CAB129-33 — Page 199

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and the volume of and 48 India for consumer goods of Pure decriptioggis heavy. Their value in the not very long run will, however, be considerable, especially with the re-emergence of strong competition from the United States, Japan and Germany and the possible entry of new European competitors into the market. Moreover, with their removal, the United Kingdom might, on some goods, face intensified competition from local Indian production protected against United Kingdom goods by a higher duty than at present. Finally, so long as the United Kingdom retains her right to receive preference in India, she can extract some useful negotiating advantage in tariff negotiations with other countries from the gradual withdrawal-if they are to be withdrawn of the preferences themselves.

18. The special treatment given to India's nationals in the United Kingdom (mainly by way of according to them as individuals relatively greater freedom of entry and stay than to foreigners) may not be of very great practical impor- tance to India. But the United Kingdom has interests of great importance in India, in the shape of British enterprises, companies and interests in Indian companies, which would be exposed to grave risk if, because of the withdrawal of the special treatment accorded to Indian nationals in the United Kingdom, India were to withdraw from Commonwealth citizens and interests such privileges as they still enjoy in India.

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There are very large United Kingdom commercial interests in India. No esti- mate, even approximate, of their capital value exists, but it is probably somewhere between £150 millions and £600 millions, of which a considerable part is in private companies. The invisible earnings of this capital are thought to account for about £20 millions a year in the United Kingdom's balance of payments with India. In addition, the existence of these interests has a substantial value from the point of view of maintaining and promoting United Kingdom trade with India.

The continuance of these United Kingdom interests in India depends upon the continuance of friendly relations between the United Kingdom and India. There is no doubt that they could be very largely eliminated by a deliberate policy of the Government of India to drive them out. Such a

Such a policy

policy might take the form either of outright expropriation or of discriminatory treatment which might make it extremely difficult for these concerns to carry on. Outright expropriation has been mentioned as the Indian Government's natural remedy for any attempt to repudiate the Indian sterling balances and might be provoked by measures in the financial field, such as the blocking of India's sterling balances to a degree unacceptable to her. Discrimination could be practised in a great variety of ways, ranging from measures which would virtually drive European businessmen out of India to measures which put them under sufficient handicap to render them unable in the long run to compete effectively with Indians. It is true that after prolonged efforts some general assurances have been obtained from the Government of India on the manner in which they will treat British interests in India. They have stated that they have no desire to harass or injure them in any way. But in changed circumstances, and particularly if Indians in the United Kingdom were to become aliens and their rights of entry, residence and activities were curtailed, India would be under strong tempta- tion to argue that her assurances could no longer stand.

19. If India remained in the Commonwealth, no absolute security would be obtained against any of these risks. It cannot be said that the Commonwealth connection contains any obligation to refrain from discriminatory measures in the internal economic field if this is justified on grounds of national economic necessity. Nevertheless, to retain India in the Commonwealth seems to provide the best hope of maintaining friendly economic relations and fair treatment for other Commonwealth citizens in India. Moreover, if India remains in the Commonwealth, it becomes possible for her, if she so desires, to give better than most-favoured-nation" treatment to other Commonwealth citizens in a number of important respects though she might be unwilling to continue those con- cessions if foreign countries showed any disposition to challenge them before the International Court.. It is part of the Indian proposals that they would make provision in their commercial treaties with foreign Powers which would enable them to do this, and that Commonwealth countries would be declared to be non- foreign for the purpot488 The existing position is that at Kingdom nationals and, for the most part, other foreign nationals receive national treatment

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in India Incertainggspects, however, United Kingdom nationals receive national treatment in matters in which foreign nationals do not receive it. This applies particularly in the sphere of taxation where there have, until recently, been certain concessions regarding the taxation of private companies which applied to United Kingdom companies as well as to Indian companies. The Government of India have, in the last eighteen months, taken power to treat United Kingdom private companies as foreign for taxation purposes, but they are now considering repre- sentations by United Kingdom nationals and by the High Commissioner against this innovation. There are some signs that they may be willing to consider these favourably.

20. A further point in favour of the first hypothesis, as against the second, is that the existing safeguards for the preferences, whether for goods or nationals, are expressed in quite general terms in commercial treaties so that it would be possible for India, so long as these safeguards are preserved in her treaties, to give to other Commonwealth countries all kinds of preferences without risk of challenge. But once India ceased to be a member of the Commonwealth, any such special favours would have to be enshrined in formal treaty clauses. In this form, when India had become foreign, they would become much more open to challenge by other foreign countries on most-favoured-nation grounds. Indeed, careful exploration of this problem at an earlier stage led to the conclusion that the chances of preserving special Commonwealth privileges in a foreign India by means of any formal treaty would be poor, and that unilateral assurances from India, even of an informal kind, would be more likely to give the desired results.

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21. Finally, it should be noted that any outcome under which the United Kingdom had to give Indian goods or nationals less favourable treatment than that accorded to Pakistan's goods or nationals would give rise to serious practical difficulties in maintaining the latter treatment. This consideration again weighs, from the trade point of view, in favour of the first hypothesis as against the second or the third.

