Two Different Models for India’s Political Economy: Mine & Dr Manmohan Singh’s (Updated Feb 24 2011)


From Facebook

February 24 2011

Subroto Roy does not know if he just heard Manmohan Singh say “inflation will soon come down” — excuse me Dr Singh, but how was it you and all your acolytes uniformly said back in July 2010 that inflation would be down to 6% by Dec 2010? 6%?! 16% more likely! I said. Until he explains his previous error, we may suppose he will repeat it.

January 11 2011:

Subroto Roy can stop the Indian inflation and bring integrity to the currency over time, and Manmohan Singh and his advisers cannot (because they have the wrong economic models/theories/data etc and refuse to change), but then they would have to make me a Minister and I keep getting reminded of what Groucho Marx said about clubs that would have him.

Subroto Roy does not think Dr Manmohan Singh or his acolytes and advisers, or his Finance Minister and his acolytes and advisers, understand Indian inflation. If you do not understand something, you are not likely to change it.



March 6 2010:

Subroto Roy  says the central difference between the Subroto Roy Model for India as described in 1990-1991 to Rajiv Gandhi in his last months, and the Manmohan Singh Model for India that has developed since Rajiv’s assassination, is that by my model, India’s money and public finances would have acquired integrity enough for the Indian Rupee to have become a hard currency of the world economy by now, allowing all one billion Indians access to foreign exchange and precious metals freely, whereas by the model of Dr Singh and his countless supporters, India’s money and public finance remain subject to government misuse and abuse, and access to foreign exchange remains available principally to politicians, bureaucrats, big business and its influential lobbyists, the military, as well as perhaps ten or twenty million nomenclatura in the metropolitan cities.


April 8 2010:

Subroto Roy notes a different way of stating his cardinal difference with the economics of Dr Manmohan Singh’s Govt: in their economics, foreign exchange is “made available” by the GoI for “business and personal uses”. That is different from my economics of aiming for all one billion Indians to have a money that has some integrity, i.e., a rupee that becomes a hard currency of the world economy. (Ditto incidentally with the PRC.)


From Facebook:

Subroto Roy  reads in *Newsweek* today  (Aug 19) Manmohan Singh “engineered the transition from stagnant socialism to a spectacular takeoff”.  This contradicts my experience with Rajiv Gandhi at 10 Janpath in 1990-91. Dr Singh had not returned to India from his years with Julius Nyerere in his final assignment before retiring from the bureaucracy when Rajiv and I first met on 18 September 1990.

“After (Rajiv Gandhi’s) 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… There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior to 1991 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…by Rajiv Gandhi in hand at 10 Janpath on 18 September 1990 and specifically sparked the change in the direction of his economic thinking…”

Subroto Roy notes that current Indian public policy discussion has thus far failed to realise that the rise in money prices of real goods and services is the same as the fall in the real value of money.

Subroto Roy  is interested to hear Mr Jaitley say in Parliament today the credibility of Government economists is at stake. Of course it is. There has been far too much greed and mendacity all around, besides sheer ignorance. (When I taught for a year or so at the Delhi School of Economics as a 22 year old Visiting Assistant Professor in 1977-78, I was told Mr Jaitley was in the law school and a student leader of note. I though was more interested in teaching the usefulness of Roy Radner’s “information structures” in a course on “advanced economic theory”.)

July 31 2010

Subroto Roy reads in today’s pink business newspaper the GoI’s debt level at Rs 38 trillion & three large states (WB, MH, UP) is at Rs 6 trillion, add another 18 for all other large states together, another 5 for all small states & 3 for errors and omissions, making my One Minute Estimate of India’s Public Debt Stock Rs 70 trillion (70 lakh crores). Interest payments at, say, 9%, keep the banking system afloat, extracting oxygen from the public finances like a cyanide capsule.


July 28 2010

Subroto Roy observes Parliament to be discussing Indian inflation but expects a solution will not be found until the problem has been comprehended.

