My Recent Works, Interviews etc on India’s Money, Public Finance, Banking, Trade, BoP, Land, etc (an incomplete list)

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My “Critique of Monetary Ideas of Manmohan & Modi: the Roy Model explaining to Bimal Jalan, Nirmala Sitharaman, RBI etc what it is they are doing” of 2019 is here.

 

 

My critical assessment dated 23 August 2013 of Professors Jagdish Bhagwati & Amartya Sen and Dr Manmohan Singh is here

 

 

My critique of PM Modi’s 8 November 2016 statement began on Twitter immediately, and is  summarized here “Modi & Monetary Theory: Economic Consequences of the Prime Minister of India”

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My critical assessment dated 19 August 2013 of Professor Raghuram Rajan is here and here.

My 3 Dec 2012 Delhi talk on India’s Money is now available at You-Tube in an audio version here

My July 2012 article “India’s Money” in the Caymans Financial Review is here and here https://independentindian.com/2012/07/21/my-article-indias-money-in-the-cayman-financial-review-july-2012/

My 5 December 2012 interview by Mr Paranjoy Guha Thakurta, on Lok Sabha TV, the channel of India’s Lower House of Parliament, broadcast for the first time on 9 December 2012 on Lok Sabha TV, is here and here  in two parts.

My interview by GDI Impuls banking quarterly of  Zürich  published on 6 Dec 2012 is here.

My interview by Ragini Bhuyan of Delhi’s Sunday Guardian published on 16 Dec 2012  is here.

 “Monetary Integrity and the Rupee” (2008)

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

  “India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

 “Fallacious Finance” (2007)

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

 “Growth and Government Delusion” (2008)

https://independentindian.com/2008/02/22/growth-government-delusion/

 “Distribution of Govt of India Expenditure (Net of Operational Income) 1995”
https://independentindian.com/2008/07/27/distribution-of-govt-of-india-expenditure-net-of-operational-income-1995/

“India in World Trade & Payments” (2007)

https://independentindian.com/2007/02/12/india-in-world-trade-payments/

“Path of the Indian Rupee 1947-1993″ (1993)

https://independentindian.com/1993/06/01/path-of-the-indian-rupee-1947-1993/

“Our Policy Process” (2007)

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

“Indian Money and Credit” (2006)

https://independentindian.com/2006/08/06/indian-money-and-credit/

“Indian Money and Banking” (2006)

https://independentindian.com/2006/04/23/indian-money-and-banking/

“Indian Inflation” (2008)

https://independentindian.com/2008/04/16/indian-inflation-upside-down-economics-from-new-delhis-establishment/

 How the Liabilities/Assets Ratio of Indian Banks Changed from 84% in 1970 to 108% in 1998 https://independentindian.com/2008/10/20/how-the-liabilitiesassets-ratio-of-indian-banks-changed-from-84-in-1970-to-108-in-1998/

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“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

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

“How to Budget” (2008)

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

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

https://independentindian.com/2005/10/27/waffle-but-no-models-of-monetary-policy-the-rbi-and-financial-repression/

“The Dream Team: A Critique” (2006)

https://independentindian.com/2006/01/08/the-dream-team-a-critique/

 

“Against Quackery” (2007)

https://independentindian.com/2007/09/24/against-quackery/

“Mistaken Macroeconomics” (2009)

https://independentindian.com/2009/06/12/mistaken-macroeconomics-an-open-letter-to-prime-minister-dr-manmohan-singh/

Towards a Highly Transparent Fiscal & Monetary Framework for India’s Union & State Governments (RBI lecture 29 April 2000)

https://independentindian.com/2000/04/29/towards-a-highly-transparent-fiscal-monetary-framework-for-india%E2%80%99s-union-state-governments/

“The Indian Revolution (2008)”

https://independentindian.com/2008/12/08/the-indian-revolution/

Can India Become an Economic Superpower or Will There Be a Monetary Meltdown? (2005)

https://independentindian.com/2005/05/05/can-india-become-an-economic-superpower-or-will-there-be-a-monetary-meltdown-2005/

Memo to Kaushik Basu, 2010

Land, Liberty, & Value, 2006

https://independentindian.com/2006/12/31/land-liberty-value/

On Land-Grabbing, 2007

https://independentindian.com/2007/01/14/on-land-grabbing/

No Marxist MBAs? An amicus curiae brief for the Honourable High Court

https://independentindian.com/2007/08/29/no-marxist-mbasan-amicus-curae-brief-for-the-honourable-high-court/

Coverage in The *Asian Age*/*Deccan Herald* of 4 Dec 2012.

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Posted in Academic research, Amartya Sen, Arvind Panagariya, Bhagwati-Sen spat, Britain in India, China's macroeconomics, China's savings rate, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of exchange controls, Economics of Public Finance, GDI Impuls Zurich, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's 1991 Economic Reform, India's balance of payments, India's Banking, India's Budget, India's Capital Markets, India's corporate governance, India's corruption, India's currency history, India's Economic History, India's Economy, India's Exports, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Military Defence, India's Monetary & Fiscal Policy, India's Money, India's nomenclatura, India's political lobbyists, India's Politics, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, Inflation, Institute of Economic Affairs, International economics, Jagdish Bhagwati, Jean Drèze, Lok Sabha TV, Macroeconomics, Manmohan Singh, Microeconomic foundations of macroeconomics, Milton Friedman, Raghuram Govind Rajan, Raghuram Rajan, Rajiv Gandhi, Reverse-Euro Model for India, Sen-Bhagwati spat, Sonia Gandhi. 1 Comment »

Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform? Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington? Judge the evidence for yourself. And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform?  Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington?  Judge the evidence for yourself.  And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

 

Contents

 

Part I:  Facts vs Fiction, Flattery, Falsification, etc

 

1. Problem

2.    Rajiv Gandhi, Siddhartha Shankar Ray, Milton Friedman & Myself

3.     Jagdish Bhagwati & Manmohan Singh?  That just don’t fly!

 4.    Amartya Sen’s Half-Baked Communism:  “To each according to his need”?

 

  Part II:    India’s Right Road Forward Now: Some Thoughtful Analysis for Grown Ups

5.   Transcending a Left-Right/Congress-BJP Divide in Indian Politics

6.   Budgeting Military & Foreign Policy

7.    Solving the Kashmir Problem & Relations with Pakistan

8.  Dealing with Communist China

9.   Towards Coherence in Public Accounting, Public Finance & Public Decision-Making

10.   India’s Money: Towards Currency Integrity at Home & Abroad

 

 

Part I:  Facts vs Fiction, Flattery, Falsification, etc

 

1. Problem


Arvind Panagariya says in the Times of India of 27 July 2013

 

 “…if in 1991 India embraced many of the Track-I reforms, writings by Sen played no role in it… The intellectual origins of the reforms are to be found instead in the writings of Bhagwati, both solely and jointly with Padma Desai and T N Srinivasan….”

 

Now Amartya Sen has not claimed involvement in the 1991 economic reforms so we are left with Panagariya claiming

 

“The intellectual origins of the reforms are to be found instead in the writings of Bhagwati…”

 

Should we suppose Professor Panagariya’s master and co-author Jagdish Bhagwati himself substantially believes and claims the same?  Three recent statements from Professor Bhagwati suffice by way of evidence:

 

(A)  Bhagwati said to parliamentarians in the Lok Sabha on 2 December 2010 about the pre-1991 situation:

 

“This policy framework had been questioned, and its total overhaul advocated, by me and Padma Desai in writings through the late 1960s which culminated in our book, India: Planning for Industrialization (Oxford University Press: 1970) with a huge blowback at the time from virtually all the other leading economists and policymakers who were unable to think outside the box. In the end, our views prevailed and the changes which would transform the economy began, after an external payments crisis in 1991, under the forceful leadership of Prime Minister Manmohan Singh who was the Finance Minister at the time….”

 

(B)  Bhagwati said to Economic Times on 28 July 2013:

 

“When finance minister Manmohan Singh was in New York in 1992, he had a lunch for many big CEOs whom he was trying to seduce to come to India. He also invited me and my wife, Padma Desai, to the lunch. As we came in, the FM introduced us to the invitees and said: ‘These friends of mine wrote almost a quarter century ago [India: Planning for Industrialisation was published in 1970 by Oxford] recommending all the reforms we are now undertaking. If we had accepted the advice then, we would not be having this lunch as you would already be in India’.”

 

(C)  And Bhagwati said in Business Standard of 9 August 2013:

 

“… I was among the intellectual pioneers of the Track I reforms that transformed our economy and reduced poverty, and witness to that is provided by the Prime Minister’s many pronouncements and by noted economists like Deena Khatkhate.. I believe no one has accused Mr. Sen of being the intellectual father of these reforms. So, the fact is that this huge event in the economic life of India passed him by…”

 

From these pronouncements it seems fair to conclude Professors Bhagwati and Panagariya are claiming Bhagwati has been the principal author of “the intellectual origins” of India’s 1991 reforms, has been their “intellectual father” or at the very least has been “among the intellectual pioneers” of the reform (“among” his own collaborators and friends, since none else is mentioned).  Bhagwati has said too his friend Manmohan Singh as Finance Minister participated in the process while quoting Manmohan as having said Bhagwati was the principal author. 

 

Bhagwati’s opponent in current debate,  Amartya Sen, has been in agreement with him that Manmohan, their common friend during college days at Cambridge in the 1950s, was a principal originating the 1991 reforms, saying to Forbes in 2006:

 

“When Manmohan Singh came to office in the early 1990s as the newly appointed finance minister, in a government led by the Congress Party, he knew these problems well enough, as someone who had been strongly involved in government administration for a long time.”

 

In my experience, such sorts of claims, even in their weakest form, have been, at best, scientifically sloppy and unscholarly,  at worst mendacious suppressio veri/suggestio falsi, and in between these best and worst interpretations, examples of academic self-delusion and mutual flattery.  We shall see Bhagwati’s opponent, Amartya Sen, has denied academic paternity of recent policies he has spawned while appearing to claim academic paternity of things he has not!  Everyone may have reasonably expected greater self-knowledge, wisdom and scholarly values of such eminent academics.  Their current spat has instead seemed to reveal something rather dismal and self-serving. 

 

You can decide for yourself where the truth, ever such an elusive and fragile thing, happens to be and what is best done about it.   Here is some evidence.

 

 

2.  Rajiv Gandhi, Siddhartha Shankar Ray,  Milton Friedman & Myself

 

Professor Arvind Panagariya is evidently an American economics professor of Indian national origin who holds the Jagdish Bhagwati Chair of Indian Political Economy at Columbia University.   I am afraid I had not known his name until he mentioned my name in Economic Times of  24 October 2001.   He said

 

panagariya

 

In mentioning the volume “edited by Subroto Roy and William E  James”,  Professor Panagariya did not appear to find the normal scientific civility to identify our work by name, date or publisher.  So here that is now:

 

 

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This was a book published in 1992 by the late Tejeshwar Singh for Sage.  It resulted from the University of Hawaii Manoa perestroika-for-India project, that I and Ted James created and led between 1986 and 1992/93.   (Yes, Hawaii — not Stanford, Harvard, Yale, Columbia or even Penn, whose India-policy programs were Johnny-come-latelies a decade or more later…)   There is a sister-volume too on Pakistan, created by a parallel project Ted and I had led at the same time:

 

 

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In 2004 from Britain, I wrote to the 9/11 Commission saying if our plan to study Afghanistan after India and Pakistan had not been thwarted by malign local forces among our sponsors themselves, we, a decade before the September 11 2001 attacks on the USA, may  just have come up with a pre-emptive academic analysis.   It was not to be.

 

Milton Friedman’s chapter that we published for the first time was a memorandum he wrote in November 1955 for the Government of India which the GoI had effectively suppressed.  I came to know of it while a doctoral student at Cambridge under Frank Hahn, when at a conference at Oxford about 1979-1980, Peter Tamas Bauer sat me down beside him and told me the story.  Later in Blacksburg about 1981, N. Georgescu-Roegen on a visit from Vanderbilt University told me the same thing.  Specifically, Georgescu-Roegen told me that leading Indian academics had almost insulted Milton in public which Milton had borne gamely; that after Milton had given a talk in Delhi to VKRV Rao’s graduate-students,  a talk Georgescu-Roegen had been present at, VKRV Rao had addressed the students and told them in all seriousness “You have heard what Professor Friedman has to say, if you repeat what he has said in your exams, you will fail”.

 

In 1981-1982 my doctoral thesis emerged, titled “On liberty & economic growth: preface to a philosophy for India”,

 

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My late great master in economic theory, Frank Hahn (1925-2013), found what I had written to be a “good thesis” bringing “a good knowledge of economics and of philosophy to bear on the literature on economic planning”, saying I had  shown “a good knowledge of economic theory” and my “critique of Development Economics was powerful not only on methodological but also on economic theory grounds”.  

 

I myself said about it decades later “My original doctoral topic in 1976  ‘A monetary theory for India’ had to be altered not only due to paucity of monetary data at the time but because the problems of India’s political economy and allocation of resources in the real economy were far more pressing. The thesis that emerged in 1982 … was a full frontal assault from the point of view of microeconomic theory on the “development planning” to which everyone routinely declared their fidelity, from New Delhi’s bureaucrats and Oxford’s “development” school to McNamara’s World Bank with its Indian staffers.  Frank Hahn protected my inchoate liberal arguments for India; and when no internal examiner could be found, Cambridge showed its greatness by appointing two externals, Bliss at Oxford and Hutchison at Birmingham, both Cambridge men. “Economic Theory and Development Economics” was presented to the American Economic Association in December 1982 in company of Solow, Chenery, Streeten, and other eminences…” How I landed on that eminent AEA panel in December 1982 was because its convener Professor George Rosen of the University of Illinois recruited me overnight — as a replacement for Jagdish Bhagwati, who had had to return to India suddenly because of a parental death.  The results were published in 1983 in World Development.

 

Soon afterwards, London’s Institute of Economic Affairs published Pricing, Planning and Politics: A Study of Economic Distortions in India.  This slim work was the first classical liberal critique of post-Mahalonobis Indian economic thought since BR Shenoy’s original criticism decades earlier.  It became the subject of The Times’ lead editorial on its day of publication 29 May 1984 — provoking the Indian High Commission in London to send copies to the Finance Ministry in Delhi where it apparently caused a stir, or so I was told years later by Amaresh Bagchi who was a recipient of it at the Ministry.

 

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The Times had said

 

“When Mr. Dennis Healey in the Commons recently stated that Hongkong, with one per cent of the population of India has twice India’s trade, he was making an important point about Hongkong but an equally important point about India. If Hongkong with one per cent of its population and less than 0.03 per cert of India’s land area (without even water as a natural resource) can so outpace India, there must be something terribly wrong with the way Indian governments have managed their affairs, and there is. A paper by an Indian economist published today (Pricing, Planning and Politics: A Study of Economic Distortions in India by Subroto Roy, IEA £1.80) shows how Asia’s largest democracy is gradually being stifled by the imposition of economic policies whose woeful effect and rhetorical unreality find their echo all over the Third World. As with many of Britain’s former imperial possessions, the rot set in long before independence. But as with most of the other former dependencies, the instrument of economic regulation and bureaucratic control set up by the British has been used decisively and expansively to consolidate a statist regime which inhibits free enterprise, minimizes economic success and consolidates the power of government in all spheres of the economy. We hear little of this side of things when India rattles the borrowing bowl or denigrates her creditors for want of further munificence. How could Indian officials explain their poor performance relative to Hongkong? Dr Roy has the answers for them. He lists the causes as a large and heavily subsidized public sector, labyrinthine control over private enterprise, forcibly depressed agricultural prices, massive import substitution, government monopoly of foreign exchange transactions, artificially overvalued currency and the extensive politicization of the labour market, not to mention the corruption which is an inevitable side effect of an economy which depends on the arbitrament of bureaucrats. The first Indian government under Nehru took its cue from Nehru’s admiration of the Soviet economy, which led him to believe that the only policy for India was socialism in which there would be “no private property except in a restricted sense and the replacement of the private profit system by a higher ideal of cooperative service.” Consequently, the Indian government has now either a full monopoly or is one of a few oligipolists in banking, insurance, railways, airlines, cement, steel, chemicals, fertilizers, ship-building, breweries, telephones and wrist-watches. No businessman can expand his operation while there is any surplus capacity anywhere in that sector. He needs government approval to modernize, alter his price-structure, or change his labour shift. It is not surprising that a recent study of those developing countries which account for most manufactured exports from the Third World shows that India’s share fell from 65 percent in 1953 to 10 per cent in 1973; nor, with the numerous restrictions on inter-state movement of grains, that India has over the years suffered more from an inability to cope with famine than during the Raj when famine drill was centrally organized and skillfully executed without restriction. Nehru’s attraction for the Soviet model has been inherited by his daughter, Mrs. Gandhi. Her policies have clearly positioned India more towards the Soviet Union than the West. The consequences of this, as Dr Roy states, is that a bias can be seen in “the antipathy and pessimism towards market institutions found among the urban public, and sympathy and optimism to be found for collectivist or statist ones.” All that India has to show for it is the delivery of thousands of tanks in exchange for bartered goods, and the erection of steel mills and other heavy industry which help to perpetuate the unfortunate obsession with industrial performance at the expense of agricultural growth and the relief of rural poverty.”…..

 

I felt there were inaccuracies in this and so replied  dated 4 June which The Times published on 16 June 1984:

 

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Milton and I met for the first time in the Fall of 1984 at the Mont Pelerin Society meetings at Cambridge when I gave him a copy of the IEA monograph, which he came to think extremely well of.   I told him I had heard of his 1955 document and asked him for it; he sent me the original blue/purple version of this soon thereafter.

 

[That original document was, incidentally,  in my professorial office among all my books, papers, theses and other academic items including my gown when I was attacked in 2003 by a corrupt gang at IIT Kharagpur —  all yet to be returned to me by IIT despite a High Court order during my present ongoing battle against corruption there over a USD 1.9 million scam !… Without having ever wished to, I have had to battle India’s notorious corruption first hand for a decade!]

 

I published Milton’s document for the first time on 21 May 1989 at the conference of the Hawaii project over the loud objection of assorted leftists… 

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Amartya Sen, Jagdish Bhagwati, Manmohan Singh or any of their acolytes will not be seen in this group photograph dated 21 May 1989 at the UH President’s House, because they were not there.  The Government of India was represented by the Ambassador to Washington, PK Kaul, as well as the Consul General in San Francisco, KS Rana (later Ambassador to Germany), besides the founding head of ICRIER who had invited himself.  

 

Manmohan Singh was not there as he precisely represented the Indian economic policy establishment I had been determined to reform!   In any case, he had left India about 1987 on his last assignment before retirement, with Julius Nyerere of Tanzania relating to the “South-South Commission”.  

 

I have said over more than a half dozen years now that there is no evidence whatsoever of Manmohan Singh having been a liberal economist in any sense of that word at any time before 1991, and scant evidence that he originated any liberal economic ideas since.  The widespread worldwide notion that he is to be credited for originating a sudden transformation of India from a path of pseudo-socialism to one of pseudo-liberalism has been without basis in evidence — almost entirely a political fiction, though an explicable one and one which has served, as such political fictions do, the purposes of those who invent them.

 

Jagdish Bhagwati and Amartya Sen were in their mid 50s and were two of the three senior-most Indians in US academic economics at the time.  I and Ted James, both in our 30s, decided to invite both Bhagwati and Sen to the Hawaii project-conference as distinguished guests but to do so somewhat insincerely late in the day, predicting they would decline, which is what they did, yet they had come to be formally informed of what we were doing.  We had a very serious attitude that was inspired a bit, I might say, by Oppenheimer’s secret “Manhattan project” and we wanted neither press-publicity nor anyone to become the star who ended up hogging the microphone or the limelight.

 

Besides, and most important of all, neither Bhagwati nor Sen had done work in the areas we were centrally interested in, namely, India’s macroeconomic and foreign trade framework and fiscal and monetary policies.   

 

Bhagwati, after his excellent 1970 work with Padma Desai for the OECD on Indian industry and trade, also co-authored with TN Srinivasan a fine 1975 volume for the NBER  Foreign Trade Regimes and Economic Development: India. 

 

TN Srinivasan was the third of the three senior-most Indian economists at the time in US academia; his work made us want to invite him as one of our main economic authors, and we charged him with writing the excellent chapter in Foundations that he came to do titled “Planning and Foreign Trade Reconsidered”.

 

The other main economist author we had hoped for was Sukhamoy Chakravarty from Delhi University and the Government of India’s Planning Commission, whom I had known since 1977 when I had been given his office at the Delhi School of Economics as a Visiting Assistant Professor while he was on sabbatical; despite my pleading he would not come due to ill health; he strongly recommended C Rangarajan, telling me Rangarajan had been the main author with him of the crucial 1985 RBI report on monetary policy; and he signed and gave me his last personal copy of that report dating it 14 July 1987.  Rangarajan said he could not come and recommended the head of the NIPFP, Amaresh Bagchi, promising to write jointly with him the chapter on monetary policy and public finance. 

 

Along with Milton Friedman’s suppressed 1955 memorandum which I was publishing for the first time in 1989, TN Srinivasan and Amaresh Bagchi authored the three main economic policy chapters that we felt we wanted. 

 

Other chapters we commissioned had to do with the state of governance (James Manor), federalism (Bhagwan Dua), Punjab and similar problems (PR Brass), agriculture (K Subbarao, as proposed by CH Hanumantha Rao), health (Anil Deolalikar, through open advertisement), and a historical assessment of the roots of economic policy (BR Tomlinson, as proposed by Anil Seal).  On the vital subject of education we failed to agree with the expert we wanted very much  (JBG Tilak, as proposed by George Psacharopolous) and so we had to cover the subject cursorily in our introduction mentioning his work.  And decades later, I apologised to Professor Dietmar Rothermund of Heidelberg University for having been so blinkered in the Anglo-American tradition at the time as to not having obtained his participation in the project.  

 

[The sister-volume we commissioned in parallel on Pakistan’s political economy had among its authors Francis Robinson, Akbar Ahmed, Shirin Tahir-Kehli, Robert La Porte, Shahid Javed Burki, Mohsin Khan, Mahmood Hasan Khan,  Naved Hamid, John Adams and Shahrukh Khan; this book came to be published in Pakistan in 1993 to good reviews but apparently was then lost by its publisher and is yet to be found; the military and religious clergy had been deliberately not invited by us though the name of Pervez Musharraf had I think arisen, and the military and religious clergy in fact came to rule the roost through the 1990s in Pakistan; the volume, two decades old, takes on fresh relevance with the new civilian governments of recent years.] [Postscript  27 November 2015: See my strident critique at Twitter of KM Kasuri, P Musharraf et al  e.g. at https://independentindian.com/2011/11/22/pakistans-point-of-view-or-points-of-view-on-kashmir-my-as-yet-undelivered-lahore-lecture-part-i/ passing off ideas they have taken from this volume without acknowledgement, ideas which have in any case become defunct  to their author, myself.]

 

Milton himself said this about his experience with me in his memoirs:

 

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And Milton wrote on my behalf when I came to be attacked, being Indian, at the very University that had sponsored us:

 

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My obituary notice at his passing in 2006 said: “My association with Milton has been the zenith of my engagement with academic economics…. I was a doctoral student of his bitter enemy yet for over two decades he not only treated me with unfailing courtesy and affection, he supported me in lonely righteous battles: doing for me what he said he had never done before, which was to stand as an expert witness in a United States Federal Court. I will miss him much though I know that he, as a man of reason, would not have wished me to….”

 

In August 1990 in Delhi I came to tell Siddhartha Shankar Ray about the unpublished India-manuscript resulting from the Hawaii project that was in my possession as it headed to its publisher. 

 

Ray was a family-friend whose maternal grandfather CR Das led the Congress Party before MK Gandhi and had been a friend and colleague of my great grandfather SN Roy in Bengal’s politics in the 1920s;  Ray had also consented to stand on my behalf as Senior Counsel in a matter in the Supreme Court of India. 

 

Ray was involved in daily political parlays at his Delhi home with other Congress Party personages led by PV Narasimha Rao.  These senior regional figures seemed to me to be keeping their national leader, Rajiv Gandhi, aloof in splendid isolation at 10 Jan Path. 

 

Ray told me he and his wife had been in London in May 1984 on the day The Times had written its lead editorial on my work and they had seen it with excitement.  Upon hearing of the Hawaii project and the manuscript I had with me, Ray immediately insisted of his own accord that I must meet Rajiv Gandhi, and that he would be arranging a meeting. 

 

Hence it came to be a month later that a copy of the manuscript of the completed Hawaii project was be given by my hand on 18 September 1990 to Rajiv Gandhi, then Leader of the Opposition and Congress President, an encounter I have quite fully described elsewhere.  I offered to get a copy to the PM, VP Singh, too but a key aide of his showed no interest in receiving it.

 

Rajiv made me a senior adviser, and I have claimed principal authorship of the 22 March 1991 draft of the Congress manifesto that actually shook and changed the political thinking of the Congress on economic matters in the direction Rajiv had desired and as I had advised him at our initial 18 September 1990 meeting. 

 

“… He began by talking about how important he felt panchayati raj was, and said he had been on the verge of passing major legislation on it but then lost the election. He asked me if I could spend some time thinking about it, and that he would get the papers sent to me. I said I would and remarked panchayati raj might be seen as decentralized provision of public goods, and gave the economist’s definition of public goods as those essential for the functioning of the market economy, like the Rule of Law, roads, fresh water, and sanitation, but which were unlikely to appear through competitive forces.

 

I distinguished between federal, state and local levels and said many of the most significant public goods were best provided locally. Rajiv had not heard the term “public goods” before, and he beamed a smile and his eyes lit up as he voiced the words slowly, seeming to like the concept immensely. It occurred to me he had been by choice a pilot of commercial aircraft. Now he seemed intrigued to find there could be systematic ways of thinking about navigating a country’s governance by common pursuit of reasonable judgement. I said the public sector’s wastefulness had drained scarce resources that should have gone instead to provide public goods. Since the public sector was owned by the public, it could be privatised by giving away its shares to the public, preferably to panchayats of the poorest villages. The shares would become tradable, drawing out black money, and inducing a historic redistribution of wealth while at the same time achieving greater efficiency by transferring the public sector to private hands. Rajiv seemed to like that idea too, and said he tried to follow a maxim of Indira Gandhi’s that every policy should be seen in terms of how it affected the common man. I wryly said the common man often spent away his money on alcohol, to which he said at once it might be better to think of the common woman instead. (This remark of Rajiv’s may have influenced the “aam admi” slogan of the 2004 election, as all Congress Lok Sabha MPs of the previous Parliament came to receive a previous version of the present narrative.)

 

Our project had identified the Congress’s lack of internal elections as a problem; when I raised it, Rajiv spoke of how he, as Congress President, had been trying to tackle the issue of bogus electoral rolls. I said the judiciary seemed to be in a mess due to the backlog of cases; many of which seemed related to land or rent control, and it may be risky to move towards a free economy without a properly functioning judicial system or at least a viable system of contractual enforcement. I said a lot of problems which should be handled by the law in the courts in India were instead getting politicised and decided on the streets. Rajiv had seen the problems of the judiciary and said he had good relations with the Chief Justice’s office, which could be put to use to improve the working of the judiciary.

 

The project had worked on Pakistan as well, and I went on to say we should solve the problem with Pakistan in a definitive manner. Rajiv spoke of how close his government had been in 1988 to a mutual withdrawal from Siachen. But Zia-ul-Haq was then killed and it became more difficult to implement the same thing with Benazir Bhutto, because, he said, as a democrat, she was playing to anti-Indian sentiments while he had found it somewhat easier to deal with the military. I pressed him on the long-term future relationship between the countries and he agreed a common market was the only real long-term solution. I wondered if he could find himself in a position to make a bold move like offering to go to Pakistan and addressing their Parliament to break the impasse. He did not say anything but seemed to think about the idea. Rajiv mentioned a recent Time magazine cover of Indian naval potential, which had caused an excessive stir in Delhi. He then talked about his visit to China, which seemed to him an important step towards normalization. He said he had not seen (or been shown) any absolute poverty in China of the sort we have in India. He talked about the Gulf situation, saying he did not disagree with the embargo of Iraq except he wished the ships enforcing the embargo had been under the U.N. flag. The meeting seemed to go on and on, and I was embarrassed at perhaps having taken too much time and that he was being too polite to get me to go. V. George had interrupted with news that Sheila Dixit (as I recall) had just been arrested by the U. P. Government, and there were evidently people waiting. Just before we finally stood up I expressed a hope that he was looking to the future of India with an eye to a modern political and economic agenda for the next election, rather than getting bogged down with domestic political events of the moment. That was the kind of hopefulness that had attracted many of my generation in 1985. I said I would happily work in any way to help define a long-term agenda. His eyes lit up and as we shook hands to say goodbye, he said he would be in touch with me again…. The next day I was called and asked to stay in Delhi for a few days, as Mr. Gandhi wanted me to meet some people…..

 

… That night Krishna Rao dropped me at Tughlak Road where I used to stay with friends. In the car I told him, as he was a military man with heavy security cover for himself as a former Governor of J&K, that it seemed to me Rajiv’s security was being unprofessionally handled, that he was vulnerable to a professional assassin. Krishna Rao asked me if I had seen anything specific by way of vulnerability. With John Kennedy and De Gaulle in mind, I said I feared Rajiv was open to a long-distance sniper, especially when he was on his campaign trips around the country.  This was one of several attempts I made since October 1990 to convey my clear impression to whomever I thought might have an effect that Rajiv seemed to me extremely vulnerable. Rajiv had been on sadhbhavana journeys, back and forth into and out of Delhi. I had heard he was fed up with his security apparatus, and I was not surprised given it seemed at the time rather bureaucratized. It would not have been appropriate for me to tell him directly that he seemed to me to be vulnerable, since I was a newcomer and a complete amateur about security issues, and besides if he agreed he might seem to himself to be cowardly or have to get even closer to his security apparatus. Instead I pressed the subject relentlessly with whomever I could. I suggested specifically two things: (a) that the system in place at Rajiv’s residence and on his itineraries be tested, preferably by some internationally recognized specialists in counter-terrorism; (b) that Rajiv be encouraged to announce a shadow-cabinet. The first would increase the cost of terrorism, the second would reduce the potential political benefit expected by terrorists out to kill him. On the former, it was pleaded that security was a matter being run by the V. P. Singh and then Chandrashekhar Governments at the time. On the latter, it was said that appointing a shadow cabinet might give the appointees the wrong idea, and lead to a challenge to Rajiv’s leadership. This seemed to me wrong, as there was nothing to fear from healthy internal contests for power so long as they were conducted in a structured democratic framework. I pressed to know how public Rajiv’s itinerary was when he travelled. I was told it was known to everyone and that was the only way it could be since Rajiv wanted to be close to the people waiting to see him and had been criticized for being too aloof. This seemed to me totally wrong and I suggested that if Rajiv wanted to be seen as meeting the crowds waiting for him then that should be done by planning to make random stops on the road that his entourage would take. This would at least add some confusion to the planning of potential terrorists out to kill him. When I pressed relentlessly, it was said I should probably speak to “Madame”, i.e. to Mrs. Rajiv Gandhi. That seemed to me highly inappropriate, as I could not be said to be known to her and I should not want to unduly concern her in the event it was I who was completely wrong in my assessment of the danger. The response that it was not in Congress’s hands, that it was the responsibility of the VP Singh and later the Chandrashekhar Governments, seemed to me completely irrelevant since Congress in its own interests had a grave responsibility to protect Rajiv Gandhi irrespective of what the Government’s security people were doing or not doing. Rajiv was at the apex of the power structure of the party, and a key symbol of secularism and progress for the entire country. Losing him would be quite irreparable to the party and the country. It shocked me that the assumption was not being made that there were almost certainly professional killers actively out to kill Rajiv Gandhi — this loving family man and hapless pilot of India’s ship of state who did not seem to have wished to make enemies among India’s terrorists but whom the fates had conspired to make a target. The most bizarre and frustrating response I got from several respondents was that I should not mention the matter at all as otherwise the threat would become enlarged and the prospect made more likely! This I later realized was a primitive superstitious response of the same sort as wearing amulets and believing in Ptolemaic astrological charts that assume the Sun goes around the Earth — centuries after Kepler and Copernicus. Perhaps the entry of scientific causality and rationality is where we must begin in the reform of India’s governance and economy. What was especially repugnant after Rajiv’s assassination was to hear it said by his enemies that it marked an end to “dynastic” politics in India. This struck me as being devoid of all sense because the unanswerable reason for protecting Rajiv Gandhi was that we in India, if we are to have any pretensions at all to being a civilized and open democratic society, cannot tolerate terrorism and assassination as means of political change. Either we are constitutional democrats willing to fight for the privileges of a liberal social order, or ours is truly a primitive and savage anarchy concealed beneath a veneer of fake Westernization….. Proceedings began when Rajiv arrived. This elite audience mobbed him just as the farmers had mobbed him earlier. He saw me and beamed a smile in recognition, and I smiled back but made no attempt to draw near him in the crush. He gave a short very apt speech on the role the United Nations might have in the new post-Gulf War world. Then he launched the book, and left for an investiture at Rashtrapati Bhavan. We waited for our meeting with him, which finally happened in the afternoon. Rajiv was plainly at the point of exhaustion and still hard-pressed for time. He seemed pleased to see me and apologized for not talking in the morning. Regarding the March 22 draft, he said he had not read it but that he would be doing so. He said he expected the central focus of the manifesto to be on economic reform, and an economic point of view in foreign policy, and in addition an emphasis on justice and the law courts. I remembered our September 18 conversation and had tried to put in justice and the courts into our draft but had been over-ruled by others. I now said the social returns of investment in the judiciary were high but was drowned out again. Rajiv was clearly agitated that day by the BJP and blurted out he did not really feel he understood what on earth they were on about. He said about his own family, “We’re not religious or anything like that, we don’t pray every day.” I felt again what I had felt before, that here was a tragic hero of India who had not really wished to be more than a happy family man until he reluctantly was made into a national leader against his will. We were with him for an hour or so. As we were leaving, he said quickly at the end of the meeting he wished to see me on my own and would be arranging a meeting. One of our group was staying back to ask him a favour. Just before we left, I managed to say to him what I felt was imperative: “The Iraq situation isn’t as it seems, it’s a lot deeper than it’s been made out to be.” He looked at me with a serious look and said “Yes I know, I know.” It was decided Pitroda would be in touch with each of us in the next 24 hours. During this time Narasimha Rao’s manifesto committee would read the draft and any questions they had would be sent to us. We were supposed to be on call for 24 hours. The call never came. Given the near total lack of system and organization I had seen over the months, I was not surprised. Krishna Rao and I waited another 48 hours, and then each of us left Delhi. Before going I dropped by to see Krishnamurty, and we talked at length. He talked especially about the lack of the idea of teamwork in India. Krishnamurty said he had read everything I had written for the group and learned a lot. I said that managing the economic reform would be a critical job and the difference between success and failure was thin….”

 

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“… I got the afternoon train to Calcutta and before long left for America to bring my son home for his summer holidays with me. In Singapore, the news suddenly said Rajiv Gandhi had been killed. All India wept. What killed him was not merely a singular act of criminal terrorism, but the system of humbug, incompetence and sycophancy that surrounds politics in India and elsewhere. I was numbed by rage and sorrow, and did not return to Delhi….”

 

In December 1991, I visited Rajiv’s widow at 10 Jan Path to express my condolences, the only time I have met her, and I gave her for her records a taped copy of Rajiv’s long-distance telephone conversations with me during the Gulf War earlier that year.   She seemed an extremely shy taciturn figure in deep mourning, and I do not think the little I said to her about her late husband’s relationship with me was comprehended.  Nor was it the time or place for more to be said.

 

In September 1993, at a special luncheon at the Indian Ambassador’s Residence in Washington, Siddhartha Shankar Ray, then the Ambassador to Washington, pointed at me and declared to Manmohan Singh, then Finance Minister, in presence of Manmohan’s key aides accompanying him including MS Ahluwalia, NK Singh, C Rangarajan and others,

 

“Congress manifesto was written on his computer”.

 

This was accurate enough to the extent that the 22 March 1991 draft as asked for by Rajiv and that came to explicitly affect policy had been and remains on my then-new NEC laptop.

 

At the Ambassador’s luncheon, I gave Manmohan Singh a copy of the Foundations book as a gift.  My father who knew him in the early 1970s through MG Kaul, ICS, had sent him a copy of my 1984 IEA monograph which Manmohan had acknowledged.  And back in 1973, he had visited our then-home at 14 Rue Eugene Manuel in Paris to advise me about economics at my father’s request, and he and I had ended up in a fierce private debate for about forty minutes over the demerits (as I saw them) and merits (as he saw them) of the Soviet influence on Indian economic policy-making.  But in 1993 we had both forgotten the 1973 meeting.  

 

In May 2002, the Congress passed an official party resolution moved by Digvijay Singh in presence of PV Narasimha Rao and Manmohan Singh that the 1991 reforms had originated with Rajiv Gandhi and not with either Narasimha Rao or Manmohan; no one dissented.  It was intended to flatter Sonia Gandhi as the Congress President,  but there was truth in it too which all Congress MPs of the 13th Lok Sabha had come to know in a publication of mine they had received from me at IIT Kharagpur where since 1996 I had become Professor.  

