Why South East Asia once considered economic integration with India

By the 1950s, quite a few nations in South East Asia had attained independence, but that did not completely end their reliance on their old colonial masters. For technical expertise, these countries still depended on their erstwhile rulers, and for international trade, they had no option but to use hard currencies. Faced by these obdurate problems, the region looked to India for answers and, for a very brief while, a radical idea popped up: integrating the Indian economy with its Asian neighbours and setting up a payments union.

India at the time was viewed as a stalwart of the anti-colonial movement. As the Cold War erupted, it had made plain that it would neither get swayed by the United States nor by the Soviet Union. “There’s no ambiguity about India’s stand,” the National Herald said in an editorial in 1950. “She feels that if she aligns herself with either of the two power blocks, the world would be irrevocably divided into two camps and the result would be war.”

Such statements were widely welcomed in South East Asia, where the emerging leadership wanted to follow a similar path and saw India as an economic example.

Their concerns can be revisited today in the documentation of a delegation of the All India Manufacturers’ Organisation that toured South East Asia in 1953. Led by the trade body’s chairman Murarji J Vaidya, the delegation visited Burma, Thailand, Hong Kong, Japan, the Philippines, Singapore, Indonesia and Ceylon and met the local leadership.

“During the tour and the discussions which were held, it was found that while every country in Southeast Asia is trying to develop its economy with a view to raise the standards of living of the people, they are faced with many economic problems including those relating to their balance of payments position,” Vaidya, who would later head the Indian Merchants’ Chamber, wrote in a letter to the Indian Finance Ministry in December 1953.

“The economies of most of these countries are parallel in the sense that with the exception of India and Japan, all other countries are dependent on the export of the same type of raw produce,” Vaidya added. “Any fall or rise in the prices of these raw commodities, consequent upon any alterations in the demand for these commodities by the Western countries, immediately affects the entire economy of the region.”

A meeting with chambers of commerce in Rangoon was the first time the ideas of establishing a South East Asian payments union and holding a South East Asian economic conference were proposed. “The delegation subsequently had opportunities of discussing these proposals with the leaders in the governments, chambers of commerce and the governors of the central banks of the countries which the delegation visited,” Vaidya said in his letter.

Upon his return, Vaidya submitted a set of proposals to the Indian government that were well ahead of their time. He called for integrating the Indian economy with Asian neighbours and setting up a payments union.

Post-colonial exploitation

In a report to the Indian Ministry of External Affairs, Vaidya said it was “profitable for Western countries to keep these Southeast Asian countries dependent upon their purchasing power and the facilities they grant in the matter of foreign exchange to these countries because it enables them to purchase all these commodities at the prices that suit these western countries”.

At the time there was little manufacturing capacity in South East Asia. The commodities the region possessed were exported to the West and the finished products produced in the West were imported. Vaidya said there was a recognition in the region that they needed to manufacture with their own commodities.

“While these manufacturing processes are comparatively simple and have been known and practised in a country like India for many decades, they are still comparatively unknown to the nationals of other countries in Southeast Asia,” he wrote in the report. “A wish was expressed by many of these countries that if India could provide the necessary technical assistance to them in this respect particularly in the matter of running simple processing industries and of providing them with the required machinery now being manufactured in India, it would be a great help to them.”

As much as technical assistance, the region was in need of technicians. Not having enough of them at home, South East Asian nations were relying on technicians from their erstwhile rulers to run their industries.

“Some of these countries, which suffered damage at the hands of Japanese soldiers during the last war, are psychologically averse to seeking Japan’s help in the matter of technicians particularly,” Vaidya wrote. “They naturally look forward to India as the next most industrially advanced country in Asia to help them out and to guide them.”

Currency crisis

Leaders in South East Asia informed the visiting Indian delegation that their balance of payments was entirely reliant on foreign exchange earnings from the export of raw commodities.

“One of the remedies discussed by the delegation in these countries was greater utilization by India or Japan of the raw produce of these countries for being converted into a final product,” Vaidya wrote in the report. “This would particularly apply to commodities like rubber, copra and minerals. The other alternative discussed was the organised cooperative or co-ordinated sale by all these countries, including India, of commodities like tea, coffee, rubber to the Western countries without competition among these countries.”

The biggest proposal from these countries was to pool all their foreign exchange and create a clearing house, with a view to helping any member country facing a shortage.

“Japan and the Philippines are the two countries which have a much easier dollar position than any other country in this region but both these countries are actually short of sterling,” Vaidya wrote. “The other countries in this region such as India, Ceylon, Malaya etc. have a much easier position in Sterling, but are short of dollars. It was felt that there was no reason why these surpluses and shortages could not be adjusted among these countries, without waiting for any action either by the Western countries or by the International Monetary Fund or the World Bank.”

Representatives of Western countries were aware of these proposals, said Vaidya, and were opposed to them for “obvious reasons”.

The External Affairs Ministry shared Vaidya’s report with the Finance and Commerce and Industry ministries, both of which did not take kindly to it. The Finance Ministry forwarded the proposal for a payments union to the Reserve Bank of India, which studied it in detail and concluded that the “establishment of a payments union, even if accompanied by trade liberalisation measures, would not increase intra-regional trade to any substantial extent”.

In 1952, the share of India’s exports to countries that would have become a part of the payments union was about 26.2%, while settlements for 33% of its exports were in pounds sterling. India used the pound for trade with Britain, Burma, Pakistan, Singapore, Malaya, China and Japan.

“India conducts its trade with all these countries in Sterling and hence enjoys the facilities for multilateral clearing of payments,” the central bank said in a report. “The establishment of a Payments Union therefore is not likely to bring any substantial benefits to India. Multilateral credit facilities provided by the Union might enable the countries of the region to bring about reductions in trade barriers and this might tend to increase India’s trade with the region. Even this increase in trade is not likely to be substantial.”

The Reserve Bank of India also rejected Vaidya’s proposal for Indian assistance to South East Asia in manufacturing. “India is not in a position to meet the needs of this region regarding a wide variety of capital and other manufactured goods,” the bank said. “Its principal current exports to the region are cotton piecegoods, twill and yarn, jute manufactures, tobacco (manufactured), iron ore, coal, manganese ore, raw cotton, etc. It does not and at present cannot supply the capital goods, including machinery and metal products, which the countries of this region are likely to demand in increasing quantity as their economic development proceeds.”

For its part, the Commerce and Industry Ministry expressed disdain at the “impropriety” of Vaidya and his delegation in approaching foreign governments without its concurrence. The ministry also washed its hands off a South East Asian economic conference.

“While we do not associate with this conference officially, I think we should also tell Mr. Vaidya that the AIMO should not attempt work which is already being done on Governmental level, but should concentrate on problems which require coordinated action by private enterprise, e.g. export promotion, modernisation of manufacturing units, etc,” MKK Nayar, an official with the ministry, said in a note to the Foreign Ministry.

After considering the Reserve Bank’s report and the resistance from the Finance and Commerce ministries, the External Affairs Ministry decided to reject Vaidya’s proposals. In doing so, it is possible that India, which showed great enthusiasm towards economic cooperation with South East Asia in the early 1950s, failed to leverage its historical connections and lost out on an opportunity.

Ajay Kamalakaran is a writer, primarily based in Mumbai. His Twitter handle is @ajaykamalakaran.