Balances And Resource Operations

Every Government must have some cash in hand. Under certain circumstances it may be justified in budgeting for a deficit, but a Government which budgets for a minus working balance proclaims, thereby, its inability to meet its obligations. It becomes insolvent. The Government of India has to find money for liabilities of all kinds. It has to pay its permanent servants, civil and military, it has to pay its contractors, it has to repay the loans which have matured and pay interest at regular intervals on all outstanding loans, it has to pay money to the Postal Savings Bank Depositors who are entitled to withdraw it at call, it has to provide cash for the expenditure of the Provincial Governments, it has to finance its capital undertakings, and it has to meet its liabilities in English currency. Cash in India has to be provided not at one paying centre but at all the district treasuries and sub-treasuries, and sufficient balance has to be deposited at the Imperial Bank to enable it to make all Government disbursements through its head offices and branches. The complexity of this network of operations can be easily realized if we take into account the number, magnitude, and diversity of the payments, and the extent of the country over which they have to be made. The fact that a very substantial portion of these payments are incurred in England and have to be paid for in English currency makes the situation still more complex, and has been and is still a great disturbing factor in the Indian finances. The ways and means programme of the Government of India comprehends, it has already been made clear, all receipts whether from taxes, quasi-commercial enterprises, repayments of loans advanced to the subordinate authorities, proceeds of the new loans floated in the year, balances of the Provincial Governments and all local bodies, and the Postal Saving Bank Deposit, and all disbursements whether for expenditure chargeable to revenue, capital outlay, repayments of loans, provincial overdrafts, advances of loans to the Provincial Governments and the local bodies, and withdrawal of the Postal Savings Bank Deposits. The object of the ordinary budget is to forecast the regular income of the State from taxes and other ordinary sources of revenue, and lay it out to the best advantage. The ways and means budget, on the other hand, anticipates all outgoings, and provides for them by making the incomings, whatever their source, adequate to cover them. As the Finance Member put it in his budget speech of 1923: “Money to meet the outgoings has to be got in before it goes out.” The coming in of money depends upon a number of factors. It depends upon the monsoon, harvests, activity of trade and commerce—the factors upon which the yield of taxes depends—and, what is still more incalculable, the changing conditions of the money market in India and in England. The incomings may be disappointing. The rate at which they come or their total amount may be different from the budget anticipations, or at a particular time the outgoings may be heavier than the incomings. ¹¹³ Provision has to be made for all these contingencies, and it is done by maintaining a certain amount of cash in hand as a reserve, which can always be drawn upon to meet all the liabilities. The treasury balances constitute that reserve. They consist of balances of all treasuries and sub-treasuries, balances in the Imperial Bank, and the balances of the Secretary of State, which are deposited in the Bank of England, or lent out for short periods. ¹¹⁴ The ways and means budget provides for sufficient closing balances, which are not allowed to fall below a particular minimum. This minimum amount is composed of two sections, the minimum which is to be maintained in India, and the minimum to be maintained in England. The estimates of the minimum amounts here and in London are based on experience. The balances in India are carefully watched from time to time, and if there are any indications of their being reduced below the minimum, the steps are taken to replenish them in some way or the other. The monthly cash balance report of the Treasury Officers has already been referred to. That is submitted on the first working day of the month. Besides this monthly report, three reports giving the total Treasury balances of the district have to be submitted on the 7th, 14th, and 21st of each month to the Deputy Controller of Currency. Besides the monthly report, which is submitted on the prescribed form and gives full details, the Treasury Officer has to telegraph to the Deputy Controller of Currency the total treasury balances in the district on the last day of the preceding month ¹¹⁵ and the amounts deposited in or withdrawn from the Imperial Bank. These reports, when consolidated, give information as regards to total cash balances in the country. The size of these balances, it need not be added, is no index of the soundness or otherwise of the financial situation. The balances are a reservoir fed by many streams. ¹¹⁶ It may be full because a lot of money has been borrowed by the Government or deposited by those who bank with the Government of India or it may be comparatively empty on account of the capital outlay from revenues and loans or other disbursements, which will constitute assets of the State in the long run, having been particularly heavy. The soundness of finances depends upon the public expenditure being wisely incurred and not allowing its total amount to exceed the national revenues. The size of balances is determined by a number of circumstances which may, from the point of view of the ultimate financial stability, have different significance. ¹¹⁷ But that does not mean that their size is a matter of no importance. A Government which wants to keep its credit intact must be prepared to meet its liabilities. Its failure to pay the claims may shake the public confidence, in spite of the essential soundness of national finances, and have consequences of a far-reaching character. The credit of the Government, like the credit of the banks, depends upon the promptness with which the claims are met. The delay may be fatal; and once the credit receives a shock, it takes a long time and watchful care to build it up again. The maintenance of sufficient balances is, therefore, necessary