In this article we will discuss about the accumulation and nature of sterling balances in India.

Accumulation of Sterling Balances:

The Principal cause of accumulation was the peculiar method of financing the enormous war expenditure in India of the Allied governments. Whenever they purchased goods and services in India, they made payment in terms of sterling which was credited to the account of the Reserve Bank of India in London.

Against these balances the Reserve Bank printed paper currency and put it at the disposal of the Government of India for making payments.

Sterling thus continued to accumulate in London while paper currency expanded in India. This may be seen from the fact that on 1 September, 1939, Sterling securities amounted to only 28% of the total, whereas on 31 December, 1943-they had risen to 86.5% of the total reserves of the Reserve Bank.


Note issue, at the other end, rose from Rs. 2245 million in 1939 to Rs. 12109 million at the end of 1945. As a consequence, prices registered an increase of 179% in the course of the war.

It is clear that the Law was observed more in form than in spirit. Sections 40 and 41 of the Reserve Bank Act were bitterly criticised for having bled the country white and for hurting every section and every class of the people.

Had these provisions not existed, the Allied Governments would have been obliged to finance their war expenditure in India by the alternative methods of exporting gold or capital goods to India, selling British investments in India or floating rupee loans in the country. Any of these methods would have spared India the horrors of inflation.

The British Government agreed to bear a portion of the Government of India’s war expenditure for which India received payments in terms of sterling securities. This was the second cause of accumulations.


Another factor leading to accumulation of sterling was India’s large export surplus during the war. From 1939-40 to 1944-45, this surplus amounted to Rs. 562 crores. As the rupee was linked to sterling, India could not receive payments from any country except through sterling.

The foreign exchange resources thus earned by India were utilised by the British Government for war purposes while sterling securities were credited to India’s account. In addition, exchange control under which Indians had to declare and hand over their possession of foreign currency to the Reserve Bank, also resulted in further accumulation of sterling balances.

The Dollar earnings of India, mainly in return for payments made in rupee to American armed forces stationed in India during the war as well as for Indian exports to America, were appropriated by the British Government through Empire Dollar pool while India received payment only in Sterling Securities.

Lastly, India sold gold worth Rs. 34.67 crores during 1939- 40. In return for the same, India received payment in sterling which was credited to the account of the Reserve Bank of India.

Nature of Sterling Balances:


It is obvious that these sterling balances represented neither abnormal gains out of a world-devastating war nor were they the out-come of any war-time profiteer­ing. In fact, the process of accumulation forced a large part of India’s population to abstain from consumption.

Indian economy was strained to the maximum, what with all round shortages and scarcities. The repayment of these balances was, therefore, no distribution of alms or a largeese but an amply deserved measure of economic restitution on the part of the U.K.

However, fears were entertained in India Britain might devise some means or the other to avoid payment of these balances. Several dark possibilities were hinted at. For instance, it was said that the balances would be just squandered away in maintaining the 1s.6d. rate.

Another possibility feared was the revision or reinterpretation of the Financial settlement governing the allocation of war expenditure in such a manner as would leave India just enough sterling Balance to clear off the heavy debts on account of her share of war expenditure.

Al­ternatively, it was suggested that India might be persuaded, by some wily means, to make a big gift to U.K. as a token of good-will and comradeship-in-arms.

Some feared that, under the post-war agreements, India’s sterling Balances might be cleared out of the way as dead-weight on international trade and as an obstacle to fruitful international economic collaboration. Others apprehended that sterling might depreciate and thus bring down the commodity-return for these balances.

Lastly, the fear was that even if the balances remained intact and were repaid in full, the speed of their release might be very slow thereby restricting the purposes for which they could be utilised.

It is not difficult to detect in those fears and speculations, not all of which were wild and unfounded, the shadow of the unpleasant memories of the past. Nor was it totally far removed from the thoughts of the British Government that India would or at-least should volunteer to scale down the balances.

Such sug­gestions came more stridently from the Conservative Party and other less official sources. Credence was lent to these fears by the Anglo-American Loan Agree­ment, signed in 1945, which contained a clause providing for “balances to be adjusted as a contribution to the settlement of War and post-war indebtedness.”


The British Proposal for reducing the balances was based on the following grounds:

1. The war had imposed greater burden on England than on India. Moreover, the war against Japan involved the protection and safety of India directly. Therefore, it was argued, the Indian government should bear a greater burden of the war and accept scaling down of the sterling balances. That the war was fought jointly and India was protected against Japanese aggression was not disputed.

However, it was asserted and the then Viceroy admitted, that Britain would have suffered defeat but for Indian support. Furthermore, equality of sacrifice has to be interpreted with reference to the paying capacity of a country as seen from per capita income and living standards of the people.

Seen from this angle, India had already shouldered a higher burden of the war. This is evident from her war expenditure which went up from Rs. 50 crores in 1939-40 to Rs. 450 crores in 1944-45.


2. It was alleged that the sterling Balances accumulated as a result of India charging high prices for goods supplied to the British Government. The argument is untenable.

(a) Because the Government of India made purchases on behalf of the British Government in the capacity of a monopolist. The question of charging higher prices, therefore, does not arise.

(b) Payments for goods purchased were made at prices fixed by the Govern­ment.

(c) In fact, as the Financial Times, admitted, Indian prices were seldom high and were generally appreciably below the U.K. Prices.


3. Another ground for scaling down of sterling balance was that Great Britain was facing acute financial difficulties after the war and that she was not in a position to repay these balances.

This argument is also wholly untenable in view of the fact that the payment of £ 100-120 million a year-would have reduced England’s National Income by only 1—1¼% only. Besides, India had faced more and not less difficulties in accumulating these balances.

