No magic wand, Professor Rajan? Oh but there is…2013 (Plus: 7 Jan 2016 “Professor Rajan stays or goes? My answer to a query”)

7 January 2016
rajan

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. http://tinyurl.com/o9dhe8d

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.

431314_10150617690307285_69226771_n

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.

3dec

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)”

https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/

Enjoy!

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On Applying Disraeli’s “Two Nations” of Victorian England to Modern India: Roy & James, Rajiv, Rahul & Manmohan

From Subroto Roy & WE James’s Introduction 1989-1990 to Foundations of India’s Political Economy: Towards an Agenda for the 1990s edited by them, published by Sage 1992, received by Rajiv Gandhi on September 1990 in manuscript form.

“Finally, no discussion of the subcontinent’s political economy can ignore the fact of the monumental poverty of external goods on the part of a vast population, in contrast with a fairly large class of people with adequate livelihoods, in turn contrasting with small islands of indolence and conspicuous consumption.  Benjamin Disraeli said of Victorian England that it consisted of two nations.  The Indian subcontinent today consists in many respects of two nations living side by side, the real division being much less longitudinal on religious or communal lines (as intended by Muslim separatists at the time of Partition and Hindu imperialists today) as it is latitudinal on class lines between “bhadralok” and “janata”, middle class and working classes, bourgeoisie and masses, “nomenclatura” and proletariat.  The sheer numbers can justify speaking of whole nations, the janata in India alone consisting of something like seven hundred million people, the bhadralok of one hundred and fifty million.  The Indian bhadralok on their own constitute one of the largest nations on earth.

The bhadralok are not to be distinguished from the janata by any self-styled civility, nor is there any inevitable conflict which will lead to the victory of one and decimation of the other, nor is it that one derives its income from productive effort or enterprise and the other does not.  A more effective criterion by which to distinguish the two nations of India may have to do not with work but with leisure, as well as with the kind of capital that comes to be inherited over time. The janata are the unleisured nation of India, people who mostly due to the meagreness of their initial resources come to possess little or no leisure in the course of their lifetimes.  They are scattered and illiterate, without connections in high places, often too involved with the hardships of daily life to care for much else.  They eat and sleep to maintain the minimum energy needed to survive, reproduce and send their children to school or work, travelling through life day by day and week by week.  They may have some short time devoted to religion or entertainment, but life is too often too hard, not so much without happiness or culture as without much time for either.  Expectations of what life has to offer may be unambitious and yet successful.

Inequality from an economic point of view may consist of the fact that the poor do not inherit any leisure from the past.  They do not inherit the savings of their parents and ancestors because most did not have parents and ancestors who had any savings to leave behind.  Capital and the income it generates, and the consumption which such income makes possible, are among the most subtle notions of political economy.  As a rough approximation, if we distinguish between human capital, physical and financial capital, and social and political capital, it may be said that the inheritance of economic inequality in India may consist of the inheritance of economic inequality in India may consist of the inheritance by the janata of no form of capital except their own stock of human capital. There is little or no inheritance from parents of savings or any other form of capital.  Hence the janata are also the “garib lok”, the masses are also the poor folk.

By contrast the bhadralok are also the leisured nation of the subcontinent, with the time and inclination to praise or decry the state of the culture or the economy or the prime minister, to visit or return from the outside world (“baahar”) to the subcontinent or vice versa, to take a walk in the morning or a nap in the afternoon, to express compassion for or embarrassment about the existence of the janata (especially in relation to the foreigner since the bhadralok have to explain both their privileged position relative to the janata and their often underprivileged position relative to the foreigner with whom they desire to consort), to study the janata or lead them in revolution or take measurements of them, and to read, write, edit or publish books such as this one.  The bhadralok are the “respectable people” of the subcontinent, with names, family histories and reputations, literate and often highly educated, bilingual at least, with an inheritance of or illusions about acknowledged places in society.  They inherit from their parents and save for their children physical and financial capital, invest in their human capital, and bestow to them as much social and political capital as they can.  The mercantile and industrial bhadralok own and transfer to their children relatively more physical and financial capital, while the managerial, administrative and professional bhadralok may transfer relatively more social and political capital.  At the apex of both groups is an elite amounting to a few million people, united perhaps by their membership or attempted membership of the post-British social clubs and centres of intellectualism, or foreign universities and the lower middle classes of Britain and North America.

What may be expected in the long run is mobility between the two nations and in both directions.  Through indolence or bad luck, families can fall by a half or a third of a social class each generation, or move in the opposite direction through chance or cunning or enterprise and effort.  It is an essential feature of mass economic development that there will be net mobility upwards in the long run, and an attendant breakdown of social barriers and the gradual assimilation of classes and castes into one another.  Contrary to an assumption of the working classes being united in their despair and contempt for the middle class, and motivated in their desire to bloodily dispose of them, it may be more accurate to say that what unleisured people want most (after employment, food, shelter and clothing) is what they value most at the margin, namely, leisure.  What the working classes desire most may be something like the kind of life as the bourgeoisie.  Let aside there being a potential or open conflict arising from the janata against the bhadralok, the truth of the matter could be there is a desire of the janata to have at least some leisure like the bhadralok.