 

Manmohan Singh himself, to his credit, has not at any point, except once during his failed Lok Sabha bid, claimed the reforms as his own invention and has said always he had followed what his Prime Minister had told him. However, he has not been averse to being attributed with all the credit by his flatterers, by the media, by businessmen and many many others around the world, and certainly he did not respond to Ambassador Siddhartha Shankar Ray telling him and his key aides how the Congress-led reform had come about through my work except to tell me at the 1993 luncheon that when Arjun Singh criticised the reforms in Cabinet, he, Manmohan, would mention the manifesto. 

 

On 28 December 2009, Rajiv’s widow in an official Congress Party statement finally declared her late husband

 

left his personal imprint on the (Congress) party’s manifesto of 1991.″ 

 

How Sonia Gandhi, who has never had pretensions to knowledge of economics or political economy or political science or governance or history, came to place Manmohan Singh as her prime ministerial candidate and the font of economic and political wisdom along with Pranab Mukherjee, when both men hardly had been favourites of her late husband, would be a story in its own right.  And how Amartya Sen’s European-origin naturalised Indian co-author Jean Drèze later came to have policy influence from a different direction upon Sonia Gandhi, also a naturalised Indian of European origin, may be yet another story in its own right,  perhaps best told by themselves.

 

I would surmise the same elderly behind-the-scenes figure, now in his late 80s, had a hand in setting up both sets of influences — directly in the first case (from back in 1990-1991),  and indirectly in the second case (starting in 2004) .  This was a man who in a November 2007 newspaper article literally erased my name and inserted that of Manmohan Singh as part of the group that Rajiv created on 25 September following his 18 September meeting with me!   Reluctantly, I had to call this very elderly man a liar; he has not denied it and knows he has not been libeled.

 

One should never forget the two traditional powers interested in the subcontinent, Russia and Britain, have been never far from influence in Delhi.  In 1990-1991 what worried vested bureaucratic and business interests and foreign powers through their friends and agents was that they could see change was coming to India but they wanted to be able to control it themselves to their advantage, which they then broadly proceeded to do over the next two decades.  The foreign weapons’ contracts had to be preserved, as did other big-ticket imports that India ends up buying needlessly on credit it hardly has in world markets.  There are similarities to what happened in Russia and Eastern Europe where many apparatchiks and fellow-travellers became freedom-loving liberals overnight;  in the Indian case more than one badly compromised pro-USSR senior bureaucrat promptly exported his children and savings to America and wrapped themselves in the American flag.

 

The stubborn unalterable fact remains that Manmohan Singh was not physically present in India and was still with the Nyerere project on 18 September 1990 when I met Rajiv for the first time and gave him the unpublished results of the UH-Manoa project.  This simple straightforward fact is something the Congress Party, given its own myths and self-deception and disinformation, has not been able to cope with in its recently published history.   For myself, I have remained loyal to my memory of my encounter with Rajiv Gandhi, and my understanding of him.  The Rajiv Gandhi I knew had been enthused by me in 1990-1991 carrying the UH-Manoa perestroika-for-India project that I had led since 1986, and he had loved my advice to him on 18 September 1990 that he needed to modernise the party by preparing a coherent agenda (as other successful reformers had done) while still in Opposition waiting for elections, and to base that agenda on commitments to improving the judiciary and rule of law, stopping the debauching of money, and focusing on the provision of public goods instead.    Rajiv I am sure wanted a modern and modern-minded Congress — not one which depended on him let aside his family, but one which reduced that dependence and let him and his family alone.

 

As for Manmohan Singh being a liberal or liberalising economist, there is no evidence publicly available of that being so from his years before or during the Nyerere project, or after he returned and joined the Chandrashekhar PMO and the UGC  until becoming,  to his own surprise as he told Mark Tully,  PV Narasimha Rao’s Finance Minister.  Some of his actions qua Finance Minister were liberalising in nature but he did not originate any basic idea of a change in a liberal direction of economic policy, and he has, with utmost honesty honestly, not claimed otherwise.  Innumerable flatterers and other self-interested parties have made out differently, creating what they have found to be a politically useful fiction; he has yet to deny them.

 

Siddhartha Shankar Ray and I met last in July 2009, when I gave him a copy of this 2005 volume I had created, which pleased him much. 

 

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I said to him Bengal’s public finances were in abysmal condition, calling for emergency measures financially, and that Mamata Banerjee seemed to me to be someone who knew how to and would dislodge the Communists from their entrenched misgovernance of decades but she did not seem quite aware that dislodging a bad government politically was not the same thing as knowing how to govern properly oneself.  He,  again of his own accord, said immediately, 

 

“I will call her and her people to a meeting here so you can meet them and tell them that directly”. 

 

It never transpired.  In our last phone conversation I mentioned to him my plans of creating a Public Policy Institute — an idea he immediately and fully endorsed as being essential though adding “I can’t be part of it,  I’m on my way out”.

 

“I’m on my way out”.   That was Siddhartha Shankar Ray — always intelligent, always good-humoured, always public-spirited, always a great Indian, my only friend among politicians other than the late Rajiv Gandhi himself.

 

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In March February 2010, my father and I called upon the new Bengal Governor, MK Narayanan and gave him a copy of the Thatcher volume for the Raj Bhavan Library; I told him the story about my encounter with Rajiv Gandhi thanks to Siddhartha Shankar Ray and its result;  Narayanan within a few days made a visit to Ray’s hospital-bed, and when he emerged after several hours he made a statement, which in substance he repeated again when Ray died in November 2010:

 

“There are few people in post-Independence India who could equal his magnificent contribution to India’s growth and progress”.

 

To what facts did MK Narayanan, a former Intelligence Bureau chief, mean to refer with this extravagant praise of Ray?  Was Narayanan referring to Ray’s politics for Indira Gandhi?  To Ray’s Chief Ministership of Bengal?  To Ray’s Governorship of Punjab?  You will have to ask him but I doubt that was what he meant:  I surmise Narayanan’s eulogy could only have resulted after he confirmed with Ray on his hospital-bed the story I had told him, and that he was referring to the economic and political results that followed for the country once Ray had introduced me in September 1990 to Rajiv Gandhi. But I say again, you will have to ask MK Narayanan himself what he and Ray talked about in hospital and what was the factual basis of Narayanan’s precise words of praise. To what facts exactly was MK Narayanan, former intelligence chief, meaning to refer when he stated Siddhartha Shankar Ray had made a “magnificent contribution to India’s growth and progress”?

 

 

3.   Jagdish Bhagwati & Manmohan Singh?  That just don’t fly!

 

Now returning to the apparent desire of Professor Panagariya, the Jagdish Bhagwati Professor of Indian Political Economy at Columbia, to attribute to Jagdish Bhagwati momentous change for the better in India as of 1991, even if Panagariya had not the scientific curiosity to look into our 1992 book titled Foundations of India’s Political Economy: Towards an Agenda for the 1990s or into Milton Friedman’s own 1998 memoirs, we may have expected him to at least turn to his co-author and Columbia colleague, Jagdish Bhagwati himself, and ask, “Master, have you heard of this fellow Subroto Roy by any chance?”

 

Jagdish would have had to say yes, since not only had he received a copy of the proofs of my 1984 IEA work Pricing, Planning and Politics: A Study of Economic Distortions in India, he was kind enough to write in a letter dated 15 May 1984 that I had

 

“done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems!” 

 

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Also Jagdish may or may not have remembered our only meeting, when he and I had had a long conversation on the sofas in the foyer of the IMF in Washington when I was a consultant there in 1993 and he had come to meet someone; he was surprisingly knowledgeable about my personal 1990 matter in the Supreme Court of India which astonished me until he told me his brother the Supreme Court judge had mentioned the case to him!

 

Now my 1984 work was amply scientific and scholarly in fully crediting a large number of works in the necessary bibliography, including Bhagwati’s important work with his co-authors.  Specifically, Footnote 1 listed the literature saying:

 

“The early studies notably include: B. R. Shenoy, `A note of dissent’, Papers relating to the formulation of the Second Five-Year Plan, Government of India Planning Commission, Delhi, 1955; Indian Planning and Economic Development, Asia Publishing, Bombay, 1963, especially pp. 17-53; P. T. Bauer, Indian Economic Policy and Development, George Allen & Unwin, London, 1961; M. Friedman, unpublished memorandum to the Government of India, November 1955 (referred to in Bauer, op. cit., p. 59 ff.); and, some years later, Sudha Shenoy, India : Progress or Poverty?, Research Monograph 27, Institute of Economic Affairs, London, 1971. Some of the most relevant contemporary studies are: B. Balassa, `Reforming the system of incentives in World Development, 3 (1975), pp. 365-82; `Export incentives and export performance in developing countries: a comparative analysis’, Weltwirtschaftliches Archiv, 114 (1978), pp. 24-61; The process of industrial development and alternative development strategies, Essays in International Finance No. 141, Princeton University, 1980; J. N. Bhagwati & P. Desai, India: Planning for Industrialisation, OECD, Paris : Oxford University Press, 1970; `Socialism and Indian Economic Policy’, World Development, 3 (1975), pp. 213-21; J. N. Bhagwati & T. N. Srinivasan, Foreign-trade Regimes and Economic Development: India, National Bureau of Economic Research, New York, 1975; Anne O. Krueger, `Indian planning experience’, in T. Morgan et al. (eds.), Readings in Economic Development, Wadsworth, California, 1963, pp. 403-20; `The political economy of the rent-seeking society, American Economic Review, 64 (June 1974); The Benefits and Costs of Import-Substitution in India: a Microeconomic Study, University of Minnesota Press, Minneapolis, 1975; Growth, distortions and patterns of trade among many countries, Studies in International Finance, Princeton University, 1977; Uma Lele, Food grain marketing in India : private performance and public policy, Cornell University Press, Ithaca, 1971; T. W. Schultz (ed.), Distortions in agricultural incentives, Indiana University Press, Bloomington, 1978; V. Sukhatme, “The utilization of high-yielding rice and wheat varieties in India: an economic assessment”, University of Chicago PhD thesis, 1977….”

 

There were two specific references to Bhagwati’s work with Srinivasan:

 

“Jagdish Bhagwati and T. N. Srinivasan put it as follows : `The allocation of foreign exchange among alternative claimants and users in a direct control system . . .would presumably be with reference to a well-defined set of principles and criteria based on a system of priorities. In point of fact, however, there seem to have been few such criteria, if any, followed in practice.’”

 

and

 

“But as Bhagwati and Srinivasan report, `. . . the sheer weight of numbers made any meaningful listing of priorities extremely difficult. The problem was Orwellian: all industries had priority and how was each sponsoring authority to argue that some industries had more priority than others? It is not surprising, therefore, that the agencies involved in determining allocations by industry fell back on vague notions of “fairness”, implying pro rata allocations with reference to capacity installed or employment, or shares defined by past import allocations or similar rules of thumb’”

 

and one to Bhagwati and Desai:

 

“The best descriptions of Indian industrial policy are still to be found in Bhagwati and Desai (1970)…”

 

Professors Bhagwati and Panagriya have not apparently referred to anything beyond these joint works of Bhagwati’s dated 1970 with Padma Desai and 1975 with TN Srinivasan.  They have not claimed Bhagwati did anything by way of either publication or political activity in relation to India’s economic policy between May 1984, when he read my soon-to-be-published-work and found I had

 

done an excellent job of setting out the problems afflicting our economic policies, unfortunately government-made problems”,

 

and September 1990 when I gave Rajiv the University of Hawaii perestroika-for-India project results developed since 1986, which came to politically spark the 1991 reform in the Congress’s highest echelons from months before Rajiv’s assassination.   

 

There may have been no such claim made by Bhagwati and Panagariya because there may be no such evidence.  Between 1984 and 1990,  Professor Bhagwati’s research interests were away from Indian economic policy while his work on India through 1970 and 1975 had been fully and reasonably accounted for as of 1984 by myself.

 

What is left remaining is Bhagwati’s statement :

 

“When finance minister Manmohan Singh was in New York in 1992, he had a lunch for many big CEOs whom he was trying to seduce to come to India. He also invited me and my wife, Padma Desai, to the lunch. As we came in, the FM introduced us to the invitees and said: ‘These friends of mine wrote almost a quarter century ago [India: Planning for Industrialisation was published in 1970 by Oxford] recommending all the reforms we are now undertaking. If we had accepted the advice then, we would not be having this lunch as you would already be in India’

 

Now this light self-deprecating reference by Manmohan at an investors’ lunch in New York “for many big CEOs” was an evident attempt at political humour written by his speech-writer.   It was clearly, on its face, not serious history.   If we test it as serious history, it falls flat so we may only hope Manmohan Singh, unlike Jagdish Bhagwati, has not himself come to believe his own reported joke as anything more than that.  

 

The Bhagwati-Desai volume being referred to was developed from 1966-1970.  India saw critical economic and political events  in 1969, in 1970, in 1971, in 1972, in 1975, in 1977, etc.

 

Those were precisely years during which Manmohan Singh himself moved from being an academic to becoming a Government of India official, working first for MG Kaul, ICS, and then in 1971 coming to the attention of  PN Haksar, Indira Gandhi’s most powerful bureaucrat between 1967 and 1974: Haksar himself was Manmohan Singh’s acknowledged mentor in the Government, as Manmohan told Mark Tully in an interview.  

 

After Manmohan visited our Paris home in 1973 to talk to me about economics, my father — who had been himself sent to the Paris Embassy by Haksar in preparation for Indira Gandhi’s visit in November 1971 before the Bangladesh war —

 

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had told me Manmohan was very highly regarded in government circles with economics degrees from both Cambridge and Oxford, and my father had added, to my surprise, what was probably a Haksarian governmental view that Manmohan was expected to be India’s Prime Minister some day.  That was 1973.

 

PN Haksar had been the archetypal Nehruvian Delhi intellectual of a certain era, being both a fierce nationalist and a fierce pro-USSR leftist from long before Independence.  I met him once on 23 March 1991, on the lawns of 10 Jan Path at the launch of General V Krishna Rao’s book on Indian defence which Rajiv was releasing, and Haksar gave a speech to introduce Rajiv (as if Rajiv needed introduction on the lawns of his own residence);  Haksar was in poor health but he seemed completely delighted to be back in favour with Rajiv,  after years of having been treated badly by Indira and her younger son.  

 

 Had Manmohan Singh in the early 1970s gone to Haksar — the architect of the nationalisation of India’s banking going on right then — and said “Sir, this OECD study by my friend Bhagwati and his wife says we should be liberalising foreign trade and domestic industry”, Haksar would have been astonished and sent him packing.  

 

There was a war on, plus a massive problem of 10 million refugees, a new country to support called Bangladesh, a railway strike, a bad crop, repressed inflation, shortages, and heaven knows what more, besides Nixon having backed Yahya Khan, Tikka Khan et al. 

 

 

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Then after Bangladesh and the railway strike etc, came the rise of the politically odious younger son of Indira Gandhi and his friends (at least one of whom is today Sonia Gandhi’s gatekeeper) followed by the internal political Emergency, the grave foreign-fueled problem of Sikh separatism and its control, the assassination of Indira Gandhi by her own Sikh bodyguards, and the Rajiv Gandhi years as Prime Minister. 

 

Certainly it was Rajiv’s arrival in office and Benazir’s initial return to Pakistan, along with the rise of Michael Gorbachev in the changing USSR, that inspired me in far away Hawaii in 1986 to design with Ted James the perestroika-projects for India and Pakistan which led to our two volumes, and which, thanks to Siddhartha Shankar Ray, came to reach Rajiv Gandhi in Opposition in September 1990 as he sat somewhat forlornly at 10 Jan Path after losing office. “There is a tide in the affairs of men, Which taken at the flood, leads on to fortune….

 

My friend and collaborator Ted James died of cancer in Manila in May 2010; earlier that year he came to say publicly

 

“Seldom are significant reforms imposed successfully by international bureaucracies. Most often they are the result of indigenous actors motivated by domestic imperatives. I believe this was the case in India in 1991. It may have been fortuitous that Dr. Roy gained an audience with a receptive Rajiv Gandhi in 1990 but it was not luck that he was prepared with a well-thought out program; this arose from years of careful thought and debate on the matter.”

 

Changing the direction of a ship of state is very hard, knowing in which direction it should change and to what degree is even harder; it has rarely been something that can be done without random shocks arising let aside the power of vested interests. Had Rajiv Gandhi lived to form a new Government, I have little doubt I would have led the reform that I had chalked out for him and that he had approved of;  Sonia Gandhi would have remained the housewife, mother and grandmother that she had preferred to be and not been made into the Queen of India by the Congress Party; Manmohan Singh had left India in 1987 for the Nyerere project and it had been rumoured at the time that had been slightly to do with him protesting, to the extent that he ever has protested anything, the anti-Sikh pogrom that some of Rajiv’s friends had apparently unleashed after Indira’s killing; he returned in November 1990, joined Chandrashekhar in December 1990, left Chandrashekhar in March 1991 when elections were announced and was biding his time as head of the UGC; had Rajiv Gandhi lived, Manmohan Singh would have had a governor’s career path, becoming the governor of one state after another; he would not have been brought into the economic reform process which he had had nothing to do with originating; and finally Pranab Mukherjee, who left the Congress Party and formed his own when Rajiv took over, would have been likely rehabilitated slowly but would not have come to control the working of the party as he did. I said in my Lok Sabha TV interview on 5 9 December 2012 that there have been many microeconomic improvements arising from technological progress in the last 22 years but the macroeconomic and monetary situation is grim, because at root the fiscal situation remains incoherent and confused. I do not see anyone in Manmohan Singh’s entourage among all his many acolytes and flatterers and apologists who is able to get to these root problems.  We shall address these issues in Part II.

 

What Manmohan Singh said in self-deprecating humour at an investors’ lunch in New York in 1992 is hardly serious history as Jagdish Bhagwati has seemed to wish it to be.  Besides, it would have been unlike Manmohan,  being the devoted student of Joan Robinson and Nicholas Kaldor as he told Mark Tully,  to have taken such a liberalising initiative at all.  Furthermore, the 1969 American Economic Review published asurvey of Indian economic policy authored by his Delhi University colleagues Jagdish Bhagwati and Sukhamoy Chakravarty which made little mention of his work, and it would have been unreasonable to expect him to have been won over greatly by theirs. Perhaps there is a generous review from the 1970s by Manmohan Singh of the Bhagwati-Desai volume hidden somewhere but if so we should be told where it is.  A list of Manmohan Singh’s publications as an economist do not seem easily available anywhere.  

 

Lastly and perhaps most decisively, the 1970 Bhagwati-Desai volume, excellent study that it was, was hardly the first of its genre by way of liberal criticism of modern Indian economic policy!   Bhagwati declared in his 2010 speech to the Lok Sabha

 

“This policy framework had been questioned, and its total overhaul advocated, by me and Padma Desai in writings through the late 1960s…”

 

But why has Bhagwati been forever silent about the equally if not more forceful and fundamental criticism of “the policy framework”, and advocacy of its “total overhaul”, by scholars in the 1950s, a decade and more earlier than him, when he and Manmohan and Amartya were still students?  Specifically, by BR Shenoy, Milton Friedman, and Peter Bauer?   The relevant bibliography from the mid 1950s is given in Footnote 1 of my 1984 work. 

 

 


topimg_15242_br_shenoy_300x400

baueronshenoy

Peter Tamas Bauer (1915-2002) played a vital role in all this as had he himself not brought the Friedman 1955 document to my attention I would not have known of it.

 

 

1902FN2

As undergraduates at the LSE, we had been petrified of him and I never spoke to him while there, having believed the propaganda that floated around about him; then while a Research Student at Cambridge, I happened to be a speaker with him at a conference at Oxford; he made me sit next to him at a meal and told me for the first time about Milton Friedman’s 1955 memorandum to the Government of India which had been suppressed.  I am privileged to say Peter from then on became a friend, and wrote, at my request, what became I am sure the kiss of death for me at the World Bank of 1982:

 

226258_10150168598862285_2325402_n

Later he may have been responsible for the London Times writing its lead editorial of 29 May 1984 on my work.

 

Now Milton had sent me in 1984, besides the original of his November 1955 memorandum to the Government of India, a confidential 1956 document also which seemed to have been written for US Government consumption.  I did not publish this in Hawaii in 1989 as I was having difficulty enough publishing the 1955 memorandum.  I gave it to be published on the Internet some years ago, and after Milton’s passing, I had it published in The Statesman  on the same day as my obituary of him. 

 

It makes fascinating reading, especially about Mahalanobis and Shenoy, of how what Bhagwati wishes to call “the policy framework” that, he claims, he and Desai called for a “total overhaul” of, came to be what it was in the decade earlier when he and Amartya and Manmohan were still students. 

 

Friedman’s 1956 document said

 

“I met PC Mahalanobis in 1946 and again at a meeting of the International Statistical Institute in September 1947, and I know him well by reputation. He was absent during most of my stay in New Delhi, but I met him at a meeting of the Indian Planning Commission, of which he is one of the strongest and most able members.   Mahalanobis began as a mathematician and is a very able one. Able mathematicians are usually recognized for their ability at a relatively early age. Realizing their own ability as they do and working in a field of absolutes, tends, in my opinion, to make them dangerous when they apply themselves to economic planning. They produce specific and detailed plans in which they have confidence, without perhaps realizing that economic planning is not the absolute science that mathematics is. This general characteristic of mathematicians is true of Mahalanobis but in spite of the tendency he is willing to discuss a problem and listen to a different point of view. Once his decision is reached, however, he has great confidence in it. Mahalanobis was unquestionably extremely influential in drafting the Indian five-year plan. There were four key steps in the plan. The first was the so-called “Plan Frame” drafted by Mahalanobis himself. The second was a tentative plan based on the “Plan Frame”. The third step was a report by a committee of economists on the first two steps, and the fourth was a minority report by BR Shenoy on the economists’ report. The economists had no intention of drafting a definitive proposal but merely meant to comment on certain aspects of the first two steps. Shenoy’s minority report, however, had the effect of making the economists’ report official. The scheme of the Five Year Plan attributed to Mahalanobis faces two problems; one, that India needs heavy industry for economic development; and two, that development of heavy industry uses up large amounts of capital while providing only small employment.  Based on these facts, Mahalanobis proposed to concentrate on heavy industry development on the one hand and to subsidize the hand production cottage industries on the other. The latter course would discriminate against the smaller manufacturers. In my opinion, the plan wastes both capital and labour and the Indians get only the worst of both efforts. If left to their own devices under a free enterprise system I believe the Indians would gravitate naturally towards the production of such items as bicycles, sewing machines, and radios. This trend is already apparent without any subsidy. The Indian cottage industry is already cloaked in the same popular sort of mist as is rural life in the US. There is an idea in both places that this life is typical and the backbone of their respective countries. Politically, the Indian cottage industry problem is akin to the American farm problem. Mohandas Gandhi was a proponent of strengthening the cottage industry as a weapon against the British. This reason is now gone but the emotions engendered by Gandhi remain. Any move to strengthen the cottage industry has great political appeal and thus, Mahalanobis’ plan and its pseudo-scientific support for the industry also has great political appeal.  I found many supporters for the heavy industry phase of the Plan but almost no one (among the technical Civil Servants) who really believes in the cottage industry aspects, aside from their political appeal. In its initial form, the plan was very large and ambitious with optimistic estimates. My impression is that there is a substantial trend away from this approach, however, and an attempt to cut down. The development of heavy industry has slowed except for steel and iron. I believe that the proposed development of a synthetic petroleum plant has been dropped and probably wisely so. In addition, I believe that the proposed five year plan may be extended to six years. Other than his work on the plan, I am uncertain of Mahalanobis’ influence. The gossip is that he has Nehru’s ear and potentially he could be very influential, simply because of his intellectual ability and powers of persuasion. The question that occurs to me is how much difference Mahalanobis’ plan makes. The plan does not seem the important thing to me. I believe that the new drive and enthusiasm of the Indian nation will surmount any plan, good or bad. Then too, I feel a wide diversity in what is said and what is done. I believe that much of Nehru’s socialistic talk is simply that, just talk. Nehru has been trying to undermine the Socialist Party by this means and apparently the Congress Party’s adoption of a socialistic idea for industry has been successful in this respect.  One gets the impression, depending on whom one talks with, either that the Government runs business, or that two or three large businesses run the government. All that appears publicly indicates that the first is true, but a case can also be made for the latter interpretation. Favour and harassment are counterparts in the Indian economic scheme. There is no significant impairment of the willingness of Indian capitalists to invest in their industries, except in the specific industries where nationalization has been announced, but they are not always willing to invest and take the risks inherent in the free enterprise system. They want the Government to support their investment and when it refuses they back out and cry “Socialism”..”

 

I look forward to seeing a fundamental classical liberal critique from India’s distinguished American friends at Columbia University, Professors Jagdish Bhagwati and Padma Desai and Arvind Panagariya, if and when such a critique arises,  of the  “policy framework” in India as that evolved from the mid 1950s to become what exists across India in 2013 today.  Specifically:  Where is the criticism from Bhagwati of Mahalanobis and friends?  And where is Bhagwati’s defence of Shenoy, leave aside of Milton Friedman or Peter Bauer?   They seem not to exist. The most we get is a footnote again without the civility of any references, in the otherwise cogent 1975 Desai-Bhagwati paper “Socialism and Indian Economic Policy” alleging 

 

” Of these three types of impact of the Soviet example, the Plan-formulation approach was to be enthusiastically received by most commentators and, indeed, to lead to demands on the part of aid agencies for similar efforts by other developing countries. However, the shift to heavy industry was seen as a definite mistake by economic opinion of the Chicago school variety, reflecting their basic unfamiliarity with the structural models of growth and development planning of the Feldman-Mahalanobis variety-an ignorance which probably still persists. The detailed regulation was not quite noticed at the time, except by conservative commentators whose position however was extreme and precluded governmental planning of industrial investments on any scale.”

 

Desai and Bhagwati naturally found no apparent desire to locate any possible scientific truth or reasonableness among

 

“conservative commentators”

 

nor among the unnamed and undescribed

 

“economic opinion of the Chicago school variety”.   

 

Could Desai and Bhagwati have done anything different after all, even when talking about India to an American audience, without being at risk of losing their East Coast Limousine Liberal credentials?  Bhagwati used to routinely declare his “socialist” credentials, and even the other day on Indian TV emphatically declared he was not a “conservative” and scornfully dismissed “Thatcher and Reagan” for their “trickle down economics”…

 

Jagdish Bhagwati has evidently wanted to have his cake and eat it too…

 


 

4.    Amartya Sen’s Half-Baked Communism: “To each according to his need”? 

 

If I have been candid or harsh in my assessments of Jagdish Bhagwati and Manmohan Singh as they relate to my personal experience with the change of direction in Indian economic policy originating in 1990-1991, I am afraid I must be equally so with Bhagwati’s current opponent in debate, Amartya Sen. Certainly I have found the current spat between Bhagwati and Sen over India’s political economy to be dismal, unscholarly, unscientific and misleading (or off-base) except for it having allowed a burst of domestic policy-discussion in circumstances when India needs it especially much.  

 

None of this criticism is personal but based on objective experience and the record.  My criticism of Professor Bhagwati and Dr Manmohan Singh does not diminish in the slightest my high personal regard for both of them.

 

Similarly, Amartya Sen and I go back, momentarily, to Hindustan Park in 1964 when there was a faint connection as family friends from World War II  (as Naren Deb and Manindranath Roy were friends and neighbours, and we still have the signed copy of a book gifted by the former to the latter), and then he later knew me cursorily when I was an undergraduate at LSE and he was already a famous professor, and I greatly enjoyed his excellent lectures at the LSE on his fine book On Economic Inequality, and a few years later he wrote in tangential support of me at Cambridge for which he was thanked in the preface to my 1989 Philosophy of Economics — even though that book of mine also contained in its Chapter 10 the decisive criticism of his main contribution until that time to what used to be called “social choice theory”. Amartya Sen had also written some splendid handwritten letters, a few pages of which remain with me, which puzzled me at the time due to his expressing his aversion to what is normally called ‘price theory’, namely the Marshallian and/or Walrasian theory of value. 

 

Professor Sen and I met briefly in 1978, and then again in 2006 when I was asked to talk to him in our philosophical conversation which came to be published nicely.  In 2006 I told him of my experience with Rajiv Gandhi in initiating what became the 1991 reform on the basis of my giving Rajiv the results of the Hawaii project,  and Amartya was kind enough to say that he knew I had been arguing all this “very early on”, referring presumably to the 1984 London Times editorial which he would have seen in his Oxford days before coming to Harvard.

 

This personal regard on my part or personal affection on his part aside, I have been appalled to find Professor Sen not taking moral and intellectual responsibility for and instead disclaiming paternity of the whole so-called “Food Security” policy which Sonia Gandhi has been prevailed upon over the years by him and his acolytes and friends and admirers to adopt, and she in her ignorance of all political economy and governance has now wished to impose upon the Congress Party and India as a whole:

 

“Questioner: You are being called the creator of the Food Security Bill.

Amartya Sen: Yes, I don’t know why. That is indeed a paternity suit I’m currently fighting. People are accusing me of being the father”.

 

Amartya Sen has repeatedly over the years gone on Indian prime-time television and declared things like

 

If you don’t agree there’s hunger in the world, there’s something morally wrong with you”

 

besides over the decades publishing titles like Poverty and Famines: An Essay on Entitlement and Deprivation, Hunger and Public Action, The Political Economy of Hunger etc and ceaselessly using his immense power with the media, with book publishing houses, with US academic departments and the world development economics business,  to promote his own and his acolytes’ opinions around the world, no matter how ill-considered or incoherent these may be.   A passage from his latest book with Jean Drèze reportedly reads

 

“If development is about the expansion of freedom, it has to embrace the removal of poverty as well as paying attention to ecology as integral parts of a unified concern, aimed ultimately at the security and advancement of human freedom. Indeed, important components of human freedoms — and crucial ingredients of our quality of life — are thoroughly dependent on the integrity of the environment, involving the air we breathe, the water we drink, and the epidemiological surroundings in which we live….”

 

Had such a passage reached me in an undergraduate essay, I would have considered it incoherent waffle, and I am afraid I cannot see why merely because it is authored  by an eminence at Harvard and his co-author, the evaluation should be any different.   I am reminded of my encounter in 1976 with Joan Robinson, the great tutor in 1950s Cambridge of Amartya and Manmohan:  “Joan Robinson cornered me once and took me into the office she shared with EAG… She came at me for an hour or so wishing to supervise me, I kept declining politely… saying I was with Frank Hahn and wished to work on money… “What does Frankie know about India?” she said… I said I did not know but he did know about monetary theory and that was what I needed for India;  I also said I did not think much about the Indian Marxists she had supervised… and mentioned a prominent name… she said about him, “Yes most of what he does can go straight into the dustbin”…”  The Indian Marxist whom I had referred to in this conversation with Joan was not Amartya but someone else much younger, yet her candid “can go straight into the dustbin” still applies to all incoherent waffle, whomsoever may produce it.

 

Indeed, Amartya Sen, if anyone, really should get down to writing his memoirs, and candidly so in order to explain his own thinking and deeds over the decades to himself and to the world in order that needless confusions do not arise.  

 

Else it becomes impossible to explain how someone who was said to be proud to have been a Communist student on the run from the police in West Bengal, who was Joan Robinson’s star pupil at a time she was extolling Maoist China and who has seemingly nurtured a deep lifelong fascination and affection for Communist China despite all its misdeeds, who was feted by the Communist regime of West Bengal after winning the Bank of Sweden Prize (on the same day that same regime had tossed into jail one unfortunate young Mr Khemkha merely for having been rude to its leaders on the Internet), and who seemed to share some of those winnings on social causes like primary education at the behest of the Communist regime’s ministers, etc, how someone with that noble comradely leftist personal history as an economist allows a flattering interviewer with a Harvard connection to describe him in Business Standard of 25 July 2013  as having been all along really a

 

“neoclassical economist”

 

who also happens to be

 

“the greatest living scholar of the original philosopher of the free market, Adam Smith”

 

Amartya Sen a neoclassical economist and a great scholar of Adam Smith?  It is hilarious to suppose so. The question arises, Does Sen, having published about Adam Smith recently in a few newspapers and leftist periodicals, agree with such a description by his flattering admirer from Harvard at Business Standard?  “Neoclassical” economics originated with men like Jevons, Menger, Walras, Pareto, Marshall, Wicksell, and was marked by the theory of value being explained by a demand-side too, and not, like classical economics, merely by the cost of production alone on the supply side.  Indeed a striking thing about the list below published by the Scandinavian Journal of Economics of Amartya’s books following his 1998 Bank of Sweden Prize

 

1467-9442.00152_p1is how consistently these works display his avoidance of all neoclassical economics, and the absence of all of what is normally called ‘price theory’, namely the Marshallian and/or Walrasian theory of value.   No “neoclassical economics” anywhere here  for sure!  

 

It would be fair enough if Professor Sen says he is hardly responsible for an admirer’s ignorant misdescription of his work — except the question still arises why he has himself also evidently misdescribed his own work!  For example, in his 13 July 2013 letter to The Economist in response to the criticism of Jagdish Bhagwati and Arvind Panagariya, he says he had always been keenly interested in

 

“the importance of economic growth as a means— not an end”

 

and that this

 

“has been one of the themes even in my earliest writings (including “Choice of Techniques” in 1960 and “Growth Economics” in 1970)”.

 

This is a very peculiar opinion indeed to have been expressed by Professor Sen about his own work because the 1970 volume Growth Economics listed above among his books hardly can be said at all to be one of his own “earliest writings” as he now describes it to have been!

 

What had happened back then was that Sen, as someone considered a brilliant or promising young Indian economist at the time, had been asked by the editors of the famous Penguin Modern Economics Readings series to edit the specific issue  devoted to growth-theory — a compendium of classic already-published essays including those of Roy Harrod, Evsey Domar, Robert Solow and many others, to which young Amartya was given a chance to write an editorial Introduction.   Every economist familiar with that literature knows too that the growth-theory contained in that volume and others was considered highly abstract and notoriously divorced from actual historical processes of economic growth in different countries.  Everyone also knew that the individual editors in that famous Penguin Modern Economics Series were of relative unimportance as they did not commission new papers but merely collected classics already published and wrote an introduction.

 

This is significant presently because neither Professor Sen nor Professor Bhagwati may be objectively considered on the evidence of his life’s work as an economist to have been a major scholar of economic growth, either in theory or in historical practice.  As of December 1989,  Amartya Sen himself described his own interests to the American Economic Association as

 

“social choice theory, welfare economics, economic development”

 

and Jagdish Bhagwati described his interests as

 

“theory of international trade and policy, economic development”. 

 

Neither Sen nor Bhagwati mentioned growth economics or economic history or even general economic theory, microeconomics, macroeconomics, monetary economics, public finance, etc.  Furthermore, Sen saying in his letter to The Economist  that he has been always interested in economic growth seems to be baseless in light of the list of his books above, other than the Penguin compendium already discussed.

 

Incidentally in the same American Economic Association volume of 1989, Padma Desai had described her interests as

 

“Soviet economy and comparative economic systems”; 

 

Arvind Panagariya had described his interests as

 

“economies of scale and trade; smuggling; parallel markets in planned economies”;

 

and one Suby Roy described his interests as

 

“foundations of monetary economics”.

 

Reflecting on Amartya Sen’s works over the 40 year period that I have known them

 

[and again, my personal copies of his books and those of Bhagwati and Desai, were all in my professorial office at IIT Kharagpur when I was attacked by a corrupt gang there in 2003; and IIT have been under a High Court order to return them but have not done so],

 

I wonder in fact if it might be fairly said that Sen has been on his own subjective journey over the decades around the world seeking to reinvent economics and political economy from scratch, and inventing his own terminology like “capabilities”, “functionings” and yes “entitlements” etc. to help him do so, while trying to assiduously avoid mention of canonical works of  modern world economics like Marshall’s Principles, Hicks’s Value and Capital, Debreu’s Theory of Value, or Arrow and Hahn’s General Competitive Analysis, all defining the central neoclassical tradition of the modern theory of value.  

 

But no contemporary science, economics and political economy included, is open to be re-invented from scratch, and what Amartya Sen has ended up doing instead is seeming to be continually trying to reinvent the wheel, possibly without having had the self-knowledge to realise this.  Wittgenstein once made a paradoxical statement that one may know another’s mind better than one knows one’s own…  

Here is a current example.  Professor Sen says

 

“First, unlike the process of development in Japan, China, Korea and other countries, which pursued what Jean Drèze and I have called “Asian economic development” in our book, India has not had enough focus on public spending on school education and basic healthcare, which these other countries have had….”

 

Does Sen really believes believe he and Drèze  have now in 2013 discovered and christened an economic phenomenon named “Asian economic development”?  Everyone, from Japan and Bangkok and Manila, to Hawaii and Stanford to the World Bank’s East Asia department, including  especially my Hawaii colleague Ted James, and many many others including especially Gerald M Meier at Stanford, were was publishing about all that every month — in the mid 1980s!  In fact, our project on India and Pakistan arose in the 1980s from precisely such a Hawaiian wave!  Everyone knows all that from back then or even earlier when the Japanese were talking about the “flying geese” model.  (And, incidentally,  Communist China did not at the time belong in the list.)  Where was Amartya Sen in the mid 1980s when all that was happening?  Jean Drèze was still a student perhaps. Is Professor Sen seeking to reinvent the wheel again with “Asian Economic Development” being claimed to be invented in 2013 by him and Drèze now? Oh please!  That just won’t fly either!