July 27 2010:

Subroto Roy continues to weep at New Delhi’s continual debauching of the rupee.

July 25 2010:

Subroto Roy  has no idea why Dr Manmohan Singh has himself (along with all his acolytes and flatterers in the Government and media and big business), gone about predicting Indian inflation will fall to 6% by December. 16% may be a more likely figure given a public debt at Rs 40 trillion perhaps plus money supply growth above 20%! (Of course, the higher the figure the Government admits, the more it has to pay in dearness allowance to those poor unionized unfortunates known as Government employees, so perhaps the official misunderestimation (sic) of Indian inflation is a strategy of public finance!)


July 12 2010:

Subroto Roy is amused to read Dr Manmohan Singh’s Chief Acolyte say in today’s pink business newspaper how important accounting is in project-appraisal — does the sinner repent after almost single-handedly helping to ruin project-appraisal  & government accounting & macroeconomic planning over decades?  I  rather doubt it.   For myself, I am amused to see chastity now being suddenly preached from within you-know-where.


July 4 2010:

Subroto Roy does not think the Rs 90 billion (mostly in foreign exchange) spent by the Manmohan Singh Government on New Delhi’s “Indira Gandhi International Airport Terminal 3” is conducive to the welfare of the common man (“aam admi”) who travels, if at all, mostly within India and by rail.

Subroto Roy hears Dr Manmohan Singh say yesterday “Global economic recession did not have much impact on us as it had on other countries”. Of course it didn’t. I had said India was hardly affected but for a collapse of exports & some fall in foreign investment. Why did he & his acolytes then waste vast public resources claiming they were rescuing India using a purported Keynesian fiscal “stimulus” (aka corporate/lobbyist pork)?


May 26 2010:

Subroto Roy  would like to know how & when Dr Manmohan Singh will assess he has finished the task/assignment he thinks has been assigned to him & finally retire from his post-retirement career: when his Chief Acolyte declares on TV that 10% real GDP growth has been reached? (Excuse me, but is that per capita? And about those inequalities….?)


Important summits in the USA, Russia, Copenhagen can be attended by the Prime Minister of India as he is not a Member of the Lok Sabha

From Facebook:

Subroto Roy notes that since Dr Manmohan Singh is the first Indian Prime Minister ever to have chosen with deliberation not to be a member of the Lok Sabha, he has been free to hold important summits at the White House, Kremlin, Copenhagen etc while the Lok Sabha debates mundane matters like the Liberhan Commission report, inflation etc.

Why did Manmohan Singh and LK Advani apologise to one another? Is Indian politics essentially collusive, not competitive, aiming only to preserve and promote the post-1947 Dilli Raj at the expense of the whole of India? We seem to have no Churchillian repartee (except perhaps from Bihar occasionally)

Yesterday the PM is reported to have been asked by someone travelling on his aeroplane from Moscow “whether he had forgiven Advani for calling him a ‘weak Prime Minister’”.

The question was absurd, almost ridiculous, typical of our docile ingratiating rather juvenile English-language press and media, as if any issue of forgiveness arises at all about what one politician says during an election campaign about another politician’s performance in office.

Dr Manmohan Singh’s answer was surprising too: “I was compelled to reply to what Advani said…On May 16 when (Advani) telephoned me, he told me that he was hurt by some of my statements. He said he was hurt and regretted his statements… I apologised to him if I have hurt him. I am looking forward to a close relationship with the Leader of the Opposition.”

So LK Advani appears to have apologised to Manmohan Singh and Manmohan Singh to LK Advani for what they said about each other during the recent general election campaign! What is going on? Were they schoolboys exchanging fisticuffs in a school playground or elderly men battling over power and policy in modern Indian politics?

What would we have done if there was a Churchill in Indian politics today – hurling sarcastic insults at domestic opponents and foreign leaders while guiding a nation on its right course during turbulent times?

