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India’s Forex Reserves1957forfinancialaid,whichwassoonexhaustedbyJune1957.InthesameyeartheIndiangovernmentapproached the US and the World Bank for loans. To receive these loans, the government had totake measures to facilitate foreign investment. In 1958, India received a credit of more than $600million from the US, Germany, Britain, Japan, the World Bank and the IMF.
To promote foreign investment in India, the Indian Investment Centre was set up in 1961. It hadoffices in major investing countries. In the early 1960s, India had accumulated trade deficits. TheGovernment of India also had a budget deficit problem. In 1962, the government subsidised theexports, as a step to reduce the current account deficit. Import tariffs were imposed to increase thegovernment’srevenue.Thegovernmentalsotriedtoincreasethemoneysupply,byissuingbondstothe Reserve Bank of India (RBI). By taking these measures the government tried to maintain theexchange rate, though the inflation was increasing. In 1964, the World Bank submitted a report onIndianeconomicpolicy.ThereportstatedthatIndiashoulddevaluetherupeeandabolishtheforeigntrade controls. In 1965, a financial aid fromAmerica was suspended, due to the war between Indiaand Pakistan. India also suffered due to two years of drought in 1965 and 1966.Finally in June 1966, India devalued the rupee by 57.5%, from 4.7 rupees to 7.5 rupees perdollar
(One British Pound = 2.754 US dollars in 1966). The devaluation was accompanied byliberalising the import policy. The import tariffs were reduced and the export subsidies werelowered.Thedevaluationwasunabletoincreasetheexportsofthecountrybecauseoftheabolitionof subsidies. In five months after the devaluation, India receivedan aidof only$465 millionfromthe World Bank. The aid of the World Bank was made on the condition that India would devaluethe rupee. “If we had waited another six months, we would have had absence of imports inIndia”
said the then Finance Minister Sachindra Chowdhury, when he was asked as to why thegovernment did not wait for another six months before going for devaluation. But again by1968,theliberalisation policywaschangedand theimportcontrols werere-imposed.Further,in ordertopromoteexportsofnon-traditionalgoodslike,engineeringgoods,chemicals,plastics,papergoods,sports goods and processed foods, many schemes were started. These schemes included the dutydrawbackscheme
, import replenishmentscheme
and cash assistance schemes. These schemesdiversified the structure of the exports. The exports of engineering goods increased during themid-1960s. But many of the engineering firms were started with foreign collaborations and their
“The Bank and 1957 Forex Crisis”, http://www.ieo.org/world-c2-p2.html
Panagariya Arvind, “India in the 1980s and 1990s: A Triumph of Reforms”, http://www.imf.org/external/np/apd/seminars/ 2003/newdelhi/pana.pdf, November 6
2003, page 14
“The Bank and 1966 Forex Crisis”, http://www.ieo.org/world-c2-p3.html
A duty drawback scheme is a form of Border Tax Adjustment whereby the duties or taxes levied on imported goods arerefunded, in whole or in part, when the goods are re-exported.
Import replenishment scheme enabled registered exporters to obtain raw materials, components and spares against export of specified products.