Bibin PB Balance

India Plus & Minus, Bravo India! Bravo Delhi!
An
Outstanding Commonwealth Games 2010
October 23, 2010 — drsubrotoroy
From Facebook October 23 2010:
Subroto Roy said somewhere in his 20s or 30s that India was concurrently many European
centuries rolled into one. Certainly if Carlyle was writing his book for India today, he would
find the Hero as Divinity in Rama and the Ramayana and Mahabharata generally, the Hero
as Prophet in the Buddha, Muhammad, Nanak, Kabir, the Hero as Poet in Kalidas, Tagore,
the Hero as Priest in Vivekananda, Gandhi perhaps, Dalai Lama, the Hero as Man of Letters
in Gandhi again, the Hero as King in Nehru…… etc… all rolled into India that is the
present…. (Of course there is a history of heroes and one of anti-heroes and usurpers too…
wasn’t there a Dustin Hoffman/Andy Garcia movie…….)
From Facebook: October 14 2010 etc:
Subroto Roy says Bravo India! Bravo Delhi! We have been exemplary hosts (ok, ok, the
insufferable incorrigible Mr K is, well, insufferable & incorrigible, but we are like this only, a
land of excesses), our many guests from across the Commonwealth have enjoyed themselves
thoroughly (leave aside the handful of spoilsports and cry-babies), and the quality of the
sports has been outstanding. India’s hundreds of millions have witnessed excellent things, and
youth and children among them will learn and be inspired for the future. (Deepika Kumari,
winner of gold in archery beating England, of modest origins, learnt playing with a bow &
arrows with her sister, and there are many many like her among India’s masses). Yes, yes,
many billions of rupees have been spent and mis-spent, and all the waste and corruption flows
into that swamp that is India’s public debt. But it is not any worse than waste and corruption
on unproductive things like expensive foreign weapons’ purchases, in fact a great deal better.
Shabash!
Subroto Roy, having been often harsh with both NDA & UPA Govts., is happy to congratulate
them on providing a real public good at last: the XIXth C’wealth Games are a grand success –
showing India’s many millions what *can* be done in sports (diving, rhythmic gymnastics,
…),& also creating facilities for India’s youth to dream of using, albeit in Delhi.(Yes, the
waste & corruption all flows into the swamp that is the public debt.)
NB: I have several more comments during the Games on my Facebook page which will find
themselves here in due course too.
India Plus and Minus:
From Facebook Aug 14 2010:
Subroto Roy’s father, as perhaps the last Govt of India officer in the new Pakistan, attended the
original Aug 14 1947 ceremony in Karachi. In fact, he had been mentored slightly by Sir
Zafrullah Khan himself, who met him at Karachi airport a few weeks later: Zafrullah was
heading to NYC as Pakistan’s UN Ambassador, my father was returning to Delhi. Zafrullah
asked him to remain and join the new Pakistan! Such were the times. My father returned to
Delhi and reported to Shyama Prosad Mukherjee, who knew him, that many thousands of Hindu
Sindhis were in danger of being massacred while waiting to be evacuated from Karachi.
Mukherjee told him to write it up and that he would present it to the Nehru Cabinet in the
morning — he did, and the Nehru Cabinet ordered three Navy frigates from Bombay to Karachi,
which then accompanied the refugee convoys and there was no massacre.
Subroto Roy’s father probably deserves some kind of award from some kind of Sindhi
association in India for having helped to prevent a massacre back in Sep 1947 in Karachi.
From Facebook:
June 20 21010 Subroto Roy is as nauseated as a pregnant Johanna Van Beethoven when he
reads in the morning paper that New Delhi’s retired perpetual bureaucrats perpetuate their
perennial humbug saying they “aim for 10 per cent growth in next Plan (sic)”– the *twelfth*so-
called “Five Year Plan”! I once noticed Indian “economic planning” started in Stalin’s time
when Manmohan Singh was a student at Punjab University & asked, when will it end?
Subroto Roy has had many people tell him to go seek out the son in Indian politics to which his
standard response over the years has been: “I advised his father, so who seeks out whom?”
Subroto Roy ponders ingredients in this Shakespearean drama:two countries bound by fraternal
love, hatreds,war; world cricket, tennis; a seemingly handsome young man & his beautiful
fiancee; a self-described overweight diabetic with beautiful voice, intelligence, culture & good
heart deserving the dignity of a married woman; claims of mistaken identity, duplicity, forgery,
bigamy;a miscarriage; police & threat of arrest of a cad.
Subroto Roy seems to remember that all Shakespearean tragedies end in a death and all
comedies in a marriage, and has to wonder which this is, or is it both.
Subroto Roy says indeed a *lot* of accurate information is required in India for public policy
purposes but it is *not* information about individual citizens to be acquired by *government*, it
is information about *government* — specifically, govt. accounting, public expenditure etc — to
be acquired by *citizens*. New Delhi has its economics Upside Down yet again.
Subroto Roy recalls before he left Cambridge for Blacksburg in 1980, Frank Hahn asked “So
you want to let capitalism rip in India?”. I had said “No no, not capitalism so much as classical
liberalism”, but now see that Professor Hahn had read the likely outcomes better. Organised
Big Business & organised Big Labour have taken over what passes for government policy in
New Delhi. Bureaucrats & politicians were happy before & remain happy now.
Subroto Roy thinks answering simple standard anonymous questions for a Census is one thing,
the outrageous totalitarian idea being implemented by New Delhi of fingerprinting ten fingers
and photographing the iris etc of each of one billion Indians is quite another. It is merely one
result of Indian Big Business, in this case the software outsourcing lobby, having taken over
what passes for government economic policy in recent years. Frank Hahn had asked me in 1980
before I left for Blacksburg “So you want to let capitalism rip in India?”. I had said something
like, “No no, not capitalism so much as classical liberalism”. But I fear he may have read the
likely outcomes better.
Subroto Roy thinks the nexus between big business lobbies and the GoI is revealed: “The data
will also help take the guesswork out of companies’ investment and marketing plans in Asia’s
third largest economy”.
Subroto Roy is appalled by the totalitarian idea of the Govt of India to abuse the Census by
using it to fingerprint & photograph all citizens above the age of 15; he plans to refuse to
comply until the Supreme Court of India finds any such law consistent with individual freedom.
Only the Information Technology lobby, in cahoots with the GoI’s bureaucrats and politicians,
stands to gain from this.
Subroto Roy’s blog has not wished to anger the GoI or its media and businessman friends except
by way of contrast with their mendacity and self-deception.
Subroto Roy says about macroeconomic policy in India as elsewhere that the fiscal dog wags
the monetary tail. The real economy dominates the nominal economy.
Subroto Roy finds the Budget, as he expected, continues the debauching of India’s money except
he really should have added in favour of “well-informed, moneyed, mostly city-based special
interest groups (especially including organised capital & organised labour) dominating
government agendas” and “at the cost of ill-informed, diffused anonymous individual
citizens”….
Subroto Roy is as nauseated as a pregnant Johanna van Beethoven when he hears New Delhi’s
TV-stations gas on with their gaseous guests about the Budget…
Subroto Roy looks at New Delhi’s TV economists — both economic bureaucrats and business-
lobby representatives…. there are no serious senior academic economists (none) — and is
reminded of Desiderius Erasmus: “In the kingdom of the blind, the one-eyed man is king”.
Letter to a Pakistani college-mate: Bhai M, choto belayato chintam, ak-hon borobelay shunlam
ey shob jehadi-bapar tomader okhanthekey to ashchey… Bharoteyr biruddhe ki emni korey
jehad kora uchit? East Pakistan ke ja West Pakistan koreychhilo, shey to jana kotha, tai na?
Bharot to shuddhu shesher dikey Sheikh Mujiber thorophe holo, ar ta shudhu na, 90,000
Pakistani soldier der bachiya rakha holo, bari pathano holo, naholey Mukti Bahini tadeyr shesh
kore dito, tai na? Ey shob bolte cheshta koro bhai, tomodaeyr desheyr lok deyr… ami banalam
Pakistaner economyr opor boi,
ar tomra korle Kargil, Mumbai ettadi! Ki bola jay bolo? Suby
Subroto Roy says again that perhaps the most India can offer Pakistan is friendship whereas the
most Pakistan can offer India is lack of aggression. The last place on earth New Delhi’s
nomenclatura would like to extend its misgovernance to would be Pakistan; but there are all
kinds of hotheads who want Pakistan to rule not merely Srinagar but also Delhi also Agra also
Aligarh also Hyderabad also Kolkata also Dhaka….
Subroto Roy expects the debauching of India’s money by the GoI that began in September 1939
with Britain’s entry into WWII, to continue with tomorrow’s Budget.
Subroto Roy has quite given up on India’s political establishment for the foreseeable future —
socialists, communists, fascists, kleptocrats, plutocrats, fake PhDs, the whole bunch of them.
Subroto Roy says New Delhi’s economic bureaucrats lack the scientific honesty & diligence
necessary to realise India’s debt and deficits have been hidden too, not as in the case of Greece
by Goldman Sachs, but merely by rotten government accounting and corruption.
“Misunderestimation” in GWB’s memorable and accurate term.
Subroto Roy thinks the best thing the Govt of India’s economic bureaucrats and retired
economic bureaucrats may be able to do is disabuse themselves of the notion they are familiar
with economics relevant to India and to start afresh…
Subroto Roy, observing New Delhi, has no hope for India’s macroeconomics until after the
Budget Speech, and, probably, not even then.
Subroto Roy hears Patrick Cronin say “Indian economic growth not far behind China” and says
at his Wall LOL……….Jokes aside, it may be higher, it may be lower, it may be the same, no
one really knows because probing even half-seriously *either* PRC *or* Indian national
income measurements, or national savings calculations, or the purported invisible Harrod-
Domar growth-models linking the two, soon leads to dead-ends and blank-stares. What is
certain is that government accounting is a mess (probably making Greece look like a Paragon of
Virtue), public finances are a mess, and money supply is growing at, hmmm, perhaps 22% per
annum in the Indian case. I am still looking for half-decent PRC series.
Q: Agree that these predictions and numbers are of questionable scientific rigor…even so, they
are the numbers on offer…
A: That reminds me of the old story about the drunk who has lost his car-keys one dark night
and insists on looking only near the lamp-post as that is where the light is…. I am obviously far
more certain of the Indian data as I had to reconstruct them some years ago (with help of two
very elderly people with failing eyesight reading long-series of numbers for me to type into
Excel), and I have barely looked at PRC data. But the argument in both cases is likely similar
(similar incidentally to US and UK situations of war finance during WWII). Namely, there has
been a vast exponential growth in *bank-deposits* — this has been interpreted, mistakenly in
both countries, as growth in *real savings*. In fact it is a phenomenon caused by a vast parallel
expansion of nominal government expenditure over decades in a situation of fractional reserve
banking (causing the bank-deposit expansion). I asked a US-based PRC scholar who was once a
colleague if she could possibly explain 50% savings rates from first principles; I have asked the
Prime Minister of India himself to explain his 30%+ claims of Indian savings made to
Parliament last year. I eagerly await any responses.
Subroto Roy surmises that the Govt of India’s prominent economists (& their acolytes and
flatterers) may be so far behind that he and they will run out of years before he can go back and
show them the road any more than he has done. On the other hand, they have accumulated more
wealth and TV exposure than he ever will might ever do.
Subroto Roy doubts whether the economic officials of either China or India are measuring
economic growth (or savings) properly. Economists at least must define economic growth 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). W Germany & 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? W 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 only 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.
Subroto Roy feels himself profoundly ignorant as he almost does not know of any proposition of
economic knowledge relevant or not to India produced by any living economist associated with
the Govt. of India; the exception is what he termed the “Rangarajan Effect” in his April 2005
Cardiff & London talks & May 2005 RBI talk and published in late August 2008.
Subroto Roy thinks India’s Parliament always needs to be led, especially on fundamental
matters like State Reorganisation or runaway inflation, by the PM — the present PM is not a
Lok Sabha Member & admits to no skills of rhetoric at all; the leader of the largest party, who
normally would have been PM, is also unskilled rhetorically (both have been in politics a dozen
years). The result is continuing incoherence in Parliament.
Subroto Roy is happy to find, as the year 2009 AD draws to a close, India’s most eminent
academic economist offer today published praise for works of Adam Smith, FH Knight, JR
Hicks, PA Samuelson & other “mainstream” or “orthodox” economists — in contrast to his
own, he says, “heretical views” which seem never to have referred to normal price theory or
monetary economics.
Subroto Roy notes that for worse or for better, there are at present Indian women who hold the
positions of Head of State, Parliament Speaker, Leader of the ruling coalition, Railway Minister
(employees 1.4 million), Leader of the Opposition, and Chief Minister of the largest state
(population 100 million)…. They are subject to political criticism or praise because of their
misdeeds or deeds, not because of their being women.
Subroto Roy is glad that honest economic numbers can still give the lie to the purported
economic commentary & prediction emanating from New Delhi’s class of flatterers, apologists
& propagandists. “Satyameva Jayathe” has been buried by greed and mendacity in India’s
capital city.
Subroto Roy does not know why he is reminded, when he hears from the apologists and
lobbyists and propagandists about the GoI’s budget later this week, of the Streep-Hawn
characters and his sympathy for the Bruce Willis character in that movie…. Plastic surgery
cannot really cover up morbidity…
Subroto Roy has been saying for five years now (say, from my lectures at the Cardiff Institute of
Applied Macroeconomics and London’s IEA in April 2005) that government accounting is a
mess in one, two,…, several countries….If government accounting is a mess, so is public finance
and any pretence of monetary policy….
Subroto Roy says at Patrick Cronin’s Wall at the description of India as ‘the emerging
giant’…..”Hmmm…. not really. Just an ancient country with many good and bad things; rotten
public finance+government accounting+macroeconomic policy; happy productive people in
stable families; quick and keen to learn all that the world is about; but led, or rather misled, by
a vapid, deluded New Delhi elite.”
Subroto Roy cannot decide if Mera Bharat Mahan is a democracy or kleptocracy or plutocracy
or what mix of each.
Subroto Roy walks through the dankest urban slum in early evening, its smells and sounds (foul
or pleasant) forbidding to the outsider. But the many children are playing, hopscotch, skipping,
marbles, carrom, cartwheels, splashing one another with laughs and water, men play cards
looking grim as crowds watch, women do their laundry, dishes, wash themselves, and gossip
endlessly. It is not an unhappy place.
Subroto Roy says all religions flourish, or should flourish, among the Hindus. (If only the same
can be said of modern science, economics etc.)
Subroto Roy says the qualitative difference between China’s and India’s large foreign exchange
reserves is that China’s have been caused by export of manufactured goods while India’s by
borrowing by Indian businessmen.
Subroto Roy would like to commission a cartoon of a corpulent, corrupted character pretending
to be sick on a charpoy, being fanned by some, massaged by others, fed by yet others all around
in a multitudinous crowd of thin anxious well-meaning real people: the caption reads: “New
Delhi being cared for by the Rest of India”.
Subroto Roy has ceased to be nauseous and so is merely amused to read in today’s pink business
New Delhi newspapers even more craven flattery of government bureaucrats emerge from
people in editorial roles who supposedly received PhDs once upon a time.
Subroto Roy is nauseous again as he reads in today’s pink business newspapers that economic
bureaucrats claim to be creating and giving Festschrifts to one another in their dotage. Someone
needs to tell them that a Festschrift was something for an eminent academic scholar created by
his doctoral students and distinguished colleagues.
Subroto Roy learns from New Delhi’s politically influential pink business newspaper’s
disclosure this morning that it is largely owned by a prominent bank! Finally, what passes for
monetary policy gets to be explained!
Subroto Roy has long thought the best thing the Republic of India can do to ameliorate the
Middle-East crisis is to encourage mass-migration of Israelis & Palestinians to India — perhaps
create a New Israel & New Palestine along the Malabar Coast or Coromandel Coast or
Orissa/Jharkhand or the NEast or in our Islands. Israelis & Palestinians are talented people
and India has many millions & can absorb more with its fecundity.
Subroto Roy says the diversity of human points of view, like the diversity of human experiences
and circumstances, is a marvellous thing.
Subroto Roy does not find in great work of Great Master Sun Tzu, May Heavenly Glory Shine
Upon Him, nor even in lesser work of Little Master Mao Zedong & Little Master Ho Chi Minh,
May They Bask in Vladimir’s Light, statement “High military expenditure may not indicate a
high defensive capability, low military expenditure may not indicate a low offensive capability”,
and so is pleased as Punch.
Subroto Roy is pleased with himself for articulating: “High military expenditure may not
indicate a high defensive capability, low military expenditure may not indicate a low offensive
capability.” (It sounds as wise as the Great Sun Tzu himself, so perhaps I suddenly channelled
him a bit. Or perhaps he wrote it and I read it and forgot that I did; must check his book.)
Subroto Roy reflects that commitments made to the dead (and the long dead, like the ancients)
may be as important as guides to action as commitments made to the living (and the yet to be
born).
Subroto Roy says at Edward Hugh’s Wall: “the gist of what I warned against in my 1998 lecture
at the Inst of Econ Affairs in London was that the euro might just lead Europe to look monetarily
like…. India….. where there is no incentive for States to run their fiscal positions better than
others as everyone is feeding at the same trough…”… (going by memory as to what I said)
Subroto Roy says about China’s “red-hot property market” at Jing’s Wall:”land is *the* real
(as opposed to nominal) asset. Why property markets are hot in China, India etc may be because
paper money & nominal assets have been systematically misused/abused by governments over
decades….This “cultural predisposition to own hard assets” may have arisen due to inflationary
public finance over decades, perhaps (in China’s case) a century a half.”
Subroto Roy says that the West’s economic crisis of 2008 did not affect India except through a
collapse of exports and foreign investment, and talk or policies of purported Keynesian fiscal
stimulus have been largely inappropriate — just more dissimulation from New Delhi’s vapid,
greedy bureaucrats and politicians (and their media and lobbyist friends).
Subroto Roy thinks, as he hears endless waffle about purported growth-rates of China and India,
that it is mostly appalling near-nonsense because national income accounting and price-indices
are still so shabby. Milton Friedman was wholly right at my Hawaii conference on India in May
1989 to speak of measuring real consumption-baskets instead.
Subroto Roy thinks India’s half-dozen “national” English-language TV channels remain
completely hopeless, purveying only movie-news, cricket-news, gossip/sex scandal news, and
Big-Business lobbyist news (which also includes gassing about a dozen or so people in
government); regional TV in Indian languages is often as bad but occasionally much better
because political and economic reality inexorably seeps in.
Subroto Roy noted, seeing the vast crowds of families over the Christmas holidays enjoying the
parks, visiting temples etc, that no single ideology or faith like Islam or communism can succeed
with conversion because the Indians are just far too numerous.
Subroto Roy thinks the implosion/collapse of India’s fascists on the one side and communists on
the other has caused the incompetence of New Delhi’s governing class to become highlighted
further, especially over Telangana, inflation etc.
Subroto Roy thinks classical liberal/libertarian economic & political analysis applied to India
may, oddly enough, lead to a kind of Marxian class-picture: “The general pattern is one of well-
informed, moneyed, mostly city-based special interest groups (especially including organised
capital & organised labour) dominating government agendas at the cost of ill-informed, diffused
anonymous individual citizens ~ peasants, small businessmen, non-unionized workers, old
people, housewives…” (“Against Quackery”, 2007)
Subroto Roy is pleased that Dr Singh has made another categorical statement of economic
policy for which he can be held to account. (His June 9 2009 statement to the 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”
is something I parsed and deconstructed in “Mistaken Macroeconomics. Neither India nor
China have the whopping savings rates being claimed for them; there has been a
mismeasurement of nominal deposit expansion in a fractional reserve banking system as
indicating real savings.) My 2007 article “Fallacious Finance” suggested Dr Singh et al may
have put India on a road to hyperinflation. I do not think I have patience enough to explain to
them the Government Budget Constraint any more than I have done, nor they the patience to
learn of it.
Posted in Britain's monarchy, China's macroeconomics, China's savings rate, China's Economy,
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sports, Manmohan Singh, New Delhi, Press and Media, Sports, Television, Thomas Carlyle, XIX
Commonwealth Games Delhi 2010. Leave a Comment »
Two Different Models for India’s Political Economy: Mine

