Map of Xinjiang/Sinkiang/East Turkestan 1967: Could this be the best available in the public domain?
July 8, 2009 — drsubrotoroyMistaken Macroeconomics: An Open Letter to Prime Minister Dr Manmohan Singh
June 12, 2009 — drsubrotoroyThe Hon’ble Dr Manmohan Singh, MP, Rajya Sabha
Prime Minister of India
Respected Pradhan Mantriji:
In September 1993 at the residence of the Indian Ambassador to Washington, I had the privilege of being introduced to you by our Ambassador the Hon’ble Siddhartha Shankar Ray, Bar-at-Law. Ambassador Ray was kind enough to introduce me saying the 1991 “Congress manifesto had been written on (my laptop) computer” – a reference to my work as adviser on economic and other policy to the late Rajiv Gandhi in his last months. I presented you a book Foundations of India’s Political Economy: Towards an Agenda for the 1990s created and edited by myself and WE James at the University of Hawaii since 1986 — the unpublished manuscript of that book had reached Rajivji by my hand when he and I first met on September 18 1990. Tragically, my pleadings in subsequent months to those around him that he seemed to my layman’s eyes vulnerable to the assassin went unheeded.
When you and I met in 1993, we had both forgotten another meeting twenty years earlier in Paris. My father had been a long-time friend of the late Brahma Kaul, ICS, and the late MG Kaul, ICS, who knew you in your early days in the Government of India. In the late summer of 1973, you had acceded to my father’s request to advise me about economics before I embarked for the London School of Economics as a freshman undergraduate. You visited our then-home in Paris for about 40 minutes despite your busy schedule as part of an Indian delegation to the Aid-India Consortium. We ended up having a tense debate about the merits (as you saw them) and demerits (as I saw them) of the Soviet influence on Indian economic “planning”. You had not expected such controversy from a lad of 18 but you were kindly disposed and offered when departing to write a letter of introduction to Amartya Sen, then teaching at the LSE, which you later sent me and which I was delighted to carry to Professor Sen.
I may add my father, back in 1973 in Paris, had predicted to me that you would become Prime Minister of India one day, and he, now in his 90s, is joined by myself in sending our warm congratulations at the start of your second term in that high office.
The controversy though that you and I had entered that Paris day in 1973 about scientific economics as applied to India, must be renewed afresh!
This is because of your categorical statement on June 9 2009 to the new 15th Lok Sabha:
“I am convinced, since our savings rate is as high as 35%, given the collective will, if all of us work together, we can achieve a growth-rate of 8%-9%, even if the world economy does not do well.” (Statement of Dr Manmohan Singh to the Lok Sabha, June 9 2009)
I am afraid there may be multiple reasons why such a statement is gravely and incorrigibly in error within scientific economics. From your high office as Prime Minister in a second term, faced perhaps with no significant opposition from either within or without your party, it is possible the effects of such an error may spell macroeconomic catastrophe for India.
“now has 10.4% growth on a 44 % savings rate… ”
Indeed the idea that China and India have had extremely high economic growth-rates based on purportedly astronomical savings rates has become a commonplace in recent years, repeated endlessly in international and domestic policy circles though perhaps without adequate basis.
1. Germany & Japan
What, at the outset, is supposed to be measured when we speak of “growth”? Indian businessmen and their media friends seem to think “growth” refers to something like nominal earnings before tax for the organised corporate sector, or any unspecified number that can be sold to visiting foreigners to induce them to park their funds in India: “You will get a 10% return if you invest in India” to which the visitor says “Oh that must mean India has 10% growth going on”. Of such nonsense are expensive international conferences in Davos and Delhi often made.
You will doubtless agree the economist at least must define economic growth properly and with care — what is referred to must be annual growth of per capita inflation-adjusted Gross Domestic Product. (Per capita National Income or Net National Product would be even better if available).
West Germany and Japan had the highest annual per capita real GDP growth-rates in the world economy starting from devastated post-World War II initial conditions. What were their measured rates?
West Germany: 6.6% in 1950-1960, falling to 3.5% by 1960-1970 falling to 2.4% by 1970-1978.
Japan: 6.8 % in 1952-1960 rising to 9.4% in 1960-1970 falling to 3.8 % in 1970-1978.
Thus in recent decades only Japan measured a spike in the 1960s of more than 9% annual growth of real per capita GDP. Now India and China are said to be achieving 8%-10 % and more year after year routinely!
Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps it is just something incredible, something false and misleading, like a mirage in the desert.
You may agree that processes of measurement of real income in India both at federal and provincial levels, still remain well short of the world standards described by the UN’s System of National Accounts 1993. The actuality of our real GDP growth may be better than what is being measured or it may be worse than what is being measured – from the point of view of public decision-making we at present simply do not know which it is, and to overly rely on such numbers in national decisions may be unwise. In any event, India’s population is growing at near 2% so even if your Government’s measured number of 8% or 9% is taken at face-value, we have to subtract 2% population growth to get per capita figures.
2. Growth of the aam admi’s consumption-basket
The late Professor Milton Friedman had been an invited adviser in 1955 to the Government of India during the Second Five Year Plan’s formulation. The Government of India suppressed what he had to say and I had to publish it 34 years later in May 1989 during the 1986-1992 perestroika-for-India project that I led at the University of Hawaii in the United States. His November 1955 Memorandum to the Government of India is a chapter in the book Foundations of India’s Political Economy: Towards an Agenda for the 1990s that I and WE James created.
“I don’t believe the term GNP ought to be used unless it is supplemented by a different statistic: the rate of growth of the average consumption basket consumed by the ordinary individual in the country. I think GNP rates of growth can give very misleading information. For example, you have rapid rates of growth of GNP in the Soviet Union with a declining standard of life for the people. Because GNP includes monuments and includes also other things. I’m not saying that that is the case with India; I’m just saying I would like to see the two figures together.”
You may perhaps agree upon reflection that not only may our national income growth measurements be less robust than we want, it may be better to be measuring something else instead, or as well, as a measure of the economic welfare of India’s people, namely, “the rate of growth of the average consumption basket consumed by the ordinary individual in the country”, i.e., the rate of growth of the average consumption basket consumed by the aam admi.
It would be excellent indeed if you were to instruct your Government’s economists and other spokesmen to do so this as it may be something more reliable as an indicator of our economic realities than all the waffle generated by crude aggregate growth-rates.
3. Logic of your model
Thirdly, the logic needs to be spelled out of the economic model that underlies such statements as yours or Meghnad Desai’s that seek to operationally relate savings rates to aggregate growth rates in India or China. This seems not to have been done publicly in living memory by the Planning Commission or other Government economists. I have had to refer, therefore, to pages 251-253 of my own Cambridge doctoral thesis under Professor Frank Hahn thirty years ago, titled “On liberty and economic growth: preface to a philosophy for India”, where the logic of such models as yours was spelled out briefly as follows:
Let
Kt be capital stock
Yt be national output
It be the level of real investment
St be the level of real savings
By definition
It = K t+1 – Kt
By assumption
Kt = k Yt 0 < k < 1
St = sYt 0 < s <1
In equilibrium ex ante investment equals ex ante savings
It = St
Hence in equilibrium
sYt = K t+1 – Kt
Or
s/k = g
where g is defined to be the rate of growth (Y t+1-Yt)/Yt .
The left hand side then defines the “warranted rate of growth” which must maintain the famous “knife-edge” with the right hand side “natural rate of growth”.
Your June 9 2009 Lok Sabha statement that a 35% rate of savings in India may lead to an 8%-9% rate of economic growth in India, or Meghnad Desai’s statement that a 44% rate of savings in China led to a 10.4% growth there, can only be made meaningful in the context of a logical economic model like the one I have given above.
[In the open-economy version of the model, let Mt be imports, Et be exports, Ft net capital inflows.
Assume
Mt = aIt + bYt 0 < a, b < 1
Et = E for all t
Balance of payments is
Bt = Mt – Et – Ft
In equilibrium It = St + Bt
Or
Ft = (s+b) Yt – (1-a) It - E is a kind of “warranted” level of net capital inflow.]
You may perhaps agree upon reflection that building the entire macroeconomic policy of the Government of India merely upon a piece of economic logic as simplistic as the
s/k = g
equation above, may spell an unacceptable risk to the future economic well-being of our vast population. An alternative procedural direction for macroeconomic policy, with more obviously positive and profound consequences, may have been that which I sought to persuade Rajiv Gandhi about with some success in 1990-1991. Namely, to systematically seek to improve towards normalcy the budgets, financial positions and decision-making capacities of the Union and all state and local governments as well as all public institutions, organisations, entities, and projects in general, with the aim of making our domestic money a genuine hard currency of the world again after seven decades, so that any ordinary resident of India may hold and trade precious metals and foreign exchange at his/her local bank just like all those glamorous privileged NRIs have been permitted to do. Such an alternative path has been described in “The Indian Revolution”, “Against Quackery”, “The Dream Team: A Critique”, “India’s Macroeconomics”, “Indian Inflation”, etc.
4. Gross exaggeration of real savings rate by misreading deposit multiplication
Specifically, I am afraid you may have been misled into thinking India’s real savings rate, s, is as high as 35% just as Meghnad Desai may have misled himself into thinking China’s real savings rate is as high as 44%.
Neither of you may have wanted to make such a claim if you had referred to the fact that over the last 25 years, the average savings rate across all OECD countries has been less than 10%. Economic theory always finds claims of discontinuous behaviour to be questionable. If the average OECD citizen has been trying to save 10% of disposable income at best, it appears prima facie odd that India’s PM claims a savings rate as high as 35% for India or a British politician has claimed a savings rate as high as 44% for China. Something may be wrong in the measurement of the allegedly astronomical savings rates of India and China. The late Professor Nicholas Kaldor himself, after all, suggested it was rich people who saved and poor people who did not for the simple reason the former had something left over to save which the latter did not!
And indeed something is wrong in the measurements. What has happened, I believe, is that there has been a misreading of the vast nominal expansion of bank deposits via deposit-multiplication in the Indian banking system, an expansion that has been caused by explosive deficit finance over the last four or five decades. That vast nominal expansion of bank-deposits has been misread as indicating growth of real savings behaviour instead. I have written and spoken about and shown this quite extensively in the last half dozen years since I first discovered it in the case of India. E.g., in a lecture titled “Can India become an economic superpower or will there be a monetary meltdown?” at Cardiff University’s Institute of Applied Macroeconomics and at London’s Institute of Economic Affairs in April 2005, as well as in May 2005 at a monetary economics seminar invited at the RBI by Dr Narendra Jadav. The same may be true of China though I have looked at it much less.
How I described this phenomenon in a 2007 article in The Statesman is this:
“Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.”
An article of mine in 2008 in Business Standard put it like this:
“India has followed in peacetime over six decades what the US and Britain followed during war. Our vast growth of bank deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit finance in a fractional reserve banking system. Policy makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food stocks, jewellery etc.”
If you asked me “What then is India’s real savings rate?” I have little answer to give except to say I know what it is not – it is not what the Government of India says it is. It is certainly unlikely to be anywhere near the 35% you stated it to be in your June 9 2009 Lok Sabha statement. If the OECD’s real savings rate has been something like 10% out of disposable income, I might accept India’s is, say, 15% at a maximum when properly measured – far from the 35% being claimed. What I believe may have been mismeasured by you and Meghnad Desai and many others as indicating high real savings is actually the nominal or paper expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending in both India and China over the last several decades.
5. Technological progress and the mainsprings of real economic growth
So much for the g and s variables in the s/k = g equation in your economic model. But the assumed constant k is a big problem too!
During the 1989 perestroika-for-India project-conference, Professor Friedman referred to his 1955 experience in India and said this about the assumption of a constant k:
“I think there was an enormously important point… That was the almost universal acceptance at that time of the view that there was a sort of technologically fixed capital output ratio. That if you wanted to develop, you just had to figure out how much capital you needed, used as a statistical technological capital output ratio, and by God the next day you could immediately tell what output you were going to achieve. That was a large part of the motivation behind some of the measures that were taken then.”
The crucial problem of the sort of growth-model from which your formulation relating savings to growth arises is that, with a constant k, you have necessarily neglected the real source of economic growth, which is technological progress!
I said in the 2007 article referred to above:
“Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before.”
