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

“On the blissful innocence of the RBI” (2009), plus “A Small Challenge to the RBI’s Governor Subbarao”(2010)

From Facebook:

Subroto Roy  can only sigh at the fact that while he has had to struggle for 35 years trying to grasp and then apply serious monetary economics to India’s circumstances, the RBI Governor & his four Deputy Governors appear blissfully innocent of all Hicks, Tobin, Friedman, Cagan et al yet exude confidence enough to “Waffle Away!”

see also

A Small Challenge to the RBI’s Governor Subbarao
April 21, 2010

The Hon’ble Gov of the Reserve Bank of India Shri D Subbarao

Dear Governor Subbarao,

You said yesterday, April 20 2010, that the Reserve Bank of India has a macroeconomic model which it uses but which you had personally not seen.

I have given two lectures at your august offices, one by invitation of Governor Jalan and Deputy Governor Reddy on April 29 2000 to address the Conference of State Finance Secretaries, the other on May 5 2005 to address the Chief Economist’s Monetary Economics Seminar. On both occasions, I had inquired of the RBI’s own models by which I could contrast my own but came to understand there were none.

If since then the RBI has now constructed a macroeconomic model of India’s economy, it is splendid news.

May I request the model be released publicly on the Internet at once, so its specifications of endogenous and exogenous variables, assumed coefficients, and sources of time-series data all may be seen by everyone in the country and abroad? Scientific scrutiny and replication of results would thus come to be permitted.

I would be especially interested to know the demand for money function that you have used. I well remember my meeting with the late great Sukhamoy Chakravarty on July 14 1987 at his Planning Commission offices, when he signed and gifted me his last personal copy of the famous Reserve Bank report by the committee he had chaired and of which he told me personally Dr Rangarajan had been the key author – that report may have contained the first official discussion of the demand for money function in India.

With cordial regards

Subroto Roy

Does the Govt. of India assume “foreign investors and analysts” are a key constituency for Indian economic policy-making? If so, why so? Have Govt. economists “learnt nothing, forgotten everything”? Some Bastille Day thoughts

Today is Bastille Day in France and the Prime Minister of India, Dr Manmohan Singh, at the invitation of President Sarkozy, is visiting Paris (where the Government of India has flown in military contingents to participate in the annual parade), before he goes to another summit in Egypt with Present Mubarak and others, following his recent summits in Italy with the Pope and others, and in Russia with President Medvedev and others, and in London with President Obama and others, etc.   Dr Singh has  almost certainly become the most internationally well-travelled of all Indian leaders on official visits ever in history, which adds to his having had the longest experience in India’s bureaucracy of any Indian political leader in history, which came to be followed by his stint in the Rajya Sabha as Finance Minister and now as a two-term Prime Minister.

But as a result of being out of the country yesterday, the Prime Minister would have missed the TV interview broadcast last night with his chief economic policy aide when it was said that “foreign investors and analysts” are an important constituency for Indian economic policy-makers, as expressed in the President’s speech to the new 15th Lok Sabha or Pranab Mukherjee’s Budget speech last week.  The interviewer seemed to agree and constantly pressed the aide, who is doubtless the most prominent Government economist on television,  about how stock-market brokers and businessmen seemed to have found the Budget not to their immediate liking, and how  privatisation or “raising insurance caps” would have been seen by businessmen as  crucial elements of future economic reform.  In fact privatisation or the insurance business have little to do with any important economic reform but the lobbying power and spin-control of  organised business becomes manifest in getting interviewers to ask such questions of Government spokesmen —  all part of the (doubtless unconscious) process of camouflaging their private interests in the guise of purported public economic policy discussion.

I have taken a very different view.  For example, I said a few years ago in starkest contrast:

“Running through the new foreign policy is a fiction that it is driven by a new economic motivation to improve development and mass well-being in India. The bizarre idea of creating hundreds of so-called “Special Economic Zones” (reminiscent of 17th and 18th Century colonial fortifications) illustrates this. India’s ordinary anonymous masses ~ certainly the 850 million people entirely outside the organised sector ~ have little or nothing to do with any of this. Benefits will accrue only to the ten million Indian nomenclatura controlling or having access to the gaping exit holes to the outside world in the new semi-closed economy with its endless deficit finance paid for by unlimited printing of an inconvertible domestic currency. It is as fallacious to think private investment from foreign or domestic businessmen will support public “infrastructure” creation as it is to think foreign exchange reserves are like tax revenues in being available for Government expenditure on “infrastructure”. Such fallacies are intellectual products of either those who know no economics at all or those who have forgotten whatever little they might have been once mistaught in their youth. What serious economics does say is that Government should generally have nothing to do with any kind of private business, and instead should focus on properly providing public goods and services, encourage competition in all avenues of economic activity and prevent or regulate monopoly, and see to it all firms pay taxes they are due to pay.  That is it. It is as bad for Government to be pampering organised foreign or domestic business or organised labour with innumerable subsidies, as has been happening in India for decades, as it is to make enterprise difficult with red tape and hurdles. Businessmen are grown ups and should be allowed to freely risk their capital and make their profits or their losses without public intervention. An economics-based policy would have single-mindedly sought to improve the financial condition of every governmental entity in the country, with the aim of improving the provision of public goods and services to all 1,000 million Indians. If and when budgets of all governmental entities become sound, foreign creditors would automatically line up before them with loans to sell, and ambitious development goals can be accomplished. As long as public budgets (and public accounts) remain in an outrageous shambles, nothing can be in fact achieved and only propaganda, corruption and paper-money creation results instead. Whatever economic growth does occur is due to new enterprise and normal technological progress, and is mostly despite and not because of New Delhi’s bureaucrats (see “The Dream Team: A Critique”, The Statesman 6-8 January 2006).  The first aspect of the new Indian foreign policy has been for Government to become wholly ingratiating towards any and all “First World” members visiting India who may deign to consider any kind of collaboration whatsoever. The long line of foreign businessmen and heads of government having photo-ops with the Indian PM began with Vajpayee and has continued with Manmohan, especially when there is a large weapons’ or commercial aircraft or other purchase to be signed. The flip-side has been ministerial and especially Prime Ministerial trips abroad ~ from Vajpayee’s to a Singapore golf-cart immediately after commiserating Gujarat, to Manmohan receiving foreign honorary doctorates while still holding public office.  Subservience to foreign business interests in the name of economic policy extends very easily to Indian naval, military or diplomatic assets being used to provide policing or support services for the great powers as and when they may ask for it. Hence, Indian naval forces may be asked by the Americans to help fight pirates in the Indian Ocean, or escort this vessel or that, or India may be asked to provide refuelling or base facilities, or India may be requested to vote against Iran, Venezuela or whomever here or there. But there would be absolutely no question of India’s role in international politics being anything greater than that of a subaltern or comprador whose response must be an instant “Ji, Huzoor”. The official backing of the Tharoor candidacy was as futile and ridiculous as the quest for UN veto-power or the willingness to attend G-8 summits as an observer. While subservience towards the First World’s business and military interests is the “kiss up” aspect of the new foreign policy, an aggressive jingoism towards others is the “kick down” aspect….”