If this is an accurate assumption, the main source of conflict between the two nations of India or the subcontinent could be different from what is often supposed by many people.  Instead of being revolutionary in nature and deriving from below, the source may be reactionary in nature and amount to resistance from the top.  Like all cartels, the bhadralok may want to preserve their numbers and not look with favour at the prospect of large-scale mass economic development, entailing as this will greater competition on all fronts, the erosion of privilege, the breakdown of social barriers and the assimilation of classes into one another.

The Jacobin/Bolshevik/Maoist method of reducing inequalities was to expropriate physical and financial capital, and decimate social and political capital and all that stands in the way of such destruction.  The upheaval and chaos of such blood-letting leaves a new order which is, or seems, for a moment, more egalitarian than the regime it replaces.  But it also leaves a society without knowledge of its past, alternately enervated by its present and terrified of its future.  Recovery from such a state of near social death has been long and hard and painful, where it has happened at all.  Despite the wishes of a few, India does not seem likely to experience such social death on a national scale, although the temporary effects of terrorism and civil chaos in pockets of the country would seem to be similar.

A more far-sighted method would be by the creation of capital for the janata to increase their sources of income and consumption and thereby reduce the inequality of wealth and political power.  It would mean investment in the only form of capital that the janata have: their own human capital.  It would mean fundamentally a change of focus away from the theoretical and grandiose in the drawing-rooms and corridors of New Delhi (and Washington), and towards the simple and commonsensical: stopping the wastage of the tax-resources; making the currency sound at home and abroad; redirecting public investment towards public goods such as civil justice, roads, fresh water and sanitation; and fostering a civilized rural life, built around village schools with blackboards and chalk, with playgrounds and libraries and hot meals, with all-weather buildings and all-weather roads to their doors.

India today resembles a kind of gigantic closed city with high walls and few gates.  Within the walls are concurrently represented many different ages in the history of man, from pre-historic and early Aryan, to medieval and Moghul, to Dickensian and American, the members of each age having some common and some individual sets of life-expectations, yet all being due to enter the next century together. Outside is the rest of human civilization, as well as the free circulation of gold and foreign exchange.  Nearabouts the gates of the city, and with ability to travel in and out, are the few million of the elite.  If the walls of the city are to be knocked down or at least if the gates opened and kept wide open, it will have to be the elite who do this or consent to have it done.

If it is done properly, after adequate preparation of the economic and political expectations of citizens, there may be many positive results, not only for the economy but also for the culture and civilization of the subcontinent as a whole. The free flow of ideas and opportunities across national borders; the freedom to travel in the world; the free movement of goods and capital; the freedom to save one’s tangible wealth, small as this may be, in whatever form or currency one considers best — these are fundamentally important freedoms which have been denied to most of the people of the subcontinent thus far and yet are taken for granted elsewhere in the world.  There seems little reason to doubt that if such freedoms come to be gradually exercised by the janata there would be a permanent trend of increase in mass income and consumption.

Yet there are genuine questions of sovereignty which have to be anticipated as well.  The consequences of a true opening are not fully or easily foreseeable.  The prompt arrival of new East India Companies may be expected.  Will there be enough competition between them?  Or will the elite come to be further subverted, taking the first Indian Republic with it?  After the long experience of foreign rule and nationalism and independent democracy, is the Indian polity mature enough to survive and gain from such an opening, or will it collapse once again as it did in the eighteenth century?  The spectres of Plassey and Avadh must haunt every Indian nationalist, even as the hopes of a free economy and a progressive culture and an open civilization, beckon from the future.  Is it a silent and implicit fear of this sort which constitutes the only possible rational barrier to greater freedom?  Has the continued poverty been, in effect, the cost of nationalism?  These are hard questions to which answers may not be found easily. It is hoped by the editors that the present volume may engage the citizens and friends of India to reflect upon them….”

From Facebook 7 Sep 2010:

Rajiv Gandhi received this book in manuscript form in hand from me on Sep 18 1990, and it contributed to the origins of India’s 1991 economic reform as has been described elsewhere.  I am delighted to hear his son Rahul has in the last few days also been referring to India as “Two Nations”, rich and poor.  Dr Manmohan Singh received the book itself in hand from me at the Indian Ambassador’s Residence in Washington in Sepember 1993; I am glad to see he too has yesterday mentioned the same “Two Nations” theory that I had applied from Disraeli’s book about Victorian England.