In “Growth and Government Delusion” published in The Statesman last year, I described the growth process more fully like this:
“The mainsprings of real growth in the wealth of the individual, and so of the nation, are greater practical learning, increases in capital resources and improvements in technology. Deeper skills and improved dexterity cause output produced with fewer inputs than before, i.e. greater productivity. Adam Smith said there is “invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”. Consider a real life example. A fresh engineering graduate knows dynamometers are needed in testing and performance-certification of diesel engines. He strips open a meter, finds out how it works, asks engine manufacturers what design improvements they want to see, whether they will buy from him if he can make the improvement. He finds out prices and properties of machine tools needed and wages paid currently to skilled labour, calculates expected revenues and costs, and finally tries to persuade a bank of his production plans, promising to repay loans from his returns. Overcoming restrictions of religion or caste, the secular agent is spurred by expectation of future gains to approach various others with offers of contract, and so organize their efforts into one. If all his offers ~ to creditors, labour, suppliers ~ are accepted he is, for the moment, in business. He may not be for long ~ but if he succeeds his actions will have caused an improvement in design of dynamometers and a reduction in the cost of diesel engines, as well as an increase in the economy’s produced means of production (its capital stock) and in the value of contracts made. His creditors are more confident of his ability to repay, his buyers of his product quality, he himself knows more of his workers’ skills, etc. If these people enter a second and then a third and fourth set of contracts, the increase in mutual trust in coming to agreement will quickly decline in relation to the increased output of capital goods. The first source of increasing returns to scale in production, and hence the mainspring of real economic growth, arises from the successful completion of exchange. Transforming inputs into outputs necessarily takes time, and it is for that time the innovator or entrepreneur or “capitalist” or “adventurer” must persuade his creditors to trust him, whether bankers who have lent him capital or workers who have lent him labour. The essence of the enterprise (or “firm”) he tries to get underway consists of no more than the set of contracts he has entered into with the various others, his position being unique because he is the only one to know who all the others happen to be at the same time. In terms introduced by Professor Frank Hahn, the entrepreneur transforms himself from being “anonymous” to being “named” in the eyes of others, while also finding out qualities attaching to the names of those encountered in commerce. Profits earned are partly a measure of the entrepreneur’s success in this simultaneous process of discovery and advertisement. Another potential entrepreneur, fresh from engineering college, may soon pursue the pioneer’s success and start displacing his product in the market ~ eventually chasers become pioneers and then get chased themselves, and a process of dynamic competition would be underway. As it unfolds, anonymous and obscure graduates from engineering colleges become by dint of their efforts and a little luck, named and reputable firms and perhaps founders of industrial families. Multiply this simple story many times, with a few million different entrepreneurs and hundreds of thousands of different goods and services, and we shall be witnessing India’s actual Industrial Revolution, not the fake promise of it from self-seeking politicians and bureaucrats.”
Technological progress in a myriad of ways and discovery of new resources are important factors contributing to India’s growth today. But while India’s “real” economy does well, the “nominal” paper-money economy controlled by Government does not. Continuous deficit financing for half a century has led to exponential growth of public debt and broad money, and, as noted, the vast growth of nominal bank-deposits has been misinterpreted as indicating unusually high real savings behaviour when it in fact may just signal vast amounts of government debt being held by our nationalised banks. These bank assets may be liquid domestically but are illiquid internationally since our government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios.
What politicians of all parties, especially your own and the BJP and CPI-M since they are the three largest, have been presiding over is exponential growth of our paper money supply, which has even reached 22% per annum. Parliament and the Government should be taking honest responsibility for this because it may certainly portend double-digit inflation (i.e., decline in the value of paper-money) perhaps as high as 14%-15% per annum, something that is certain to affect the aam admi’s economic welfare adversely.
6. Selling Government assets to Big Business is a bad idea in a potentially hyperinflationary economy
Respected PradhanMantriji, the record would show that I, and really I alone, 25 years ago, may have been the first among Indian economists to advocate the privatisation of the public sector. (Viz, “Silver Jubilee of Pricing, Planning and Politics: A Study of Economic Distortions in India”.) In spite of this, I have to say clearly now that in present circumstances of a potentially hyperinflationary economy created by your Government and its predecessors, I believe your Government’s present plans to sell Government assets may be an exceptionally unwise and imprudent idea. The reasoning is very simple from within monetary economics.
Government every year has produced paper rupees and bank deposits in practically unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus over decades. Such has been the nature of the macroeconomic process that all Indian political parties have been part of, whether they are aware of it or not.
Indian Big Business has an acute sense of this long-term nominal/paper expansion of India’s economy, and acts towards converting wherever possible its own hoards of paper rupees and rupee-denominated assets into more valuable portfolios for itself of real or durable assets, most conspicuously including hard-currency denominated assets, farm-land and urban real-estate, and, now, the physical assets of the Indian public sector. Such a path of trying to transform local domestic paper assets – produced unlimitedly by Government monetary and fiscal policy and naturally destined to depreciate — into real durable assets, is a privately rational course of action to follow in an inflationary economy. It is not rocket-science to realise the long-term path of rupee-denominated assets is downwards in comparison to the hard-currencies of the world – just compare our money supply growth and inflation rates with those of the rest of the world.
The Statesman of November 15 2006 had a lead editorial titled Government’s land-fraud: Cheating peasants in a hyperinflation-prone economy which said:
“There is something fundamentally dishonourable about the way the Centre, the state of West Bengal and other state governments are treating the issue of expropriating peasants, farm-workers, petty shop-keepers etc of their small plots of land in the interests of promoters, industrialists and other businessmen. Singur may be but one example of a phenomenon being seen all over the country: Hyderabad, Karnataka, Kerala, Haryana, everywhere. So-called “Special Economic Zones” will merely exacerbate the problem many times over. India and its governments do not belong only to business and industrial lobbies, and what is good for private industrialists may or may not be good for India’s people as a whole. Economic development does not necessarily come to be defined by a few factories or high-rise housing complexes being built here or there on land that has been taken over by the Government, paying paper-money compensation to existing stakeholders, and then resold to promoters or industrialists backed by powerful political interest-groups on a promise that a few thousand new jobs will be created. One fundamental problem has to do with inadequate systems of land-description and definition, implementation and recording of property rights. An equally fundamental problem has to do with fair valuation of land owned by peasants etc. in terms of an inconvertible paper-money. Every serious economist knows that “land” is defined as that specific factor of production and real asset whose supply is fixed and does not increase in response to its price. Every serious economist also knows that paper-money is that nominal asset whose price can be made to catastrophically decline by a massive increase in its supply, i.e. by Government printing more of the paper it holds a monopoly to print. For Government to compensate people with paper-money it prints itself by valuing their land on the basis of an average of the price of the last few years, is for Government to cheat them of the fair present-value of the land. That present-value of land must be calculated in the way the present-value of any asset comes to be calculated, namely, by summing the likely discounted cash-flows of future values. And those future values should account for the likelihood of a massive future inflation causing decline in the value of paper-money in view of the fact we in India have a domestic public debt of some Rs. 30 trillion (Rs. 30 lakh crore) and counting, and money supply growth rates averaging 16-17% per annum. In fact, a responsible Government would, given the inconvertible nature of the rupee, have used foreign exchange or gold as the unit of account in calculating future-values of the land. India’s peasants are probably being cheated by their Government of real assets whose value is expected to rise, receiving nominal paper assets in compensation whose value is expected to fall.”
Shortly afterwards the Hon’ble MP for Kolkata Dakshin, Km Mamata Banerjee, started her protest fast, riveting the nation’s attention in the winter of 2006-2007. What goes for government buying land on behalf of its businessman friends also goes, mutatis mutandis, for the public sector’s real assets being bought up by the private sector using domestic paper money in a potentially hyperinflationary economy. If your new Government wishes to see real assets of the public sector being sold for paper money, let it seek to value these assets not in inconvertible rupees that Government itself has been producing in unlimited quantities but perhaps in forex or gold-units instead!
In the 2004-2005 volume Margaret Thatcher’s Revolution: How it Happened and What it Meant, edited by myself and Professor John Clarke, there is a chapter by Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics) that was placed ahead of the chapter by Professor Martin Ricketts on Margaret Thatcher’s privatisation (microeconomics). India’s fiscal and monetary or macroeconomic problems are far worse today than Britain’s were when Margaret Thatcher came to power. We need to get our macroeconomic problems sorted before we attempt the microeconomic privatisation of public assets.
It is wonderful that your young party colleague, the Hon’ble MP from Amethi, Shri Rahul Gandhi, has declined to join the present Government and instead wishes to reflect further on the “common man” and “common woman” about whom I had described his late father talking to me on September 18 1990. Certainly the aam admi is not someone to be found among India’s lobbyists of organised Big Business or organised Big Labour who have tended to control government agendas from the big cities.
With my warmest personal regards and respect, I remain,
Cordially yours
Subroto Roy, PhD (Cantab.), BScEcon (London)
Kolkata
Parliament’s sovereignty has been diminished by the Executive: A record for future generations to know
May 25, 2009 — drsubrotoroySad to say, Parliament’s sovereignty has been diminished, indeed usurped, by the new Executive Government.
Here is a brief record for future generations to know.
India’s people completed their voting in the 15th General Elections on Wednesday May 13 2009.
The results of how they had spoken, what was their will, were known and declared by Saturday May 16 2009.
There was no legal or logical reason why the 543 members of the 15th Lok Sabha could not have been sworn in as new MPs by the close-of-business on Monday May 18 at the latest.
On Tuesday May 19 the 15th Lok Sabha could have and should have met to elect itself a pro tem or even a permanent Speaker.
The Speaker would have divided the new House into its Government Party and its Opposition.
There would have been a vote of confidence on the floor of the House, which in the circumstances would have been in favour of the Government Party.
Observing this to have taken place, the Hon’ble President of India as the Head of State would have sent for the leader of the Government Party and invited her to form the new Government.
In this particular case, the leader of the largest political party, namely Sonia Gandhi, would have been accompanied perhaps by the Leader of the Lok Sabha, Pranab Mukherjee, as well as her personal nominee for the position of PM, namely, Manmohan Singh.
Sonia Gandhi would have respectfully declined the invitation of the President to be the new Prime Minister, and she would have also explained that she wanted Manmohan Singh to have the position instead.
The President would have said “Very well, Dr Singh, can you please form the Government?”
He would have said, “Yes Madame President it shall be a privilege and an honour to do so”.
The President would have added, “Thank you, and I notice you are not a member of the Lok Sabha at the moment but I am sure you are taking steps towards becoming one.”
End of visit.
Manmohan Singh would have been sworn in as PM and would have gone about adding Ministers at a measured pace. Later, he would have resigned his Rajya Sabha seat and sought election to the Lok Sabha on the parliamentary precedent set by Alec Douglas-Home.
What has happened instead?
On May 18 2009, instead of 543 members of the 15th Lok Sabha taking their oaths as required by parliamentary law and custom, Dr Singh held a purported “Cabinet” meeting of the 14th Lok Sabha — a long-since dead institution!
Some of the persons attending this meeting as purported “Cabinet ministers” had even lost their seats in the elections decided a few days earlier and so had absolutely zero democratically legitimate status left. All these persons then submitted their purported resignations which Dr Singh carried to the President, stating his Government had resigned. The President then appointed him a caretaker PM and he, along with Sonia Gandhi, then went about “staking claim” to form the next Government — turning up at the President’s again with “letters of support” signed by some 322 persons who were MP-elects but were yet to become MPs formally by not having been sworn in.
The President appeared satisfied the party Sonia Gandhi and Manmohan Singh belonged to would command a majority in prospect in the Lok Sabha and invited him to be PM. Some major public wrangling then took place with at least one of his allies about cabinet berths — and that is the situation as of the present moment except that Dr Singh and several others have been sworn in as the Council of Ministers even though the new 15th Lok Sabha of 543 members has still not convened! It has been all rather sloppy and hardly uplifting.
Parliament is supposed to be sovereign in India.
Not the Executive Government or the largest political party or its leader.
The sovereignty of Parliament required Sonia Gandhi and Dr Singh to have realised
first, that the 14th Lok Sabha stood automatically dissolved when elections were announced;
secondly, that the 15th Lok Sabha could have and should have been sworn in by Monday May 18;
thirdly, that there should have been a vote of confidence in the Lok Sabha immediately which would have gone in favour of the Government Party;
fourthly, that only then should the Executive Government have been sought to be formed;
and of course fifthly, that if that Executive Government was to be led by someone who happened to be a member of the Rajya Sabha and not the Lok Sabha, parliamenary law and custom required him to follow the Douglas-Home precedent of resigning from the former and seeking election to the latter at the earliest opportunity.
Let future generations know that as of today, May 25, the 543 persons whom the people of India voted to constitute the 15th Lok Sabha still remain in limbo without having been sworn in though we already have an Executive Government appointed!
The sovereignty of Parliament, specifically that of the Lok Sabha, has come to be diminished, indeed usurped, by the Executive. It is the Executive that receives its political legitimacy from Parliament, not vice versa. Nehru and his generation knew all this intimately well and would have been appalled at where we in the present have been taking it.