& Dr Manmohan Singh’s (Updated Aug 19 2010)
July 12, 2010 — drsubrotoroy
From Facebook
March 6 2010:
Subroto Roy says the central difference between the Subroto Roy Model for India as
described in 1990-1991 to Rajiv Gandhi in his last months, and the Manmohan Singh Model
for India that has developed since Rajiv’s assassination, is that by my model, India’s money
and public finances would have acquired integrity enough for the Indian Rupee to have
become a hard currency of the world economy by now, allowing all one billion Indians access
to foreign exchange and precious metals freely, whereas by the model of Dr Singh and his
countless supporters, India’s money and public finance remain subject to government misuse
and abuse, and access to foreign exchange remains available principally to politicians,
bureaucrats, big business and its influential lobbyists, the military, as well as perhaps ten or
twenty million nomenclatura in the metropolitan cities.
April 8 2010:
Subroto Roy notes a different way of stating his cardinal difference with the economics of Dr
Manmohan Singh’s Govt: in their economics, foreign exchange is “made available” by the
GoI for “business and personal uses”. That is different from my economics of aiming for all
one billion Indians to have a money that has some integrity, i.e., a rupee that becomes a hard
currency of the world economy. (Ditto incidentally with the PRC.)
Updates:
From Facebook:
Subroto Roy reads in *Newsweek* today (Aug 19) Manmohan Singh “engineered the
transition from stagnant socialism to a spectacular takeoff”. This contradicts my experience
with Rajiv Gandhi at 10 Janpath in 1990-91. Dr Singh had not returned to India from his
years with Julius Nyerere in his final assignment before retiring from the bureaucracy when
Rajiv and I first met on 18 September 1990.
“After (Rajiv Gandhi’s) assassination, the comprador business press credited Narasimha Rao
and Manmohan Singh with having originated the 1991 economic reform. In May 2002,
however, the Congress Party itself passed a resolution proposed by Digvijay Singh explicitly
stating Rajiv and not either of them was to be so credited… There is no evidence Dr Singh or his
acolytes were committed to any economic liberalism prior to 1991 and scant evidence they have
originated liberal economic ideas for India afterwards. Precisely because they represented the
decrepit old intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked
in the mid-1980s to be part of a “perestroika-for-India” project done at a foreign university ~
the results of which were received…by Rajiv Gandhi in hand at 10 Janpath on 18 September
1990 and specifically sparked the change in the direction of his economic thinking…”
Subroto Roy notes that current Indian public policy discussion has thus far failed to realise that
the rise in money prices of real goods and services is the same as the fall in the real value of
money.
Subroto Roy is interested to hear Mr Jaitley say in Parliament today the credibility of
Government economists is at stake. Of course it is. There has been far too much greed and
mendacity all around, besides sheer ignorance. (When I taught for a year or so at the Delhi
School of Economics as a 22 year old Visiting Assistant Professor in 1977-78, I was told Mr
Jaitley was in the law school and a student leader of note. I though was more interested in
teaching the usefulness of Roy Radner’s “information structures” in a course on “advanced
economic theory”.)
July 31 2010
Subroto Roy reads in today’s pink business newspaper the GoI’s debt level at Rs 38 trillion &
three large states (WB, MH, UP) is at Rs 6 trillion, add another 18 for all other large states
together, another 5 for all small states & 3 for errors and omissions, making my One Minute
Estimate of India’s Public Debt Stock Rs 70 trillion (70 lakh crores). Interest payments at, say,
9%, keep the banking system afloat, extracting oxygen from the public finances like a cyanide
capsule.
July 28 2010
Subroto Roy observes Parliament to be discussing Indian inflation but expects a solution will not
be found until the problem has been comprehended.
July 27 2010:
Subroto Roy continues to weep at New Delhi’s continual debauching of the rupee.
July 25 2010:
Subroto Roy has no idea why Dr Manmohan Singh has himself (along with all his acolytes and
flatterers in the Government and media and big business), gone about predicting Indian inflation
will fall to 6% by December. 16% may be a more likely figure given a public debt at Rs 40
trillion perhaps plus money supply growth above 20%! (Of course, the higher the figure the
Government admits, the more it has to pay in dearness allowance to those poor unionized
unfortunates known as Government employees, so perhaps the official misunderestimation (sic)
of Indian inflation is a strategy of public finance!)
July 12 2010:
Subroto Roy is amused to read Dr Manmohan Singh’s Chief Acolyte say in today’s pink business
newspaper how important accounting is in project-appraisal — does the sinner repent after
almost single-handedly helping to ruin project-appraisal & government accounting &
macroeconomic planning over decades? I rather doubt it. For myself, I am amused to see
chastity now being suddenly preached from within you-know-where.
July 4 2010:
Subroto Roy does not think the Rs 90 billion (mostly in foreign exchange) spent by the
Manmohan Singh Government on New Delhi’s “Indira Gandhi International Airport Terminal
3″ is conducive to the welfare of the common man (“aam admi”) who travels, if at all, mostly
within India and by rail.
Subroto Roy hears Dr Manmohan Singh say yesterday “Global economic recession did not have
much impact on us as it had on other countries”. Of course it didn’t. I had said India was hardly
affected but for a collapse of exports & some fall in foreign investment. Why did he & his
acolytes then waste vast public resources claiming they were rescuing India using a purported
Keynesian fiscal “stimulus” (aka corporate/lobbyist pork)?
May 26 2010:
Subroto Roy would like to know how & when Dr Manmohan Singh will assess he has finished
the task/assignment he thinks has been assigned to him & finally retire from his post-retirement
career: when his Chief Acolyte declares on TV that 10% real GDP growth has been reached?
(Excuse me, but is that per capita? And about those inequalities….?)
Posted in Academic economics, Academic research, Banking, Congress Party, Economic Policy,
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Bank, Interest group politics, Manmohan Singh, Rajiv Gandhi, Rajiv Gandhi's assassination,
Sonia Gandhi. Leave a Comment »
Did the GoI’s MoF’s CEA certify India’s fiscal health

yesterday? If so, it is a mistaken certificate
June 15, 2010 — drsubrotoroy
From Facebook:
Subroto Roy reads that Dr Kaushik Basu, Chief Economic Adviser to the Finance Ministry of
the Manmohan Singh Government, has “expressed great confidence in the fiscal health of the
economy” and says to Kaushik:
You are unaware of that of which you wish to speak.
Posted in Academic research, Economic Policy, Economic quackery, Economic Theory,

