The Foreign Exchange Crisis & Some Remedies

By A. D. Shroff

Summary

In this speech to the Rotary Club of Bombay (reprinted as a Forum of Free Enterprise booklet), A. D. Shroff argues that the most urgent problem facing India is the foreign exchange crisis triggered by the Second Five-Year Plan. He traces the crisis to its genesis: India embarked on the Second Plan in April 1956 with sterling reserves of Rs. 746 crores, and by the time of the speech those balances had collapsed to roughly Rs. 200 crores, forcing the country to approach the International Monetary Fund for temporary assistance. Shroff blames serious miscalculations and over-optimistic official estimates of the foreign exchange required, aggravated by the Suez crisis and price rises, and pointedly rejects the government’s habit of blaming the private sector, defending against the Industrial Control Act’s licensing regime as the real culprit that left the country on the brink of insolvency.

Key points

• Shroff identifies foreign exchange as the single most urgent problem facing India.

• India began the Second Five-Year Plan in April 1956 with sterling reserves of Rs. 746 crores; by the speech these had fallen to about Rs. 200 crores.

• He cites C. D. Deshmukh, the Ex-Finance Minister, as having warned as early as April 1956 that the problem had already arisen.

• Shroff rejects blaming the private sector, attributing the crisis to the licensing regime under the Industrial Control Act and reckless import licences from 1955.

• He argues against devaluation of the Rupee, while endorsing import restrictions and a drive to augment exports.

• He proposes mobilising India’s inert private gold holdings (Rs. 3,000-3,500 crores) via a long-term loan scheme modelled on the French Government’s.

• Success requires a broad-based government and renewed appeals for foreign assistance.

• The booklet is based on a speech at the Rotary Club, Bombay, on July 29, 1958.

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