Subroto Roy, Kolkata
Understanding Pakistan
July 31, 2006 — drsubrotoroyUNDERSTANDING PAKISTAN
First published in The Sunday Statesman and The Statesman Editorial Page Special Article 30-31 July 2006,
By SUBROTO ROY
Pakistan’s political institutions have failed to develop properly over sixty years. Yet in the last ten years or more, its Government has acquired weapons of mass destruction and in 1998-99 its Foreign Minister half-threatened to use these against India in a first strike. As a religious and cultural phenomenon and as a putative nation-state, Pakistan needs to be sought to be understood in as unbiased and objective a manner as possible, not least by Pakistanis themselves, as well as by Afghans, Bangladeshis, Chinese, Americans,Israelis, Arabs, Iranians etc. besides ourselves in India.
The slogan “Islam in danger” has always had some substance since orthodox Muslims constantly face temptations in the world existing around them from materialism, scepticism, syncretism, pantheism etc. Some responded defensively to the Westernisation/modernisation of India’s Hindus, Parsees and Christians by becoming insular and separatist in outlook, and anti-individualist or communal in behaviour.
“We are an Arab people whose fathers have fallen in exile in the country of Hindustan, and Arabic genealogy and Arabic language are our pride,” declared Wali Allah (1703-1762), a contemporary of Nejd’s founder of Wahhabism. “We must repudiate all those Indian, Persian and Roman customs which are contrary to the Prophet’s teaching”, declared Barelvi (1786-1831), who also initiated the idea of a religious mass migration of North Indian Muslims. His movement saw “jihad as one of the basic tenets of faith… it chose as the venue of jihad the NW Frontier of the subcontinent, where it was directed against the Sikhs. Barelvi temporarily succeeded in carving out a small theocratic principality which collapsed owing to the friction between his Pathan and North Indian followers…” (A. Ahmed, in Basham (ed) Cultural History of India).
Political and psychological tensions between Pakistan’s Pashtun/Baloch tribal people and Punjabi/ Urdu elite continue to this day, even when many of the former have integrated into industries and vocations controlled by the latter. The highlanders were never part of Hindu societies, while the plainsmen, whether they admit it or not, ethnically were converts for the most part from India’s native religions (though here again the religious syncretism of Sindhis, both Muslim and Hindu, may be contrasted with orthodoxy). Barelvi’s theocracy, named Tariqa-yi Muhammadiya, had remnants near Sittana until the First World War, and his followers are still a major component of Pakistan’s most orthodox today.
Muslim separatism in North India would have been futile without British political backing. As early as 1874, the British saw their advantage: “The existence side by side of these hostile creeds (Hindu and Muslim) is one of the strong points in our political position in India. The better classes of Mohammedans are a source of strength to us and not of weakness. They constitute a comparatively small but an energetic minority of the population whose political interests are identical with ours.” When the Agha Khan’s 1906 delegation first pleaded for communal representation, Minto agreed with them, and Minto’s wife wrote in her diary the effect was “nothing less than the pulling back of sixty two millions (of Muslims) from joining the ranks of the seditious opposition.” The slogan “If you are not with us you are against us” was always widely applied by the British in India in the form “If you dare to not be with us, we definitely will be with your adversaries”.
One obscure ideological current of today’s Pakistan came via the enigmatic personage of Inayatullah Mashriqi (1888-1963), who, from being a Cambridge Wrangler, became a friend of Adolf Hitler in 1926, received a Renault as a gift from Hitler (possibly housed in a Lahore museum today) and claimed to have affected Hitler’s ideology. Mashriqi created the Khaksars, modelled on the Nazi SA, and was often jailed for violence.
But the official ideology of today’s Pakistan came from Mohammad Iqbal (1877-1938), an admirer of Friedrich Nietzsche. Indeed, “Pakistan” would have been better named “Iqbalistan” and its nationals “Iqbalians”, just as countries like Colombia, the USA, Israel, Saudi Arabia etc. have been named after an individual person. Iqbal’s 1930 Presidential Speech to the Muslim League in Allahabad conceptualised the country that exists today: “I would like to see the Punjab, NWFP, Sind and Baluchistan amalgamated into a single state…the formation of a consolidated NW Indian Muslim state appears to me to be the final destiny of the Muslims at least of NW India… India is the greatest Muslim country in the world. The life of Islam as a cultural force in this living country very largely depends on its centralisation in a specified territory… “
Though Kashmiri himself, Iqbal was silent about J&K being any part of this new entity. Nor did he see this Muslim country being theocratic or filled with anti-Hindu bigotry: “A community which is inspired by feelings of ill-will towards other communities is low and ignoble. I entertain the highest respect for the customs, laws, religious and social institutions of other communities…. Yet I love the communal group which is the source of my life and my behaviour; and which has formed me what I am by giving me its religion, its literature, its thought, its culture,and thereby recreating its whole past, as a living operating factor, in my present consciousness… Nor should the Hindus fear that the creation of autonomous Muslim states will mean the introduction of a kind of religious rule in such states…. I therefore demand the formation of a consolidated Muslim state in the best interests of India and Islam. For India it means security and peace resulting from an internal balance of power, for Islam an opportunity to rid itself of the stamp that Arabian Imperialism was forced to give it, to mobilise its law, its education, its culture, and to bring them into closer contact with its own original spirit and the spirit of modern times.” Iqbal clearly wished to be rid of the same stamp of Arabian Imperialism that Wali Allah had extolled.
In 1937, Iqbal added an economic dimension referring to Shariat in order that “at least the right to subsistence is secured to everybody”. A “free Muslim state or states” was “the only way to solve the problem of bread for Muslims as well as to secure a peaceful India.”
Iqbal persuaded MA Jinnah (1876-1948), who had settled once again into his London law practice, to return to India in 1934. But when, following the 1935 Government of India Act, India experienced its first democratic elections in 1937, the Muslim League’s ideology promoted by Iqbal and Jinnah failed miserably in the very four provinces that Iqbal had named.
Three days after Hitler’s attack on Poland, the British chose to politically empower Jinnah. Until September 4 1939, the British “had had little time for Jinnah and his League. The Government’s declaration of war on Germany on 3 September, however, transformed the situation. A large part of the army was Muslim, much of the war effort was likely to rest on the two Muslim majority provinces of Punjab and Bengal. The following day, the Viceroy invited Jinnah for talks on an equal footing with Gandhi…. because the British found it convenient to take the League seriously, everyone had to as well” (F. Robinson, in James & Roy (eds) Foundations of Pakistan’s Political Economy). Jinnah himself was amazed: “suddenly there was a change in the attitude towards me. I was treated on the same basis as Mr Gandhi. I was wonderstruck why all of a sudden I was promoted and given a place side by side with Mr Gandhi.”
Britain at war was faced too with intransigence from the Congress — Gandhi, for example, rudely dismissing the 1942 Cripps offer as a “post-dated cheque on a failing bank”. It was unsurprising this would contribute to the British tilt towards Congress’s adversary. Suddenly, Rahmat Ali’s acronym “PAKSTAN” , supposedly invented on the top floor of a London bus, was becoming a credible possibility.
By 1946, Muslim electoral opinion had changed drastically in the League’s favour. By 1947, Iqbal’s lofty philosophical vision of a cultured Muslim state had degenerated into irrational street mobs shouting: “Larke lenge Pakistan; Marke lenge Pakistan; Khun se lenge Pakistan; Dena hoga Pakistan”.
Events remote from India’s history and geography, namely, Hitler’s rise and the Second World War, had contributed between 1937 and 1947 to the change of fortune of Jinnah’s League, and hence the fate of all the people of the subcontinent. Even so, thanks to AK Azad’s diplomacy, the May 1946 Cabinet Mission Plan denying Partition and Pakistan did come to be accepted by Jinnah’s Muslim League, and it was doubtless the obduracy and megalomania of Azad’s Congress colleagues which contributed equally to the failure to find a political solution ~ along with the vapid behaviour of a pompous, vacuous Mountbatten who caused infinite uncertainty until June 3 1947, as to what was going to happen to the lives of scores of millions of ordinary people within a few weeks.
In August 1947, the new Pakistani elite hardly felt or even wished to feel free of the British ~ they merely felt independent of what they saw as Congress domination, and had now acquired some power for themselves. Far from any nation-building taking place, Pakistan’s early years were marked by political, legal, constitutional and military chaos and trauma. Both Dominions made a grab for the Raj’s common assets, especially the armed forces.
Indeed, how did the Kashmir problem originate? As much as any other factor, it occurred because of the incompetent partitioning of military assets and hurried decommissioning of British Indian armies ~ causing thousands of Mirpuri soldiers to return to a communally inflamed Punjab/ Jammu region.
The first J&K war started within weeks of Partition and was in all but name a civil war ~ somewhat like the American Civil War. It was a civil war not merely between Kashmir’s National and Muslim Conferences but also between Army regiments who had been jointly fighting Britain’s enemies until very recently.
Pakistan’s leadership vacuum started at once. Jinnah was ill and died shortly. Liaquat Ali Khan was the only politician of any experience left. He faced on one side Pashtuns having no wish to be dominated by a new Karachi/ Rawalpindi elite, and on the other side, the Kashmir conflict. The most basic functions of governance never got started. Taking a Census has been one such function since Roman times, yet Pakistan has never had one. Writing a Constitution is another, but Maududi and others demanded “That the sovereignty in Pakistan belongs to God Almighty alone and that the Government of Pakistan shall administer the country as His agent”. As a result, Pakistan’s few constitutionalists have been battling impossibly ever since to overcome the ontological mistake made of assuming that any earthly government, no matter how pious, can be in communication with God Almighty as easily as it can be with foreign governments.
The Rule of Law is another basic function. But when Liaquat was himself assassinated in 1951, his assassin was killed on the spot yet the murder remained unsolved. Mashriqi was immediately arrested because of his hostility to the Muslim League, but later released. Because the assassin was Pashtun, Afghanistan was blamed but the Afghan Government proved otherwise. The investigating policeman was killed in an aircrash, and all documents went with him. Final suspicion pointed towards Akbar Khan, the renegade Army general who had led the attack on J&K and was in jail for the Rawalpindi conspiracy. Years later, Liaquat’s widow (the former Irene Pant of Naini Tal) rued the fact no one was ever prosecuted.
After Liaquat’s assassination, the period of Ghulam Mohammad, Nazimuddin, Mohammad Ali Bogra, Chaudhury Mohammad Ali, and most importantly, Iskander Mirza leading up to Ayub Khan’s Martial Law in 1958, was simply appalling in its display of the sheer irresponsibility of Pakistan’s new super-elite. Instead of domestic nation-building or fulfilling the basic functions of governance, close comprador relations came to be established with the US and British Governments ~ exemplified by Mirza’s elder son taking the American Ambassador’s daughter as his (first) wife and moving to a lifelong career with the World Bank in Washington. This comprador relationship between Washington, London and Pakistan’s super-elite flourishes and continues to this day. E.g., the current World Bank head and architect of the 2003 Bush invasion of Iraq, Paul Wolfowitz, remains in a mentoring relationship with Shaukat Aziz, a former American bank executive, who is General Musharraf’s Prime Minister. For better or worse, Pakistan’s Government will never veer from the side of Anglo-American policy while such comprador relationships remain intact.
Before the 1971 war, West Pakistan was in a frenzy from a propaganda campaign of “Crush India” and “Hang Mujib”. General Niazi’s surrender to General Arora in Dhaka Stadium ~ causing 90,000 PoWs whom India then protected from Bangladeshi revenge ~ shocked Pakistan and shattered the self-image of its Army. ZA Bhutto was the only populist politician of the country ever, and his few years held vanishing promise of a normal political agenda (no matter how economically misguided) finally arising. But Bhutto suppressed the new Baloch revolt with the Shah of Iran’s military help; at the same time he failed to protect his own back against Zia ul Haq’s coup, leading to his judicial murder in 1979. Zia tried to rebuild the Army’s shattered esprit de corps the only way he knew how, which was by indoctrinating the Punjabi officer corps with Sunni dogmatism. This coincided with the Afghan civil war, influx of refugees, and US-Saudi-Chinese plan to defeat the USSR. Pakistan’s super-elite in their comprador role were happy to allow themselves to be used again and be hung out to dry afterwards.
All normal branches of Pakistan’s polity, like the electorate,press, political parties, Legislature and Judiciary, have remained at best in ill-formed inchoate states of being. The economy remains, like India’s, one fed on endless deficit finance paid for by unlimited printing of inconvertible paper money, though Pakistan has had relatively more labour emigration and much less foreign investment and technological progress than India. Both are wracked by corruption, poverty, ignorance and superstition.
Over half a century, the military has acquired vast economic and political interests and agendas, on pretext of protecting Pakistan from India or gaining “Kashmeer” for it. With few and noble exceptions, academics, politicians and journalists have remained timid in face of fascistic State-power with its militarist/Islamist ideology ~ causing a transferance of the people’s anger and frustration onto an easier target, namely ourselves in India. Anti-Indianism (especially over J&K) remains the sole unifying factor of Pakistan’s super-elite, regardless of what history’s objective facts may have to say. Much political courage and understanding will be needed for that to be reversed.
