Diplomatic Wisdom

DIPLOMATIC WISDOM

by Subroto Roy

Editorial page, The Statesman, January 31 2006

Indian diplomacy has, almost accidentally, shown some wisdom. The King of Saudi Arabia should have been long ago invited to be Chief Guest on Republic Day. His Majesty immediately reciprocated with the most gracious words possible: “I consider myself to be in my second homeland. The relationship between India and the Kingdom of Saudi Arabia is an historic one, we have been old friends and, God willing, this visit will renew these historic ties”. Indeed the King should be invited to make a full State visit in the near future travelling all over India, including Srinagar Valley ; where Khruschev and Bulganin went in 1955!

India has the second largest population of Muslim believers in the world after Indonesia, and it is only right the Keeper of the Holy Places of Islam should see for himself that India is indeed dar-ul-aman, not the dar-ul-harb that the propaganda of the Pakistanis and their terroristic protégés have made it out to be in Saudi and Gulf power circles.

Kalam and the King

The Vajpayee Government deserves a little credit for the present success, because it was they who caused the fact that His Majesty Faisal Ibn Abdullah Ibn Muhammad Al-Saud was hosted by an Indian rocket scientist born in a Muslim family in an impecunious fishing village of Tamil Nadu. The King and his princes would not have failed to feel the poignancy in that. India is also the second largest country of Shiá Islam after Iran, and Ayatollah Khatami was Chief Guest a few years ago when he was President of Iran. It has been argued in these columns (“Solving Kashmir”, The Statesman, December 1-3, 2005) that the solution to J&K requires Indian diplomacy with Iran and Afghanistan as well ; which, incidentally, will make the hollowness of Pakistan’s claims in J&K most obvious.

Now the President of the United States is due to visit India shortly. George W Bush is the third Republican President to come to India after Dwight D. Eisenhower and Richard Nixon. His predecessor Bill Clinton came as a single man at the end of his second term, on holiday from a rocky marriage, to dance with Rajasthani women and indulge his love of Indian food. Before Clinton in 2000, the last American President to visit was Jimmy Carter in 1978, who gave a stirring speech to Parliament about democracy after Morarji Desai had defeated Indira Gandhi’s Emergency. George Bush, also in his second term, will come to India amid controversy.

“You’re a good man”, Bush condescendingly said to Manmohan Singh in Washington, half-remembering that morning’s intelligence briefing memo. Had our PM been more experienced of the world he could have replied equally loudly: “Thanks, you’re not so bad yourself. Let’s chop some wood next time”. It is almost definite there will be no agreement on the nuclear collaboration deal, and that the dispute erupting over Iran may have enlarged itself. Platitudes will be exchanged but the fact that the President has chosen to combine his visit to India with a visit to his buddies in the Pakistani Government will not go unnoticed in the MEA.

“Balance of power” has been the motif of Anglo-American foreign policy in Asia at least ever since the Arabs were induced to revolt against the Turks by Allenby and Lawrence, followed by pitting Iran and the Arabs against each other. The same goes for India and Pakistan. Also, our rather uncouth Communists have vowed to make their presence felt in street-protests and boycotts of Parliament when Bush comes.

FDR & Martin Luther King Jr

In this tense atmosphere, where the summit may actually falter rather badly on substance, Manmohan Singh will need to make some important symbolic gestures. Going to meet the Saudi King at the airport was an appropriate gesture. Clinton had expected the Indian PM to meet him too, and was visibly disappointed to land in the middle of the night only amidst the lights of the TV cameras. The Bushes should be met at the airport by our PM and his spouse. The President is our honoured guest and guests are to be treated like gods.

In the same vein, four boulevards across India’s largest cities deserve to be named after four American heroes: Franklin Delano Roosevelt, Martin Luther King Jr., Dwight D. Eisenhower and Abraham Lincoln. The first two were Democrats, the latter two Republicans.