4. It was also pointed out that sterling balances were not commercial debts which England was honour —bound to repay. These represented a part of the cost of a war jointly fought with India. In other words, it was implied that these balances could be repudiated. True, these were not commercial debts.

They, in fact, stood at a much higher level because goods represented by these balances were badly needed by the Indian people but were taken away from the country at controlled price. What is more, these goods were taken away by the use of the political power and without the consent of India.

Many independent observers in England admitted that India would not and could not have freely given the goods which were forcibly taken away from her. Therefore, England was honour bound to repay the debt fully.

On the other hand, India’s case for a full repayment of these balances was very strong. Firstly, these balances accumulated as a result of payments which England was bound to make under the Indo-British Financial Agreement of 1939. Any repudiation or scaling down of these balances would have been a gross breach of the agreement solemnly entered into with India.


Secondly, Sterling Balances represented the blood and tears of the Indian people since they were accumulated not out of war profiteering but by depriving the people of badly needed goods and services.

India, therefore, had a natural right to use these balances as it deemed fit. Thirdly, India was a poor country and she had already borne more than her share of the war expenditure. She just could not afford to make a gift of these balances. Fourthly, Indian industries had suffered terrible wear and tear in supplying the war needs of England. These balances were urgently required to replace the worn out plant and machinery.

Fifthly, a part of these balances accrued on account of India’s exports to other countries. England had no right to appropriate these balances.

Sixthly, India’s Plans for industrialisation, financed out of these balances, provided the only way of breaking her vicious circle of poverty.

Lastly, India, despite her poverty and frequent famines, had never defaulted in repayment of her debts to England. It was now England’s turn to honour her commitments to India.

Fortunately, India’s fears regarding the scaling down of the balances proved unfounded. On one side, Indian authorities conveyed the hint that any attempt at ‘grossing up or scaling down’ would be firmly resisted. On the other, the British Government decided “to settle honorably what was honorably and generously given”.


A series of negotiations culminated in a financial agreement between India and England on 14 August, 1947. Under the agreement, which covered the period up to 31 December, 1947, the U.K. agreed to release a sum of £ 65 million from the accumulated balances for meeting the current expenditure of India.

However, it left the major issue of the liquidation of the Sterling Balances pending. The issue was resolved in a fresh agreement signed in July, 1948.

Under this agreement, the Government of India took over all the military stores and installations of His Majesty’s Government lying in India for a sum of £ 100 million paid out of sterling balances. Further, a sum of £ 167.5 million was agreed to be paid by India to Britain in payment of pensions to British personnel who had served in India.

In addition, a sum of £ 80 million was also released for current needs. This was over and above the unspent balance of £ 80 million out of the previous releases. Thus, in all, a total of £ 160 million was released for meeting the needs of India’s current expenditure.

A major disappointment of the agreement was the release, almost in trickles, of convertible Sterling. The I.M.F. could provide only a temporary expedient and India, despite being a big creditor, was made to look for Dollars from the world bank or the U.S. Government Official circles, however, regarded the agreement as quite satisfactory.

That this view was mistaken was soon proved by the events. Liberal imports, permitted as part of anti-inflationary policy, resulted in heavy adverse balance of payment and rapid depletion of sterling available for current needs.


By January, 1949, £ 43 million more than what had been provided for had been spent. A fresh agreement was signed in July, 1949 which provided for drawing of £ 50 million per annum for each of the two years, 1949-50 and 1950-51. In addition, the British Government also released another £ 50 million for meeting the cost of liabilities entered into under the old open General License before its cancellation in May, 1949.

The important thing about the agreement is that it was made as part of a larger Commonwealth Finance Ministers’ Conference. As a consequence, India was admitted to all the rights and duties of full membership of the sterling Area and quantitative restrictions on her right to draw hard currency from the central reserves of the area were removed.

The Agreement at the time it was signed was hailed as being very liberal to India.

Many London papers criticised it on the ground of over generosity on England’s part. The generosity was explained by the Devaluation of the Pound within two months of the agreement. At one stroke, the value of the sterling releases as well as the sterling lying blocked was reduced by 30.5% in terms of gold and Dollars.

The July 1948 agreement was extended for a period of three years ending 30 June, 1951. In February 1952, it was further extended for a period of six years ending 30 June, 1957. The extended agreement provided for the transfer of £ 310 million to the currency Reserve of the Reserve Bank of India.

The Balance, from time to time, standing in the blocked account was to be transferred to the current account in instalments not exceeding £ 34 million in each of the Six years. It further provided that any balance in the blocked account on 30 June, 1957 would be automatically transferred to current account. There was no fresh agreement since 30 June, 1957 as there was no need for the same.


Till 1951, there was no definite policy regarding the use to which sterling balances were to be put. The unsatisfied war demand and liberal import licenses combined to increase the import of consumer luxury articles. Chander Dalaya estimates that Rs. 300 crores worth of sterling was utilised for importing mostly commodities which were not helpful for economic or industrial growth of the country.

This was a clear wastage of resources which could have been used in a more purposeful manner. It was only with the introduction of the First Five Year Plan in 1951 that an attempt was made to establish a link between the use of the sterling balances and economic growth of the country. During the First Plan, it was estimated that India would be able to draw upon these balances to the extent of Rs. 290 crores.

During the Second Plan, provision was made to draw these balances to the tune of Rs. 200 crores. In actual practice, more than this amount was withdrawn in the very first year of the plan. The drain was rapid and the balances declined from Rs. 740 crores in January, 1956 to Rs. 136 crores in April, 1961. By 1966, the balances had dwindled to Rs. 86 crores, just a little more than the statutory backing for the currency in India.