All countries hunger for genuine national heroes who take upon themselves individual risks on behalf of ordinary people. Wali Khan stood up to his father’s jailors, and young Benazir of 1980s vintage to her father’s executioner. But Pakistan has had few such heroes,certainly none among its bemedalled generals. Why AQ Khan is seen as a hero is because he at least took some personal risks, and finally brought Pakistan a kind of respect and independence in the world with his Bomb.
Milton Friedman: A Man of Reason, 1912-2006
November 22, 2006 — drsubrotoroy
A Man of Reason
Milton Friedman (1912-2006)
First published in The Statesman, Perspective Page Nov 22 2006 www.thestatesman.net
Milton Friedman, who died on 16 November 2006 in San Francisco, was without a doubt the greatest economist after John Maynard Keynes. Before Keynes, great 20th century economists included Alfred Marshall and Knut Wicksell, while Keynes’s contemporaries included Irving Fisher, AC Pigou and many others. Keynes was followed by his younger critic FA Hayek, but Hayek is remembered less for his technical economics as for his criticism of “socialist economics” and contributions to politics. Milton Friedman more than anyone else was Keynes’s successor in economics (and in applied macroeconomics in particular), in the same way David Ricardo had been the successor of Adam Smith. Ricardo disagreed with Smith and Friedman disagreed with Keynes, but the impact of each on the direction and course both of economics and of the world in which they lived was similar in size and scope.
Friedman’s impact on the contemporary world may have been largest through his design and advocacy as early as 1953 of the system of floating exchange-rates. In the early 1970s, when the Bretton Woods system of adjustable fixed exchange-rates collapsed and Friedman’s friend and colleague George P. Shultz was US Treasury Secretary in the Nixon Administration, the international monetary system started to become of the kind Friedman had described two decades earlier. Equally large was Friedman’s worldwide impact in re-establishing concern about the frequent cause of macroeconomic inflation being money supply growth rates well above real income growth rates. All contemporary talk of “inflation targeting” among macroeconomic policy-makers since the 1980s has its roots in Friedman’s December 1967 presidential address to the American Economic Association. His main empirical disagreement with Keynes and the Keynesians lay in his belief that people held the intrinsically worthless tokens known as “money” largely in order to expedite their transactions and not as a store of value – hence the “demand for money” was a function mostly of income and not of interest rates, contrary to what Keynes had suggested in his 1930s analysis of “Depression Economics”. It is in this sense that Friedman restored the traditional “quantity theory” as being a specific theory of the demand for money.
Friedman’s main descriptive work lay in the monumental Monetary History of the United States he co-authored with Anna J. Schwartz, which suggested drastic contractions of the money supply had contributed to the Great Depression in America. Friedman made innumerable smaller contributions too, the most prominent and foresighted of which had to do with advocating larger parental choice in the public finance of their children’s school education via the use of “vouchers”. The modern Friedman Foundation has that as its main focus of philanthropy. The emphasis on greater individual choice in school education exemplified Friedman’s commitments both to individual freedom and the notion of investment in human capital.
Friedman had significant influences upon several non-Western countries too, most prominently India and China, besides a grossly misreported episode in Chile. As described in his autobiography with his wife Rose, Two Lucky People (Chicago 1998), Friedman spent six months in India in 1955 at the Government of India’s invitation during the formulation of the Second Five Year Plan. His work done for the Government of India came to be suppressed for the next 34 years. Peter Bauer had told me during my doctoral work at Cambridge in the late 1970s of the existence of a Friedman memorandum, and N. Georgescu-Roegen told me the same in America in 1980, adding that Friedman had been almost insulted publicly by VKRV Rao at the time after giving a lecture to students on his analysis of India’s problems.
When Friedman and I met in 1984, I asked him for the memorandum and he sent me two documents. The main one dated November 1955 I published in Hawaii on 21 May 1989 during a project on a proposed Indian “perestroika” (which contributed to the origins of the 1991 reform through Rajiv Gandhi), and was later published in Delhi in Foundations of India’s Political Economy: Towards an Agenda for the 1990s, edited by myself and WE James.
The other document on Mahalanobis is published in The Statesman today for the first time, though there has been an Internet copy floating around for a few years. The Friedmans’ autobiography quoted what I said in 1989 about the 1955 memorandum and may be repeated: “The aims of economic policy (in India) were to create conditions for rapid increase in levels of income and consumption for the mass of the people, and these aims were shared by everyone from PC Mahalanobis to Milton Friedman. The means recommended were different. Mahalanobis advocated a leading role for the state and an emphasis on the growth of physical capital. Friedman advocated a necessary but clearly limited role for the state, and placed on the agenda large-scale investment in the stock of human capital, encouragement of domestic competition, steady and predictable monetary growth, and a flexible exchange rate for the rupee as a convertible hard currency, which would have entailed also an open competitive position in the world economy… If such an alternative had been more thoroughly discussed at the time, the optimal role of the state in India today, as well as the optimum complementarity between human capital and physical capital, may have been more easily determined.”
A few months before attending my Hawaii conference on India, Friedman had been in China, and his memorandum to Communist Party General Secretary Zhao Ziyang and two-hour dialogue of 19 September 1988 with him are now classics republished in the 1998 autobiography. Also republished there are all documents relating to Friedman’s six-day academic visit to Chile in March 1975 and his correspondence with General Pinochet, which speak for themselves and make clear Friedman had nothing to do with that regime other than offer his opinion when asked about how to reduce Chile’s hyperinflation at the time.
My association with Milton has been the zenith of my engagement with academic economics, with e-mails exchanged as recently as September. I was a doctoral student of his bitter enemy yet for over two decades he not only treated me with unfailing courtesy and affection, he supported me in lonely righteous battles: doing for me what he said he had never done before, which was to stand as an expert witness in a United States Federal Court. I will miss him much though I know that he, as a man of reason, would not have wished me to.
Subroto Roy
The Dream Team: A Critique
January 8, 2006 — drsubrotoroyThe Dream Team: A Critique
by Subroto Roy
First published in The Statesman and The Sunday Statesman, Editorial Page Special Article, January 6,7,8 2006 www.thestatesman.net
(Author’s Note: Within a few weeks of this article appearing, the Dream Team’s leaders appointed the so-called Tarapore 2 committee to look into convertibility — which ended up recommending what I have since called the “false convertibility” the RBI is presently engaged in. This article may be most profitably read along with other work republished here: “Rajiv Gandhi and the Origins of India’s 1991 Economic Reform”, “Three Memoranda to Rajiv Gandhi”, “”Indian Money & Banking”, “Indian Money & Credit” , “India’s Macroeconomics”, “Fiscal Instability”, “Fallacious Finance”, “India’s Trade and Payments”, “Our Policy Process”, “Against Quackery”, “Indian Inflation”, etc)
1. New Delhi’s Consensus: Manmohantekidambaromics
Dr Manmohan Singh has spoken of how pleasantly surprised he was to be made Finance Minister in July 1991 by PV Narasimha Rao. Dr Singh was an academic before becoming a government economic official in the late 1960s, rising to the high office of Reserve Bank Governor in the 1980s. Mr Montek Singh Ahluwalia now refers to him as “my boss” and had been his Finance Secretary earlier. Mr Ahluwalia was a notable official in the MacNamara World Bank before being inducted a senior government official in 1984. Mr P Chidambaram was PVNR’s Commerce Minister, and later became Finance Minister in the Deve Gowda and Gujral Governments. Mr Chidamabaram is a Supreme Court advocate with an MBA from Harvard’s Business School. During 1998-2004, Dr Singh and Mr Chidambaram were in Opposition but Mr Ahluwalia was Member-Secretary of the Vajpayee Planning Commission. Since coming together again in Sonia Gandhi’s United Progressive Alliance, they have been flatteringly named the “Dream Team” by India’s pink business newspapers, a term originally referring to some top American basketball players.
Based on pronouncements, publications and positions held, other members or associates of the “Dream Team” include Reserve Bank Governor Dr YV Reddy; his predecessor Dr Bimal Jalan; former PMO official Mr NK Singh, IAS; Chief Economic Advisers Dr Shankar Acharya and Dr Ashok Lahiri; RBI Deputy Governor Dr Rakesh Mohan; and others like Dr Arvind Virmani, Dr Isher Ahluwalia, Dr Parthasarathi Shome, Dr Vijay Khelkar, Dr Ashok Desai, Dr Suman Bery, Dr Surjit Bhalla, Dr Amaresh Bagchi, Dr Govind Rao. Honorary members include Mr Jaswant Singh, Mr Yashwant Sinha, Mr KC Pant and Dr Arun Shourie, all economic ministers during the Vajpayee premiership. Institutional members include industry chambers like CII and FICCI representing “Big Business”, and unionised “Big Labour” represented by the CPI, CPI(M) and prominent academics of JNU. Mr Mani Shankar Aiyar joins the Dream Team with his opinion that a gas pipeline is “necessary for the eradication of poverty in India”. Mr Jairam Ramesh explicitly claimed authoring the 1991 reform with Mr Pranab Mukherjee and both must be members (indeed the latter as Finance Minister once had been Dr Singh’s boss). Dr Arjun Sengupta has claimed Indira Gandhi started the reforms, and he may be a member too. External members include Dr Jagdish Bhagwati, Dr. TN Srinivasan, Dr Meghnad Desai, Dr Vijay Joshi, Mr Ian Little, Dr Anne O. Krueger, Dr John Williamson, IMF Head Dr R Rato, and many foreign bank analysts who deal in Bombay’s markets. Harvard’s Dr Larry Summers joins with his statement while US Treasury Secretary in January 2000 that a 10% economic growth rate for India was feasible. His Harvard colleague Dr Amartya Sen — through disciples like Dr Jean Dreze (adviser to Sonia Gandhi on rural employment) — must be an ex officio member; as an old friend, the Prime Minister launched Dr Sen’s recent book while the latter has marked Dr Singh at 80% as PM. Media associates of the Dream Team include editors like Mr Aroon Purie, Mr Vinod Mehta, Dr Prannoy Roy, Mr TN Ninan, Mr Vir Sanghvi and Mr Shekhar Gupta, as well as the giddy young anchors of what passes for news and financial analysis on cable TV.
This illustrious set of politicians, government officials, economists, journalists and many others have come to define what may be called the “New Delhi Consensus” on contemporary India’s economic policy. While it is unnecessary everyone agree to the same extent on every aspect — indeed on economic policy the differences between the Sonia UPA and Vajpayee NDA have had to do with emphasis on different aspects, each side urging “consensus” upon the other — the main factual and evaluative claims and policy-prescriptions of the New Delhi Consensus may be summarised as follows:
A: “The Narasimha Rao Government in July 1991 found India facing a grave balance of payments crisis with foreign exchange reserves being very low.”
B: “A major cause was the 1990-1991 Gulf War, in its impact as an exogenous shock on Indian migrant workers and oil prices.”
C: “The Dream Team averted a macroeconomic crisis through “structural adjustment” carried out with help of the IMF and World Bank; hence too, India was unaffected by the 1997 ‘Asian crisis’”.
D: “The PVNR, Deve Gowda, Gujral and Vajpayee Governments removed the notorious license-quota-permit Raj.”
E: “India’s measurable real economic growth per capita has been raised from 3% or lower to 7% or more.”
F: “Foreign direct investment has been, relative to earlier times, flooding into India, attracted by lower wages and rents, especially in new industries using information technology.”
G: “Foreign financial investment has been flooding into India too, attracted by India’s increasingly liberalised capital markets, especially a liberalised current account of the balance of payments.”
H: “The apparent boom in Bombay’s stock market and relatively large foreign exchange reserves bear witness to the confidence foreign and domestic investors place in India’s prospects.”
I: “The critical constraint to India’s future prosperity is its “infrastructure” which is far below what foreign investors are used to in other countries elsewhere in Asia.”
J: “It follows that massive, indeed gargantuan, investments in highways, ports, airports, aircraft, city-flyovers, housing-estates, power-projects, energy exploration, gas pipelines, etc, out of government and private resources, domestic and foreign, is necessary to remove remaining “bottlenecks” to further prosperity for India’s masses, and these physical constructions will cause India’s economy to finally ‘take off’.”
K: “India’s savings rate (like China’s) is exceptionally high as is observable from vast expansion of bank-deposits, and these high (presumed) savings, along with foreign savings, will absorb the gargantuan investment in “infrastructure” without inflation.”
L: “Before the gargantuan macroeconomic investments bear the fruits of prosperity, equally large direct transfer payments also must be made from the Government to prevent mass hunger and/or raise nominal incomes across rural India, while existing input or other subsidies to producers, especially farmers, also must continue.”