Churchill once famously said his parents had not shown him “The Boneless Wonder” in PT Barnum’s circus because it was too horrible a sight but now he had finally seen such a “Boneless Wonder” in his opponent on the Treasury Benches, namely, Ramsay MacDonald. Of the same opponent he said later “He has the gift of compressing the largest number of words into the smallest amount of thought”.

When accused of being drunk by a woman MP he replied “And you are very ugly, but tomorrow I’ll be sober”. Today’s politically correct world would scream at far less. Field Marshall Montgomery told Churchill, “I neither drink nor smoke and am 100% fit,” to which Churchill replied, “I drink and smoke and I am 200% fit”. That too would be politically incorrect today.

Churchill described Prime Minister Clement Attlee as “a modest man with much to be modest about”; also about Attlee: “If any grub is fed on Royal Jelly it turns into a Queen Bee”. Yet Attlee had enough dignity and self-knowledge and self-confidence to brush it all off and instead respect and praise him. In the 1954 volume Winston Spencer Churchill Servant of Crown and Commonwealth Attlee added his own tribute to his great opponent: “I recall…the period when he was at odds with his own party and took a seat on the Bench below the Gangway on the Government side. Here he was well placed to fire on both parties. I remember describing him as a heavily armed tank cruising in No Man’s Land. Very impressive were the speeches he delivered as the international horizon grew darker. He became very unpopular with the predominant group in his own party, but he never minded fighting a lone battle.”

Stanley Baldwin, who as PM first appointed Churchill as Chancellor of the Exchequer, once said “There comes Winston with his hundred horsepower mind”. Yet Churchill was to later say harshly “I wish Stanley Baldwin no ill, but it would have been much better had he never lived.”

Of Lenin, Churchill said, he was “transported in a sealed truck like a plague bacillus from Switzerland into Russia”. Of Molotov: “I have never seen a human being who more perfectly represented the modern concept of a robot.” Of Hitler, “If [he] invaded hell I would at least make a favourable reference to the devil in the House of Commons”. Of De Gaulle, “He was a man without a country yet he acted as if he was head of state”.” Of John Foster Dulles, “[He] is the only bull who carries his china shop with him”. Of Stafford Cripps, British Ambassador to the USSR, “…a lunatic in a country of lunatics”; and also “There but for the Grace of God, goes God”.

Decades later, that great neo-Churchillian Margaret Thatcher was on the receiving end of a vast amount of sarcasm. “President Mitterrand once famously remarked that Thatcher had ‘the eyes of Caligula and the lips of Marilyn Monroe’. Rather less flatteringly, Dennis Healey described her as Attila the Hen. She probably took both descriptions as compliments.” (Malcolm Rifkind in Margaret Thatcher’s Revolution: How it Happened and What it Meant edited by Subroto Roy and John Clarke, 2005).

Politics is, and should be, grown up stuff because it deals with human lives and national destinies, and really, if you can’t take the heat please do not enter the kitchen. The slight Churchillian sarcasm that does arise within modern Indian politics comes very occasionally from Bihar but nowhere else, e.g. about the inevitability of aloo in samosas and of bhaloos in the jungle but no longer of Laloo being in the seat of power. In general, everyone seems frightfully sombre and self-important though may be in fact short of self-knowledge and hence self-confidence.

What had Manmohan Singh said about LK Advani that he felt he had to apologise for? That Advani had no substantial political achievement to his credit and did not deserve to be India’s PM. Manmohan was not alone in making the charge – Sonia Gandhi, Rahul Gandhi and numerous other spokesmen and representatives of their party said the same. Has Manmohan’s apology to Advani been one on behalf of the whole Congress Party itself?

Was Advani’s apology to Manmohan one on behalf of the whole BJP too?

What had the BJP charged Manmohan with that Advani felt he had to apologise for?  Being a “weak PM”.

Hmmm. Frankly, thinking about it, it is hard to count who has not been weak as a PM in India’s modern history.