Dr Singh’s aide at one point challenged his friendly interviewer  suggesting the very need for “fiscal stimulus” could hardly be questioned as if such a thing was beyond his imagination.  And again, I am afraid, I may have been quite alone  in December 2008 in lambasting as counter-productive all this purported “fiscal stimulus”. Just another colossal, indeed perverse, waste of public resources driven by organised business lobbies in their own interests, since in fact no one — not Dr Singh nor any of his aides, acolytes or flatterers, foreign or domestic, or anyone else anywhere — has any empirical or theoretical models of any kind depicting the phase, period or amplitude of any possible business-cycle that India’s economy may be on.  Since none of them has any idea whatsoever of what the amplitude or frequency is of any such purported business cycle, they are as likely to have caused a pro-cyclical exacerbation of the amplitude as any sort of counter-cyclical dampening! (Viz., Leibniz ‘s principle of insufficient reason.)

How to see what is happening in Indian macroeconomic policy in the simplest comparative static terms is this: both the IS and LM curves are being pushed outwards drastically based on a deliberately erroneous assumption that there is  or might develop mass involuntary unemployment of the sort Maynard Keynes once described in 1936.  The overall impact on nominal interest-rates is indeterminate; the process of inflationary deficit-finance with an inconvertible currency that the Government has indulged in for half a century merely continues, further pushing us towards a potential hyperinflation.

The Bourbon regime swept away by the French Revolution that Bastille Day celebrates were said to have “learnt nothing and forgotten nothing”.   I am afraid the macroeconomic illogic often found among Government economists, private commentators and business lobbyists in India today suggests to me nothing less than that they have  either learnt nothing or forgotten everything from their economics classes decades ago! We in India may need our own storming of the Bastille to sweep away the perverse thoughts and power structures of the post-1947 Dilli Raj.

Subroto Roy
Kolkata

Letter to the GoI’s seniormost technical economist, May 21

“May 21 2009    It is wonderful to hear from you and I am honoured to find myself, perhaps accidentally, on the same list as so many of your distinguished colleagues among Government economists.

Your essay is most engaging. I am afraid I disagree with your assessment that the current problems “did not originate in the real sector of the economy” but were “triggered by the excesses of the financial system”. I have said to the contrary There is no clear path to solving the great (alleged) economic and financial crisis because no one wants to admit its roots were the overvaluation (over decades) of American real-estate, and hence American assets in general.”

There is no more real sector than real-estate itself and American real-estate has tended to be overvalued as a result of government policy since the Carter Administration; the accumulated dangers along that path came to explode in the sub-prime crisis. Here as elsewhere in economics, the financial tail has not wagged the non-financial dog but vice versa.

I have also said “(i) foreign central banks might have been left holding more bad US debt than might be remembered, and dollar depreciation and an American inflation seem to be inevitable over the next several years; (ii) all those bad mortgages and foreclosures could vanish within a year or two by playing the demographic card and inviting in a few million new immigrants into the United States; restoring a worldwide idea of an American dream fueled by mass immigration may be the surest way for the American economy to restore itself.”

Re the comparison with the Great Depression, I believe

“there are overriding differences. Most important, the American economy and the world economy are both incomparably larger today in the value of their capital stock, and there has also been enormous technological progress over eight decades. Accordingly, it would take a much vaster event than the present turbulence — say, something like an exchange of multiple nuclear warheads with Russia causing Manhattan and the City of London to be destroyed — before there was a return to something comparable to the 1929 Crash and the Great Depression that followed. Besides, the roots of the crises are different. What happened back then? In 1922, the Genoa Currency Conference wanted to correct the main defect of the pre-1914 gold standard, which was freezing the price of gold while failing to stabilise the purchasing power of money. From 1922 until about 1927, Benjamin Strong of the Federal Reserve Bank of New York adopted price-stabilisation as the new American policy-objective. Britain was off the gold standard and the USA remained on it. The USA, as a major creditor nation, saw massive gold inflows which, by traditional gold standard principles, would have caused a massive inflation. Governor Strong invented the process of “sterilisation” of those gold inflows instead and thwarted the rise in domestic dollar prices of goods and services. Strong’s death in 1928 threw the Federal Reserve System into conflict and intellectual confusion. Dollar stabilisation ended as a policy. Surplus bank money was created on the release of gold that had been previously sterilised. The traditional balance between bulls and bears in the stock-market was upset. Normally, every seller of stock is a bear and every buyer a bull. Now, amateur investors appeared as bulls attracted by the sudden stock price rises, while bears, who sold securities, failed to place their money into deposit and were instead lured into lending it as call money to brokerages who then fuelled these speculative bulls. As of October 22, 1929 about $4 billion was the extent of such speculative lending when Chase National Bank’s customers called in their money. Chase National had to follow their instructions, as did other New York banks. New York’s Stock Exchange could hardly respond to a demand for $4 billion at a short notice and collapsed. Within a year, production had fallen by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and the Greatest Depression of recorded history was in progress — involuntary unemployment levels in America reaching 25 per cent. That is not, by any reading, what we have today. Yes, there has been plenty of bad lending, plenty of duping shareholders and workers and plenty of excessive managerial payoffs. It will all take a large toll, and affect markets across the world. But it will be a toll relative to our plush comfortable modern standards, not those of 1929-1933. In fact, modern decision-makers have the obvious advantage that they can look back at history and know what is not to be done. The US and the world economy are resilient enough to ride over even the extra uncertainty arising from the ongoing presidential campaign, and then some.”

These quotes are from recent publications and may be found most easily under “America’s financial crises” at my site http://www.independentindian.com.

What may be of interest to the Government of India’s economists also may be a sample of my recent short articles on India’s monetary and fiscal economics based on my research beginning with my doctoral work under Frank Hahn at Cambridge in the 1970s and followed by my work with James Buchanan and Milton Friedman in America in the 1980s and 1990s and later. One of these is even named “The Rangarajan Effect” which I first defined at a seminar invited by Dr Jadav at the RBI in May 2005!

https://independentindian.com/2008/08/24/rangarajan-effect/

https://independentindian.com/2008/09/28/monetary-integrity-and-the-rupee/

https://independentindian.com/2007/01/20/indias-macroeconomics/

https://independentindian.com/2007/02/04/fiscal-instability/

https://independentindian.com/2008/07/16/india-in-world-trade-payments/

https://independentindian.com/2007/03/05/fallacious-finance-the-congress-bjp-cpi-m-et-al-may-be-leading-india-to-hyperinflation/

https://independentindian.com/2007/02/20/our-policy-process-self-styled-planners-have-controlled-indias-paper-money-for-decades/

https://independentindian.com/2008/07/28/growth-of-real-income-money-prices-in-india-1869-2004/

https://independentindian.com/2008/07/17/growth-government-delusion/

https://independentindian.com/2008/07/09/indian-inflation-upside-down-economics-from-new-delhis-establishment/

https://independentindian.com/2008/02/26/how-to-budget-thrift-not-theft-should-guide-our-public-finances/

https://independentindian.com/2008/02/21/a-note-on-the-indian-policy-process/

With warm regards,

Cordially,

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

Sometime Adviser to the Late Rajiv Gandhi, 1990-1991

Caveat emptor! Satyam is taken over

Textbook corporate finance theory says that when a going concern takes over an ailing or bankrupt company (with low or zero or negative value), it does so in expectation that the net value of the combined entity shall, at least in due course, exceed the present value of the  successful buyer.