 

A second example may be taken from the year before Professor Sen was awarded the Bank of Sweden Prize when he gave a lecture on “human capital” theory which was published as a survey titled “Human Capital and Human Capability” in World Development 1997 Vol. 25, No. 12, 

 

Can you see any reference in this 1997 survey to TW Schultz’s 1960 American Economic Association Presidential Address or to Schultz’s classic 1964 book Transforming Traditional Agriculture or to his 1979 Bank of Sweden Prize address?  I could not.   If one did not know better, one might have thought from Professor Sen’s 1997 survey that there was nothing done worth talking about on the subject of “human capital” from the time of Adam Smith and David Hume until Amartya Sen finally came to the subject himself. 

 

Thirdly,  one is told by Sen’s admirer and collaborator, Professor James Foster of George Washington University, that what  Sen means by his notion of

 

“effective freedom”

 

is that this is something

 

“enhanced when a marginally nourished family now has the capability to be sufficiently nourished due to public action”…

 

Are Amartya and his acolytes claiming he has invented or reinvented welfare economics ab initio?   That before Amartya Sen, we did not know the importance of the able-bodied members of a community assisting those who are not able-bodied? 

 

Where have they been? Amartya needed merely to have read Marshall’s Principles evenslightly to find Marshall himself, the master of Maynard Keynes and all of Cambridge and modern world economics, declaring without any equivocation at the very start 

 

“….the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind…”

 

But Marshall was interested in study, serious study, of poverty and its causes and amelioration, which is not something as easy or trivial as pontification on modern television.  My 1984 article “Considerations on Utility, Benevolence and Taxation” which also became a chapter of my 1989 Philosophy of Economics surveyed some of Marshall’s opinion.

 

“From each according to his ability, to each according to his need” was a utopian slogan around 1875 from Karl Marx, which generations of passionate undergraduates have found impressive. Amartya Sen deserves to tell us squarely about his engagement with Marx or Marxist thought from his earliest days until now.  His commitment in recent decades to democracy and the open and free society is clear;  but has he also at the same time all along been committed to a kind of half-baked communist utopia as represented by Marx’s 1875 slogan? 

 

“To each according to his need” sounds to be the underlying premise that is seeing practical manifestation in the Sonia Congress’s imposition of a so-called “right to food”; “from each according to his ability” is its flip side in the so-called “rural employment guarantee”.  Leave aside the limitless resource-allocation and incentive and public finance problems created by such naive ideas being made into government policy, there is a grave and fundamental issue that Amartya and other leftists have been too blinkered to see:

 

Do they suppose the organised business classes have been weakly cooperative and will just allow such massive redistribution to occur without getting the Indian political system to pay them off as well?   And how do the organised business classes get paid off?  By their getting to take the land of the inhabitants of rural India.   And land in an environment of a debauching of money and other paper assets is as good as gold.

 

So the peasants will lose their land to the government’s businessman friends on the one hand while purportedly getting “guaranteed” employment and food from the government’s bureaucrats on the other!  A landless, asset-less slave population, free to join the industrial proletariat! Is that what Amartya wants to see in India?  It may become what results within a few decades from his and his acolytes’ words and deeds. 

 

Rajiv Gandhi once gave me his private phone numbers at 10 Jan Path.  I used them back in January 1991 during the Gulf war.  But I cannot do so now as Rajiv is gone.  Amartya can.  Let him phone Sonia and prevail upon her to put the brakes on the wild food and employment schemes he and his friends have persuaded her about until he reads and reflects upon what I said in January 2007 in “On Land-Grabbing” and in my July 2007 open letter to him, reproduced below:

 

“At a business meet on 12 January 2005, Dr Manmohan Singh showered fulsome praise on Buddhadeb Bhattacharjee as “dynamic”, “the Nation’s Best Chief Minister”, whose “wit and wisdom”, “qualities of head and heart”, “courage of conviction and passionate commitment to the cause of the working people of India” he admired, saying “with Buddhadeb Babu at the helm of affairs it appears Bengal is once again forging ahead… If today there is a meeting of minds between Delhi and Kolkata, it is because the ideas that I and Buddhadebji represent have captured the minds of the people of India. This is the idea of growth with equity and social justice, the idea that economic liberalization and modernization have to be mindful of the needs of the poor and the marginalized.”…. Dr Singh returned to the “needs of the poor and the marginalized” at another business meet on 8 January 2007 promising to “unveil a new Rehabilitation Policy in three months to increase the pace of industrialisation” which would be “more progressive, humane and conducive to the long-term welfare of all stakeholders”, while his businessman host pointedly stated about Singur “land for industry must be made available to move the Indian manufacturing sector ahead”. The “meeting of minds between Delhi and Kolkata” seems to be that agriculture allegedly has become a relatively backward slow-growing sector deserving to yield in the purported larger national interest to industry and services: what the PM means by “long-term welfare of all stakeholders” is the same as the new CPI-M party-line that the sons of farmers should not remain farmers (but become automobile technicians or IT workers or restaurant waiters instead).   It is a political viewpoint coinciding with interests of organised capital and industrial labour in India today, as represented by business lobbies like CII, FICCI and Assocham on one hand, and unions like CITU and INTUC on the other. Business Standard succinctly (and ominously) advocated this point of view in its lead editorial of 9 January as follows: “it has to be recognised that the world over capitalism has progressed only with the landed becoming landless and getting absorbed in the industrial/service sector labour force ~ indeed it is obvious that if people don’t get off the land, their incomes will rise only slowly”.  Land is the first and ultimate means of production, and the attack of the powerful on land-holdings or land-rights of the unorganised or powerless has been a worldwide phenomenon ~ across both capitalism and communism.  In the mid-19th Century, white North America decimated hundreds of thousands of natives in the most gargantuan land-grab of history. Defeated, Chief Red Cloud of the Sioux spoke in 1868 for the Apache, Navajo, Comanche, Cheyenne, Iroquois and hundreds of other tribes: “They made us many promises, more than I can remember, but they never kept any except one: they promised to take our land, and they took it.”  Half a century later, while the collapse of grain prices contributed to the Great Depression and pauperisation of thousands of small farmers in capitalist America in the same lands that had been taken from the native tribes, Stalin’s Russia embarked on the most infamous state-sponsored land-grab in modern history: “The mass collectivisation of Soviet agriculture (was) probably the most warlike operation ever conducted by a state against its own citizens…. Hundreds of thousands and finally millions of peasants… were deported… desperate revolts in the villages were bloodily suppressed by the army and police, and the country sank into chaos, starvation and misery… The object of destroying the peasants’ independence…was to create a population of slaves, the benefit of whose labour would accrue to industry. The immediate effect was to reduce Soviet agriculture to a state of decline from which it has not yet recovered… The destruction of the Soviet peasantry, who formed three quarters of the population, was not only an economic but a moral disaster for the entire country. Tens of millions were driven into semi-servitude, and millions more were employed as executants…” (Kolakowski, Main Currents of Marxism).   Why did Stalin destroy the peasants? Lenin’s wishful “alliance between the proletariat and the peasantry” in reality could lead only to the peasants being pauperised into proletarians. At least five million peasants died and (Stalin told Churchill at Yalta) another ten million in the resultant famine of 1932-1933. “Certainly it involved a struggle ~ but chiefly one between urban Communists and villagers… it enabled the regime to obtain much of the capital desired for industrialization from the defeated village… it was the decisive step in the building of Soviet totalitarianism, for it imposed on the majority of the people a subjection which only force could maintain” (Treadgold, 20th Century Russia).  Mr Bhattacharjee’s CPI-M is fond of extolling Chinese communism, and the current New Delhi establishment have made Beijing and Shanghai holiday destinations of choice. Dr Singh’s Government has been eager to create hundreds of “Special Economic Zones” run by organised capital and unionised labour, and economically privileged by the State. In fact, the Singur and Nandigram experiences of police sealing off villages where protests occur are modelled on creation of “Special Economic Zones” in China in recent years.  For example, Chinese police on 6 December 2005 cracked down on farmers and fishermen in the seaside village of Dongzhou, 125 miles North East of Hong Kong. Thousands of Dongzhou villagers clashed with troops and armed police protesting confiscation of their lands and corruption among officials. The police immediately sealed off the village and arrested protesters. China’s Public Security Ministry admitted the number of riots over land had risen sharply, reaching more than seventy thousand across China in 2004; police usually suppressed peasant riots without resort to firing but in Dongzhou, police firing killed 20 protesters. Such is the reality of the “emergence” of China, a totalitarian police-state since the Communist takeover in 1949, from its period of mad tyranny until Mao’s death in 1976, followed by its ideological confusion ever since.  Modern India’s political economy today remains in the tight grip of metropolitan “Big Business” and “Big Labour”. Ordinary anonymous individual citizens ~ whether housewife, consumer, student, peasant, non-union worker or small businessman ~ have no real voice or representation in Indian politics. We have no normal conservative, liberal or social democratic party in this country, as found in West European democracies where the era of land-grabbing has long-ceased. If our polity had been normal, it would have known that economic development does not require business or government to pauperise the peasantry but instead to define and secure individual property rights and the Rule of Law, and establish proper conditions for the market economy. The Congress and BJP in Delhi and CPI-M in Kolkata would not have been able to distract attention from their macroeconomic misdeeds over the decades ~ indicated, for example, by increasing interest-expenditure paid annually on Government debt as a fraction of tax revenues… This macroeconomic rot originated with the Indira Gandhi-PN Haksar capriciousness and mismanagement, which coincided with the start of Dr Singh’s career as India’s best known economic bureaucrat….”

 

“Professor Amartya Sen, Harvard University,  Dear Professor Sen,  Everyone will be delighted that someone of your worldwide stature has joined the debate on Singur and Nandigram; The Telegraph deserves congratulations for having made it possible on July 23.  I was sorry to find though that you may have missed the wood for the trees and also some of the trees themselves. Perhaps you have relied on Government statements for the facts. But the Government party in West Bengal represents official Indian communism and has been in power for 30 years at a stretch. It may be unwise to take at face-value what they say about their own deeds on this very grave issue! Power corrupts and absolute power corrupts absolutely, and there are many candid communists who privately recognise this dismal truth about themselves. To say this is not to be praising those whom you call the “Opposition” ~ after all, Bengal’s politics has seen emasculation of the Congress as an opposition because the Congress and communists are allies in Delhi. It is the Government party that must reform itself from within sua sponte for the good of everyone in the State.  The comparisons and mentions of history you have made seem to me surprising. Bengal’s economy now or in the past has little or nothing similar to the economy of Northern England or the whole of England or Britain itself, and certainly Indian agriculture has little to do with agriculture in the new lands of Australia or North America. British economic history was marked by rapid technological innovations in manufacturing and rapid development of social and political institutions in context of being a major naval, maritime and mercantile power for centuries. Britain’s geography and history hardly ever permitted it to be an agricultural country of any importance whereas Bengal, to the contrary, has been among the most agriculturally fertile and hence densely populated regions of the world for millennia.  Om Prakash’s brilliant pioneering book The Dutch East India Company and the Economy of Bengal 1630-1720 (Princeton 1985) records all this clearly. He reports the French traveller François Bernier saying in the 1660s “Bengal abounds with every necessary of life”, and a century before him the Italian traveller Verthema saying Bengal “abounds more in grain, flesh of every kind, in great quantity of sugar, also of ginger, and of great abundance of cotton, than any country in the world”. Om Prakash says “The premier industry in the region was the textile industry comprising manufacture from cotton, silk and mixed yarns”. Bengal’s major exports were foodstuffs, textiles, raw silk, opium, sugar and saltpetre; imports notably included metals (as Montesquieu had said would always be the case).  Bengal did, as you say, have industries at the time the Europeans came but you have failed to mention these were mostly “agro-based” and, if anything, a clear indicator of our agricultural fecundity and comparative advantage. If “deindustrialization” occurred in 19th Century India, that had nothing to do with the “deindustrialization” in West Bengal from the 1960s onwards due to the influence of official communism.  You remind us Fa Hiaen left from Tamralipta which is modern day Tamluk, though he went not to China but to Ceylon. You suggest that because he did so Tamluk effectively “was greater Calcutta”. I cannot see how this can be said of the 5th Century AD when no notion of Calcutta existed. Besides, modern Tamluk at 22º18’N, 87º56’E is more than 50 miles inland from the ancient port due to land-making that has occurred at the mouth of the Hooghly. I am afraid the relevance of the mention of Fa Hiaen to today’s Singur and Nandigram has thus escaped me.  You say “In countries like Australia, the US or Canada where agriculture has prospered, only a very tiny population is involved in agriculture. Most people move out to industry. Industry has to be convenient, has to be absorbing”. Last January, a national daily published a similar view: “For India to become a developed country, the area under agriculture has to shrink, urban and industrial land development has to take place, and about 100 million workers have to move out from agriculture into industry and services. This is the only way forward for bringing prosperity to the rural population”.   Rice is indeed grown in Arkansas or Texas as it is in Bengal but there is a world of difference between the technological and geographical situation here and that in the vast, sparsely populated New World areas with mechanized farming! Like shoe-making or a hundred other crafts, agriculture can be capital-intensive or labour-intensive ~ ours is relatively labour-intensive, theirs is relatively capital-intensive. Our economy is relatively labour-abundant and capital-scarce; their economies are relatively labour-scarce and capital-abundant (and also land-abundant). Indeed, if anything, the apt comparison is with China, and you doubtless know of the horror stories and civil war conditions erupting across China in recent years as the Communist Party and their businessman friends forcibly take over the land of peasants and agricultural workers, e.g. in Dongzhou. All plans of long-distance social engineering to “move out” 40 per cent of India’s population (at 4 persons per “worker”) from the rural hinterlands must also face FA Hayek’s fundamental question in The Road to Serfdom: “Who plans whom, who directs whom, who assigns to other people their station in life, and who is to have his due allotted by others?”  Your late Harvard colleague, Robert Nozick, opened his brilliant 1974 book Anarchy, State and Utopia saying: “Individuals have rights, and there are things no person or group may do to them (without violating their rights)”. You have rightly deplored the violence seen at Singur and Nandigram. But you will agree it is a gross error to equate violence perpetrated by the Government which is supposed to be protecting all people regardless of political affiliation, and the self-defence of poor unorganised peasants seeking to protect their meagre lands and livelihoods from state-sponsored pogroms. Kitchen utensils, pitchforks or rural implements and flintlock guns can hardly match the organised firepower controlled by a modern Government.   Fortunately, India is not China and the press, media and civil institutions are not totally in the hands of the ruling party alone. In China, no amount of hue and cry among the peasants could save them from the power of organised big business and the Communist Party. In India, a handful of brave women have managed to single-handedly organise mass movements of protest which the press and media have then broadcast that has shocked the whole nation to its senses.  You rightly say the land pricing process has been faulty. Irrelevant historical prices have been averaged when the sum of discounted expected future values in an inflationary economy should have been used. Matters are even worse. “The fear of famine can itself cause famine. The people of Bengal are afraid of a famine. It was repeatedly charged that the famine (of 1943) was man-made.” That is what T. W. Schultz said in 1946 in the India Famine Emergency Committee led by Pearl Buck, concerned that the 1943 Bengal famine should not be repeated following dislocations after World War II. Of course since that time our agriculture has undergone a Green Revolution, at least in wheat if not in rice, and a White Revolution in milk and many other agricultural products. But catastrophic collapses in agricultural incentives may still occur as functioning farmland comes to be taken by government and industry from India’s peasantry using force, fraud or even means nominally sanctioned by law. If new famines come to be provoked because farmers’ incentives collapse, let future historians know where responsibility lay.  West Bengal’s real economic problems have to do with its dismal macroeconomic and fiscal position which is what Government economists should be addressing candidly. As for land, the Government’s first task remains improving grossly inadequate systems of land-description and definition, as well as the implementation and recording of property rights.  With my most respectful personal regards, I remain, Yours ever, Suby”

 

How does India, as a state, treat its weakest and most vulnerable citizens? Not very well at all.  It is often only because families and society have not collapsed completely, as they have elsewhere, that the weakest survive.  Can we solve in the 21st Century, in a practical manner appropriate to our times, the problem Buddha raised before he became the Buddha some twenty six centuries ago?  Says Eliot,

 

“The legend represents him as carefully secluded from all disquieting sights and as learning the existence of old age, sickness and death only by chance encounters which left a profound impression”

 

It is to this list we add “the poor” too, especially if we want to include a slightly later and equally great reformer some miles west of the Terai in the Levant.  I said some years ago “As we as infants and children need to be helped to find courage to face the start of life, we when very elderly can need to be helped to find courage to face life’s end”.   Old age carries with it the fear of death, fear of the end of life and what that means, which raises the meaning of life itself, or at least of the individual life, because we can hardly grasp what the end of life is if we haven’t what it is supposed to be the end of in the first place. What the very elderly need, as do the dying and terminally ill, is to find courage within themselves to comprehend all this with as much equanimity as possible. Companionship and camaraderie — or perhaps let us call it love — go towards that courage coming to be found; something similar goes for the sick, whether a sick child missing school or the elderly infirm, courage that they are not alone and that they can and will recover and not have to face death quite yet, that life will indeed resume.  

 

As for the poor, I said in 2009 about the bizarre Indian scheme of “interrogating, measuring, photographing and fingerprinting them against their will” that “the poor have their privacy and their dignity. They are going to refuse to waste their valuable time at the margins of survival volunteering for such gimmickry.”

 

“What New Delhi’s governing class fails to see is that the masses of India’s poor are not themselves a mass waiting for New Delhi’s handouts: they are individuals, free, rational, thinking individuals who know their own lives and resources and capacities and opportunities, and how to go about living their lives best. What they need is security, absence of state or other tyranny, roads, fresh water, electricity, functioning schools for their children, market opportunities for work, etc, not handouts from a monarch or aristocrats or businessmen….” Or, to put it differently in Kant’s terms, the poor need to be treated as ends in themselves, and not as the means towards the ends of others…

 

 

Part II India’s Right Road Forward Now: Some Thoughtful Analysis for Grown Ups

 

5.   Transcending a Left-Right/Congress-BJP Divide in Indian Politics

6.   Budgeting Military & Foreign Policy

 

7.    Solving the Kashmir Problem & Relations with Pakistan

 

8.  Dealing with Communist China

 

9.   Towards Coherence in Public Accounting, Public Finance & Public Decision-Making

 

10.   India’s Money: Towards Currency Integrity at Home & Abroad

Posted in Academic research, Amartya Sen, Arvind Panagariya, Asia and the West, Bengal's Public Finances, Bhagwati-Sen spat, BJP, Britain in India, Cambridge Univ Economics, Cambridge University, Columbia University, Congress Party, Congress Party History, Credit markets, Economic inequality, Economic Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory of Interest, Economic Theory of Value, Economics of Public Finance, Financial Repression, Governance, Government accounting, Government of India, India's Big Business, India's Cabinet Government, India's Government economists, India's 1991 Economic Reform, India's balance of payments, India's Budget, India's bureaucracy, India's Capital Markets, India's constitutional politics, India's corruption, India's currency history, India's Economic History, India's Economy, India's Exports, India's Foreign Exchange Reserves, India's Government Budget Constraint, India's Industry, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Polity, India's Public Finance, India's Reserve Bank, India's State Finances, Institute of Economic Affairs, Jagdish Bhagwati, Jean Drèze, LK Advani, Manmohan Singh, Margaret Thatcher's Revolution, Mihir Kumar Roy (MKRoy), Milton Friedman, Money and banking, Padma Desai, Paper money and deposits, Political Economy, Public Choice/Public Finance, Public property waste fraud, Rajiv Gandhi, Rajiv Gandhi's assassination, Reverse-Euro Model for India, Sen-Bhagwati spat, Siddhartha Shankar Ray, Sonia Gandhi, Subroto Roy, Sukhamoy Chakravarty, The Times (London), University of Hawaii, William E (Ted) James (1951-2010). Leave a Comment »

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

7 January 2016
rajan

3 June 2014

from World Economy & Central Banking Seminar at Facebook

Professor Rajan’s statement “I determine the monetary policy. I say what it is….ultimately the interest rate that is set is set by me” equates Indian monetary policy with the money interest rate; but monetary policy in India has always involved far more than that, namely, the bulk of Indian banking and insurance has been in government hands for decades, all these institutions have been willy-nilly compelled to hold vast stocks of government debt, both Union and State, on their asset-sides…and unlimited unending deficit finance has led to vast expansion of money supply, making it all rather fragile. My “India’s Money” in 2012 might be found useful. http://tinyurl.com/o9dhe8d

11 April 2014

from World Economy & Central Banking Seminar at Facebook

I have to wonder, What is Professor Rajan on about? Growth in an individual country is affected by the world monetary system? Everyone for almost a century has seen it being a real phenomenon affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress… A “source country” needs to consult “recipient” countries before it starts or stops Quantitative Easing? Since when? The latter can always match policy such as to be more or less unaffected… unless of course it wants to ride along for free when the going is good and complain loudly when it is not…. Monetary policy may affect the real economy but as a general rule we may expect growth (a real phenomenon) to be affected by other real factors like savings propensities, capital accumulation, learning and productivity changes, innovation, and, broadly, technological progress..

22 September 2013

“Let us remember that the postponement of tapering is only that, a postponement. We must use this time to create a bullet proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike…”

I will say the statement above is the first sensible thing I have heard Dr Rajan utter anywhere, cutting through all the hype…I should also think he may be underestimating the task at hand, so here’s some help as to what needs to be done from my 19 Aug 2013 Mint article “A wand for Raghuram Rajan” and my 3 Dec 2012 Delhi lecture:

“Rajan has apparently said, “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.” Of course there are no magic wands but there is a scientific path forward. It involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity. It also involves institutional changes in public decision-making like separating banking and central banking from the treasury while making the planning function serve the treasury function rather than pretend to be above it. It is a road long and arduous but at its end both corruption and inflation will have been reduced to minimal levels. The rupee will have acquired sufficient integrity to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases. India signed the treaty of Versailles as a victor and was an original member of the League of Nations, the United Nations and the IMF. Yet sovereign India has failed to develop a currency universally acceptable as freely convertible world money. It is necessary and possible for India to aim to do so because without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. An RBI governor’s single overriding goal should be to try to bring a semblance of integrity to India’s money both domestically and worldwide.”

 

 

19 August 2013

A wand for Raghuram Rajan

9 August 2013

No magic wand, Professor Rajan? Oh but there is… read up all this over some hours and you will find it… (Of course it’s not from magic really,  just hard economic science & politics)

Professor Raghuram Govind Rajan of the University of Chicago Business School deserves everyone’s congratulations on his elevation to the Reserve Bank of India’s Governorship.  But I am afraid I cannot share the wild optimism in India’s business media over this.  Of course there are several positives to the appointment.  First, having a genuine PhD and that too from a top school is a rarity among India’s policy-makers; Rajan earned a 1991 PhD in finance at MIT’s management school for a thesis titled “Essays on banking” (having to do we are told “with the downside to cozy bank-firm relationships”).   Secondly, and related,  he has not been a career bureaucrat as almost all RBI Governors have been in recent decades.  Thirdly, he has been President of the American Finance Association, he won the first Fischer Black prize in finance of that Association, and during Anne Krueger’s 2001-2006 reign as First Deputy MD at the IMF, he was given the research role made well-known by the late Michael Mussa, that of “Economic Counselor” of the IMF.

Hence, altogether, Professor Rajan has come to be well-known over the last decade in the West’s financial media. Given the dismal state of India’s credit in world capital markets, that is an asset for a new RBI Governor to have.

On the negatives, first and foremost, if Professor Rajan has renounced at any time his Indian nationality, surrendered his Indian passport and sworn the naturalization oath of the USA, then he is a US citizen with a US passport and loyalty owed to that country, and by US law he will have to enter the USA using that and no other nationality.  If that happens to be the factual case, it will be something that comes out in India’s political cauldron for sure, and there will arise legal issues and court orders  barring him from heading the RBI or representing India officially, e.g. when standing in for India’s Finance Minister at the IMF in Washington or the BIS in Basle etc.   Was he an Indian national as Economic Counselor at the IMF?   The IMF has a tradition of only European MDs and at least one American First Deputy MD.   The Economic Counselor was always American too; did Rajan break that by having remained Indian, or conform to it by having become American?  It is a simple question of fact which needs to come out clearly.   Even if Rajan is an American, he and the Government of India could perhaps try to cite to the Indian courts the new precedent set by the venerable Bank of England which recently appointed a Canadian as Governor.

Secondly, does Professor Rajan know enough (or “have enough domain knowledge” in the modern term) to comprehend let aside confront India’s myriad monetary and public finance problems?  Much of his academic experience in the USA and his approach to Western financial markets may be quite simply divorced from the reality of Indian credit markets and India’s peculiar monetary and banking system as these have evolved over decades and centuries.  Mathematical finance is a relatively new, small specialised American sub-field of economic theory, and not a part of general economics. Rajan’s academic path of engineering and management in India followed by a finance thesis in the management department of a US engineering school may have exposed him to relatively little formal textbook micro- and macroeconomics, monetary economics, public finance, international economics, economic development etc, especially as these relate to Indian circumstances  “Growing up in India, I had seen poverty all around me. I had read about John Maynard Keynes and thought, wow, here’s a guy who managed to have an enormous influence on the world. Economics must be very important.”… He ran across Robert Merton’s paper on rational option pricing, and something clicked that set him on his own intellectual path. “It all came together. You didn’t have these touchy-feely ways of describing human behavior; there were neat arbitrage ways of pricing things. It just seemed so clever and sophisticated,” he said. “And I could use the math skills that I fancied I had, so I decided to get my PhD.”

Let me take two examples.  Does Rajan realise how the important Bottomley-Chandavarkar debates of the 1960s about India’s rural credit markets influenced George Akerlof’s “Market for Lemons” theory and prompted much work on “asymmetric information”, 325.extract signalling etc in credit-markets, insurance-markets, labour-markets and markets in general, as acknowledged in the awards of several Bank of Sweden prizes?  Or will he need a tutorial on the facts of rural India’s financial and credit markets, and their relationship with the formal sector?  What the Bottomley-Chandavarkar debate referred to half a century ago still continues in rural India insofar as large arbitrage profits are still made by trading across the artificially low rates of money interest caused by financial repression of India’s “formal” monetised sector with its soft inconvertible currency against the very high real rates of return on capital in the “informal” sector.   It is obvious to the naked eye that India is a relatively labour-abundant country.  It follows the relative price of labour will be low and relative price of capital high compared to, e.g. the Western or Middle Eastern economies, with mobile factors of production like labour and capital expected to flow accordingly across national boundaries.   Indian nominal interest-rates in organized credit markets have been for decades tightly controlled, making it necessary to go back to Irving Fisher’s data to obtain benchmark interest-rates, which, as expected, are at least 2%-3% higher in India than in Western capital markets. Joan Robinson once explained “the difference between 30% in an Indian village and 3% in London” saying “side by side with the industrial revolution went great technical progress in the provision of credit and the reduction of lender’s risk.”

What is logically certain is no country can have both relatively low world prices for labour and relatively low world prices for capital!  Yet that impossibility seems to have been what India’s purported economic “planners” have planned to engineer!  The effect of financial repression over decades may have been to artificially “reverse” or “switch” the risk-premium — making it lucrative for there to be capital flight out of India, with real rates of return on capital within India being made artificially lower than those in world markets!   Just as enough export subsidies and tariffs can make a country artificially “reverse” its comparative advantage with its structure of exports and imports becoming inverted, so a labour-rich capital-scarce country may, with enough financial repression, end up causing a capital flight.  The Indian elite’s capital flight out of India exporting their adult children and savings overseas may be explained as having been induced by government policy itself.

431314_10150617690307285_69226771_n

Secondly, Professor Rajan as a finance and banking specialist, will see at once the import of this graph above that has never been produced let aside comprehended by the RBI, yet which uses the purest RBI data.  It shows India’s mostly nationalised banks have decade after decade gotten weaker and weaker financially, being kept afloat by continually pumping in of new “capital” via “recapitalisation” from the government that owns them, using more and more of the soft inconvertible currency that has been debauched merrily by government planners.  The nationalised banks with their powerful pampered employee unions, like other powerful pampered employee unions in the government sector, have been the bane of India, where a mere 30 million privileged people in a vast population work with either the government or the organised private sector.  The RBI’s own workforce at last count was perhaps 75,000… the largest central bank staff in the world by far!

Will Rajan know how to bring some system out of the institutional chaos that prevails in Indian banking and central banking?  If not, he should start with the work of James Hanson “Indian Banking: Market Liberalization and the Pressures for Institutional and Market Framework Reform”, contained in the book created by Anne Krueger who brought him into the IMF, and mentioned in my 2012 article “India’s Money” linked below.

The central question for any 21st century RBI Governor worth the name really becomes whether he or she can stand up to the Finance Ministry and insist that the RBI stop being a mere department of it — even perhaps insisting on constitutional status for its head to fulfill the one over-riding aim of trying to bring a semblance of integrity to India’s currency both domestically and worldwide.  Instead it is the so-called “Planning Commission” which has been dominating the Treasury that needs to be made a mere department of the Finance Ministry, while the RBI comes to be hived off to independence!  

Professor Rajan has apparently said “We do not have a magic wand to make the problems disappear instantaneously, but I have absolutely no doubt we will deal with them.”  Of course there are no magic wands but my 3 December 2012 talk in Delhi  has described the right path forward, complex and difficult as this may be.

The path forward involves system-wide improvements in public finance and accounting using modern information technology to comprehend government liabilities and expenditures and raise their productivity, plus institutional changes in public decision-making like separating banking and central banking from the Treasury while making the planning function serve the Treasury function rather than pretend to be above it.  The road described is long and arduous but at its end both corruption and inflation will have been reduced to minimal levels, and the rupee would have acquired integrity enough to become a hard currency of the world in the sense the average resident of, say, rural Madhya Pradesh or Mizoram may freely convert rupees and hold or trade foreign currencies or precious metals as he/she pleases.

3dec

India signed the Treaty of Versailles as a victor and was an original member of the League of Nations, UN and IMF.  Yet sovereign India has failed to develop a currency universally acceptable as a freely convertible world money. It is necessary and possible for India to do so. Without such a national aim, the integrity of the currency continues to be damaged regularly by governmental abuse. 

Professor Rajan will not want to be merely an adornment for the GoI in world capital markets for a few  years, waiting to get back to his American career and life and perhaps to the IMF again.  As RBI Governor, he can find his magic wand if he reads and reflects hard enough using his undoubted academic acumen, and then acts to lead India accordingly.  Here is the basic reading list:

“India’s Money” (2012)

“Monetary Integrity and the Rupee” (2008)

“India’s Macroeconomics” (2007)

“Fiscal Instability” (2007)

“Fallacious Finance” (2007)

“Growth and Government Delusion” (2008)

“India in World Trade & Payments” (2007)

“Path of the Indian Rupee 1947-1993” (1993)

“Our Policy Process” (2007)

“Indian Money and Credit” (2006)

“Indian Money and Banking” (2006)

Indian Inflation

“Growth of Real Income, Money & Prices in India 1869-2004” (2005)

“How to Budget” (2008)

“Waffle but No Models of Monetary Policy: The RBI and Financial Repression (2005)”

“The Dream Team: A Critique” (2006)

“Against Quackery” (2007)

“Mistaken Macroeconomics” (2009)

“The Indian Revolution (2008)”

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

Enjoy!

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

Budgets & Financial Positions of Three of India’s Most Populous States (combined population c.300 million)…Brought to you especially by Dr Subroto Roy… Feel free to use (with acknowledgment)…

Budgets & Financial Positions of Three of India’s Most Populous States (combined population c.300 million)…Brought to you especially by Dr Subroto Roy… Feel free to use (with acknowledgment)… Government Finance 2003-2004 (C&AG data)
EXPENDITURE ACTIVITIES : Rs Bn (Hundred Crore)
MAHARASHTRA UTTARPRADESH WEST BENGAL
government & local government 18.19 2.58% 30.33 3.52% 8.68 1.68%
judiciary 2.96 0.42% 3.17 0.37% 1.27 0.25%
police (including vigilance etc) 19.81 2.81% 25.81 2.99% 13.47 2.61%
prisons 0.86 0.12% 1.13 0.13% 0.62 0.12%
bureaucracy 27.97 3.97% 11.63 1.35% 5.69 1.10%
collecting land revenue & taxes 42.25 6.00% 8.41 0.98% 4.32 0.84%
government employee pensions 26.36 3.74% 29 3.36% 26.11 5.05%
schools, colleges, universities, institutes 93.74 13.31% 62.79 7.28% 45.06 8.72%
health, nutrition & family welfare 23.42 3.33% 18.97 2.20% 14.7 2.84%
water supply & sanitation 10.22 1.45% 6.04 0.70% 3.53 0.68%
roads, bridges, transport etc. 12.96 1.84% 16.13 1.87% 8.29 1.60%
electricity 16.96 2.41% 200.22 23.23% 31.18 6.03%
irrigation, flood cntrl., environ, ecology 70.79 10.05% 29.98 3.48% 10.78 2.09%
agricultural subsidies, rural development 41.3 5.86% 16.07 1.86% 7.97 1.54%
industrial subsidies 2.6 0.37% 8.19 0.95% 2.56 0.50%
capital city development 6.25 0.89% 1.08 0.13% 7.29 1.41%
soc security, SC, ST, OBC, lab.welfare 25.4 3.61% 18.36 2.13% 9.87 1.91%
tourism 0.89 0.13% 0.2 0.02% 0.09 0.02%
arts, archaeology, libraries, museums 0.75 0.11% 0.37 0.04% 0.16 0.03%
miscellaneous -0.47 -0.07% 0.53 0.06% 0.52 0.10%
debt amortization & debt servicing 261.03 37.07% 373.6 43.34% 314.77 60.89%
total expenditure 704.24 862.01 516.93
MAHARASHTRA UTTARPRADESH WEST BENGAL
tax revenues 285.52 268.74 141.1
operational income 35.49 22.82 6.06
grants from Union of India 22.7 24.82 18.93
loans recovered 4.82 124.98 0.91
total income 348.53 441.36 167
GOVERNMENT BORROWING REQUIREMENT
(total expenditure less total income) = 355.71 420.65 349.93
FINANCED BY
new public debt issued 317.02 385.41 339.48
use of Trust Funds etc. 38.68 35.26 10.45
355.7 420.67 349.93

Brady Bonds for Bengal….

From Facebook July 11 2011:

Subroto Roy introduced the idea, of course momentarily, of Brady Bonds for Bengal some six hours ago, and expects it will become part of policy-discussion in Bengal within six months.

From Facebook July 10 2011:

Subroto Roy is glad to read of Brady Bonds again — Mamata Banerjee’s West Bengal needs them too but who is going to explain that much economics to her? Amartya Sen? Or his proteges?

My 200 words on India’s Naxal guerrilla rebels that a “leading business magazine” invited but then found too hot to handle

“Public finances in India, state and Union, show appalling accounting and lack of transparency. Vast amounts of waste, fraud and malfeasance get hidden as a result. The Congress, BJP, official communists, socialists et al are all culpable for this situation having developed – over decades. So if you ask me, “Is the Indian state and polity in a healthy condition?” I would say no, it is pretty rotten. Well-informed, moneyed, mostly city-based special interest groups (especially including organised capital and organised labour) dominate government agendas at the cost of ill-informed, diffused masses of anonymous individual citizens ~ peasants, forest-dwellers, small businessmen, non-unionized workers, the destitute, etc. Demarcations of private, community and public property rights frequently remain fuzzy. Inflation causes non-paper assets to rise in value, encouraging land-grabs. And the fetish over purported growth-rates continues despite measurements being faulty, not reaching UN SNA standards, probably hiding increasing inequalities. India’s polity and economy are in poor shape for many millions of ordinary people. Armed rebellion, however, does not follow from this. Killing poor policemen and starting class-wars were failed Naxal tactics in the 1970s and remain so today. Naxals should put down their weapons and use Excel sheets and government accounting data instead.

Dr Subroto Roy, economist and adviser to Rajiv Gandhi 1990-1991.”

A New Drachma? Thinking further on the need for a new Greek domestic currency to revive trade: Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?

from Twitter 2015 June July

 

What is my argument against € in #Greece= #grexit? It’s that Greeks didn’t need a hard world currency to turnover their real transactions… Eg suppose everyone in India was compelled to use grains of gold to buy fish or veg in the mkt or to get a haircut: mightn’t trade slow down? even if a barber gives you a haircut and accepts a grain or two of gold in exchange, he may then *hoard* that, not use it in further trade… would you use grains of gold in India to get a haircut or buy fish? if forced to,Velocityof Circulation would slow…

People would tend to hoard the gold, liquidate assets to acquire it, wait to see how things went…rather than actually trade as they used to..

My surmise has been Greeks who had assets & could liquidate did so, gaining windfall profits, then leaving/emigrating…hedging their bets..

The public debt left for those w/o assets…meanwhile velocity of circulation of the currency slowed, domestic trade& hence income collapsed.

 

From Facebook discussions:

March 2010:  …My view on Greece appears different. In my view, a transition to a new Drachma will be drastic but will not be any more catastrophic than the present trap Greece has put itself in.

The current path makes a fetish of the fiscal side when the problem at root has been monetary, arising from a purported monetary union, a *superficial* monetary union being created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences.

Money has two main functions, being a medium of exchange and a store of value; the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default makes the Euro a risky store of value for Germans, Dutch et al. Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, others would have been wondering about a flight to safety outside the Euro. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may worsen the situation without any new equilibrium path being anywhere near to be found.

The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. There would have to be a

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls (smuggling is inevitable);
(c) deciding a new price for the Drachma, say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.
(f) Exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions.

Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

I have spent decades arguing *against* all this in the Indian case but have to say it is what Greece may need now, for a period of adjustment of half a dozen or so years.