to make it possible for the Government of India to be always ready to make all Government disbursements from day to day. If, however, unduly low balances carry with them the risk of the Government being exposed to the danger of undermining public confidence in its ability to pay, it is a common-sense consideration that they should not be unduly high. It is held, and rightly, that in these days of banking, security of life and property, and opportunities of profitable investment, it is not wise for the individual to keep more money with him than what is needed for meeting immediate requirements. It is folly to hoard money and let it lie idle when it can be made to fructify by judicious investment. The Government can always find good outlets for laying out its balances, if they tend to grow excessive, but apart from the wise application of funds, the maintenance of balances over and above the amount of what is necessary for safeguarding public credit involves additional expense. It means loss of interest on money that is lying idle in the vaults of the Treasury (the Imperial Bank does not pay any interest on public deposits), its custody involves trouble and expense, and the possibility of the misappropriation of funds is increased in proportion to their magnitude. The amount which is adequate and no more than adequate for public purposes cannot be determined on a priori considerations. It depends upon the amount of the Government disbursements, the circumstances under which they are made, and the general economic development of the country. The Government in England generally does not maintain large balances of its own. There the payments are centralized. The Government can always depend upon raising temporary loans from the public, and getting temporary advances from the Bank of England, when the disbursements are larger than receipts. The Government of India has, on the other hand, to make payments all over the country, and in spite of the gratifying improvement in the lending capacity of the public and the banks in the recent years, the description of the Indian money market by Sir David Barbour, in his evidence given in London before the Welby Commission in 1895, still holds true to a very large extent. After pointing out how the Government of India worked with its own balances, he went on to say, “You see that in India there is not the great supply of the loanable capital that there is in this country, in London, nor can you get loanable capital from outside very readily; and the transactions are carried on much more by cash than by credit, so that any increase of capital or demand, not in itself very great, leads to a scarcity of cash. Therefore we cannot depend upon the market; we must keep a balance.” ¹¹⁸ Loanable capital has since 1895 increased, the expansion of banking credit has taken place, and the recent amendments in the Paper Currency Act make it possible to ease the money market by lending the currency notes to the extent of 12 crores ¹¹⁹ on the basis of the genuine trade bills, and thereby afford a partial relief to the business community; but it still remains true that the Government of India cannot safely rely on the money market, and it must have a balance of its own and a large one for the matter of that. But making allowance for all these considerations, it has to be admitted that the Government of India has several times been known to let its balances grow disproportionately large. ¹²⁰ The size of the balances and the location of a very large portion in England a few years before the outbreak of the war were made a subject of adverse criticism, and the Chamberlain Commission was specially asked to make enquiries into the matter. The Chamberlain Commission exonerated the Government from any serious blame, and attributed the large amount of the Treasury balances and their distribution between India and England to circumstances, which could not be foreseen and over which the Government of India has no control. They, however, commended the practice of giving loans for short periods in India for the acceptance of the Government of India to avoid hardship to the business community, which resulted from the lock-up of the public funds in the Government treasuries. The outbreak of the war made it necessary for the Government of India to postpone the formulation of a definite policy in this respect; but during the war the Government of India pursued the policy of giving relief to the business and the banking community at times by giving temporary loans, but mainly by leaving in deposit with the Presidency banks the proceeds of the loans till actually required and a substantial portion of the balances. The formation of the Imperial Bank has changed the situation for the better by making the cash balances of the Government, to the extent to which they are left with the bank, a part of the general banking balances of the country. But the need of keeping aggregate of the cash balances as low as possible is not less important than before. The balances have during and after the war been quite large. It is not possible to say whether they have been excessive, as the circumstances were quite abnormal. The pre-war figures ¹²¹ have in several cases been exceeded, and if they were considered unduly large, the balances of the later years seem to be open to the same criticism. With the growth of the banking and general economic advancement of the country, it should be possible for the Government to manage its finances with reduced balances. The disbursements of the Government have also increased, and will increase still further with the assumption of fresh activities, but in spite of this fact the reduction of balances can and ought to be effected. It is, of course, difficult to lay down any criteria according to which the amount of these balances should be determined from time to time. The actual working of the financial system must be a reliable guide for the purpose. A general maxim, like the one that the Government should neither err on the side of being over cautious, nor take unnecessary risks, is not, like all general maxims of its kind, practically very helpful, and may be taken as a guiding principle for regulating the treasury balances, if the interpretation of what is a right mean between the two extremes is left to the executive authorities.