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

 

 

12 June 2009

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

Prime Minister of India

 

 

Respected Pradhan Mantriji:

 

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Towards an Agenda for the 1990s created and edited by myself and WE James at the University of Hawaii since 1986 — the unpublished manuscript of that book had reached Rajivji by my hand when he and I first met on September 18 1990.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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

 

1.   Germany & Japan

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

 

 

3.  Logic of your model

 

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

 

Let

 

 

Kt be capital stock

 

Yt be national output

 

It be the level of real investment

 

St be the level of real savings

 

By definition

 

It = K t+1 – Kt

 

By assumption

 

Kt = k Yt 0 < k < 1

 

St = sYt 0 < s <1

 

In equilibrium ex ante investment equals ex ante savings

 

It = St

 

Hence in equilibrium

 

sYt = K t+1 – Kt

 

Or

 

s/k = g

 

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

 

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

 

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

 

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

 

Assume

 

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

 

Et = E for all t

 

Balance of payments is

 

Bt = Mt – Et – Ft

 

In equilibrium It = St + Bt

 

Or

 

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

 

 

 

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

 

s/k = g

 

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

 

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

 

 

5. Technological progress and the mainsprings of real economic growth

 

 

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

 

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

 

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

 

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

 

I said in the 2007 article referred to above:

 

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

 

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

 

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

 

 

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

 

 

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

 

 

 

 

 

 

 

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

 

 

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

 

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

 

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

 

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

 

 

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

 

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

 

 

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

 

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

 

With my warmest personal regards and respect, I remain,

Cordially yours

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

 

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

Advertisements
Posted in 15th Lok Sabha, Academic economics, Academic freedom, Academic research, Adam Smith, Banking, Bengal, Big Business and Big Labour, BJP, Cambridge Univ Economics, Capital and labour, China's macroeconomics, China's savings rate, China's Economy, Congress Party, Deposit multiplication, Economic Policy, Economic Theory, Economic Theory of Growth, Economic Theory of Value, Economics of Public Finance, Enterprise and entrepeneurship, European Community, Financial Management, Financial markets, Foreign exchange controls, General equilbrium theory, Germany, Governance, Government accounting, Government Budget Constraint, Government of India, Growth rates (economic), India's Big Business, India's Government economists, India's savings rate, India's 1991 Economic Reform, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's corporate governance, India's Economy, India's farmers, India's Government Budget Constraint, India's Government Expenditure, India's grassroots activists, India's inflation, India's Land, India's Lok Sabha, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Parliament, India's political lobbyists, India's political parties, India's poverty, India's Public Finance, India's Reserve Bank, India's Revolution, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest group politics, Japan, London School of Economics, Mamata Banerjee, Manmohan Singh, Margaret Thatcher, Margaret Thatcher's Revolution, Martin Ricketts, Milton Friedman, Monetary Theory, Money and banking, Non-Resident Indians, OECD savings rates, Paper money and deposits, Parliamentary Backbenchers, Political Economy, Public Choice/Public Finance, Rahul Gandhi, Rajiv Gandhi, Rajiv Gandhi's assassination, Redeposits, Siddhartha Shankar Ray. 1 Comment »

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

Unaccountable Delhi: India’s Separation of Powers’ Doctrine

UNACCOUNTABLE DELHI

India’s Separation Of Powers’ Doctrine

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

By Subroto Roy

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

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

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

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

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

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

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

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

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

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

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