No magic wand, Professor Rajan? Oh but there is…(Revised 3 June 2014)

3 June 2014

from World Economy & Central Banking Seminar at Facebook

Professor Rajan’s statement “I determine the monetary policy. I say what it is….ultimately the interest rate that is set is set by me” equates Indian monetary policy with the money interest rate; but monetary policy in India has always involved far more than that, namely, the bulk of Indian banking and insurance has been in government hands for decades, all these institutions have been willy-nilly compelled to hold vast stocks of government debt, both Union and State, on their asset-sides…and unlimited unending deficit finance has led to vast expansion of money supply, making it all rather fragile. My “India’s Money” in 2012 might be found useful.

11 April 2014

from World Economy & Central Banking Seminar at Facebook

I have to wonder, What is Professor Rajan on about? Growth in an individual country is affected by the world monetary system? Everyone for almost a century has seen it being a real phenomenon affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress… A “source country” needs to consult “recipient” countries before it starts or stops Quantitative Easing? Since when? The latter can always match policy such as to be more or less unaffected… unless of course it wants to ride along for free when the going is good and complain loudly when it is not…. Monetary policy may affect the real economy but as a general rule we may expect growth (a real phenomenon) to be affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress..

22 September 2013

“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike…”

I will say the statement above is the first sensible thing I have heard Dr Rajan utter anywhere, cutting through all the hype…I should also think he may be underestimating the task at hand, so here’s some help as to what needs to be done from my 19 Aug 2013 Mint article “A wand for Raghuram Rajan” and my 3 Dec 2012 Delhi lecture:

“Rajan has apparently said, “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.” Of course there are no magic wands but there is a scientific path forward. It involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity. It also involves institutional changes in public decision-making like separating banking and central banking from the treasury while making the planning function serve the treasury function rather than pretend to be above it. It is a road long and arduous but at its end both corruption and inflation will have been reduced to minimal levels. The rupee will have acquired sufficient integrity to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases. India signed the treaty of Versailles as a victor and was an original member of the League of Nations, the United Nations and the IMF. Yet sovereign India has failed to develop a currency universally acceptable as freely convertible world money. It is necessary and possible for India to aim to do so because without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. An RBI governor’s single overriding goal should be to try to bring a semblance of integrity to India’s money both domestically and worldwide.”



19 August 2013

A wand for Raghuram Rajan

9 August 2013

No magic wand, Professor Rajan? Oh but there is… read up all this over some hours and you will find it… (Of course it’s not from magic really,  just hard economic science & politics)

Professor Raghuram Govind Rajan of the University of Chicago Business School deserves everyone’s congratulations on his elevation to the Reserve Bank of India’s Governorship.  But I am afraid I cannot share the wild optimism in India’s business media over this.  Of course there are several positives to the appointment.  First, having a genuine PhD and that too from a top school is a rarity among India’s policy-makers; Rajan earned a 1991 PhD in finance at MIT’s management school for a thesis titled “Essays on banking” (having to do we are told “with the downside to cozy bank-firm relationships”).   Secondly, and related,  he has not been a career bureaucrat as almost all RBI Governors have been in recent decades.  Thirdly, he has been President of the American Finance Association, he won the first Fischer Black prize in finance of that Association, and during Anne Krueger’s 2001-2006 reign as First Deputy MD at the IMF, he was given the research role made well-known by the late Michael Mussa, that of “Economic Counselor” of the IMF.

Hence, altogether, Professor Rajan has come to be well-known over the last decade in the West’s financial media. Given the dismal state of India’s credit in world capital markets, that is an asset for a new RBI Governor to have.

On the negatives, first and foremost, if Professor Rajan has renounced at any time his Indian nationality, surrendered his Indian passport and sworn the naturalization oath of the USA, then he is a US citizen with a US passport and loyalty owed to that country, and by US law he will have to enter the USA using that and no other nationality.  If that happens to be the factual case, it will be something that comes out in India’s political cauldron for sure, and there will arise legal issues and court orders  barring him from heading the RBI or representing India officially, e.g. when standing in for India’s Finance Minister at the IMF in Washington or the BIS in Basle etc.   Was he an Indian national as Economic Counselor at the IMF?   The IMF has a tradition of only European MDs and at least one American First Deputy MD.   The Economic Counselor was always American too; did Rajan break that by having remained Indian, or conform to it by having become American?  It is a simple question of fact which needs to come out clearly.   Even if Rajan is an American, he and the Government of India could perhaps try to cite to the Indian courts the new precedent set by the venerable Bank of England which recently appointed a Canadian as Governor.