Government accounting, Government Budget Constraint, Government of India, India's
Government economists, India's bureaucracy, India's Macroeconomics, India's Monetary &
Fiscal Policy, India's Public Finance, Manmohan Singh, Microeconomic foundations of
macroeconomics. 2 Comments »
(Yet Another) Memo to Dr Kaushik Basu
May 17, 2010 — drsubrotoroy
Dear Kaushik,
Apropos your reported predictions, I have had to say at Facebook:
Subroto Roy is appalled the GoI’s Chief Economic Adviser has declared (as the PM and the
PM’s Chief Acolyte had declared in earlier months) that prices are trending downwards
stochastically but amused that at least a stochastic (“fluctuating”) trend got mentioned.
Governor Subbarao has been set a small challenge the other day to release asap for public
scrutiny the comprehensive macroeconomic model he says he believes the RBI has — which
may be hard if no such model may exist at the RBI. Nor does your Ministry or anyone else in
New Delhi have such a model. So what is the Government’s precise scientific basis for
predicting a slowing of inflation? Nothing at all?
The Government needs to begin to try to understand that inflation does not slow down in
circumstances where real public debt per capita and money supply have been growing
exponentially for decades — to the contrary, inflation tends to rise to dangerous heights!
Debauching of fiat money would hardly have been allowed if the rupee was a hard currency
because we would have seen an honest exchange-rate crashing through the floor with this kind of
inflationary finance the Government has given us over the decades. There is, sad to say, zero
chance of the rupee becoming a hard currency that all one billion Indians may feel confident
about so long as such inflationary finance continues unabated.
Cordially yours
Suby
Posted in Academic economics, Academic research, Economic Policy, Economic quackery,

Economic Theory, Economics of exchange controls, Economics of Exchange Rates, Financial
Repression, Government Budget Constraint, Government of India, India's Government
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Exchange Reserves, India's Government Budget Constraint, India's Government Expenditure,
India's inflation, India's Monetary & Fiscal Policy, India's Public Finance, India's Reserve Bank,
Inflation. Leave a Comment »
A Small Challenge to the RBI’s Governor Subbarao

April 21, 2010 — drsubrotoroy
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
Posted in Academic economics, Academic research, Government of India, India's Government

economists, India's Banking, India's bureaucracy, India's Economic History, India's Economy,
India's Government Budget Constraint, India's Government Expenditure, India's inflation, India's
Macroeconomics, India's Monetary & Fiscal Policy, India's Reserve Bank, Sukhamoy
Chakravarty. Leave a Comment »
(Another) Memo to Dr Kaushik Basu

From Facebook:
Subroto Roy says to Kaushik: Dear Kaushik, Buffer-stock interventions are *microeconomic* in
nature, and won’t do to control the *macroeconomic* phenomenon that is inflation. Get
government accounting straight (and clean), try to raise government productivity *drastically*
and try to *understand* the fiscal situation and *hence* the monetary situation. Feel free to
email or phone. Cordially, Suby
Posted in Academic economics, Economic Policy, Economic quackery, Economic Theory,

Economics of Public Finance, Government accounting, Government Budget Constraint,
Government of India, India's Government economists, India's bureaucracy, India's currency
history, India's Economic History, India's Economy, India's Government Budget Constraint,
India's Government Expenditure, India's inflation, India's Macroeconomics, India's Monetary &
Fiscal Policy, Manmohan Singh, Monetary Theory, Money and banking. Leave a Comment »
On the blissful innocence of the RBI

December 11, 2009 — drsubrotoroy
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!”
Posted in Academic economics, Academic research, Banking, Deposit multiplication, Economic

Policy, Economic quackery, Economic Theory, Economic Theory of Growth, Economic Theory
of Interest, Economic Theory of Value, Foreign exchange controls, General equilbrium theory,
Government of India, India's Government economists, India's interest rates, India's savings rate,
India's stock and debt markets, India's Banking, India's Capital Markets, India's Foreign
India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's Reserve
Bank, India's State Finances, India's Union-State relations, Inflation, Inflation targeting, Interest
rates, Macroeconomics, Monetary Theory, Money and banking, Paper money and deposits,
Power-elites and nomenclatura, Public Choice/Public Finance, Public property waste fraud,
Redeposits, Unorganised capital markets. Leave a Comment »
Reflections on Mr Zoellick’s reported claim

From Facebook:
Subroto Roy says that there are no viable macroeconomic models or time series data in the
possession of the World Bank, IMF, the Govt of India’s Finance Ministry, Planning
Commission, Reserve Bank etc, or any professor from Oxford, Cambridge, LSE, Harvard, Yale,
MIT, Stanford to the University of Timbuctoo to justify the reported claim yesterday of World
Bank President Robert Zoellick that India is headed to “8-9% growth”. Growth may be higher,
may be lower or something else altogether, no one knows because national income
measurements have yet to reach SNA standards (in any case it should be *per capita real
GDP*… and *even then*, there is no adjustment for inequality...)…
What *is* clear though is that Indian public finance at Union and State level is a mess and
paper money has been growing at more than 20% per annum…. (And if you happen to believe
the Government of India’s apologists and propagandists about Indian inflation being in single
digits, might I interest you in a marble structure in Agra, or a steel bridge over the Hooghly
perhaps? Very nice, just like Brooklyn Bridge itself….)
Posted in Academic economics, Asia and the West, Economic Policy, Economic quackery,
Economic Theory of Growth, Government accounting, Government Budget Constraint,
Government of India, Growth rates (economic), India's Government economists, India's Budget,
India's Economic History, India's Government Budget Constraint, India's Government
Expenditure, India's Macroeconomics, India's Monetary & Fiscal Policy, India's pork-barrel
politics, India's Public Finance, Macroeconomics, Robert Zoellick. Leave a Comment »
Thoughts on Indian Governance

From Facebook:
Subroto Roy believes the great optimism about the Indian Republic that he had felt as a 7-year
old boy upon meeting Jawaharlal Nehru at Colombo Airport on Oct 13 1962 (the first days of
the surprise Communist Chinese attack on India), has now dissipated, and apart from Nehru’s
immediate successor (Lal Bahadur Shastri) all Indian Prime Ministers since then have been
gravely, perhaps catastrophically, disappointing.
Subroto Roy thinks President Obama’s informed lawyerly academic approach to the
Afghanistan decision, whether or not it has its intended good consequences, has a positive
demonstration effect for other capital cities, e.g. New Delhi, where public policy decisions are
too often made to appease special interest groups inside a cloud of meaningless rhetoric.
Subroto Roy says of India and China in summary discussion at Edward Hugh’s Wall: “Well,
both have massive and energetic populations, each with relatively little capital per head; raising
the capital per head with new production and exchange processes leads to growth. (But the
nominal economies are weak, public finances are absymal and paper money is out of control.)”
Subroto Roy recalls again Pericles of Athens: “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 inter…est in politics is a man who minds his own business;we
say that he has no business here at all.”
Posted in 1962 War, Asia and the West, Atal Behari Vajpayee, Barack Obama, Economic
Theory of Growth, Governance, Government of India, Growth rates (economic), India's Big
Business, India's Government economists, India's Economy, India's Foreign Service, India's
History, India's Monetary & Fiscal Policy, India's nomenclatura, India's political lobbyists,
India's Public Finance, Indira Gandhi, Jawaharlal Nehru, Lal Bahadur Shastri, Manmohan Singh,
Pericles. 2 Comments »
Finance Minister Mukherjee deserves a cheer for connecting

with economics (though half a cheer gets subtracted)
November 15, 2009 — drsubrotoroy
From Facebook today
Independent India’s Finance Ministers have never in 62 years referred to economic theory or
the history of economic thought until Mr Mukherjee delivered the 4th Kadirgamar Memorial
Lecture in Colombo yesterday, making the following academic claim:
“As students of economics would understand, economic theory is an evolutionary process and
undergoes change with every major crisis. The classical theory gave way to Keynesian
economics after the Great Depression of 1930s. Thereafter, there were post-Keynesian and
monetarist approaches to economic problems during 1960s to 90s. The present crisis, which has
also been called Great Recession, would be another watershed in the evolution of economics
and is expected to bring about radical retooling of the theory. The crisis has, in the first place,
conclusively established that the pursuit of individual goals do not necessarily lead to public
good. Adam Smith’s ‘invisible hand’ cannot guarantee allocation of resources efficiently.”
I might rather count this as intellectual progress to the extent that it at least allows the
Government of India’s economists the possibility of moving away from politically-induced
dissimulation and instead begin to connect with where I was 25 years ago in my May 1984
monograph published by London’s Institute of Economic Affairs (leave aside my 1976-82
doctoral thesis under Professor Frank Hahn at Cambridge “On liberty and economic growth:
preface to a philosophy for India”). As for the Finance Minister saying “The Indian economy
has shown remarkable resilience to the crisis because the financial system had no exposure to
the toxic assets”, I am afraid he has left unsaid that this is because (a) the rupee is not a hard
currency; and (b) India’s banks hold plenty of domestic assets that are “toxic”.
Subroto Roy
Posted in Academic economics, Academic research, America's mortgage crisis, Economic

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»
How to fight government corruption whether on Earth
or Mars
November 6, 2009 — drsubrotoroy
From Facebook:
Subroto Roy believes — partly from personal experience — that there is only one really
sustainable way to fight government corruption whether in Afghanistan, Pakistan, India, the UK,
the USA, Russia, China or Mars: tough and clean government accounting and audit processes
allied with an uncorrupted press/media. And without clean government accounting, incidentally,
all public finance and hence almost all monetary policy becomes meaningless.
Posted in Accounting and audit, Afghanistan, anarchy and governance, Britain, China's
macroeconomics, Government accounting, Government of Afghanistan, Government of India,
Government of Pakistan, India's corruption, India's Monetary & Fiscal Policy, India's political
lobbyists, India's Public Finance, Money and banking, Pakistan's economy, Pork-barrel politics,
Power-elites and nomenclatura, Press and Media, Principal-agent problem, Professional ethics,
Public Choice/Public Finance, Public property waste fraud, US economy. Leave a Comment »
Could someone please sketch India’s Rupees 35(? 70?)

trillion (lakh crore) public debt? Here are some pointers…
Exactly nineteen years ago, in late October 1990, I advised the then-Congress Party President
Rajiv Gandhi as follows:
“The prime indicator of economic mismanagement today is not the annual deficit, but rather the
vast public debt today of more than Rs. 273,000 crores (Rs.2.73 trillion). Our Government has
borrowed something like Rs. 3500/- on behalf of each man, woman and child in the country —
and spent it. A pile of rupee coins adding up to the public debt of India would stretch 4.55
million km into the sky, or be as long as six trips to the moon and back. That is the size of the
problem….”
In recent years I have estimated the stock of India’s public debt has grown to perhaps Rs 30
trillion; after the lobbyist-induced corporate pork aka the “fiscal stimulus” since 2008, it has
perhaps risen to Rs 35 trillion, along with States’ debts, Rs 70 trillion!
[From Facebook July 31 2010
Subroto Roy reads in today’s pink business newspaper the GoI’s debt level at Rs 38 trillion &
that of each of three large states (WB, MH, UP) is at Rs 6 trillion, add another 18 for all other
large states together, another 5 for all small states & 3 for errors and omissions, making my
One Minute Estimate of India’s Public Debt Stock Rs 70 trillion (70 lakh crores). Interest
payments at, say, 9%, keep the banking system afloat, extracting oxygen from the public finances
like a cyanide capsule.]
(1 trillion = 1 lakh crore ie. 1,000,000,000,000 = 100000,0000000)
Now when I advised Rajiv it was still early days in the IT-revolution and in fact I wrote the
words quoted above on the first laptop I had ever used which was Rajiv’s own (enormous)
Toshiba laptop in an office of his staff.
It was eight years before Google was launched — and now there is even something called
Google Sketch which I am downloading as I write.
Today on Facebook, I have reposted this wonderful link sent by a friend of a Google Sketch of
what one trillion dollars (or one lakh crore dollars) looks like:
Ten thousand dollars:
1million dollars (i.e. ten lakh dollars):

100 million dollars (i.e. ten crore dollars):
One billion dollars (i.e. one hundred crore dollars):
One trillion dollars (i.e. one lakh crore dollars):