The most peculiar aspect of the Satyam auction process has been the delay and obfuscation that greeted  attempts by potential buyers to ascertain the extent of its liabilities (many of which may be contingent liabilities depending on the outcomes of American class-action suits.)  Even so, Satyam appears to have been taken over.   Caveat emptor!  may be all that needs to be said. We are like this only.

Subroto Roy

Kolkata

Could the Satyam/PwC fraud be the visible part of an iceberg? Where are India’s “Generally Accepted Accounting Principles”? Isn’t governance rather poor all over corporate India? Bad public finance may be a root cause

In a March 5 2007 article in The Statesman, I said:

“Our farmers are peaceful hardworking people who should be paying taxes and user-fees normally but should not be otherwise disturbed or needlessly provoked by outsiders. It is the businessmen wishing to attack our farm populations who need to look hard in the mirror – to improve their accounting, audit, corporate governance, to enforce anti-embezzlement and shareholder protection laws etc.”

In a September 23-24 2007 article in The Sunday Statesman I said:

“… Government, instead of hobnobbing with business chambers, needed to get Indian corporations to improve their accounting, audit and governance, and reduce managerial pilfering and embezzlement, which is possible only if Government first set an example.”

In a February 4 2007 article in The Statesman, I said:

“Financial control of India’s fiscal condition, and hence monetary expansion, vitally requires control of the growth of these kinds of dynamic processes and comprehension of their analytical underpinnings. Yet such understanding and control seem quite absent from all organs of our Government, including establishment economists and the docile financial press…. the actual difference between Government Expenditure and Income in India has been made to appear much smaller than it really is. Although neglected by the Cabinet, Finance Ministry, RBI and even (almost) the C&AG, the significance of this discrepancy in measurement will not be lost on anyone seriously concerned to address India’s fiscal and monetary problems.”

All three articles are available elsewhere here and are republished below together.  I have published elsewhere today my brief 2006 lecture on corporate governance.  (See also my “The Indian Revolution”, “Monetary Integrity & the Rupee”, “Indian Inflation”,  “The Dream Team: A Critique”, “India’s Macroeconomics”, “Growth & Government Delusion”, etc).

The fraud at Satyam amounts to it having been long bankrupt but not seemingly so.  The fact it was long bankrupt was apparently overlooked or condoned by its auditors Pricewaterhouse Coopers! This may be big news today but the response of corporate India and the Indian business media seems utterly insincere (and there has been a lot of fake pontificating on TV by some notorious frauds).  Remember the head of Satyam received awards with all the other honchos at those fake ceremonies that businessmen and the business media keep holding at this or that hotel.  (See my several articles here under the categories “Satyam corporate fraud”, “Corporate governance” etc.)

Government agencies, as enforcers of the law, must be seen in such circumstances to have greater credibility than the violators, but who can say that Government accounting and audit and corporate governance in India is not as bad as that of the private sector?    It may be in fact far, far worse.   Poor accounting, endless deficit finance, unlimited paper money creation, false convertibility of the rupee etc is what emerges from our supposedly wise economic policy-makers.

When was the last time some major businessman or top politician spoke publicly about the importance of “Generally Accepted Accounting Principles”?   The answer is never.   Government (of this party or that) has become well-oiled by political lobbyists and is hand-in-glove with organized business, especially in a few cities.  Until Government gets its own accounts straight, stops its endless deficit finance, reins in unlimited paper money-creation, creates an honest currency domestically and externally, there is no proper example or standard set for the private sector, and such scandals will erupt along with insincere responses from the cartels of corporate India.

What emerges from New Delhi’s economists seems often to have as much to do with economics as Bollywood has to do with cinema.

Subroto Roy

Fallacious Finance: Congress, BJP, CPI-M et al may be leading India to hyperinflation

by

Subroto Roy

First published in The Statesman, March 5 2007 Editorial Page Special Article http://www.thestatesman.net

It seems the Dream Team of the PM, Finance Minister, Mr. Montek Ahluwalia and their acolytes may take India on a magical mystery tour of economic hallucinations, fantasies and perhaps nightmares. I hasten to add the BJP and CPI-M have nothing better to say, and criticism of the Government or of Mr Chidambaram’s Budget does not at all imply any sympathy for their political adversaries. It may be best to outline a few of the main fallacies permeating the entire Governing Class in Delhi, and their media and businessman friends:

1. “India’s Savings Rate is near 32%”. This is factual nonsense. 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.

2. “High economic growth in India is being caused by high savings and intelligently planned government investment”. This too is nonsense. 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. New Delhi still believes in antiquated Soviet-era savings-investment models without technological progress, and some non-sycophant must tell our top Soviet-era bureaucrat that such growth models have been long superceded and need to be scrapped from India’s policy-making too. Can politicians and bureaucrats assist India’s progress? Indeed they can: the telecom revolution in recent years was something in which they participated. But the general presumption is against them. Progress, productivity gains and hence economic growth arise from enterprise and effort of ordinary people — mostly despite not because of an exploitative, parasitic State.

3. “Agriculture is a backward sector that has been retarding India’s recent economic growth”. This is not merely nonsense it is dangerous nonsense, because it has led to land-grabbing by India’s rulers at behest of their businessman friends in so-called “SEZ” schemes. The great farm economist Theodore W. Schultz once quoted Andre and Jean Mayer: “Few scientists think of agriculture as the chief, or the model science. Many, indeed, do not consider it a science at all. Yet it was the first science – Mother of all science; it remains the science which makes human life possible”. Centuries before Europe’s Industrial Revolution, there was an Agricultural Revolution led by monks and abbots who were the scientists of the day. Thanks partly to American help, India has witnessed a Green Revolution since the 1960s, and our agriculture has been generally a calm, mature, stable and productive industry. Our farmers are peaceful hardworking people who should be paying taxes and user-fees normally but should not be otherwise disturbed or needlessly provoked by outsiders. It is the businessmen wishing to attack our farm populations who need to look hard in the mirror – to improve their accounting, audit, corporate governance, to enforce anti-embezzlement and shareholder protection laws etc.

4. “India’s foreign exchange reserves may be used for ‘infrastructure’ financing”. Mr Ahluwalia promoted this idea and now the Budget Speech mentioned how Mr Deepak Parekh and American banks may be planning to get Indian businesses to “borrow” India’s forex reserves from the RBI so they can purchase foreign assets. It is a fallacy arising among those either innocent of all economics or who have quite forgotten the little they might have been mistaught in their youth. Forex reserves are a residual in a country’s balance of payments and are not akin to tax revenues, and thus are not available to be borrowed or spent by politicians, bureaucrats or their businessman friends — no matter how tricky and shady a way comes to be devised for doing so. If anything, the Government and RBI’s priority should have been to free the Rupee so any Indian could hold gold or forex at his/her local bank. India’s vast sterling balances after the Second World War vanished quickly within a few years, and the country plunged into decades of balance of payments crisis – that may now get repeated. The idea of “infrastructure” is in any case vague and inferior to the “public goods” Adam Smith knew to be vital. Serious economists recommend transparent cost-benefit analyses before spending any public resources on any project. E.g., analysis of airport/airline industry expansion would have found the vast bulk of domestic airline costs to be forex-denominated but revenues rupee-denominated – implying an obvious massive currency-risk to the industry and all its “infrastructure”. All the PM’s men tell us nothing of any of this.