Naming a boulevard in New Delhi after FDR would belatedly acknowledge his small, spontaneous yet critical and principled role in support of Indian independence that, shockingly, remains unrecognised in India. Britain could not expect American support against German and Japanese imperialism while expecting the Americans not to support Indian aspirations for national freedom. India’s own academic historians, mostly under influence of either Communist or RSS methodologies, have failed even to produce objective biographies of major national leaders, let aside candid accounts of British rule, the development of the Indian nation-state, the Transfer of Power or Partition.

The same intellectual sloppiness has extended to economics too, and underlies the gross misunderstanding of India’s monetary and fiscal histories as was outlined recently in these columns. It has required a young American scholar, Dinyar Patel, writing in an official American Government publication to outline Roosevelt’s role during India’s independence (Span, March 2005).

Where FDR helped India’s struggle for freedom, Martin Luther King Jr adopted India’s method to lead America’s blacks (“Negroes” and “coloureds” as they were then called) to freedom within their own country. MK Gandhi had corresponded with Tolstoy after beginning his campaign of passive resistance to unjust South African laws, and he read Henry Thoreau’s essay on civil disobedience when he was already in jail for that very same offence. Many years later, the young Alabama preacher put to use Gandhi’s example of courageous peaceful defiance of injustice in his own sweet land of liberty. On receiving the Nobel Peace Prize on 10 December 1964, King said: “Non-violence is the answer to the crucial political and moral question of our time – the need for man to overcome oppression and violence without resorting to violence and oppression. Civilisation and violence are antithetical concepts. Negroes of the United States, following the people of India, have demonstrated that non-violence is not sterile passivity, but a powerful moral force which makes for social transformation”. Of course, King like Gandhi would have been appalled by the religious, colour, caste and racial prejudices of contemporary Indians, Pakistanis etc today, and naming a boulevard in King’s name may do more for our own moral well-being than anything else.

Eisenhower and Lincoln

As for Dwight Eisenhower and Abraham Lincoln, the former may well be seen in later centuries as the greatest of 20th Century American Presidents as the latter was of the 19th. Though they had nothing to do with India, naming boulevards after them would remind Indians of the existence of great men in world history.

Jyoti Basu’s Communists once named streets in Kolkata after Lenin and Ho Chi Minh, and still pay annual obeisance at Lenin’s statue with clenched fists and garlands. Ho Chi Minh was a great nationalist and may have deserved an Indian street but it was a cheap and gratuitous insult by the Communists to name the very street on which the American Consulate stood after the Vietnamese leader who was then their enemy. The Americans were mature enough at the time to ignore it and not pull out their Consulate from Kolkata — the very same Consulate that is so highly in demand with Basu’s successor, Buddhadeb Bhattacharjee.

Under influence of the well-known academic apologists for Communist China, Bhattacharjee has been recently extolling the virtues of Mao Zedong and Zhou Enlai too – apparently ignorant of the 40 million Chinese that Mao killed and apparently forgiving Zhou’s hatred of and perfidy against India. Before any further such nonsense occurs, we should name roads after FDR, King, Eisenhower and Lincoln, and the time to do it would be when George W. Bush makes his visit.

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Communists and Constitutions

COMMUNISTS & CONSTITUTIONS

By SUBROTO ROY
first published in The Sunday Statesman, Editorial Page, Special Article,

January 22 2006 www.thestatesman.net

Constitutions and communists do not go together. The most glaring example comes from Russia — the Motherland not only of modern communism but also of great brave individual souls like Aleksandr Solzhenitsyn and Andrei Sakharov, and the many other men and women who struggled to defeat communism there over seven decades. Before Russia managed to liberate herself from communism — i.e. before the Communist Party of the Soviet Union began under Mikhail Gorbachev and Boris Yeltsin to liberate itself from itself in the late 1980s — the only genuine elections that ever occurred in the country were to the Constituent Assembly of November 1917.