M: “While private sector participants may increasingly compete via imports or as new entrants in industries where the public sector has been dominant, no bankruptcy or privatisation must be allowed to occur or be seen to occur which does not provide public sector workers and officials with golden parachutes.”
Overall, the New Delhi Consensus paints a picture of India’s economy on an immensely productive trajectory as led by Government partnered by Big Business and Big Labour, with the English-speaking intellectuals of the Dream Team in the vanguard as they fly between exotic conferences and international commercial deals. An endless flow of foreign businessmen and politicians streaming through Bangalore, Hyderabad, five-star hotels or photo-opportunities with the PM, followed by official visits abroad to sign big-ticket purchases like arms or aircraft, reinforce an impression that all is fine economically, and modern India is on the move. Previously rare foreign products have become commonplace in India’s markets, streets and television-channels, and a new materialist spirit, supposedly of capitalism, is captured by the smug slogan yeh dil mange more (this heart craves more) as well as the more plaintive cry pardesi jana nahin, mujhe chhorke (foreigner, please don’t leave me).
2. Money, Convertibility, Inflationary Deficit Financing
India’s Rupee became inconvertible in 1942 when the British imposed exchange controls over the Sterling-Area. After 1947 independent India and Pakistan, in name of “planned” economic development, greatly widened this war-time regime – despite the fact they were at war now only with one another over Jammu & Kashmir and, oddly enough, formed an economic union until 1951 with their currencies remaining freely convertible with each other.
On May 29 1984, the present author’s Pricing, Planning and Politics: A Study of Economic Distortions in India proposed in London that the Indian Rupee become a convertible hard currency again — the first time liberal economics had been suggested for India since BR Shenoy’s critique of the Second Five Year Plan (a fact attracting an editorial of The Times). The simple litmus test whether believers in the New Delhi Consensus have or have not the courage of their stated convictions – i.e., whether what they have been saying is, in its empirical fundamentals, more signal or noise, more reality or rhetorical propaganda – would be to carry through that proposal made 21 years ago. The Dream Team have had more than enough political power to undertake this, and it remains the one measure necessary for them to demonstrate to India’s people and the world that the exuberant confidence they have been promoting in their model of India’s economy and its prospects is not spurious.
What does convertibility entail? For a decade now, India has had limited ease of availability of foreign exchange for traders, students and tourists. Indeed some senior Government monetary economists believe there is convertibility already except forex dealers are being allowed “one-way” and not “two-way” quotes! That is wrong. The Government since 1942 has requisitioned at the border all foreign exchange earned by exporters or received as loans or investment — allocating these first to pay interest and amortisation on the country’s foreign debt, then to make its own weapons and other purchases abroad, then to release by ration what remains to private traders, students, tourists et al. Current account liberalisation has meant the last of these categories has been relaxed, especially by removal of some import quotas. What a convertible Rupee would mean is far more profound. It would allow any citizen to hold and save an Indian money that was exchangeable freely (i.e. without Government hindrance) into moneys of other countries. Full convertibility would mean all the paper money, bank deposits and rupee-denominated nominal assets held by ordinary people in India becomes, overnight, exchangeable without hindrance into dollars, yens, pounds or euros held anywhere (although not of course at the “one-way” rates quoted today).
Now money is a most peculiar human institution. Paper money is intrinsically worthless but all of India’s 1,000 million people (from street children onwards) have need to hold it temporarily to expedite their individual transactions of buying and selling real goods and services. Money also acts as a repository of value over time and unit of account or measure of economic value. While demand to hold such intrinsically worthless paper is universal, its supply is a Government monopoly. Because Government accepts obligations owed to it in terms of the fiat money it has itself issued, the otherwise worthless paper comes to possess value in exchange. Because Government controls its supply, money also can be abused easily enough as a technique of invisible taxation via inflation.
With convertibility in India, the quantity of currency and other paper assets like public debt instruments representing fiscal decisions of India’s Union and State Governments, will have to start to compete with those produced by other governments. Just as India’s long-jumpers and tennis-players must compete with the world’s best if they are to establish and sustain their athletic reputations, so India’s fiscal and monetary decisions (i.e. about government spending and revenues, interest-rates and money supply growth) will have to start competing in the world’s financial markets with those of the EU, USA, Japan, Switzerland, ASEAN etc.
The average family in rural Madhya Pradesh who may wish, for whatever personal reason, to liquidate rupee-denominated assets and buy instead Canadian, Swiss or Japanese Government debt, or mutual fund shares in New York, Frankfurt or Singapore, would not be hindered by India’s Government from doing so. They would become as free as the swankiest NRI jet-setters have been for years (like many members of the New Delhi Consensus and their grown children abroad). Scores of millions of ordinary Indians unconnected with Big Business or Big Labour, neither among the 18 million people in government nor the 12 million in the organised private sector, would become free to hold any portfolio of assets they chose in global markets (small as any given individual portfolio may be in value). Like all those glamorous NRIs, every Indian would be able to hold dollar or Swiss Franc deposit accounts at the local neighbourhood bank. Hawala operators worldwide would become redundant. Ordinary citizens could choose to hold foreign shares, real-estate or travellers’ cheques as assets just as they now choose jewellery before a wedding. The Indian Rupee, after more than 65 years, would once again become as good as all the proverbial gold in Fort Knox.
When added up, the new demand of India’s anonymous masses to hold foreign rather than Rupee-denominated assets will certainly make the Rupee decline in price in world markets. But — if the implicit model of India’s economy promoted by the Dream Team is based on correctly ascertained empirical facts — foreign and domestic investor confidence should suffice for countervailing tendencies to keep India’s financial and banking system stable under convertibility. Not only would India’s people be able to use and save a currency of integrity, the allocation of real resources would also improve in efficiency as distortions would be reduced in the signalling function of domestic relative prices compared to world relative prices. An honest Rupee freely priced in world markets at, say, 90 per dollar, would cause very different real microeconomic decisions of Government and private producers and consumers (e.g., with respect to weapons’ purchases or domestic transportation, given petroleum and jet fuel imports) than a semi-artificial Rupee at 45 per dollar which forcibly an inconvertible asset in global markets. A fully convertible Rupee will cause economic and political decisions in the country more consistent with word realities.
Why the Rupee is not going to be made convertible in the foreseeable future – or why, in India’s present fiscal circumstances if it was, it would be imprudent to do so – is because, contrary to the immense optimism promoted by the Dream Team about their own deeds since 1991, they have in fact been causing India’s monetary economy to skate on the thinnest of thin ice. Put another way, a house of cards has been constructed whose cornerstone constitutes that most unscientific anti-economic of assumptions, the “free lunch”: that something can be had for nothing, that real growth in average consumption levels of the masses of ordinary households of rural and urban India can meaningfully come about by nominal paper-money creation accompanied by verbal exhortation, hocus-pocus or abracadabra from policy-makers and their friends in Big Business, Big Labour and the media. (Lest half-remembered inanities about “orthodox economics” come to be mouthed, Maynard Keynes’s 1936 book was about specific circumstances in Western economies during the Depression and it is unwise to extend its presumptions to unintended situations.)
3. Rajiv Gandhi and Perestroika Project
On 25 May 2002, India’s newspapers reported “PV Narasimha Rao and Manmohan Singh lost their place in Congress history as architects of economic reforms as the Congress High Command sponsored an amendment to a resolution that had laid credit at the duo’s door. The motion was moved by…. Digvijay Singh asserting that the reforms were a brainchild of the late Rajiv Gandhi and that the Rao-Singh combine had simply nudged the process forward.”
Now Rajiv Gandhi was an airline-pilot and knew no economics. But the origins of the 1991 reform did come about because of an encounter he had, as Opposition Leader and Congress President from September 1990 onwards, with a “perestroika” project for India’s political economy occurring at an American university since 1986 (viz., The Statesman Editorial Page July 31-August 2 1991, now republished here; Freedom First October 2001). In being less than candid in acknowledging the origins of the reform, the Dream Team may have failed to describe accurately the main symptoms of illness that afflicted India before 1991, and have consequently failed to diagnose and prescribe for it correctly ever since.
The Government of India, like many others, has been sorely tempted to finance its extravagant expenditures by abusing its monopoly over paper-money creation. The British taught us how to do this, and in 1941-43 caused the highest inflation rates ever seen in India as a result. Fig. 1 shows this, and also that real growth in India follows as expected the trend-rate of technological progress (having little to do with government policy). Independent India has continually financed budget- deficits by money creation in a process similar to what the British and Americans did in wartime. This became most conspicuous after Indira Gandhi’s bank and insurance nationalisations of 1969-1970. Indeed, among current policy-makers, Pranab Mukherjee, Manmohan Singh, Arjun Sengupta, Montek Singh Ahluwalia, Bimal Jalan, NK Singh, Amaresh Bagchi and Shankar Acharya, were among those governing such macroeconomic processes before 1991 — albeit in absence of the equations that illustrate their nature. Why the Rupee cannot be made an honest, internationally convertible, stable money held with confidence by all Indians today, is because the Dream Team have continued with the same macroeconomics ever since. The personal and political ambitions of the tiniest super-elite that the New Delhi Consensus represent (both personal and political) have depended precisely on gargantuan unending deficit-financing backed by unlimited printing of paper-money, and hence the continuing destruction of the integrity of India’s banking system. A convertible Rupee would allow India’s ordinary people to choose to hold other stores of value available in the world today, like gold or monies issued by foreign governments, and thus force an end to such processes.
Two recent articles in The Statesman (Perspective Page 30 October 2005, Front Page 29 November 2005) outlined India’s financial repression and negative real interest rates (which suffice to explain the present stock market boom the way athletes perform better on steroids), and also how deficits get financed by money creation accompanied by wishful projections of economic growth in an upside down imitation of how macroeconomic policy gets done in the West.
“Narrow Money” consists mostly of hand-to-hand currency. “Broad Money” consists of Narrow Money plus bank-deposits. Modern banking is built on “fractional reserves”, i.e. a system of trust where your bank does not literally hold onto deposits you place there but lends these out again – which causes further deposit expansion because no individual banker can tell whether a new deposit received by it is being caused by the depositor having himself borrowed. As a general rule, bank lending causes further deposit expansion. Why India’s (and China’s) bank deposits have been expanding is not because Indians (or Chinese) are superhuman savers of financial assets in banks but because the Government of India (and China) has for decades compelled (the mostly nationalised) banks to hold vast sums of Government debt on the asset side of their balance-sheets. Thus there has been humongous lending by the banking system to pay for Government expenditures. The Dream Team’s macroeconomics relies entirely on this kind of unending recourse to deficit finance and money creation, causing dry rot to set into banks’ balance sheets (Figs. 2,3, 4). If the Rupee became convertible, those vast holdings of Government debt by banks would become valued at world prices. The crucial question would be how heavily New York, London and Hong Kong financial markets discounted Indian sovereign debt. If upon convertibility, the asset sides of domestic Indian banks get discounted very heavily by world financial markets, their insolvency upon being valued at international prices could trigger catastrophic repercussions throughout India’s economy. Hence the Rupee cannot be made convertible — and all our present inefficiencies and inequities will continue for ever with New Delhi’s rhetorical propaganda alongside. The capital flight of 10 out of 1000 million Indians will continue, leaving everyone else with the internal and foreign public debts to pay.
4. A Different Strategy had Rajiv Not Been Assassinated
Had Rajiv Gandhi not been assassinated and the perestroika project allowed to take its course, a different strategy would have been chosen. Honest money first demands honest Government and political leadership. It would at the outset have been recognised by Government (and through Government by all India’s people) that the asset-liability, income-expenditure and cash-flow positions of every public entity in the country without exception — of the Union Government, every State and local Government, every public undertaking and project – is abysmal. Due to entanglement with government financial loans, labour regulations, subsidies, price controls, protection and favouritism, the same holds for the financial positions of vast numbers of firms in the organised private sector. Superimpose on this dismal scene, the bleak situation of the Rule of Law in the country today – where Courts of Justice from highest to lowest suffer terrible abuse receiving pitiable amounts of public resources despite constituting a third and independent branch of India’s Government (while police forces, despite massive expenditure, remain incompetent, high-handed and brutal). What India has needed ever since 1991 is the Rule of Law, total transparency of public information, and the fiercest enforcement of rigorous accounting and audit standards in every government entity and public institution. It is only when budgets and financial positions become sound that ambitious goals can be achieved.