Is the Greek/German Eurozone problem the mathematical dual of Gresham’s Law?
17 October 2011 
 
Money according to economic theory has two main functions, namely, being a medium of exchange and a store of value; I have been saying that I think the Euro has become too (implicitly) expensive for Greeks to be an effective medium of exchange, while the threat of a Greek default would make the Euro a risky store of value for Germans, Danes et al. If I am right, Greeks would have been hoarding Euros, reducing the velocity of circulation, and causing domestic trade to turnover more slowly and hence damaging national income; at the same time, the Germans, Danes et al would have been wondering about a flight to safety outside the Euro. Some young mathematical economist may take my idea and develop it it intelligently as the *dual* problem to Gresham’s law http://en.wikipedia.org/wiki/Gresham%27s_law inasmuch as weak fiscal positions are causing, through a common money, stronger fiscal positions to weaken…
 
Addendum Oct 25 2011
My guess has been the Euro has become a de facto hard currency for Greeks, who will then hoard it and slow the velocity of circulation, damaging the turnover of normal domestic trade and hence damaging national income; i.e. it has become too expensive as a currency to properly fulfill the medium of exchange function of money in Greece; at the same time, Germans, Dutch and others in fiscally strong economies relatively have to account for the added risk of Greek infirmity and hence find the Euro less of a store of value than otherwise, causing incentives to flee to other denominations. Introducing a soft inconvertible domestic money in Greece would allow the medium of exchange function to be fulfilled and revive domestic trade and income; it would have to be accompanied by exchange and import controls, leaving the Euro as a hard currency for external transactions. The present route being followed of trying to improve Greece’s fiscal situation by compulsion may well worsen the situation without any new equilibrium path being anywhere near to be found.
 

Thinking further on the need for a new Greek domestic currency to revive trade
16 September 2011 
 
Subroto Roy: Re  “it is still not clear what will actually happen”, what will happen is there will be an inevitable recognition that the introduction of the Euro was premature, probably irreversible, and likely to be catastrophic as it unwinds.
 
Edward Hugh Yes, well…. and apart from that little detail Suby, what else do you forsee. I absolutely agree, by the way, that these madmen (and women) have taken the global economy to the brink of disaster through their inability to listen.
 
Maria Tadd When words like catastrophic are used, they obviously send fear into the hearts of many. Suby and Ed, how do you envision the fall out to look like?
 
Subroto Roy    There has to be a clear way out for a currency to exit; that has never been thought out beforehand; creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union.  A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. Now Greece needs, as I have said over two years, an inexpensive inconvertible domestic money which allows domestic trade and savings to take place normally; the Euro would have to become a hard currency for external use.
 
Edward Hugh Do you mean like what has been happening in Croatia Suby?
Subroto Roy I am afraid I have to admit ignorance of Europe’s facts, what I am working on is my (quite sound) knowledge of monetary economics acquired from Hahn, Friedman, Walters, ACL Day, Griffths, Hicks via Miller, etc. Thinking about Greece overnight: if the Euro has become a de facto hard currency there, its velocity of circulation will fall as people tend to hoard it, causing domestic transactions & trade and hence national income to fall too; hence further the need for an inexpensive domestic currency (under capital controls) for domestic trade and transactions to be revived.
 
(Capital controls imply import restrictions and the rationing of foreign exchange so Greeks will not be big tourists in the rest of the world for a while but what the heck they have so much to see in their own country.)
 
 
Oct 3 2011:
 
“What I have said for two years now is that Greece needs to introduce a soft inconvertible domestic money to facilitate domestic trade and revive growth; it would have to be accompanied by import controls and forex rationing with the Euro becoming a hard currency in Greece for external transactions. Why? Because the Euro has probably become a de facto hard currency for Greeks who would then tend to hoard it, slowing velocity of circulation and causing domestic transactions to be reduced. (At the same time, Germans, Danes and others have an incentive to leave the Euro for the safety of some other hard currency in view of a possible Greek default.) Money has two main functions, being a store of value and a medium of exchange. In present circumstances, the Euro is becoming a dubious store of value for the Germans et al while becoming too scarce to be a proper medium of exchange for the Greeks. All this is good standard monetary economics, which no one in the ECB, IMF, financial journalism etc somehow seems to be able to recall. Instead they have made a fetish of the fiscal side, and that is destined to neither address the root problem nor to bring civil peace….”

My “Reverse Euro” Model of June 1998, and my writings on a new money for Greece: letter to the Wolfson Economics Prize donors by Subroto Roy on Thursday, 20 October 2011 at 18:51 ·
 

Hello,
In June 1998, I gave an invited lecture at the Institute of Economic Affairs on a “Reverse Euro” model for India, i.e., on how India could and should consider creating (under certain conditions) more than a dozen state-monies to coexist with a national currency too in the interests of a better fisc and some slight pretence to monetary integrity. In doing so, I also expressed my very grave foreboding about what the Euro was intended to be doing the following year in actual practice in Europe; I remember visiting a prominent British  Euro-optimist too and making my argument in contrast about the Euro’s arrival.

Subsequently, Milton Friedman and I corresponded too about my idea, and he found merit in it in describing an exit route for, he said, Italy for example, if that country needed such an exit route given its fiscal condition to depart from the Euro in due course. I also talked briefly about the subject at an invited lecture at the Reserve Bank of India in April 2000, as well as elsewhere.

Over the last two years, I have (and I think was the first to do so) suggested Greece needs a New Drachma, and how this should be gone about.  This has been outlined by me with many economists informally by email, as well as discussed at Facebook at some length.

I have little doubt what I am saying is broadly right — in the sense that it is the most consistent with the formal body of economic theory known as monetary economics.  I was taught monetary economics very well in the mid 1970s at the LSE by, for example, ACL Day, Alan Walters, Brian Griffiths, Marcus Miller (a student of JR Hicks) and others which came to be followed by my doctoral dissertation at Cambridge under Frank Hahn, and postdoctoral work in America with Jim Buchanan.  Plus Milton Friedman became a friend and stood for me as an expert witness in a US federal court (the only time he ever did that)!  My most recent work is a book edited with John Clark titled Margaret Thatcher’s Revolution: How it Happened and What it Meant published by Continuum in 2005 — that has an essay relevant to this subject commissioned by us and done by Patrick Minford of Cardiff.

So I do plan to write something for your prize but whatever I do write will not be worth the vast sum of money you are offering — in fact, I would say you need to break it up into little bits in due course and parcel it out to the most fruitful ideas.  The fox knows many things but the hedgehog knows one big thing… This is a fox problem, not a hedgehog one.  Perhaps you should commission a journal or a multi-essay volume or a set of volumes or monographs rather than hand out one big cheque to someone who will not deserve it. (And please say no more about the moneys the Bank of Sweden gives away every year in the name of the advancement of knowledge in economics…)  

The problem you have raised is a fundamental one and should have been raised decades ago, not merely by Eurosceptics in the occasional lecture or newspaper article but in many formal academic doctoral theses and journals all over Europe, long before the Euro came to be introduced — and note that the jump from the unification of Germany (with the 1:1 DM:Ostmark problem) was less than a decade before that.  That did not happen.  So now your belated initiative is most welcome, better late than never, better something than nothing.

Do let me know please what else I need to know to send in my theoretical thoughts on this.

Cordially

Suby Roy

February 21 2012:

My idea has been far better (because it is based on standard monetary economics which the ECB, IMF etc bureaucrats appear to have all forgotten or never learnt) …

[Devaluation refers to exchange-rates. There are no exchange-rates, that is precisely the problem; exchange-rates are prices, and as such market signals. By getting rid of them, market signals were lost. The point I am making in my notes is that there is still an *implicit* shadow exchange-rate if you like, so the Euro being used in Greece actually has a different local price in terms of real goods and services than the same Euro being used in Germany!]

Hans Suter: A Drachma at a discount of 40% would certainly push tourism by a 20% ? That would be a 3 to 4% jump of GDP.)

Subroto Roy: A New Drachma can be at 0.1 of a Euro, or less. But at least *local* trade and business will be revived and slowly national income will grow. The Greeks will feel free and self-confident and sovereign. Yes they cannot buy any more BMWs or tour Paris or Italy any more. But they can go and visit the Taj Mahal and the Pyramids perhaps. [And they can take 100 years to repay their Euro debts instead of 50 years…]

Subroto Roy hears “If the Baltics can, then why not Greece?”, and says the Baltics are the Baltics, God Bless them, Greece is Greece… I have no idea about the Baltics. The closest I got to them was an Estonian friend in Helsinki many years ago. In Greece what I am saying is that the money that is being used, the Euro, is no longer a natural money, and for that matter, it never was a natural money — money and banking evolve naturally out of trade and commerce, and to truck, barter and exchange are natural human propensities. Creating a monetary union is the *final* step from a free trade area to a customs union to an economic union to a monetary union. A purported monetary union, or rather a *superficial* monetary union was created, when there were wildly different underlying fiscal histories and fiscal propensities and preferences. The Euro has been an artificial money that eradicated the vital market signalling function that exchange-rates played (since exchange-rates are prices). A new inconvertible soft domestic money for Greece would allow domestic transactions to turnover properly once more and hence revive trade and national income. Greece could still be “in” the Eurozone nominally in the sense of having a fixed exchange-rate with the Euro which would be used for external trade. But there would have to be capital controls and import controls and foreign exchange rationing. At least for a while, probably a long while. Greece’s Euro debt would take 100 years instead of 50 years to repay. But at least the Greeks would feel free and sovereign and self-confident again, and adjust to their domestic economic realities in peace.

From Facebook May 14 2012
Diran Majarian
“The big issue here is how to deal with the debt overhang after the drachma transition since this must apply to both assets and liabilities.”

Subroto Roy The New Drachma has to be an inconvertible soft currency and Greece has to have import controls and capital export controls. Euro denominated assets held by domestic residents become Drachma-denominated (at a fixed, not a market-determined rate, e.g. 1:500 or 1:1000); Euro-denominated liabilities incurred by domestic residents remain Euro-denominated: if it is the Government, they can negotiate how much or all if it they will repay over time; if it is private, private assets may be converted to pay it and/or there will be individual defaults or delays (restructuring) or write-offs.

May 14 2012
The famous Professor Wilhelm Buiter (Cambridge BA 1971, Yale PhD 1975) has said this? “The instant before Greece exits it (somehow) introduces a new currency (the New Drachma or ND, say). Assume for simplicity that at the moment of its introduction the exchange rate between the ND and the euro is 1 for 1. This currency then immediately depreciates sharply vis-à-vis the euro (by 40 percent seems a reasonable point estimate). All pre-existing financial instruments and contracts under Greek law are redenominated into ND at the 1 for 1 exchange rate. What this means is that, as soon as the possibility of a Greek exit becomes known, there will be a bank run in Greece and denial of further funding to any and all entities, private or public, through instruments and contracts under Greek law. Holders of existing euro-denominated contracts under Greek law want to avoid their conversion into ND and the subsequent sharp depreciation of the ND. The Greek banking system would be destroyed even before Greece had left the euro area”…

Excuse me? This from the Chief Economist at Citi bank and “Professor of European Political Economy” at my alma mater, the London School of Economics and Political Science? What a load of rubbish Professor Buiter! Whom did you learn your monetary economics from? OK, ok, I should be polite: what makes you think a 1:1 exchange-rate should be fixed? Why not 1:500? Or 1:1000? The aim is to have a soft flexible inconvertible domestic currency *which facilitates, indeed stimulates, the turnover of domestic trade*, and allows equilibrium domestic relative prices to be found and adjusted towards. And why should Greece default on its Euro debt?! It might merely take a little longer to repay it. The change in currency is a conceptually distinct problem from that of credit-worthiness. Here is what I have said instead over two years, and for free:

Reintroducing the New Drachma would require

(a) clamping down overnight on capital exports followed by forex rationing;
(b) closing the trade borders and imposing import controls;
(c) deciding a new price for the Drachma, I would say something like 500 or 1000 to the Euro (the aim is for equilibrium domestic relative prices to be adjusted towards and for domestic trade to turnover properly and expeditiously and indeed stop its collapse);
(d) exchanging all forex/Euro-denominated financial assets held by domestic residents to New Drachma-denominations at the new rate automatically;
(e) exchanging all cash forex/Euro held by domestic residents to New Drachmas, through “licensed authorised dealers” as well as e.g. by ordering all commercial establishments to give New Drachma change in transactions. Would Greece have “left the Euro”? Yes and No. It would not be part of the Euro Area but the New Drachma would be a Euro-standard currency where the Government guaranteed to buy up all Euro held by domestic residents at the fixed price in exchange for New Drachmas and held its forex reserves in Euros.

A New Drachma?
Facebook April 29 2010:
Subroto Roy thinks a New Drachma is inevitable sooner or later but remains deeply puzzled at the possible ways it may get reintroduced. The examples of such monetary reforms are all long gone from memory, in the immediate aftermath of WWII. It seems clear the Euro will become an increasingly scarce currency not suitable for fulfilling the normal medium of exchange function in domestic Greek transactions and will become a rationed hard currency under capital controls for external transactions only. It may already be hard or impossible to restrain a capital flight, perhaps underway. How will the actual transition be made? Perhaps by allowing Greek government debt denominated in a new local money, call it the New Drachma, to become tradeable? I said in my *Reverse Euro* model for India lecture in June 1998 at London’s IEA that the Eurozone could end up looking less like America’s monetary union than India’s.
 
April 8 2010:
Subroto Roy, reading “It is hard to know how to interpret this large decline in deposits”, says “Not really. The Euro is becoming a *scarce hard currency* in Greece, i.e., it is becoming too expensive to use Euros to satisfy Greece’s transactions demand for money, the medium of exchange function, hence Greece has an increasing need for a new local currency which will satisfy that function while the Euro is retained for use in Greece’s international transactions”.
 
Subroto Roy thinks the only sustainable long-term solution may be the reintroduction of a New Drachma, which will need time to stabilize behind a period of foreign exchange controls and rationing. The DM/FFr-based Euro would become a hard currency relative to a New Drachma.
 
March 24 2010:
Subroto Roy expects the US, Britain, ANZ and everyone else in the IMF who is not in the Eurozone may legitimately ask why the effective subsidy of Greece by its Eurozone partners should be transferred to the rest of the world.
Subroto Roy thinks the Europeans have enough clout in the IMF to, say, insist some of their own IMF-directed resources be directed towards Greece specifically, which would spell the unravelling of the IMF if it became a general habit.
 
Subroto Roy says “I had a very productive few months in 1993 as a high-level consultant working for Hubert Neiss at the IMF (consultants are, or at least were, very rare at the IMF unlike at the World Bank etc) when I came to understand a little of how the place works (leaving aside all the theory). The French Managing Director is a politician and not an economist or even a central banker, and I am sure France and Germany can swing some IMF money towards Greece. But of course, the IMF can by definition give no *monetary* or exchange-rate advice to Greece because there is no sovereign monetary authority in Greece any more. Hence all it can do is add the same fiscal (and political) advice and conditions as the rest of the Eurozone countries have done plus make the piggy bank larger with some IMF money. It may work once, but if France and Germany then say, right, Portugal, Spain, Italy are next in line, that is the end of the IMF, because its European members may as well be asked to pull out altogether. On the other hand, my radical advice to the IMF might have been to propose to help Greece to reintroduce the drachma and re-establish a sovereign monetary authority of its own, which would take IMF advice and expertise as a New Drachma would take time to stabilize and there would be a period of capital controls on foreign exchange transactions.”
 
Subroto Roy gave a Jun ’98 lecture at London’s IEA on why India should have a  *Reverse-Euro* model: eg 16 major states have their own (domestic) monies with a national rupee coexisting too & free currency markets everywhere. I said I feared a Eurozone may end up *looking like India* rather than the US in this. India has papered over wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!
 
Subroto Roy says Europe could have been a confederation & an economic union for practical purposes without individual monetary sovereignties being lost. E.g., the drachma or peso or escudo or punt or lira could each have chosen to appropriately link to some combination of the DM, FFR, sterling etc. And a Europe-wide Euro from an ECB could have coexisted as well.
 
Subroto Roy  finds Mr Constanzo mention Gresham’s Law, and says, “Certainly there might have been currency competition in Europe, and some of the smaller currencies may have chosen to go to *that* Euro — but DM would not have done, and would have been an alternative to it.”
 
Subroto Roy  thought imposing a single newly invented money on different economies a bit like imposing a single newly invented language (like Esperanto) on different peoples.
 
Subroto Roy  says India has papered over the wild fiscal mismanagement by the States by even wilder fiscal mismanagement by the Union!
 
Subroto Roy  thinks the effective subsidy French farmers et al were getting from Germany in pre-Euro days all came to be subsumed within Euro-economics; an alternative would have been to *leave* DM as it was, & perhaps FFR too, & to have introduced a Euro for smaller economies to use (presumably to save transactions costs);*that* Euro could have been linked to the DM etc. The Germans would have been happy & the problems avoided.
 
Subroto Roy  says German unification hit the Germans badly enough and they seem hardly in any mood to keep on playing Sugar-Daddy to everyone else while still having to defer to the putative victors of WWII (France and Britain) for political leadership.
 

Will the Telangana flare-up awaken New Delhi from its dream-world and into India’s political reality?

Subroto Roy thinks the flare-up of the Telangana issue has one and only one positive consequence: it brings home to New Delhi’s ruling elite that there are real political questions in India, and not everything can be left to spin-doctors and lobbyists to handle.

Where are the Reserve Bank’s Macroeconomic Models?

“On the blissful innocence of the RBI” (2009) From Facebook:

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

see also A Small Challenge to the RBI’s Governor Subbarao

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

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

Dear Governor Subbarao,

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

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

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

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

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

With cordial regards

Subroto Roy

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/

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 »

A Dozen Grown-Up Questions for Indian Politicians Dreaming of Becoming/Deciding India’s PM After the 2009 General Elections

The 2009 General Election campaign is supposed to elect a Parliament and a Head of Government for the Republic of India, not a Head Boy/Head Girl at an urban middle-class high school or the karta of a joint family. Unfortunately, our comprador national-level media seem to be docile  and juvenile enough in face of power and privilege to want to ask only touchy-feely koochi-woochi pretty baby questions of the “candidates” for PM (several of whom are not even running as candidates for the Lok Sabha but still seem to want to be PM).   Rival candidates themselves seem to want to hurl invective and innuendo at one another, as if all this was merely some public squabble between Delhi middle-class families.

So here are a set of grown-up adult questions instead:

1. Pakistan is politically and strategically our most important neighbour. Can you assure the country that a government headed by you will have a coherent policy on both war and peace with Pakistan? How would you achieve it?

2. Do you agree with the Reagan-Gorbachev opinion that “a nuclear war cannot be won and must never be fought”? If so, what would your Government do about it?

3. If there are Indian citizens in Jammu & Kashmir presently governed by Article 370 who wish to renounce Indian nationality and remain stateless or become Pakistani/Afghan/Iranian citizens instead, would you consider letting them do so and giving them Indian “green cards” for peaceful permanent residence in J&K and India as a whole?

4. Do you know where Chumbi Valley is? If so, would your Government consider reviving the decades-old idea with China to mutually exchange permanent leases to Aksai Chin and Chumbi Valley respectively?

5. Nuclear power presently accounts as a source of about 4% of total Indian electricity; do you agree that even if nuclear power capacity alone increased by 100% over the next ten years and all other sources of electricity remained constant, nuclear power would still account for less than 8% of the total?

6. The public debt of the country  may now amount to something like Rs 30 lakh crore (Rs 30 trillion); do you find that worrisome? If so, why so? If not, why not?

7. The Government of India may be paying something like Rs 3 lakh crore (Rs 3 trillion) annually on interest payments on its debt;  do you agree that tends to suck dry every public budget even before it can try to do something worthwhile?

8.  If our money supply growth is near 22% per annum, and the rate of growth of real income is near 7% per annum, would you agree the decline in the value of money (i.e., the rate of inflation) could be as high as 15% per annum?

9. Do you agree that giving poor people direct income subsidies is a far better way to help them than by distorting market prices for everybody? If not, why not?

10. How would you seek to improve the working of  (and reduce the corruption in) the following public institutions: (1) the Army and paramilitary; (2) the Judiciary and Police; (3) Universities and technical institutes?

11. There has never been a Prime Minister in any parliamentary democracy in the world throughout the 20th Century who was also not an elected member of the Lower House; do you agree BR Ambedkar and Jawaharlal Nehru intended that for the Republic of India as well and thought it  something so obvious as  not necessary to specify in the 1950 Constitution?  What will your Government do to improve the working of the Presidency, the Lok Sabha, Rajya Sabha and State Assemblies?

12. What, personally, is your vision for India after a five-year period of a Government led by you?

Subroto Roy,

Citizen & Voter

Posted in 15th Lok Sabha, Academic research, Afghanistan, Air warfare, Aksai Chin, BR Ambedkar, China's expansionism, China-India Relations, Chumbi Valley, India's 2009 General Election, India's Army, India's Banking, India's Budget, India's bureaucracy, India's Constitution, India's constitutional politics, India's Democracy, India's Diplomacy, India's Economy, India's education, India's Election Commission, India's Electorate, India's Foreign Policy, India's Government Budget Constraint, India's Government Expenditure, India's higher education, India's History, India's inflation, India's Judiciary, India's Lok Sabha, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's Personality Cults, India's political lobbyists, India's political parties, India's Politics, India's Polity, India's pork-barrel politics, India's poverty, India's Presidency, India's private TV channels, India's Public Finance, India's Rajya Sabha, India's Reserve Bank, India's Rule of Law, India's State Finances, India's Supreme Court, India's Union-State relations, India-China relations, India-Pakistan cooperation against terrorism, India-Pakistan naval cooperation, India-Pakistan peace process, India-Tibet Border, India-United States business, India-US Nuclear Deal, International diplomacy, Iran, Jammu & Kashmir, Jammu & Kashmir in international law, Jawaharlal Nehru, Just war, Laddakh, Land and political economy, LK Advani, Manmohan Singh, Pakistan's murder of Indian POWs, Pakistan's terrorist masterminds, Pakistan's terrorist training institutes, Pakistan, Balochistan, Afghanistan, Iran, Pakistani expansionism, Press and Media, Sonia Gandhi, Stonewalling in politics, Voting, War. Leave a Comment »

India’s “pork-barrel politics” needs a nice (vegetarian) Hindi name! “Teli/oily politics” perhaps? (And are we next going to see a Bill of Rights for Lobbyists?)

“Pork barrel politics” has been known as a concept  in America and other Western countries for more than a century. India is clearly playing catch-up here but advancing quickly. The so-called “second fiscal stimulus” announced yesterday by Dr Manmohan Singh’s chief economic policy aide no longer makes any pretence of any engagement with serious public finance economics at all and is instead a plain bill of rights for lobbyists, especially organised business (and with it, organised labour).

In fact New Delhi’s way seems to be for organised lobbies to deal directly with the higher bureaucracy with executive political approval or acquiescence;  pork arising from legislative politics may be secondary.

Now “pork” is too ugly a term for our Indian sensibilities and not many people eat any in the country (though, believe it or not, pork-production literally speaking is still the recipient of a government subsidy!).  So we do need a nice preferably vegetarian name for “pork-barrel politics” Indian-style.  “Tel” or “oil” may provide some ideas, and as a rough approximation I would suggest “Teli politics” or “Oily politics” but suggestions are welcome.

There are groups in America known as “Porkbusters” :

porkbustersnewsm

Any similar resistance in India responding to our version of pork-barrel politics might have to be called “Tel busters” or “Oil busters” or just  “Detergents”.

And finally, since there has been a complete takeover of the economic policy process (and the mainstream media) by organised business lobbies, are we going to be perhaps seeing next a formal Bill of Rights for Lobbyists?

Subroto Roy, Kolkata

Pump-priming for car-dealers: Keynes groans in his grave (If evidence was needed of the intellectual dishonesty of New Delhi’s new macroeconomic policy, here it is)

Pump-priming for car-dealers: Keynes groans in his grave

(If evidence was needed of the intellectual dishonesty of New Delhi’s new macroeconomic policy, here it is)

by

Subroto Roy

I have said the  Government of India’s new macroeconomic policy announced on Sunday by Dr Manmohan Singh’s main economic policy aide has no economic models or data to support it, and may as likely worsen rather than dampen any business-cycle India might be on for the simple reason that no one has a clue where we are in the cycle, or indeed even if such a cycle exists. (See https://independentindian.com/2008/12/07/will-the-government-of-indias-economic-policy-dampen-or-worsen-the-business-cycle-if-such-a-cycle-exists-at-all-no-one-knows-%E2%80%9Cwhere-ignorance-is-bliss-%E2%80%98tis-folly-to-be-wise/)

The policy appears to be the result of the usual intense lobbying by organised  capital and organised labour with the Government’s Ministries in New Delhi.

If evidence was needed of this root intellectual dishonesty, one need look only as far as “Highlights of India’s fiscal stimulus package” (Daily News and Analysis, December 7 2008) and note the item:

” Norms for government departments to replace vehicles relaxed”.

Dr Singh’s aide, after announcing the policy, openly spoke of how private automobile manufacturers had accumulated a lot of unintended inventory due to falling sales, and how they needed, in his opinion, to lower prices.  Evidently, the Government has also decided to itself  buy a lot of that unintended inventory too, using  the very scarce  public  resources of India’s ordinary people.  Pump-priming for car-dealers — JM Keynes groans in his grave!  Watch out for those fancy  fast new cars carrying India’s bureaucrats, politicians and their friends and family!

Distribution of Govt of India Expenditure (Net of Operational Income) 1995

For more than a decade and a half now, I have been engaged in some “fundamental research” about India’s public finances.  This has involved inter alia transforming the entire set of government accounting data (both Union and all States) from their present obscurity and opaqueness to what I have called a condition of “maximum feasible transparency” (see my April 29 2000 address to the Reserve Bank’s Conference of Finance Secretaries).

Here is an example of the Union Government’s 1994-1995 expenditure (net of operational income).

It is from my unpublished ongoing research and is being released as a public service for India’s people.  Readers are welcome to use it with acknowledgement under the normal “fair use” rule.  Please try not to steal it, i.e. use it without proper acknowledgement.

from-ongoing-research-of-dr-subroto-roy-on-india

Subroto Roy

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

Indian Inflation: Upside Down Economics from New Delhi’s Establishment

Indian Inflation:

Upside Down Economics From The New Delhi Establishment

by

Subroto Roy

First published in two parts in

The Statesman, Editorial Page Special Article,

April 15-16, 2008

Suppose there are only three real goods and services in the economy, and their prices per unit expressed in terms of money were Rs 3, Rs 2, Rs 6 respectively. If those money prices per unit doubled to Rs 6, Rs 4, Rs 12 respectively, we would say inflation of 100% occurred during the relevant time-period. If the prices had gone instead to Rs 4.50, Rs 3, Rs 9, we would say inflation was 50%, and so on. Notice the ratios between the three prices have remained the same in these examples; i.e., while the money prices of the items have changed, relative prices between them remained constant. In reality, there are many hundreds of millions of differentiated real goods and services in any economy though the logic stays the same.

Decline of money
It is well within living memory that the monthly salary of a Government of India Joint Secretary was Rs 3,000. Middle class parents would wed their daughters respectably to a groom earning such a figure. A Joint Secretary today makes 20 times as much and Rs 3,000 is made by his driver or children’s nanny whose equivalent back then made perhaps Rs 150 per month. The relative distance between the Joint Secretary and his driver has not decreased but the absolute amount of rupees made by each has been multiplied by a factor of 20. That indicates the fall in the value of rupees or rise in prices of goods and services relative to rupees during that period.

One reason this has happened is that the monopoly issuer of rupees, namely the Government of India, has vastly enlarged the stock of rupees present in the economy, both paper-notes and bank-deposits.  Inflation, strictly speaking, is uniform decline in the value of money or, what is the same thing, uniform increase in all rupee prices, including wages, with relative prices constant. The time-period could be a year or even a month; “hyperinflation” may start to be defined if the value of money falls at more than 10% per month.

The main problem with inflation is that rupee prices never expand uniformly and hence some classes of people gain unexpectedly while others suffer catastrophe. E.g., all those with debts expressed in rupee terms pay back less in real terms while their creditors go bankrupt. Those with fixed or slow-changing incomes (like old people, unorganised non-unionised workers etc) and those with paper assets (like currency rather than land or jewelry) are all made worse off by inflation. Unionized workers, like Government employees, do very well from inflation relative to others in society as their compensation is inflation-indexed. And the Government of India itself, as the largest debtor in the economy, gains massively from inflation; indeed, printing more paper is a standard way for all governments around the world to reduce their real debts by subterfuge.

The farmers at Singur or the SEZs who hand over their land for paper rupees from the Government will find the value of that paper declining and the value of that land rising over future years ~ which may help explain the recent keenness of city-people to take over rural India.

Rupee prices are one key variable that tend to expand via inflation with expansion of money stock. The other main change occurs in real income through growth. The Joint Secretary and his driver both use colour TVs for entertainment and gas-stoves for cooking these days; their earlier counterparts would have used transistor radios and coal-fired ovens.

To that extent, we have superior standards of living than we did in the past. There has been enormous technological progress, mostly through spontaneous learning and productivity increase, and that leads to vastly greater commerce and transactions between people, hence greater income and wealth through specialization. The vastly increased volume and value of commerce requires more money to expedite its turnover.

India’s money stock in recent decades has been growing at no less than 15% per annum, most recently reaching an all-time high of 22% per annum last year. Even if current Government estimates of growth of real income at some 9% are taken at face-value, that may mean growth in all rupee prices, i.e. inflation, near 22-9=13% per annum. TV economists parrot Government WPI inflation at 5% per annum, and now newspaper headlines are screaming WPI inflation is at 7.4% ~ more realistically, the decline in the value of India’s paper money has likely been in double-digits for years.

Paper money is a peculiar thing as it has no intrinsic value ~ even a hair pin or shirt-button has more usefulness as such. Paper money derives whatever value it has only because each of us in the economy believes everyone else will accept it in transactions in payment of wages or to purchase food and other items with.

Gold standard

The currency note in your pocket may carry the signature of the RBI Governor and his “promise to pay the bearer” the face-value ~ as if he is going to pay you its equivalent in gold held by the Government. But this is open humbug, a childish fiction. In 1931 the British pound, and the Indian rupee which linked to it at the time, went off the “gold standard” and there has been no backing of the Indian currency with gold ever since then.

In a pure gold standard, gold is money ~ interchangeable in the sense the central bank guarantees it will exchange gold for the paper it issues at an announced price. If that price changes up or down, there is devaluation or revaluation of the currency with respect to gold (depending on how you count it).

A gold exchange standard is similar except gold is not used as money and central banks of nations guarantee the announced prices of their paper moneys with respect to gold in transactions with one another. In the dollar exchange standard (or Bretton Woods system from 1944 to 1971), the US Government alone and uniquely undertook to guarantee the price of the dollar at $35 a troy oz of gold in transactions with all other central banks. That was the underpinning of the international financial system until Richard Nixon “closed the gold window” on 15 August 1971 because the US had largely financed the Vietnam War through money-creation, and other countries’ central banks (like France) had accumulated large dollar-balances.

The “gold standard”, “gold exchange standard”, and “dollar exchange standard” are all examples of “fixed” exchange rate systems which came to end in 1971-1972. The price of gold at $35 an oz was obviously unrealistically low, and it shot up at once, and has even reached $1000 an oz recently. Since 1972, the Western world has been on “floating exchange rates” where currencies find their own values and gold is merely one asset among many. Fixed exchange rate systems can lead to speculation, runs against currencies and the irresponsible international export of inflation which floating exchange rate systems tend to avoid because there will tend to be market-determined movement in the exchange-rate instead.

Elite capital flight

India today has neither a proper fixed nor a proper floating exchange-rate system but instead continues a system of highly discriminatory exchange controls. Twenty or thirty million people in our major cities know how to use the present system well enough to exchange their Indian rupees for as much as US $200,000 per annum to send their children and relatives settled abroad as foreign nationals. Plus Indian corporations have been allowed to convert rupees to buy sinking foreign companies. Foreign-currency reserves have vastly climbed too as domestic Indian companies have been allowed to incur foreign-currency denominated debt. Hence the thirty million special people are rather cleverly able to borrow foreign currency with one hand and then transmit it abroad with the other.

The net result is a clear policy of government-induced elite capital flight, unprecedented in its irresponsibility anywhere in world economic history ~ signed, sealed and delivered by the Montek-Manmohan-Chidambaram trio now just as Yashwant-Jaswant-KC Pant and friends had done a little earlier. The Communists would only be worse, as their JNU economists renounce all standard textbook microeconomics and macroeconomics in favour of street-shouting instead.

Outside the thirty million Indians with NRI connections, the average Indian today is disallowed from holding foreign exchange accounts at his/ her local bank or holding or trading in gold or other precious metals freely as he/she may please ~ the physical arrest of Mohun Bagan’s hapless Brazilian footballer by our inimitable Customs officers the other day reveals the ugliness of the situation most poignantly.

Every TV economist in Delhi, Bombay and Kolkata now seems to have a solution about India’s inflation and all sorts of fallacious reasoning is in the air. Some recommend the rupee appreciating or depreciating ~ as if anyone in the country has the faintest idea how elastic imports, exports and capital flows may be in fact to changes in the (controlled) exchange-rate. The Finance Minister and PM keep saying inflation is being “imported” because international commodity prices are high ~ someone should explain to them inflation is “imported” when fixed exchange rates allow transmission through the price-specie flow mechanism, and that is far from being India’s main problem. The extra-constitutional “Planning Commission” has, we may be thankful, remained silent about inflation, and seems to have abandoned earlier misconceptions about using forex reserves for “infrastructure”. The UPA Chair, we may be thankful, also has been silent and admits innocence of all economics, implicitly trusting her PM’s wisdom in all such matters instead.

What no one wants to talk about is the hippopotamus that is present in the room, namely, the chronically diseased state of accounts and public finances of the issuer of India’s paper-rupees, the Union Government, as well as the diseased accounts and finances of more than two dozen State Governments that are subservient to it. The macroeconomic and fiscal policy process that the Congress, BJP, Communists and everyone else in the political class in New Delhi and the State capitals have been presiding over for decades is one that turns normal economics upside down.

What happens in the West is that an estimate of technological progress and population growth is made by policy-makers, then an “acceptable” or “unavoidable” or “natural” rate of inflation is added (the figure of monetary change needed for efficiency in the real economy so relative prices adjust to equilibrium in response to demand and supply changes), then a monetary growth target is set, to which the fiscal authority ~ i.e. the legislature handling the Government’s budget ~ must adjust taxation and spending plans accordingly.

What has been happening in India every year for decades is that each of some two dozen state legislatures runs up a large deficit, which are all added up and passed on to the “Centre”; the “Centre” and its “Yojana Bhavan”, at the behest of every conceivable organised interest-group with access in Delhi especially government unions and the military, runs up its own vastly larger fiscal deficit, and then this grand total of fiscal-deficits is offered to the Reserve Bank at the end of a loaded pistol ~ to pay for one way or another via new public debt creation and money printing.  Subtract the WPI rate from the Money Supply Growth rate and government spokesmen and their businessmen friends then exclaim that the economy must try to reach the difference as its “warranted” growth rate! It is all economics upside down from people who have either learnt nothing significant in the subject or forgotten whatever little they once did.

Fragile financial state

The net result has been a banking system (mostly nationalized) in which the asset side of banks’ balance-sheets is made up almost entirely of rather dubious government debt, interest payments on which are received every year from fresh money-printing. The liability side of those balance-sheets consists of course of customer-deposits. In this fragile monetary and financial state, a government-induced capital flight has been allowed to continue under pretence of liberalization ~ with Indian companies being allowed to borrow from foreign markets many times their domestic rupee-denominated net worth by which to acquire ailing foreign companies and brands. Furthermore, there has been a massive fiscal effect as vast new Government spending programs ~ like buying foreign aircraft carriers, fighter-jets or passenger aircraft or writing off farm loans ~ come to be announced and absorbed into expectations of future inflation. A monetary meltdown is what the present author cautioned against in 1990-1995 and again, publicly, in 2000-2005. Economics, candidly treated, tells us not only that there is no such thing as a free lunch but also that chickens come home to roost.

Articles of related interest include “Against Quackery”, “India’s Macroeconomics”, “Fiscal Instability”, “Indian Money and Credit”, “Indian Money and Banking”, “The Dream Team: A Critique” etc. See https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/


Against Quackery

Against Quackery

 

 

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

 

by

Subroto Roy

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

Rule of Law

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

 

Government accounts


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

 

 

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

Posted in Accounting and audit, asymmetric information, Banking, Big Business and Big Labour, BJP, Communists, Congress Party, Deposit multiplication, DMK, Economic Policy, Economic quackery, Economics of Public Finance, Governance, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform, India's aviation, India's balance of payments, India's Banking, India's Budget, India's Capital Markets, India's communists, India's corporate governance, India's corruption, India's Democracy, India's Economic History, India's Economy, India's Energy, India's Exports, India's Families, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's Industry, India's inflation, India's Judiciary, India's Land, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's political lobbyists, India's Politics, India's Polity, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, India-Pakistan peace process, India-US Nuclear Deal, Indira Gandhi, Inflation, Interest group politics, Mamata Banerjee, Manmohan Singh, Mendacity in politics, Non-Resident Indians, Pakistan, Balochistan, Afghanistan, Iran, Political corruption, Political cynicism, Political Economy, Political mendacity, Political Philosophy, Politics, Pork-barrel politics, Power-elites and nomenclatura, Public Choice/Public Finance, Public property waste fraud, Rajiv Gandhi, Reason, Redeposits, Singur and Nandigram, Sonia Gandhi, Unorganised capital markets, Welfare Economics. 2 Comments »

On Indian Nationhood

On Indian Nationhood
From Tamils To Kashmiris And Assamese And Mizos To Sikhs And Goans

First published in The Statesman, Editorial Page

May 25 2007

By Subroto Roy

In the decades before 1947, imperialist critics of Indian nationalism accused the movement of being less about creating Indian nationhood than about supplanting British rule with local Indian oligarchies. Sydenham, for example, in the upper house of Britain’s Parliament in August 1918, gleefully quoted from the “Madras Dravidian Hindu Association” (forerunners of today’s DMK etc): “We shall fight to the last drop of our blood any attempt to transfer the seat of authority in this country from British hands to so-called high-caste Hindus, who have ill-treated us in the past and will do so again but for the protection of British laws.” Also quoted were “Namasudras of Bengal”, allegedly numbering “ten million men”, protesting “gross misrepresentation” by “so-called high-caste leaders” of the desirability of “Home Rule or self-government”. Besides caste and class there was always religion too by which India’s inhabitants could be classified and divided, and it must have delighted Sydenham to quote the “South Indian Islamic League” saying “Nothing should be done which will weaken British authority in any manner whatsoever, and hand over the destinies of the Moslem community to a class which has no regard for their interests and no respect for their sentiments”.