So much for dollars.
May I ask someone to use this link and this one to re-sketch India’s public debt, of perhaps Rs 35
70 trillion, and annual interest-payments, at perhaps 9% per annum on average? (Before the next
“Budget” please…)
Subroto Roy, Kolkata
Postscript: Of course, most of this exists intangibly as deposits or accounting-entries, not as

tangible cash, but it is fun anyway — and an illustrative way to explain things to politicians and
citizens.
Posted in Government accounting, Government Budget Constraint, India's Big Business, India's
Government economists, India's 1991 Economic Reform, India's Budget, India's Government
Budget Constraint, India's Government Expenditure, India's Macroeconomics, India's Monetary
& Fiscal Policy, India's political lobbyists, India's pork-barrel politics, India's Public Finance,
Public Choice/Public Finance, Rajiv Gandhi. Leave a Comment »
Q: What is common to swine flu, a weak monsoon, climate

change, America’s financial crisis and Pakistani terrorism?
August 11, 2009 — drsubrotoroy
A: They are all external or exogenous factors that the Government of India’s leaders, spokesmen
and other apologists adduce to explain away endogenous economic outcomes arising from bad
fiscal and monetary policies, pork-barrel politics, lobbying by organised Big Business and Big
Labour, political and bureaucratic corruption etc. (And the Parliamentary Opposition is hardly
any better, probably worse…)
More to come…
Posted in India's Monetary & Fiscal Policy, Economic Theory, Economic Policy, Economic
Theory of Value, India's Politics, Economic quackery, Government of India, Economics of
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pork-barrel politics, India's political parties. Leave a Comment »
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Does the Govt. of India assume “foreign investors and

analysts” are a key constituency for Indian economic policy-
making? If so, why so? Have Govt. economists “learnt
nothing, forgotten everything”? Some Bastille Day thoughts
Today is Bastille Day in France and the Prime Minister of India, Dr Manmohan Singh, at the
invitation of President Sarkozy, is visiting Paris (where the Government of India has flown in
military contingents to participate in the annual parade), before he goes to another summit in
Egypt with Present Mubarak and others, following his recent summits in Italy with the Pope and
others, and in Russia with President Medvedev and others, and in London with President Obama
and others, etc. Dr Singh has almost certainly become the most internationally well-travelled of
all Indian leaders on official visits ever in history, which adds to his having had the longest
experience in India’s bureaucracy of any Indian political leader in history, which came to be
followed by his stint in the Rajya Sabha as Finance Minister and now as a two-term Prime
Minister.
But as a result of being out of the country yesterday, the Prime Minister would have missed the
TV interview broadcast last night with his chief economic policy aide when it was said that
“foreign investors and analysts” are an important constituency for Indian economic policy-
makers, as expressed in the President’s speech to the new 15th Lok Sabha or Pranab Mukherjee’s
Budget speech last week. The interviewer seemed to agree and constantly pressed the aide, who
is doubtless the most prominent Government economist on television, about how stock-market
brokers and businessmen seemed to have found the Budget not to their immediate liking, and
how privatisation or “raising insurance caps” would have been seen by businessmen as crucial
elements of future economic reform. In fact privatisation or the insurance business have little to
do with any important economic reform but the lobbying power and spin-control of organised
business becomes manifest in getting interviewers to ask such questions of Government
spokesmen – all part of the (doubtless unconscious) process of camouflaging their private
interests in the guise of purported public economic policy discussion.
I have taken a very different view. For example, I said a few years ago in starkest contrast:
“Running through the new foreign policy is a fiction that it is driven by a new economic
motivation to improve development and mass well-being in India. The bizarre idea of creating
hundreds of so-called “Special Economic Zones” (reminiscent of 17th and 18th Century
colonial fortifications) illustrates this. India’s ordinary anonymous masses ~ certainly the 850
million people entirely outside the organised sector ~ have little or nothing to do with any of
this. Benefits will accrue only to the ten million Indian nomenclatura controlling or having
access to the gaping exit holes to the outside world in the new semi-closed economy with its
endless deficit finance paid for by unlimited printing of an inconvertible domestic currency. It is
as fallacious to think private investment from foreign or domestic businessmen will support
public “infrastructure” creation as it is to think foreign exchange reserves are like tax revenues
in being available for Government expenditure on “infrastructure”. Such fallacies are
intellectual products of either those who know no economics at all or those who have forgotten
whatever little they might have been once mistaught in their youth. What serious economics does
say is that Government should generally have nothing to do with any kind of private business,
and instead should focus on properly providing public goods and services, encourage
competition in all avenues of economic activity and prevent or regulate monopoly, and see to it
all firms pay taxes they are due to pay. That is it. It is as bad for Government to be pampering
organised foreign or domestic business or organised labour with innumerable subsidies, as
has been happening in India for decades, as it is to make enterprise difficult with red tape and
hurdles. Businessmen are grown ups and should be allowed to freely risk their capital and
make their profits or their losses without public intervention. An economics-based policy
would have single-mindedly sought to improve the financial condition of every governmental
entity in the country, with the aim of improving the provision of public goods and services to
all 1,000 million Indians. If and when budgets of all governmental entities become sound,
foreign creditors would automatically line up before them with loans to sell, and ambitious
development goals can be accomplished. As long as public budgets (and public accounts)
remain in an outrageous shambles, nothing can be in fact achieved and only propaganda,
corruption and paper-money creation results instead. Whatever economic growth does occur is
due to new enterprise and normal technological progress, and is mostly despite and not because
of New Delhi’s bureaucrats (see “The Dream Team: A Critique”, The Statesman 6-8 January
2006). The first aspect of the new Indian foreign policy has been for Government to become
wholly ingratiating towards any and all “First World” members visiting India who may deign to
consider any kind of collaboration whatsoever. The long line of foreign businessmen and heads
of government having photo-ops with the Indian PM began with Vajpayee and has continued
with Manmohan, especially when there is a large weapons’ or commercial aircraft or other
purchase to be signed. The flip-side has been ministerial and especially Prime Ministerial trips
abroad ~ from Vajpayee’s to a Singapore golf-cart immediately after commiserating Gujarat, to
Manmohan receiving foreign honorary doctorates while still holding public office. Subservience
to foreign business interests in the name of economic policy extends very easily to Indian naval,
military or diplomatic assets being used to provide policing or support services for the great
powers as and when they may ask for it. Hence, Indian naval forces may be asked by the
Americans to help fight pirates in the Indian Ocean, or escort this vessel or that, or India may be
asked to provide refuelling or base facilities, or India may be requested to vote against Iran,
Venezuela or whomever here or there. But there would be absolutely no question of India’s role
in international politics being anything greater than that of a subaltern or comprador whose
response must be an instant “Ji, Huzoor”. The official backing of the Tharoor candidacy was as
futile and ridiculous as the quest for UN veto-power or the willingness to attend G-8 summits as
an observer. While subservience towards the First World’s business and military interests is the
“kiss up” aspect of the new foreign policy, an aggressive jingoism towards others is the “kick
down” aspect….”
Dr Singh’s aide at one point challenged his friendly interviewer suggesting the very need for
“fiscal stimulus” could hardly be questioned as if such a thing was beyond his imagination. And
again, I am afraid, I may have been quite alone in December 2008 in lambasting as counter-
productive all this purported “fiscal stimulus”. Just another colossal, indeed perverse, waste of
public resources driven by organised business lobbies in their own interests, since in fact no one
— not Dr Singh nor any of his aides, acolytes or flatterers, foreign or domestic, or anyone else
anywhere — has any empirical or theoretical models of any kind depicting the phase, period or
amplitude of any possible business-cycle that India’s economy may be on. Since none of them
has any idea whatsoever of what the amplitude or frequency is of any such purported business
cycle, they are as likely to have caused a pro-cyclical exacerbation of the amplitude as any sort
of counter-cyclical dampening! (Viz., Leibniz ‘s principle of insufficient reason.)
How to see what is happening in Indian macroeconomic policy in the simplest comparative static
terms is this: both the IS and LM curves are being pushed outwards drastically based on a
deliberately erroneous assumption that there is or might develop mass involuntary
unemployment of the sort Maynard Keynes once described in 1936. The overall impact on
nominal interest-rates is indeterminate; the process of inflationary deficit-finance with an
inconvertible currency that the Government has indulged in for half a century merely continues,
further pushing us towards a potential hyperinflation.
The Bourbon regime swept away by the French Revolution that Bastille Day celebrates were said
to have “learnt nothing and forgotten nothing”. I am afraid the macroeconomic illogic often
found among Government economists, private commentators and business lobbyists in India
today suggests to me nothing less than that they have either learnt nothing or forgotten
everything from their economics classes decades ago! We in India may need our own storming
of the Bastille to sweep away the perverse thoughts and power structures of the post-1947 Dilli
Raj.
Subroto Roy
Kolkata
Posted in 15th Lok Sabha, Comparative Government, Economic Policy, Economic quackery,
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India's Revolution, Manmohan Singh. Leave a Comment »
Mistaken Macroeconomics: An Open Letter to Prime

Minister Dr Manmohan Singh
June 12, 2009 — drsubrotoroy
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 decades only 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 = S t
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 15 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)
Kolkata
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Silver Jubilee of “Pricing, Planning & Politics: A Study of

Economic Distortions in India”
May 29 2009:
It is a quarter century precisely today since my monograph Pricing, Planning and Politics: A
Study of Economic Distortions in India was first published in London by the Institute of
Economic Affairs.
Its text is now available (in slightly rough form) at this site here.
Now in May 1984, Indira Gandhi ruled in Delhi, and the ghost of Brezhnev was still fresh in
Moscow. The era of Margaret Thatcher in Britain and Ronald Reagan in America was at its
height. Pricing, Planning & Politics emerged from my 1976-1982 doctoral thesis at Cambridge
though it came to be written in Blacksburg and Ithaca in 1982-1983. It was the first critique
after BR Shenoy of India’s Sovietesque economics since Jawaharlal Nehru’s time.
The Times, London’s most eminent paper at the time, wrote its lead editorial comment about it
on the day it was published, May 29 1984.
It used to take several days for the library at Virginia Tech in Blacksburg to receive its copy of
The Times of London and other British newspapers. I had not been told of the date of
publication and did not know of what had happened in London on May 29 until perhaps June 2
— when a friend, Vasant Dave of a children’s charity, who was on campus, phoned me and
congratulated me for being featured in The Times which he had just read in the University
Library. “You mean they’ve reviewed it?” I asked him, “No, it’s the lead editorial.” “What?” I
exclaimed. There was worse. Vasant was very soft-spoken and said “Yes, it’s titled ‘India’s
Bad Example’” — which I misheard on the phone as “India’s Mad Example”
Drat! I thought (or words to that effect), they must have lambasted me, as I rushed down to the
Library to take a look.
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 this may have been intended to be laudatory but it was also inaccurate and had to be
corrected. I replied dated June 4 which The Times published in their edition of June 16 1984:
I was 29 when Pricing, Planning and Politics was published, I am 54 now. I do not agree with
everything I said in it and find the tone a little puffed up as young men tend to be; it was also five
years before my main “theoretical” work Philosophy of Economics would be published. My
experience of life in the years since has also made me far less sanguine both about human nature
and about America than I was then. But I am glad to find I am not embarrassed by what I said
then, indeed I am pleased I said what I did in favour of classical liberalism and against statism
and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as
elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals
overnight.)
The editorial itself may have been due to a conversation between Peter Bauer and William Rees-
Mogg, so I later heard. The work sold 700 copies in its first month, a record for the publisher.
The wife of one prominent Indian bureaucrat told me in Delhi in December 1988 it had affected
her husband’s thinking drastically. A senior public finance economist told me he had been
deputed at the Finance Ministry when the editorial appeared, and the Indian High Commission in
London had urgently sent a copy of the editorial to the Ministry where it caused a stir. An IMF
official told me years later that he saw the editorial on board a flight to India from the USA on
the same day, and stopped in London to make a trip to the LSE’s bookshop to purchase a copy.
Professor Jagdish Bhagwati of Columbia University had been a critic of aspects of Indian policy;
he received a copy in draft just before it was published and was kind enough to write I had
“done an excellent job of setting out the problems afflicting our economic policies, unfortunately
government-made problems!”
Siddhartha Shankar Ray told me when we first met that he had been in London when the
editorial appeared and had seen it there; it affected his decision to introduce me to Rajiv Gandhi
as warmly as he came to do a half dozen years later.
Within a few months though, by the Fall of 1984, I was under attack by the “gang of inert game
theorists” who had come to Blacksburg following the departure of James Buchanan. By mid
1985 I had moved to Provo, Utah, really rather wishing, as I recall, to have left my India-work
behind me. But by late 1986, I was at the University of Hawaii, Manoa, where the perestroika-
for-India and Pakistan projects that I and WE James led, had come to be sponsored by the
University and the East West Center.
The unpublished results of the India-project reached Rajiv Gandhi by my hand on September 18
1990 as has been told elsewhere. A week later, on September 25 1990, Rajiv appointed a small
group that included myself, to advise him. It was that encounter with Rajiv Gandhi that sparked
the origins of the 1991 economic reform. Yet in 2007 one member of the group, declaring
himself close to Sonia Gandhi, brazenly lied in public saying it was Manmohan Singh and not I
who had been part of the group — a group of which I had been in fact the first member!
Manmohan Singh himself has never claimed to have been present and in fact was not even in
India at the time it was formed.
I have explained elsewhere here why I believe this specific lie came to be told by this specific
liar who shared membership with me in the group that Rajiv had formed: because I had also
pleaded with many and especially within this group that Rajiv had seemed, to my layman’s eyes,
very vulnerable to assassination, and none of them had lifted a finger to do anything about it!
Such is how duplicity, envy and greed for power make people mendacious and venal in politics!
As for Pricing, Planning and Politics, Dr Manmohan Singh received a personal copy from my
father whom he had long known through the Kaul brothers, Brahma and Madan, both of whom
were dear friends of my father since the War and Independence. From a letter Dr Singh wrote to
my father, he would have received his copy in late 1986 when he was heading the Planning
Commission in his penultimate appointment before retirement from the bureaucracy.
Readers of Pricing, Planning and Politics today, 25 years after it was published, may judge for
themselves what if any part of it may be still relevant to the new government that Dr Singh is
now prime minister of. The work was mostly one of applied microeconomics or the theory of
value; in recent years I have written much also of applied macroeconomics or the theory of
money as it relates to India. My great professor at Cambridge, Frank Hahn, was kind enough to
say in 1985 that he thought my “critique of Development Economics was powerful not only on
methodological but also on economic theory grounds”; that to me has been a special source of
delight.
Posted in BR Shenoy, Economic Policy, Economic Theory, Economic Theory of Growth,