Certainly Vallabhai Patel as a kind of co-PM was decisive and far from weak back in 1947-48.

Lal Bahadur Shastri was not weak when he told Pakistan that a Pakistani attack on Kashmir would result in an Indian attack on Pakistan.

Indira Gandhi was not weak when she resisted the Yahya Khan-Tikka Khan tyranny against Bangladesh.

Had he not been assassinated, Rajiv Gandhi in a second term would have been decisive and not weak in facing up to and tackling the powerful lobbies and special interest groups that have crippled our domestic economic policy for decades.

But the number of such examples may be counted by hand.  Perhaps VP Singh might count, riding in an open jeep to Amritsar, as might AB Vajpayee’s Pokhran II and travelling on a bus to Lahore. In general, the BJP’s charge that Manmohan was “weak” may have constructively led to serious discussion in the country about the whole nature of the Prime Ministership in modern India, which means raising a whole gamut of issues about Indian governance – about India being the softest of “soft states”, with the softest of “soft government budget constraints” (i.e., endless deficit finance and paper money creation) etc.

Instead, what we have had thus far is apologies being exchanged for no real political reason between the leaderships of the Government and the Opposition. If two or three sellers come to implicitly carve up a market between themselves they are said by economic theory to be colluding rather than being in competition. Indian politics may be revealing such implicit collusive behaviour. The goal of this political oligopoly would seem to be to preserve and promote the status quo of the post-1947 Dilli Raj with its special hereditary nomenclatura, at the expense of anonymous diffused teeming India.

Subroto Roy, Kolkata

Postscript July 15 2009: Churchill’s mature opinion of Baldwin was one of the fullest praise at the 20 May 1950 unveiling of a memorial to him.  See his In the Balance, edited by Randolph S Churchill, 1951, p. 281

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:





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




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.




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




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)


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Parliament is supposed to control the Government, not be bullied or intimidated by it: Will Rahul Gandhi be able to lead the Backbenches in the 15th Lok Sabha?

Any Lok Sabha MP who neither sits with the Opposition nor is a sworn-in member of the Government is a Backbench MP of the Government party or its coalition.

Shrimati Sonia Gandhi is the most prominent of such Backbench MPs in the 15th Lok Sabha, just as she was of the 14th Lok Sabha, and has chosen to be in a most peculiar position from the point of view of parliamentary law. As the leader of the largest parliamentary party, she could have been not merely a member of the Government but its Prime Minister. She has in fact had a decisive role in determining the composition of the Manmohan Government as well as its policies. She in fact sits on the Frontbenches in the Lok Sabha along with the Manmohan Government. But she is not a member of the Government and is, formally speaking, a Backbench MP who is choosing to sit in the Frontbenches.

(Dr Manmohan Singh himself, not being a member of the Lok Sabha, may, formally speaking, sit or speak from among the Frontbenches of his own Government only by invitation of the Lok Sabha Speaker as a courtesy – such would have been the cardinal reason why Alec Douglas-Home resigned from being Lord Home and instead stood for a House of Commons seat when he was appointed British Prime Minister.)

Sonia Gandhi’s son, Mr Rahul Gandhi, is also a Backbench MP. From all accounts, including that of Dr Singh himself, he could have been a member of Dr Singh’s Government but has specifically chosen not to be. He has appeared to have had some much lesser role than Sonia Gandhi in determining the composition of the Government and its policies but he is not a member of it. He is, formally speaking, a Backbench MP, indeed the most prominent to actually sit in the Backbenches, as he had done in the 14th Lok Sabha, which, it is to be hoped, he does in the 15th Lok Sabha too.

Now Rahul Gandhi, Sonia Gandhi and their 541 other fellow 15th Lok Sabha MPs were declared winners by May 16 2009 having won the Indian people’s vote.