That Constituent Assembly was a multiparty legislative body and it happened to have a large anti-Bolshevik majority. It met only once in January 1918 and was destroyed under Lenin immediately because it quite naturally refused to adopt Bolshevik proposals. Under the Czar, the “Constitutional Democratic Party” (the “Cadets”), formed in 1905, “constituted the most dangerous ranks of revolution”. Under the government of the proletariat, the very same Cadet Party represented “the most dangerous ranks of reaction” (Solzhenitsyn). Constitutionalists inevitably end up battling both the Fascists of the Right and the Communists of the Left. As Hannah Arendt made clear, the organisation of totalitarian governments whether of Hitler’s Germany or Stalin’s USSR or Mao’s China were remarkably similar in nature. Upon seizing power in November 1917, Russia’s Bolsheviks attacked the constitutionalists first, outlawing the Cadet Party and arresting its members, and doing the same to students, workers and soldiers associated with the “Alliance for the Constituent Assembly”.

This is not a coincidence. Communists and fascists are powered by instincts of grabbing State political power for themselves any which way they can, in order to impose by brute force on everyone else the rather shoddy obsolete ideologies they subscribe to themselves. Karl Marx himself most famously said the words “I am not a Marxist”. Communists and fascists cannot stand the idea of the anonymous individual citizen standing up on his or her own; their instinct is one which cannot attribute credit to the individual person for any good that may be done, instead purloining it into a fake “collective” effort. Similarly, errors cannot be simply acknowledged, and instead responsibility is diffused all around until nobody remembers who said or did what or when, and all history becomes a jumble.

Every great scientific and artistic achievement has been an expression of individual genius, often against the reactionary collective will. And constitutions from Magna Carta onwards have been built on the idea of protecting the anonymous, powerless individual citizen against the violent arbitrary power of the established State and its comprador organisations. Britain and America may have contributed their share of evil to world history but they have made up for at least some of it by pioneering Anglo-Saxon constitutional jurisprudence. It may be no coincidence Britain and America have been home to the greatest outpourings of human creativity and invention in modern times, from the steam engine to the Internet.

In fact it has been a singularly American contribution to pioneer the very idea that parliamentary majorities themselves need to be restrained from their own baser proclivities. In 1767, before America had herself become free from British rule, the British Parliament once issued a declaration that a parliamentary majority could pass any law it saw fit. It was greeted with an outcry of horror in Britain’s American colonies. Patrick Henry of Virginia — later famous for his cry “Give me Liberty or give me Death” — led the battle for the anonymous free individual citizen against the arbitrary power that comes to be represented by the herd or mob instincts even of elected parliamentary majorities. Constitutions are written to protect parliaments and peoples from themselves.

The philosopher John Wisdom, who translated the subtle work of Wittgenstein and Freud into normal idioms, once said: “Sometimes a society acts as if all power lay in the hands of the most babyish and animal members, and sometimes as if all power lay in the hands of strict old men, and sometimes it acts more as a whole — mostly when there’s a war on. Sometimes a man is not himself and acts as if a babyish or cunning animal had gained control — that’s the id — sometimes as if an exacting parent, a sarcastic schoolmaster, or an implacable deity possessed him — that’s the super-ego. Sometimes a man is more himself and acts more as a whole, a new whole which is not a combination but a synthesis of the id and the super-ego. Some are constantly at the mercy of the id, some are slaves to the super-ego, and in some first one and then the other gains an unhappy victory in a continual struggle, and in some conflict and control have vanished into cooperation…”

Similarly, we may say that political processes in any country appear to often give play to the most “babyish” and “cunning animal” instincts of the society, while at other times the “strict old men” or “exacting parent” take over. The constant struggle of political reasonableness is to find the rational, normal national self that rests in between.

India at present has been set upon an unproductive and pointless course of inevitable Constitutional collision between Parliament and the Supreme Court. That course has been singly set by the present Speaker even though every attempt is being made now to diffuse his responsibility for the situation that has arisen, so that soon nobody will be able to remember exactly what happened or why. The incumbent Speaker, instead of being wholly self-effacing as called for by the job-requirements of the high and grave office he holds, has remained too much of a normal parliamentary advocate. Before grave irreparable damage comes to be done to India’s Parliamentary and Constitutional traditions, he needs to return at once to the Front Benches of the Communist Party of India (Marxist) as a distinguished senior Member of the House, and from there make whatever arguments he wishes about Parliament’s rights under the Constitution. The high self-effacing office of the Speaker is not from where such arguments as he has been making should be made — unless India’s Parliament and Constitution are soon to be thrown into the dustbin for ever (as has similarly happened for half a century across the border with our Pakistani cousins).