Secondly, does Professor Rajan know enough (or “have enough domain knowledge” in the modern term) to comprehend let aside confront India’s myriad monetary and public finance problems?  Much of his academic experience in the USA and his approach to Western financial markets may be quite simply divorced from the reality of Indian credit markets and India’s peculiar monetary and banking system as these have evolved over decades and centuries.  Mathematical finance is a relatively new, small specialised American sub-field of economic theory, and not a part of general economics. Rajan’s academic path of engineering and management in India followed by a finance thesis in the management department of a US engineering school may have exposed him to relatively little formal textbook micro- and macroeconomics, monetary economics, public finance, international economics, economic development etc, especially as these relate to Indian circumstances  “Growing up in India, I had seen poverty all around me. I had read about John Maynard Keynes and thought, wow, here’s a guy who managed to have an enormous influence on the world. Economics must be very important.”… He ran across Robert Merton’s paper on rational option pricing, and something clicked that set him on his own intellectual path. “It all came together. You didn’t have these touchy-feely ways of describing human behavior; there were neat arbitrage ways of pricing things. It just seemed so clever and sophisticated,” he said. “And I could use the math skills that I fancied I had, so I decided to get my PhD.”

Let me take two examples.  Does Rajan realise how the important Bottomley-Chandavarkar debates of the 1960s about India’s rural credit markets influenced George Akerlof’s “Market for Lemons” theory and prompted much work on “asymmetric information”, 325.extract signalling etc in credit-markets, insurance-markets, labour-markets and markets in general, as acknowledged in the awards of several Bank of Sweden prizes?  Or will he need a tutorial on the facts of rural India’s financial and credit markets, and their relationship with the formal sector?  What the Bottomley-Chandavarkar debate referred to half a century ago still continues in rural India insofar as large arbitrage profits are still made by trading across the artificially low rates of money interest caused by financial repression of India’s “formal” monetised sector with its soft inconvertible currency against the very high real rates of return on capital in the “informal” sector.   It is obvious to the naked eye that India is a relatively labour-abundant country.  It follows the relative price of labour will be low and relative price of capital high compared to, e.g. the Western or Middle Eastern economies, with mobile factors of production like labour and capital expected to flow accordingly across national boundaries.   Indian nominal interest-rates in organized credit markets have been for decades tightly controlled, making it necessary to go back to Irving Fisher’s data to obtain benchmark interest-rates, which, as expected, are at least 2%-3% higher in India than in Western capital markets. Joan Robinson once explained “the difference between 30% in an Indian village and 3% in London” saying “side by side with the industrial revolution went great technical progress in the provision of credit and the reduction of lender’s risk.”

What is logically certain is no country can have both relatively low world prices for labour and relatively low world prices for capital!  Yet that impossibility seems to have been what India’s purported economic “planners” have planned to engineer!  The effect of financial repression over decades may have been to artificially “reverse” or “switch” the risk-premium — making it lucrative for there to be capital flight out of India, with real rates of return on capital within India being made artificially lower than those in world markets!   Just as enough export subsidies and tariffs can make a country artificially “reverse” its comparative advantage with its structure of exports and imports becoming inverted, so a labour-rich capital-scarce country may, with enough financial repression, end up causing a capital flight.  The Indian elite’s capital flight out of India exporting their adult children and savings overseas may be explained as having been induced by government policy itself.


Secondly, Professor Rajan as a finance and banking specialist, will see at once the import of this graph above that has never been produced let aside comprehended by the RBI, yet which uses the purest RBI data.  It shows India’s mostly nationalised banks have decade after decade gotten weaker and weaker financially, being kept afloat by continually pumping in of new “capital” via “recapitalisation” from the government that owns them, using more and more of the soft inconvertible currency that has been debauched merrily by government planners.  The nationalised banks with their powerful pampered employee unions, like other powerful pampered employee unions in the government sector, have been the bane of India, where a mere 30 million privileged people in a vast population work with either the government or the organised private sector.  The RBI’s own workforce at last count was perhaps 75,000… the largest central bank staff in the world by far!