Economic Theory of Value, Economics of education, Economics of exchange controls,
Economics of Public Finance, Economics of Unemployment, India's 1991 Economic Reform,
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 Caste/Ethnic Problems,
India's Democracy, India's Diplomacy, India's Economic History, India's Economy, India's
emigrants to the West, India's farmers, India's Foreign Policy, India's Foreign Trade, India's
Industry, India's Labour Markets, India's Monetary & Fiscal Policy, India's pork-barrel politics,
India-Pakistan peace process, Indira Gandhi, Institute of Economic Affairs, Jawaharlal Nehru,
Liberalism/Libertarianism, Manmohan Singh, Margaret Thatcher, Mendacity in politics, Peter
Bauer, Political mendacity, Rajiv Gandhi, Rajiv Gandhi's assassination, Ronald Reagan,
Siddhartha Shankar Ray, The Times (London), Transparency, University of Hawaii. Leave a
Comment »
How tightly will organised Big Business be able to control

economic policies this time?
The power of organised Big Business over New Delhi’s economic policies (whether Congress-
led or BJP-led) was signalled by the presence in the audience at Rashtrapati Bhavan last week of
several prominent lobbyists when Dr Manmohan Singh and his senior-most Cabinet colleagues
were being sworn-in by the President of India. Why were such witnesses needed at such an
auspicious national occasion?
Organised Big Business (both private sector and public sector) along with organised Big Labour
(whose interests are represented most ably by New Delhi’s official communist parties like the
CPI-M and CPI), are astutely aware of how best to advance their own economic interests; this
usually gets assisted nicely enough through clever use of our comprador English-language TV,
newspaper and magazine media. Shortly after the election results, lobbyists were all over
commercial TV proposing things like FDI in insurance and airports etc– as if that was the
meaning of the Sonia-Rahul mandate or were issues of high national priority. A typical piece of
such “pretend-economics” appears in today’s business-press from a formerly Leftist Indian
bureaucrat: “With its decisive victory, the new Manmohan Singh government should at last be
able to implement the required second generation reforms. Their lineaments (sic) are well known
and with the removal of the Left’s veto, many of those stalled in the legislature as well as those
which were forestalled can now be implemented. These should be able to put India back on a 9-
10 per cent per annum growth rate…”
Today’s business-press also reports that the new Government is planning to create a fresh
“Disinvestment Ministry” and Dr Singh’s chief economic policy aide is “a frontrunner among
the names short-listed to head the new ministry” with Cabinet rank.
Now if any enterprising doctoral student was to investigate the question, I think the evidence
would show that I, and I alone – not even BR Shenoy or AD Shroff or Jagdish Bhagwati — may
have been the first among Indian economists to have argued in favour of the privatisation of
India’s public sector. I did so precisely 25 years ago in Pricing, Planning and Politics: A Study
of Economic Distortions in India, which was so unusual for its time that it attracted the lead
editorial of The Times of London on the day it was published May 29 1984, and had its due
impact on Indian economic policy then and since, as has been described elsewhere here. In
1990-1991 while with Rajiv Gandhi, I had floated an idea of literally giving away shares of the
public sector to the public that owned it (as several other countries had been doing at that time),
specifically perhaps giving them to the poorest panchayats in aid of their development. In 2004-
2005, upon returning to Britain after many years, I helped create the book Margaret Thatcher’s
Revolution: How it Happened and What it Meant, and Margaret Thatcher if anyone was a
paragon of privatisation.
That being said, I have to say I think a new Indian policy of creating a Ministry to privatise
India’s public sector is probably a very BAD idea indeed in present circumstances — mainly
because it will be driven by the interests of the organised Big Business lobbies that have so
profoundly and subtly been able to control the New Delhi Government’s behaviour in recent
decades.
Such lobbyist control is exercised often without the Government even realising or
comprehending its parameters. For example, ask yourself: Is there any record anywhere of Dr
Manmohan Singh, in his long career as a Government economist and then as a Rajya Sabha MP,
having ever proposed before 2004-2005 that nuclear reactors were something vitally important to
India’s future? And why do you suppose the most prominent Indian business lobby spent a
million dollars and registered itself as an official lobbyist in Washington DC to promote the
nuclear deal among American legislators? Because Big Business was feeling generous and
altruistic towards the “energy security” of the ordinary people of India? Hardly. Indian Big
Business calculates and acts in its own interests, as is only to be expected under economic
assumptions; those interests are frequently camouflaged by their lobbyist and media friends into
seeming to be economic policy for the country as a whole.
Now our Government every year produces paper rupees and bank deposits in practically
unlimited amounts to pay for its practically unlimited deficit financing, and it has behaved thus
over decades. Why we do not hear about this at all is because the most prominent Government
economists themselves remain clueless — sometimes by choice, mostly by sheer ignorance —
about the nature of the macroeconomic process that they are or have been part of. (See my
“India’s Macroeconomics”, “The Dream Team: A Critique” etc elsewhere here). As for the
Opposition’s economists, the less said about the CPI-M’s economists the better while the BJP,
poor thing, has absolutely no economists at all!
Briefly speaking, Indian Big Business has acquired an acute sense of this long-term
nominal/paper expansion of India’s economy, and as a result 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 the Indian rupee 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 15 2006 had a lead editorial titled Government’s land-fraud:
Cheating peasants in a hyperinflation-prone economy. It 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.”
Mamata Banerjee started her famous protest fast-unto-death in Kolkata not long afterwards,
riveting the nation’s attention in the winter of 2006-2007.
What goes for the 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 Dr Singh’s new
Government wishes to see real public sector assets being sold, let the Government seek to value
these assets not in inconvertible rupees which the Government itself has been producing in
unlimited quantities but rather in forex or gold-units instead!
Today’s headline says “Short of cash, govt. plans to revive disinvestment ministry”. Big
Business’s powerful lobbies will suggest that real public assets must be sold (to whom? to
organised Big Business of course!) in order to solve the grave fiscal problems in an inflationary
economy caused precisely by those grave fiscal problems! What I said in 2002 at IndiaSeminar
may still be found to apply: I said the BJP’s privatisation ideas “deserve to be condemned…
because they have made themselves believe that the proceeds of selling the public sector should
merely go into patching up the bleeding haemorrhage which is India’s fiscal and monetary
situation… (w)hile…Congress were largely responsible for that haemorrhage to have occurred in
the first place.”
If the new Government would like to know how to proceed more wisely, they need to read and
grasp, in the book edited by myself and Professor John Clarke in 2004-2005, the chapter by
Professor Patrick Minford on Margaret Thatcher’s fiscal and monetary policy (macroeconomics)
before they read 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 Thatcher came in.
During the recent Election Campaign, I contrasted Dr Singh’s flattering praise in 2005 of the
CPI-M’s Buddhadeb Bhattacharjee with Sonia Gandhi’s pro-Mamata line in 2009 saying the
CPI-M had taken land away from the poor. This may soon signal a new fault-line in the new
Cabinet too on economic policy with respect to not only land but also public sector privatisation
– with Dr Singh’s pro-Big Business acolytes on one side and Mamata Banerjee’s stance in
favour of small-scale unorganised business and labour on the other. Party heavyweights like Dr
Singh himself and Sharad Pawar and Pranab Mukherjee will weigh in one side or the other with
Sonia being asked in due course to referee.
I personally am delighted to see the New Rahul Gandhi deciding not to be in Government and to
instead reflect further on the “common man” and “common woman” about whom I had
described his father talking to me on September 18 1990 at his home. Certainly the “aam admi”
is not someone to be found among India’s organised Big Business or organised Big Labour nor
their paid lobbyists in the big cities.
Posted in Academic research, AD Shroff, Asia and the West, Big Business and Big Labour, BR
Shenoy, Britain, Britain in India, British history, Economic Policy, Economic quackery,
Economic Theory, Economics of exchange controls, Economics of Public Finance, Economics of
real estate valuation, Financial Management, Financial markets, Foreign exchange controls,
Government Budget Constraint, Government of India, India's Big Business, India's Banking,
India's bureaucracy, India's Capital Markets, India's corporate finance, India's corporate
governance, India's corruption, India's currency history, India's Economic History, India's
Economy, India's Government Budget Constraint, India's Government Expenditure, India's
Industry, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's
nomenclatura, India's peasants, India's political lobbyists, India's Politics, India's pork-barrel
politics, India's poverty, India's Public Finance, Inflation, Land and political economy,
Macroeconomics, Mamata Banerjee, Manmohan Singh, Margaret Thatcher, Margaret Thatcher's
Revolution, Martin Ricketts, Mendacity in politics, Microeconomics, Monetary Theory, Money
and banking, Mumbai financial world, New Delhi, Patrick Minford, Political cynicism, Political
Economy, Political mendacity, Political Science, Politics, Pork-barrel politics, Power-elites and
nomenclatura, Practical wisdom, Principal-agent problem, Privatisation, Public Choice/Public
Finance, Public property waste fraud, Rajiv Gandhi, Rational decisions, Singur and Nandigram,
Sonia Gandhi, Statesmanship, The Statesman, The Times (London), University of Buckingham.
Leave a Comment »
Letter to the GoI’s seniormost technical economist, May 21

“May 21 2009 It is wonderful to hear from you and I am honoured to find myself, perhaps
accidentally, on the same list as so many of your distinguished colleagues among Government
economists.
Your essay is most engaging. I am afraid I disagree with your assessment that the current
problems “did not originate in the real sector of the economy” but were “triggered by the
excesses of the financial system”. I have said to the contrary “There is no clear path to solving
the great (alleged) economic and financial crisis because no one wants to admit its roots were
the overvaluation (over decades) of American real-estate, and hence American assets in
general.”
There is no more real sector than real-estate itself and American real-estate has tended to be
overvalued as a result of government policy since the Carter Administration; the accumulated
dangers along that path came to explode in the sub-prime crisis. Here as elsewhere in economics,
the financial tail has not wagged the non-financial dog but vice versa.
I have also said “(i) foreign central banks might have been left holding more bad US debt than
might be remembered, and dollar depreciation and an American inflation seem to be
inevitable over the next several years; (ii) all those bad mortgages and foreclosures could
vanish within a year or two by playing the demographic card and inviting in a few million new
immigrants into the United States; restoring a worldwide idea of an American dream fueled by
mass immigration may be the surest way for the American economy to restore itself.”
Re the comparison with the Great Depression, I believe
“there are overriding differences. Most important, the American economy and the world
economy are both incomparably larger today in the value of their capital stock, and there has
also been enormous technological progress over eight decades. Accordingly, it would take a
much vaster event than the present turbulence — say, something like an exchange of multiple
nuclear warheads with Russia causing Manhattan and the City of London to be destroyed —
before there was a return to something comparable to the 1929 Crash and the Great
Depression that followed. Besides, the roots of the crises are different. What happened back
then? In 1922, the Genoa Currency Conference wanted to correct the main defect of the pre-
1914 gold standard, which was freezing the price of gold while failing to stabilise the
purchasing power of money. From 1922 until about 1927, Benjamin Strong of the Federal
Reserve Bank of New York adopted price-stabilisation as the new American policy-objective.
Britain was off the gold standard and the USA remained on it. The USA, as a major creditor
nation, saw massive gold inflows which, by traditional gold standard principles, would have
caused a massive inflation. Governor Strong invented the process of “sterilisation” of those
gold inflows instead and thwarted the rise in domestic dollar prices of goods and services.
Strong’s death in 1928 threw the Federal Reserve System into conflict and intellectual
confusion. Dollar stabilisation ended as a policy. Surplus bank money was created on the
release of gold that had been previously sterilised. The traditional balance between bulls and
bears in the stock-market was upset. Normally, every seller of stock is a bear and every buyer
a bull. Now, amateur investors appeared as bulls attracted by the sudden stock price rises,
while bears, who sold securities, failed to place their money into deposit and were instead
lured into lending it as call money to brokerages who then fuelled these speculative bulls. As
of October 22, 1929 about $4 billion was the extent of such speculative lending when Chase
National Bank’s customers called in their money. Chase National had to follow their
instructions, as did other New York banks. New York’s Stock Exchange could hardly respond
to a demand for $4 billion at a short notice and collapsed. Within a year, production had
fallen by 26 per cent, prices by 14 per cent, personal income by 14 per cent, and the Greatest
Depression of recorded history was in progress — involuntary unemployment levels in
America reaching 25 per cent. That is not, by any reading, what we have today. Yes, there has
been plenty of bad lending, plenty of duping shareholders and workers and plenty of excessive
managerial payoffs. It will all take a large toll, and affect markets across the world. But it will
be a toll relative to our plush comfortable modern standards, not those of 1929-1933. In fact,
modern decision-makers have the obvious advantage that they can look back at history and
know what is not to be done. The US and the world economy are resilient enough to ride over
even the extra uncertainty arising from the ongoing presidential campaign, and then some.”
These quotes are from recent publications and may be found most easily under “America’s
financial crises” at my site www.independentindian.com.
What may be of interest to the Government of India’s economists also may be a sample of my
recent short articles on India’s monetary and fiscal economics based on my research beginning
with my doctoral work under Frank Hahn at Cambridge in the 1970s and followed by my work
with James Buchanan and Milton Friedman in America in the 1980s and 1990s and later. One of
these is even named “The Rangarajan Effect” which I first defined at a seminar invited by Dr
Jadav at the RBI in May 2005!
http://independentindian.com/2008/08/24/rangarajan-effect/
http://independentindian.com/2008/09/28/monetary-integrity-and-the-rupee/
http://independentindian.com/2007/01/20/indias-macroeconomics/
http://independentindian.com/2007/02/04/fiscal-instability/
http://independentindian.com/2008/07/16/india-in-world-trade-payments/
http://independentindian.com/2007/03/05/fallacious-finance-the-congress-bjp-cpi-m-et-al-may-
be-leading-india-to-hyperinflation/
http://independentindian.com/2007/02/20/our-policy-process-self-styled-planners-have-
controlled-indias-paper-money-for-decades/
http://independentindian.com/2008/07/28/growth-of-real-income-money-prices-in-india-1869-
2004/
http://independentindian.com/2008/07/17/growth-government-delusion/
http://independentindian.com/2008/07/09/indian-inflation-upside-down-economics-from-new-
delhis-establishment/
http://independentindian.com/2008/02/26/how-to-budget-thrift-not-theft-should-guide-our-
public-finances/
http://independentindian.com/2008/02/21/a-note-on-the-indian-policy-process/
With warm regards,
Cordially,
Subroto Roy, PhD (Cantab.), BScEcon(London)
Sometime Adviser to the Late Rajiv Gandhi, 1990-1991