Mistaken Macroeconomics: An Open Letter to Prime Minister Dr Manmohan Singh 12 June 2009

 

 

12 June 2009

The Hon’ble Dr Manmohan Singh, MP, Rajya Sabha

Prime Minister of India

 

 

Respected Pradhan Mantriji:

 

In September 1993 at the residence of the Indian Ambassador to Washington, I had the privilege of being introduced to you by our Ambassador the Hon’ble Siddhartha Shankar Ray, Bar-at-Law. Ambassador Ray was kind enough to introduce me saying the 1991 “Congress manifesto had been written on (my laptop) computer” – a reference to my work as adviser on economic and other policy to the late Rajiv Gandhi in his last months. I presented you a book Foundations of India’s Political Economy: Towards an Agenda for the 1990s created and edited by myself and WE James at the University of Hawaii since 1986 — the unpublished manuscript of that book had reached Rajivji by my hand when he and I first met on September 18 1990. Tragically, my pleadings in subsequent months to those around him that he seemed to my layman’s eyes vulnerable to the assassin went unheeded.

 

 

When you and I met in 1993, we had both forgotten another meeting twenty years earlier in Paris. My father had been a long-time friend of the late Brahma Kaul, ICS, and the late MG Kaul, ICS, who knew you in your early days in the Government of India. In the late summer of 1973, you had acceded to my father’s request to advise me about economics before I embarked for the London School of Economics as a freshman undergraduate. You visited our then-home in Paris for about 40 minutes despite your busy schedule as part of an Indian delegation to the Aid-India Consortium. We ended up having a tense debate about the merits (as you saw them) and demerits (as I saw them) of the Soviet influence on Indian economic “planning”. You had not expected such controversy from a lad of 18 but you were kindly disposed and offered when departing to write a letter of introduction to Amartya Sen, then teaching at the LSE, which you later sent me and which I was delighted to carry to Professor Sen.

 

 

I may add my father, back in 1973 in Paris, had predicted to me that you would become Prime Minister of India one day, and he, now in his 90s, is joined by myself in sending our warm congratulations at the start of your second term in that high office.

 

 

The controversy though that you and I had entered that Paris day in 1973 about scientific economics as applied to India, must be renewed afresh!

 

 

This is because of your categorical statement on June 9 2009 to the new 15th Lok Sabha:

 

 

“I am convinced, since our savings rate is as high as 35%, given the collective will, if all of us work together, we can achieve a growth-rate of 8%-9%, even if the world economy does not do well.” (Statement of Dr Manmohan Singh to the Lok Sabha, June 9 2009)

 

 

I am afraid there may be multiple reasons why such a statement is gravely and incorrigibly in error within scientific economics. From your high office as Prime Minister in a second term, faced perhaps with no significant opposition from either within or without your party, it is possible the effects of such an error may spell macroeconomic catastrophe for India.

 

 

As it happens, the British Labour Party politician Dr Meghnad Desai made an analogous statement to yours about India when he claimed in 2006 that China

 

 

“now has 10.4% growth on a 44 % savings rate… ”

 

Indeed the idea that China and India have had extremely high economic growth-rates based on purportedly astronomical savings rates has become a commonplace in recent years, repeated endlessly in international and domestic policy circles though perhaps without adequate basis.

 

 

 

1.   Germany & Japan

 

What, at the outset, is supposed to be measured when we speak of “growth”? Indian businessmen and their media friends seem to think “growth” refers to something like nominal earnings before tax for the organised corporate sector, or any unspecified number that can be sold to visiting foreigners to induce them to park their funds in India: “You will get a 10% return if you invest in India” to which the visitor says “Oh that must mean India has 10% growth going on”. Of such nonsense are expensive international conferences in Davos and Delhi often made.

 

You will doubtless agree the economist at least must define economic growth properly and with care — what is referred to must be annual growth of per capita inflation-adjusted Gross Domestic Product. (Per capita National Income or Net National Product would be even better if available).

 

West Germany and Japan had the highest annual per capita real GDP growth-rates in the world economy starting from devastated post-World War II initial conditions. What were their measured rates?

 

West Germany: 6.6% in 1950-1960, falling to 3.5% by 1960-1970 falling to 2.4% by 1970-1978.

 

Japan: 6.8 % in 1952-1960 rising to 9.4% in 1960-1970 falling to 3.8 % in 1970-1978.

 

Thus in recent decadesonly Japan measured a spike in the 1960s of more than 9% annual growth of real per capita GDP. Now India and China are said to be achieving 8%-10 % and more year after year routinely!

 

Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps it is just something incredible, something false and misleading, like a mirage in the desert.

 

You may agree that processes of measurement of real income in India both at federal and provincial levels, still remain well short of the world standards described by the UN’s System of National Accounts 1993. The actuality of our real GDP growth may be better than what is being measured or it may be worse than what is being measured – from the point of view of public decision-making we at present simply do not know which it is, and to overly rely on such numbers in national decisions may be unwise. In any event, India’s population is growing at near 2% so even if your Government’s measured number of 8% or 9% is taken at face-value, we have to subtract 2% population growth to get per capita figures.