5. “HIV-AIDS is a major Indian health problem”. Government doctors privately know the scare of an AIDS epidemic is based on false assumptions and analysis. Few if any of us have met, seen or heard of an actual incontrovertible AIDS victim in India (as opposed to someone infected by hepatitis-contaminated blood supplies). Syringe-exchange by intravenous drug users is not something widely prevalent in Indian society, while the practise that caused HIV to spread in California’s Bay Area in the 1980s is not something depicted even at Khajuraho. Numerous real diseases do afflict Indians – e.g. 11 children died from encephalitis in one UP hospital on a single day in July 2006, while thousands of children suffer from “cleft lip” deformity that can be solved surgically for 20,000 rupees, allowing the child a normal life. Without any objective survey being done of India’s real health needs, Mr Chidamabaram has promised more than Rs 9.6 Billion (Rs 960 crore) to the AIDS cottage industry.

6. “Fiscal consolidation & stabilization has been underway since 1991”. There is extremely little reason to believe this. If you or I borrow Rs. 100,000 for a year, and one year later repay the sum only to borrow the same again along with another Rs 40,000, we would be said to have today a debt of Rs. 140,000 at least. Our Government has been routinely “rolling over” its domestic debt in this manner (in the asset-portfolios of the nationalised banking system) but displaying and highlighting only its new additional borrowing in a year as the “ Fiscal Deficit” (see graph, also “Fiscal Instability”, The Sunday Statesman, 4 February 2007). More than two dozen State Governments have been doing the same though, unlike the Government of India, they have no money-creating powers and their liabilities ultimately accrue to the Union as well. The stock of public debt in India may be Rs 30 trillion (Rs 30 lakh crore) at least, and portends a hyperinflation in the future. Mr Chidambaram’s announcement of a “Debt Management Office” yet to be created is hardly going to suffice to avert macroeconomic turmoil and a possible monetary collapse. The Congress, BJP, CPI-M and all their friends shall be responsible.

Against Quackery

First published in two parts in The Sunday Statesman, September 23 2007, The Statesman September 24 2007, http://www.thestatesman.net

By Subroto Roy

Manmohan and Sonia have violated Rajiv Gandhi’s intended reforms; the Communists have been appeased or bought; the BJP is incompetent

WASTE, fraud and abuse are inevitable in the use and allocation of public property and resources in India as elsewhere, but Government is supposed to fight and resist such tendencies. The Sonia-Manmohan Government have done the opposite, aiding and abetting a wasteful anti-economics ~ i.e., an economic quackery. Vajpayee-Advani and other Governments, including Narasimha-Manmohan in 1991-1996, were just as complicit in the perverse policy-making. So have been State Governments of all regional parties like the CPI-M in West Bengal, DMK/ AIADMK in Tamil Nadu, Congress/NCP/ BJP/Sena in Maharashtra, TDP /Congress in Andhra Pradesh, SP/BJP/BSP in Uttar Pradesh etc. Our dismal politics merely has the pot calling the kettle black while national self-delusion and superstition reign in the absence of reason.

The general pattern is one of well-informed, moneyed, mostly city-based special interest groups (especially including organised capital and organised labour) dominating government agendas at the cost of ill-informed, diffused anonymous individual citizens ~ peasants, small businessmen, non-unionized workers, old people, housewives, medical students etc. The extremely expensive “nuclear deal” with the USA is merely one example of such interest group politics.

Nuclear power is and shall always remain of tiny significance as a source of India’s electricity (compared to e.g. coal and hydro); hence the deal has practically nothing to do with the purported (and mendacious) aim of improving the country’s “energy security” in the long run. It has mostly to do with big business lobbies and senior bureaucrats and politicians making a grab, as they always have done, for India’s public purse, especially access to foreign currency assets. Some $300 million of India’s public money had to be paid to GE and Bechtel Corporation before any nuclear talks could begin in 2004-2005 ~ the reason was the Dabhol fiasco of the 1990s, a sheer waste for India’s ordinary people. Who was responsible for that loss? Pawar-Mahajan-Munde-Thackeray certainly but also India’s Finance Minister at the time, Manmohan Singh, and his top Finance Ministry bureaucrat, Montek Ahluwalia ~ who should never have let the fiasco get off the ground but instead actively promoted and approved it.

Cost-benefit analysis prior to any public project is textbook operating procedure for economists, and any half-competent economist would have accounted for the scenario of possible currency-depreciation which made Dabhol instantly unviable. Dr Singh and Mr Ahluwalia failed that test badly and it cost India dearly. The purchase of foreign nuclear reactors on a turnkey basis upon their recommendation now reflects similar financial dangers for the country on a vastly larger scale over decades.

Our Government seems to function most expeditiously in purchasing foreign arms, aircraft etc ~ not in improving the courts, prisons, police, public utilities, public debt. When the purchase of 43 Airbus aircraft surfaced, accusations of impropriety were made by Boeing ~ until the local Airbus representative said on TV that Boeing need not complain because they were going to be rewarded too and soon 68 aircraft were ordered from Boeing!

India imports all passenger and most military aircraft, besides spare parts and high-octane jet fuel. Domestic aviation generates near zero forex revenues and incurs large forex costs ~ a debit in India’s balance of payments. Domestic airline passengers act as importers subsidised by our meagre exporters of textiles, leather, handicrafts, tea, etc. What a managerially-minded PM and Aviation Minister needed to do before yielding to temptations of buying new aircraft was to get tough with the pampered managements and unions of the nationalized airlines and stand up on behalf of ordinary citizens and taxpayers, who, after all, are mostly rail or road-travellers not jet-setters.

The same pattern of negligent policy-behaviour led Finance Minister P. Chidambaram in an unprecedented step to mention in his 2007 Union Budget Speech the private American companies Blackstone and GE ~ endorsing the Ahluwalia/Deepak Parekh idea that India’s forex reserves may be made available to be lent out to favoured private businesses for purported “infrastructure” development. We may now see chunks of India’s foreign exchange reserves being “borrowed” and never returned ~ a monumental scam in front of the CBI’s noses.

The Reserve Bank’s highest echelons may have become complicit in all this, permitting and encouraging a large capital flight to take place among the few million Indians who read the English newspapers and have family-members abroad. Resident Indians have been officially permitted to open bank accounts of US $100,000 abroad, as well as transfer gifts of $50,000 per annum to their adult children already exported abroad ~ converting their largely untaxed paper rupees at an artificially favourable exchange-rate.

In particular, Mr Ratan Tata (under a misapprehension he may do whatever Lakshmi Mittal does) has been allowed to convert Indian rupees into some US$13,000,000,000 to make a cash purchase of a European steel company. The same has been allowed of the Birlas, Wipro, Dr Reddy’s and numerous other Indian corporations in the organised sector ~ three hundred million dollars here, five hundred million dollars there, etc. Western businessmen now know all they have to do is flatter the egos of Indian boxwallahs enough and they might have found a buyer for their otherwise bankrupt or sick local enterprise. Many newcomers to New York City have been sold the Brooklyn Bridge before. “There’s a sucker born every minute” is the classic saying of American capitalism.

The Sonia-Manmohan Government, instead of hobnobbing with business chambers, needed to get Indian corporations to improve their accounting, audit and governance, and reduce managerial pilfering and embezzlement, which is possible only if Government first set an example.