Home Rule League

Sydenham was attacking the Montagu-Chelmsford Report which had stated that India had “a core of earnest men who believe sincerely and strive for political progress; around them a ring of less educated people to whom a phrase or a sentiment appeals; and an outside fringe of those who have been described as attracted by curiosity to this new thing, or who find diversions in attacking a big and very solemn Government as urchins might take a perilous joy at casting toy darts at an elephant.”

Annie Besant, herself an Englishwoman, was, along with BG Tilak and MA Jinnah, a pioneer of Indian nationalism at the time and headed the new Indian Home Rule League on the Irish pattern. The League stated its membership at 52,000. Sydenham multiplied that by five and asked if a quarter million could purport to rule 244 millions in an Indian democracy. Where, he demanded, was the “voice that cannot yet be heard, the voice of the peoples of India”? The imperialist jibe was that the British Raj would be replaced at best by a “Vakil Raj” of “high-caste” Hindus and at worst by anarchy and bloodshed.

Thirty years later India’s was partitioned and independent under Attlee’s Labour Party. Churchill took over the imperialist mantle and found solace in the new India agreeing to remain in Britain’s “Commonwealth”, saying that India doing so as a Republic did not impair “the majesty of the Crown or the personal dignity of the King”.

The ghosts of Churchill and Sydenham today would heartily cheer our Republic’s current President APJ Abdul Kalam agreeing to receive the “King Charles II Medal” from the Royal Society, and our current PM Manmohan Singh accepting honorary British degrees also while in office. Britain’s Crown Prince has proposed a cricket match between India and Pakistan to mark the 60th anniversary of 1947, and what, after all, could be less inappropriate to mark the event in British eyes? All that Indian nationalism would have been firmly put in its place.

Now Pakistan mostly goes unmentioned in the history of Indian nationalism because the new Pakistanis as of 14 August 1947 hardly felt or even wished to be independent of the British. Instead they longed only to acquire control over any kind of Muslim-majority Government that they could, and as much of the resources and joint military assets of the old India they could get their hands on.

The Kashmir dispute and India-Pakistan conflict have not been ones between Hindus and Muslims, regardless of what the BBC, CNN etc make themselves believe. As much as for any other reason, Kashmir escalated out of control because of British irresponsibility during the process of disintegration of the old Indian Army between the two new Dominions. Newly demobilised Mirpuri soldiers who had formed loyal British battalions were drawn into the cycle of Partition-related communal violence and reprisals in Punjab, which inevitably spilt over into Jammu and culminated in the attack on J&K State that commenced from Pakistan’s NWFP in October 1947 ~ plunging J&K into civil war with Sheikh Abdullah and Bakshi Ghulam Mohammad’s National Conference allied to the new secular India and Sardar Ibrahim’s Muslim Conference allied to the new and soon to be Islamic Pakistan. Field Marshal Auchinlek, the Supreme Commander of both Indian and Pakistani Armed Forces, had the decency to resign and abolish the so-called “Supreme Command” as soon as he realised his own forces were at war with one another.

It would not be too inaccurate to say Pakistan and Britain continued in a neo-colonial relationship throughout the 1950s and 1960s ~ all the way until Ayub Khan (who had been warmly entertained at Chequers during the Christine Keeler-Profumo matter), overplayed his hand by attacking India in 1965. That war followed by the East Pakistan cyclone in 1969 brought to a head the inherent political contradictions of the Pakistani state accumulated until that time, and soon led to Bangladesh’s creation in 1971. Britain has had no real interest in Bangladesh but as Pakistan had allowed dual nationality with Britain, Britain found itself with a lot of Bangladeshi immigrants whose “Indian” restaurants give modern Britons today something to look forward to every weekend.

Britain and its American ally continued to have deep interests in Pakistan, mostly because of the geopolitical importance of Pakistani real estate and the generally obsequious and compliant nature of the Pakistani military and diplomatic elite. All that began to change fundamentally when the real declaration of Pakistani independence occurred in the world with the AQ Khan nuclear bombs exploding in 1998 followed by the September 11 2001 attacks upon the USA.

Nationalism today

As for ourselves in India, we have developed some coherent and recognisable design of a modern political economy with a Union Government and more than two dozen State Governments, and we have abolished the imperialist lackeys known as the “princes”. Our Governments at Union and State levels change peacefully by periodic elections under the 1950 Constitution. This in itself would be seen as an astonishing democratic achievement relative to where we were one hundred years ago at the time of the Morley-Minto policies. Thanks to Jawaharlal Nehru, we have had universal franchise since 1952 (at a time when the USA still had its Jim Crow laws against black citizens) ~ yet the imperialist jibe of an infinitesimally small elite purporting to represent hundreds of millions of India’s people remains to be addressed.

It would be interesting to know how many descendants of the 52,000 members of Annie Besant’s Home Rule League remain in India and how many have emigrated to the USA, Britain, Australia etc. The children of our top military, bureaucratic, business, professional and academic elite have cheerfully led an exodus out of the country. E.g. the son of a former commanding general of the Indian Army’s Artillery Regiment is now a British businessman and member of Tony Blair’s new House of Lords. Indian Nationhood in the 21st Century no longer has to include Bangladeshis and Pakistanis who have ended up seeking to develop their own nationalisms, but it remains hard enough to try to include everyone else ~ from Tamils to Kashmiris and from Assamese and Mizos to Sikhs and Goans. Cleaning up our government accounting and sorting out our public finances nationwide so as to establish a sound money for everyone to use for the first time in sixty or seventy years, is among the first steps in defining our common goals as an independent nation.

(Postscript: The original text stated Independence and Paritition came “forty years” after the only date mentioned until that point in the text, which is of the 1918 Montagu-Chelmsford period.   Unconsciously, I was counting from the Morley-Minto period of 1906-1908 which was the constitutional precedent to Montagu-Chelmsford.)

India and Her Neighbours

We & Our Neighbours
Pakistanis And Bangladeshis Would Do Well To Learn From Sheikh Abdullah

by Subroto Roy

First published in The Statesman May 15 2007, Editorial Page Special Article, http://www.thestatesman.net

Pakistan and Bangladesh, unlike ourselves in India, have yet to properly establish elementary constitutional institutions. “Individuals may form communities, but it is institutions alone that can create a nation”, said Benjamin Disraeli. The continual political chaos on the streets of Pakistan and Bangladesh ~ not just in recent weeks but in recent years and decades ~ indicate such institutions are still lacking or stillborn there. Tear gas, water cannon and hordes of armed policemen to charge at enraged stone-throwing crowds are not part of any solution but part of the political problem itself.

One main purpose of constitutional institutions has to do with peaceful transfer of power from one political party to its adversary. Mulayam Singh Yadav has just transferred political power to Mayawati in Uttar Pradesh, an Indian State more populous than either Pakistan or Bangladesh. Not long ago Lalu Prasad Yadav did the same to Nitish Kumar in Bihar, and Atal Behari Vajpayee to an appointee of Sonia Gandhi for all India itself. Modern democratic institutions are precisely about such peaceful transfers of power after voters have acted periodically to try to “throw the rascals out”.

Honeymoon period
It would be foolish to suppose an incoming Government of UP, Bihar or all India itself will be very much better than the one it displaces. But certainly in its first few “honeymoon” months or weeks at least, it will not be any worse. The tail-end of any scheduled democratic government, whether in India, Britain, the USA or elsewhere, is quite a disgusting sight, as those in their last days of power grab whatever they can from office before departure without any pretence of shame or embarrassment. Serious decision-making in the public interest would have long ago ceased. Almost anything new would be better.

At the same time, among those coming into power there will be some earnest wish at least to make some small difference for the better ~ a wish that will surely disappear within weeks of entering office after which the old cynicism and corruption will take hold again, and it will be the same ugly business as usual. But certainly, voters can expect slightly fresh air for a brief time after they have thrown one party out of power and chosen to bring in another. That is as about as good as democracy gets in modern practice.

Of India’s dozen or more larger States, we have, in the sixth decade of our Constitution, quite a few in which bipartisan democratic processes have been taking shape. UP was not one of them, and it is to Mayawati’s credit that she has broken the pattern of hung assemblies and now heads a majority government. Bihar too had seemed in the monolithic grip of Lalu Yadav until Nitish Kumar broke it, though the latter’s honeymoon period is now long over and it is business quite as usual there. Madhya Pradesh, Punjab, Maharashtra, Rajasthan, Haryana, Andhra Pradesh, Karnataka, Kerala and even J&K each have a noticeable bipartisan nature developing with at least one “national” party present to be counted. Tamil Nadu has been bipartisan but in an unhealthy way based on the personality cults of antagonistic leaders rather than any political principles or class-interests ~ which is a pity as the old Madras once had seemed a source of some new rationality in Indian politics. West Bengal’s voters have been definitely bipartisan, the communist vote being no more than that of the Congress and Trinamul combined. But for decades the local Congress has been notoriously sold down the river to its communist adversary by the Congress “leadership” in Delhi, and that has allowed an entrenched and wholly corrupted communist cultural and political mindset to rule in Kolkata. The Basu-Bhattacharjee Government was palpably bewildered over the Singur and Nandigram events because of their self-induced delusion about the economic and political realities of the State.

Throughout India though, periodic elections have acquired enough legitimacy to be accepted as the means of peaceful change of government. And with bipartisan politics there is a tendency for the median voter to be wooed at election-time.

We have of course many other continuing problems in our political economy ~ most notorious of which is the rotten state of our public finances and the continuous massive deficit finance that has ruined our paper currency and banking system ever since Indira Gandhi’s rule, coinciding with the start of Manmohan Singh’s career as an economic bureaucrat and Pranab Mukherjee’s as a politician in the early 1970s. Our acceptance of the democratic way has to an extent depended on our notoriously irresponsible macroeconomic policies ~ since every State and Union Government entity has been allowed to face no effective binding financial budget-constraint, and all its perverse decision-making can flow eventually into the swamp that is our Public Debt which constitutes the asset-side of the domestic banking system. India’s cardinal problem then becomes one of how to improve our macroeconomics without losing our democracy ~ something the Sonia-Manmohan-Pranab Congress, the BJP/RSS and the Communists are all equally clueless about.

Across our borders, our Pakistani and Bangladeshi cousins were cut from the same constitutional cloth as ourselves, namely the 1935 Government of India Act and the Montague-Chelmsford reforms before that. But after Jinnah’s death they refused to admit this and instead embarked on trying to write and implement a Constitution for a new Caliphate. The initial demand was “That the sovereignty in Pakistan belongs to God Almighty alone and that the Government of Pakistan shall administer the country as His agent”. In Rashid Rida and Maulana Maududi’s words, Islam becomes “the very antithesis of secular Western democracy. The philosophical foundation of Western democracy is the sovereignty of the people. Lawmaking is their prerogative and legislation must correspond to the mood and temper of their opinion… Islam… altogether repudiates the philosophy of popular sovereignty and rears its polity on the foundations of the sovereignty of God and the viceregency (Khilafat) of man.” (Rosenthal, Islam & the Modern National State, Cambridge 1965). Pakistan’s constitutionalists thus have faced an impossible battle to overcome the ontological error of assuming that any mundane government can be in communication with God Almighty.

J&K’s Constitution
Now Sheikh Mohammad Abdullah was as pious a Muslim as any but was far more modern in his 5 November 1951 speech to J&K’s Constituent Assembly: “You are the sovereign authority in this State of Jammu & Kashmir; what you decide has the irrevocable force of law”. Referring to the American and French Constitutions, he said the “basic democratic principle” was of the “sovereignty of the nation”. “We should be clear about the responsibilities that this power invests us with. In front of us lie decisions of the highest national importance which we shall be called upon to take. Upon the correctness of our decisions depends not only the happiness of our land and people now, but the fate as well of generations to come.”

Can a modern conclave of Pervez Musharraf, Nawaz Sharif, Benazir Bhutto and Chaudhry Iftikhar Ahmed decide or declare any better for Pakistan today? Or one of Khaleda, Hasina and whichever cabal of generals and bureaucrats happens to head Bangladesh at present?

If Pakistan and Bangladesh each chose to restart with the modern-minded constitutional example Sheikh Abdullah set more than a half century ago in J&K, they may find their political problems less severe in due course. It is a long road ahead.

Maharashtra’s Money

Maharashtra Govt Finance 2004 Table

 

Maharashtra’s Money: Those Who Are Part Of The Problem Are Unlikely To Be A Part Of Its Solution

first published in The Statesman April 24 2007, Editorial Page

by Subroto Roy

Mr Percy Mistry, according to the World Bank’s official chronology, worked there with Moeen Qureshi, and S Javed Burki. Mr Qureshi was doyen of Pakistani bureaucrats in Washington and something of a king-maker back home, briefly becoming Pakistan’s PM himself; Mr Burki briefly became Pakistan’s Finance Minister and is an author in the book Foundations of Pakistan’s Political Economy created by WE James and myself in the 1980s in the USA. Although Mr Mistry claims no special expertise about India’s monetary economy or public finances, he was appointed by Finance Minister P. Chidambaram to head an official committee that has given an opinion on a crucial monetary issue facing the country today, namely, the rupee’s convertibility. Mr Mistry apparently authored the report but resigned before its release, making it unclear who is responsible for its contents.

 

Mr Mistry has glossed over India’s present fiscal circumstances, said nothing of the limitless waste, fraud and abuse of the public purse the Sonia-Manmohan Government have been indulging in (like their Vajpayee-Advani predecessor) yet declared the rupee should be freed in 2008 ~ telling Business Standard a convertible rupee will allow people like “Ratan” and “Kumar” to raise capital in India for their foreign purchases, and not have to go to London as they must do now, poor things. All this in a report purporting to be a plan to make Mumbai an “international financial centre”, which is a different subject altogether.

Mr Mistry thus becomes a certifiable member of the “Dream Team” of Dr Singh, Mr Chidambaram, Mr Montek Ahluwalia, Mr Deepak Parekh and their big business/big labour/big media friends across political parties. Dreaming involves constructs in which normal logic and facts have no place. In the waking world, India is a labour-rich, capital-scarce country where wages are lower and interest-rates are higher respectively than in labour-scarce, capital-rich Western countries; hence India will be importing not exporting capital. In the real world too, Mumbai is not an off-shore island-resort outside India (like the so-called SEZs are going to be from a legal standpoint) but happens to be located in Maharashtra, whose public finances urgently require hard investigation and sober thought.

 

Now there used to be a “Bombay State” coinciding with the old Bombay Presidency plus “princely states” plus Marathi-majority districts of MP and Hyderabad and excluding Kannada-majority districts to Mysore. On May 1 1960, after much agitation, this became the new States of Gujarat and Maharashtra. There was talk of making Bombay city a Union Territory but the Marathis would have none of it. In fact, within a few weeks, Maharashtra reverted to calling itself “Bombay State” and it was not until the end of the year the Government of India officially declared it must be called Maharashtra.

 

The same quest for, or confusion about, cultural and political identity continues in recent times and may be at the root of the Shiv Sena’s erratic political behaviour which rocks Maharashtra politics so frequently. “Bombay” may be “Mumba Bai” or “Mumba Devi” but it had not been a Marathi town any more than Calcutta had been a Bengali town. Bombay’s traders and businessmen descended there while it developed after the decline of Surat, where the British initially came to trade in the 17th Century. Modern Bombay retains some of its “all-India” character and even today you cannot make money in its markets unless you speak Gujarati. Marathi-speakers have tended to wish Maharashtra was “Maratha-rashtra” reminiscent of the great Shivaji Bhonsla (1627-1680) but others have read the name only as “Great State”.

 

This continuing identity crisis had its most devastating costly impact through the Dabhol-Enron fiasco. As recently as March 4 2007, Chief Minister Vilasrao Deshmukh said frankly “We could not generate a single megawatt of electricity in the last 10 years due to the Enron issue”, adding demand for electric power had been growing in the State at 10% per annum.

 

Indeed, before the 2005-2006 nuclear or any other deal could be contemplated with the Americans, the US-India Business Council, the American business lobbyist (and recent guest and soon-to-be host of the CPI-M’s Buddhadeb Bhattacharya), insisted India pay up fully for the Dabhol-Enron fiasco. Maharashtra and its sovereign guarantor the Government of India, duly paid out at least $140-$160 million ($14-$16 crore) to each General Electric and Bechtel Corporation in “an amicable settlement”. It was only then that Dr Manmohan Singh could be hosted in the White House and in turn play host to President George W. Bush.

 

Without entering the intricacies of the fiasco, it may be still asked who was responsible. And in retrospect the finger must point both at the Mahajan-Munde BJP/ Thakeray-Joshi Shiv Sena, and at the Sharad Pawar Government and Manmohan-Montek Union Finance Ministry at the time. The BJP-Shiv Sena declared an intent to “throw Enron into the Arabian Sea” and thus vitiated the atmosphere with the Americans. Americans are shrewd and practical people in commercial matters and accounted for such contingencies in their deal-making, tidily earning their money anyway, winning the arbitration awards in due course. Maharashtra’s identity confusion was exemplified by Rebecca Mark having to visit Bal Thakeray before a policy flip-flop could be permitted.

 

If the basic technical cause Enron’s electricity became too expensive was that it was denominated in dollar prices and the rupee depreciated rapidly during and after the deal-making, then the financial responsibility for the fiasco must be ultimately traced to India’s Finance Minister in the early 1990s, namely Dr Singh, and his chief acolyte and Finance Secretary Mr Ahluwalia. Maharasthtra is not a sovereign country, and it was the Union Finance Ministry’s responsibility to oversee the necessary cost-benefit and project appraisal analyses, and these if properly done would have accounted for exchange-rate depreciation scenarios. It is no wonder the World Bank later refused to finance the project because they had done their studies better. The same kind of cavalier unprofessional attitude in spending scarce foreign moneys earned by India’s public has been displayed now more than a decade later by the Manmohan-Montek duo, though on a vastly larger scale, in regard to the planned purchase of nuclear reactors from Russia, the USA etc on a turnkey basis.

 

Maharashtra may be a Great State but its public finances are in as great a shambles as any other. The table for 2003-2004 (before the Enron payments were made) reveals the very high continuing public indebtedness, and the same pattern as the budgets of West Bengal and Uttar Pradesh described in these columns earlier. A closer look would reveal, e.g., that Rs 814.36 crore (Rs. 8.14 billion) were spent in collecting Rs1,205.97 crore. (Rs. 12.05 billion) of “Vehicle Tax”! There is much that Mumbai’s and Maharashtra’s and India’s citizens have to ponder over and act upon before serious thought can be put to restoring the integrity of India’s money. In that process, those who have been part of the problem are unlikely to be part of its solution.

 

Govt. of Maharashtra Finances 2003-04
EXPENDITURE ACTIVITIES: RsBn (Hundred Crore)
governance & local governance 18.19 2.58%
judiciary 2.96 0.42%
police (including vigilance etc) 19.81 2.81%
prisons 0.86 0.12%
bureaucracy 27.97 3.97%
collecting land revenue & taxes 42.25 6.00%
government employee pensions 26.36 3.74%
schools, colleges, universities, institutes 93.74 13.31%
health, nutrition & family welfare 23.42 3.33%
water supply & sanitation 10.22 1.45%
roads, bridges, transport etc. 12.96 1.84%
electricity 16.96 2.41%
irrigation, flood control, environ, ecology 70.79 10.05%
agricultural subsidies, rural development 41.30 5.86%
industrial subsidies 2.60 0.37%
capital city development 6.25 0.89%
social security, SC, ST, OBC, lab.welfare 25.40 3.61%
tourism 0.89 0.13%
arts, archaeology, libraries, museums 0.75 0.11%
miscellaneous -0.47 -0.07%
debt amortization & debt servicing 261.03 37.07%
total expenditure 704.22

INCOME SOURCES:
tax revenue 285.52
operational income 35.49
grants from Union 22.70
loans recovered 4.82
total income 348.53

GOVT. BORROWING REQUIREMENT (total expenditure minus total income) 355.70

financed by:
new public debt issued 317.02
use of Trust Funds etc 38.68
355.70
from author’s research and using C&AG data

Uttar Pradesh Polity and Finance

Uttar Pradesh Polity & Finance


A Responsible New Govt May Want To Declare A Financial Emergency

First published in

The Statesman Editorial Page, March 24 2007

by

Subroto Roy

 

 

Uttar Pradesh goes to the polls beginning April 7. Nothing may succeed better in focusing the minds of its citizens and political candidates than some hard macroeconomic realities. Discussing UP’s public finances may be the first step to bringing cool rationality to the cauldron of its politics ~ consisting as it does of seemingly deep and irreconcilable divisions of religion, caste and personality.

 

UP shared initials of the old British “United Provinces of Agra and Oudh”, and in 1947 was mostly the same territory. It deserves better than to be known merely as our “Northern State”: UP has been India’s fulcrum, deeply affecting our history, culture and politics. There could have been today not merely a new Uttarakhand but also perhaps Agra, Bareilly (Rohilkhand), Jhansi (Bundelkhand), Meerut, Avadh (Ayodhya, Oudh), Kanauj, Varanasi etc.

 

 

History and politics

 

Each has had its history. Oudh was seen by the British before Dalhousie as a northern buffer for their Bengal possessions. Bareilly was “an important centre of disaffection” of Muslim soldiers against the British in 1857 and also where Hindus after Aurangzeb’s death in 1707 had “thrown off the imperial yoke” refusing to pay tribute to Delhi. The very idea of “Pakistan” was mostly a UP-invention. Long before Iqbal and Jinnah, Sayyid Ahmad Barelvi (1786-1831) initiated a mass migration of Muslims and created a theocratic principality in the NWFP (Tariqah-i-Muhammadiyah) which collapsed due to conflict between his Pashtun and North Indian followers. Pervez Musharraf’s family were frankly nostalgic during their India-visit, and indeed Pakistan’s Mohajirs long for fertile UP more than the arid country they in fact possess ~ even more than for J&K on which Pakistanis since Liaquat (UP’s most prominent Muslim legislator between 1926-1940) became fixated instead.

 

 

In the 1980s and 1990s, the “Ram Janambhoomi/Babri Masjid” dispute may have been mostly a gigantic, inchoate, incoherent national exercise in defining our identity: “Who are we?” or perhaps “Who are we not?” as modern Indians, questions that remain unanswered. Certainly, in 1908 the Imperial Gazetteer of India Vol XIX pp 279-280 reported: “After Babar had gained a footing in Hindustan by his victory at Panipat in 1526, and had advanced to Agra, the defeated Afghan house of Lodhi still occupied the Central Doab, Oudh, and the eastern districts of the present United Provinces. In 1527, Babar, on his return from Central India, defeated his opponents in Southern Oudh near Kanauj, and passed on through the Province as far as Ajodhya where he built a mosque in 1528, on the site renowned as the birthplace of Rama. The Afghans remained in opposition after the death of Babar in 1530, but were defeated near Lucknow in the following year.”

 

 

History books and doctoral theses should have been perhaps where all such old facts deserved to remain in a modern self-confident, self-aware India.

 

 

Today’s UP at more than 166 million people exceeds in population France and Germany combined. One in every six or seven Indians is from UP. The State has become notorious for its chaotic politics, its “history-sheeters”, its corruption, crimes, badlands, astrology and other superstition. Its popular power gets divided between Mulayam, Mayawati and the BJP: each the self-appointed spokesman of Muslims, “Bahujans” and Hindu upper castes respectively. Congress, once India’s grand old secular national party, has been side-lined in UP politics.

 

 

Yet UP’s pivotal role remains such that the healthiest development for Indian democracy today may be for the Lok Sabha Member from Rae Bareilly to close down 10 Janpath as a residence and office for herself, and live instead as an exemplary parliamentarian among the common people of her constituency, setting the example too for her son to do the same in Amethi. Their permanent departure from New Delhi, becoming prominent UP politicians instead, would be the desperately needed “tough love” required by the Congress Party ~ which finally, after many decades, would be compelled to grow up and elect a leadership for itself based on some real political principles and not mere sycophancy.

 

 

Focussing on UP’s Public Finances is the first constructive step towards a rational political economy arising in the interests of its many citizens. As with other States of our Union, it is not impossible to understand what is going on with UP’s finances, though it does take some serious effort. The State receives tax revenues, income from State operations (like bus fares etc), and grants transferred from the Union. Of these revenues, more than 70% arise from taxation. Of those taxes, about 45% is collected by the Union on behalf of the State according to the Finance Commission’s formulae; 55% is collected by the State itself, and about 50% of what the State collects is Sales Tax. On the expenditure side, some 43% has been going to repay the State’s debts plus interest owed on that debt. The remainder gets distributed as summarily shown in the table.

 

 

Audit and restructuring

As with the Union of India, as well as with other States like West Bengal, the wide difference between income and expenditure implies the Government must then issue new public debt, which typically has been a larger and larger sum every year, greater than the maturing debt being amortised or extinguished. The grave consequences of this will be obvious to any householder, and makes it imperative that calm, sober thought and objective analysis occur about UP’s financial condition and budget constraint. E.g., what is revealed at a higher level of detail is that in 2003-2004, Rs. 5.43 Bn (Rs 543 crores) were spent to collect Rs. 1.18 Bn (Rs. 118 crores) of land revenue! UP has also spent extraordinarily vast public resources (and World Bank loans) on electricity ~ yet its power supply remains dismal.

 

 

These kinds of facts may be enough for any responsible new Government of UP (perhaps even a “Unity Government”) to declare a financial emergency under Article 360 of the Constitution, followed by ordering the most stringent of audits of all government departments and projects using public resources as well as recognition of public assets, followed in turn by a restructuring of the public budget over a few years with the aim of cutting all waste, fraud and abuse, and directing public resources instead to areas of highest social usefulness.

The author is Contributing Editor, The Statesman

UP Government Finance 2003-2004
EXPENDITURE ACTIVITIES : Rs Billion (Hundred Crore)
government & local government
judiciary
police (including vigilance etc)
prisons
bureaucracy
collecting land revenue & taxes
government employee pensions
schools, colleges, universities, institutes
health, nutrition & family welfare
water supply & sanitation
roads, bridges, transport etc.
electricity
irrigation, flood cntrl., environ, ecology
agricultural subsidies, rural development
industrial subsidies
capital city development
social security, SC, ST, OBC, lab.welfare
tourism
arts, archaeology, libraries, museums
miscellaneous
debt amortization & debt servicing
total expenditure

30.33
3.17
25.81
1.13
11.63
8.41
29.00
62.79
18.97
6.04
16.13
200.22
29.98
16.07
8.19
1.08
18.36
0.20
0.37
0.53
373.60

3.52%
0.37%
2.99%
0.13%
1.35%
0.98%
3.36%
7.28%
2.20%
0.70%
1.87%
23.23%
3.48%
1.86%
0.95%
0.13%
2.13%
0.02%
0.04%
0.06%
43.34%

tax revenue
operational income
grants from Union
loans recovered
total income
268.74
22.82
24.82
124.98
Govt. Borrowing Requirement:
(total expenditure minus total income) 420.67
financd by:
new public debt issued
use of Trust Funds etc.

385.41
35.26
420.67

From the author’s research based on latest available data published by the C&AG of India

Fallacious Finance: Congress, BJP, CPI-M et al may be leading India to hyperinflation (2007)

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

by

Subroto Roy

first published in The Statesman, March 5 2007

Editorial Page Special Article

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

1. “India’s Savings Rate is near 32%”. This is factual nonsense. Savings is indeed normally measured by adding financial and non-financial savings. Financial savings include bank-deposits. But India is not a normal country in this. Nor is China. Both have seen massive exponential growth of bank-deposits in the last few decades. Does this mean Indians and Chinese are saving phenomenally high fractions of their incomes by assiduously putting money away into their shaky nationalized banks? Sadly, it does not. What has happened is government deficit-financing has grown explosively in both countries over decades. In a “fractional reserve” banking system (i.e. a system where your bank does not keep the money you deposited there but lends out almost all of it immediately), government expenditure causes bank-lending, and bank-lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits in India but it is a nominal paper phenomenon and does not signify superhuman savings behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash, not as bank deposits.

2. “High economic growth in India is being caused by high savings and intelligently planned government investment”. This too is nonsense. Economic growth in India as elsewhere arises not because of what politicians and bureaucrats do in capital cities, but because of spontaneous technological progress, improved productivity and learning-by-doing on part of the general population. Technological progress is a very general notion, and applies to any and every production activity or commercial transaction that now can be accomplished more easily or using fewer inputs than before. New Delhi still believes in antiquated Soviet-era savings-investment models without technological progress, and some non-sycophant must tell our top Soviet-era bureaucrat that such growth models have been long superceded and need to be scrapped from India’s policy-making too. Can politicians and bureaucrats assist India’s progress? Indeed they can: the telecom revolution in recent years was something in which they participated. But the general presumption is against them. Progress, productivity gains and hence economic growth arise from enterprise and effort of ordinary people — mostly despite not because of an exploitative, parasitic State.

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

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

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

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

Of related interest: Mistaken Macroeconomics,
“The Indian Revolution”, “Against Quackery”, “The Dream Team: A Critique”, “India’s Macroeconomics”, “Indian Inflation”

Posted in Academic research, Banking, Big Business and Big Labour, BJP, China, China's macroeconomics, China's savings rate, China's Economy, Communists, Congress Party, Deposit multiplication, Economic Policy, Economic quackery, Economic Theory of Growth, Economics of exchange controls, Economics of Public Finance, Economics of real estate valuation, Finance, Financial Management, Financial markets, Financial Repression, Foreign exchange controls, Governance, Government accounting, Government Budget Constraint, Government of India, India's Big Business, India's credit markets, India's Government economists, India's interest rates, India's savings rate, India's stock and debt markets, India's agriculture, India's Agriculture & Food, India's balance of payments, India's Banking, India's Budget, India's bureaucracy, India's Capital Markets, India's corporate finance, India's corporate governance, India's currency history, India's Democracy, India's Economic History, India's Economy, India's Exports, India's farmers, India's Finance Commission, India's Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint, India's Government Expenditure, India's grassroots activists, India's Health/Medicine, India's Industry, India's inflation, India's Labour Markets, India's Land, India's Macroeconomics, India's Monetary & Fiscal Policy, India's nomenclatura, India's peasants, India's political lobbyists, India's Polity, India's pork-barrel politics, India's poverty, India's Public Finance, India's Reserve Bank, India's State Finances, India's Union-State relations, Inflation, Interest group politics, Macroeconomics, Manmohan Singh, Mendacity in politics, Monetary Theory, Money and banking, Paper money and deposits, Political cynicism, Political Economy, Political mendacity, Public Choice/Public Finance, Redeposits, Unorganised capital markets. 3 Comments »

Bengal’s Finances

BENGAL’S FINANCES

First published in The Sunday Statesman February 25 2007, Editorial Page  Special Article, www.thestatesman.net

There is urgent need for calm, sober thought, not self-delusion. Foreign trade, world politics are not what State Governments are constitutionally permitted to do.

By SUBROTO ROY

Mr Buddhadeb Bhattacharjee is fond of saying his hoped for industrialization plans will lead to jobs for “thousands” of unemployed young men and women emerging from West Bengal’s many schools, colleges and universities.

Now ever since JM Keynes’s time, economists have understood the phenomenon of unemployment quite well. Some unemployment is voluntary: where someone declines to accept a job at the prevailing wage or chooses leisure instead, e.g. withdraws from the labour-force in order to go to college or care for children or family or be involved in search for a better job. Some unemployment is seasonal, as in agriculture ~ where there often is “overfull” employment at harvest-time. Some unemployment may be frictional or structural, depending on dynamic unpredictable industrial or technological changes. In none of these cases is any large role defined for government investment using public resources, though there can be smaller roles like providing job-information, advice and training.

Keynes himself was concerned with systematic “involuntary” unemployment, where masses of people are willing but unable to find work at the going wage because there has been a general collapse of the market economy, as arguably happened in the 1930s in the Western countries. There has been no such situation in independent India.

And it is important to remember our labour markets are mostly unrestricted by State boundaries: unlike totalitarian China, we do not have internal passports in the country, and Indians are mostly free to work anywhere they wish to. Talk from CPI-M, Congress, BJP or other politicians of alleged Keynesian “multiplier” effects arising from government expenditure is mostly talk. And as for Sonia Gandhi’s “National Rural Employment Guarantee”, to the extent it was argued for at all by Amartya Sen’s disciples like Jean Drèze, the argument was not on Keynesian grounds but of a purportedly more equitable distribution of government expenditure.

What then is the Bhattacharjee Government supposed to be doing?

Chandrababu Naidu started a trend among Chief Ministers flying off to exotic foreign vistas, addressing international conferences and signing memoranda with foreign businessmen. But world politics, international relations and foreign trade are not what Indian State Governments are permitted by our Constitution to be engaged in doing. Nelson Mandela is a great man of history but Jyoti Basu’s Government had no constitutional right or business to gift him five million American dollars of West Bengal public money after he was released from jail in South Africa in 1990 by De Klerk.

Our Constitution is crystal clear that the legitimate agenda of India’s State Governments is something very mundane and wholly unglamorous: State Governments are supposed to be managing Courts of Law; the Police, Civil Order, Prisons; Water, Sanitation, Health; State Debt Service; Intra-State Infrastructure & Communications; Local Government; Liquor & Other Public Sector Industry; Trade, Local Banking & Finance; Land, Agriculture, Animal Husbandry; Libraries, Museums, Monuments; State Civil Service & Administration. In addition, “concurrent” with the Union Government are Criminal, Civil & Family Law, Contracts & Torts; Forests & Environmental Protection; Unemployment & Refugee Relief; Electricity; Education. It is relative to that explicit agenda that State Government performances around the country must be evaluated.

The finances of the West Bengal Government and those of every other State of the Union appear in a condition of Byzantine confusion. Even so, it is not impossible for any citizen to understand them with a little serious effort. The State receives tax revenues, income from State operations (like bus fares, lottery tickets etc), and grants transferred from the Union. Of the State’s total revenues, more than 80% arise from taxation. Of those taxes, about 30% is collected by the Union on behalf of the State in accordance with the Finance Commission’s formulae; 70% is collected by the State itself, and about 60% of whhat the State collects is Sales Tax. On the expenditure side, more than 60% goes in repaying the State’s debts as well as interest owed on that debt. The remainder gets distributed as summarily shown in the table. (What would be revealed at a higher level of detail is that e.g. Rs. 2.63 Bn is spent in collecting Rs. 9.93 Bn of land revenue!) The wide difference between the State’s income from all sources and its expenditures implies the State must then issue new public debt. That typically has been a larger and larger sum every year, greater than the amount of maturing debt being amortised or extinguished. The potentially grave consequence of this will be obvious to any householder, and makes it imperative that calm, sober thought and objective analysis occur about the State’s financial condition and budget constraint. There is no room for self-delusion, especially on the part of the Bhattacharjee Government. We are still paying interest on the money we borrowed to make Nelson Mandela a gift seventeen years ago.

Govt. of W. Bengal’s Finances 2003-2004
Rs Billion (Hundred Crore)
EXPENDITURE ACTIVITIES:
government & local government 8.68 1.68%
judiciary 1.27 0.25%
police (including home guard etc.) 13.47 2.61%
prisons 0.62 0.12%
bureaucracy 5.69 1.10%
collecting land revenue & taxes 4.32 0.84%
government employee pensions 26.11 5.05%
schools, colleges, universities, institutes 45.06 8.72%
health, nutrition & family welfare 14.70 2.84%
water supply & sanitation 3.53 0.68%
roads, bridges, transport, etc. 8.29 1.60%
electricity (mostly loans to power sector) 31.18 6.03%
irrigation, flood control, environment, ecology 10.78 2.09%
agricultural subsidies, rural development, etc. 7.97 1.54%
industrial subsidies 2.56 0.50%
capital city development 7.29 1.41%
social security, SC, ST, OBC, labour welfare 9.87 1.91%
tourism 0.09 0.02%
arts, archaeology, libraries, museums 0.16 0.03%
miscellaneous 0.52 0.10%
debt amortization & debt servicing 314.77 60.89%
total expenditure 516.92

tax revenue 141.10
operational income 6.06
grants from Union 18.93
loans recovered 0.91
total income 167.00
INCOME SOURCES:

GOVT. BORROWING REQUIREMENT
(total expenditure
minus total income ) 349.93

financed by:
new public debt issued 339.48
use of Trust Funds etc 10.45
349.93
From the author’s research and based on latest available data published by the Comptroller & Auditor General of India

Our Policy Process: Self-Styled “Planners” Have Controlled India’s Paper Money For Decades

Our Policy Process:

 

Self-Styled “Planners” Have Controlled India’s Paper Money For Decades

 

by

Subroto Roy

 

First published in The Statesman, Editorial Page Special Article, Feb 20 2007

 

 

Three agencies of the Executive Branch of our Government have controlled the country’s fiscal and monetary processes. The most glamorous is the Planning Commission, a nominated agency of the Government of the day without constitutional status but which has informally charged itself with articulating national and provincial preferences on public spending. It has overshadowed in impact and prestige the Finance Ministry or Treasury, which normally would design the budget, raise taxes, run the fiscal machinery and be accountable to Parliament (the Legislative Branch) via the person of the Finance Minister. In turn, the Finance Ministry owns and controls the Reserve Bank, effectively placing India’s paper money and bank deposits at the discretion of New Delhi’s purported “economic planners”.