 

 

 

 

 

2.  Growth of the aam admi’s consumption-basket

 

 

The late Professor Milton Friedman had been an invited adviser in 1955 to the Government of India during the Second Five Year Plan’s formulation. The Government of India suppressed what he had to say and I had to publish it 34 years later in May 1989 during the 1986-1992 perestroika-for-India project that I led at the University of Hawaii in the United States. His November 1955 Memorandum to the Government of India is a chapter in the book Foundations of India’s Political Economy: Towards an Agenda for the 1990s that I and WE James created.

 

At the 1989 project-conference itself, Professor Friedman made the following astute observation about all GNP, GDP etc growth-numbers that speaks for itself:

 

 

“I don’t believe the term GNP ought to be used unless it is supplemented by a different statistic: the rate of growth of the average consumption basket consumed by the ordinary individual in the country. I think GNP rates of growth can give very misleading information. For example, you have rapid rates of growth of GNP in the Soviet Union with a declining standard of life for the people. Because GNP includes monuments and includes also other things. I’m not saying that that is the case with India; I’m just saying I would like to see the two figures together.”

 

 

You may perhaps agree upon reflection that not only may our national income growth measurements be less robust than we want, it may be better to be measuring something else instead, or as well, as a measure of the economic welfare of India’s people, namely, “the rate of growth of the average consumption basket consumed by the ordinary individual in the country”, i.e., the rate of growth of the average consumption basket consumed by the aam admi.

 

 

It would be excellent indeed if you were to instruct your Government’s economists and other spokesmen to do so this as it may be something more reliable as an indicator of our economic realities than all the waffle generated by crude aggregate growth-rates.

 

 

 

 

3.  Logic of your model

 

Thirdly, the logic needs to be spelled out of the economic model that underlies such statements as yours or Meghnad Desai’s that seek to operationally relate savings rates to aggregate growth rates in India or China. This seems not to have been done publicly in living memory by the Planning Commission or other Government economists. I have had to refer, therefore, to pages 251-253 of my own Cambridge doctoral thesis under Professor Frank Hahn thirty years ago, titled “On liberty and economic growth: preface to a philosophy for India”, where the logic of such models as yours was spelled out briefly as follows:

 

Let

 

 

Kt be capital stock

 

Yt be national output

 

It be the level of real investment

 

St be the level of real savings

 

By definition

 

It = K t+1 – Kt

 

By assumption

 

Kt = k Yt 0 < k < 1

 

St = sYt 0 < s <1

 

In equilibrium ex ante investment equals ex ante savings

 

It = St

 

Hence in equilibrium

 

sYt = K t+1 – Kt

 

Or

 

s/k = g

 

where g is defined to be the rate of growth (Y t+1-Yt)/Yt  .

 

The left hand side then defines the “warranted rate of growth” which must maintain the famous “knife-edge” with the right hand side “natural rate of growth”.

 

Your June 9 2009 Lok Sabha statement that a 35% rate of savings in India may lead to an 8%-9% rate of economic growth in India, or Meghnad Desai’s statement that a 44% rate of savings in China led to a 10.4% growth there, can only be made meaningful in the context of a logical economic model like the one I have given above.

 

[In the open-economy version of the model, let Mt be imports, Et be exports, Ft net capital inflows.

 

Assume

 

Mt = aIt + bYt 0 < a, b < 1

 

Et = E for all t

 

Balance of payments is

 

Bt = Mt – Et – Ft

 

In equilibrium It = St + Bt

 

Or

 

Ft = (s+b) Yt – (1-a) It – E is a kind of “warranted” level of net capital inflow.]

 

 

 

You may perhaps agree upon reflection that building the entire macroeconomic policy of the Government of India merely upon a piece of economic logic as simplistic as the

 

s/k = g

 

equation above, may spell an unacceptable risk to the future economic well-being of our vast population. An alternative procedural direction for macroeconomic policy, with more obviously positive and profound consequences, may have been that which I sought to persuade Rajiv Gandhi about with some success in 1990-1991. Namely, to systematically seek to improve towards normalcy the budgets, financial positions and decision-making capacities of the Union and all state and local governments as well as all public institutions, organisations, entities, and projects in general, with the aim of making our domestic money a genuine hard currency of the world again after seven decades, so that any ordinary resident of India may hold and trade precious metals and foreign exchange at his/her local bank just like all those glamorous privileged NRIs have been permitted to do. Such an alternative path has been described in “The Indian Revolution”, “Against Quackery”, “The Dream Team: A Critique”, “India’s Macroeconomics”, “Indian Inflation”, etc.

 

 

 

4. Gross exaggeration of real savings rate by misreading deposit multiplication

 

 

Specifically, I am afraid you may have been misled into thinking India’s real savings rate, s, is as high as 35% just as Meghnad Desai may have misled himself into thinking China’s real savings rate is as high as 44%.