Why have Indian foreign currency reserves zoomed up in recent years? Not mainly because we are exporting more textiles, tea, software engineers, call centre services or new products to the world, but because Indian corporations have been allowed to borrow abroad, converting their hoards of paper rupees into foreign debt. Forex reserves are a residual in a country’s international balance of payments and are not like tax-resources available to be spent by Government; India’s reserves largely constitute foreign liabilities of Indian residents. This may bear endless repetition as the PM and his key acolytes seem impervious to normal postgraduate-level economics textbooks.

Other official fallacies include thinking India’s savings rate is near 32 per cent and that clever bureaucratic use of it can cause high growth. In fact, real growth arises not because of what politicians and bureaucrats do but because of spontaneous technological progress, improved productivity and learning-by-doing of the general population ~ mostly despite not because of an exploitative parasitic State. What has been mismeasured as high savings is actually expansion of bank-deposits in a fractional reserve banking system caused by runaway government deficit-spending.

Another fallacy has been that agriculture retards growth, leading to nationwide politically-backed attempts at land-grabbing by wily city industrialists and real estate developers. In a hyperinflation-prone economy with wild deficit-spending and runaway money-printing, cheating poor unorganised peasants of their land, when that land is an asset that is due to appreciate in value, has seemed like child’s play.

What of the Opposition? The BJP/RSS have no economists who are not quacks though opportunists were happy to say what pleased them to hear when they were in power; they also have much implicit support among organised business lobbies and the anti-Muslim senior bureaucracy. The official Communists have been appeased or bought, sometimes so cheaply as with a few airline tickets here and there. The nonsensical “Rural Employment Guarantee” is descending into the wasteland of corruption it was always going to be. The “Domestic Violence Act” as expected has started to destroy India’s families the way Western families have been destroyed. The Arjun-DMK OBC quota corrodes higher education further from its already dismal state. All these were schemes that Congress and Communist cabals created or wholeheartedly backed, and which the BJP were too scared or ignorant to resist.

And then came Singur and Nandigram ~ where the sheer greed driving the alliance between the Sonia-Manmohan-Pranab Congress and the CPI-M mask that is Buddhadeb, came to be exposed by a handful of brave women like Mamata and Medha.

2. A Fiscal U-Turn is Needed For India to Go in The Right Economic Direction

Rajiv Gandhi had a sense of noblesse oblige out of remembrance of his father and maternal grandfather. After his assassination, the comprador business press credited Narasimha Rao and Manmohan Singh with having originated the 1991 economic reform. In May 2002, however, the Congress Party itself passed a resolution proposed by Digvijay Singh explicitly stating Rajiv and not either of them was to be so credited. The resolution was intended to flatter Sonia Gandhi but there was truth in it too. Rajiv, a pilot who knew no political economy, was a quick learner with intelligence to know a good idea when he saw one and enough grace to acknowledge it.

Rule of Law

The first time Dr Manmohan Singh’s name arose in contemporary post-Indira politics was on 22 March 1991 when M K Rasgotra challenged the present author to answer how Dr Singh would respond to proposals being drafted for a planned economic liberalisation that had been authorised by Rajiv, as Congress President and Opposition Leader, since September 1990. It was replied that Dr Singh’s response was unknown and he had been heading the “South-South Commission” for Tanzania’s Julius Nyerere, while what needed to be done urgently was make a clear forceful statement to restore India’s credit-worthiness and the confidence of international markets, showing that the Congress at least knew its economics and was planning to take bold new steps in the direction of progress.

There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior to 1991 as that term is understood worldwide, and scant evidence they have originated liberal economic ideas for India afterwards. Precisely because they represented the decrepit old intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked in the mid-1980s to be part of a “perestroika-for-India” project done at a foreign university ~ the results of which were received, thanks to Siddhartha Shankar Ray, by Rajiv Gandhi in hand at 10 Janpath on 18 September 1990 and specifically sparked the change in the direction of his economic thinking.

India is a large, populous country with hundreds of millions of materially poor citizens, a weak tax-base, a vast internal and external public debt (i.e. debt owed by the Government to domestic and foreign creditors), massive annual fiscal deficits, an inconvertible currency, and runaway printing of paper-money. It is unsurprising Pakistan’s economy is similar, since it is born of the same land and people. Certainly there have been real political problems between India and Pakistan since the chaotic demobilisation and disintegration of the old British Indian Army caused the subcontinent to plunge into war-like or “cold peace” conditions for six decades beginning with a bloody Partition and civil war in J&K. High military expenditures have been necessitated due to mutual and foreign tensions, but this cannot be a permanent state if India and Pakistan wish for genuine mass economic well-being.

Even with the continuing mutual antagonism, there is vast scope for a critical review of Indian military expenditures towards greatly improving the “teeth-to-tail” ratio of its fighting forces. The abuse of public property and privilege by senior echelons of the armed forces (some of whom have been keen most of all to export their children preferably to America) is also no great secret.

On the domestic front, Rajiv was entirely convinced when the suggestion was made to him in September 1990 that an enormous infusion of public resources was needed into the judicial system for promotion and improvement of the Rule of Law in the country, a pre-requisite almost for a new market orientation. Capitalism without the Rule of Law can quickly degenerate into an illiberal hell of cronyism and anarchy which is what has tended to happen since 1991.

The Madhava Menon Committee on criminal justice policy in July proposed a Hong Kong model of “a single high-tech integrated Criminal Justice complex in every district headquarters which may be a multi-storied structure, devoting the ground floor for the police station including a video-installed interrogation room; the first floor for the police-lockups/sub-jail and the Magistrate’s Court; the second floor for the prosecutor’s office, witness rooms, crime laboratories and legal aid services; the third floor for the Sessions Court and the fourth for the administrative offices etc…. (Government of India) should take steps to evolve such an efficient model… and not only recommend it to the States but subsidize its construction…” The question arises: Why is this being proposed for the first time in 2007 after sixty years of Independence? Why was it not something designed and implemented starting in the 1950s?

The resources put since Independence to the proper working of our judiciary from the Supreme Court and High Courts downwards have been abysmal, while the state of prisons, borstals, mental asylums and other institutions of involuntary detention is nothing short of pathetic. Only police forces, like the military, paramilitary and bureaucracies, have bloated in size.

Neither Sonia-Manmohan nor the BJP or Communists have thought promotion of the Rule of Law in India to be worth much serious thought ~ certainly less important than attending bogus international conclaves and summits to sign expensive deals for arms, aircraft, reactors etc. Yet Rajiv Gandhi, at a 10 Janpath meeting on 23 March 1991 when he received the liberalisation proposals he had authorized, explicitly avowed the importance of greater resources towards the Judiciary. Dr Singh and his acolytes were not in that loop, indeed they precisely represented the bureaucratic ancien regime intended to be changed, and hence have seemed quite uncomprehending of the roots of the intended reforms ever since 1991.

Similarly, Rajiv comprehended when it was said to him that the primary fiscal problem faced by India is the vast and uncontrolled public debt, interest payments on which suck dry all public budgets leaving no room for provision of public goods.

Government accounts
Government has been routinely “rolling over” its domestic debt in the asset-portfolios of the nationalised banks while displaying and highlighting only its new additional borrowing in a year as the “Fiscal Deficit”. More than two dozen States have been doing the same and their liabilities ultimately accrue to the Union too. The stock of public debt in India is Rs 30 trillion (Rs 30 lakh crore) at least, and portends a hyperinflation in the future.