 

 

In addition, the Finance Commission is charged with articulating a suitable allocation of public resources between the Union and States, setting some medium-term parameters of federal finance. And the Comptroller & Auditor General is supposed to assess effectiveness of Government behaviour: the “high independent statutory authority..… who sees on behalf of the Legislature that … money expended was legally available for and applied to the purpose or purposes to which it has been applied.” “Audit … is the main instrument to secure accountability of the Executive to the Legislature …. The fundamental object of audit is to secure real value for the taxpayer’s money” (Indian Government Accounts & Audit, 1930).

 

 

Weakness of Parliament

 

In parliamentary government, the whole Executive Branch is accountable to and the agent of the Legislative Branch. But the utter weakness of our Parliament over decades has led its institutions, including the C&AG, to be run roughshod over by the Government of the day. The Finance Commission, being a temporary and transient body, can hardly take on the entrenched bureaucracy the Planning Commission has become.

 

This unconstitutional subservience of policy-making to the Planning Commission began when the first planners said on December 7 1952: “The raison d’etre of a planned economy is the fullest mobilisation of available resources and their allocation so as to secure optimum results …. There is no doubt that the RBI, which is a nationalised institution, will play its appropriate part in furthering economic development along agreed lines”. When Jawaharlal Nehru as free India’s first prime minister chose to himself lead the “Second Plan”, the fate of India’s paper money was sealed. “Insofar as government expenditure is financed by central bank credit, there is a direct increase in currency in circulation”. That May 14 1956 statement marked the last mention for the next 43 years of India’s money during the process of articulating India’s public expenditure priorities.

 

The Reserve Bank has indeed behaved “along agreed lines”. While superficially presiding over currency, banking and foreign exchange, it has been legally and practically a department (with some 75,000 employees today) of the Finance Ministry. Since the vast bulk of customer deposits are held by nationalized banks owned and managed by the Finance Ministry, India has had practically a “one-tier” banking system on the old USSR model.

 

The “Ninth” and “Tenth” Planning Commissions included not only Prime Minister Atal Behari Vajpayee but also his Finance and Foreign Ministers as members. It was not our Reserve Bank but such persons, including the prominent official (now in post-retirement service) Montek Singh Ahluwalia, who declared on April 5 1999 in the “Ninth Five Year Plan” that a “viable monetary posture” was “to accept an average inflation rate in the region of 7 per cent per annum, which would justify a growth rate of money supply (base money) of 16 per cent per annum”. Recent money supply growth rates under the Sonia-Manmohan Congress have been near 19%-21%, and inflation properly measured may be well above 10%.

 

In Western countries, it would be normal procedure for an acceptable level of inflation to be decided upon, followed by monetary and fiscal targets being set in view of what is statistically expected by way of real economic growth, since growth is mainly a result not of Government behaviour but of spontaneous technological progress and increase in productivity. By contrast, our “planning” process has allowed unconstrained fiscal expenditure to emerge out of chaotic and unconstrained nationwide politics on the sure-fire assumption that budget deficits are going to be “paid for” by money-printing (and hence by invisible taxation of the paper assets of an unknowing public).

 

For a PM and Finance Minister to sign off on fiscal-monetary targets during the “planning” process commits the entire Executive Branch to it. Reversing or even critically discussing such intentions would require nothing less than a Parliamentary Vote of No-Confidence, which itself would require public dissemination of economic models and data exclusively available to the Executive Branch, whether or not the Executive Branch is aware of it. Public exhortations and rhetoric then follow from politicians, bureaucrats and their businessman friends as to how much real growth needs to occur in order for inflation not to be above a given level!

 

The cart is thus squarely placed in front of and not behind the buffalo. If exhortations are not met by reality it is typically said ~ in bureaucrat-speak that avoids accountability ~ “slippages” occurred due to outside factors like rainfall, American business cycles or perhaps, now, global warming and AIDS.

 

Indeed because the upside-down nature of this process has likely not been grasped even by politicians, bureaucrats and establishment economists participating in it, let aside Parliament or the public, it hardly seems a conscious or deliberate “macroeconomic policy” at all, but rather an outcome of habitual, ritualistic routines taking place year after year for decades. And India’s financial press and TV media, instead of soberly seeking facts, have tended merely to flatter top politicians and bureaucrats, as is the wont of businessmen to do.

 

 

War finance, not peace

 

The structure of incentives and information has become such that no one in government, academia, international credit-rating agencies or elsewhere, is able to effectively point out that fiscal intentions expressed in a “Plan” may be infeasible, inflationary or generally unwise. This includes the IMF and World Bank who lead India’s creditors in Western financial markets, and whose staff are generally uninterested in the countries they work on except to make sure loans received are large and repayments timely (as their personal livelihoods depend on such factors). But a brave anonymous squeak can be found hidden in thousands of pages of “Tenth Plan” verbiage dated December 21 2002 ~ that it is all being “financed almost entirely by borrowing …. India’s public finance inherits the consequence of fiscal mismanagement in the past.” Efforts of one recent Governor to carve out a modern independent role for the Reserve Bank have apparently gone in vain, and he too has been co-opted as a Government spokesman in retirement.

 

 

The Bank of England could at one time “theoretically lend the full amount” the British Government was authorized to spend by the UK Parliament (Hirsch). For decades, the RBI has been required by our Government to do almost that in practice (see graph). During the Second World War, the US Government was assured its Central Bank “could and would see that the Treasury was supplied with all the money that it needed for war finance … beyond those secured by taxation and by borrowing from non-bank sources” (Chandler). India’s politicians and bureaucrats have given us macroeconomic processes that pretend our country has since Independence remained at war ~ when in fact we have been mostly at peace.

Fiscal Instability

Fiscal Instabilty

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

by Subroto Roy

First published in The Sunday Statesman,

Editorial Page Special Article, 4 February 2007

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On Land-Grabbing

ON LAND-GRABBING

Dr Singh’s India, Buddhadeb’s Bengal, Modi’s Gujarat have notorious US, Soviet and Chinese examples to follow ~ distracting from the country’s real economic problems

By SUBROTO ROY

First published in The Sunday Statesman, Editorial Page Special Article, Jan 14 2007

AT a business meet on 12 January 2005, Dr Manmohan Singh showered fulsome praise on Buddhadeb Bhattacharjee as “dynamic”, “the Nation’s Best Chief Minister”, whose “wit and wisdom”, “qualities of head and heart”, “courage of conviction and passionate commitment to the cause of the working people of India” he admired, saying “with Buddhadeb Babu at the helm of affairs it appears Bengal is once again forging ahead… If today there is a meeting of minds between Delhi and Kolkata, it is because the ideas that I and Buddhadebji represent have captured the minds of the people of India. This is the idea of growth with equity and social justice, the idea that economic liberalization and modernization have to be mindful of the needs of the poor and the marginalized.”

With such support of a Congress Prime Minister (as well as proximity to Pranab Mukherjee), Mr Bhattacharjee could hardly have feared the local Congress and Trinamul would pose any threat in the 2006 Assembly Elections despite having more potential voters between them than the CPI-M.

Dr Singh returned to the “needs of the poor and the marginalized” at another business meet on 8 January 2007 promising to “unveil a new Rehabilitation Policy in three months to increase the pace of industrialisation” which would be “more progressive, humane and conducive to the long-term welfare of all stakeholders”, while his businessman host pointedly stated about Singur “land for industry must be made available to move the Indian manufacturing sector ahead”.

The “meeting of minds between Delhi and Kolkata” seems to be that agriculture allegedly has become a relatively backward slow-growing sector deserving to yield in the purported larger national interest to industry and services: what the PM means by “long-term welfare of all stakeholders” is the same as the new CPI-M party-line that the sons of farmers should not remain farmers (but become automobile technicians or IT workers or restaurant waiters instead).

It is a political viewpoint coinciding with interests of organised capital and industrial labour in India today, as represented by business lobbies like CII, FICCI and Assocham on one hand, and unions like CITU and INTUC on the other. Business Standard succinctly (and ominously) advocated this point of view in its lead editorial of 9 January as follows: “it has to be recognised that the world over capitalism has progressed only with the landed becoming landless and getting absorbed in the industrial/service sector labour force ~ indeed it is obvious that if people don’t get off the land, their incomes will rise only slowly”.

Land is the first and ultimate means of production, and the attack of the powerful on land-holdings or land-rights of the unorganised or powerless has been a worldwide phenomenon ~ across both capitalism and communism.

In the mid-19th Century, white North America decimated hundreds of thousands of natives in the most gargantuan land-grab of history. Defeated, Chief Red Cloud of the Sioux spoke in 1868 for the Apache, Navajo, Comanche, Cheyenne, Iroquois and hundreds of other tribes: “They made us many promises, more than I can remember, but they never kept any except one: they promised to take our land, and they took it.”

Half a century later, while the collapse of grain prices contributed to the Great Depression and pauperisation of thousands of small farmers in capitalist America in the same lands that had been taken from the native tribes, Stalin’s Russia embarked on the most infamous state-sponsored land-grab in modern history: “The mass collectivisation of Soviet agriculture (was) probably the most warlike operation ever conducted by a state against its own citizens…. Hundreds of thousands and finally millions of peasants… were deported… desperate revolts in the villages were bloodily suppressed by the army and police, and the country sank into chaos, starvation and misery… The object of destroying the peasants’ independence…was to create a population of slaves, the benefit of whose labour would accrue to industry. The immediate effect was to reduce Soviet agriculture to a state of decline from which it has not yet recovered… The destruction of the Soviet peasantry, who formed three quarters of the population, was not only an economic but a moral disaster for the entire country. Tens of millions were driven into semi-servitude, and millions more were employed as executants…” (Kolakowski, Main Currents of Marxism).

Why did Stalin destroy the peasants? Lenin’s wishful “alliance between the proletariat and the peasantry” in reality could lead only to the peasants being pauperised into proletarians. At least five million peasants died and (Stalin told Churchill at Yalta) another ten million in the resultant famine of 1932-1933. “Certainly it involved a struggle ~ but chiefly one between urban Communists and villagers… it enabled the regime to obtain much of the capital desired for industrialization from the defeated village… it was the decisive step in the building of Soviet totalitarianism, for it imposed on the majority of the people a subjection which only force could maintain” (Treadgold, 20th Century Russia).

Mr Bhattacharjee’s CPI-M is fond of extolling Chinese communism, and the current New Delhi establishment have made Beijing and Shanghai holiday destinations of choice. Dr Singh’s Government has been eager to create hundreds of “Special Economic Zones” run by organised capital and unionised labour, and economically privileged by the State. In fact, the Singur and Nandigram experiences of police sealing off villages where protests occur are modelled on creation of “Special Economic Zones” in China in recent years.

For example, Chinese police on 6 December 2005 cracked down on farmers and fishermen in the seaside village of Dongzhou, 125 miles North East of Hong Kong. Thousands of Dongzhou villagers clashed with troops and armed police protesting confiscation of their lands and corruption among officials. The police immediately sealed off the village and arrested protesters. China’s Public Security Ministry admitted the number of riots over land had risen sharply, reaching more than seventy thousand across China in 2004; police usually suppressed peasant riots without resort to firing but in Dongzhou, police firing killed 20 protesters. Such is the reality of the “emergence” of China, a totalitarian police-state since the Communist takeover in 1949, from its period of mad tyranny until Mao’s death in 1976, followed by its ideological confusion ever since.

Modern India’s political economy today remains in the tight grip of metropolitan “Big Business” and “Big Labour”. Ordinary anonymous individual citizens ~ whether housewife, consumer, student, peasant, non-union worker or small businessman ~ have no real voice or representation in Indian politics. We have no normal conservative, liberal or social democratic party in this country, as found in West European democracies where the era of land-grabbing has long-ceased. If our polity had been normal, it would have known that economic development does not require business or government to pauperise the peasantry but instead to define and secure individual property rights and the Rule of Law, and establish proper conditions for the market economy. The Congress and BJP in Delhi and CPI-M in Kolkata would not have been able to distract attention from their macroeconomic misdeeds over the decades ~ indicated, for example, by increasing interest-expenditure paid annually on Government debt as a fraction of tax revenues (see Table). This macroeconomic rot originated with the Indira Gandhi-PN Haksar capriciousness and mismanagement, which coincided with the start of Dr Singh’s career as India’s best known economic bureaucrat.

Hypocrisy of the CPI-M

Hypocrisy of the CPI-M

Political Collapse In Bengal: A Mid-Term Election/Referendum Is Necessary

First published in The Statesman, Editorial Page Special Article, January 9 2007,

By Subroto Roy

For the 1991 Assembly elections, I happened to draft the West Bengal Congress’s election manifesto although I was not then or ever a member of that or any other party. There was no Trinamul but its future leader had made her jibe of there being watermelons who were red inside and green outside, aptly in case of a few senior leaders. The manifesto quoted George Orwell’s denunciation of communist ruling classes, and was so hard-hitting that the CPI-M’s Sailen Dasgupta came out with a statement he had never read a Congress manifesto that had been so harsh on them; privately, I took that to be a compliment though the Congress of course lost the election. There is no one in Bengal who does not want to see Bengal prosper, and the most candid vigorous political conversation is necessary to discover what in fact is true and what ought or not to be done.

Democratic norms

The functioning of the Basu-Bhattacharjee CPI-M is quite utterly amazing. It deserves to be called such because of the seamless transfer of power that occurred between the two men in November 2000. The Chief Minister in a parliamentary democracy is supposed to have the confidence of the House, yet when Jyoti Basu stopped being CM and anointed Buddhadeb Bhattacharjee to succeed him, not even a perfunctory vote of confidence was asked for in the House ~ a fact I brought to the attention of the-then editor of The Statesman who agreed with me it signified the CPI-M’s contempt for the parliamentary institution they have been ruling over for decades. By contrast, there is already talk in Britain of an early general election as soon as Gordon Brown takes over from Tony Blair.

It is the same contempt for democratic parliamentary norms that Mr Bhattacharjee and company reveal today in pushing through their diabolical plan to acquire farmers’ lands on behalf of their businessmen friends.

All of 37% of those voting in the 2006 Assembly Elections voted for the CPI-M. By contrast, 41.2% voted for Trinamul and Congress together. Add also the 11.4% of those who voted for the Forward Bloc, RSP and CPI all of whom though part of the Left Front have been opposing the CPI-M on this cardinal issue. That constitutes prima facie evidence that a majority of 52.6% vs. 37% of voters may oppose the CPI-M’s present course of action. Mr Bhattacharjee heads a Government that is supposed to act not merely in the interest of members or groups of his own party or those who have flattered or financed it, but everyone in West Bengal including those who voted against the CPI-M as well as those who did not vote at all.

Gerhard Schröder dissolved the German Bundestag in 2005 though his own party held a majority there. He did so merely because his party lost a provincial election and he felt that indicated loss of confidence in it at the federal level also. Such is how genuine modern democracies work. In India to the contrary, we have had notorious misuse of the Constitution when State Governments were dissolved merely because they were ruled by parties opposed to that which had won a Union-level General Election. Even so, India remains a Parliamentary democracy at Union and State levels, and the Government of the day may advise the Head of State to dissolve the House and call for new elections to be held. It may do so even when there is no legal necessity to do so, i.e., even when it is secure with a majority of seats. It may do so because a political necessity has arisen for doing so.

If Mr Bhattacharjee is a genuine democrat, as he wishes to convey an impression of being, he should advise the Governor to dissolve the Assembly because the CPI-M wishes to go to the people to seek a mandate for its plans for the State’s industrialisation and forced acquisition of farm lands towards that end. The Trinamul, Congress, SUCI, Maoists and others including perhaps the CPI, FB, RSP and others will state their opposition, while he, Mr Nirupam Sen and their party will be able to articulate for West Bengal’s voters exactly what they propose to do and why. The CPI-M is adamant its cause is right while the Opposition have been agitating in the streets for months, and miniature civil war conditions now prevail in parts of rural Bengal; worse may be yet to come. There is only one way in a supposedly democratic society like ours to discover what should be done, and that is to dissolve the Assembly and call an election. Both sides will have a chance to articulate their positions to the public, and a vote will be held. There the matter would end. It is the one constructive way forward for the State, and indeed for the nation as a whole. (Alternatively, the Governor could be advised to request the Election Commission to administer India’s first referendum on a single agreed-upon question like “The West Bengal Government’s industrialisation and land-acquisition plan deserves citizens’ support: Yes/No”.)

If an Assembly election comes to be called and the CPI-M falls below a pre-set target of the vote-share, say 33%, or the Left Front below, say, 45%, then Mr Bhattacharjee, even if he commands a majority of seats again, will know he has no mandate and that he must stop and reconsider what he is doing. As I have said in these columns, West Bengal’s main economic problems are financial, having to do with Rs. 92 billion (Rs 9,200 crore) being paid as annual interest on the State Public Debt in 2004, and this may reach Rs 200 billion shortly. Economic development of the State has precious little to do with private businessmen making small cars or motorcycles or putting up buildings for information technology institutes, as Mr Bhattacharjee and his Government have deluded themselves into believing.

CPI-M 2003 statement
Besides its lack of democratic mandate, what surprises most about the modern CPI-M is its sheer hypocrisy. This is a party whose “Central Committee” in June 2003 in Kolkata condemned “non-Left State Governments” for allegedly “giving away thousands of hectares of land either on sale or on lease at throw-away prices to multinational companies and domestic monopolists”, and the Union Government for allegedly issuing “a circular calling for forcible eviction of lakhs of adivasis from the land”. The Basu-Bhattacharjee CPI-M is now clearly hoist with its own petard. Tilak said that what Bengal thinks today, India will think tomorrow. It was not for nothing that he said it. If the CPI-M refers the land-acquisition question to the people in a free and fair election or referendum today, it will set a positive precedent for other States and parties in the country. If instead it pushes forward its current diabolical plans, the example it will have set will be one of initiating a class war in reverse, where the poor shall become poorer and the rich richer. India’s poorest consist of those rural inhabitants without land, and Government would have deliberately contributed to their numbers swelling.

(Author’s Note March 2007: The original article in its first paragraph referred mistakenly to Promode Dasgupta when Sailen Dasgupta had been meant, an error corrected in the next day’s paper.)

Land, Liberty & Value

LAND, LIBERTY & VALUE

Government must act in good faith treating all citizens equally ~ not favouring organised business lobbies and organised labour over an unorganised peasantry

By SUBROTO ROY
First published in The Sunday Statesman Editorial Page Special Article, December 31 2006,

EVERY farmer knows that two adjacent plots of land which look identical to the outsider may be very different in character, as different as two siblings of the same family. Adjacent plots may differ in access to groundwater and sunlight, in minerals and salts, in soil, fertilisers, parasites, weeds or a dozen other agronomic factors. Most of all, they will differ in the quality and ingenuity of thought and labour that has gone into their care and cultivation over the years, perhaps over generations.

John Locke said: “Whatsoever that (a man) removes out of the state that Nature hath provided and left it in, he hath mixed his labour with and joined to it something that is his own, and thereby makes it his property… For this labour being the unquestionable property of the labourer, no one but he can have a right to what that once joined to, at least where there is enough and as good left in common for others” (Second Treatise of Government). Plots of land are as specific as the families that have “mixed” their labour with them. Locke wrote of labour being something “unquestionably” the labourer’s own property; in the same libertarian vein, Robert Nozick opened Anarchy, State and Utopia saying “Individuals have rights, and there are things no person or group may do to them (without violating their rights)”.

But as we recognise the universal sanctity of the individual person and his/her private property, we have to start qualifying it. If you purchase a field, forest or estate through which runs a pathway traditionally used by the public to get from one side to the other then even as the new owner you may not have a right to forbid the public’s use of the pathway. By extension, it is clear the State, the community of which you are a citizen, may approach you and demand there should be and will be a public road or thoroughfare through your property in the common interest. Such is the sovereign’s right of “eminent domain” recognised throughout the world, not only in times of war or natural disaster but also in normal times where private property may be taken for public use. The individual’s right to free use of his/her property is circumscribed as a result.

What may be certainly expected though in all matters is that the State will act in good faith, i.e., that it has conducted proper technical surveys and cost-benefit analyses as well as transparent public hearings, and has honestly decided that the road must be constructed using this route and no other. The doctrine of eminent domain implies that while the right to private property may be basic, it is not absolute, as indeed no right is, not even the right to one’s own life. In India, one key difference between the landmark Golaknath (AIR 1967 SC 1643) and Kesavananda Bharati (AIR 1973 SC 1461) rulings had to do precisely with the former recognising the right to property being fundamental as in our original 1950 Constitution, while the latter consented to the Indira Parliament’s denial of this.

When private property is taken, fair compensation must be paid. For example, the American Constitution says “no private property may be taken for public use without just compensation”. What is just compensation? Typically it would be the “fair market value” — but that must be properly adjudged accounting for the best future use of the land, not merely the historical or traditional past use of the land.

Consider, in a mature urban real-estate market, a plot made vacant because a warehouse located on it has accidentally burned down. What is the value of the plot now? Another warehouse could be built, but other bids could come in too for construction of offices or residential flats or a multi-storey garage. The plot’s value would differ depending on which use it is ultimately put to. And this value would be ascertained by calculating the expected cash flows into the future from each of these possibilities, discounted appropriately to account for the fact the future is less valuable than the present, with the highest value alternative being chosen. That is how a mature private real-estate market works in theory, though in practice there would be zoning and environmental restrictions to account for the traditional nature of the neighbourhood as well as possible pollution by effluent waste etc.

In India, Government departments and ministries have inherited prime urban real estate from British times. Amidst the highest value real estate in Kolkata, Bangalore, Delhi etc. will be found a military camp or flats built for military personnel, having nothing whatsoever to do with furtherance of the nation’s defences today. The appalling state of government accounting and audit of our public property and institutions includes the fact that neither the Union nor State Governments and municipalities have the faintest idea of assets, including real estate, that they own. These public assets are frequently open to abuse by managerially uncontrolled government employees.

Fallacies even more curious seem to be currently at work in Indian policy-making, whether by this or that political party. The “eminent domain” doctrine requires a public purpose to exist for acquisition of private property by the State: e.g. construction of a road, bridge, dam, airport or some other traditional public good which is going to be used by the public. In India as elsewhere, “land reform” did involve taking an absentee landlord A’s land and distributing it to B, C, D and E who worked as peasants on it. But nowhere else outside formerly communist China has land been forcibly taken from peasants B, C, D and E and handed over to this or that private capitalist in name of economic development (in a reverse class war)!

Eminent domain doctrine requires good faith on part of the State with respect to its citizens and that implies treating all citizens’ interests equally – not e.g. favouring an organised business lobby or organised industrial labour over the unorganised peasantry uneducated in the wiles of city people.

Also, there is no reason why Government should be interested in a particular product-mix emerging out of a given private factory (such as the so-called inflation-unadjusted “Rs one lakh car” instead of telecom equipment or garments or textiles). Dr Manmohan Singh’s statement last week that he wishes to see “employment-intensive” industries merely added to Government confusion: from Henry Ford to Japanese “lean business” today, everyone knows the direction of change of technology in the automobile industry has been towards robotics, making modern manufacturing less and less manpower-intensive! The Tatas themselves underwent a major downsizing and restructuring in the last decade, hiving off industries not considered part of their “core competence”.

Traditional agriculture of Singur’s sort represents the most labour-intensive employment-generating kind of rural economy. While such rural life may appear unsatisfying to the urban outsider, there is, as Tolstoy, Rabindranath, Gandhi and others knew, subtle happiness, contentment and tranquility there absent in alienated industrial sprawls. “Surplus” labour occurs in agriculture because of technological improvements in quality and delivery of agricultural inputs as well as new education and awareness (Theodore W. Schultz,Transforming Traditional Agriculture). It is mostly seasonal and all hands are used during the harvest when even urban migrants flock back to help. Industry did not leave Bengal in the 1960s and 1970s because of Mamata Banerjee but because of urban unrest, the culture of gheraos and lockouts, and bad regulations of the labour and capital markets associated largely with Ms Banerjee’s Left Front adversaries.

The basic fiction the Union and State Governments have made themselves believe is that their idea of an industrialisation plan is necessary for economic development. It is not. Real economic problems in West Bengal and elsewhere are financial to do with State budgets. “Debt overhang is there” is how the RBI Governor apologetically put it last week. Interest payments on the West Bengal State public debt consume larger and larger fractions of the revenue: these payments were at Rs 13 Bn in 1995 but grew to Rs. 92 Bn by 2004, and may jump to Rs 200 Bn in the next decade. The communists have been in power thirty years and no one but they are responsible. Making the State’s budget healthy would require tackling the gargantuan bureaucracy, slashing ministerial extravagance (foreign trips, VIP security) etc. It is much easier to hobnob with the rich and powerful while tear-gassing the peasants.

On a Liberal Party for India

NON-EXISTENT LIBERALS

By SUBROTO ROY

First published in The Sunday Statesman October 22 2006, Editorial Page Special Article


Communists, socialists and fascists exist in the Left, Congress and BJP-RSS ~ but there is a conservative/”classical liberal” party missing in Indian democracy today

We in India have sorely needed for many years a serious “classical liberal” or “conservative” political party. Major democratic countries used to have such parties which paid lip-service at least to “classical liberal” principles. But the 2003 attack on Iraq caused Bush/McCain-Republicans to merge with Hilary-Democrats, and Blair-Labour with Tory neocons, all united in a cause of collective mendacity, self-delusion and jingoism over the so-called “war on terror”. The “classical liberal” or “libertarian” elements among the Republicans and Tories find themselves isolated today, just as do pacifist communitarian elements among the Democrats and Labour. There are no obvious international models that a new Indian Liberal Party could look at ~ any models that exist would be very hard to find, perhaps in New Zealand or somewhere in Canada or North Eastern Europe like Estonia. There have been notable individual Indian Liberals though whom it may be still possible to look to for some insight: Gokhale, Sapru, Rajagopalachari and Masani among politicians, Shenoy among economists, as well as many jurists in years and decades gone by.

What domestic political principles would a “classical liberal” or conservative party believe in and want to implement in India today? First of all, the “Rule of Law” and an “Efficient Judiciary”. Secondly, “Family Values” and “Freedom of Religious Belief”. Thirdly, “Limited Government” and a “Responsible Citizenry”. Fourthly, “Sound Money” and “Free Competitive Markets”. Fifthly, “Compassion” and a “Safety Net”. Sixthly, “Education and Health for All”. Seventhly, “Science, not Superstition”. There may be many more items but this in itself would be quite a full agenda for a new Liberal Party to define for India’s electorate of more than a half billion voters, and then win enough of a Parliamentary majority to govern with at the Union-level, besides our more than two dozen States.

The practical policies entailed by these sorts of political slogans would involve first and foremost cleaning up the budgets and accounts of every single governmental entity in the country, namely, the Union, every State, every district and municipality, every publicly funded entity or organisation. Secondly, improving public decision-making capacity so that once budgets and accounts recover from having been gravely sick for decades, there are functioning institutions for their proper future management. Thirdly, resolving J&K in the most lawful and just manner as well as military problems with Pakistan in as practical and efficacious a way as possible today. This is necessary if military budgets are ever going to be drawn down to peacetime levels from levels they have been at ever since the Second World War. How to resolve J&K justly and lawfully has been described in these pages before (The Statesman, “Solving Kashmir” 1-3 December 2005, “Law, Justice and J&K”, 2-3 July 2006).

Cleaning up public budgets and accounts would pari passu stop corruption in its tracks, as well as release resources for valuable public goods and services. A beginning may be made by, for example, tripling the resources every year for three years that are allocated to the Judiciary, School Education and Basic Health, subject to tight systems of performance-audit. Institutions for improved political and administrative decision-making are necessary throughout the country if public preferences with respect to raising and allocating common resources are to be elicited and then translated into actual delivery of public goods and services.

This means inter alia that our often dysfunctional Parliament and State Legislatures have to be inspired by political statesmen (if any such may be found to be encouraged or engendered) to do at least a little of what they have been supposed to be doing. If the Legislative Branch and the Executive it elects are to lead this country, performance-audit will have to begin with them.

The result of healthy public budgets and accounts, and an economy with functioning public goods and services, would be a macroeconomic condition for the paper-rupee to once more become a money that is as good as gold, namely, a convertible world currency again after having suffered sixty years of abuse via endless deficit finance at the hands of first the British and then numerous Governments of free India that have followed.

It may be noticed the domestic aspects of such an agenda oppose almost everything the present Sonia-Manmohan Congress and Jyoti Basu “Left” stand for — whose “politically correct” thoughts and deeds have ruined India’s money and public budgets, bloated India’s Government especially the bureaucracy and the military, starved the Judiciary and damaged the Rule of Law, and gone about overturning Family Values. While there has been endless talk from them about being “pro-poor”, the actual results of their politicization of India’s economy are available to be seen with the naked eye everywhere.

One hundred years from now if our souls returned to visit the areas known today as India, Pakistan, Bangladesh etc, we may well find 500+ million inhabitants still below the same poverty-line despite all the gaseous prime ministerial or governmental rhetoric today and projections about alleged growth-rates.

If the Congress and “Left” must oppose any real “classical liberal” or conservative agenda, we may ask if the BJP-RSS could be conceivably for it. The answer is clearly not. The BJP-RSS may pontificate much about being patriotic to the motherland and about past real or imagined glories of Indian culture and religion, but that hardly ever has translated concretely into anything besides anti-Muslim or anti-Christian rhetoric, or breeding superstitions like astrology even at supposedly top technological institutes in the country. (Why all astrology is humbug, and a pre-Copernican Western import at that, is because all horoscopes assume the Sun rotates around the Earth in a geocentric solar system; the modern West’s scientific outlook arose only after astrology had declined there thanks to Copernicus and Galileo establishing the solar system as heliocentric.)

As for a “classical liberal” economic agenda, the BJP in Government transpired to be as bad if not worse than their adversaries in fiscal and monetary profligacy, except they flattered and were flattered by the organised capital of the big business lobbies whereas their adversaries flatter and are flattered by the organised power of the big labour unions (covering a tiny privileged class among India’s massive workforce). Neither has had the slightest interest in the anonymous powerless individual Indian citizen or household. The BJP in Opposition, instead of seeking to train and educate a new modern principled conservative leadership, appear to wish to regress even further back towards their very own brand of coarse fascism. “Family Values” are why Indian school-children have become the envy of the world in their keen discipline and anxiety to learn – yet even there the BJP had nothing to say on Sonia Gandhi’s pet bill on women’s property rights, whose inevitable result will be further conflict between daughters and daughters-in-law of normal Indian families.

At the root of the malaise of our political parties may be the fact we have never had any kind of grassroots “orange” revolution. There has been also an underlying national anxiety of disintegration and disorder from which the idea of a “strong Centre” follows, which has effectively meant a Delhi bloated with power and swimming in self-delusion. The BJP and Left are prisoners of their geriatric leaderships and rather unpleasant ideologies and interest-groups, while the Congress has failed to invent or adopt any ideology besides sycophancy. Let it be remembered Sonia Gandhi had been genuinely disdainful of the idea of leading that party at Rajiv’s death; today she has allowed herself to become its necessary glue. The most salubrious thing she could do for the party (and hence for India) is to do a Michael Howard: namely, preside over a genuine leadership contest between a half-dozen ambitious people, and then withdraw with her family permanently from India’s politics, focusing instead on the legacy of her late husband. Without that happening, the Congress cannot be made a healthy political entity, and hence the other parties have no role-model to imitate. Meanwhile, a liberal political party, which necessarily would be non-geriatric and non-sycophantic, is still missing in India.

Indian Money and Banking

ON MONEY & BANKING

 

The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI

 

by

 

SUBROTO ROY

 

First published in The Sunday Statesman, Editorial Page, Special Article

April 23 2006

 

THE Reserve Bank of India, like all other public institutions, belongs to all of India’s people. There has been a tendency with every national institution, whether the ONGC or nationalised banks like SBI, or the IITs and IIMs or Air India and Indian Airlines or the Railways, Army, Navy, Air Force, IAS, IFS, Central Secretariat etc, even Parliament and State legislatures, to think that its assets, both tangible and intangible, are to serve the interests mainly of its employees, whether of Class 1, 2, 3, or 4. In fact, the assets of all such national institutions belong to all Indians: all one thousand million of us, from nameless street children and rural mendicants onwards. The body of our whole Indian citizenry own any and all such public institutions, and their employees are merely our “agents”, literally “public servants” who get paid salaries and perquisites out of public revenues. The task of managing and controlling these vast cohorts of public servants is a stupendous one of democratic politics and public administration. As a country we have never been very adept at it, indeed we often have been hopelessly incompetent. Without proper control and management, employees of national institutions have naturally tended to take over control of these assets, shifting liabilities onto the shoulders and budgets of the anonymous diffused body of citizenry who are supposed to be their masters. The public’s servants have tended to become the masters of the public’s assets and resources.

 

The RBI, as the nation’s Central Bank, has a unique position because its principal task is to establish and maintain the integrity of our money and banking system. The deficit-finance of all public institutions flow like rivulets into the swamp that is our Public Debt, managed by the RBI.

 

Money as such has no “intrinsic” worth. All the paper rupees, dollars, pounds, euros, yen in the world have less “intrinsic” usefulness than a hairpin or a button or a pair of shoelaces. Hairpins, buttons and shoelaces at least keep your hair, your shirt or your shoes together ~ the paper of paper money can be at best used to roll cigarettes perhaps. Yet paper money comes to be needed and is valued by everyone in every country ~ from street children upwards to Mr Premji, Mr Gates and Mr Mittal. Everyone accepts paper money as wages in exchange for his/her work, and then plans to use that same paper to buy food, shelter, clothing and other necessities with. I.e., we accept paper money for a short time believing we can use it to acquire useful things with. It has no intrinsic worth yet it is universally valued because everyone believes it will be accepted by everyone else in exchange for real goods and services which are in fact useful and conducive to life. The use of paper money depends on a fine and invisible web of collective trust permeating throughout the economy.

 

Banks arose due to the increasing complexity of modern economies in the last six hundred years. Paper currency was then supplemented in commerce by “deposits”, so that a transaction between two persons need not involve turnover of cash but can come to be accomplished by adjustment in their respective deposits with their banks. This vastly increased the quantum of trust ordinary people placed in the system of normal transactions, since they had to now believe not just in the exchangeability of paper money but also in the viability of the banks where they had placed their deposits. Currency plus Bank Deposits constitute what is called the “Money Supply”, and its controller is the RBI.

 

Our collective trust in money and banking is in and of itself something with economic value, which commercial banks are in a unique position to exploit. Banks can usually bet that all their customers will not demand their deposits at the same time, and so they are able to lend out as loans a very large fraction of what they have received as deposits from the public. Making such loans in turn causes the recipients of the loans to make new deposits (of what they have borrowed) in yet other banks, and this in turn acts as a signal to the receiving banks to make even more loans. Hence a process of “redeposit” or “deposit multiplication” occurs in any banking system where only a fraction of deposits is legally required to be kept as reserves by the bank. A Central Bank like the RBI then has the duty to see none of this gets out of hand: that while individual banks are acting to make profitable investments on the capital risked by a bank’s owners, they are, as a collective body, creating enough but not excessive credit to meet the needs of business.

 

In India, most banks came to be nationalised decades ago by Indira Gandhi on advice of P. N. Haksar, the mentor of Dr Manmohan Singh in his career as an economic bureaucrat. Whatever original capital they have had also arises from the public exchequer, and all their employees are effectively “public servants” under the Ministry of Finance. We have not been hearing from the RBI anything about the deleterious effects of this continuing state of affairs.

 

The RBI’s functions include managing the “Public Debt”, which stands today at perhaps Rs. 30 trillion (1 trillion= 1 lakh crore), on which interest of perhaps Rs 2-3 trillion must be paid by the Union and State Governments every year to those holding the debt (mostly the nationalised banking system under duress from the RBI). Why the stock-market has been doing so “well” is because it has been like an athlete on steroids. A stock market is supposed to be risky while a debt market is supposed to be safe. Our Government’s fiscal and monetary behaviour over decades has caused the formal debt market to yield negative returns, and so the stock-market has become relatively lucrative despite its risky nature.

 

It is also the RBI’s task to manage the country’s foreign exchange “reserves”, i.e. the residual balance left after all forex outgoings from purchases of imports (like petroleum or weapons) and payments of interest on or repayment of foreign loans have been subtracted from flows of incoming forex arising from export revenues, emigrants’ remittances, and new foreign loans and investments. These “reserves” do not belong to the Government or the nation in the same way tax-revenues belong to the Consolidated Fund of India. It was a shocking conceptual error of the Manmohan Singh Government’s most prominent economic bureaucrat to fail to see this and to suggest forex reserves could be used for “infrastructure” development. For the business press to get excited about forex reserves being at this or that level is also misleading, since high reserves may or may not indicate a better financial position just as a heavily indebted man may or may not be in a bad position depending on what kind of use he has made of his debts.

