India's first Union Budget after Independence was tabled in the shadow of the Partition. It carried the cost of a hurried political division, mass displacement, and a complex financial settlement with Pakistan.
The government of Independent India presented its first Union Budget on November 26, 1947, barely three months after the country was born. Finance Minister R K Shanmukham Chetty introduced an interim Budget for the shortened fiscal year from August 15, 1947, to March 31, 1948. It projected revenues of Rs 171.15 crore against expenditure of Rs 197.39 crore, leaving a deficit of about Rs 26 crore.
Partition And Cash Division
At the time of Partition, undivided British India held cash balances estimated at about Rs 400 crore. Under the agreed financial settlement, Pakistan was entitled to 17.5 per cent of the assets and liabilities of British India.
From these cash reserves, Pakistan's share was fixed at around Rs 75 crore. This included a working balance of Rs 20 crore that was released on August 15, 1947, the day India became independent. The remaining amount was to be transferred later, as part of the inter-Dominion settlement between the two new governments.
The division of finances was overseen by the Partition Council, chaired by Lord Mountbatten, with leaders from both sides, including Sardar Vallabhbhai Patel, Rajendra Prasad, and Muhammad Ali Jinnah.
Some areas of the Partition, such as defence cooperation, currency, and public finance, were initially handled through negotiated arrangements. For over a year after Independence, India and Pakistan even shared the same central bank, with the Reserve Bank of India managing currency and banking functions for both until September 1948.
After the initial Rs 20 crore was transferred, the remaining Rs 55 crore became entangled with the deteriorating political relationship between the two countries.
The Kashmir Conflict And A Frozen Payment
Following the invasion of Kashmir in late 1947, India decided to withhold further payments to Pakistan, saying that it could not release funds to a government taking hostile action. Pakistan objected to linking financial transfers with the Kashmir dispute and demanded immediate payment.
Mahatma Gandhi then intervened. According to the RBI's official history, Gandhi believed that the agreed cash balances should be released, regardless of political tensions.
He even undertook a fast to press this view. In January 1948, after Gandhi's assassination, the government under Jawaharlal Nehru announced that it would implement the agreement and release the funds. The decision was a contribution to Gandhi's effort for peace and goodwill, the government said at the time.
The payment was eventually made, even as relations between the two countries remained strained.
This transfer did not appear in the Union Budget as a conventional expenditure. The 1947-48 Budget, with total spending of around Rs 197 crore, concentrated on immediate needs such as refugee relief, defence, and civil administration.
The cash paid to Pakistan was handled as a balance sheet adjustment arising from the Partition settlement and not as a routine budgetary outgo.
The pressure on India's finances at the time was severe. Millions of refugees required housing, food, and rehabilitation. Revenue systems were disrupted in Punjab and Bengal, two regions central to the economy.
Government assets and liabilities had to be divided, even as the administration itself was being rebuilt. In this context, releasing tens of crores of rupees to Pakistan represented a significant strain on depleted reserves.
For years, Indian financial statements carried entries showing large sums, often around Rs 300 crore, due from Pakistan on account of its share of pre-Partition debt and other obligations. These amounts were treated as receivables.