There has been no serious recognition of this since it is political and bureaucratic actions that have been causing the problem. Proper recognition would entail systematically cleaning up the budgets and accounts of every single governmental entity in the country: the Union, every State, every district and municipality, every publicly funded entity or organisation, and at the same time improving public decision-making capacity so that once budgets and accounts recover from grave sickness over decades, functioning institutions exist for their proper future management. All this would also stop corruption in its tracks, and release resources for valuable public goods and services like the Judiciary, School Education and Basic Health. Institutions for improved political and administrative decision-making are needed throughout the country if public preferences with respect to raising and allocating common resources are to be elicited and then translated into actual delivery of public goods and services. Our dysfunctional legislatures will have to do at least a little of what they are supposed to. When public budgets and accounts are healthy and we have functioning public goods and services, macroeconomic conditions would have been created for the paper-rupee to once more become a money as good as gold ~ a convertible world currency for all of India’s people, not merely the metropolitan special interest groups that have been controlling our governments and their agendas.

Fiscal Instabilty

Interest payments quickly suck dry every year’s Budget. And rolling over old public debt means that Government Borrowing in fact much exceeds the Fiscal Deficit

by Subroto Roy

First published in The Sunday Statesman, Editorial Page Special Article, February 4 2007, http://www.thestatesman.net

While releasing Mr Chidambaram’s book some days ago, our PM said that as Narasimha Rao’s Finance Minister in 1991 he had caused “fiscal stabilization” of the country. Unfortunately, Dr Manmohan Singh may have been believing the flattery of his sycophants, since the facts point differently.

The Fiscal Deficit is new borrowing by Government added for a given year. In 1994-1995 for example, the Union Government’s expenditure net of operational and other income was some Rs 1,295 billion (1 billion = 100 crore). Rs. 674 billion was generated for the Union Government by taxation that year (Rs 184 billion from direct taxes, Rs 653 billion from indirect and miscellaneous taxes, less Rs 163 billion as the States’ share). The difference between Rs 1,295 billion and Rs. 674 billion, that is Rs. 621 billion had to be borrowed by the Government of India in the name of future unborn generations of Indian citizens. That was the “Fiscal Deficit” that year. If the stock of Public Debt already accumulated has been B,this Fiscal Deficit, C, adds to the interest burden that will be faced next year since interest will have to be then paid on B + C.

Interest payments on Government debt have dominated all public finance in recent decades, quickly sucking dry the budgets every year both of the Union and each of our more than two dozen States. Some Rs. 440 billion was paid by the Union Government as interest in 1994-1995, and this had risen to some Rs. 1,281 billion by 2003-2004. As a percentage of tax revenue, interest expenditure by the Government of India on its own debt rose from 40% in 1991 to 68% in 2004 ~ through the Finance Ministerships of Manmohan Singh, P Chidambaram, Yashwant Sinha and Jaswant Singh.

Financial control of India’s fiscal condition, and hence monetary expansion, vitally requires control of the growth of these kinds of dynamic processes and comprehension of their analytical underpinnings. Yet such understanding and control seem quite absent from all organs of our Government, including establishment economists and the docile financial press.

For example, contrary to the impression created by the Finance Ministry, RBI and Union Cabinet (whether of the UPA or NDA, while the Communists would only be worse), the Fiscal Deficit has been in fact very far from being all that the Government of India borrows from financial markets in a given year. The stock of Public Debt at any given moment consists of numerous debt-instruments of various sorts at different terms. Some fraction of these come to maturity every year and hence their principal amounts (not merely their interest) must be repaid by Government. What our Government has been doing routinely over decades is to roll over these debts, i.e. issue fresh public debt of the same amount as that being extinguished and more. For example, some Rs. 720 billion, Rs. 1,180 billion, Rs.1,330 billion and Rs. 1,390 billion were amounts spent in extinguishing maturing public debt in 1993, 1994, 1995 and 1996 respectively. No special taxes were raised in those years specifically for that purpose. Instead the Government merely issued additional new debt or “rolled over” or “converted” the old debt in the same amounts and more in the portfolios of the captive nationalized banking system (see graph).

Plainly, the Government of India’s actual “Borrowing Requirement”, as the difference between its Income and Expenditure, when accounted for properly, will be the sum of this rolled over old debt and the Fiscal Deficit (which is merely the additional borrowing required by a single year’s Budget). In other words, the Government’s Borrowing Requirement is the Fiscal Deficit plus the much larger amount required to annually roll over maturing debt. Because the latter expenditure does not appear at all in calculation of the Fiscal Deficit by the subterfuge of having been routinely rolled over every year, the actual difference between Government Expenditure and Income in India has been made to appear much smaller than it really is. Although neglected by the Cabinet, Finance Ministry, RBI and even (almost) the C&AG, the significance of this discrepancy in measurement will not be lost on anyone seriously concerned to address India’s fiscal and monetary problems.

On the expenditure side, Current Expenditure (anachronistically named “Revenue Expenditure” in India as it is supposed to be met by current revenue) meets recurrent liabilities from one budget-date to the next, like salaries of school-staff or coupon payments on Government debt.

Investment Expenditure “of a capital nature” is supposed to increase “concrete assets of a material and permanent character” like spending on a new public library, or reducing “recurring liabilities” by setting aside a sinking fund to reduce Government debt. Some public resources need to be spent to yield benefits or reduce costs not immediately but in the future. Besides roads, bridges and libraries, these may include less tangible investments too like ensuring proper working of law-courts or training police-officers and school-teachers.

Also, there has been large outright direct lending by the Government of India bypassing normal capital markets on the pattern of old Soviet “central planning”, whereby “credit” is disbursed to chosen recipients.

“Current”, “Investment” and “Loan” expenditure decisions of this kind are made on the same activities. For example, in 1994-1995, the Government of India spent Rs. 2.7 billion as “Loans for Power Projects” in addition to Rs. 9.8 billion under Current Expenditure on “Power” and Rs. 15.5 billion as Investment Expenditure on “Power Projects”. By 2003-2004, these had grown to Rs. 50.94 billion, Rs. 31.02 billion, Rs. 28.5 billion respectively. Yet the opaqueness of Government accounts, finances and economic decision-making today is such that nowhere will such data be found in one table giving a full picture of public expenditure on the Power sector as a whole. On the revenue side, Government’s “Current Income” includes direct and indirect taxes, operational income from public utilities (like railways or the post office), and dividends and profits from public assets. There has been a small “Investment Income” too received from sale of public assets like Maruti. Also, since loans are made directly, there has to be a category for their recovery.

“One must not take from the real needs of the people for the imaginary needs of the state”, said Montesquieu; while De Marco in the same vein said “the greatest satisfaction of collective needs” has to be sought by “the least possible waste of private wealth”. Even Mao Zedong reportedly said: “Thrift should be the guiding principle of our government expenditure”. The C&AG requires Government determine “how little money it need take out of the pockets of the taxpayers in order to maintain its necessary activities at the proper standard of efficiency”.

Yet India’s top politicians and bureaucrats spend wildly ~ driven by the organised special interest groups on whom they depend, while ostentatiously consuming public time, space and resources themselves “quite uselessly in the pleasurable business of inflating the ego” (Veblen).

For Government to do what it need not or should not do contributes to its failure to do what it must. Thus we have armies of indolent soldiers, policemen and bureaucrats and piles of rotting supplies in government warehouses while there are queues outside hospitals, schools, courts etc.