Will Rajan know how to bring some system out of the institutional chaos that prevails in Indian banking and central banking?  If not, he should start with the work of James Hanson “Indian Banking: Market Liberalization and the Pressures for Institutional and Market Framework Reform”, contained in the book created by Anne Krueger who brought him into the IMF, and mentioned in my 2012 article “India’s Money” linked below.

The central question for any 21st century RBI Governor worth the name really becomes whether he or she can stand up to the Finance Ministry and insist that the RBI stop being a mere department of it — even perhaps insisting on constitutional status for its head to fulfill the one over-riding aim of trying to bring a semblance of integrity to India’s currency both domestically and worldwide.  Instead it is the so-called “Planning Commission” which has been dominating the Treasury that needs to be made a mere department of the Finance Ministry, while the RBI comes to be hived off to independence!  

Professor Rajan has apparently said “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.”  Of course there are no magic wands but my 3 December 2012 talk in Delhi  has described the right path forward, complex and difficult as this may be.

The path forward involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity, plus institutional changes in public decision-making like separating banking and central banking from the Treasury while making the planning function serve the Treasury function rather than pretend to be above it.  The road described is long and arduous but at its end both corruption and inflation will have been reduced to minimal levels, and the rupee would have acquired integrity enough to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases.


India signed the Treaty of Versailles as a victor and was an original member of the League of Nations, UN and IMF.  Yet sovereign India has failed to develop a currency universally acceptable as a freely convertible world money. It is necessary and possible for India to do so. Without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. 

Professor Rajan will not want to be merely an adornment for the GoI in world capital markets for a few  years, waiting to get back to his American career and life and perhaps to the IMF again.  As RBI Governor, he can find his magic wand if he reads and reflects hard enough using his undoubted academic acumen, and then acts to lead India accordingly.  Here is the basic reading list:

“India’s Money” (2012)

“Monetary Integrity and the Rupee” (2008)

“India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

“Fallacious Finance” (2007)

“Growth and Government Delusion” (2008)

“India in World Trade & Payments” (2007)

“Path of the Indian Rupee 1947-1993″ (1993)

“Our Policy Process” (2007)

“Indian Money and Credit” (2006)

“Indian Money and Banking” (2006)

Indian Inflation

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

“How to Budget” (2008)

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

“The Dream Team: A Critique” (2006)

“Against Quackery” (2007)

“Mistaken Macroeconomics” (2009)

“The Indian Revolution (2008)”


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Posted in Academic economics, Academic research, Asia and the West, asymmetric information, Banking, Big Business and Big Labour, Bretton Woods institutions, Britain in India, Capital and labour, Deposit multiplication, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Exchange Rates, Economics of Public Finance, Financial Management, Financial markets, Financial Repression, Foreign exchange controls, Governance, Government accounting, Government Budget Constraint, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform, India's agriculture, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's currency history, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's Polity, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest group politics, Interest rates, International economics, International monetary economics, International Monetary Fund IMF, Land and political economy, Microeconomic foundations of macroeconomics, Monetary Theory, Money and banking, Paper money and deposits, Power-elites and nomenclatura, Public Choice/Public Finance, Public property waste fraud, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Rajiv Gandhi's assassination, Statesmanship, Unorganised capital markets. Leave a Comment »

Sonia Gandhi on the origins of the 1991 economic reform (Revised 17 Dec 2012)

[See also Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform?  Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington?  Judge the evidence for yourself.  And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture! and Fact vs Falsification & Flattery in New Delhi (& Kolkata etc) Revised 30 June 2013]