Posted in Academic economics, Academic research, America's housing market, America's
mortgage crisis, American financial crises, Big Business and Big Labour, Crash of 1929, Credit
markets, Economic Policy, Economic Theory, Economic Theory of Growth, Economic Theory
of Interest, Economic Theory of Value, Economics of Public Finance, 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 1991 Economic Reform, India's balance of payments, India's Banking,
India's Budget, India's Capital Markets, India's Economic History, India's Economy, India's
Foreign Exchange Reserves, India's Foreign Trade, India's Government Budget Constraint,
India's Government Expenditure, India's inflation, India's Macroeconomics, India's Monetary &
Fiscal Policy, India's pork-barrel politics, India's Public Finance, Inflation, Inflation targeting,
Unorganised capital markets. Leave a Comment »
A Dozen Grown-Up Questions for Sonia Gandhi,

Manmohan Singh, LK Advani, Sharad Pawar, Km
Mayawati and Anyone Else 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
Kolkata
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 »
An eminent economist of India passes away

Dr Raja Chelliah (1922-2009) may have been India’s only serious public finance economist in
living memory. He first and more clearly than anyone warned of the out-of-control fiscal
situation and the grave burden of the public debt.
Unfortunately he has left no professional successors. The institute he founded appears to consist
mostly of a name and some buildings and a lot of wasteful bureaucratic public expenditure as is
typical of the new Dilli Raj of recent decades. I recall a heated discussion with two of his
successors there in the late 1990s in which they somehow attempted to say they were beyond
Government of India control and could do as they pleased (which they had in fact proceeded to
do). Neither could be said to have been familiar with Indian public finance data at the degree of
precision necessary to grasp the fiscal problems Dr Chelliah had warned against. Like the
Planning Commission and similar sets of public buildings, it is all mostly a waste; Delhi’s
“think tanks” have been largely incapable of any real thought.
Raja Chelliah very kindly met me in the summer of 1987 or the winter of 1988 at his Planning
Commission offices when I was putting together the University of Hawaii perestroika-for-India
project that led in due course to sparking the 1991 reform thanks to Rajiv Gandhi in his last
months. I wish very much I could have had Dr Chelliah join the project but he was over-
committed.
His passing means there is no one left in the Indian economic-policy establishment who has (or
wishes to have ) the faintest clue about the gravity of the fiscal situation. It may be a sign of the
times that the business press is reporting on the same day that the current head of the RBI
bureaucracy has been saying that monetising Indian fiscal deficits seems to him “benign”,
pointing abroad and saying something like “Look aren’t they doing it too?”! (Contemporary
Delhi and Bombay are self-deluded and so enamoured with five-star hotel rooms that they may
be unable to cope with economic reality outside such an environment.)
Dr Chelliah was professionally serious, committed to truth-telling, personally modest and truly
eminent in his contribution to modern Indian economic thought.
Posted in Economics of Public Finance, Government accounting, Government Budget

Constraint, India's Budget, India's bureaucracy, India's Economy, India's Government Budget
Constraint, India's Government Expenditure, India's inflation, India's Macroeconomics, India's
Monetary & Fiscal Policy, India's nomenclatura, India's Public Finance, India's Reserve Bank.
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India’s incredibly volatile inflation rate!

March 20, 2009 — drsubrotoroy
Some months ago India’s inflation rate was said to be the highest it has been for decades and
now today, right on cue, it is said to be the lowest it has been for decades! Today’s business
press says Dr Manmohan Singh’s chief economic policy aide has apparently immediately
expressed his keenness to see an even further purported “fiscal stimulus package” (aka pork-
barrel politics prior to an election).
For myself, I have long given up on the credibility of such stuff emanating from our capital’s
supposed policy-makers — putting it down, generally speaking, to what I consider and what I
have called “New Delhi’s intellectual and moral bankruptcy”.
Here are two simple crude alternative ways to measure India’s (long-term trend) inflation-rate:
1. Take the Money-Supply Growth Rate, say 22% per annum, subtract from it the Growth of
Real National Income, say 7%, get, hmmmm, 15%.
2. Find C&AG data for a series of several years; read off nominal expenditure on a dozen major
heads of government bureaucracy (like “Central Secretariat”); calculate an average rate of
growth of nominal expenditure on bureaucratic departments. On an assumption that
Government of India bureaucracies, especially useless unproductive ones in New Delhi, seek to
maintain their real consumption-levels, that growth of nominal expenditure reflects their beliefs
about the actual change in the cost of living or decline in the value of money. Oddly enough,
quick calculations of that amount to, hmmmm, 15% again!
For those who prefer to believe what emanates from New Delhi’s pretentious economists
wallowing in their own ignorance, I wonder, as I said a couple of years ago on The Statesman’s
frontpage, might I interest you in a marble structure in Agra, or perhaps a steel bridge over the
Hooghly River, very famous, like Brooklyn Bridge itself….?
Posted in asymmetric information, Economic Policy, Economic quackery, India's Government

economists, India's bureaucracy, India's corruption, India's Economic History, India's
Government Expenditure, India's inflation, India's Macroeconomics, India's Monetary & Fiscal
Policy, India's political lobbyists, India's pork-barrel politics, India's Reserve Bank, Inflation,
Manmohan Singh, Mendacity in politics, Money and banking, Political mendacity, Pork-barrel
politics. 1 Comment »
And now for the Great Satyam Whitewash/CoverUp/Public

Subsidy! The wrong Minister appoints the wrong new Board
who, probably, will choose the wrong policy
January 12, 2009 — drsubrotoroy
The old Satyam, call it Satyam-I, is dead. It was a “Limited Liability” company which means its
ordinary shareholders can walk away with zero value and not be personally liable to pay the
creditors and preferred shareholders (who are and ought to be considered its new owners).
“Satyam” as a brand name, a logo and a trademark might be salvageable after a reconstitution in
due course.
Besides physical plant, fixed assets and other similar tangible things, the main assets of Satyam-I
consist of “works-in-progress”, namely all the existing ongoing contracts around the world.
What should happen is that all these contracts — while maintaining client confidentiality (e.g. by
using generic terminology) — should be auctioned off to other similar IT companies, big or
small.
Satyam-I’s existing technical staff associated with these ongoing contracts can go with them to
the new buyers (with the new buyers negotiating individual wage contracts).
Alternatively, existing staff can offer to participate too in such auctions themselves as buyers and
use their personal savings to buy off old Satyam contracts.
All the proceeds from such auctions should go to a trust fund that Satyam-I’s liquidator should
use to pay off the creditors, or at least come to an agreement with creditors about a future
structure of payments. If assets have been siphoned off or misused or embezzled by the previous
owners and management, then these need to be pursued and located and retrieved to the extent
possible. (Some reports say there has been some transmutation into real estate and some
transfers abroad).
If all this happened, there might be a Satyam-II or New Satyam some years down the road which
can use the same brand-name and logo and trademark comfortably again.
But not much of this seems likely to happen. The best thing this Minister could have done was
to have turned in his papers saying that the problem was beyond his intellectual capacity as he
had never done a course in Corporate Finance. Instead he has appointed three persons whom he
considers “eminent”. One has been involved with the software lobby and another with the real
estate business (and associated with the idea of using India’s forex reserves for “infrastructure”,
not realizing forex reserves are hardly like tax revenues). As things stand presently, this Board,
themselves unfamiliar with standard modern textbook Corporate Finance, and far too close to
the previous Board, is unlikely to take the right decisions because such decisions will require
more intellectual and moral effort than may be forthcoming.
Instead they will probably lobby hard for a vast public subsidy to be injected into the financial
corpse that is Satyam-I, so that a zombie company can attempt to be resurrected (we in India
have many such zombies walking around in the organised business sector).
The PM who is also now his own Finance Minister has, in his long career as a top economic
bureaucrat and a politician, never met a public subsidy he did not like or approve of. So watch
out for a billion or two dollars of public money in India injected into the corpse, adding to
India’s vast and growing public debt. Parliament will hardly disapprove when the PM and his
acolytes soon announce it in unison.
Ask yourself then how such a vast public subsidy can possibly benefit ordinary Indian people
who live in, say, Imphal, Agartala, Ajmer, Lalitpur or Balasore, or even Guntur and Telengana.
The answer is that it won’t — it will hurt them and their succeeding generations for decades.
Such has been the pattern of economic-policy making in India whether under this political party
or that; it is organised lobbies, especially organized business as represented on this new Board,
that call the shots. The relatively few people who can convert Indian rupees into forex do so with
impunity while the vast unknowing masses continue to use a currency damaged by waste, fraud
and abuse.
Jail terms for the Rajus and their friends? Hmmmm. Perhaps the few weeks or months that are
due to wealthy criminals.
Somebody in Delhi yesterday apparently told the visiting Cambridge Vice Chancellor that
Kolkata “does not count”; to the contrary, it is New Delhi that remains entirely bankrupt
intellectually and morally, and that bankruptcy will continue to be revealed in coping with
Satyam’s bankruptcy.
Postcript: The above was written and published here before the new Board’s press-meet.
Nothing the Board said has given reason to alter the opinion above. Rather, the Board seemed
exceptionally dull in failing to see that once the new accountants have done their work, it seems
likely if not inevitable that Satyam’s balance-sheet calls for “winding up” in the Indian term, i.e.
declaring bankruptcy. The news that the Government of Inda would also likely subsidise
Satyam with public resources also confirms the dismal state of economic policy-making
described above. SR., 1830 hrs, Jan 12.
Posted in Accounting and audit, Banking, Bankruptcy, Corporate Finance, Corporate
Governance, Economic Policy, Finance, Financial Management, Financial markets, Government
accounting, Government Budget Constraint, Government of India, India's Budget, India's
bureaucracy, India's Capital Markets, India's corporate finance, India's corporate governance,
India's corruption, India's crimes, India's Industry, India's Monetary & Fiscal Policy, India's
nomenclatura, India's political lobbyists, India's Politics, India's pork-barrel politics, India's
Public Finance, India's zombie companies, Manmohan Singh, Satyam corporate fraud, Zombie
companies. Leave a Comment »
Could the Satyam/PwC fraud be the visible part of an

iceberg? Where are India’s “Generally Accepted Accounting
Principles”? Isn’t governance rather poor all over corporate
India? Bad public finance may be a root cause
In a March 5 2007 article in The Statesman, I said:
“Our farmers are peaceful hardworking people who should be paying taxes and user-fees
normally but should not be otherwise disturbed or needlessly provoked by outsiders. It is the
businessmen wishing to attack our farm populations who need to look hard in the mirror – to
improve their accounting, audit, corporate governance, to enforce anti-embezzlement and
shareholder protection laws etc.”
In a September 23-24 2007 article in The Sunday Statesman I said:
“… Government, instead of hobnobbing with business chambers, needed to get Indian