Parliament and State Legislatures need to first ask of an annual budget whether it is efficient: “Is expenditure being allocated to enhance the public interest to the greatest extent possible, and if not, how may it be made to do so?” National welfare overall should increase the same whichever public good or service the final million of public rupees has been spent on.

Fundamentally, government finance requires scientific honesty, especially by way of clear rigorous accounting and audit of uses and origins of public resources. That scientific honesty is what we have not had at Union or State level for more than half a century.

Against Quackery

Against Quackery

 

 

First published in two parts in The Sunday Statesman, September 23 2007, The Statesman September 24 2007

 

by

Subroto Roy

 

 

Manmohan and Sonia have violated Rajiv Gandhi’s intended reforms; the Communists have been appeased or bought; the BJP is incompetent

 

 

WASTE, fraud and abuse are inevitable in the use and allocation of public property and resources in India as elsewhere, but Government is supposed to fight and resist such tendencies. The Sonia-Manmohan Government have done the opposite, aiding and abetting a wasteful anti-economics ~ i.e., an economic quackery. Vajpayee-Advani and other Governments, including Narasimha-Manmohan in 1991-1996, were just as complicit in the perverse policy-making. So have been State Governments of all regional parties like the CPI-M in West Bengal, DMK/ AIADMK in Tamil Nadu, Congress/NCP/ BJP/Sena in Maharashtra, TDP /Congress in Andhra Pradesh, SP/BJP/BSP in Uttar Pradesh etc. Our dismal politics merely has the pot calling the kettle black while national self-delusion and superstition reign in the absence of reason.

 

 

The general pattern is one of well-informed, moneyed, mostly city-based special interest groups (especially including organised capital and organised labour) dominating government agendas at the cost of ill-informed, diffused anonymous individual citizens ~ peasants, small businessmen, non-unionized workers, old people, housewives, medical students etc. The extremely expensive “nuclear deal” with the USA is merely one example of such interest group politics.

 

 

Nuclear power is and shall always remain of tiny significance as a source of India’s electricity (compared to e.g. coal and hydro); hence the deal has practically nothing to do with the purported (and mendacious) aim of improving the country’s “energy security” in the long run. It has mostly to do with big business lobbies and senior bureaucrats and politicians making a grab, as they always have done, for India’s public purse, especially access to foreign currency assets. Some $300 million of India’s public money had to be paid to GE and Bechtel Corporation before any nuclear talks could begin in 2004-2005 ~ the reason was the Dabhol fiasco of the 1990s, a sheer waste for India’s ordinary people. Who was responsible for that loss? Pawar-Mahajan-Munde-Thackeray certainly but also India’s Finance Minister at the time, Manmohan Singh, and his top Finance Ministry bureaucrat, Montek Ahluwalia ~ who should never have let the fiasco get off the ground but instead actively promoted and approved it.

 

 

Cost-benefit analysis prior to any public project is textbook operating procedure for economists, and any half-competent economist would have accounted for the scenario of possible currency-depreciation which made Dabhol instantly unviable. Dr Singh and Mr Ahluwalia failed that test badly and it cost India dearly. The purchase of foreign nuclear reactors on a turnkey basis upon their recommendation now reflects similar financial dangers for the country on a vastly larger scale over decades.

 

 

Our Government seems to function most expeditiously in purchasing foreign arms, aircraft etc ~ not in improving the courts, prisons, police, public utilities, public debt. When the purchase of 43 Airbus aircraft surfaced, accusations of impropriety were made by Boeing ~ until the local Airbus representative said on TV that Boeing need not complain because they were going to be rewarded too and soon 68 aircraft were ordered from Boeing!

 

 

India imports all passenger and most military aircraft, besides spare parts and high-octane jet fuel. Domestic aviation generates near zero forex revenues and incurs large forex costs ~ a debit in India’s balance of payments. Domestic airline passengers act as importers subsidised by our meagre exporters of textiles, leather, handicrafts, tea, etc. What a managerially-minded PM and Aviation Minister needed to do before yielding to temptations of buying new aircraft was to get tough with the pampered managements and unions of the nationalized airlines and stand up on behalf of ordinary citizens and taxpayers, who, after all, are mostly rail or road-travellers not jet-setters.

 

 

The same pattern of negligent policy-behaviour led Finance Minister P. Chidambaram in an unprecedented step to mention in his 2007 Union Budget Speech the private American companies Blackstone and GE ~ endorsing the Ahluwalia/Deepak Parekh idea that India’s forex reserves may be made available to be lent out to favoured private businesses for purported “infrastructure” development. We may now see chunks of India’s foreign exchange reserves being “borrowed” and never returned ~ a monumental scam in front of the CBI’s noses.

 

 

The Reserve Bank’s highest echelons may have become complicit in all this, permitting and encouraging a large capital flight to take place among the few million Indians who read the English newspapers and have family-members abroad. Resident Indians have been officially permitted to open bank accounts of US $100,000 abroad, as well as transfer gifts of $50,000 per annum to their adult children already exported abroad ~ converting their largely untaxed paper rupees at an artificially favourable exchange-rate.

 

 

In particular, Mr Ratan Tata (under a misapprehension he may do whatever Lakshmi Mittal does) has been allowed to convert Indian rupees into some US$13,000,000,000 to make a cash purchase of a European steel company. The same has been allowed of the Birlas, Wipro, Dr Reddy’s and numerous other Indian corporations in the organised sector ~ three hundred million dollars here, five hundred million dollars there, etc. Western businessmen now know all they have to do is flatter the egos of Indian boxwallahs enough and they might have found a buyer for their otherwise bankrupt or sick local enterprise. Many newcomers to New York City have been sold the Brooklyn Bridge before. “There’s a sucker born every minute” is the classic saying of American capitalism.

 

 

The Sonia-Manmohan Government, instead of hobnobbing with business chambers, needed to get Indian corporations to improve their accounting, audit and governance, and reduce managerial pilfering and embezzlement, which is possible only if Government first set an example.

 

 

Why have Indian foreign currency reserves zoomed up in recent years? Not mainly because we are exporting more textiles, tea, software engineers, call centre services or new products to the world, but because Indian corporations have been allowed to borrow abroad, converting their hoards of paper rupees into foreign debt. Forex reserves are a residual in a country’s international balance of payments and are not like tax-resources available to be spent by Government; India’s reserves largely constitute foreign liabilities of Indian residents. This may bear endless repetition as the PM and his key acolytes seem impervious to normal postgraduate-level economics textbooks.

 

 

Other official fallacies include thinking India’s savings rate is near 32 per cent and that clever bureaucratic use of it can cause high growth. In fact, real growth arises not because of what politicians and bureaucrats do but because of spontaneous technological progress, improved productivity and learning-by-doing of the general population ~ mostly despite not because of an exploitative parasitic State. What has been mismeasured as high savings is actually expansion of bank-deposits in a fractional reserve banking system caused by runaway government deficit-spending.

 

 

Another fallacy has been that agriculture retards growth, leading to nationwide politically-backed attempts at land-grabbing by wily city industrialists and real estate developers. In a hyperinflation-prone economy with wild deficit-spending and runaway money-printing, cheating poor unorganised peasants of their land, when that land is an asset that is due to appreciate in value, has seemed like child’s play.