22. Financial.-If India remained within the Commonwealth, it is reasonable to assume that she would also remain within the Sterling Area. There would then be no tangible change in the financial relations between India and the rest of the Commonwealth. Any unwillingness on India's part to co-operate in financial and economic matters, or to accord favourable treatment to British interests in India (as distinct from her ability under international law and treaty obligations to continue to give them preferential treatment) would result from causes more or less independent of any constitutional change. But India's continuing membership of the Commonwealth might be expected to imply a greater readiness to give full co-operation in financial matters as a member of the Sterling Area.

IV

Second Hypothesis: That India becomes a foreign State in especially close treaty relationship with the United Kingdom and other Commonwealth countries.

23. Political.-If India left the Commonwealth in the circumstances envisaged under this hypothesis, her relations with the United Kingdom and other Commonwealth countries, and the extent to which other Commonwealth Govern- ments could continue to exercise influence over Indian policy, would then depend. largely on the nature of the treaty relationships which could be arrived at. In the process of negotiating such treaties, India herself might come to realise more readily where her interests lay, while Commonwealth countries would hope to establish in the new relationship adequate provision not only for the preserva- tion but for the strengthening of existing ties. By these means relations with India might in practice become easier than they are under the Commonwealth system, where rights and obligations are undefined and are left to the good sense and good feelings of the different Governments. From the particular point of view of the United Kingdom, it could no longer be held that there was any moral obligation upon the United Kingdom to come to the assistance of India if threatened by aggression, while India recognised no such reciprocal obligation.

Bagel foreign policy of Commonwealth Golaghat fight also benefit from the fact that India, no longer in a position to exert pressure by the real or implied threat of leaving the Commonwealth, would have no pretext for

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invoking Commonwealth assistance in any policy which was designed solely to further Indian interests88All Commonwealth countriespwould be ablegto treat each aspect of their relations with India strictly on its merits. Under the stress of world events India might find that the loss of the Commonwealth connection was adversely affecting her own position and security, and even her internal stability, and might thereby be led to seek a renewal of Commonwealth support by offering greater reciprocity than she does at present.

25. On the other hand, India's secession from the Commonwealth would have world-wide repercussions. Judging by the fact that the Soviet Union voted for the admission to the United Nations of Burma, which had left the Common- wealth, while they vetoed the application of Ceylon, which remains a member, it could be expected that India's departure from the Commonwealth would be exploited to the full. Every effort would be made to exaggerate the degree of the estrangement and, without the steadying influence of Commonwealth member- ship, India herself might respond. She might then tend to greater intransigence in her handling of international affairs, and show less willingness to consider the interests of other Commonwealth countries. Foreign countries other than the Soviet Union would have an incentive to establish closer relations with India which might be to the detriment of Commonwealth countries.

One of the most serious disadvantages of this course is the situation that would arise if India left the Commonwealth and Pakistan remained within it. The political dangers of that situation are obvious. Reference is made elsewhere to its economic and financial difficulties.

26. Colonial.-If India became a foreign State, political difficulty would arise in any British Colonial territory in which a substantial majority of the Indian community opted for Indian nationality. Those who so opted would presumably have to be disfranchised, and the creation of alien communities without political rights would aggravate the difficulties to which the Indian com- munities already give rise. Other communities would intensify their attacks upon them, and also upon any Indians who chose to remain British subjects. There might even be demands for the deportation of all persons of Indian origin. No treaty relationship with a foreign India could reduce the bad effects which India's complete independence would have on the future of constitutional development in Colonial territories. It could not fail to increase the influence of the extreme nationalists in the Colonies, and would correspondingly reduce the influence of the more responsible political leaders who are content that their peoples should remain within the Commonwealth.

27. Economic.-If India became a foreign State, it would be very unlikely, as indicated in paragraph 16 above, that the Commonwealth countries could preserve their trade preferences and the privileged position of their trade connections in India. Further, it seems highly doubtful whether Commonwealth countries could in fact secure by a special treaty with India the assurances of special treatment which they would wish to obtain. Even if these could be secured, there would be far greater risk of their being successfully challenged by foreign countries under their most-favoured-nation treaties with India. This applies particularly to the privileges for nationals and companies, though the trade preferences would also become open to challenge from many countries. In fact, it seems virtually certain that, even under a special treaty, Commonwealth interests in India could not receive anything better than most-favoured-nation treatment in any field. The effects of this change,

The effects of this change, particularly in regard to taxation, might be severe on United Kingdom companies and would substantially reduce the invisible earnings which at present assist the United Kingdom's balance of payments with India.

28. Financial. As indicated in paragraph 10 above no special financial problems would be raised if India remained within the Sterling Area as a foreign country in close treaty relationship with the United Kingdom and other Common- wealth countries. Such a treaty relationship might be no less satisfactory than the Commonwealth membership as a basis for financial co-operation. Indeed, in one respect it might be even more satisfactory. For if it were at any time decided that India's membership of the Sterling Area was more of a liability than an

to if

such exclusion would precipitate her withdrawal from the Commonwealth.

•Boss 39 not then be necessary to take into accoue as me a foreign

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