The article you're quoting is misleading - Britain was in technical default of one condition of the Anglo-American loan and did not default on it's wartime debts.

The Sterling Area, Dollar Pooling and Convertibility

The Sterling Area was the group of countries that had pegged their currency to the Sterling with the main benefit of allowing almost complete freedom of payment amongst its members. It had informally existed since the depression but was only formally defined after the start of the war. It included most members of the Commonwealth (Canada and Newfoundland being the major exception, as they were pegged to the US dollar) as well as independent countries such as Egypt and Iraq. Due to the needs to purchase war materiel overseas, paid for in US dollars or gold, exchange controls were set-up shortly after the outbreak of the war. This was known as dollar pooling. Members of the bloc would impose exchange controls that required existing dollar holdings (and gold) and any subsequent dollar earnings to be surrendered to the control authorities of each country; any surplus holdings in each country would be sold to the Bank of England in exchange for Sterling and dollar expenditure would be controlled through import controls. This allowed London to control the flow of Dollars in the bloc area so that they could be used for cash and carry purchases. Such a system had existed informally before the war, with most members holding their currency reserves in London denominated in Sterling. Convertibility was the ability to draw back these Sterling holdings and convert them back into other currencies in order to fund imports. Free convertibility was suspended during the war – only “essential” imports were to be funded and would be decided upon based on need rather than contribution to the pool.

Britain’s Wartime Debts

At the end of the war, the Sterling account balance of the Indian government totalled £1.321b, around a third of the total amount, even after being reduced by £650m during the war through the repatriation of debts held in Britain, the sale of British held assets in India (primarily railways), the sale of gold and overseas imports into India. The debt resulted from British war expenditure within India, as defined by the Financial Agreement of 1940 signed between the British and Colonial Indian governments. The agreement stipulated that Britain would fund 75% of the cost of the modernisation of the Indian army and fully fund the cost of troops raised in India for service abroad, while the Indian government would pay the cost of war measures undertaken on its behalf. The fact that the agreement was signed before the Japanese entry into the war and subsequent invasion of Burma caused significant friction between the two governments, Burma having been administratively separated from India in 1937 meant that the war was considered fighting abroad rather than the defence of India itself. There would be loud calls in Britain to renegotiate the agreement to reduce part of the debt owed to India to claim back part of the costs of the Burma campaign.

The Dollar Crisis and the Anglo-American Loan

The freeing up of shipping resulting from the end of the war and the demands for food and machinery to help rebuild resulted in massive demand for imports form the United States. The pre-war balance of payments between the Dollar and Sterling areas had been shattered - whereas exports from the Sterling area had been 115% of the value of imports pre-war, they were now less than 50%. The two most important exports to the dollar region – gold and rubber – had lost value compared to other trade commodities. The informal wartime methods of restraining dollar spending within the Sterling area fell apart as individual countries looked to their own rebuilding efforts resulting in massive demands on the dollar pool. Britain’s need to fund the balance of payments until trade recovered (estimated to be around 1950) and the unexpectedly abrupt end of lend-lease a week after the war resulted in John Maynard Keynes’ trip to the US in late 1945 to try and secure $5b in credits. The US government was unwilling and instead agreed to loan $3.75b under certain conditions – including the resumption of Sterling convertibility 1 year after the signing of the agreement (Article 7 – due to come into force in July 1947). Meanwhile, European countries such as Belgium and Sweden had opened Sterling transferable accounts and were building large surpluses by restricting imports from Britain. These countries were entitled to convertibility prior to article 7 coming into force and were already putting pressure in Britain’s dollar reserves and loan credits. Balances were falling rapidly from $7.1b in July 1946 to $4.7b in July 1947 just prior to convertibility. In effect these countries were passing on their own dollar shortages onto Britain. Agreements to only convert ongoing trade balances and not capital amounts were broken before the ink had dried. Once convertibility came into force $870m was converted in six weeks. This level of drain was utterly unsustainable, and Britain would likely collapse economically if it continued. After renegotiations with the US government the dollar pool and import restrictions were reintroduced, along with drastic cuts in British government spending. Bilateral agreements were signed with the members of the transferable account area to exclude convertibility.

Settling the Indian Debt

Britain entered negotiations with the Colonial Government of India in early 1947 to settle the Sterling balance question. Britain initially wished to divide the debt into 3 parts – one to be released immediately, one to be released over a five-year period and the remainder to be ‘adjusted’, that is to be written off as part of the counterclaim against the 1940 Financial agreement. It had seemed that the US government would be more generous to Britain, but when this did not eventuate British negotiators saw low interest rates and a long-term release of the Sterling balance as more a realistic goal than cancellation of part of the debt. The Government of India initially requested releases of £250m to be released per annum and a significant interest rate. An agreement was signed at the time of independence on 14 August 1947 with the debt at time of independence calculated at £1.16b. Sterling balance releases of £35m of which £15m was in dollars through to the end of that year were agreed. Further negotiations occurred in the first half of 1948, complicated by India overspending Dollar balances by £23m in 1947 and then threatening to leave the Sterling area – a major threat as Britain could not reduce imports of Indian primary goods whereas Indian imports of British consumer goods could be redirected. An agreement was reached in July 1948 for £168m to be used to fund future Indian pension obligations through the purchase of annuities in London and £45m would be used to purchase defence installations and stores at a significant discount. Various releases were agreed up to mid-1951 totalling £593m to cover Indian balance of payments for imports and an additional £180m was transferred to the government of Pakistan as part of the partition settlement. By 1956, £815m of the £1.16b balance had been released with the remainder being held as foreign exchange reserves to fund the growing trade deficits. No part of the debt was cancelled or defaulted.

Sources

Review of Foreign Developments 242: India and Sterling Convertibility – Yves Maroni, United States Federal Reserve (August 1954)

Sterling and Imperial Policy 1945-51 – Allister E. Hinds. The Journal of Imperial and Commonwealth History, Volume 15 (1987)

The Background to Sterling Convetibility – J.R. Sargent. The Political Quarterly (January 1955)

Sterling in 1947: The Problem of Convertibility – E.C. The World Today, Volume 3, No 2 (February 1947)

The Sterling Crisis of 1947 and the British Response to the Marshall Plan – C. C. S Newton. The Economic History review, Vol 37, No 3 (Aug 1984)

Dollar Pooling in the Sterling Area, 1939-1952 – Kenneth M. Wright. The American Economic Review, Vol. 44, No.4 (September 1954)

India as a Creditor: Sterling Balance 1940-1953 – Mercelo de Paiva Abreu