The incumbent Speaker is right that the Supreme Court does not oversee Parliament. The Supreme Court oversees something greater than Parliament, namely, India’s Constitution. Parliament, its Speaker, its Prime Minister, the President of India, and the Supreme Court itself are all creatures of the Constitution. However, the Constitution of India that was adopted on 26 January 1950 is not sui generis a creature of itself. It is the outcome of a clear and well-known constitutional history which has among its modern milestones the Government of India Act of 1935, and thence all the ancient milestones of Anglo-American constitutional jurisprudence going back to Magna Carta. And India’s Supreme Court — sitting not in any of its normal division benches but as a Constitutional Bench — does indeed have jurisdiction, indeed it has sole jurisdiction, over whether India’s Constitution is being made to suffer crimes or misdemeanours at the hands of India’s Government or Parliament of the day. For the Speaker to decline to receive a notice from the High Court is an irrelevancy; many people who are served notices ignore them; it does not reduce jurisdiction by an iota. An “All-Party” meeting of MPs can rail all it wants against the Supreme Court — even the whole of the present Parliament can pass as many unanimous resolutions as they want against the Supreme Court. They will only make themselves look silly and petulant in the eyes of history. As for the BJP Opposition in particular, the present situation may make it perfectly clear that there is not among them a single, principled, liberal constitutionalist hidden in their proto-fascistic ranks.

Unaccountable Delhi: India’s Separation of Powers’ Doctrine

UNACCOUNTABLE DELHI

India’s Separation Of Powers’ Doctrine

First published in The Statesman Jan 13 2006 Editorial Page Special Article,

By Subroto Roy

The Speaker does not like the fact the High Court has issued notices questioning the procedure he followed in expelling MPs from Parliament. Sonia Gandhi’s self-styled “National Advisory Council” has demanded control over disbursement of 100,000,000,000 rupees of public money. The Manmohan Singh Government plans to quietly ignore the Supreme Court’s finding that it had breached India’s Constitution in imposing President’s Rule in Bihar.  All three issues have to do with application of India’s Separation of Powers Doctrine, i.e. the appropriate delimitation of Constitutional powers between our Legislature, Executive and Judiciary.

A constitutional crime was attempted in India during the Indira-Sanjay Gandhi political “Emergency” declared on 26 June 1975. On 10 November 1975 (a time of press censorship) a 13-judge Bench of the Supreme Court met to hear the Government plead for overrule of Kesavananda Bharati (A.I.R. 1973 S.C. 1461), a landmark Nani Palkhivala once called “the greatest contribution of the Republic of India to constitutional jurisprudence”. Within two days, the Government had failed in the Court, and Kesavananda held. What was upheld? That while India’s Parliament was sovereign and could amend the Constitution, the amending power may not be used to alter or destroy “the basic structure or framework of the Constitution”. And the Supreme Court decides for itself whether Parliament has exceeded its legitimate power to amend.

Basic structure
Palkhivala’s description of what constitutes the “basic structure or framework” of India’s Constitution is excellent enough: “the rule of law, the right to personal liberty and freedom from arbitrary arrest and imprisonment, the right to dissent which implies the freedom of speech and expression and a free press are… a part of the basic structure of a free democracy, and it is these priceless human freedoms which cannot be destroyed by Parliament in exercise of its amending power. Thus Kesavananda’s case ensures that tyranny and despotism shall not masquerade as constitutionalism.”

Palkhivala argued that, if anything, the aspects of Kesavananda that needed to be set aside were those that had over-ruled Golaknath (A.I.R. 1967 S.C. 1643) which said Parliament should not be held to have the power to abridge any fundamental right, indeed any amended article which abrogates any fundamental right is invalid.

Dicey said “In the principle of the distribution of powers which determines its form, the constitution of the United States is the exact opposite of the English constitution.” Kesavananda Bharati showed the midway point between the two in constitutional jurisprudence anywhere in the world. We are like the Americans and unlike the British first in being a Republic, and secondly in having an explicit written Constitution. We are like the British and unlike the Americans in being a parliamentary democracy where the Executive Branch of Government, namely the Prime Minister and his/her Cabinet is elected from within the Legislative Branch of Government, namely, Parliament, and must at all times retain the confidence of the latter, specifically the Lok Sabha, the House of the People.