From Facebook 17 Dec 2012


Subroto Roy says to Mr Sathe, Shekhar, changing the direction of a ship of state is very hard, knowing in which direction it should change and to what degree is even harder; it has rarely been something that can be done without random shocks arising let aside the power of vested interests. Had Rajiv Gandhi lived to form a new Government, I have little doubt I would have led the reform that I had chalked out for him and that he had approved of; Sonia Gandhi would have remained the housewife, mother and grandmother that she had preferred to be and not been made into the Queen of India by her party; Manmohan Singh had left India in 1987 for the Nyerere project and it had been rumoured at the time that had been slightly to do with him protesting, to the extent that he ever has protested anything, the anti-Sikh pogrom that some of Rajiv’s friends had apparently unleashed after Indira’s killing; he returned in Nov 1990, joined Chandrashekhar in Dec 1990, left Chandrashekhar in March 1991 when elections were announced and was biding his time as head of the UPSC UGC (typo corrected 5 July 2013); had Rajiv Gandhi lived, Manmohan Singh would have had a governor’s career path, becoming the governor of this or that state one after next; he would not have been brought into the economic reform process which he had had nothing to do with originating; and finally Pranab Mukherjee, who had been made to leave the Congress when Rajiv took over, would have been likely rehabilitated slowly but would not have come to control the working of the party as he did. I think I have said in my Lok Sabha TV interview that there have been many microeconomic improvements arising from technological progress in the last 20+ years but the macroeconomic and monetary situation is grim, because at root the fiscal situation remains incoherent and confused. I do not see anyone in Manmohan Singh’s entourage among all his many acolytes and flatterers and apologists who is able to get to these root problems.




Facebook March 26 2011


Mr Chidambaram knows better than that!


by Subroto Roy


I remain amused by the powers-that-be in Delhi continuing to attempt to deny me credit for the origins of the 1991 economic reform based on the UH-Manoa perestroika-for-India project I had led 1986-1992, and the results of which I brought with me to my first meeting with Rajiv Gandhi on September 18 1990.


After almost a decade of relentless pressure from me for the truth to be told, Rajiv’s widow on December 28 2009 finally admitted her late husband “left his personal imprint on the (Congress) party’s manifesto of 1991″.


Now yesterday, March 25 2011, Mr Chidambaram has admitted “The Congress manifesto prepared for the general elections in 1991 did talk about an agenda of reforms but with the assassination of Rajiv Gandhi, there was no certainty that these would have remained on the agenda”.


Well, Mr Chidambaram, you know better than that!  Did you not yourself say in Tokyo in April 1993 that the reform “was not miraculous” but based on “rewriting of the Congress manifesto while in Opposition. We were ready when we came back to power in 1991″? (And as for those two former World Bank types with you on the podium yesterday, one was out of the country and cannot possibly claim to have been part of anything, though he had begged me to come to Hawaii and I had said sorry, no; the other, well, perhaps the less said about his capacity for self-delusion the better for India (though his shift from Sovietism to Americanism and his power to waffle endlessly on TV etc is a true bureaucratic marvel). The third man on the podium with you was someone I had tried hard to get to come to Hawaii, upon recommendation of Sukhamoy Chakravarty; but he could not make it; he though has inevitably lost his way for some years now with his wish to stay in Delhi much longer than he should ever have done.)


The simple truth is very simple: the positive change in direction of the Congress Party’s economic and other thinking  occurred due to the Congress President’s meeting with me on September 18 1990, where I gave him the perestroika-for-India project results and advised him to look to the future and write a fresh and modern manifesto. He agreed with his actions the following week, and subsequently, viz., Rajiv Gandhi and the Origins of India’s 1991 Economic Reform. Later, after his assassination, against which I had warned, the process came to be taken over by the greedy and the mendacious (specifically, organised big business lobbies, big bureaucrats and politicians, Soviet sleeper agents etc). So the truth got lost and has had to be reconstructed slowly.


(And puleaaase, baba, Manmohan Singh or any of his acolytes had nothing to do with it! Not in the loop! After all, if they had had the creativity and economic knowledge and intellectual honesty and courage, during all their years and decades in the Government of India and sundry international bureaucracies, to do what we did, they would and should have done it!  But there is just no evidence that they did, sorry baba! Time almost to say Uff!)