 

 

What of the Opposition? The BJP/RSS have no economists who are not quacks though opportunists were happy to say what pleased them to hear when they were in power; they also have much implicit support among organised business lobbies and the anti-Muslim senior bureaucracy. The official Communists have been appeased or bought, sometimes so cheaply as with a few airline tickets here and there. The nonsensical “Rural Employment Guarantee” is descending into the wasteland of corruption it was always going to be. The “Domestic Violence Act” as expected has started to destroy India’s families the way Western families have been destroyed. The Arjun-DMK OBC quota corrodes higher education further from its already dismal state. All these were schemes that Congress and Communist cabals created or wholeheartedly backed, and which the BJP were too scared or ignorant to resist.

 

 

And then came Singur and Nandigram ~ where the sheer greed driving the alliance between the Sonia-Manmohan-Pranab Congress and the CPI-M mask that is Buddhadeb, came to be exposed by a handful of brave women like Mamata and Medha.

 

 

A Fiscal U-Turn is Needed For India to Go in The Right Economic Direction

 

Rajiv Gandhi had a sense of noblesse oblige out of remembrance of his father and maternal grandfather. After his assassination, the comprador business press credited Narasimha Rao and Manmohan Singh with having originated the 1991 economic reform. In May 2002, however, the Congress Party itself passed a resolution proposed by Digvijay Singh explicitly stating Rajiv and not either of them was to be so credited. The resolution was intended to flatter Sonia Gandhi but there was truth in it too. Rajiv, a pilot who knew no political economy, was a quick learner with intelligence to know a good idea when he saw one and enough grace to acknowledge it.

 

 

Rule of Law

 

The first time Dr Manmohan Singh’s name arose in contemporary post-Indira politics was on 22 March 1991 when M K Rasgotra challenged the present author to answer how Dr Singh would respond to proposals being drafted for a planned economic liberalisation that had been authorised by Rajiv, as Congress President and Opposition Leader, since September 1990. It was replied that Dr Singh’s response was unknown and he had been heading the “South-South Commission” for Tanzania’s Julius Nyerere, while what needed to be done urgently was make a clear forceful statement to restore India’s credit-worthiness and the confidence of international markets, showing that the Congress at least knew its economics and was planning to take bold new steps in the direction of progress.

 

 

There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior to 1991 as that term is understood worldwide, and scant evidence they have originated liberal economic ideas for India afterwards. Precisely because they represented the decrepit old intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked in the mid-1980s to be part of a “perestroika-for-India” project done at a foreign university ~ the results of which were received, thanks to Siddhartha Shankar Ray, by Rajiv Gandhi in hand at 10 Janpath on 18 September 1990 and specifically sparked the change in the direction of his economic thinking.

 

 

India is a large, populous country with hundreds of millions of materially poor citizens, a weak tax-base, a vast internal and external public debt (i.e. debt owed by the Government to domestic and foreign creditors), massive annual fiscal deficits, an inconvertible currency, and runaway printing of paper-money. It is unsurprising Pakistan’s economy is similar, since it is born of the same land and people. Certainly there have been real political problems between India and Pakistan since the chaotic demobilisation and disintegration of the old British Indian Army caused the subcontinent to plunge into war-like or “cold peace” conditions for six decades beginning with a bloody Partition and civil war in J&K. High military expenditures have been necessitated due to mutual and foreign tensions, but this cannot be a permanent state if India and Pakistan wish for genuine mass economic well-being.

 

 

Even with the continuing mutual antagonism, there is vast scope for a critical review of Indian military expenditures towards greatly improving the “teeth-to-tail” ratio of its fighting forces. The abuse of public property and privilege by senior echelons of the armed forces (some of whom have been keen most of all to export their children preferably to America) is also no great secret.

 

 

On the domestic front, Rajiv was entirely convinced when the suggestion was made to him in September 1990 that an enormous infusion of public resources was needed into the judicial system for promotion and improvement of the Rule of Law in the country, a pre-requisite almost for a new market orientation. Capitalism without the Rule of Law can quickly degenerate into an illiberal hell of cronyism and anarchy which is what has tended to happen since 1991.

 

 

The Madhava Menon Committee on criminal justice policy in July proposed a Hong Kong model of “a single high-tech integrated Criminal Justice complex in every district headquarters which may be a multi-storied structure, devoting the ground floor for the police station including a video-installed interrogation room; the first floor for the police-lockups/sub-jail and the Magistrate’s Court; the second floor for the prosecutor’s office, witness rooms, crime laboratories and legal aid services; the third floor for the Sessions Court and the fourth for the administrative offices etc…. (Government of India) should take steps to evolve such an efficient model… and not only recommend it to the States but subsidize its construction…” The question arises: Why is this being proposed for the first time in 2007 after sixty years of Independence? Why was it not something designed and implemented starting in the 1950s?

 

 

The resources put since Independence to the proper working of our judiciary from the Supreme Court and High Courts downwards have been abysmal, while the state of prisons, borstals, mental asylums and other institutions of involuntary detention is nothing short of pathetic. Only police forces, like the military, paramilitary and bureaucracies, have bloated in size.

 

 

Neither Sonia-Manmohan nor the BJP or Communists have thought promotion of the Rule of Law in India to be worth much serious thought ~ certainly less important than attending bogus international conclaves and summits to sign expensive deals for arms, aircraft, reactors etc. Yet Rajiv Gandhi, at a 10 Janpath meeting on 23 March 1991 when he received the liberalisation proposals he had authorized, explicitly avowed the importance of greater resources towards the Judiciary. Dr Singh and his acolytes were not in that loop, indeed they precisely represented the bureaucratic ancien regime intended to be changed, and hence have seemed quite uncomprehending of the roots of the intended reforms ever since 1991.

 

 

Similarly, Rajiv comprehended when it was said to him that the primary fiscal problem faced by India is the vast and uncontrolled public debt, interest payments on which suck dry all public budgets leaving no room for provision of public goods.

 

 

 

Government accounts


Government has been routinely “rolling over” its domestic debt in the asset-portfolios of the nationalised banks while displaying and highlighting only its new additional borrowing in a year as the “Fiscal Deficit”. More than two dozen States have been doing the same and their liabilities ultimately accrue to the Union too. The stock of public debt in India is Rs 30 trillion (Rs 30 lakh crore) at least, and portends a hyperinflation in the future.

 

 

There has been no serious recognition of this since it is political and bureaucratic actions that have been causing the problem. Proper recognition would entail systematically cleaning up the budgets and accounts of every single governmental entity in the country: the Union, every State, every district and municipality, every publicly funded entity or organisation, and at the same time improving public decision-making capacity so that once budgets and accounts recover from grave sickness over decades, functioning institutions exist for their proper future management. All this would also stop corruption in its tracks, and release resources for valuable public goods and services like the Judiciary, School Education and Basic Health. Institutions for improved political and administrative decision-making are needed throughout the country if public preferences with respect to raising and allocating common resources are to be elicited and then translated into actual delivery of public goods and services. Our dysfunctional legislatures will have to do at least a little of what they are supposed to. When public budgets and accounts are healthy and we have functioning public goods and services, macroeconomic conditions would have been created for the paper-rupee to once more become a money as good as gold ~ a convertible world currency for all of India’s people, not merely the metropolitan special interest groups that have been controlling our governments and their agendas.

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