The American Executive Branch has a directly-elected President who chooses his administration, and it is commonplace for him to not have the confidence of the Upper or Lower House of the Legislature, to the point that one recent president had to undergo impeachment proceedings and barely survived. There is no constitutional crisis in America if the Legislature loathes the President and wishes him out. The American President and his Executive Branch stay in office until the last minute of his fixed term.

PM answers to Parliament
In our system, the Prime Minister answers at all times to Parliament. Parliament in India’s democracy has normally meant the House of the People — where every member has contested and won a direct vote in his/her constituency. India’s current Lok Sabha has set a constitutional precedent not seen in more than a hundred years anywhere in electing an Executive led by someone not a member. The British Upper House used to have an aristocratic hereditary component which Mr Blair’s New Labour Government has removed, making it more like what the Rajya Sabha was supposed to be — except that by now our Rajya Sabha has tended to become a place for party worthies who have lost normal elections, superannuated cinematic personalities, perpetual bureaucrats still seeking office, and others who really should be at home helping to raise the grandchildren.  Parliament may not have fully recovered its health ever since that constitutional crime committed against the Republic known as the Indira-Sanjay “Emergency” (and at least one member of Sanjay’s coterie wields much power today).

Crimes and misdemeanours
The Supreme Court’s finding that the Government breached the Constitution by imposing President’s Rule in Bihar is a finding not of a constitutional crime but of a constitutional misdemeanour. (For reasons given already in these columns on 20 October 2005, it has nothing to do with the President, who merely embodies the sovereignty of our Republic.)  For an Executive Order or Legislative Act to be found by a competent Court as being unconstitutional means merely that it does not have to be obeyed by citizens. In the Bihar case, the Supreme Court found this consequence irrelevant because new elections were already in process, the result of which would come from the most authentic democratic voice possible, namely, the same people who elect the House of the People in the first place. India’s Executive has been found to have committed a constitutional misdemeanour, for which it needed to apologise to the Court and Parliament (who are its constitutional co-equals) and then ask the latter to renew its confidence — in which event, life goes on. If confidence was not renewed, the Government would fall and a new Government would have to be formed. But we do not have yet the idea of a backbench revolt —mainly because all the front benches themselves have tended to be in such confusion and disarray with regard to parliamentary traditions, processes and functions.

The Supreme Court as the ultimate protector of the Constitution would be well within its prerogative to oversee whether a Parliamentary Speaker has acted appropriately. Consider a hypothetical case. Once elected, a Speaker is supposed to have no party-affiliation ever more for the rest of his/her life. Suppose, hypothetically, a controlled experiment found a Speaker systematically biased in favour of his/her own former party-members and against their opponents. Where but the Courts could such arbitrariness be effectively remonstrated against? Even if the incumbent Speaker impossibly imagines himself the personal embodiment of the Legislative Branch, he is not beyond the Constitution and therefore not beyond India’s Separation of Powers’ Doctrine.

The Opposition had alleged that the Speaker failed to follow procedure which required the culprits in the expulsion case be referred to the Privileges Committee. But beyond that the Opposition was too confused and guilt-ridden to pursue the matter during the dying moments of Parliament’s Winter Session. In the clear light of day, the issue has now ended up in the Courts. If the Supreme Court eventually rules the Speaker had in fact failed to follow Parliament’s own procedures (and hence breached Constitutional practices), the Speaker would need to apologise to the Courts and the House that elected him, and perhaps offer to fall on his sword.

Finally, for the “National Advisory Council”, a wholly unelected body, to demand a say for itself over spending Rs. 100 billion in State and Union Government budget-making, would be another constitutional misdemeanour — unless its members are merely on the personal staff of the Hon’ble Member representing Rae Bareili, who may of course introduce whatever legislation on money-bills that any other Lok Sabha Member may do.

The Dream Team: A Critique

The 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.


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