My colleague Ted James who with me led the Hawaii projects said of it in January 2010 a few months before he tragically died: “Seldom are significant reforms imposed successfully by international bureaucracies. Most often they are the result of indigenous actors motivated by domestic imperatives. I believe this was the case in India in 1991. It may have been fortuitous that Dr. Roy gained an audience with a receptive Rajiv Gandhi in 1990 but it was not luck that he was prepared with a well-thought out program; this arose from years of careful thought and debate on the matter.”


Why all this is important is not because I want a national award and due recognition etc, which I won’t of course mind getting, but because Dr Singh, Mr Chidambaram et al (as well as all the BJP and CPI-M etc people in Delhi too) have rather ruined the fisc, the currency and the exchanges…. It may be hopeless….

From Facebook December 20 2010


Subroto Roy is glad to hear today, for the first time, Dr Manmohan Singh explicitly praise Rajiv Gandhi for chalking out the roadmap of the 1991 economic reform, as Rajiv did thanks to his encounter with the UH-Manoa project I had led since 1986. At last year’s Congress Party meet, Sonia Gandhi for the first time on Dec 28 2009 said Rajiv “left his personal imprint on the (Congress) party’s manifesto of 1991″. Better late than never.



From Facebook Sep 20 2010


Subroto Roy  notes the 20th anniversary just passed over the weekend of Rajiv Gandhi’s encounter with the UH-Manoa peresteroika-for-India project that I had led. On Sep 18 1990, when Rajiv and I first met, Dr Manmohan Singh was not physically in India, ending his final assignment before retirement with Julius Nyerere of Tanzania. Of the others whom Rajiv appointed along with myself as advisers a week later on Sep 25 1990, at least one has recently proved to be mendacious in print — stating Manmohan Singh and not I was in the group that got created on Sep 25 following my single meeting with Rajiv on Sep 18! — and I had to expose the mendacity; he has not sued me for calling him a liar because, of course, truth is a first and full defence against a charge of defamation!

National policy should not float on self-delusion and flattery and myth and mendacity — or grave problems like Kashmir and macroeconomic inflation are the inevitable result.

I have met Mrs Sonia Gandhi once in December 1991 when I gave her a tape of her husband’s conversations with me during the Gulf War; she later in 2001 was kind enough to write acknowledging receipt of an earlier draft of this story.



From Facebook  (December 29, 2009):


Subroto Roy is pleased that Sonia Gandhi has finally said, yesterday (December 28 2009), her late husband Rajiv “left his personal imprint on the (Congress) party’s manifesto of 1991″. He did — thanks to his encounter with me dated Sep 18 1990 where I gave him a copy of the results of the perestroika-for-India project I had led at a US university since 1986, as well as my May 29 1984 IEA monograph that had provoked the lead editorial of *The Times* of London when first published (based on my Cambridge doctoral thesis under Frank Hahn).  I was very warmly introduced to Rajiv thanks to Siddhartha Shankar Ray, Bar-at-Law, senior Congress Party politician and my senior counsel in India’s Supreme Court during a grave international custody battle. The story of my encounter with Rajiv has now been fully told in the Indian newspapers, at my blog/website, and reproduced in my Notes at Facebook. Perhaps Mrs Gandhi will realise too some time that Manmohan Singh (or any of his prominent acolytes and flatterers among Indian bureaucrats, businessmen and journalists) had nothing to do with the origins of the 1991 reform — there was a reason I did not invite them to Manoa,


namely, I had felt they had been part of the problem, not the solution.


Dr Singh and I have met twice and I hold him in high personal regard — in the late summer of 1973 in Paris he kindly consented to visit our then-home there at my father’s request to discuss economics with me before I, as an 18 year old, left for my freshman year at the London School of Economics; we ended up having a tense debate on the merits (as he saw them) and demerits (as I saw them) of the Soviet influence on Indian economic policy-making until that time; then we met twenty years later in Washington in the Fall of 1993 when the Indian Ambassador, the same Barrister Ray, introduced me to him as the person on whose laptop the 1991 manifesto had been written. To his credit, he himself has not attributed to himself any of the original economic thought his many flatterers have attributed to him since 1991 though he has not denounced them either, or at least is yet to do so. My rather critical views on his economics and politics are available in the Indian newspapers, my site and now in my Notes at Facebook, e.g. “Mistaken Macroeconomics” etc.