corporations to improve their accounting, audit and governance, and reduce managerial
pilfering and embezzlement, which is possible only if Government first set an example.”
In a February 4 2007 article in The Statesman, I said:
“Financial control of India’s fiscal condition, and hence monetary expansion, vitally requires
control of the growth of these kinds of dynamic processes and comprehension of their
analytical underpinnings. Yet such understanding and control seem quite absent from all
organs of our Government, including establishment economists and the docile financial
press…. the actual difference between Government Expenditure and Income in India has
been made to appear much smaller than it really is. Although neglected by the Cabinet,
Finance Ministry, RBI and even (almost) the C&AG, the significance of this discrepancy in
measurement will not be lost on anyone seriously concerned to address India’s fiscal and
monetary problems.”
All three articles are available elsewhere here and are republished below together. I have
published elsewhere today my brief 2006 lecture on corporate governance. (See also my “The
Indian Revolution”, “Monetary Integrity & the Rupee”, “Indian Inflation”, “The Dream Team:
A Critique”, “India’s Macroeconomics”, “Growth & Government Delusion”, etc).
The fraud at Satyam amounts to it having been long bankrupt but not seemingly so. The fact it
was long bankrupt was apparently overlooked or condoned by its auditors Pricewaterhouse
Coopers! This may be big news today but the response of corporate India and the Indian business
media seems utterly insincere (and there has been a lot of fake pontificating on TV by some
notorious frauds). Remember the head of Satyam received awards with all the other honchos at
those fake ceremonies that businessmen and the business media keep holding at this or that
hotel. (See my several articles here under the categories “Satyam corporate fraud”, “Corporate
governance” etc.)
Government agencies, as enforcers of the law, must be seen in such circumstances to have
greater credibility than the violators, but who can say that Government accounting and audit and
corporate governance in India is not as bad as that of the private sector? It may be in fact far,
far worse. Poor accounting, endless deficit finance, unlimited paper money creation, false
convertibility of the rupee etc is what emerges from our supposedly wise economic policy-
makers.
When was the last time some major businessman or top politician spoke publicly about the
importance of “Generally Accepted Accounting Principles”? The answer is never.
Government (of this party or that) has become well-oiled by political lobbyists and is hand-in-
glove with organized business, especially in a few cities. Until Government gets its own
accounts straight, stops its endless deficit finance, reins in unlimited paper money-creation,
creates an honest currency domestically and externally, there is no proper example or standard
set for the private sector, and such scandals will erupt along with insincere responses from the
cartels of corporate India.
What emerges from New Delhi’s economists seems often to have as much to do with economics
as Bollywood has to do with cinema.
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
www.thestatesman.net
It seems the Dream Team of the PM, Finance Minister, Mr. Montek Ahluwalia and their acolytes
may take India on a magical mystery tour of economic hallucinations, fantasies and perhaps
nightmares. I hasten to add the BJP and CPI-M have nothing better to say, and criticism of the
Government or of Mr Chidambaram’s Budget does not at all imply any sympathy for their
political adversaries. It may be best to outline a few of the main fallacies permeating the entire
Governing Class in Delhi, and their media and businessman friends:
1. “India’s Savings Rate is near 32%”. This is factual nonsense. Savings is indeed normally
measured by adding financial and non-financial savings. Financial savings include bank-
deposits. But India is not a normal country in this. Nor is China. Both have seen massive
exponential growth of bank-deposits in the last few decades. Does this mean Indians and
Chinese are saving phenomenally high fractions of their incomes by assiduously putting money
away into their shaky nationalized banks? Sadly, it does not. What has happened is government
deficit-financing has grown explosively in both countries over decades. In a “fractional reserve”
banking system (i.e. a system where your bank does not keep the money you deposited there but
lends out almost all of it immediately), government expenditure causes bank-lending, and bank-
lending causes bank-deposits to expand. Yes there has been massive expansion of bank-deposits
in India but it is a nominal paper phenomenon and does not signify superhuman savings
behaviour. Indians keep their assets mostly in metals, land, property, cattle, etc., and as cash,
not as bank deposits.
2. “High economic growth in India is being caused by high savings and intelligently planned
government investment”. This too is nonsense. Economic growth in India as elsewhere arises
not because of what politicians and bureaucrats do in capital cities, but because of spontaneous
technological progress, improved productivity and learning-by-doing on part of the general
population. Technological progress is a very general notion, and applies to any and every
production activity or commercial transaction that now can be accomplished more easily or
using fewer inputs than before. New Delhi still believes in antiquated Soviet-era savings-
investment models without technological progress, and some non-sycophant must tell our top
Soviet-era bureaucrat that such growth models have been long superceded and need to be
scrapped from India’s policy-making too. Can politicians and bureaucrats assist India’s
progress? Indeed they can: the telecom revolution in recent years was something in which they
participated. But the general presumption is against them. Progress, productivity gains and
hence economic growth arise from enterprise and effort of ordinary people — mostly despite not
because of an exploitative, parasitic State.
3. “Agriculture is a backward sector that has been retarding India’s recent economic growth”.
This is not merely nonsense it is dangerous nonsense, because it has led to land-grabbing by
India’s rulers at behest of their businessman friends in so-called “SEZ” schemes. The great
farm economist Theodore W. Schultz once quoted Andre and Jean Mayer: “Few scientists think
of agriculture as the chief, or the model science. Many, indeed, do not consider it a science at
all. Yet it was the first science – Mother of all science; it remains the science which makes
human life possible”. Centuries before Europe’s Industrial Revolution, there was an
Agricultural Revolution led by monks and abbots who were the scientists of the day. Thanks
partly to American help, India has witnessed a Green Revolution since the 1960s, and our
agriculture has been generally a calm, mature, stable and productive industry. Our farmers are
peaceful hardworking people who should be paying taxes and user-fees normally but should not
be otherwise disturbed or needlessly provoked by outsiders. It is the businessmen wishing to
attack our farm populations who need to look hard in the mirror – to improve their accounting,
audit, corporate governance, to enforce anti-embezzlement and shareholder protection laws etc.
4. “India’s foreign exchange reserves may be used for ‘infrastructure’ financing”. Mr Ahluwalia
promoted this idea and now the Budget Speech mentioned how Mr Deepak Parekh and
American banks may be planning to get Indian businesses to “borrow” India’s forex reserves
from the RBI so they can purchase foreign assets. It is a fallacy arising among those either
innocent of all economics or who have quite forgotten the little they might have been mistaught
in their youth. Forex reserves are a residual in a country’s balance of payments and are not akin
to tax revenues, and thus are not available to be borrowed or spent by politicians, bureaucrats
or their businessman friends — no matter how tricky and shady a way comes to be devised for
doing so. If anything, the Government and RBI’s priority should have been to free the Rupee so
any Indian could hold gold or forex at his/her local bank. India’s vast sterling balances after the
Second World War vanished quickly within a few years, and the country plunged into decades of
balance of payments crisis – that may now get repeated. The idea of “infrastructure” is in any
case vague and inferior to the “public goods” Adam Smith knew to be vital. Serious economists
recommend transparent cost-benefit analyses before spending any public resources on any
project. E.g., analysis of airport/airline industry expansion would have found the vast bulk of
domestic airline costs to be forex-denominated but revenues rupee-denominated – implying an
obvious massive currency-risk to the industry and all its “infrastructure”. All the PM’s men tell
us nothing of any of this.
5. “HIV-AIDS is a major Indian health problem”. Government doctors privately know the scare
of an AIDS epidemic is based on false assumptions and analysis. Few if any of us have met, seen
or heard of an actual incontrovertible AIDS victim in India (as opposed to someone infected by
hepatitis-contaminated blood supplies). Syringe-exchange by intravenous drug users is not
something widely prevalent in Indian society, while the practise that caused HIV to spread in
California’s Bay Area in the 1980s is not something depicted even at Khajuraho. Numerous real
diseases do afflict Indians – e.g. 11 children died from encephalitis in one UP hospital on a
single day in July 2006, while thousands of children suffer from “cleft lip” deformity that can be
solved surgically for 20,000 rupees, allowing the child a normal life. Without any objective
survey being done of India’s real health needs, Mr Chidamabaram has promised more than Rs
9.6 Billion (Rs 960 crore) to the AIDS cottage industry.
6. “Fiscal consolidation & stabilization has been underway since 1991”. There is extremely
little reason to believe this. If you or I borrow Rs. 100,000 for a year, and one year later repay
the sum only to borrow the same again along with another Rs 40,000, we would be said to have
today a debt of Rs. 140,000 at least. Our Government has been routinely “rolling over” its
domestic debt in this manner (in the asset-portfolios of the nationalised banking system) but
displaying and highlighting only its new additional borrowing in a year as the “ Fiscal Deficit”
(see graph, also “Fiscal Instability”, The Sunday Statesman, 4 February 2007). More than two
dozen State Governments have been doing the same though, unlike the Government of India,
they have no money-creating powers and their liabilities ultimately accrue to the Union as well.
The stock of public debt in India may be Rs 30 trillion (Rs 30 lakh crore) at least, and portends a
hyperinflation in the future. Mr Chidambaram’s announcement of a “Debt Management Office”
yet to be created is hardly going to suffice to avert macroeconomic turmoil and a possible
monetary collapse. The Congress, BJP, CPI-M and all their friends shall be responsible.
Against Quackery
First published in two parts in The Sunday Statesman, September 23 2007, The Statesman
September 24 2007, www.thestatesman.net
By Subroto Roy
Manmohan and Sonia have violated Rajiv Gandhi’s intended reforms; the Communists have
been appeased or bought; the BJP is incompetent
WASTE, fraud and abuse are inevitable in the use and allocation of public property and
resources in India as elsewhere, but Government is supposed to fight and resist such tendencies.
The Sonia-Manmohan Government have done the opposite, aiding and abetting a wasteful anti-
economics ~ i.e., an economic quackery. Vajpayee-Advani and other Governments, including
Narasimha-Manmohan in 1991-1996, were just as complicit in the perverse policy-making. So
have been State Governments of all regional parties like the CPI-M in West Bengal, DMK/
AIADMK in Tamil Nadu, Congress/NCP/ BJP/Sena in Maharashtra, TDP /Congress in Andhra
Pradesh, SP/BJP/BSP in Uttar Pradesh etc. Our dismal politics merely has the pot calling the
kettle black while national self-delusion and superstition reign in the absence of reason.
The general pattern is one of well-informed, moneyed, mostly city-based special interest groups
(especially including organised capital and organised labour) dominating government agendas
at the cost of ill-informed, diffused anonymous individual citizens ~ peasants, small
businessmen, non-unionized workers, old people, housewives, medical students etc. The
extremely expensive “nuclear deal” with the USA is merely one example of such interest group
politics.
Nuclear power is and shall always remain of tiny significance as a source of India’s electricity
(compared to e.g. coal and hydro); hence the deal has practically nothing to do with the
purported (and mendacious) aim of improving the country’s “energy security” in the long run. It
has mostly to do with big business lobbies and senior bureaucrats and politicians making a
grab, as they always have done, for India’s public purse, especially access to foreign currency
assets. Some $300 million of India’s public money had to be paid to GE and Bechtel
Corporation before any nuclear talks could begin in 2004-2005 ~ the reason was the Dabhol
fiasco of the 1990s, a sheer waste for India’s ordinary people. Who was responsible for that
loss? Pawar-Mahajan-Munde-Thackeray certainly but also India’s Finance Minister at the time,
Manmohan Singh, and his top Finance Ministry bureaucrat, Montek Ahluwalia ~ who should
never have let the fiasco get off the ground but instead actively promoted and approved it.
Cost-benefit analysis prior to any public project is textbook operating procedure for economists,
and any half-competent economist would have accounted for the scenario of possible currency-
depreciation which made Dabhol instantly unviable. Dr Singh and Mr Ahluwalia failed that test
badly and it cost India dearly. The purchase of foreign nuclear reactors on a turnkey basis upon
their recommendation now reflects similar financial dangers for the country on a vastly larger
scale over decades.
Our Government seems to function most expeditiously in purchasing foreign arms, aircraft etc ~
not in improving the courts, prisons, police, public utilities, public debt. When the purchase of
43 Airbus aircraft surfaced, accusations of impropriety were made by Boeing ~ until the local
Airbus representative said on TV that Boeing need not complain because they were going to be
rewarded too and soon 68 aircraft were ordered from Boeing!
India imports all passenger and most military aircraft, besides spare parts and high-octane jet
fuel. Domestic aviation generates near zero forex revenues and incurs large forex costs ~ a debit
in India’s balance of payments. Domestic airline passengers act as importers subsidised by our
meagre exporters of textiles, leather, handicrafts, tea, etc. What a managerially-minded PM and
Aviation Minister needed to do before yielding to temptations of buying new aircraft was to get
tough with the pampered managements and unions of the nationalized airlines and stand up on
behalf of ordinary citizens and taxpayers, who, after all, are mostly rail or road-travellers not
jet-setters.
The same pattern of negligent policy-behaviour led Finance Minister P. Chidambaram in an

unprecedented step to mention in his 2007 Union Budget Speech the private American
companies Blackstone and GE ~ endorsing the Ahluwalia/Deepak Parekh idea that India’s forex
reserves may be made available to be lent out to favoured private businesses for purported
“infrastructure” development. We may now see chunks of India’s foreign exchange reserves
being “borrowed” and never returned ~ a monumental scam in front of the CBI’s noses.
The Reserve Bank’s highest echelons may have become complicit in all this, permitting and
encouraging a large capital flight to take place among the few million Indians who read the
English newspapers and have family-members abroad. Resident Indians have been officially
permitted to open bank accounts of US $100,000 abroad, as well as transfer gifts of $50,000 per
annum to their adult children already exported abroad ~ converting their largely untaxed paper
rupees at an artificially favourable exchange-rate.
In particular, Mr Ratan Tata (under a misapprehension he may do whatever Lakshmi Mittal

