Slice of History: Politics scored over economics on trade ties with Soviet Bloc

One of the more striking features of India's external economic relationships of the 1950s and the 1960s was the forging of trade, investment, and financial links between India and the centrally planned economies of eastern Europe.

Until 1952, trade contact with east Europe was confined to agreements with Poland, Yugoslavia, Hungary, and Czechoslovakia. Business contacts with the then Soviet Union and other countries of eastern Europe were established in the 1950s, which did not have the stamp of approval of the central bank.

Thereafter, trade with the region increased rapidly. These bilateral agreements were important because they were believed to give India access to new markets, and enabled it to import the crucial capital and defence goods, often on easy rupee payment terms. Political considerations weighed in more when it came to India's policy on trade and financial relations.

But a rapid expansion of these bilateral rupee payment agreements evoked a certain amount of concern in the central banking circles as they led directly or indirectly to a reduction in India's hard currency export receipts.

Alarmed by what appeared to him as a headlong push towards bilateral trading arrangements and the limited benefits to India from them, the then RBI governor HVR Iyengar wrote to the then Prime Minister Jawaharlal Nehru, alerting him of the dangers of such agreements, notes one of the volumes of RBI's history. But Nehru brushed aside Iyengar's reservations.

In a two-page handwritten note, he instructed the finance ministry to ignore the governor's views and declared that "political compulsions far outweighed economic considerations in this relationship".