Update from Facebook July 2, 2010:


Subroto Roy has lost count of all the Advisory Councils in New Delhi and whom they are supposed to be advising or about what. Manmohan Singh has an “Economic Advisory Council” and a “Trade and Industry Advisory Council” besides the “Planning Commission” and “National Development Council” and “National Security Council” and any number of others for sure. Sonia Gandhi has the “National Advisory Council” who seem to live in cities but want to talk about rural India; a rural India where people have always been fully familiar with normal markets for food and labour yet those markets are now being destroyed or at least distorted, perhaps incorrigibly. My advice to Rajiv Gandhi 20 years ago based on the perestroika-for-India project I had led at the UH Manoa was for free (in fact it has cost me a lot personally, so the price I charged was probably negative) — and yet, I am bold enough to say, it remains unsurpassed.



Update from Facebook July 3, 2010:


Subroto Roy is pleasantly surprised to find a “senior journalist” speak a truth in today’s pink business newspaper about the origins of India’s 1991 economic reform, admitting: “Nor might the government have been able to justify liberalisation if it hadn’t been for the 1991 Congress election manifesto that Rajiv Gandhi had compiled, but tragically, not lived to push through.”   And who got Rajiv to do that? I did. On Sep 18 1990, based on the University of Hawaii Manoa project I had led since 1986.  Later, the process got corrupted by the greedy and the mendacious.

Silver Jubilee of “Pricing, Planning & Politics: A Study of Economic Distortions in India”

May 29 2009:

It is a quarter century precisely today since my monograph Pricing, Planning and Politics: A Study of Economic Distortions in India was first published in London by the Institute of Economic Affairs.


Its text is now available (in slightly rough form) at this site here.

Now in May 1984, Indira Gandhi ruled in Delhi, and the ghost of Brezhnev was still fresh in Moscow.   The era of Margaret Thatcher in Britain and Ronald Reagan in America was at its height.   Pricing, Planning & Politics emerged from my 1976-1982 doctoral thesis at Cambridge though it came to be written in Blacksburg and Ithaca in 1982-1983.   It was the first critique after BR Shenoy of India’s Sovietesque economics since Jawaharlal Nehru’s time.

The Times, London’s most eminent paper at the time, wrote its lead editorial comment about it on the day it was published, May 29 1984.


It used to take several days for the library at Virginia Tech in Blacksburg to receive its copy of The Times of London and other British newspapers.    I had not been told of the date of publication and did not know of what had happened in London on May 29 until perhaps June 2 — when a friend, Vasant Dave of a children’s charity, who was on campus, phoned me and congratulated me for being featured in The Times which he had just read in the University Library.  “You mean they’ve reviewed it?”  I asked him, “No, it’s the lead editorial.” “What?” I exclaimed.  There was worse.  Vasant was very soft-spoken and said “Yes, it’s titled ‘India’s Bad Example'” — which I misheard on the phone as “India’s Mad Example”  :D

Drat! I thought (or words to that effect), they must have lambasted me, as I rushed down to the Library to take a look.

The Times had said

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India.   If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is.   A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World.   As with many of Britain’s former imperial possessions, the rot set in long before independence.  But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy.  We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence.  How could Indian officials explain their poor performance relative to Hongkong?  Dr Roy has the answers for them.   He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats.  The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.”  Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches.   No businessman can expand his operation while there is any surplus capacity anywhere in that sector.  He needs government approval to modernize, alter his price-structure, or change his labour shift.  It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi.  Her policies have clearly positioned India more towards the Soviet Union than the West.  The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.”  All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

I felt this may have been intended to be laudatory but it was also inaccurate and had to be corrected.  I replied dated June 4 which The Times published in their edition of  June 16 1984:


I was 29 when Pricing, Planning and Politics was published, I am 54 now. I do not agree with everything I said in it and find the tone a little puffed up as young men tend to be; it was also five years before my main “theoretical” work Philosophy of Economics would be published. My experience of life in the years since has also made me far less sanguine both about human nature and about America than I was then. But I am glad to find I am not embarrassed by what I said then, indeed I am pleased I said what I did in favour of classical liberalism and against statism and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals overnight.)