 

 

Neither of you may have wanted to make such a claim if you had referred to the fact that over the last 25 years, the average savings rate across all OECD countries has been less than 10%. Economic theory always finds claims of discontinuous behaviour to be questionable. If the average OECD citizen has been trying to save 10% of disposable income at best, it appears prima facie odd that India’s PM claims a savings rate as high as 35% for India or a British politician has claimed a savings rate as high as 44% for China. Something may be wrong in the measurement of the allegedly astronomical savings rates of India and China. The late Professor Nicholas Kaldor himself, after all, suggested it was rich people who saved and poor people who did not for the simple reason the former had something left over to save which the latter did not!

 

 

And indeed something is wrong in the measurements. What has happened, I believe, is that there has been a misreading of the vast nominal expansion of bank deposits via deposit-multiplication in the Indian banking system, an expansion that has been caused by explosive deficit finance over the last four or five decades. That vast nominal expansion of bank-deposits has been misread as indicating growth of real savings behaviour instead. I have written and spoken about and shown this quite extensively in the last half dozen years since I first discovered it in the case of India. E.g., in a lecture titled “Can India become an economic superpower or will there be a monetary meltdown?” at Cardiff University’s Institute of Applied Macroeconomics and at London’s Institute of Economic Affairs in April 2005, as well as in May 2005 at a monetary economics seminar invited at the RBI by Dr Narendra Jadav. The same may be true of China though I have looked at it much less.

 

 

How I described this phenomenon in a 2007 article in The Statesman is this:

 

 

“Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.”

 

 

An article of mine in 2008 in Business Standard put it like this:

 

 

“India has followed in peacetime over six decades what the US and Britain followed during war. Our vast growth of bank deposits in recent decades has been mostly a paper (or nominal) phenomenon caused by unlimited deficit finance in a fractional reserve banking system. Policy makers have widely misinterpreted it as indicating a real phenomenon of incredibly high savings behaviour. In an inflationary environment, people save their wealth less as paper deposits than as real assets like land, cattle, buildings, machinery, food stocks, jewellery etc.”

 

 

If you asked me “What then is India’s real savings rate?” I have little answer to give except to say I know what it is not – it is not what the Government of India says it is. It is certainly unlikely to be anywhere near the 35% you stated it to be in your June 9 2009 Lok Sabha statement. If the OECD’s real savings rate has been something like 10% out of disposable income, I might accept India’s is, say, 15% at a maximum when properly measured – far from the 35% being claimed. What I believe may have been mismeasured by you and Meghnad Desai and many others as indicating high real savings is actually the nominal or paper expansion of bank-deposits in a fractional reserve banking system induced by runaway government deficit-spending in both India and China over the last several decades.

 

 

 

 

5. Technological progress and the mainsprings of real economic growth

 

 

So much for the g and s variables in the s/k = g equation in your economic model. But the assumed constant k is a big problem too!

 

During the 1989 perestroika-for-India project-conference, Professor Friedman referred to his 1955 experience in India and said this about the assumption of a constant k:

 

“I think there was an enormously important point… That was the almost universal acceptance at that time of the view that there was a sort of technologically fixed capital output ratio. That if you wanted to develop, you just had to figure out how much capital you needed, used as a statistical technological capital output ratio, and by God the next day you could immediately tell what output you were going to achieve. That was a large part of the motivation behind some of the measures that were taken then.”

 

The crucial problem of the sort of growth-model from which your formulation relating savings to growth arises is that, with a constant k, you have necessarily neglected the real source of economic growth, which is technological progress!

 

I said in the 2007 article referred to above:

 

“Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before.”

 

In “Growth and Government Delusion” published in The Statesman last year, I described the growth process more fully like this:

 

“The mainsprings of real growth in the wealth of the individual, and so of the nation, are greater practical learning, increases in capital resources and improvements in technology. Deeper skills and improved dexterity cause output produced with fewer inputs than before, i.e. greater productivity. Adam Smith said there is “invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many”. Consider a real life example. A fresh engineering graduate knows dynamometers are needed in testing and performance-certification of diesel engines. He strips open a meter, finds out how it works, asks engine manufacturers what design improvements they want to see, whether they will buy from him if he can make the improvement. He finds out prices and properties of machine tools needed and wages paid currently to skilled labour, calculates expected revenues and costs, and finally tries to persuade a bank of his production plans, promising to repay loans from his returns. Overcoming restrictions of religion or caste, the secular agent is spurred by expectation of future gains to approach various others with offers of contract, and so organize their efforts into one. If all his offers ~ to creditors, labour, suppliers ~ are accepted he is, for the moment, in business. He may not be for long ~ but if he succeeds his actions will have caused an improvement in design of dynamometers and a reduction in the cost of diesel engines, as well as an increase in the economy’s produced means of production (its capital stock) and in the value of contracts made. His creditors are more confident of his ability to repay, his buyers of his product quality, he himself knows more of his workers’ skills, etc. If these people enter a second and then a third and fourth set of contracts, the increase in mutual trust in coming to agreement will quickly decline in relation to the increased output of capital goods. The first source of increasing returns to scale in production, and hence the mainspring of real economic growth, arises from the successful completion of exchange. Transforming inputs into outputs necessarily takes time, and it is for that time the innovator or entrepreneur or “capitalist” or “adventurer” must persuade his creditors to trust him, whether bankers who have lent him capital or workers who have lent him labour. The essence of the enterprise (or “firm”) he tries to get underway consists of no more than the set of contracts he has entered into with the various others, his position being unique because he is the only one to know who all the others happen to be at the same time. In terms introduced by Professor Frank Hahn, the entrepreneur transforms himself from being “anonymous” to being “named” in the eyes of others, while also finding out qualities attaching to the names of those encountered in commerce. Profits earned are partly a measure of the entrepreneur’s success in this simultaneous process of discovery and advertisement. Another potential entrepreneur, fresh from engineering college, may soon pursue the pioneer’s success and start displacing his product in the market ~ eventually chasers become pioneers and then get chased themselves, and a process of dynamic competition would be underway. As it unfolds, anonymous and obscure graduates from engineering colleges become by dint of their efforts and a little luck, named and reputable firms and perhaps founders of industrial families. Multiply this simple story many times, with a few million different entrepreneurs and hundreds of thousands of different goods and services, and we shall be witnessing India’s actual Industrial Revolution, not the fake promise of it from self-seeking politicians and bureaucrats.”

