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V.
Page 203
Third Hypothesis: That India becomes a foreign State with no close treaty relationship with Commonwealth countries
29. As stated in paragraph 2 above, it is assumed for the purposes of this hypothesis that India leaves the Commonwealth in a frame of mind which is at the least unco-operative and possibly hostile. The greater part of the existing ties of sentiment between India and the Commonwealth are assumed to have been broken, and this could hardly occur without some accompanying bitterness on the part of India.
30. Political. In this situation the interests of the Commonwealth would certainly be prejudiced; and the disadvantages mentioned in paragraph 25 above would be experienced to an even greater extent. It would be difficult for the United Kingdom Government, or any other Commonwealth Government, to
any over the
Government in international affairs, and cies and attitude of the Indian
India might well embark on a frankly anti-western policy. This in its turn might lead her to fall eventually under Communist domination; and this, combined with Communist domination of China, might well result in the total extinction of all western influence throughout Asia.
31. Colonial. The problems mentioned in paragraph 26 above would be even more serious if India were, not merely a foreign Power, but a Power un- friendly to the Commonwealth countries and ready to exploit the difficulties inherent in the existence of large Indian communities in these territories. India would, in these circumstances, be unlikely to show any restraint in pursuing her policy of opposing "Colonialism.
,,
32. Economic. From the economic angle also, this is the most unfavourable of all the hypotheses. In this situation it would become quite impossible to maintain trade preferences or special privileges between the Commonwealth countries and India. Indeed, from a hostile India it might be difficult to secure even most-favoured-nation treatment for the future, except perhaps for goods. In such circumstances India would be free to accord to the citizens or companies of the United States or other foreign countries treatment more favourable than that accorded to Commonwealth citizens or companies. And she might treat Commonwealth countries less favourably than at present, or than other foreign countries, in the supply of certain scarce commodities.
33. Financial. For reasons of financial self-interest India might wish to remain in the Sterling Area, even though she had severed all friendly relations with the Commonwealth. In that event, it must be assumed that, though remaining within the Sterling Area, she would do nothing to co-operate in its working and would be as hostile as she thought it expedient or prudent to be. Her attitude would then be somewhat similar to that now adopted by Burma; and it would be open to her to adopt the following courses :-
(i) She might do her utmost to wreck British business interests in India. The necessities of her economic situation might restrain her from any attempt to confiscate or drive out British capital, at any rate in the short run, but the general atmosphere would deteriorate so much that British interests would tend to withdraw of their own volition from India.
(ii) She might try to stop payment of the sterling pensions payable to former members of the Indian Services. India has bought annuities with which to finance these payments, and the United Kingdom Government would still control the funds from which the pensions are paid. But the civil pensions (which form the smaller part of the whole) are paid through the Office of the High Commissioner for India in London; and the United Kingdom Government would not have enough information about the individual cases to enable them to take over the administration.
(iii) India might go as far as she dared, short of risking expulsion from the Sterling Area, in exceeding the agreed net drawings on the
Preserves of gold and dollars. Page 203 of 488
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(iv) She might do the least she need by way of co-operating in strengthening the position of sterling, e.g., in helping the wording of Payments Agreements which establish a basis of payment in sterling. This might cause serious embarrassment.
If, however, India indulged to any serious extent in either or both of the two latter policies, it would become necessary to expel her from the Sterling Area.
34. If, however, India decided to leave the Sterling Area, by reason of her general hostility to the Commonwealth countries, it would be open to her to take the following action (in addition to the two courses indicated in sub-paragraphs (i). and (ii) of the preceding paragraph)
:
(i) She could demand an exchange guarantee to protect the value of her sterling balances against a possible depreciation of sterling. Such a guarantee would be both embarrassing and harmful to the position of sterling Egypt's request for such a guarantee has already been refused. (ii) She would demand a share of the central reserves of gold and dollars; and, in view of her hard-currency deficit (which is now running at a rate of £40 millions a year), she would certainly press for a large share of the reserves. A similar demand from Egypt has already been
refused. (iii) She might try to apply dollar invoicing in her trade with the United Kingdom and other sterling area countries. This would be wasteful and harmful both to the other sterling area countries and (in view of their probable retaliation) to herself; and it seems doubtful whether she would in fact take this step. For, owing to her lack of the means of exchange in which to carry on trade and payments on a dollar basis, she would have to offer sterling for most of her purchases and could not therefore do more than make limited demands for dollars for essential commodities, e.g., for jute goods. Secondly, she is at present sub- stantially in deficit (by nearly £40 millions on current account) with the Sterling Area and probably could not eliminate this deficit, though she could reduce it, in conditions of economic warfare. She would there- fore become a net loser of dollars if there were dollar invoicing on a large scale.
35. Finally, there would be two substantial disadvantages to the Common- wealth if India left the Sterling Area. First, the exchange control maintained in London would have to bear a very large additional burden in handling the great volume of transactions between India and the United Kingdom. Secondly, Pakistan would probably desire to remain in the Sterling Area; and Commonwealth countries would be seriously embarrassed if it proved impossible to meet her desire because of the defective exchange control between India and Pakistan.
VI.
Summary
36. This analysis shows that the third of the three hypotheses discussed in this paper is from all points of view-political, colonial, economic, financial and military the most disadvantageous to Commonwealth countries.
Between the first and the second hypotheses there is perhaps less to choose. From the point of view of military interests the important need is that India should be on friendly terms with the Commonwealth countries, and her consti- tutional status is of secondary importance.
From the financial point of view, it is desirable that India should remain a co-operative member of the Sterling Area. But it is not essential for this purpose that she should continue a member of the Commonwealth. There is no reason why she should not give full financial co-operation within the Sterling Area as a foreign country in close great relationship with the Commonwealth countrie04 of 488
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Paremore gefn48 economic grounds, the first hypothesis clearly preferable to the second. The existing preferences, both in trade and in the treatment of nationals, might be maintained so long as India remained a member of the Commonwealth, even though she severed her connection with the Crown; but it is very unlikely that they could be preserved if India became a foreign State, however close her treaty relations with the Commonwealth countries.
From the point of view of repercussions in the Colonies the first hypothesis is the least inconvenient.
The political considerations are perhaps more nicely balanced as between the first and second, hypotheses.
37. Thus, whatever view is finally taken of the relative advantages of the first and second hypotheses, it is at least clear that it will be of special importance that the negotiations with India should be so conducted as to ensure that, if she has to leave the Commonwealth, she does so in an atmosphere of goodwill and with intentions conducive to the continuance of a friendly association with the countries of the Commonwealth.
February, 1949.
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