 

We have not been hearing of any of these matters from the RBI under Dr Y. V. Reddy. Instead, the one definite number we have received last week is that the RBI, under behest of its master, the Ministry of Finance, has been causing the Money Supply to grow at something like 15%. The Government’s apologists would like us to believe that this gets distributed between real economic growth in the region of 10% and inflation in the region of 5%. But for all that anybody really knows, it may be that real growth is at 5% and inflation is at 10%! Ask yourself if what you bought last year for Rs 1000 costs Rs 1050 or Rs. 1100 this year. Your guess may be as good as the Government’s.

The Dream Team: A Critique

The Dream Team: A Critique

by Subroto Roy

First published in The Statesman and The Sunday Statesman, Editorial Page Special Article, January 6,7,8, 2006

(Author’s Note: Within a few weeks of this article appearing, the Dream Team’s leaders appointed the so-called Tarapore 2 committee to look into convertibility — which ended up recommending what I have since called the “false convertibility” the RBI is presently engaged in. This article may be most profitably read along with other work republished here: “Rajiv Gandhi and the Origins of India’s 1991 Economic Reform”, “Three Memoranda to Rajiv Gandhi”, “”Indian Money & Banking”, “Indian Money & Credit” , “India’s Macroeconomics”, “Fiscal Instability”, “Fallacious Finance”, “India’s Trade and Payments”, “Our Policy Process”, “Against Quackery”, “Indian Inflation”, etc)

1. New Delhi’s Consensus: Manmohantekidambaromics

Dr Manmohan Singh has spoken of how pleasantly surprised he was to be made Finance Minister in July 1991 by PV Narasimha Rao. Dr Singh was an academic before becoming a government economic official in the late 1960s, rising to the high office of Reserve Bank Governor in the 1980s. Mr Montek Singh Ahluwalia now refers to him as “my boss” and had been his Finance Secretary earlier. Mr Ahluwalia was a notable official in the MacNamara World Bank before being inducted a senior government official in 1984. Mr P Chidambaram was PVNR’s Commerce Minister, and later became Finance Minister in the Deve Gowda and Gujral Governments. Mr Chidamabaram is a Supreme Court advocate with an MBA from Harvard’s Business School. During 1998-2004, Dr Singh and Mr Chidambaram were in Opposition but Mr Ahluwalia was Member-Secretary of the Vajpayee Planning Commission. Since coming together again in Sonia Gandhi’s United Progressive Alliance, they have been flatteringly named the “Dream Team” by India’s pink business newspapers, a term originally referring to some top American basketball players.

Based on pronouncements, publications and positions held, other members or associates of the “Dream Team” include Reserve Bank Governor Dr YV Reddy; his predecessor Dr Bimal Jalan; former PMO official Mr NK Singh, IAS; Chief Economic Advisers Dr Shankar Acharya and Dr Ashok Lahiri; RBI Deputy Governor Dr Rakesh Mohan; and others like Dr Arvind Virmani, Dr Isher Ahluwalia, Dr Parthasarathi Shome, Dr Vijay Khelkar, Dr Ashok Desai, Dr Suman Bery, Dr Surjit Bhalla, Dr Amaresh Bagchi, Dr Govind Rao. Honorary members include Mr Jaswant Singh, Mr Yashwant Sinha, Mr KC Pant and Dr Arun Shourie, all economic ministers during the Vajpayee premiership. Institutional members include industry chambers like CII and FICCI representing “Big Business”, and unionised “Big Labour” represented by the CPI, CPI(M) and prominent academics of JNU. Mr Mani Shankar Aiyar joins the Dream Team with his opinion that a gas pipeline is “necessary for the eradication of poverty in India”. Mr Jairam Ramesh explicitly claimed authoring the 1991 reform with Mr Pranab Mukherjee and both must be members (indeed the latter as Finance Minister once had been Dr Singh’s boss). Dr Arjun Sengupta has claimed Indira Gandhi started the reforms, and he may be a member too. External members include Dr Jagdish Bhagwati, Dr. TN Srinivasan, Dr Meghnad Desai, Dr Vijay Joshi, Mr Ian Little, Dr Anne O. Krueger, Dr John Williamson, IMF Head Dr R Rato, and many foreign bank analysts who deal in Bombay’s markets. Harvard’s Dr Larry Summers joins with his statement while US Treasury Secretary in January 2000 that a 10% economic growth rate for India was feasible. His Harvard colleague Dr Amartya Sen — through disciples like Dr Jean Dreze (adviser to Sonia Gandhi on rural employment) — must be an ex officio member; as an old friend, the Prime Minister launched Dr Sen’s recent book while the latter has marked Dr Singh at 80% as PM. Media associates of the Dream Team include editors like Mr Aroon Purie, Mr Vinod Mehta, Dr Prannoy Roy, Mr TN Ninan, Mr Vir Sanghvi and Mr Shekhar Gupta, as well as the giddy young anchors of what passes for news and financial analysis on cable TV.

This illustrious set of politicians, government officials, economists, journalists and many others have come to define what may be called the “New Delhi Consensus” on contemporary India’s economic policy. While it is unnecessary everyone agree to the same extent on every aspect — indeed on economic policy the differences between the Sonia UPA and Vajpayee NDA have had to do with emphasis on different aspects, each side urging “consensus” upon the other — the main factual and evaluative claims and policy-prescriptions of the New Delhi Consensus may be summarised as follows:

A: “The Narasimha Rao Government in July 1991 found India facing a grave balance of payments crisis with foreign exchange reserves being very low.”

B: “A major cause was the 1990-1991 Gulf War, in its impact as an exogenous shock on Indian migrant workers and oil prices.”

C: “The Dream Team averted a macroeconomic crisis through “structural adjustment” carried out with help of the IMF and World Bank; hence too, India was unaffected by the 1997 ‘Asian crisis'”.

D: “The PVNR, Deve Gowda, Gujral and Vajpayee Governments removed the notorious license-quota-permit Raj.”

E: “India’s measurable real economic growth per capita has been raised from 3% or lower to 7% or more.”

F: “Foreign direct investment has been, relative to earlier times, flooding into India, attracted by lower wages and rents, especially in new industries using information technology.”

G: “Foreign financial investment has been flooding into India too, attracted by India’s increasingly liberalised capital markets, especially a liberalised current account of the balance of payments.”

H: “The apparent boom in Bombay’s stock market and relatively large foreign exchange reserves bear witness to the confidence foreign and domestic investors place in India’s prospects.”

I: “The critical constraint to India’s future prosperity is its “infrastructure” which is far below what foreign investors are used to in other countries elsewhere in Asia.”

J: “It follows that massive, indeed gargantuan, investments in highways, ports, airports, aircraft, city-flyovers, housing-estates, power-projects, energy exploration, gas pipelines, etc, out of government and private resources, domestic and foreign, is necessary to remove remaining “bottlenecks” to further prosperity for India’s masses, and these physical constructions will cause India’s economy to finally ‘take off’.”

K: “India’s savings rate (like China’s) is exceptionally high as is observable from vast expansion of bank-deposits, and these high (presumed) savings, along with foreign savings, will absorb the gargantuan investment in “infrastructure” without inflation.”

L: “Before the gargantuan macroeconomic investments bear the fruits of prosperity, equally large direct transfer payments also must be made from the Government to prevent mass hunger and/or raise nominal incomes across rural India, while existing input or other subsidies to producers, especially farmers, also must continue.”

M: “While private sector participants may increasingly compete via imports or as new entrants in industries where the public sector has been dominant, no bankruptcy or privatisation must be allowed to occur or be seen to occur which does not provide public sector workers and officials with golden parachutes.”

Overall, the New Delhi Consensus paints a picture of India’s economy on an immensely productive trajectory as led by Government partnered by Big Business and Big Labour, with the English-speaking intellectuals of the Dream Team in the vanguard as they fly between exotic conferences and international commercial deals. An endless flow of foreign businessmen and politicians streaming through Bangalore, Hyderabad, five-star hotels or photo-opportunities with the PM, followed by official visits abroad to sign big-ticket purchases like arms or aircraft, reinforce an impression that all is fine economically, and modern India is on the move. Previously rare foreign products have become commonplace in India’s markets, streets and television-channels, and a new materialist spirit, supposedly of capitalism, is captured by the smug slogan yeh dil mange more (this heart craves more) as well as the more plaintive cry pardesi jana nahin, mujhe chhorke (foreigner, please don’t leave me).

2. Money, Convertibility, Inflationary Deficit Financing

India’s Rupee became inconvertible in 1942 when the British imposed exchange controls over the Sterling-Area. After 1947 independent India and Pakistan, in name of “planned” economic development, greatly widened this war-time regime – despite the fact they were at war now only with one another over Jammu & Kashmir and, oddly enough, formed an economic union until 1951 with their currencies remaining freely convertible with each other.

On May 29 1984, the present author’s Pricing, Planning and Politics: A Study of Economic Distortions in India proposed in London that the Indian Rupee become a convertible hard currency again — the first time liberal economics had been suggested for India since BR Shenoy’s critique of the Second Five Year Plan (a fact attracting an editorial of The Times). The simple litmus test whether believers in the New Delhi Consensus have or have not the courage of their stated convictions – i.e., whether what they have been saying is, in its empirical fundamentals, more signal or noise, more reality or rhetorical propaganda – would be to carry through that proposal made 21 years ago. The Dream Team have had more than enough political power to undertake this, and it remains the one measure necessary for them to demonstrate to India’s people and the world that the exuberant confidence they have been promoting in their model of India’s economy and its prospects is not spurious.

What does convertibility entail?  For a decade now, India has had limited ease of availability of foreign exchange for traders, students and tourists. Indeed some senior Government monetary economists believe there is convertibility already except forex dealers are being allowed “one-way” and not “two-way” quotes! That is wrong. The Government since 1942 has requisitioned at the border all foreign exchange earned by exporters or received as loans or investment — allocating these first to pay interest and amortisation on the country’s foreign debt, then to make its own weapons and other purchases abroad, then to release by ration what remains to private traders, students, tourists et al. Current account liberalisation has meant the last of these categories has been relaxed, especially by removal of some import quotas. What a convertible Rupee would mean is far more profound. It would allow any citizen to hold and save an Indian money that was exchangeable freely (i.e. without Government hindrance) into moneys of other countries. Full convertibility would mean all the paper money, bank deposits and rupee-denominated nominal assets held by ordinary people in India becomes, overnight, exchangeable without hindrance into dollars, yens, pounds or euros held anywhere (although not of course at the “one-way” rates quoted today).

Now money is a most peculiar human institution. Paper money is intrinsically worthless but all of India’s 1,000 million people (from street children onwards) have need to hold it temporarily to expedite their individual transactions of buying and selling real goods and services. Money also acts as a repository of value over time and unit of account or measure of economic value. While demand to hold such intrinsically worthless paper is universal, its supply is a Government monopoly. Because Government accepts obligations owed to it in terms of the fiat money it has itself issued, the otherwise worthless paper comes to possess value in exchange. Because Government controls its supply, money also can be abused easily enough as a technique of invisible taxation via inflation.

With convertibility in India, the quantity of currency and other paper assets like public debt instruments representing fiscal decisions of India’s Union and State Governments, will have to start to compete with those produced by other governments. Just as India’s long-jumpers and tennis-players must compete with the world’s best if they are to establish and sustain their athletic reputations, so India’s fiscal and monetary decisions (i.e. about government spending and revenues, interest-rates and money supply growth) will have to start competing in the world’s financial markets with those of the EU, USA, Japan, Switzerland, ASEAN etc.

The average family in rural Madhya Pradesh who may wish, for whatever personal reason, to liquidate rupee-denominated assets and buy instead Canadian, Swiss or Japanese Government debt, or mutual fund shares in New York, Frankfurt or Singapore, would not be hindered by India’s Government from doing so. They would become as free as the swankiest NRI jet-setters have been for years (like many members of the New Delhi Consensus and their grown children abroad).  Scores of millions of ordinary Indians unconnected with Big Business or Big Labour, neither among the 18 million people in government nor the 12 million in the organised private sector, would become free to hold any portfolio of assets they chose in global markets (small as any given individual portfolio may be in value). Like all those glamorous NRIs, every Indian would be able to hold dollar or Swiss Franc deposit accounts at the local neighbourhood bank. Hawala operators worldwide would become redundant. Ordinary citizens could choose to hold foreign shares, real-estate or travellers’ cheques as assets just as they now choose jewellery before a wedding. The Indian Rupee, after more than 65 years, would once again become as good as all the proverbial gold in Fort Knox.

When added up, the new demand of India’s anonymous masses to hold foreign rather than Rupee-denominated assets will certainly make the Rupee decline in price in world markets. But — if the implicit model of India’s economy promoted by the Dream Team is based on correctly ascertained empirical facts — foreign and domestic investor confidence should suffice for countervailing tendencies to keep India’s financial and banking system stable under convertibility. Not only would India’s people be able to use and save a currency of integrity, the allocation of real resources would also improve in efficiency as distortions would be reduced in the signalling function of domestic relative prices compared to world relative prices. An honest Rupee freely priced in world markets at, say, 90 per dollar, would cause very different real microeconomic decisions of Government and private producers and consumers (e.g., with respect to weapons’ purchases or domestic transportation, given petroleum and jet fuel imports) than a semi-artificial Rupee at 45 per dollar which forcibly an inconvertible asset in global markets. A fully convertible Rupee will cause economic and political decisions in the country more consistent with word realities.

Why the Rupee is not going to be made convertible in the foreseeable future – or why, in India’s present fiscal circumstances if it was, it would be imprudent to do so – is because, contrary to the immense optimism promoted by the Dream Team about their own deeds since 1991, they have in fact been causing India’s monetary economy to skate on the thinnest of thin ice. Put another way, a house of cards has been constructed whose cornerstone constitutes that most unscientific anti-economic of assumptions, the “free lunch”: that something can be had for nothing, that real growth in average consumption levels of the masses of ordinary households of rural and urban India can meaningfully come about by nominal paper-money creation accompanied by verbal exhortation, hocus-pocus or abracadabra from policy-makers and their friends in Big Business, Big Labour and the media. (Lest half-remembered inanities about “orthodox economics” come to be mouthed, Maynard Keynes’s 1936 book was about specific circumstances in Western economies during the Depression and it is unwise to extend its presumptions to unintended situations.)

3. Rajiv Gandhi and Perestroika Project

On 25 May 2002, India’s newspapers reported “PV Narasimha Rao and Manmohan Singh lost their place in Congress history as architects of economic reforms as the Congress High Command sponsored an amendment to a resolution that had laid credit at the duo’s door. The motion was moved by…. Digvijay Singh asserting that the reforms were a brainchild of the late Rajiv Gandhi and that the Rao-Singh combine had simply nudged the process forward.”

Now Rajiv Gandhi was an airline-pilot and knew no economics. But the origins of the 1991 reform did come about because of an encounter he had, as Opposition Leader and Congress President from September 1990 onwards, with a “perestroika” project for India’s political economy occurring at an American university since 1986 (viz., The Statesman Editorial Page July 31-August 2 1991, now republished here; Freedom First October 2001). In being less than candid in acknowledging the origins of the reform, the Dream Team may have failed to describe accurately the main symptoms of illness that afflicted India before 1991, and have consequently failed to diagnose and prescribe for it correctly ever since.

The Government of India, like many others, has been sorely tempted to finance its extravagant expenditures by abusing its monopoly over paper-money creation. The British taught us how to do this, and in 1941-43 caused the highest inflation rates ever seen in India as a result. Fig. 1 shows this, and also that real growth in India follows as expected the trend-rate of technological progress (having little to do with government policy). Independent India has continually financed budget- deficits by money creation in a process similar to what the British and Americans did in wartime. This became most conspicuous after Indira Gandhi’s bank and insurance nationalisations of 1969-1970. Indeed, among current policy-makers, Pranab Mukherjee, Manmohan Singh, Arjun Sengupta, Montek Singh Ahluwalia, Bimal Jalan, NK Singh, Amaresh Bagchi and Shankar Acharya, were among those governing such macroeconomic processes before 1991 — albeit in absence of the equations that illustrate their nature. Why the Rupee cannot be made an honest, internationally convertible, stable money held with confidence by all Indians today, is because the Dream Team have continued with the same macroeconomics ever since. The personal and political ambitions of the tiniest super-elite that the New Delhi Consensus represent (both personal and political) have depended precisely on gargantuan unending deficit-financing backed by unlimited printing of paper-money, and hence the continuing destruction of the integrity of India’s banking system. A convertible Rupee would allow India’s ordinary people to choose to hold other stores of value available in the world today, like gold or monies issued by foreign governments, and thus force an end to such processes.

Two recent articles in The Statesman (Perspective Page 30 October 2005, Front Page 29 November 2005) outlined India’s financial repression and negative real interest rates (which suffice to explain the present stock market boom the way athletes perform better on steroids), and also how deficits get financed by money creation accompanied by wishful projections of economic growth in an upside down imitation of how macroeconomic policy gets done in the West.

“Narrow Money” consists mostly of hand-to-hand currency. “Broad Money” consists of Narrow Money plus bank-deposits. Modern banking is built on “fractional reserves”, i.e. a system of trust where your bank does not literally hold onto deposits you place there but lends these out again – which causes further deposit expansion because no individual banker can tell whether a new deposit received by it is being caused by the depositor having himself borrowed. As a general rule, bank lending causes further deposit expansion. Why India’s (and China’s) bank deposits have been expanding is not because Indians (or Chinese) are superhuman savers of financial assets in banks but because the Government of India (and China) has for decades compelled (the mostly nationalised) banks to hold vast sums of Government debt on the asset side of their balance-sheets. Thus there has been humongous lending by the banking system to pay for Government expenditures. The Dream Team’s macroeconomics relies entirely on this kind of unending recourse to deficit finance and money creation, causing dry rot to set into banks’ balance sheets (Figs. 2,3, 4).   If the Rupee became convertible, those vast holdings of Government debt by banks would become valued at world prices. The crucial question would be how heavily New York, London and Hong Kong financial markets discounted Indian sovereign debt. If upon convertibility, the asset sides of domestic Indian banks get discounted very heavily by world financial markets, their insolvency upon being valued at international prices could trigger catastrophic repercussions throughout India’s economy. Hence the Rupee cannot be made convertible — and all our present inefficiencies and inequities will continue for ever with New Delhi’s rhetorical propaganda alongside. The capital flight of 10 out of 1000 million Indians will continue, leaving everyone else with the internal and foreign public debts to pay.

4. A Different Strategy had Rajiv Not Been Assassinated

Had Rajiv Gandhi not been assassinated and the perestroika project allowed to take its course, a different strategy would have been chosen. Honest money first demands honest Government and political leadership. It would at the outset have been recognised by Government (and through Government by all India’s people) that the asset-liability, income-expenditure and cash-flow positions of every public entity in the country without exception — of the Union Government, every State and local Government, every public undertaking and project – is abysmal.  Due to entanglement with government financial loans, labour regulations, subsidies, price controls, protection and favouritism, the same holds for the financial positions of vast numbers of firms in the organised private sector. Superimpose on this dismal scene, the bleak situation of the Rule of Law in the country today – where Courts of Justice from highest to lowest suffer terrible abuse receiving pitiable amounts of public resources despite constituting a third and independent branch of India’s Government (while police forces, despite massive expenditure, remain incompetent, high-handed and brutal). What India has needed ever since 1991 is the Rule of Law, total transparency of public information, and the fiercest enforcement of rigorous accounting and audit standards in every government entity and public institution. It is only when budgets and financial positions become sound that ambitious goals can be achieved.

The Dream Team have instead made a fetish of physical construction of “infrastructure”, in some grandiose make-believe dreamworld which says the people of India wish the country to be a superpower. The Dream Team have failed to properly redefine for India’s masses the appropriate fiscal and monetary relationship between State and citizen – i.e. to demarcate public from private domains, and so enhance citizens’ sense of individual responsibility for their own futures, as well as explain and define what government and public institutions can and cannot do to help people’s lives. Grotesque corruption and inefficiency have thus continued to corrode practically all organs, institutions and undertakings of government. Corruption is the transmutation of publicly owned things into private property, while its mirror image, pollution, is the disposal of private wastes into the public domain. Both become vastly more prevalent where property rights between private and public domains remain ill demarcated. What belongs to the individual citizen and what to sovereign India –their rights and obligations to one another – remains fuzzy. Hence corruption and pollution run amuck. The irrational obsession with “infrastructure” is based on bad economics, and has led to profoundly wrong political and financial directions. The Rupee cannot be made an honest stable money because India’s fiscal and monetary situation remains not merely out of control but beyond New Delhi’s proper comprehension and grasp. If and when the Dream Team choose to wake up to India’s macroeconomic realities, a great deal of serious work will need to be done.

 

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Towards a Highly Transparent Fiscal & Monetary Framework for India’s Union & State Governments (29 April 2000)

Towards a Highly Transparent Fiscal & Monetary Framework for India’s Union & State Governments

An address by Dr Subroto Roy to

the Conference of State Finance Secretaries, Reserve Bank of India,  Mumbai, 29 April 2000.

It is a great privilege to speak to this distinguished gathering of Finance Secretaries and economic policy-makers here at the Reserve Bank today. I should like to begin by thanking the Hon’ble Governor Dr Bimal Jalan and the Hon’ble Deputy Governor Dr YV Reddy for their kind invitation for me to do so. I should also like to record here my gratitude to their eminent predecessor, the Hon’ble Governor of Andhra Pradesh, Dr C Rangarajan, for his encouragement of my thinking on these subjects over several years.

My aim will be to share with you and seek your help with my continuing and very incomplete efforts at trying to comprehend as clearly as possible the major public financial flows taking place between the Union of India and each of its constituent States. I plan to show you by the end of this discussion how all the information presently contained in the budgets of the Union and State Governments of India, may be usefully transformed one-to-one into a fresh modern format consistent with the best international practices of government accounting and public budgeting.

I do not use the term “Central Government”, because it is a somewhat sinister anachronism left over from British times. When we were not a free nation, there was indeed a Central Government in New Delhi which took its orders from London and gave orders to its peripheral Provinces as well as to the British “Residents” parked beside the thrones of those who were called “Indian Princes”.

Free India has been a Union of States. There is a Government of the whole Union and there is a Government of each State. The Union is the sovereign and the sole international power, while the States, as political subdivisions of the Union, also possess certain sub-sovereign powers; as indeed do their own subdivisions like zilla parishads, municipalities and other local bodies in smaller measure.

Our 15 large States, which account for 97% of the population of the country, have an average of something like 61 million citizens each, which is vastly more than most countries of the world. In size of population at least, we are like 15 Frances or 15 Britains put together. The Indian Republic is unique or sui generis in that there has never been in history any attempt at federalism or democracy with such sheer large numbers of people involved.

In such a framework the citizen is supposed to feel a voter and a taxpayer at different levels, owing loyalty and taxes to both the national unit and the subdivisions in which he or she resides. In exchange, government at different levels is expected to provide citizens with public goods and services in appropriate measure. The problem of optimal fiscal decentralisation in India as elsewhere is one of allocating to each level of government the power to tax and responsibility to provide, public goods and services most appropriate to that level of government given the availability of information of resources and citizens’ preferences.

In parallel, a problem of optimal monetary decentralisation may be identified as that of allocating between an autonomous Central Bank and its regional or even State-level affiliates or subsidiaries, the power to finance through money-creation the deficits, if any, of the Union and State Governments respectively. It is not impossible to imagine a world in which individual State deficits did not flow into the Union deficit as a matter of course, but instead were intended to be financed more or less independently of the Union budget from a single-window source. There would be a clear conceptual independence between the Union and State levels of public action in the country. In such a world, the Union Government might approach a constitutionally autonomous national-level Central Bank to finance its deficit, while individual State Governments did something analogous with respect to autonomous regional or even State-level Central Banks which would be affiliates or subsidiaries of the national Central Bank.

This is similar to the intended model of the United States Federal Reserve System when it started 90 years ago, though it has not worked like that, in part because of the rapid rise to domination by the New York Federal Reserve relative to the other 11 regional Federal Reserve Banks.

A more radical monetary step would be to contemplate a “Reverse Euro” model by which a national currency issued by the national-level Central Bank acts in parallel with a number of regional or State-level currencies with full convertibility and floating exchange-rates guaranteed between all of them in a world of unhindered mobility of goods and factors.

However, these are very incomplete and theoretical thoughts which perhaps deserve to be shelved for the time being.[1] What necessitates this kind of discussion is after all not something theoretical but rather the practical ground realities of our country’s fiscal and monetary position, something of which this audience will be far better aware than am I.

Economic and political analysis suggests that managing a process of public financial decision-making requires a coincidence of the people who have the best information with the people who have the authority to act. In other words, decision-makers need to have relevant, reliable and timely information made available to them, and then they need to be considered accountable for the decisions made on that basis.

In a democracy like ours, the locus of economic policy decision-making must be Parliament and the State legislatures. Academics, civil servants, journalists, special interest groups, this or that business or industrial lobbyist or foreign management consultant can all have their say — but consensus on the direction and nature of economic policy, if it is to be genuine, has to ultimately emerge out of the legislative process on the basis of reasonable, well-informed discussion and debate, given full relevant timely information. The proper source of all economic policy decisions and initiatives is Parliament, the State legislatures and local government bodies — not this or that lobby or interest-group which may be vocal or powerful enough to be heard at a given time in New Delhi or some State capital-city.

Our 1950 Constitution was a marvellous document in its time and it has worked tolerably well. It defined the functions of government in India in accordance with the main parameters of normative public finance.

Economics ascribed a quite extensive traditional role to Government, the most important functions being collective and individual security, followed by all activities which in the words of Adam Smith,

 “though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain.” (Wealth of Nations, V.i.c., 1776)

Our 1950 Constitution defined the Union’s responsibilities to be

External Security;

Foreign Relations & Trade;

Supreme Court & Domestic Security;

Debt Service, Foreign & Domestic;

National Infrastructure;

Communications & Broadcasting;

Atomic Energy;

Public Sector Industries;

Banking; Currency & Finance;

Archives; Surveys & National Institutions;

National Universities;

National Civil Services & Administration.

Each State’s responsibilities were

High Courts & Lower Judiciary;

Police; Civil Order; Prisons;

Water; Sanitation; Health;

State Debt Service;

Intra-State Infrastructure & Communications;

Local Government;

Liquor & Other Public Sector Industries; Trade; Local Banking & Finance;

Land; Agriculture; Animal Husbandry;

Libraries, Museums, Monuments;

State Civil Service & Administration.

Some duties were supposed to be shared by the Union with each State, including

Criminal Law;

Civil & Family Law, Contracts & Torts;

Forests & Environmental Protection;

Unemployment & Refugee Relief;

Electricity;

Education.

But the authors of the 1950 Constitution could not have envisaged the nature of present problems, or foreseen in those early years what we would have become like today. Our fiscal system has become such that a few clauses may have led to an impossibly complex centralization of fiscal power and information. Not only did the 1950 Constitution identify agendas of the Union and State Governments, it also dictated the procedure of decision-making and it is this which may have become intractable over 50 years. Under Article 280, a Finance Commission is appointed every five years whose task is to try to efficiently and equitably allot tax revenues collected by the Union downwards to the States and laterally between the States. Members of Finance Commissions have been elder statesmen of high reputation and integrity, yet the practical impossibility of their task has made their actions seem to all observers to be clouded in mystery and perhaps muddle. As one recent member, Justice Qureshi, has candidly stated

 “it is humanly impossible for a person to understand the problems of the Centre and the 25 States and take a decision thereon within such a short time” (Ninth Finance Commission, Issues and Recommendations, p.350).

No matter how competent or well-meaning a Finance Commission’s members may be, their purpose may be stymied by the overload of information and overcentralisation of authority that has come to take place. As a result, it may have been inevitable that Government has ended up doing what it need not have done at the expense concomitantly of failing to do what only Government could or must have done.

The present situation is such that, despite the best efforts of the Reserve Bank and other Government agencies, there may be a gross lack of timely, relevant and reliable information reaching all decision-makers including the ordinary citizen, who as voter and taxpayer is the cornerstone of the fiscal system. My own inquiry started when Mr. Hubert Neiss, then Central Asia Director at the IMF, hired me as a consultant in December 1992. He told me the IMF was naturally concerned about India’s national budget deficit, but no one seemed to quite know how this related precisely to the budgets of the different States whose deficits seemed to be flowing into it. By its terms of reference, the IMF could not inquire into India’s States’ budgets and I did not do so in my work with them, but the import of his question remained in my thinking. Later I found similar questions being asked at the World Bank. I do not think it a great secret to state that there may be a great deal of simple puzzlement about the workings of our fiscal and monetary system on the part of observers and decision-makers who may be concerned about India’s fiscal position.

Among both public decision-makers and ordinary citizens right across the length and breadth of our country, a severe and widespread lack of information about and comprehension of India’s basic fiscal and monetary facts seems to exist. This in itself may be a cause of fiscal problems as citizens may not be adequately aware of the link between making their demands for public goods and services on the one hand, and the necessity of finding the resources to fund these goods and services on the other.

In any ultimate analysis, resources for public goods and services in an economy can be found only by diverting the real resources of individual citizens towards public uses. Other than printing fiat money, a national Government can only either tax those citizens who are present today in the population, or, borrow from the capital stock on behalf of unborn generations of future citizens.

West Europe and America are heirs to a long history of political development; yet even there, as Professor James Buchanan has often observed, the idea until has not been grasped until recently that benefits from use of public goods and services are supposed to accrue to citizens from whom resources have been raised. Until the 19th Century,

 “government outlay was frequently considered “unproductive”, and there was, by implicit assumption, no return of services to the citizens who were taxed. In a political regime that devotes the bulk of government outlay to the maintenance expenses of a single sovereign, or even of an elite, there is no demonstrable return flow of services to the taxpayers…. Tax principles were discussed as if, once collected, revenues were removed forever from the economy; taxpayers, both individually and in the aggregate, were held to suffer real income loss” (James M. Buchanan, The Demand and Supply of Public Goods, Rand 1968, p. 167).

According to Buchanan, such an undemocratic fiscal model was transformed in the work of the great Swedish economist Knut Wicksell and others by introducing the key assumption of fiscal democracy, namely, that

 “those who bear the costs of public services are also the beneficiaries in democratic structures”

Conversely, we may say those who demand public goods and services in a fiscal democracy should also expect to pay for them in real resources. If citizens are aware of taxes only as a burden and come to feel they receive little or nothing from Governments in return, there is a loss of incentive to pay taxes or to stand up and be counted as proud citizens of the country. There is an incentive instead to evade taxes or to flee the country or to cynically believe everything to be corrupt. On the other hand, if citizens demand public goods and services without expecting to contribute resources for their production, this amounts to being no more than a demand to be a free-rider on the general budget.

In our country, we may have been seeing both phenomena. On one hand, there is, rightly or wrongly, a tremendous public cynicism present almost everywhere with respect to expecting effective provision of public goods and services. On the other hand, the idea that the beneficiaries of public goods and services must also, sooner or later, come to bear the costs in terms of taxed resources is far from established so our politics come to often be unreasonable and irresponsible.

Reliable and comprehensible information about the system as a whole and about the contents of public budgets is thus vital for a fiscal democracy to function. In ancient Athens it was said:

 “Here each individual is interested not only in his own affairs but in the affairs of the State as well; even those who are mostly occupied with their own business are extremely well-informed on general politics — this is a peculiarity of ours: we do not say that a man who has no interest in politics is a man who minds his own business; we say that he has no business here at all.” Pericles (Funeral Oration, Thucydides, The Pelopennesian War)

That was the criterion that Pericles defined for ancient Athenian democracy, and I see no reason why in the 21st Century it cannot be met in modern India’s democracy.

This finally brings me to the positive contribution I have promised to make. The aim my attempt to redesign the Union and State’s budgets utilising precisely the same data as available has been to make the fiscal position of all public entities accessible to any interested citizen.

We do not have to say that every Indian citizen, or even every literate and numerate citizen of our country, has to be able to understand the intricacies of the public budgets of his or her State and the Union. But if information is available such that anyone who understands the finances of his own family or his own business enterprise is also reasonably able to understand the public budget then a standard of maximum feasible transparency would have been defined and met.

I have relied on the international normative model developed by our own countryman, Mr. A. Premchand, who retired from the IMF a few years ago, as described in his outstanding book Effective Government Accounting (IMF 1995), where he showed applications for e.g. the USA, New Zealand and Switzerland. What I have done – or rather did in 1997/1998, with the help of a research assistant and a student – is apply that to all of our States and the Union too.[2] What will be seen by way of differences with the present methodology is that there is essentially an Operating Statement, a Financial Statement and a Cash Flow Statement offered for each State and the Union. The financial position and gross fiscal deficit definition emerge rather neatly from this – while there the rather confusing “Development/Non-development” and “Planning/Non-Planning” distinctions have been done away with.

The exercise points to the foundations of a new and fresh federal framework for our Republic. A central new fact of modern India is that many, perhaps most, of our States have developed what is effectively a bipolar division in their legislatures. Voters have also increasingly started to judge Governments not by the personalities they contain but rather by their performance on the job, and, at election-time, have begun to frequently enough shown one side the door in the hope the other side may do better. In such circumstances, there seems no reason in principle why an entity as large as the average State of modern India today cannot be entrusted to legislate and administer a modern tax-system, based especially on the income-tax, and especially taxing income from all sources including agriculture. In a fresh and modern federalism, an elected State Government would have appropriate economic powers to run its own affairs, and be mainly accountable to the legislature whose confidence it requires, and ultimately to voters below.

From an efficiency standpoint, we should want a framework in which repercussions of political turmoil or bad financial management by a State Government to not spill into other States or flow into the Union Government’s own problems of deficit financing. With free mobility of goods and factors throughout the Union, citizens faced with a poorly performing State Government could seek to vote it out of office, or may of course “vote with their feet” by moving their capital or resources to another part of the country. In short, State Governments will be held responsible by their electorates for their expenditures on public goods and services, while having the main powers of domestic taxation in the economy, especially taxes on income from all sources including agriculture.

At the same time, diverse as India is, we are not 15 or 25 separate republics federated together but rather one country all of whose peoples are united by a common geography and a common experience of history. From an equity and indeed national standpoint, we may also want a system which also firmly established that the National Parliament would have to determine how much each citizen should be taxed for the Union to provide public goods and services for the country as a whole, as well as what transfers ought to be made between the States via the Union in the interests of equity given differences in initial resource-endowments between them.

Here again an American example may be useful. As is well-known, the 50 United States each have their own Constitutions governing most intra-State political matters, yet all being inferior in authority to the 1789 Constitution of the United States as duly amended. In India, an author as early as 1888 recommended popular Constitutions for India’s States on the grounds

“where there are no popular constitutions, the personal character of the ruler becomes a most important factor in the government… evils are inherent in every government where autocracy is not tempered by a free constitution.”[3]

We could ask if a better institutional arrangement may occur by each State of India electing its own Constitutional Convention subject naturally to the supervision of the National Parliament and the obvious provision that all State Constitutions be inferior in authority to the Constitution of the Union of India.[4] These documents would then furnish the major sets of rules to govern intra-State political and fiscal decision-making more efficiently. An additional modern reason can be given from the work of Professor James M. Buchanan, namely, that fiscal constitutionalism, and perhaps only fiscal constitutionalism, allows over-riding to take place of the interests of competing power-groups.[5]

State-level Constitutional Conventions in India would provide an opportunity for a realistic assessment to be made by State-level legislators and citizens of the fiscal positions of their own States. Greater recognition and understanding of the plain facts and the desired relationships between income and expenditures, public benefits and public costs, would likely improve the quality of public decision-making at State-levels, sending public resources from destinations which are socially worthless towards destinations which are socially worthwhile. It bears repeating the average size of a large State of India is 61 million people, and almost all existing political Constitutions around the globe furnish rules for far smaller populations than that.

Thank you for your patience. Jai Hind.

[1] Monetary Federalism at Work: F. A. Hayek more than anyone else taught us that relative prices are signals or guides to economic activity — summarizing in a single statistic information about the resources, constraints, expectations and ambitions of market participants. An exchange-rate between two currencies is also a relative price, conveying information about relative market opinions regarding the issuers of the two currencies. Suppose we had two States of India in the fresh kind of federal framework outlined above, which were identical in all respects except one had a larger deficit and so a larger nominal money supply growth. Would that mean the first currency must depreciate relative to the second? Not necessarily; it is not the size of indebtedness that matters but rather the quality of public investment decisions, to which borrowed money has been put. Thus we come to the crux: Suppose we have two States which are identical in all respects except one: State X is found to have an efficient Government, i.e. one which has made relatively good quality public investment decisions, and State Y is found to have one which has made relatively bad quality public investment decisions. In the present amalgamated model of Indian federal finance, no objective distinction can be made between the two, and efficient State Governments are surreptitiously compelled to end up subsidising inefficient ones. In a differentiated federal framework for India, as the different information about the two State Governments comes to be discovered, the X currency will tend to appreciate as resources move towards it while the Y will tend to depreciate as resources move away from it. In an amalgamated model, efficient State Governments lose incentives to remain efficient, while in a differentiated model, inefficient State Governments will gain an incentive not to be inefficient. The present amalgamated situation is such that inefficient States – and this may include not only the State Government but also the State Legislature and the State electorate itself – receive no fiscal incentive to improve themselves. In a differentiated framework, the same inefficient State would face a tangible, visible loss of reserves or depreciation of its currency relative to other States on account of its inefficiency, and thereby have some incentive to mend its ways. I call the proposal given here a “Reverse Euro” model because Europe appears to be moving from differentiated currencies and money supplies to an amalgamated currency and money supply, while the argument given here for India is in the opposite direction. Professor Milton Friedman of the Hoover Institution at Stanford, has had the kindness, at the age of 88, to send me a brilliant and forceful critique of my Reverse Euro idea for India when I requested his comment. Since he is the founder of the flexible exchange-rate system and he has found it too radical, I have shelved it for the time being.