(Incidentally, I predicted the outcome here two hours before polls closed on May 13 – how I did so is simply by having done the necessary work of determining that some 103 million people had voted for Congress in 2004 against some 86 million for the BJP; in my assessment Congress had done more than enough by way of political rhetoric and political reality to maintain if not extend that difference in 2009, i.e., the BJP had not done nearly enough to even begin to get enough of a net drift in its favour. I expect when the data are out it shall be seen that the margin of the raw vote between them has been much enlarged from 2004.)

As I have pointed out here over the last fortnight, there was no legal or logical reason why the  whole 15th Lok Sabha could not have been sworn in latest by May 18 2009.

Instead, Dr Manmohan Singh on May 18 held a purported “Cabinet” meeting of the defunct 14th Lok Sabha – an institution that had been automatically dissolved when Elections had been first announced! The Government then went about forming itself over two weeks despite the 15th Lok Sabha, on whose confidence it depended for its political legitimacy, not having been allowed to meet. Everyone – the Congress Party’s Supreme Court advocates, the Lok Sabha Secretariat, the Election Commission, Rashtrapati Bhavan too –  seems to have gotten it awfully wrong by placing the cart before the horse.

In our system it is Parliament that is sovereign, not the Executive Government. In fact the Executive is accountable to Parliament, specifically the Lok Sabha, and is supposed to be guided by it as well as hold its confidence at all times.

What has happened instead this time is that Government ministers have been busy taking oaths and entering their offices and making policy-decisons days before they have taken their oaths and their seats as Lok Sabha MPs!  The Government has thus started off by diminishing Parliament’s sovereignty and this should not be allowed to happen again.

(Of course why it took place is because of the peculiarity of the victory relative to our experience in recent decades – nobody could remember parliamentary traditions from Nehru’s time in the 1950s.  Even so, someone, e.g. the former Speaker, should have known and insisted upon explaining the relevant aspect of parliamentary law and hence avoided this breach.)

A central question now is whether a Government which has such a large majority, and which is led by someone in and has numerous ministers from the Rajya Sabha, is going to be adequately controlled and feel itself accountable to the Lok Sabha.

Neither of the Lok Sabha’s most prominent Backbenchers, Sonia Gandhi and Rahul Gandhi, have thus far distinguished themselves as Parliamentarians on the floor of the Lok Sabha. In the 14th Lok Sabha, Sonia Gandhi, sitting in the Frontbenches, exercised the  enormous control that she did over the Government not on the floor of the House itself but  from outside it.

It would be best of all if she chose in the 15th Lok Sabha to actually physically sit in the Congress’s Backbenches because that would ensure best that the Government Party’s ministers in the Frontbenches will keep having to seek to be accountable to the  Backbenches!

But this seems unlikely to happen in view of the fact she herself seems to have personally influenced the choice of a Speaker for the 15th Lok Sabha and it may be instead expected that she continues to sit on the Frontbenches with the Government without being a member of it.

That leaves Rahul Gandhi. If he too comes to be persuaded by the sycophants to sit on the Frontbenches with the Government, that will not be a healthy sign.

On the other hand, if he continues to sit on the Backbenches, he may be able to have a salubrious influence on the 15th Lok Sabha fulfilling its responsibility of seeking to seriously control and hold accountable the Executive Government,  and not be bullied or intimidated by it. His paternal grandfather, Feroze Gandhi, after all, may have been India’s most eminent and effective Backbench MP yet.

Subroto Roy, Kolkata

Note to Posterity: 79 Ministers in office but no 15th Lok Sabha until June 1 2009!

The Government of India’s 79 Ministers have taken to their offices like bees to honey yet the 15th Lok Sabha that the people of India elected a fortnight ago is still three days from being convened.

In other words, people have been taking oaths and entering offices as Ministers even before they have taken their oaths or their seats in the 15th Lok Sabha which accords the Government its political legitimacy by its confidence!

Let posterity recall that the 15th Lok Sabha was made to needlessly wait from May 16 2009 until June 1 2009 and despite this the Government formed itself and entered office during that time.  It cannot be something that helps the psychology or morale of  our elected representatives nor be something conducive to the smooth working of the House.

