A lot of myths about India’s finances at the time of Independence are being presented as facts to unsuspecting Indian public. We will discuss two such myths below.
Myth 1 Public Debt at the Time of Independence was Zero (0).
Recently out of sheer curiosity, I read the First Budget Speech in Independent India by then Finance Minister Shri R K Shanmukham Chetty. Whilst issues arising out of Partition & Indian Independence and economic consequences thereof dominate the agenda of the Finance Minister, Para 36 of the Budget Speech unequivocally clarifies the position of India’s public debt on 1 April, 1947.
“Our debt position is also intrinsically sound and for a country of its size, India carries only a relatively small burden of unproductive debt. Our external debt is negligible and we have considerable external resources in the accumulated sterling balances. At the beginning of this year the total public debt and interest bearing obligations of undivided India stood at roughly Rs. 2,531 crores of which only Rs. 864 crores represented unproductive debt and Rs. 36 crores external debt, while her external reserves amounted to over Rs. 1,600 crores.”
Myth 2 One Dollar = One Rupee
At the time of Independence, Indian rupee was pegged to UK pound which was in turn pegged to the US Dollar. One Rupee equaled to 18 pence, and a pound was worth 13.33 rupees (See the footnote 1 on page 1 of this RBI document). The official UK pound – UD Dollar rates was 1 GBP = 4 USD. Deriving therefrom the INR – USD rate would be closer to around 1 USD = 3.33 INR. This arrangement continued till 6 June, 1966 when the rupee was devalued for the first time after Independence and then after the collapse of the Bretton Woods system, the Rupee was directly pegged against the US Dollar in 1971.