[2] The assistance of Dola Dasgupta and K. Shanmugam is recorded with gratitude.

[3] Surendranath Roy, A History of the Native States of India, Vol I. Gwalior, Calcutta & London: Thacker 1888.

[4] Large amounts of legal and constitutional precedent have built up on issues of a regional or local nature: whether a State legislature should be unicameral or bicameral, what should be its procedures, what days should be State holidays but need not be national holidays, on tenancy, rent control, school standards, health standards and so on ad infinitum. All this body of explicit and implicit local rules and conventions may be duly collected and placed in State-level Constitutions.

[5] James M. Buchanan, Limits to Liberty, Texas, 1978.

A major expansion and reorganization of the judiciary would have to accompany the sort of basic constitutional reform outlined above. Union and State judiciaries would need to be more clearly demarcated, and rules established for review of State-level decisions by Union courts of law. It is common knowledge the judiciary in India is in a state of organizational overload at the point of collapse and dysfunction. An expansion and reorganization of the judiciary to match new Union-State constitutional relations will likely improve efficiency, and therefore welfare levels of citizens.

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Transparency and Economic Policy-Making

Transparency and Economic Policy-Making

An address by Professor Subroto Roy to the Asia-Pacific Public Relations Conference, (panel on Transparency chaired by C. R. Irani) January 30 1998.

This talk is dedicated to the memory of my sister Suchandra Bhattacharjee (14.02.1943-10.01.1998).
1. I would like to talk about transparency and economic policy-making in our country. For something to be transparent is, in plain language, for it to be able to be openly seen through, for it to not to be opaque, obscure or muddy, for it to be clear to the naked eye or to the reasonable mind. A clear glass of water is a transparent glass of water. Similarly, an open and easily comprehensible set of economic policies is a transparent set of economic policies.

The philosopher Karl Popper wrote a famous book after the Second World War titled The Open Society and its Enemies. It contained a passionate defence of liberal institutions and democratic freedoms and a bitter attack on totalitarian doctrines of all kinds. It generated a lot of controversy, especially over its likely misreading of the best known work of political philosophy since the 4th Century BC, namely, Plato’s Republic .[1] I shall borrow Popper’s terms ‘open society’ and ‘closed society’ and will first try to make this a useful distinction for modern times, and then apply it to the process of economic policy-making in India today.

2. An open society is one in which the ordinary citizen has reasonably easy access to any and all information relating to the public or social interest — whether the information is directly available to the citizen himself or herself, or is indirectly available to his or her elected representatives like MP’s and MLA’s. Different citizens will respond to the same factual information in different ways, and conflict and debate about the common good will result. But that would be part of the democratic process.

The assessment that any public makes about the government of the day depends on both good and bad news about the fate of the country at any given time. In an open society, both good news and bad news is out there in the pubic domain — open to be assessed, debated, rejoiced over, or wept about. If we win a cricket match or send a woman into space we rejoice. If we lose a child in a manhole or a busload of children in a river, we weep. If some tremendous fraud on the public exchequer comes to be exposed, we are appalled. And so on.

It is the hallmark of an open society that its citizens are mature enough to cope with both the good and the bad news about their country that comes to be daily placed before them. Or, perhaps more accurately, the experience of having to handle both good and bad news daily about their world causes the citizens in an open society to undergo a process of social maturation in formulating their understanding of the common good as well as their responses to problems or crises that the community may come to face. They might be thereby thought of as improving their civic capacities, as becoming better-informed and more discerning voters and decision-makers, and so becoming better citizens of the country in which they live.

The opposite of an open society is a closed society — one in which a ruling political party or a self-styled elite or nomenclatura keep publicly important information to themselves, and do not allow the ordinary citizen easy or reasonably free access to it. The reason may be merely that they are intent on accumulating assets for themselves as quickly as they can while in office, or that they are afraid of public anger and want to save their own skins from demands for accountability. Or it may be that they have the impression that the public is better off kept in the dark — that only the elite nomenclatura is in position to use the information to serve the national interest.

In a closed society it is inevitable that bad news comes to be censored or suppressed by the nomenclatura, and so the good news gets exaggerated in significance. News of economic disasters, military defeats or domestic uprisings gets suppressed. News of victories or achievements or heroics gets exaggerated. If there are no real victories, achievements or heroics, fake ones have to be invented by government hacks — although the suppressed bad news tends to silently whisper all the way through the public consciousness in any case.

Such is the way of government propaganda in almost every country, even those that pride themselves on being free and democratic societies. Dostoevsky’s cardinal advice in Brothers Karamasov was: “Above all, never lie to yourself”. Yet people in power tend to become so adept at propaganda that they start to deceive themselves and forget what is true and what is false, or worse still, cannot remember how to distinguish between true and false in the first place. In an essay thirty years ago titled Truth and Politics, the American scholar Hannah Arendt put it like this:

“Insofar as man carries within himself a partner from whom he can never win release, he will be better off not to live with a murderer or a liar; or: since thought is the silent dialogue carried out between me and myself, I must be careful to keep the integrity of this partner intact, for otherwise I shall surely lose the capacity for thought altogether.”[2]

3. Closed societies may have been the rule and open societies the exception for most of human history. The good news at the end of the 20th Century is surely that since November 7 1989, when the Berlin Wall fell, the closed society has officially ceased to be a respectable form of human social organization. The age of mass access to television and telecommunications at the end of the 20th Century may be spelling the permanent end of totalitarianism and closed societies in general. The Berlin Wall was perhaps doomed to fall the first day East Germans were able to watch West German television programs.

Other than our large and powerful neighbour China, plus perhaps North Korea, Myanmar, and some Islamic countries, declared closed societies are becoming hard to find, and China remains in two minds whether to be open or closed. No longer is Russia or Romania or Albania or South Africa closed in the way each once was for many years. There may be all sorts of problems and confusions in these countries but they are or trying to become open societies.

Under the glare of TV cameras in the 21st Century, horrors like the Holocaust or the Gulag or even an atrocity like Jalianwalla Bag or the Mai Lai massacre will simply not be able to take place anywhere in the world. Such things are not going to happen, or if they do happen, it will be random terrorism and not systematic, large scale genocide of the sort the 20th Century has experienced. The good news is that somehow, through the growth of human ingenuity that we call technical progress, we may have made some moral progress as a species as well.

4. My hypothesis, then, is that while every country finds its place on a spectrum of openness and closedness with respect to its political institutions and availability of information, a broad and permanent drift has been taking place as the 20th Century comes to an end in the direction of openness.

With this greater openness we should expect bad news not to come to be suppressed or good news not to come to be exaggerated in the old ways of propaganda. Instead we should expect more objectively accurate information to come about in the public domain — i.e., better quality and more reliable information, in other words, more truthful information. This in turn commensurately requires more candour and maturity on the part of citizens in discussions about the national or social interest. Closed society totalitarianism permitted the general masses to remain docile and unthinking while the nomenclatura make the decisions. Dostoevsky’s Grand Inquisitor said that is all that can be expected of the masses. Open society transparency and democracy defines the concept of an ordinary citizen and requires from that citizen individual rationality and individual responsibility. It is the requirement Pericles made of the Athenians:

“Here each individual is interested not only in his own affairs but in the affairs of the state as well; even those who are mostly occupied with their own business are extremely well-informed on general politics – this is a peculiarity of ours: we do not say that a man who takes no interest in politics is a man who minds his own business; we say that he has no business here at all.”[3]

5. All this being said, I am at last in a position to turn to economic policy in India today. I am sorry to have been so long-winded and pedantic but now I can state my main substantive point bluntly: in India today, there is almost zero transparency in the information needed for effective macroeconomic policy-making whether at the Union or State levels. To illustrate by some examples.

(A) Macroeconomic policy-making in any large country requires the presence of half a dozen or a dozen well-defined competing models produced by the government and private agencies, specifying plausible causal links between major economic variables, and made testable against time-series data of reasonably long duration. In India we seem to have almost none. The University Economics Departments are all owned by some government or other and can hardly speak out with any academic freedom. When the Ministry of Finance or RBI or Planning Commission, or the India teams of the World Bank or IMF, make their periodic statements they do not appear to be based on any such models or any such data-base. If any such models exist, these need to be published and placed in the public domain for thorough discussion as to their specification and their data. Otherwise, whatever is being predicted cannot be assessed as being very much more reliable than the predictions obtained from the Finance Minister’s astrologer or palmist. (NB: Horse-Manure is a polite word used in the American South for what elsewhere goes by the initials of B. S.). Furthermore, there is no follow-up or critical review to see whether what the Government said was going to happen a year ago has in fact happened, and if not, why not.

(B) The Constitution of India defines many States yet no one seems to be quite certain how many States really constitute the Union of India at any given time. We began with a dozen. Some 565 petty monarchs were successfully integrated into a unitary Republic of India, and for some years we had sixteen States. But today, do we really have 26 States? Is Delhi a State? UP with 150 million people would be the fifth or sixth largest country in the world on its own; is it really merely one State of India? Are 11 Small States de facto Union Territories in view of their heavy dependence on the Union? Suppose we agreed there are fifteen Major States of India based on sheer population size: namely, Andhra, Assam, Bihar, Gujarat, Haryana, Karnataka, Kerala, MP, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, UP and West Bengal. These States account for 93% of the population of India. The average population of these 15 Major States is 58 million people each. That is the size of a major country like France or Britain. In other words, the 870 million people in India’s Major States are numerically 15 Frances or 15 Britains put together.

Yet no reliable, uniformly collected GDP figures exist for these 15 States. The RBI has the best data, and these are at least two years old, and the RBI will tell you without further explanation that the data across States are not comparable. If that is the case at State-level, I do not see how the national-level Gross Domestic Product can possibly be estimated with any meaningfulness at all.

(C) Then we hear about the Government Budget deficit as a percentage of GDP. Now any national government is able to pay for its activities only by taxation or borrowing or by using its monopoly over the domestic medium of exchange to print new money. In India today, universal money-illusion seems to prevail. It would not be widely recognised by citizens, journalists or policy-makers that, say, 100,000 Rupees nominally taxed at 10% under 20% inflation leaves less real disposable income than the same taxed at 20% with 5% inflation. This is in part because inflation figures are unknown or suspect. There is no reliable all-India or State-level consumer price index. The wholesale price index on the basis of which the Government of India makes its inflation statements, may not accurately reflect the actual decline in the purchasing power of money, as measured, say, by rises in prices of alternative stores of value like land. The index includes artificially low administered or subsidized prices for petroleum, cereals, and electricity. To the extent these prices may be expected to move towards international equilibrium prices, the index contains a strong element of deferred inflation. One urgent task for all macroeconomic research in India is construction of reliable price-data indices at both Union and State levels, or at a minimum, the testing for reliability by international standards of series currently produced by Government agencies.

Without reliable macroeconomic information being spread widely through a reasonably well-informed electorate, the Government of India has been able to wash away fiscal budget constraints by monetization and inflation without significant response from voters. The routine method of meeting deficits has become “the use of the printing press to manufacture legal tender paper money”, either directly by paying Government creditors “with new paper money specially printed for the purpose” or indirectly by paying creditors “out of loans to itself from the Central Bank”, issuing paper money to that amount. Every Budget of the Government of India, including the most recent ones of 1996 and 1997, comes to be attended by detailed Press discussion with regard to the minutae of changes in tax rates or tax-collection — yet the enormous phenomena of the automatic monetization of the Government’s deficit is ill-understood and effectively ignored. Historically, a policy of monetization started with the British Government in India during the Second World War, with a more than five-fold increase in money supply occurring between 1939 and 1945. Inflation rates never seen in India before or since were the result (Charts 0000), attended by the Great Famine of 1942/43. Though these were brought down after succession of C. D. Deshmukh as Governor of the Reserve Bank, the policy of automatic monetization did not cease and continues until the present day. Inflation “sooner or later destroys the confidence, not only of businessmen, but of the whole community, in the future value of the currency. Then comes the stage known as “the flight from the currency.” Had the Rupee been convertible during the Bretton Woods period, depreciation would have signalled and helped to adjust for disequilibrium. But exchange-controls imposed during the War were enlarged by the new Governments of India and Pakistan after the British departure to exclude convertible Sterling Area currencies as well. With the Rupee no longer convertible, internal monetization of deficits could continue without commensurate exchange-rate depreciation.

The Reserve Bank was originally supposed to be a monetary authority independent of the Government’s fiscal compulsions. It has been prevented from developing into anything more than a department of the Ministry of Finance, and as such, has become the captive creditor of the Government. The RBI in turn has utilized its supervisory role over banking to hold captive creditors, especially nationalized banks whose liabilities account for 90% of commercial bank deposits in the country. Also captive are nationalized insurance companies and pension funds. Government debt instruments show on the asset side of these balance-sheets. To the extent these may not have been held had banks been allowed to act in the interests of proper management of depositors’ liabilities and share-capital according to normal principles, these are pseudo-assets worth small fractions of their nominal values. Chart 0000 shows that in the last five years the average term structure of Government debt has been shortening rapidly, suggesting the Government is finding it increasingly difficult to find creditors, and portending higher interest rates.

General recognition of these business facts, as may be expected to come about with increasing transparency, would be a recipe for a crisis of confidence in the banking and financial system if appropriate policies were not in place beforehand.

(D) As two last examples, I offer two charts. The first shows the domestic interest burden of the Government of India growing at an alarming rate, even after it has been deflated to real terms. The second tries to show India’s foreign assets and liabilities together – we always come to know what is happening to the RBI’s reserve levels, what is less known or less understood is the structure of foreign liabilities being accumulated by the country. Very roughly speaking, in terms that everyone can understand, every man, woman and child in India today owes something like 100 US dollars to the outside world. The Ministry of Finance will tell you that this is not to be worried about because it is long-term debt and not short-term debt. Even if we take them at their word, interest payments still have to be paid on long-term debt, say at 3% per annum. That means for the stock of debt merely to be financed, every man, woman and child in India must be earning $3 every year in foreign exchange via the sale of real goods and services abroad. I.e., something like $3 billion must be newly earned every year in foreign exchange merely to finance the existing stock of debt. Quite clearly, that is not happening and it would stretch the imagination to see how it can be made to happen.

In sum, then, India, blessed with democratic political traditions which we had to take from the British against their will — remember Tilak, “Freedom is my birthright, and I shall have it” — may still be stuck with a closed society mentality when it comes to the all-important issue of economic policy. There is simply an absence in Indian public discourse of vigourous discussion of economic models and facts, whether at Union or State levels. A friendly foreign ambassador pointedly observed an absence in India of political philosophy. It may be more accurate to say that without adequate experience of a normal agenda of government being seen to be practised, widespread ignorance regarding fiscal and monetary causalities and inexperience of the technology of governance remains in the Indian electorate, as well as among public decision-makers at all levels. Our politicians seem to spend an inordinate amount of their time either garlanding one another with flowers or garlanding statues and photographs of the glorious dead. It is high time they stopped to think about the living and the future.

[1] Renford Bambrough (ed.) Plato, Popper and Politics: Some Contributions to a Modern Controversy, 1967.

[2] Philosophy, Politics and Society, 2nd Series, Peter Laslett & W. G. Runciman (eds.), 1967.

[3] Thucydides, History of the Pelopennesian War, II.40.

Constitution for a Second Indian Republic (April 1991)

Constitution for a Second Indian Republic

Author’s Note April 2007: I wrote “A Second Constitution for India” on October 2 1990 while working in an advisory capacity for Rajiv Gandhi, then Leader of the Opposition. But he did not get to see it and I was not able to guide any coherent discussion towards this vital subject. I published it on April 20 1991 in The Statesman in its Saturday supplement. While I am not sure I agree with all of my 1991  “Constitution” today, it may be useful for discussion. One salient feature of this concise 60-article Constitution is having a directly elected PM and Deputy PM with a tough Senate somewhat on the US pattern (though the distinction between Head of Government and Head of State is  maintained as in the present system) with a modified British pattern of parliamentary democracy continuing in the States.

I do, however, fully endorse what I wrote on December 30 2002 in a personal letter to the late C. R. Irani, in his capacity as a member of the “Constitutional Review Commission” (to which he responded with very warm agreement). That letter is placed below the text of the proposal and outlines some of what I think is most urgent today in India’s constitional progress.

“Nai Duniya”, Constitution of a Second Republic

by Subroto Roy

First published in The Statesman, April 20 1991

Preamble

We the People of India, in order to establish a more perfect Union of PERPETUAL PEACE; in which the ancient virtues of COURAGE,TRUTHFULNESS and JUSTICE may be better practiced; in which the FREEDOM and WELFARE of all our People may be more easily secured, do adopt, enact and give to ourselves this Constitution, on this the 26th day of January 1995.

FOUNDATION
1. India, that is Bharat or Hindustan, shall be a Union of States and Territories, and a sovereign member of the community of nations.

2. The Union of India shall be a democratic republic, and the Union shall guarantee a democratic and republican form of governance in each of its States and Territories.

3. The Union of India shall protect every State and Territory against foreign aggression and armed rebellion, and shall ensure its governance to be in accordance with  provisions of the Union Constitution.

4. A State or Territory may elect to establish its own Constitution, but no provision of the Constitution of any State of Territory shall be valid if it violates any provision of the Union Constitution.

FUNDAMENTAL RIGHTS OF CITIZENS
5. Every person born in the territory of India, or either of whose parents or any of whose grandparents was born in the territory of India, or who is a citizen of India at the commencement of this Constitution shall be a citizen of India by birth. Any person who has been domiciled in India for five years may become a citizen of India by naturalization according to law.

6. Every citizen of India who is not less than 21 years of age shall have the right to vote, and the right to vote shall not be denied or abridged on account of religion, race, sex, descent, caste or place of birth, or by reason of failure to pay any poll tax or any other tax.

7. The Union of India or any of its States or Territories shall not deny to any person within the territory of India equality before the laws or the equal protection of the laws.

8. No person within the territory of India shall be deprived of life, liberty or property save by authority of law, nor shall private property be taken for public use without just compensation.

9. The rights of citizens to be secure in their persons, homes, communications, papers and effects, against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, supported by oath or affirmation, and describing the place to be searched, and the person or things to be seized.

10. No person accused of a criminal offence shall be compelled to be a witness against himself or herself, nor shall any person be arrested without being informed of the grounds of such arrest, nor shall any person in custody be deprived of the right to legal
counsel, nor shall the privilege of the writ of habeas corpus be suspended unless in the case of war or armed rebellion the public safety requires it.

11. No person shall be prosecuted or punished for the same offence more than once, nor shall excessive bail be required or excessive fines imposed, nor shall punishments be cruel or unusual.

12. The Union of India or any of its States or Territories shall not deny to any citizen the right to move freely throughout the territory of India or to reside or settle in any part of the territory of India.

13. The Union of India or any of its States or Territories shall not deny to any citizen the right to freedom of conscience, or the right to freely profess or practice religion, or establish, maintain and manage religious institutions in accordance with law and subject to public safety, order and health.

14. No citizen shall be subject on account of religion, race, caste, sex, descent or place of birth to any disability, liability or restriction with regard to public institutions, public places or places of worship, or use of public facilities, maintained wholly or partly out of public funds or otherwise dedicated to the use of the public.

15. The Union of India or any of its States or Territories shall not deny any citizen equality of opportunity or discriminate on account of religion, race, caste, sex, descent or place of birth.

16. The Union of India or any of its States or Territories shall not deny or abridge the freedom of speech, inquiry or expression of citizens, or the freedom of the press or broadcasting, subject to public safety, order, health, laws of defamation and standards of common morality.

17. The Union of India or any of its States or Territories shall not deny the right of citizens to form associations and unions, to assemble peaceably without arms, or to petition for redress of grievances, subject to public safety, order and health.

18. The Union of India or any of its States or Territories shall not deny to any citizen the right to practice any profession, trade or business, or carry on any occupation or means of livelihood, subject to public safety, order, health and standards of common morality.

19. Trade, commerce and enterprise throughout the territory of India shall be free, and the Union of India or any of its States or Territories shall not make any law to restrict them except in the interests of public safety, order, health, standards of common morality or economic efficiency.

20. No tax shall be levied or collected except by authority of law.

DUTIES OF CITIZENS
21. It shall be the duty of every person within the territory of India to abide by the Constitution of India and show no disrespect to its institutions; to participate in democratic processes and to vote in elections according to law; to make timely payments of taxes, fees and dues according to law; to keep clean and hygienic streets, roads, highways, neighbourhoods, waterways, railways, parks, public buildings and institutions; to protect public property; to protect the natural environment and to treat living creatures without cruelty; to abjure violence and promote harmony among all people; to value and preserve the languages and cultural history of the Indian subcontinent; to renounce practices derogatory to women or children.

EXECUTIVE, LEGISLATIVE AND JUDICIAL POWERS
22. There shall be a President of India in whom shall be vested the executive power of the Union, and who shall be the Supreme Commander of the Armed Forces of the Union. The President shall be elected indirectly by the citizens of India in the manner prescribed in Article 40 of this Constitution.

23. There shall be a Vice-President of India, who shall exercise the duties and functions of the President in the event of the death, resignation, incapacitation, absence or impeachment of the President. The Vice-President shall be elected indirectly by the citizens of India in the manner prescribed in Article 41 of this Constitution.

24. The President of India shall appoint a Prime Minister upon the advice of the citizens of India in a direct election in the manner prescribed in Article 43 of this Constitution. The Prime Minister of India shall be the Chief Executive Officer of the Union, and the President shall, in exercising the executive power of the Union, act at all times upon the advice of the Prime Minister. The Prime Minister shall keep the President of India informed at all times, and shall reconsider advice rendered if the President so requests it.

25. There shall be a Union Parliament which shall consist of the President, the Vice-President, the Prime Minister and two elected Houses.

The Upper House, or Council of the Nation, shall consist of members elected directly by the citizens of India according to States in the manner prescribed in Article 37 of this Constitution. The Lower House, or House of the People, shall consist of members elected indirectly by the citizens of India according to States, in the manner prescribed in Article 35 of this Constitution. The legislative power of the Union of India shall be vested in the Union Parliament.

A Bill, except a Tax Bill, may originate in either House. A Tax Bill, that is to say any Bill for the raising of revenue, shall originate in the Lower House. After a Bill has been passed in one House, it shall be sent to the other House which shall pass, modify or reject it. A Bill passed by both Houses shall be sent to the Prime Minister, upon whose approval it shall be sent to the President for signature upon which it shall become law. A Bill passed by both Houses which does not receive the approval of the Prime Minister shall be returned to the House where it shall have originated. If, after reconsideration, both Houses pass the Bill, each House by two thirds of its members, then the Bill shall be sent to the Prime Minister who shall advise the President that it be signed and become law.

26. There shall be a Supreme Court of India, consisting of a Chief Justice and Associate Justices appointed by the President upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The judicial power of the Union of India shall be vested in the Supreme Court and such courts inferior to it that it may establish or authorize. The Supreme Court of India shall have its seat in the capital of the Union and also in every State of the Union.

27. Each State shall have a Governor appointed by the President of India upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The Governor shall be vested with the executive power of the State, and shall be the supreme commander of all police forces within the State.

28. Each State shall have a Parliament, which shall consist of the Governor of the State and one or two chambers, elected by the citizens of the State in accordance with the Constitution or laws of the State. All legislative power of the State shall be vested in the State Parliament or such duly elected bodies of local government which the State Parliament shall establish by law.

29. The Governor of a State shall appoint a Chief Minister who shall be a member of the State Parliament enjoying the confidence of that Parliament. The Governor shall act upon the advice of the Chief Minister in exercising the executive powers of the State except in conditions of Emergency as stated in Article 56 of this Constitution. In the event no member of the State Parliament shall have its confidence, or in conditions of Emergency as stated in Article 56, the Governor of the State shall exercise the executive powers of the State in consultation with the State Parliament, until such a time as either such confidence comes to obtain, or new elections to the State Parliament take place within a maximum time of one year, or conditions of Emergency come to an end.

30. Each State Parliament shall elect its representatives to the Lower House of the Union Parliament in accordance with the provisions of Articles 34 and 35 of this Constitution.

31. Each State shall have a Supreme Court consisting of a Chief Judge and Associate Judges appointed by the Governor as the Constitution or laws of the State may establish. The judicial power of the State shall be vested in the Supreme Court of the State and such courts inferior to it as the Constitution or laws of the State may establish.

ELECTIONS AND TERMS OF OFFICE
32. All elections in the Union of India and its States and Territories shall be held on the 2nd day of October in any year, and this day shall be known as Election Day or Gandhi Jayanti and shall be a bank holiday. There shall be no more than 14 other bank holidays in the year, and no more than  2  in any month of the year.

33. The power required for the conduct of all elections to the Union Parliament and all State Parliaments shall be vested in a Chief Election Commissioner, who shall be appointed by the President upon the nomination of the Chief Justice of India with the advice and consent of the Prime Minister and the Upper House of the Union Parliament. The Chief Election Commissioner shall be assisted by four Associate Commissioners, one each for Northern, Central, Southern and Eastern India, and State Election Commissioners, one for each State.

34. Election to any State Parliament shall be for a maximum term of 4 years. A State Parliament shall consist of no more than 1000 members, chosen by direct election from territorial constituencies of the State, each member representing no more than 100,000 citizens so far as is possible.

35. Elections to the Lower House of the Union Parliament shall be for a term of 2 years, and the House shall stand dissolved every 2 years. The Lower House shall be elected indirectly by the citizens of the States, the delegations from a State being elected by members of the State Parliament. Each member of the Lower House shall represent indirectly 1 million citizens of the State so far as is possible. The Lower House of the Union Parliament shall have no more than 1000 members, each member having one vote.

36. The Lower House shall choose its own Speaker; determine the rules of its own proceedings; punish its members including by expulsion with the approval of two thirds of its members; keep a record of its proceedings and publish the same regularly except such parts as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Lower House be questioned in any other place. No member of the Lower House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.

37. The Upper House of the Union Parliament shall have no more than 100 members, of whom 90 shall be chosen by direct election from territorial constituencies of the Union and shall have one vote each. Elections to the Upper House shall be for a term of 6 years, with one third of the elected members retiring every 2 years. No person shall be elected to the Upper House for more than three terms successively. For purposes of elections to the Upper House, the Union of India shall be divided into territorial constituencies each of approximately 10 million citizens, so long as there are no more than 22 constituencies from the States of Southern India (presently consisting of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and Goa); 22 constituencies from the States of Eastern India (presently consisting of Arunachal Pradesh, Tripura, Mizoram, Manipur, Meghalaya, Nagaland, Assam, Sikkim, West Bengal and Bihar); 22 constituencies from the States of Northern India (presently consisting of Uttar Pradesh, Himachal Pradesh, Jammu and Kashmir,Rajasthan, Punjab and Haryana); and 22 constituencies from the States of Central India (presently consisting of Gujarat, Maharashtra, Madhya Pradesh and Orissa). There shall be one constituency in the Union Territory of Delhi and one constituency in all other UnionTerritories together.

38. The President of India may appoint up to 10 members of the Upper House each of whom shall have no vote and shall hold one term of office of 2 years. The President shall make such appointments in view of considerations such as the representation of the arts, sciences, sports, literature or social work, as also the representation of any community, caste, religion or other group which, in the opinion of the President, deserves a voice in the Upper House in the national interest.

39. The Vice President of India shall chair the Upper House but shall have no vote unless they are equally divided. The Upper House shall choose its own Chairman pro tempore in the absence of the Vice President; determine the rules of its own proceedings; punish its members including by expulsion with the concurrence of two thirds of its members; keep a record of its proceedings and publish the same except as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or their travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Upper House be questioned in any other place. No member of the Upper House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.

40. The President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Upper House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Lower House which shall elect between them by secret ballot. The President of India shall not hold any other office of profit or honour.

41. The Vice-President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Lower House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Upper House which shall elect between them by secret ballot. The Vice-President of India shall not hold any other office of profit or honour.

42. The terms of the President and Vice-President shall not be concurrent.

43. The Prime Minister of India shall be appointed by the President upon the advice of the citizens of India in a direct election, and shall hold office for four years. The Prime Minister shall be a citizen of India not less than 35 years of age, and no person shall hold the office of Prime Minister for two terms successively. Candidates shall register 12 months prior to the date of the election with the Chief Election Commissioner. The Chief Election Commissioner shall report to the President the results of the election to the office of the Prime Minister, and the President shall appoint the candidate receiving the highest number of votes.

44. Upon the nomination of the Prime Minister, the President shall appoint a Deputy Prime Minister and a Council of Ministers, who shall hold office at the pleasure of the President and who shall assist the Prime Minister in the discharge of the duties of the office. The Deputy Prime Minister shall exercise the duties and functions of the Prime Minister in the event of the death, resignation, incapacitation, absence or impeachment of the Prime Minister.

45. The Prime Minister, the Deputy Prime Minister and the Council of Ministers shall from time to time answer the questions of members of the Union Parliament as requested by the latter, and the Prime Minister shall no less than once every year address the Union Parliament on the State of the Republic.

46. Neither the Prime Minister nor the Deputy Prime Minister nor any member of the Council of Ministers shall hold any other office of profit or honour.

DUTIES OF THE UNION AND THE STATES
47. The duties of the Union of India shall include

— defence of the Republic from foreign aggression, armed rebellion and crime
— foreign relations and foreign trade
— management of currency and exchange-rate
— management of the public debt of the Union
— inter-State highways, waterways and dams
— regulation of inter-State railways
— regulation of harbours and airports
— regulation of civil aviation
— regulation of communications and broadcasting
— protection of national monuments and archives
— development of space and atomic research, research
universities and institutes of national importance
— planning of metropolitan areas
— environmental protection, national forests, parks and wildlife
— regulation of banking other than rural banking
— regulation of stock exchanges and futures markets
— census, voter registration, and social security

48. The Union of India shall in addition
— promote and encourage State and local democracy
— reduce disparities of income and wealth consistent with economic efficiency
— reduce inequitable transfers of debt to future generations by ensuring balance in the Union Budget over a quincennial period
— promote harmony among the nations of the world, abjure violencein the settlement of international conflicts, foster respect for international law, and maintain just and honourable relations with other nations.

49. The original jurisdiction of the Supreme Court of India shall extend to substantive questions of law and constitutional interpretation; fundamental rights of citizens, and relations between the citizen and the Union and its States and Territories; international law; inter-State relations and commerce; relations between the Union and any State.

50. There shall be a Reserve Bank of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Governor and Deputy Governors of the Reserve Bank of India. It shall be the duty of the Reserve Bank of India to maintain a sound currency, that is, a stable value of the Rupee for transactions within the Union and outside it. The Reserve Bank of India shall be further responsible for the charter and regulation of banks, and the efficient working of financial and credit markets.

51. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Comptroller and Auditor General of India, who shall be responsible for the issue of public moneys and the audit of the accounts of the Union of India.

52. There shall be a Public Services Commission of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Secretary-General of the Public Services Commission, who shall be responsible for all matters relating to the civil services of India.

53. The duties of each State of India shall include
— civil order and police forces in the State
— State highways, waterways and dams
— regulation of State railways
— land registration and tenurial reform
— agricultural pricing, stocks and extension
— animal husbandry
— colleges and non-research universities
— finance of schools and setting of school standards
— regulation of electricity
— regulation of insurance
— regulation of rural banking
— management of the public debt of the State
— vital statistics
— public health
— environmental protection
— State parks and forests

A State of India shall in addition
— extend processes of democracy by promoting ad encouraging constitutional local government
— reduce disparities of income and wealth consistent with requirements of economic efficiency
— reduce inequitable transfers of debt to future generations by ensuring balance in the State Budget over a quincennial period
— endeavour to secure a common civil code for citizens of the State
— promote harmony among the peoples of India.

The duties of local governments established in a State by law shall include provision of primary and secondary education or regulation thereof; provision of and maintenance of streets, roads and lighting or regulation thereof; provision of fresh water and sewage disposal or regulation thereof.

54. The original jurisdiction of the Supreme Court of a State shall extend to substantive questions of law and interpretation of the State Constitution; civil and criminal law within the State; marriage, divorce, custody and guardianship of minors; fundamental rights of citizens and relations between citizens and the State.

WAR AND EMERGENCY
55. The President of India, upon the advice of the Prime Minister and with the consent of a majority of each of the Union Parliament, shall have authority to declare and make war on behalf of the Union of India and its State and Territories, and to raise armed forces and resources for this purpose. A declaration of war may include the suspension of fundamental rights so long as that no such suspension shall continue for longer than 30 days without the consent of a majority of each House of the Union Parliament.

56. The President of India, upon the advice of the Prime Minister and with the consent of a two thirds majority of the Upper House of the Union Parliament, shall have authority to declare the whole of India or any part of its territory to face an imminent danger from foreign aggression, armed rebellion, disturbance or natural calamity, and proclaim an Emergency accordingly. Proclamation of Emergency may include declaration of Governor’s Rule in a State according to Article 29 and suspension of fundamental rights, so long as that no such suspension shall continue for longer than 30 days without the consent of a two thirds majority of the Upper House, and no elections to any State shall be delayed for longer than one year.

AMENDMENTS AND MISCELLANY
57. Within the groupings of States given in Article 37, new States may be formed or State boundaries altered by authority of the President of India, upon the advice of the Prime Minister and with the consent of two thirds of the members of each House of the Union Parliament and the consent of a majority of each State Parliament affected thereby.

58. The provisions of this Constitution may be amended by the authority of the President of India with the consent of a four fifths majority of each House of the Union Parliament.

59. Impeachment from office of the President, Vice-President, Prime Minister or Deputy Prime Minister of India shall be initiated by a four fifths majority of each House of the Union Parliament. The Speaker of the Lower House shall inform the Chief Justice of India of such a majority in each House, whereupon the Chief Justice shall constitute a Special Bench of the Supreme Court of India which shall act as the Court of Impeachment.

60. Written and printed communications between the Union of India and foreign nations; between the Union of India and the States of India, and between the States of India and the Union of India; and between the Union of India and citizens of India shall be in the Hindustani (Hindi) and English languages. Any language or dialect of India may be spoken in the Union Parliament or any State Parliament with the prior permission of the Chairman or Speaker of the chamber.”

December 30 2002 letter to Mr C. R. Irani, Constitutional Review Commission:

“Dear Mr. Irani, Other than yourself and Mr. Sorabji, most other members of the Constitutional Review panel seem to be retired judges or bureaucrats. How many are under 50 years of age? Or have demonstrable knowledge of e.g. modern economics or constitutional political theory? Such a panel may be worse than nothing, since after its fossilized reports are in, it will take another 50 years before genuine constitutional reform can be addressed. Here are some examples:1. There is no such thing as a “Central” Government of India. There used to be one taking orders from London, giving orders to “Provinces” on the periphery. Free India has been a Union of States. Each Indian is supposed to be and to feel as being a citizen both of the Union and of his/her State, owing loyalty and taxes at both levels. Yet the colonial anachronism continues in all our thought with devastating results, so, e.g. the States remain mendicants before an all-powerful “Centre” which remains a mendicant before the new “London”. Ergo, your panel should be talking about Union-State relations, and the proper nature of federalism in modern India. But is any member a recognised expert on fiscal finance? For a start, all our State and Union Government accounting would need to be sorted out properly before anyone can comprehend what is going on between them. 2. The Governor of the RBI must be made a Constitutional post, on par with e.g. the Auditor-General. Reason: Monetary policy needs to be made independent of the fiscal compulsions of the Government of the day, which was the intended function of the RBI at its inception in 1935. Instead it has become a large Department of the Finance Ministry. The RBI’s sole job should be to establish and maintain the soundness of the currency, both domestically and internationally. I wonder if such an idea will arise from the panel appointed to look into it. 3. Our 16 large States have an average population of 61 million people. Each needs to be allowed to have its own Constitution if it so wishes on the American model, where the Union Constitution presides over a large number of State Constitutions. Indeed the resolution of the J&K problem and indeed our problems with Pakistan may rest in a broad, controlled devolution of fiscal and monetary powers to all States, with the Union’s mandate becoming clearer and more focussed and feasible and realistic as a result. Will your panel talk about this? (Delhi does not forsake its own power, as even Old Man Tughlak found many years ago.) I could go on. Eleven years ago, I wrote in Foundations of India’s Political Economy “The 1950 Constitution was a marvellous document at the time. Since then it has become too bulky, too full of exceptions and qualifications, and far from comprehensible to the ordinary Indian. A neater, cleaner and shorter document may be sought which keeps the best of the 1950 Constitution and integrates it with the experience of forty years as well as the best of foreign constitutions, with the aim of promoting a system with less uncertainty and more stability.” The Statesman on April 20 1991 published my proposed Constitution for a Second Indian Republic, now … I enclose a copy for your interest. In Keshavananda Bharati the Supreme Court meant that liberal, republican, representative democracy in a free society with separation of powers must not be subverted by any sort of constitutional gimmickry. My proposals enhance such political values. I hope your panel may do the same.”