 

 

Technological progress in a myriad of ways and discovery of new resources are important factors contributing to India’s growth today. But while India’s “real” economy does well, the “nominal” paper-money economy controlled by Government does not. Continuous deficit financing for half a century has led to exponential growth of public debt and broad money, and, as noted, the vast growth of nominal bank-deposits has been misinterpreted as indicating unusually high real savings behaviour when it in fact may just signal vast amounts of government debt being held by our nationalised banks. These bank assets may be liquid domestically but are illiquid internationally since our government debt is not held by domestic households as voluntary savings nor has it been a liquid asset held worldwide in foreign portfolios.

 

 

What politicians of all parties, especially your own and the BJP and CPI-M since they are the three largest, have been presiding over is exponential growth of our paper money supply, which has even reached 22% per annum. Parliament and the Government should be taking honest responsibility for this because it may certainly portend double-digit inflation (i.e., decline in the value of paper-money) perhaps as high as 14%-15% per annum, something that is certain to affect the aam admi’s economic welfare adversely.

 

 

 

 

 

 

 

6. Selling Government assets to Big Business is a bad idea in a potentially hyperinflationary economy

 

 

Respected PradhanMantriji, the record would show that I, and really I alone, 25 years ago, may have been the first among Indian economists to advocate  the privatisation of the public sector. (Viz, “Silver Jubilee of Pricing, Planning and Politics: A Study of Economic Distortions in India”.) In spite of this, I have to say clearly now that in present circumstances of a potentially hyperinflationary economy created by your Government and its predecessors, I believe your Government’s present plans to sell Government assets may be an exceptionally unwise and imprudent idea. The reasoning is very simple from within monetary economics.

 

Government every year has produced paper rupees and bank deposits in practically unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus over decades. Such has been the nature of the macroeconomic process that all Indian political parties have been part of, whether they are aware of it or not.

 

Indian Big Business has an acute sense of this long-term nominal/paper expansion of India’s economy, and acts towards converting wherever possible its own hoards of paper rupees and rupee-denominated assets into more valuable portfolios for itself of real or durable assets, most conspicuously including hard-currency denominated assets, farm-land and urban real-estate, and, now, the physical assets of the Indian public sector. Such a path of trying to transform local domestic paper assets – produced unlimitedly by Government monetary and fiscal policy and naturally destined to depreciate — into real durable assets, is a privately rational course of action to follow in an inflationary economy. It is not rocket-science to realise the long-term path of rupee-denominated assets is downwards in comparison to the hard-currencies of the world – just compare our money supply growth and inflation rates with those of the rest of the world.

 

The Statesman of November 16 2006 had a lead editorial titled Government’s land-fraud: Cheating peasants in a hyperinflation-prone economy which said:

 

 

