joining the club had submitted its third interim report. Though it recommended payment of an installment of $7.96 million due towards subscription to the Fund which was due in August, it left the decision on membership to the legislature.
“We strongly recommend, therefore, that, irrespective of the political situation at the time, a session of the Legislative Assembly should be called on or about the10th November 1946 at the latest, in order to allow the Assembly to make up its mind finally whether it wishes to continue India’s membership of the Bank or whether it wishes India to withdraw from that institution,” the report said.
Further complicating matters, Mr. Manu Subedar, a member on the Committee, submitted a Minority Report, in which he observed: “I have no hesitation in saying that India should withdraw from the membership of the Bank at this stage.”
The main reason advanced by him was that India would be unable to shoulder further credit obligations, until her own position regarding repayment of sterling balances was made clear.
After the receipt of the Fund’s request, the Government of India invited Chambers of Commerce, Bankers’ Associations and other interested bodies or persons to send their views in writing to them before October 31, 1946. Views of the members of the Bretton Woods Committee and a few other Members of the Legislature were also sought; the majority expressed themselves in favour of the maintenance of the status quo.
The Bretton Woods Committee’s report was presented to the Legislative Assembly on October 28, 1946, when the second session commenced. The Finance Member of the Interim Government under Nehru, Mr. Liaquat Ali Khan, moved a resolution “to approve India’s continued membership of the International Monetary Fund and the International Bank for Reconstruction and Development.”
On November 9, 1946, the central board of RBI resolved “That a recommendation be made to Government that no change be made in the par value of the Rupee already communicated by the Government of India to the International Monetary Fund on the 10th October 1946 viz.,.0086357 ounce of fine gold per rupee. It was further resolved that Government be requested to consider the economic implications of this decision on the lines indicated in Professor D. R. Gadgil’s Note on Exchange Parities circulated to Directors of the Central Board, and to take appropriate measures from time to time in order to ensure that the rate decided upon is not out of equilibrium.”
The recommendation was accepted by Government. Although in view of this there was no need to send any fresh communication to IMF, the Government of India wrote to the Fund stating that in the interests of accuracy, they preferred the par value to be expressed as under: “Using gold as common denominator, Rupee one is to be regarded as having a theoretical gold content of 4.145142857 grains of fine gold; this weight of gold producing Rupee /Dollar rate of Rs 3.3085194 per US Dollar and a parity price of gold of Rs115-12-9.25056 per ounce of fine gold.”
The exact dates of when the recommendation was accepted and when it was communicated onwards to the IMF are not clear from the archives. It is also silent about Nehru’s role in these decisions, though it is safe to assume that he was a part of it either as the vice president of the executive council, the executive arm of the interim government or as the first prime minister of independent India. Nehru would take the rupee through another painful devaluation in 1949. More on that later.
