The phenomenon of a balance of payments surplus combined with a high level of liquidity and low levels of investment is not a particularly new aspect of the Indian economy.

Indeed that was the normal condition for India before a planned economy; there was always a surplus of exports over imports.

For example in the average period of ten years before the First World War, the excess of exports over imports was 51per cent which rose to 64 per cent in 1916-17; this surplus was balanced by imports of bullion after providing for deficits in such invisible items as shipping, insurance and remittances.

In those days India was a net remitter to the rest of the world, the bulk of which was paid for merchandise surpluses in the balance of trade.

Yet these customary surpluses did not lead to faster investment; on the contrary as Findlay Shirras the director of statistics to the government of India wrote in 1919 "If on an average each man kept in his house or otherwise hid away two rupees per annum, the entire surplus would dissipate in unusable hoardings."

"He complained that as a consequence of lack of better education and of proper banking facilities "absorption (of precious metals) is bound to continue on a large scale and our resources will continue to be dissipated in this appalling manner." (Italics mine).

It was perhaps this tendency that led to the economic analysis that "the history of India at all times has provided an example of a country impoverished by a preference for liquidity. . .  that has been insufficient to bring down the rate of interest to a level which was compatible with the growth of real wealth" ( Keynes General Theory, page 337).

It had become an economic trivia to seek an explanation for slow development in India to a blind passion for silver and gold.

But in reality as Shirras himself half realised, the true answer may lie elsewhere; it was the lack of banking facilities that were so damaging to the Indian accumulation of savings.

For as David Ricardo pointed out "the distinctive function of the banker begins as soon as he uses the money of others'; as long as he uses his own money he is only a capitalist."(Bagehot Volume IX published by The Economist).

It is a necessary condition of deploying other people's money for an adequate degree of trust is developed between depositors and lenders of money.

Unfortunately the trouble in India was that "The perpetual see-saw of good and bad years due to the vagaries of the monsoons which is the jugular vein of Indian trade does not increase the cultivator's trust in things and added to these facts is the absence of any real banking system. Every one outside towns may be said to be a firm believer in the saying that 'every man should be his own banker'."

(Shirras 'Indian Finance and Banking') If this was characteristic of the Indian financial system, that is if every man was his own banker this is not in the Ricardian sense 'banking' at all but actions of small capitalists choosing only to trust themselves and not others for the deployment of their own money.

Much has changed. We now have an extensive banking system that is able to absorb much of currency from the public; but what seems unchanged in the eighty years that have passed since Shirras book, is a fundamental lack of trust between savers and borrowers.

Every man may no longer be his own banker but still the guardians and custodians of depositor's money have little faith in the will to risk and are all too ready to a preference for lending to government than to funnel a boom in private investment.

It is the relative and innate conservatism of the Indian banking system that has prevented the transfer of hoardings into savings. In the use of such words one needs to define one's concepts rather carefully.

John Stuart Mill distinguished savings from hoardings in the following language; "Savings does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that if consumed immediately it is not consumed by the person who saves it"; on the other hand, in the case of hoarding "it is merely laid out for future use; and while hoarded is not consumed at all" (Mill 'Principles of Political Economy' Book 1 chapter 5).

In other words, savings do not lie idle but are borrowed and thereby utilised by one person or the other while hoardings lie unused both by the person who first accumulates it and subsequently until he uses it.

The above definition of savings by Mill reveals an essential economic characteristic; the value of savings and the accumulation thereof is useful only so long as it is in the form that it is utilisable by others, but if it is merely hoarded for future consumption of the saver himself, it cannot play a useful role in the process of development.

In India with its ill developed banking system, there was no saving only hoarding either in the form of precious metals or unutilised currency.

Therefore the surpluses in the balance of payments and the accumulation of hoarded capital contributed nothing to Indian development, whereas in the more advanced countries like the United Kingdom, the banking system was able to transform savings into dynamic investments.

It was the banking facilities of London that enabled the UK to use its savings for productive purposes.

Whenever I embark on these historic anecdotes the editor requires me to relate these economic tales to present circumstances. It is my hope that in this case the lesson to be learnt is not as obscure as my previous tales.

We are today basking in the sun of surpluses both in terms of balance of payments and liquidity, but somehow there is a niggling doubt on whether we are able to absorb these surpluses for active development or whether we shall be caught in the distressing syndrome that for so long held India back as "the sink of precious metals" that is, in an endless programme of inactive hoarding to guard against the possibility of troublesome times in the future.

To some extent these anxieties reflect an attempt to protect ourselves against an uncertain future that Keynes implied was our wont.

It is this precautionary attitude that we should be wary of to ensure that the accumulation of savings does not disintegrate into an accumulation of hoardings.

It is to that end that bankers capable of assessing the risk of loans are imperative. For it serves no purpose if banks accumulate deposits for which they find no commercial users.

Indian banks have perhaps established enormous success in garnering resources from the public particularly in rural areas; but they have been less successful in finding borrowers for their resources.

As a result the hoarding tendencies of Indians have not diminished, only that they have been one step removed from hoarding money themselves into allowing banks to hoard money.

As a reflection of depositors preference, banks seek to lend to the government rather than trust other borrowers. To that extent we have progressed little from the hoarding through precious metals of our forefathers.

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