“There is something fundamentally dishonourable about the way the Centre, the state of West Bengal and other state governments are treating the issue of expropriating peasants, farm-workers, petty shop-keepers etc of their small plots of land in the interests of promoters, industrialists and other businessmen. Singur may be but one example of a phenomenon being seen all over the country: Hyderabad, Karnataka, Kerala, Haryana, everywhere. So-called “Special Economic Zones” will merely exacerbate the problem many times over. India and its governments do not belong only to business and industrial lobbies, and what is good for private industrialists may or may not be good for India’s people as a whole. Economic development does not necessarily come to be defined by a few factories or high-rise housing complexes being built here or there on land that has been taken over by the Government, paying paper-money compensation to existing stakeholders, and then resold to promoters or industrialists backed by powerful political interest-groups on a promise that a few thousand new jobs will be created. One fundamental problem has to do with inadequate systems of land-description and definition, implementation and recording of property rights. An equally fundamental problem has to do with fair valuation of land owned by peasants etc. in terms of an inconvertible paper-money. Every serious economist knows that “land” is defined as that specific factor of production and real asset whose supply is fixed and does not increase in response to its price. Every serious economist also knows that paper-money is that nominal asset whose price can be made to catastrophically decline by a massive increase in its supply, i.e. by Government printing more of the paper it holds a monopoly to print. For Government to compensate people with paper-money it prints itself by valuing their land on the basis of an average of the price of the last few years, is for Government to cheat them of the fair present-value of the land. That present-value of land must be calculated in the way the present-value of any asset comes to be calculated, namely, by summing the likely discounted cash-flows of future values. And those future values should account for the likelihood of a massive future inflation causing decline in the value of paper-money in view of the fact we in India have a domestic public debt of some Rs. 30 trillion (Rs. 30 lakh crore) and counting, and money supply growth rates averaging 16-17% per annum. In fact, a responsible Government would, given the inconvertible nature of the rupee, have used foreign exchange or gold as the unit of account in calculating future-values of the land. India’s peasants are probably being cheated by their Government of real assets whose value is expected to rise, receiving nominal paper assets in compensation whose value is expected to fall.”

 

Shortly afterwards the Hon’ble MP for Kolkata Dakshin, Km Mamata Banerjee, started her protest fast, riveting the nation’s attention in the winter of 2006-2007. What goes for government buying land on behalf of its businessman friends also goes, mutatis mutandis, for the public sector’s real assets being bought up by the private sector using domestic paper money in a potentially hyperinflationary economy. If your new Government wishes to see real assets of the public sector being sold for paper money, let it seek to value these assets not in inconvertible rupees that Government itself has been producing in unlimited quantities but perhaps in forex or gold-units instead!

 

 

In the 2004-2005 volume Margaret Thatcher’s Revolution: How it Happened and What it Meant, edited by myself and Professor John Clarke, there is a chapter by Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics) that was placed ahead of the chapter by Professor Martin Ricketts on Margaret Thatcher’s privatisation (microeconomics). India’s fiscal and monetary or macroeconomic problems are far worse today than Britain’s were when Margaret Thatcher came to power. We need to get our macroeconomic problems sorted before we attempt the  microeconomic privatisation of public assets.

 

It is wonderful that your young party colleague, the Hon’ble MP from Amethi, Shri Rahul Gandhi, has declined to join the present Government and instead wishes to reflect further on the “common man” and “common woman” about whom I had described his late father talking to me on September 18 1990. Certainly the aam admi is not someone to be found among India’s lobbyists of organised Big Business or organised Big Labour who have tended to control government agendas from the big cities.

 

With my warmest personal regards and respect, I remain,

Cordially yours

Subroto Roy, PhD (Cantab.), BScEcon (London)

 

see also https://independentindian.com/thoughts-words-deeds-my-work-1973-2010/rajiv-gandhi-and-the-origins-of-indias-1991-economic-reform/did-jagdish-bhagwati-originate-pioneer-intellectually-father-indias-1991-economic-reform-did-manmohan-singh-or-did-i-through-my-e/

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Indian Money and Credit

Indian Money & Credit
by
Subroto Roy
First published in The Sunday Statesman, August 6 2006, Editorial Page Special Article

One rural household may lend another rural household 10 kg or 100 kg of grain or seed for a short time. When it does, it expects to receive back a little more than the amount lent ~ even if that little amount is in services or in plain goodwill among friends or neighbours. That extra amount is “real interest”, and the percentage of its value relative to the whole is the “real rate of interest”. So if 10 kg of grain are lent for two weeks and 11 kg are returned, an implicit real rate of interest of 10 per cent has been paid over that short period. The future is always less valuable than the present in the sense that 10 kg of grain today is worth something more than the prospect of the same 10 kg of grain tomorrow.

But loans may be made in terms of money rather than real units of grain, thus the change in the value of money over the period of the loan becomes relevant. If a loan of Rs 100,000 is made by a bank to a borrower for one year at a simple interest rate of 13 per cent per annum, and the value of money then declines at 8 per cent over the year, the debtor is paying real interest of just about 13 per cent-8 per cent = 5 per cent. The Yale economist Irving Fisher described how this monetary rate of interest equals the real rate of interest plus the rate of monetary inflation, while the great Swedish economist Knut Wicksell predicted inflation if the monetary rate fell below the real rate, and vice versa.

And there is another consideration too. A new cycle-rickshaw costs about Rs 5,000. A rickshaw driver who does not own his own machine has to pay the owner of the rickshaw a fixed rental of about Rs 15 per day. Now a government policy may want to see more cycle-rickshaw drivers owning their own machines, and allocate bank-credit accordingly. But some fraction of the drivers are alcoholics and hence are bad credit-risks, while others are industrious, have strong family lives and are good credit-risks. If a creditor is unable to distinguish between who is an alcoholic and who is not, credit terms will tend towards subsidising the alcoholic and taxing the industrious.