The editorial itself may have been due to a conversation between Peter Bauer and William Rees-Mogg, so I later heard. The work sold 700 copies in its first month, a record for the publisher. The wife of one prominent Indian bureaucrat told me in Delhi in December 1988 it had affected her husband’s thinking drastically. A senior public finance economist told me he had been deputed at the Finance Ministry when the editorial appeared, and the Indian High Commission in London had urgently sent a copy of the editorial to the Ministry where it caused a stir. An IMF official told me years later that he saw the editorial on board a flight to India from the USA on the same day, and stopped in London to make a trip to the LSE’s bookshop to purchase a copy. Professor Jagdish Bhagwati of Columbia University had been a critic of aspects of Indian policy; he received a copy  in draft just before it was published and was kind enough to write I had “done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!”

Siddhartha Shankar Ray told me when  we first met that he had been in London when the editorial appeared and had seen it there; it affected his decision to introduce me to Rajiv Gandhi as warmly as he came to do a half dozen years later.

Within a few months though, by the Fall of 1984, I was under attack by the “gang of inert game theorists”  who had come to  Blacksburg following the departure of James Buchanan.  By mid 1985 I had moved to Provo, Utah, really rather wishing, as I recall,  to have left my India-work behind me.  But by late 1986, I was at the University of Hawaii, Manoa, where the perestroika-for-India and Pakistan projects that I and WE James led, had come to be sponsored by the University and the East West Center.

The unpublished results of the India-project reached Rajiv Gandhi by my hand on September 18 1990 as has been told elsewhere.  A week later, on September 25 1990,  Rajiv appointed a small group that included myself, to advise him.  It was that encounter with Rajiv Gandhi that sparked the origins of the 1991 economic reform.  Yet in 2007 one member of the group, declaring himself close to Sonia Gandhi, brazenly lied in public saying it was Manmohan Singh and not I who had been part of the group — a group of which I had been in fact the first member!  Manmohan Singh himself has never claimed to have been present and in fact was not even in India at the time it was formed.

I have explained elsewhere here why I believe this specific  lie  came to be told by this specific liar who shared membership with me in the group that Rajiv had formed:  because I had also pleaded with  many and especially within this group that Rajiv had seemed, to my layman’s eyes, very vulnerable to assassination, and none of them had lifted a finger to  do anything about it!  Such is how duplicity, envy and greed for power make people mendacious and venal in politics!

As for Pricing, Planning and Politics, Dr Manmohan Singh received a personal copy from my father whom he had long known through the Kaul brothers, Brahma and Madan, both of whom were dear friends of my father since the War and Independence.   From a letter Dr Singh wrote to my father,  he would have received his copy in late 1986 when he was heading the Planning Commission in his penultimate appointment before retirement from the bureaucracy.

Readers of Pricing, Planning and Politics today, 25 years after it was published, may judge for themselves what if any  part of it may be still relevant to the new government that Dr Singh is now prime minister of.   The work was mostly one of applied microeconomics or the theory of value; in recent years I have written much also of applied macroeconomics or the theory of money as it relates to India.  My great professor at Cambridge, Frank Hahn, was kind enough to say in 1985 that he thought my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”; that to me has been a special source of delight.

Subroto Roy, Kolkata

My 200 words on India’s Naxal guerrilla rebels that a “leading business magazine” invited but then found too hot to handle

“Public finances in India, state and Union, show appalling accounting and lack of transparency. Vast amounts of waste, fraud and malfeasance get hidden as a result. The Congress, BJP, official communists, socialists et al are all culpable for this situation having developed – over decades. So if you ask me, “Is the Indian state and polity in a healthy condition?” I would say no, it is pretty rotten. Well-informed, moneyed, mostly city-based special interest groups (especially including organised capital and organised labour) dominate government agendas at the cost of ill-informed, diffused masses of anonymous individual citizens ~ peasants, forest-dwellers, small businessmen, non-unionized workers, the destitute, etc. Demarcations of private, community and public property rights frequently remain fuzzy. Inflation causes non-paper assets to rise in value, encouraging land-grabs. And the fetish over purported growth-rates continues despite measurements being faulty, not reaching UN SNA standards, probably hiding increasing inequalities. India’s polity and economy are in poor shape for many millions of ordinary people. Armed rebellion, however, does not follow from this. Killing poor policemen and starting class-wars were failed Naxal tactics in the 1970s and remain so today. Naxals should put down their weapons and use Excel sheets and government accounting data instead.