The Dream Team have instead made a fetish of physical construction of “infrastructure”, in some grandiose make-believe dreamworld which says the people of India wish the country to be a superpower. The Dream Team have failed to properly redefine for India’s masses the appropriate fiscal and monetary relationship between State and citizen – i.e. to demarcate public from private domains, and so enhance citizens’ sense of individual responsibility for their own futures, as well as explain and define what government and public institutions can and cannot do to help people’s lives. Grotesque corruption and inefficiency have thus continued to corrode practically all organs, institutions and undertakings of government. Corruption is the transmutation of publicly owned things into private property, while its mirror image, pollution, is the disposal of private wastes into the public domain. Both become vastly more prevalent where property rights between private and public domains remain ill demarcated. What belongs to the individual citizen and what to sovereign India –their rights and obligations to one another – remains fuzzy. Hence corruption and pollution run amuck. The irrational obsession with “infrastructure” is based on bad economics, and has led to profoundly wrong political and financial directions. The Rupee cannot be made an honest stable money because India’s fiscal and monetary situation remains not merely out of control but beyond New Delhi’s proper comprehension and grasp. If and when the Dream Team choose to wake up to India’s macroeconomic realities, a great deal of serious work will need to be done.
Constitution for a Second Indian Republic (April 1991)
April 20, 1991 — drsubrotoroyConstitution for a Second Indian Republic
Author’s Note April 2007: I wrote “A Second Constitution for India” on October 2 1990 while working in an advisory capacity for Rajiv Gandhi, then Leader of the Opposition. But he did not get to see it and I was not able to guide any coherent discussion towards this vital subject. I published it on April 20 1991 in The Statesman in its Saturday supplement. While I am not sure I agree with all of my 1991 “Constitution” today, it may be useful for discussion. One salient feature of this concise 60-article Constitution is having a directly elected PM and Deputy PM with a tough Senate somewhat on the US pattern (though the distinction between Head of Government and Head of State is maintained as in the present system) with a modified British pattern of parliamentary democracy continuing in the States.
I do, however, fully endorse what I wrote on December 30 2002 in a personal letter to the late C. R. Irani, in his capacity as a member of the “Constitutional Review Commission” (to which he responded with very warm agreement). That letter is placed below the text of the proposal and outlines some of what I think is most urgent today in India’s constitional progress.
“Nai Duniya”, Constitution of a Second Republic
by Subroto Roy
First published in The Statesman, April 20 1991
Preamble
We the People of India, in order to establish a more perfect Union of PERPETUAL PEACE; in which the ancient virtues of COURAGE,TRUTHFULNESS and JUSTICE may be better practiced; in which the FREEDOM and WELFARE of all our People may be more easily secured, do adopt, enact and give to ourselves this Constitution, on this the 26th day of January 1995.
FOUNDATION
1. India, that is Bharat or Hindustan, shall be a Union of States and Territories, and a sovereign member of the community of nations.
2. The Union of India shall be a democratic republic, and the Union shall guarantee a democratic and republican form of governance in each of its States and Territories.
3. The Union of India shall protect every State and Territory against foreign aggression and armed rebellion, and shall ensure its governance to be in accordance with provisions of the Union Constitution.
4. A State or Territory may elect to establish its own Constitution, but no provision of the Constitution of any State of Territory shall be valid if it violates any provision of the Union Constitution.
FUNDAMENTAL RIGHTS OF CITIZENS
5. Every person born in the territory of India, or either of whose parents or any of whose grandparents was born in the territory of India, or who is a citizen of India at the commencement of this Constitution shall be a citizen of India by birth. Any person who has been domiciled in India for five years may become a citizen of India by naturalization according to law.
6. Every citizen of India who is not less than 21 years of age shall have the right to vote, and the right to vote shall not be denied or abridged on account of religion, race, sex, descent, caste or place of birth, or by reason of failure to pay any poll tax or any other tax.
7. The Union of India or any of its States or Territories shall not deny to any person within the territory of India equality before the laws or the equal protection of the laws.
8. No person within the territory of India shall be deprived of life, liberty or property save by authority of law, nor shall private property be taken for public use without just compensation.
9. The rights of citizens to be secure in their persons, homes, communications, papers and effects, against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, supported by oath or affirmation, and describing the place to be searched, and the person or things to be seized.
10. No person accused of a criminal offence shall be compelled to be a witness against himself or herself, nor shall any person be arrested without being informed of the grounds of such arrest, nor shall any person in custody be deprived of the right to legal
counsel, nor shall the privilege of the writ of habeas corpus be suspended unless in the case of war or armed rebellion the public safety requires it.
11. No person shall be prosecuted or punished for the same offence more than once, nor shall excessive bail be required or excessive fines imposed, nor shall punishments be cruel or unusual.
12. The Union of India or any of its States or Territories shall not deny to any citizen the right to move freely throughout the territory of India or to reside or settle in any part of the territory of India.
13. The Union of India or any of its States or Territories shall not deny to any citizen the right to freedom of conscience, or the right to freely profess or practice religion, or establish, maintain and manage religious institutions in accordance with law and subject to public safety, order and health.
14. No citizen shall be subject on account of religion, race, caste, sex, descent or place of birth to any disability, liability or restriction with regard to public institutions, public places or places of worship, or use of public facilities, maintained wholly or partly out of public funds or otherwise dedicated to the use of the public.
15. The Union of India or any of its States or Territories shall not deny any citizen equality of opportunity or discriminate on account of religion, race, caste, sex, descent or place of birth.
16. The Union of India or any of its States or Territories shall not deny or abridge the freedom of speech, inquiry or expression of citizens, or the freedom of the press or broadcasting, subject to public safety, order, health, laws of defamation and standards of common morality.
17. The Union of India or any of its States or Territories shall not deny the right of citizens to form associations and unions, to assemble peaceably without arms, or to petition for redress of grievances, subject to public safety, order and health.
18. The Union of India or any of its States or Territories shall not deny to any citizen the right to practice any profession, trade or business, or carry on any occupation or means of livelihood, subject to public safety, order, health and standards of common morality.
19. Trade, commerce and enterprise throughout the territory of India shall be free, and the Union of India or any of its States or Territories shall not make any law to restrict them except in the interests of public safety, order, health, standards of common morality or economic efficiency.
20. No tax shall be levied or collected except by authority of law.
DUTIES OF CITIZENS
21. It shall be the duty of every person within the territory of India to abide by the Constitution of India and show no disrespect to its institutions; to participate in democratic processes and to vote in elections according to law; to make timely payments of taxes, fees and dues according to law; to keep clean and hygienic streets, roads, highways, neighbourhoods, waterways, railways, parks, public buildings and institutions; to protect public property; to protect the natural environment and to treat living creatures without cruelty; to abjure violence and promote harmony among all people; to value and preserve the languages and cultural history of the Indian
subcontinent; to renounce practices derogatory to women or children.
EXECUTIVE, LEGISLATIVE AND JUDICIAL POWERS
22. There shall be a President of India in whom shall be vested the executive power of the Union, and who shall be the Supreme Commander of the Armed Forces of the Union. The President shall be elected indirectly by the citizens of India in the manner prescribed in Article 40 of this Constitution.
23. There shall be a Vice-President of India, who shall exercise the duties and functions of the President in the event of the death, resignation, incapacitation, absence or impeachment of the President. The Vice-President shall be elected indirectly by the citizens of India in the manner prescribed in Article 41 of this Constitution.
24. The President of India shall appoint a Prime Minister upon the advice of the citizens of India in a direct election in the manner prescribed in Article 43 of this Constitution. The Prime Minister of India shall be the Chief Executive Officer of the Union, and the President shall, in exercising the executive power of the Union, act at all times upon the advice of the Prime Minister. The Prime Minister shall keep the President of India informed at all times, and shall reconsider advice rendered if the President so requests it.
25. There shall be a Union Parliament which shall consist of the President, the Vice-President, the Prime Minister and two elected Houses.
The Upper House, or Council of the Nation, shall consist of members elected directly by the citizens of India according to States in the manner prescribed in Article 37 of this Constitution. The Lower House, or House of the People, shall consist of members elected indirectly by the citizens of India according to States, in the manner prescribed in Article 35 of this Constitution. The legislative power of the Union of India shall be vested in the Union Parliament.
A Bill, except a Tax Bill, may originate in either House. A Tax Bill, that is to say any Bill for the raising of revenue, shall originate in the Lower House. After a Bill has been passed in one House, it shall be sent to the other House which shall pass, modify or reject it. A Bill passed by both Houses shall be sent to the Prime Minister, upon whose approval it shall be sent to the President for signature upon which it shall become law. A Bill passed by both Houses which does not receive the approval of the Prime Minister shall be returned to the House where it shall have originated. If, after reconsideration, both Houses pass the Bill, each House by two thirds of its members, then the Bill shall be sent to the Prime Minister who shall advise the President that it be signed and become law.
26. There shall be a Supreme Court of India, consisting of a Chief Justice and Associate Justices appointed by the President upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The judicial power of the Union of India shall be vested in the Supreme Court and such courts inferior to it that it may establish or authorize. The Supreme Court of India shall have its seat in the capital of the Union and also in every State of the Union.
27. Each State shall have a Governor appointed by the President of India upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The Governor shall be vested with the executive power of the State, and shall be the supreme commander of all police forces within the State.
28. Each State shall have a Parliament, which shall consist of the Governor of the State and one or two chambers, elected by the citizens of the State in accordance with the Constitution or laws of the State. All legislative power of the State shall be vested in the
State Parliament or such duly elected bodies of local government which the State Parliament shall establish by law.
29. The Governor of a State shall appoint a Chief Minister who shall be a member of the State Parliament enjoying the confidence of that Parliament. The Governor shall act upon the advice of the Chief Minister in exercising the executive powers of the State except in conditions of Emergency as stated in Article 56 of this Constitution. In the event no member of the State Parliament shall have its confidence, or in conditions of Emergency as stated in Article 56, the Governor of the State shall exercise the executive powers of the State in consultation with the State Parliament, until such a time as either such confidence comes to obtain, or new elections to the State Parliament take place within a maximum time of one year, or conditions of Emergency come to an end.
30. Each State Parliament shall elect its representatives to the Lower House of the Union Parliament in accordance with the provisions of Articles 34 and 35 of this Constitution.
31. Each State shall have a Supreme Court consisting of a Chief Judge and Associate Judges appointed by the Governor as the Constitution or laws of the State may establish. The judicial power of the State shall be vested in the Supreme Court of the State and such courts inferior to it as the Constitution or laws of the State may establish.
ELECTIONS AND TERMS OF OFFICE
32. All elections in the Union of India and its States and Territories shall be held on the 2nd day of October in any year, and this day shall be known as Election Day or Gandhi Jayanti and shall be a bank holiday. There shall be no more than 14 other bank holidays in the year, and no more that 2 in any month of the year.
33. The power required for the conduct of all elections to the Union Parliament and all State Parliaments shall be vested in a Chief Election Commissioner, who shall be appointed by the President upon the nomination of the Chief Justice of India with the advice and consent of the Prime Minister and the Upper House of the Union Parliament. The Chief Election Commissioner shall be assisted by four Associate Commissioners, one each for Northern, Central, Southern and Eastern India, and State Election Commissioners, one for each State.
34. Election to any State Parliament shall be for a maximum term of 4 years. A State Parliament shall consist of no more than 1000 members, chosen by direct election from territorial constituencies of the State, each member representing no more than 100,000 citizens so far as is possible.
35. Elections to the Lower House of the Union Parliament shall be for a term of 2 years, and the House shall stand dissolved every 2 years. The Lower House shall be elected indirectly by the citizens of the States, the delegations from a State being elected by members of the State Parliament. Each member of the Lower House shall represent indirectly 1 million citizens of the State so far as is possible. The Lower House of the Union Parliament shall have no morethan 1000 members, each member having one vote.
36. The Lower House shall choose its own Speaker; determine the rules of its own proceedings; punish its members including by expulsion with the approval of two thirds of its members; keep a record of its proceedings and publish the same regularly except such parts as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Lower House be questioned in any other place. No member of the Lower House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.
37. The Upper House of the Union Parliament shall have no more than 100 members, of whom 90 shall be chosen by direct election from territorial constituencies of the Union and shall have one vote each. Elections to the Upper House shall be for a term of 6 years, with one third of the elected members retiring every 2 years. No person shall be elected to the Upper House for more than three terms successively. For purposes of elections to the Upper House, the Union of India shall be divided into territorial constituencies each of approximately 10 million citizens, so long as there are no more than 22 constituencies from the States of Southern India (presentlyconsisting of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and Goa); 22 constituencies from the States of Eastern India (presentlyconsisting of Arunachal Pradesh, Tripura, Mizoram, Manipur, Meghalaya, Nagaland, Assam, Sikkim, West Bengal and Bihar); 22 constituencies from the States of Northern India (presentlyconsisting of Uttar Pradesh, Himachal Pradesh, Jammu and Kashmir,Rajasthan, Punjab and Haryana); and 22 constituencies from the States of Central India (presently consisting of Gujarat, Maharashtra, Madhya Pradesh and Orissa). There shall be one constituency in theUnion Territory of Delhi and one constituency in all other UnionTerritories together.