On the other hand, a creditor who knows each debtor individually will also know their credit-risks, and price individual loans to them accordingly. India’s credit markets, both rural and urban, have been segmented always into “formal” and “informal”, and remain so despite (or perhaps because of) much government intervention in recent decades.

Banks and the Reserve Bank of India operate in formal financial markets, but the informal credit market is where the real action is. For example, a mosaic-machine used in the construction business costs Rs 15,000 brand new and gets to be rented out at the rate of Rs 150 per day.

Someone with access to formal sector bank loans at say 13 per cent per annum, might borrow the Rs 15,000, buy a machine, rent it out, break-even within a few months and make a whopping profit afterwards. Everyone would thus hunger after subsidised formal sector bank loans, and these would be rationed quickly and then come to be allocated to people known to bank officials (like their own friends and relatives).

Rates of return on capital, i.e. real profits, are and always have been massively high in India, and that is what is to be expected because capital, both machinery and finance, is relatively scarce as a factor of production. Rates of return on labour, i.e. real wages, are on the other hand relatively low in India thanks to our vast population. For these reasons we have had for three centuries foreigners coming to India to invest their capital in enterprise and make a profit, while Indians have emigrated all over the world from Fiji to Britain to America in search of higher wages.

Now all of this is very elementary reasoning well known to serious monetary economists, yet it seems to have always escaped India’s monetary and fiscal decision-makers. For example, just the other day, the Finance Minister said in Parliament that all rural banks had been instructed to lend farmers credit at a 7 per cent (monetary) rate of interest, and failure to do so would lead to  punishment. By the rickshaw example (in fact many cycle-rickshaw drivers are also marginal farmers), the FM did not wish to, and of course cannot in practice, distinguish between good and bad credit-risks among the recipients of such loans. If the value of money is declining by, say, 8 per cent per annum, a 7 per cent monetary rate is equivalent to a minus 1 per cent real rate. i.e., the FM would have done some Humpty Dumpty economics and caused the future prospect of holding Rs 1,000 tomorrow to be more and not less valuable than the certainty of holding Rs 1,000 today. It is inevitable there will be credit-rationing when credit is so massively subsidised, so the typical borrowing farmer will get some little fraction of his credit-needs at the official government price of 7 per cent per annum and then have to get the bulk of his credit-needs fulfilled in the informal market ~ at a price perhaps of 1 per cent-5 per cent PER DAY! The FM promising in his Budget to subsidise farm credit sounds nice on TV but may be wholly futile as a way of stopping farmers’ suicides.

The same kind of Humpty Dumpty monetary economics has been religiously pursued by the Reserve Bank of India for decades upon directions from its owner and master, the Finance Ministry ~ which in turn has always meekly followed the dictates of India’s unreasonable politicians of all parties. Formal sector interest rates in India have been for decades so artificially lowered that even if we use official figures measuring inflation, this leads to real interest rates being lower in capital-scarce India than in the capital-rich West! (See graphs).  Negative or near-zero real interest rates in India’s formal financial sector coexisting with massively high profit rates in informal credit markets point to continuous processes of low risk profits being made by arbitrage between the two. That is why the organised private and public sectors seem so pleased with official credit policies ~ while every borrower in the informal credit markets always has suicide not far from his/her mind.

Other than Dr Rangarajan who once mentioned it, we have never had an RBI Governor who has wished to see the Reserve Bank of India constitutionally independent of the Government of the day, and hence dedicated to restoring the integrity of India’s money. Playing with the repo rate or other short term monetary rates is fun and makes the RBI think it is doing something as important as the US or UK central banks. Certainly the upward trend in such short term rates over the last few months is better than the nonsensical flip-flops previously. But it is small potatoes compared to the really giant variables which are all fiscal and not monetary in India. For example, Sonia Gandhi (as advised by another naturalized Indian, Jean Drèze, disciple of the Non-Resident Amartya Sen) insisted on a massive “Rural Employment Guarantee”; Manmohan Singh and Pranab Mukherjee have insisted on massive foreign weapons’ purchases and government wage increases; Praful Patel on massive foreign aircraft purchases; Arjun Sengupta on Scandinavian welfare benefits; Montek Ahluwalia on nuclear reactor purchases (so South Delhi will be able at least to run its ACs in 20 years’ time). All this adds endlessly to the stock of government paper being held as bank-assets, while the currency remains inconvertible (See e.g. The Statesman 30 October 2005, 6-8 January, 23 April 2006).The RSS/BJP and JNU/Left have been equally bereft of serious thought.

Tell any suicidal farmer that the Government of India has been borrowing larger and larger amounts every year just to pay interest on previously incurred debts; it may make him realise there are famous and powerful people who are even more unwise than himself and amount to effective suicide-prevention therapy. But do not tell him that they unlike himself have been playing with public money ~ or you may have the opposite effect.