Dr Subroto Roy, economist and adviser to Rajiv Gandhi 1990-1991.”

Wage inflation among agricultural workers in India

From Facebook

Subroto Roy finds from Gopa’s data that wage inflation among unskilled agricultural workers in rural India has been at about 6.35% per annum over the last 7 years or so.

Afghanistan should become a major manufacturer of morphine using its poppy

From Facebook:

Subroto Roy thinks the Senlis Council’s advice on regulating and licensing Afghanistan’s poppy market may be more important than trying to ham-handedly fight “drug wars” there…. Poppy may be best-suited to grow in that arid country which may not be otherwise able to feed itself.

Postcript: This report on regulating India’s poppy market for phramaceutical uses seems a good model.

Politics can be so entertaining :) Manmohan versus Sonia on the poor old CPI(M)!

My January 14 2007 article “On Land-Grabbing” started by saying:

“AT a business meet on 12 January 2005, Dr Manmohan Singh showered fulsome praise on Buddhadeb Bhattacharjee as “dynamic”, “the Nation’s Best Chief Minister”, whose “wit and wisdom”, “qualities of head and heart”, “courage of conviction and passionate commitment to the cause of the working people of India” he admired, saying “with Buddhadeb Babu at the helm of affairs it appears Bengal is once again forging ahead… If today there is a meeting of minds between Delhi and Kolkata, it is because the ideas that I and Buddhadebji represent have captured the minds of the people of India. This is the idea of growth with equity and social justice, the idea that economic liberalization and modernization have to be mindful of the needs of the poor and the marginalized.”  With such support of a Congress Prime Minister (as well as proximity to Pranab Mukherjee), Mr Bhattacharjee could hardly have feared the local Congress and Trinamul would pose any threat in the 2006 Assembly Elections despite having more potential voters between them than the CPI-M.  Dr Singh returned to the “needs of the poor and the marginalized” at another business meet on 8 January 2007 promising to “unveil a new Rehabilitation Policy in three months to increase the pace of industrialisation” which would be “more progressive, humane and conducive to the long-term welfare of all stakeholders”, while his businessman host pointedly stated about Singur “land for industry must be made available to move the Indian manufacturing sector ahead”.   The “meeting of minds between Delhi and Kolkata” seems to be that agriculture allegedly has become a relatively backward slow-growing sector deserving to yield in the purported larger national interest to industry and services: what the PM means by “long-term welfare of all stakeholders” is the same as the new CPI-M party-line that the sons of farmers should not remain farmers (but become automobile technicians or IT workers or restaurant waiters instead).  It is a political viewpoint coinciding with interests of organised capital and industrial labour in India today, as represented by business lobbies like CII, FICCI and Assocham on one hand, and unions like CITU and INTUC on the other. Business Standard succinctly (and ominously) advocated this point of view in its lead editorial of 9 January as follows: “it has to be recognised that the world over capitalism has progressed only with the landed becoming landless and getting absorbed in the industrial/service sector labour force ~ indeed it is obvious that if people don’t get off the land, their incomes will rise only slowly”. “

I went on to say

“Land is the first and ultimate means of production, and the attack of the powerful on land-holdings or land-rights of the unorganised or powerless has been a worldwide phenomenon ~ across both capitalism and communism.”

It is interesting and amusing to see today’s newspapers report that the person who appointed Dr Manmohan Singh to be India’s PM, namely Sonia Gandhi,  has taken a  180-degree turn on this subject while sitting beside Mamata Banerjee yesterday.

She apparently said:  “I am happy so be sharing the  dais with Mamata Banerjee once again….in Nandigram and Singur the State Government had unleashed dictatorship in the garb of democracy… . In the name of development (the CPI(M)) created terror in Nandigram and Singur.  In the name of development, they snatched the land from the poor people there.”

Now what is the poor old CPI(M) to think after all this! Politics can be so  entertaining.  :D

Subroto Roy, Kolkata


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