38. The President of India may appoint up to 10 members of the Upper House each of whom shall have no vote and shall hold one term of office of 2 years. The President shall make such appointments in view of considerations such as the representation of the arts, sciences, sports, literature or social work, as also the representation of any community, caste, religion or other group which, in the opinion of the President, deserves a voice in the Upper House in the national interest.
39. The Vice President of India shall chair the Upper House but shall have no vote unless they are equally divided. The Upper House shall choose its own Chairman pro tempore in the absence of the Vice President; determine the rules of its own proceedings; punish its members including by expulsion with the concurrence of two thirds of its members; keep a record of its proceedings and publish the same except as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or their travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Upper House be questioned in any other place. No member of the Upper House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.
40. The President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Upper House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Lower House which shall elect between them by secret ballot. The President of India shall not hold any other office of profit or honour.
41. The Vice-President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Lower House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Upper House which shall elect between them by secret ballot. The Vice-President of India shall not hold any other office of profit or honour.
42. The terms of the President and Vice-President shall not be concurrent.
43. The Prime Minister of India shall be appointed by the President upon the advice of the citizens of India in a direct election, and shall hold office for four years. The Prime Minister shall be a citizen of India not less than 35 years of age, and no person shall hold the office of Prime Minister for two terms successively. Candidates shall register 12 months prior to the date of the election with the Chief Election Commissioner. The Chief Election Commissioner shall report to the President the results of the election to the office of the Prime Minister, and the President shall appoint the candidate receiving the highest number of votes.
44. Upon the nomination of the Prime Minister, the President shall appoint a Deputy Prime Minister and a Council of Ministers, who shall hold office at the pleasure of the President and who shall assist the Prime Minister in the discharge of the duties of the office. The Deputy Prime Minister shall exercise the duties and functions of the Prime Minister in the event of the death, resignation, incapacitation, absence or impeachment of the Prime Minister.
45. The Prime Minister, the Deputy Prime Minister and the Council of Ministers shall from time to time answer the questions of members of the Union Parliament as requested by the latter, and the Prime Minister shall no less than once every year address the Union Parliament on the State of the Republic.
46. Neither the Prime Minister nor the Deputy Prime Minister nor any member of the Council of Ministers shall hold any other office of profit or honour.
DUTIES OF THE UNION AND THE STATES
47. The duties of the Union of India shall include
– defence of the Republic from foreign aggression, armed
rebellion and crime
– foreign relations and foreign trade
– management of currency and exchange-rate
– management of the public debt of the Union
– inter-State highways, waterways and dams
– regulation of inter-State railways
– regulation of harbours and airports
– regulation of civil aviation
– regulation of communications and broadcasting
– protection of national monuments and archives
– development of space and atomic research, research
universities and institutes of national importance
– planning of metropolitan areas
– environmental protection, national forests, parks and wildlife
– regulation of banking other than rural banking
– regulation of stock exchanges and futures markets
– census, voter registration, and social security
48. The Union of India shall in addition
– promote and encourage State and local democracy
– reduce disparities of income and wealth consistent with
economic efficiency
– reduce inequitable transfers of debt to future generations by
ensuring balance in the Union Budget over a quincennial period
– promote harmony among the nations of the world, abjure violencein the settlement of international conflicts, foster respect for international law, and maintain just and honourable relations with other nations.
49. The original jurisdiction of the Supreme Court of India shall extend to substantive questions of law and constitutional interpretation; fundamental rights of citizens, and relations between the citizen and the Union and its States and Territories; international law; inter-State relations and commerce; relations between the Union and any State.
50. There shall be a Reserve Bank of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Governor and Deputy Governors of the Reserve Bank of India. It shall be the duty of the Reserve Bank of India to maintain a sound currency, that is, a stable value of the Rupee for transactions within the Union and outside it. The Reserve Bank of India shall be further responsible for the charter and regulation of banks, and the efficient working of financial and credit markets.
51. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Comptroller and Auditor General of India, who shall be responsible for the issue of public moneys and the audit of the accounts of the Union of India.
52. There shall be a Public Services Commission of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Secretary-General of the Public Services Commission, who shall be responsible for all matters relating to the civil services of India.
53. The duties of each State of India shall include
– civil order and police forces in the State
– State highways, waterways and dams
– regulation of State railways
– land registration and tenurial reform
– agricultural pricing, stocks and extension
– animal husbandry
– colleges and non-research universities
– finance of schools and setting of school standards
– regulation of electricity
– regulation of insurance
– regulation of rural banking
– management of the public debt of the State
– vital statistics
– public health
– environmental protection
– State parks and forests
A State of India shall in addition
– extend processes of democracy by promoting ad encouraging
constitutional local government
– reduce disparities of income and wealth consistent with
requirements of economic efficiency
– reduce inequitable transfers of debt to future generations by
ensuring balance in the State Budget over a quincennial period
– endeavour to secure a common civil code for citizens of the
State
– promote harmony among the peoples of India.
The duties of local governments established in a State by law shall
include provision of primary and secondary education or regulation
thereof; provision of and maintenance of streets, roads and lighting
or regulation thereof; provision of fresh water and sewage disposal
or regulation thereof.
54. The original jurisdiction of the Supreme Court of a State shall extend to substantive questions of law and interpretation of the State Constitution; civil and criminal law within the State; marriage, divorce, custody and guardianship of minors; fundamental rights of citizens and relations between citizens and the State.
WAR AND EMERGENCY
55. The President of India, upon the advice of the Prime Minister and with the consent of a majority of each of the Union Parliament, shall have authority to declare and make war on behalf of the Union of India and its State and Territories, and to raise armed forces and resources for this purpose. A declaration of war may include the suspension of fundamental rights so long as that no such suspension shall continue for longer than 30 days without the consent of a majority of each House of the Union Parliament.
56. The President of India, upon the advice of the Prime Minister and with the consent of a two thirds majority of the Upper House of the Union Parliament, shall have authority to declare the whole of India or any part of its territory to face an imminent danger from foreign aggression, armed rebellion, disturbance or natural calamity, and proclaim an Emergency accordingly. Proclamation of Emergency may include declaration of Governor’s Rule in a State according to Article 29 and suspension of fundamental rights, so long as that no such suspension shall continue for longer than 30 days without the consent of a two thirds majority of the Upper House, and no elections to any State shall be delayed for longer than one year.
AMENDMENTS AND MISCELLANY
57. Within the groupings of States given in Article 37, new States may be formed or State boundaries altered by authority of the President of India, upon the advice of the Prime Minister and with the consent of two thirds of the members of each House of the Union Parliament and the consent of a majority of each State Parliament affected thereby.
58. The provisions of this Constitution may be amended by the authority of the President of India with the consent of a four fifths majority of each House of the Union Parliament.
59. Impeachment from office of the President, Vice-President, Prime Minister or Deputy Prime Minister of India shall be initiated by a four fifths majority of each House of the Union Parliament. The Speaker of the Lower House shall inform the Chief Justice of India of such a majority in each House, whereupon the Chief Justice shall constitute a Special Bench of the Supreme Court of India which shall act as the Court of Impeachment.
60. Written and printed communications between the Union of India and foreign nations; between the Union of India and the States of India, and between the States of India and the Union of India; and between the Union of India and citizens of India shall be in the Hindustani (Hindi) and English languages. Any language or dialect of India may be spoken in the Union Parliament or any State Parliament with the prior permission of the Chairman or Speaker of the chamber.”
December 30 2002 letter to Mr C. R. Irani, Constitutional Review Commission:
“Dear Mr. Irani, Other than yourself and Mr. Sorabji, most other members of the Constitutional Review panel seem to be retired judges or bureaucrats. How many are under 50 years of age? Or have demonstrable knowledge of e.g. modern economics or constitutional political theory? Such a panel may be worse than nothing, since after its fossilized reports are in, it will take another 50 years before genuine constitutional reform can be addressed. Here are some examples:1. There is no such thing as a “Central” Government of India. There used to be one taking orders from London, giving orders to “Provinces” on the periphery. Free India has been a Union of States. Each Indian is supposed to be and to feel as being a citizen both of the Union and of his/her State, owing loyalty and taxes at both levels. Yet the colonial anachronism continues in all our thought with devastating results, so, e.g. the States remain mendicants before an all-powerful “Centre” which remains a mendicant before the new “London”. Ergo, your panel should be talking about Union-State relations, and the proper nature of federalism in modern India. But is any member a recognised expert on fiscal finance? For a start, all our State and Union Government accounting would need to be sorted out properly before anyone can comprehend what is going on between them. 2. The Governor of the RBI must be made a Constitutional post, on par with e.g. the Auditor-General. Reason: Monetary policy needs to be made independent of the fiscal compulsions of the Government of the day, which was the intended function of the RBI at its inception in 1935. Instead it has become a large Department of the Finance Ministry. The RBI’s sole job should be to establish and maintain the soundness of the currency, both domestically and internationally. I wonder if such an idea will arise from the panel appointed to look into it. 3. Our 16 large States have an average population of 61 million people. Each needs to be allowed to have its own Constitution if it so wishes on the American model, where the Union Constitution presides over a large number of State Constitutions. Indeed the resolution of the J&K problem and indeed our problems with Pakistan may rest in a broad, controlled devolution of fiscal and monetary powers to all States, with the Union’s mandate becoming clearer and more focussed and feasible and realistic as a result. Will your panel talk about this? (Delhi does not forsake its own power, as even Old Man Tughlak found many years ago.) I could go on. Eleven years ago, I wrote in Foundations of India’s Political Economy “The 1950 Constitution was a marvellous document at the time. Since then it has become too bulky, too full of exceptions and qualifications, and far from comprehensible to the ordinary Indian. A neater, cleaner and shorter document may be sought which keeps the best of the 1950 Constitution and integrates it with the experience of forty years as well as the best of foreign constitutions, with the aim of promoting a system with less uncertainty and more stability.” The Statesman on April 20 1991 published my proposed Constitution for a Second Indian Republic, now … I enclose a copy for your interest. In Keshavananda Bharati the Supreme Court meant that liberal, republican, representative democracy in a free society with separation of powers must not be subverted by any sort of constitutional gimmickry. My proposals enhance such political values. I hope your panel may do the same.”
Surendranath Roy (1860-1929)
June 17, 2008 — drsubrotoroySurendranath Roy was my paternal great grandfather. He was an eminent statesman of his time, sometime President of the Bengal Legislative Council, and close political friend of CR Das who led the Indian National Congress before MK Gandhi. SN Roy was a pioneer of primary education, and a legislative expert on local and general public finance as well as the federal politics of his time, authoring books on the “Princely” States of Gwalior and Kashmir, and proposing the origins of what became the Rajya Sabha. He also protested the Salt Tax as early as 1918. SN Roy Road in Kolkata is named after him. The first photograph is of him as a newly graduated advocate-at-law, the second may have been after his book on Gwalior was published in 1888. He also gave the Tagore Law Lectures in 1905, on the subject of customary law; these are available at India’s National Library. His role in the development of the legislative process in Bengal after the Morley-Minto reforms will be described further here in due course, as will be his role as a pioneer of primary education.
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Apropos “Philosophy of Economics”
April 22, 2009 — drsubrotoroySome reviews of Philosophy of Economics: On the Scope of Reason in Economic Inquiry (London & New York: Routledge). First published 1989. Paperback 1991.
“Dr. Roy’s book, Philosophy of Economics, which I have read in galleys, I regard as a masterpiece, not only in economic analysis but in philosophic analysis as well.” — Sidney Hook 1989
“I shall have to ponder your rejection of the Humean position which has, I suppose, been central in not only my thought but that of most economists. Candidly, I have never understood what late Wittgenstein was saying, but I have not worked very hard at his work, and perhaps your book will give guidance.”–Kenneth J. Arrow, letter to the author, 1989
“It is an extraordinarily well-written and well-thought through book that shows a wide-ranging capacity and understanding of economics as a discipline in both its macro and micro aspects.” Milton Friedman 1991. Evidence in the US District Court for the District of Hawaii.
