Finance—Public & Private
India and the Investor WHILE much has been said and written on the political side both for and against the proposed new Indian Constitution, investors in India Government stocks may perhaps be excused for placing first and foremost the question of whether under the proposed new arrange- ments their stocks, will be as safe as they have been considered to be in the years gone by.
That there have been some serious misgivings on the point can easily be seen by the present prices of India Government stocks. Time was when market quotations of India Loans differed very little from those of British Government stocks themselves. India Loans for many years have been, and still are, full trustee securities, but in spite of that fact market prices no longer keep step with those of British Government -stocks. At the present moment, for example, India 2/ per cents. stand at only 63/ 'as compared with the quotation for 2/ per cent. Consols of 764 ; and while the British Government 3 per cent. Conversion Loan stands at about 99, India 3 per cent. are only 76. Similarly, while the British Government 3/ per cent. War Loan is quoted at 1014, India 3/ per, cents. stand at 88/.
CAUSES OF DISQUIET The chief explanation of this great difference in price is, of course, to be found in the uneasiness occasioned during recent years by the disturbed political conditions in India, so that at one time India stocks were greatly below their present level. Indeed, India 8 per cents. as recently as last year were down to 42/ and India 2/ per cents. to 66, quotations which might well have occasioned grave anxiety to the investor. That such a severe fall was ever justified may be open to question, but un- doubtedly an alarm was then created which has never wholly subsided, though in the past year the great rise in all gilt-edged securities has had its effect upon Indian as well as upon other trustee stocks, while it is possible, too, that hopes of more settled conditions in India may have been a contributing factor.
The point, however, which now has to be considered by holders of India stocks, and for that matter by potential investors in future India Loans which may be issued from time to time, is whether under the proposed Constitution the safety of investors is suffi- ciently safeguarded. If it is, then India stocks at the present level are probably too low. If it is not, then there would seem to be justification for the wide margin which now exists between the estimated safety of the investor, as expressed in the respective quotations of British Government and India Loans.
SAFEGUARDS.
At the present time the control of the finances of India by this country is very great, and the Budgets are produced each year by the Finance Member of the Executive Council of the Governor-General of India, whereas in future they will be framed by the Finance Minister of India. In other words, the initiative of India's financial policy will come direct from the Indian Government, though according to the White Paper the Budget is to be framed by the Finance Minister not only in consultation with his colleagues but with the Governor-General. The. White Paper, indeed, emphasizes that the safeguarding of the financial stability and credit of the Federation of India will be one of the special responsibilities of the Governor-General. He is to be empowered to appoint a Financial Adviser to advise him, and will also be given powers to secure that the Annual Finance Act provides the resources he considers necessary for the discharge of his special responsibilities. Rights and liabilities arising under any statute or contract in existence at the beginning of the proposed Act, including existing -immunities from Indian income tax in respect of interest on sterling loans issued or guaranteed by the Secretary of State in Council, will be maintained and be enforceable by or against the Secretary of State (substituted for the Secretary of State in Council). All obligations arising under any such statute or contract 'which imposed a liability on the revenues of India will remain a liability on all the revenues of India,- 'whether Federal or Provincial.
TRUSTEE STATUS TO REMALV.
The Federal Government is to have power to borrow for any of the purposes of the Federation upon the security of the Federal revenues within such limits as may from time to time be fixed by Federal law, and unless occasion arises for the exercise of the Governor. General's special powers, Ministers will decide upon the programme of external and internal borrowing. The Trustee status of India ' Sterling Loans is to be maintained and to be extended to future sterling Federal Loans.
A CENTRAL RESERVE BANK.
A very important item is the provision which is to be made for the establishment in India of a Central Reserve Bank free from any kind of Government control, and if I am right in gathering from the White Paper that the successful establishment of this Reserve Bank has to be a fait accompli before the proposed Federation can be carried throtigh I am inclined to think that we may have here a very important safeguard for investors in Indian securities, at all events so far as such security is based upon the general soundness of Indian banking and currency. The White Paper itself says that proposals relating to responsibility for Federal finance are based on. the assumption that a Reserve Bank—free from political influence—will have been set up by Indian legislation and will be in successful operation, before the first Federal Ministry comes into being. This Central Bank is to be responsible for managing currency and exchange.
INDIA'S NEW POWERS.
Great powers, however, are to be conveyed to the Indian legislature with regard to taxation and other financial measures, and while On paper the vetoing power of the Governor-General seems to make the safe- guards for investors in Indian securities almost watertight, it is not difficult to see that the whole matter is really linked with the good intentions and the general bona fides of future Indian Governments. If there is loyalty both to this country and to the investors in India Government stocks the wealth of India should itself constitute a strong guarantee for the fulfilment of financial pledges, but if the forebodings of some who distrust the whole political future of India should be justified, then, of course, it might be found 'that the safeguards had broken down because, in a word, they were only paper " safeguards. As against those possibilities, however, it is only fair to set another, namely, the complete success of the reform plans in the sense of bringing about settled conditions in India with increasing good will on the part of the Indian people as a whole to this country, in -which good will would consist adequate security for the investor in Indian securities.
The difficulty lies rather in the fact that up to the present there has been little opportunity for testing the bona fides of an Indian legislature. During recent years ive have had all the disquieting and disturbing elements incidental to semi-revolutionary movements so that it is scarcely surprising that the effect should have been to occasion a decline in Indian Government stocks and a widening of the margin of difference between their standing and that of British Government securities. If, therefore, we assume that the Reforms as at present provided are carried out, it seems probable that until the new regime in India has commanded confidence by its loyalty to the terms of the new Constitution quotations of India Loans will not, so far as the immediate future is concerned, enjoy their former prestige in the category of gilt-edged trustee stocks. That is not to say, however, that they may not ultimately regain their former position. In that matter their future rests with the Indian Govern- ment of to-morrow.
ARTHUR W. KIDDY, (For Financial Notes, see page 480.)
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