It is all a terrible constitutional muddle  which I doubt the PM or his party or Government, or even the Opposition, will admit to or want to clear up on their own but shall probably have to await a Constitutional Bench of the Supreme Court of India telling them  what  parliamentary law is in due course.

Subroto Roy, Kolkata

Eleven days and counting after the 15th Lok Sabha was elected and still no Parliament of India! (But we do have 79 Ministers — might that be a world record?)

A lawyer friend tells me she thinks it a “technicality” that there is no Lok Sabha or Parliament in India today despite eleven long days and nights having passed since the 15th Lok Sabha came to be elected by the people of India.  “At least we did not get Advani and Modi to rule”, is how she sought to justify the current circumstance.   I am afraid I think she has produced a non sequitur, and also forgotten the constitutional law she would have read as a student.

The best argument that I think the Government of India shall be able to give justifying their legal error in not having the 15th Lok Sabha up and running yet 11 days after India’s people have spoken would run something like this:

(1) The President of India invites a Council of Ministers led by a PM to form the government and has done so.

(2) The President must be satisfied that the PM commands a majority in the Lok Sabha, and the President has been satisfied by the 322  “letters of support” that the PM produced.

(3) The Government of the day calls parliamentary sessions and does so at its discretion, and the Government of the day headed by this PM has announced when it shall call the 15th Lok Sabha which will be in a few days yet.

Any such argument, I am afraid, would be specious because it simply puts the cart before the horse.

Parliament is sovereign in India, to repeat what I have said several times before.

Parliament is sovereign in India — not even the President who is the symbol of that sovereignty.  We do not follow the British quite exactly in this because we are a republic and not a monarchy.  In Britain sovereignty rests with “The King in Parliament”.  With us, Parliament is sovereign and the President is the symbol of that sovereignty.  In all matters of state, our President must act in a manner that Parliament and parliamentary law says.

Parliament is sovereign in India — not the Executive Government, certainly not its largest political party or its leader.

Parliament is sovereign in India because the people of India have chosen it to be so within the Constitution of India.

Parliament is sovereign in India and the people of India have elected the 15th Lok Sabha which has still not been allowed to meet eleven days later.

To the contrary, as noted days ago, the purported “Cabinet” of the 14th Lok Sabha, a dead institution, met on May 18 2009, some 48 hours after the 15th Lok Sabha had already been declared!   The 14th Lok Sabha in fact stood automatically dissolved in law when General Elections came to be announced.

Is all this merely a “technicality” as my friend believes?  I think not.

Executive Government in India derives its political legitimacy from being elected  by Parliament,  i.e., from holding the confidence of Parliament, and that means the Lok Sabha.

The Government of the day might  for sake of convenience have a prerogative of calling sessions of the 15th Lok Sabha once it has been constituted but the Government of the day cannot logically constitute a Lok Sabha after a General Election because it itself receives legitimacy from such a Lok Sabha.

If the 15th Lok Sabha has not met, confidence in any Executive has yet to be recorded, and hence any such Government has yet to receive legitimacy.

Do “322 letters of support” suffice?  Hardly.  They are signed after all by persons who have yet to take their seats in the Lok Sabha!  (Let us leave aside the fact that the PM, not being a member of the Lok Sabha, is in this case unable to be one of those 322 himself!)

Yet we have 79 “Ministers” of this new “Government” holding press-conferences and giving out free-bees and favours etc already.  As I have said before, Ambedkar, Nehru and others of their generation, plus Indira and Rajiv too, would all have been appalled.

Because the incompetence of the fascists and communists in the Opposition may continue to  be expected, it will be up to ordinary citizens and voters of India to point out such  simple truths whenever the Emperor is found to be naked.  (Our docile juvenile ingratiating media may well remain mostly hopeless.)

Subroto Roy, Kolkata.