“There is no doubt whatsoever that he has a thorough and deep understanding of the major issues that have occupied macroeconomics over the past fifty years…. It is a sign of real understanding that Roy can state these ideas not in terms of jargon, not in terms of equations or technical terms, but in straightforward English using only a minimum of specifically economic terminology. All in all, it is a very knowledgeable and sophisticated performance.” — Milton Friedman, 1989
“I had the privilege of reading early drafts of this book. I saw it emerge as an in-depth analysis of the philosophical foundations of economics. It is scholarship of a high order. It is an original contribution of major importance to economic thought.” — Theodore W. Schultz 1989
“The core of Roy’s study is devoted to the nature and grounds of economics as knowledge; it examines the basic intellectual roots of economics. It is cogent and, what is exceedingly rare these days, it is refreshingly lucid…. Roy’s book is in several important respects an original contribution, the most important being his treatment of the philosophical foundations of economics as knowledge. He is all too modest in assessing the importance of his contribution.” Theodore W. Schultz, 1983
“This is a very ambitious work directed at the foundations of normative judgements in economics. The author arrives at some conclusions very closely matching those I arrived at some years ago. It is clear, however, that Dr. Roy arrived at his conclusions completely independently…. Dr. Roy reveals a clear understanding of the methodological positivism that invaded economic policy analysis in the thirties and still dominates the literature of economics…. Following Renford Bambrough, he arrives at a position equivalent to that of the American pragmatists, especially Dewey, who insist that the problematic situation provides the starting point for the analysis of a problem even though there are no ultimate starting points. The methodological implication is the support of inquiry as fundamental, avoiding both scepticism and dogmatism.” Sidney S. Alexander, 1985
“A work altogether well written and admirably clear.” Renford Bambrough, 1985
“I like very much the courage in trying to produce a genuine philosophy of economics. Such a book is badly needed and could be very useful to economists. The fine use made of extensive readings in older as well as contemporary theorists and the splendid choice of quotations would themselves be worth the price of admission. The style maintains a fine level of clarity and emphasis.” Max Black 1985
“The discussion of Arrow’s theorem under unintended interpretations focuses our understanding on what is really fundamental to this famous result…. Roy has obviously thought much harder about the foundational and methodological problems in economics than most of his fellow-economists.” Anonymous
“Roy’s platonist view of what is the purpose of government is very odd at this stage of history. He seems to suppose that there is an objectively best state of affairs which we must simply discover. The more urgent issue in politics is generally not that of knowing what is the best thing to do but of dealing with conflicting interests. Conflict of interests is not merely disagreement over facts.” Anonymous
“The author has performed a very valuable service for economists interested in the philosophical problems and positions discussed. He has not misrepresented the positions he discusses and his account of various issues and different positions on those issues is philosophically adequate. Many economists will be stimulated as a result of reading this work to reconsider their own positions on the issues Roy addresses.” Anonymous
“The work has many strengths. It is wide in its references and its outlook. Its endorsement of objectivism is both right and timely. The chapter on mathematics in economics is particularly fine.” Anonymous
“It is very well written and I enjoyed reading it very, very much…. The account of Arrow and Sen is beautifully clear, the best I have seen, and I was delighted to follow the argument to the conclusion…. An extremely engaging and provocative work.” Peter T. Manicas.
“A new, thoroughly subtle discussion of a fundamental yet traditional problem”. Jahrbücher für Nationalökonomie und Statistik (Germany).
“Effectively demonstrates the direct and significant links between the basic philosophical beliefs held by economists and their fundamental disagreements” Kyklos (Switzerland).
“Every rule of good argument is flouted. Does little to grapple with the large issues to which he rightly urges us to attend.” Times Literary Supplement (UK).
“Not the book to set off the revolution in economic epistemology and it is not even a reliable introduction to the field for undergraduates.” Journal of Applied Philosophy (UK).
“Subroto Roy’s Philosophy of Economics is a formidable contribution…. The author’s aim is to steer a middle course between scepticism and dogmatism in his account of the knowledge we can have of economic phenomena, and in this he largely succeeds. The result is a most distinguished and valuable exploration of the nature of economic inquiry.” John Gray, Economic Affairs (UK).
“Interesting and well-written. Definitely worthwhile being read by any economist interested in the philosophical foundations of his subject and profession.
Journal of Institutional & Theoretical Economics (Germany).
Roy’s basic argument is that the theory of economic knowledge underlying the work of most economists is logically inconsistent… The inconsistency lies in not permitting the skepticism that undermines the analysis of normative problems to destroy the logical foundation underlying positive analysis….. This well-documented study is a worthwhile contribution to the burgeoning literature on the philosophy of economics. Choice
“The central argument of the book shows that the skepticism/dogmatism choice is a false dichotomy, that one need not embrace dogmatism in order to have objectivity or give up objectivity for freedom…. In the final section of the book Roy applies his critique… to several debates in economics. Chapter 8 presents the development of macroeconomics from John Maynard Keynes to the present through a dialogue between economists of opposing schools… Chapter 9 is a rich, wide-ranging discussion of mathematical models in economics…. Chapter 10 discusses the foundations of welfare economics… Roy shows how philosophical mistakes can lead economic thought astray, even though some of his arguments are also unsound. As a philosopher I find it encouraging to see an economist apply recent developments in epistemology to economic debates.” Journal of Economic History
Accomplished, interesting and ambitious.” Manchester School (UK).
“Perfectly sensible.” De Economist (Netherlands).
“Engaging and illuminating study. His seamless style may lull the reader into underestimating the extent and difficulty of the philosophical ground covered.” Research in History & Methodology of Economics (USA).
(Roy’s) message is for his fellow economists, urging them not to shy away from the treatment of normative issues in their discipline. – Economics and Philosophy
When Roy refers to the present received theory of economics, he means that this is the view not only of Chicago, but also of Cambridge, Massachusetts, and Cambridge, England, of Friedman, Samuelson, Myrdal, Hayek, and Joan Robinson. His coverage is broad…. In one place he states that it is precisely because it is possible for even a unanimous group of experts to be wrong that we have a reason, an objective reason, why freedom is to be valued. ‘Freedom is necessary for objectivity.’…. Whether one agrees or disagrees, one has to be impressed by the knowledge and sophistication involved in Roy’s presentation. Involved here is no run-of-the-mill carping at the economics establishment. This is a serious thoughtful work. Social Science Quarterly
Growth & Government Delusion
February 22, 2008 — drsubrotoroyGrowth & Government Delusion:
Progress Comes From Learning, Enterprise, Exchange, Not The Parasitic State
By Subroto Roy
First published in The Statesman, Editorial Page Special Article,
February 22 2008, www.thestatesman.net
P Chidambaram, Montek Ahluwalia and Manmohan Singh, like their BJP predecessors, delude themselves and the country as a whole when they claim responsibility for phenomenal economic growth taking place. “My goal is to continue to maintain growth but at the same time the government reserves the right to make rapid adjustments depending upon the evolving international situation” is a typical piece of nonsensical waffle.
Honest Finance Ministers in any country cannot take personal responsibility for rates of economic growth nor is any government in the world nimble, well-informed and intelligent enough to respond to exogenous shocks in a timely manner. The UPA and NDA blaming one another for low growth or taking credit for high growth merely reveal the crude mis-education of their pretentious TV economists. There are far too many measurement and data problems as well as lead-and-lag problems for any credibility to attach to what is said.
Per capita real GDP
Indian businessmen and their politician/ bureaucratic friends seem to think “growth” refers to nominal earnings before tax for the corporate sector, or some such number that can be sold to visiting foreigners to induce them to park their money in India: “You will get a 10 per cent return if you invest in India” to which the visitor says “Oh that must mean India has 10 per cent growth going on”. Of such nonsense are expensive Davos and Delhi conferences made.
What is supposed to be measured when we speak of economic growth? It is annual growth of per capita inflation-adjusted Gross Domestic Product (National Income or Net National Product would be better if available). West Germany and Japan had the highest annual per capita real GDP growth-rates in the world starting from devastated post-War initial conditions. What were their rates? West Germany: 6.6 per cent in 1950-1960, falling to 3.5 per cent by 1960-1970, and 2.4 per cent by 1970-1978. Japan: 6.8 per cent in 1952-1960; 9.4 per cent in 1960-1970, 3.8 per cent in 1970-1978. Thus, only Japan in the 1960s measured more than 9 per cent annual growth of real per capita GDP.
Now India and China are said to be achieving 9 per cent plus routinely. Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps we are just being fed something incredible, some humbug. India’s population is growing at 2 per cent so even if the Government’s number of 9 per cent is taken at face-value, we have to subtract 2 per cent population growth to get per capita figures. Typical official fallacies include thinking clever bureaucratic use of astronomically high savings rates causes growth. For example, Meghnad Desai of Britain’s Labour Party says: “China now has 10.4 per cent growth on a 44 per cent savings rate… ” Indian savings have been alleged near 32 per cent. What has been mismeasured as high savings is actually paper expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending in both countries.
Real economic growth arises from spontaneous technological progress, improved productivity and learning-by-doing of the general population. World economic history suggests growth occurs in spite of, rather than due to, behaviour of an often parasitic State. Technological progress in a myriad of ways and discovery of new resources are important factors contributing to India’s growth today. But while the “real” economy does well, the “nominal” paper-money economy controlled by Government does not.
Continuous deficit financing for half a century has led to exponential growth of public debt and broad money. The vast growth of bank-deposits has been misinterpreted as indicating unusual savings behaviour when it in fact signals vast government debt being held by nationalised banks. What Messrs Chidambaram, Ahluwalia,Manmohan Singh, the BJP et al have been presiding over is annual paper-money supply growth of 22 per cent! That is what they should be taking honest responsibility for because it certainly implies double-digit inflation (i.e. decline in the value of paper-money) perhaps as high as 14 or 15 per cent. If you believe Government numbers that inflationis near 5 per cent you may believe anything.
The mainsprings of real growth in the wealth of the individual, and so of the nation, are greater practical learning, increases in capital resources and improvements in technology. Deeper skills and improved dexterity cause output produced with fewer inputs than before, i.e. greater productivity. Adam Smith said there is “invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”.
Consider a real life example. A fresh engineering graduate knows dynamometers are needed in testing and performance-certification of diesel engines. He strips open a meter, finds out how it works, asks engine manufacturers what design improvements they want to see, whether they will buy from him if he can make the improvement. He finds out prices and properties of machine tools needed and wages paid currently to skilled labour, calculates expected revenues and costs, and finally tries to persuade a bank of his production plans, promising to repay loans from his returns.
Overcoming restrictions of religion or caste, the secular agent is spurred by expectation of future gains to approach various others with offers of contract, and so organize their efforts into one. If all his offers ~ to creditors, labour, suppliers ~ are accepted he is, for the moment, in business. He may not be for long ~ but if he succeeds his actions will have caused an improvement in design of dynamometers and a reduction in the cost of diesel engines, as well as an increase in the economy’s produced means of production (its capital stock) and in the value of contracts made. His creditors are more confident of his ability to repay, his buyers of his product quality, he himself knows more of his workers’ skills, etc. If these people enter a second and then a third and fourth set of contracts, the increase in mutual trust in coming to agreement will quickly decline in relation to the increased output of capital goods. The first source of increasing returns to scale in production, and hence the mainspring of real economic growth, arises from the successful completion of exchange.
Risk and enterprise
Transforming inputs into outputs necessarily takes time, and it is for that time the innovator or entrepreneur or “capitalist” or “adventurer” must persuade his creditors to trust him, whether bankers who have lent him capital or workers who have lent him labour. The essence of the enterprise (or “firm”) he tries to get underway consists of no more than the set of contracts he has entered into with the various others, his position being unique because he is the only one to know who all the others happen to be at the same time. In terms introduced by Professor Frank Hahn, the entrepreneur transforms himself from being “anonymous” to being “named” in the eyes of others, while also finding out qualities attaching to the names of those encountered in commerce.
Profits earned are partly a measure of the entrepreneur’s success in this simultaneous process of discovery and advertisement. Another potential entrepreneur, fresh from engineering college, may soon pursue the pioneer’s success and start displacing his product in the market ~ eventually chasers become pioneers and then get chased themselves, and a process of dynamic competition would be underway. As it unfolds, anonymous and obscure graduates from engineering colleges become by dint of their efforts and a little luck, named and reputable firms and perhaps founders of industrial families. Multiply this simple story many times, with a few million different entrepreneurs and hundreds of thousands of different goods and services, and we shall be witnessing India’s actual Industrial Revolution, not the fake promise of it from self-seeking politicians and bureaucrats.
Growth of Real Income, Money & Prices in India 1869-2008
July 28, 2008 — drsubrotoroyI have warned against a “monetary meltdown” in India for more than a decade and a half now. I said it to Rajiv Gandhi (who listened with care and respect) and after he was gone I have said it to Government economists in India, to IMF/World Bank bureaucrats in Washington, to academic audiences in India and the UK and to India’s general newspaper reading public.
Obviously I hope such a meltdown does not come about. But inflation, or the decline in the value of money, presently is in double-digits even by the Government’s own admission. (As a general rule, I think the decline in the value of money has been higher by several percent than what the Government says at any given time.) Hence I am publishing again some results of my macroeconomic research on India over the years. You are free to use them and communicate with me about them but please acknowledge them properly and do not steal.
The first graph of 1869-2004 data was published in print to accompany my Growth and Government Delusion in The Statesman February 22, 2008; it had also accompanied other similar articles, e.g. The Dream Team: A Critique in January 2006. The second graph of 1935-2008 data was published in print to accompany my article Indian Inflation in The Statesman of April 22 2008.
Subroto Roy