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

get Indian corporations to improve their accounting, audit and governance, and reduce
managerial pilfering and embezzlement, which is possible only if Government first set an
example.
Why have Indian foreign currency reserves zoomed up in recent years? Not mainly because we
are exporting more textiles, tea, software engineers, call centre services or new products to the
world, but because Indian corporations have been allowed to borrow abroad, converting their
hoards of paper rupees into foreign debt. Forex reserves are a residual in a country’s
international balance of payments and are not like tax-resources available to be spent by
Government; India’s reserves largely constitute foreign liabilities of Indian residents. This may
bear endless repetition as the PM and his key acolytes seem impervious to normal postgraduate-
level economics textbooks.
Other official fallacies include thinking India’s savings rate is near 32 per cent and that clever
bureaucratic use of it can cause high growth. In fact, real growth arises not because of what
politicians and bureaucrats do but because of spontaneous technological progress, improved
productivity and learning-by-doing of the general population ~ mostly despite not because of an
exploitative parasitic State. What has been mismeasured as high savings is actually expansion of
bank-deposits in a fractional reserve banking system caused by runaway government deficit-
spending.
Another fallacy has been that agriculture retards growth, leading to nationwide politically-
backed attempts at land-grabbing by wily city industrialists and real estate developers. In a
hyperinflation-prone economy with wild deficit-spending and runaway money-printing, cheating
poor unorganised peasants of their land, when that land is an asset that is due to appreciate in
value, has seemed like child’s play.
What of the Opposition? The BJP/RSS have no economists who are not quacks though
opportunists were happy to say what pleased them to hear when they were in power; they also
have much implicit support among organised business lobbies and the anti-Muslim senior
bureaucracy. The official Communists have been appeased or bought, sometimes so cheaply as
with a few airline tickets here and there. The nonsensical “Rural Employment Guarantee” is
descending into the wasteland of corruption it was always going to be. The “Domestic Violence
Act” as expected has started to destroy India’s families the way Western families have been
destroyed. The Arjun-DMK OBC quota corrodes higher education further from its already
dismal state. All these were schemes that Congress and Communist cabals created or
wholeheartedly backed, and which the BJP were too scared or ignorant to resist.
And then came Singur and Nandigram ~ where the sheer greed driving the alliance between the
Sonia-Manmohan-Pranab Congress and the CPI-M mask that is Buddhadeb, came to be
exposed by a handful of brave women like Mamata and Medha.
2. A Fiscal U-Turn is Needed For India to Go in The Right Economic Direction
Rajiv Gandhi had a sense of noblesse oblige out of remembrance of his father and maternal
grandfather. After his assassination, the comprador business press credited Narasimha Rao and
Manmohan Singh with having originated the 1991 economic reform. In May 2002, however, the
Congress Party itself passed a resolution proposed by Digvijay Singh explicitly stating Rajiv and
not either of them was to be so credited. The resolution was intended to flatter Sonia Gandhi but
there was truth in it too. Rajiv, a pilot who knew no political economy, was a quick learner with
intelligence to know a good idea when he saw one and enough grace to acknowledge it.
Rule of Law
The first time Dr Manmohan Singh’s name arose in contemporary post-Indira politics was on 22
March 1991 when M K Rasgotra challenged the present author to answer how Dr Singh would
respond to proposals being drafted for a planned economic liberalisation that had been
authorised by Rajiv, as Congress President and Opposition Leader, since September 1990. It
was replied that Dr Singh’s response was unknown and he had been heading the “South-South
Commission” for Tanzania’s Julius Nyerere, while what needed to be done urgently was make a
clear forceful statement to restore India’s credit-worthiness and the confidence of international
markets, showing that the Congress at least knew its economics and was planning to take bold
new steps in the direction of progress.
There is no evidence Dr Singh or his acolytes were committed to any economic liberalism prior
to 1991 as that term is understood worldwide, and scant evidence they have originated liberal
economic ideas for India afterwards. Precisely because they represented the decrepit old
intellectual order of statist ”Ma-Bap Sarkari” policy-making, they were not asked in the mid-
1980s to be part of a “perestroika-for-India” project done at a foreign university ~ the results of
which were received, thanks to Siddhartha Shankar Ray, by Rajiv Gandhi in hand at 10 Janpath
on 18 September 1990 and specifically sparked the change in the direction of his economic
thinking.
India is a large, populous country with hundreds of millions of materially poor citizens, a weak
tax-base, a vast internal and external public debt (i.e. debt owed by the Government to domestic
and foreign creditors), massive annual fiscal deficits, an inconvertible currency, and runaway
printing of paper-money. It is unsurprising Pakistan’s economy is similar, since it is born of the
same land and people. Certainly there have been real political problems between India and
Pakistan since the chaotic demobilisation and disintegration of the old British Indian Army
caused the subcontinent to plunge into war-like or “cold peace” conditions for six decades
beginning with a bloody Partition and civil war in J&K. High military expenditures have been
necessitated due to mutual and foreign tensions, but this cannot be a permanent state if India
and Pakistan wish for genuine mass economic well-being.
Even with the continuing mutual antagonism, there is vast scope for a critical review of Indian
military expenditures towards greatly improving the “teeth-to-tail” ratio of its fighting forces.
The abuse of public property and privilege by senior echelons of the armed forces (some of
whom have been keen most of all to export their children preferably to America) is also no great
secret.
On the domestic front, Rajiv was entirely convinced when the suggestion was made to him in
September 1990 that an enormous infusion of public resources was needed into the judicial
system for promotion and improvement of the Rule of Law in the country, a pre-requisite almost
for a new market orientation. Capitalism without the Rule of Law can quickly degenerate into an
illiberal hell of cronyism and anarchy which is what has tended to happen since 1991.
The Madhava Menon Committee on criminal justice policy in July proposed a Hong Kong model
of “a single high-tech integrated Criminal Justice complex in every district headquarters which
may be a multi-storied structure, devoting the ground floor for the police station including a
video-installed interrogation room; the first floor for the police-lockups/sub-jail and the
Magistrate’s Court; the second floor for the prosecutor’s office, witness rooms, crime
laboratories and legal aid services; the third floor for the Sessions Court and the fourth for the
administrative offices etc…. (Government of India) should take steps to evolve such an efficient
model… and not only recommend it to the States but subsidize its construction…” The question
arises: Why is this being proposed for the first time in 2007 after sixty years of Independence?
Why was it not something designed and implemented starting in the 1950s?
The resources put since Independence to the proper working of our judiciary from the Supreme
Court and High Courts downwards have been abysmal, while the state of prisons, borstals,
mental asylums and other institutions of involuntary detention is nothing short of pathetic. Only
police forces, like the military, paramilitary and bureaucracies, have bloated in size.
Neither Sonia-Manmohan nor the BJP or Communists have thought promotion of the Rule of
Law in India to be worth much serious thought ~ certainly less important than attending bogus
international conclaves and summits to sign expensive deals for arms, aircraft, reactors etc. Yet
Rajiv Gandhi, at a 10 Janpath meeting on 23 March 1991 when he received the liberalisation
proposals he had authorized, explicitly avowed the importance of greater resources towards the
Judiciary. Dr Singh and his acolytes were not in that loop, indeed they precisely represented the
bureaucratic ancien regime intended to be changed, and hence have seemed quite
uncomprehending of the roots of the intended reforms ever since 1991.
Similarly, Rajiv comprehended when it was said to him that the primary fiscal problem faced by
India is the vast and uncontrolled public debt, interest payments on which suck dry all public
budgets leaving no room for provision of public goods.
Government accounts
Government has been routinely “rolling over” its domestic debt in the asset-portfolios of the
nationalised banks while displaying and highlighting only its new additional borrowing in a
year as the “Fiscal Deficit”. More than two dozen States have been doing the same and their
liabilities ultimately accrue to the Union too. The stock of public debt in India is Rs 30 trillion
(Rs 30 lakh crore) at least, and portends a hyperinflation in the future.
There has been no serious recognition of this since it is political and bureaucratic actions that
have been causing the problem. Proper recognition would entail systematically cleaning up the
budgets and accounts of every single governmental entity in the country: the Union, every State,
every district and municipality, every publicly funded entity or organisation, and at the same
time improving public decision-making capacity so that once budgets and accounts recover from
grave sickness over decades, functioning institutions exist for their proper future management.
All this would also stop corruption in its tracks, and release resources for valuable public goods
and services like the Judiciary, School Education and Basic Health. Institutions for improved
political and administrative decision-making are needed throughout the country if public
preferences with respect to raising and allocating common resources are to be elicited and then
translated into actual delivery of public goods and services. Our dysfunctional legislatures will
have to do at least a little of what they are supposed to. When public budgets and accounts are
healthy and we have functioning public goods and services, macroeconomic conditions would
have been created for the paper-rupee to once more become a money as good as gold ~ a
convertible world currency for all of India’s people, not merely the metropolitan special interest
groups that have been controlling our governments and their agendas.
Fiscal Instabilty
Interest payments quickly suck dry every year’s Budget. And rolling over old public debt
means that Government Borrowing in fact much exceeds the Fiscal Deficit
by Subroto Roy
First published in The Sunday Statesman, Editorial Page Special Article, February 4 2007,
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.
Posted in Accounting and audit, Big Business and Big Labour, Economic Policy, Economic
quackery, Economic Theory, Economics of Public Finance, Finance, Financial Management,
Financial markets, Financial Repression, Government accounting, Government Budget
Constraint, Government of India, Growth rates (economic), India's Big Business, India's credit
markets, India's savings rate, India's stock and debt markets, India's 1991 Economic Reform,
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 corruption, India's crimes, India's Economy, India's Foreign
India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's
nomenclatura, India's political lobbyists, India's political parties, India's Politics, India's pork-
barrel politics, India's poverty, India's Public Finance, Macroeconomics, Mendacity in politics,
Political corruption, Political cynicism, Political Economy, Political mendacity, Public
Choice/Public Finance, Public property waste fraud, Satyam corporate fraud, Unorganised
capital markets. 2 Comments »
Corporate Governance & the Principal-Agent Problem (a
brief lecture dated 31 May 2006)
Corporate Governance & the Principal-Agent Problem

by
Subroto Roy
for a conference on corporate governance, Kolkata, 31 May 2006
I am most grateful for this opportunity to speak at this distinguished gathering. I have to say I
have had just a day to collect my thoughts on the subject of our discussion, so I may be less
precise than I would wish to be. But I am delighted I have a mere 7 minutes to speak, and I will
not plan to speak for a second more!
I would like to ask you to consider the following pairings:
PATIENT: DOCTOR
CLIENT: LAWYER
PUPIL: TEACHER
STUDENT: PROFESSOR
SHAREHOLDER: DIRECTORS & MANAGERS
CITIZEN: GOVERNMENT
You will recognize something in common to all of these pairings I am sure. A patient goes to a
doctor with a problem, like a swelling or a stomach ache or a fever, and expects the doctor to do
his/her best to treat it successfully. A client goes to a lawyer with a problem, of a contract or a
tort or a criminal charge, and expects the lawyer to represent him to the best of his ability. A
student attends a University or higher educational Institute, and expects the professors there to
impart some necessary knowledge, to explain some difficult or complex natural or social
phenomena, to share some well-defined expertise, so the student too may aspire to becoming an
expert.
In each case, there is a Principal – namely the patient, the client, the student, — and there is an
Agent, namely, the doctor, the lawyer, the professor. The Agent is not acting out of charity but
is someone who receives payment from the Principal either directly through fees or indirectly
through taxes.
The Agent is also someone who necessarily knows more than the Principal about the answer to
the Principal’s problem. I.e. there is an asymmetry in the information between the two sides.
The Agent has the relevant information or expertise – the Principal needs this information or
expertise and wishes to purchase it from him one way or another.
A company’s Board of Directors and the management that reports to it, may be similarly
assumed to have far greater specific knowledge than the company’s shareholders (and other
stakeholders) about the state of a company’s operations, its finances, its organisation, its position
in various input and output markets, its potential for growth in the industry it is a part of, and so
on. Yet the shareholders are the Principal and the directors and managers are their Agents.
And indeed the Government of a country, i.e. its political leadership and the bureaucracy and
military that are reporting to it, also have much more relevant decision-making information
available to them than does the individual citizen as to the economic and political direction the
country should be taking and why, and again the body of the ordinary citizenry of any country
may have a reasonable expectation that politicians, bureaucrats and military generals are acting
on their behalf.
In each of these cases, the Principal, having less information than the Agent, must necessarily
trust that the Agent is going to be acting in good faith on the Principal’s behalf. There is a
corporate governance problem in each case simply because the Agent can abuse this derived
power that he acquires over the Principal, and breach the contract he has entered into with the
Principal. Doctors or lawyers can practise improperly, professors can cheat their students of
their money and teach them nothing or less than nothing, boards of directors and managers can
cheat their shareholders and other “stakeholders” (including their workers who have expectations
about the company) of value that should be rightfully theirs — and of course politicians,
bureaucrats and military men are all too easily able to misuse the public purse in a way that the
public will not even begin to know how to rectify.
In such situations, the only real checks against abuse can come from within the professions
themselves. It is only doctors who can control medical malpractice, and only a doctor can
certify that another doctor has behaved badly. It is only lawyers who can control legal
malpractice, and testify that yes a client has been cheated of his money by some unscrupulous
attorney. It is only good professors and good teachers who can do what they can to stand out as
contrasting examples against corrupt professors or incompetent teachers.
In case of managerial malpractice, it is only fellow-managers who may be able to comprehend

the scam that a particular CEO has been part of, in stealing money from his shareholders. And
in case of political malpractice, similarly, it is only rival political parties and when even those
fail, rival political institutions like the courts or the press and media, who can expose the
shenanigans of a Government, and tell an electorate to throw the rascals out in the next election.
In other words, self-policing, and professional self-discipline are the only ultimate checks and
balances that any society has. The ancient Greeks asked the question “Who guards the
guardians”, and the answer has to be that the guardians themselves have to guard themselves.
We ultimately must police ourselves . I think it was William Humboldt who said that a people
get the government they deserve.
In India today, indeed in India in the last thirty or forty years, perhaps ever since 1966 after the
passing away of Lal Bahadur Shastri, we may be facing a universal problem of the breach of
good faith especially so perhaps in the Government and the organised corporate sector. Such
breaches occur in other countries too, but when an American court sends the top management of
Enron to jail for many years or a Korean court sends the top management of Daewoo to jail for
many years, we know that there are processes in these countries which are at least making a
show of trying to rectify the breaches of good faith that may have occurred there. That is
regrettably not the situation in India. And the main responsibility for that rests with our
Government simply because our Government is by far the largest organised entity in the country
and dwarfs everyone else.
As an economist, I have been personally intrigued to realise that Government corruption is

closely caused by the complete absence of serious accounting and audit norms being followed in
Government organisations and institutions. Get control of as big a budget as you can, is the aim
of every Government department, then spend as little of it as is absolutely necessary on the
publicly declared social or national aim that the department is supposed to have, and instead
spend as much as possible on the travel or personal lifestyles of those in charge, or better still
transform as much as possible into the personal property of those in charge – for example,
through kickbacks on equipment purchases or building contracts. For example, it is not
unknown for the head of some or other government institution to receive an apartment off-site
from a builder who may have been chosen for a major construction project on site. This kind of
thing has unfortunately become the implicit goal of almost all departments of the Government of
India as well as the Governments of our more than two dozen States. I have no doubt it is a
state of affairs ultimately being caused by the macroeconomic processes of continuous deficit-
financing and unlimited printing of paper-money over decades. For the first two decades or so
after Independence, our institutions still had enough self-discipline, integrity, competence and
optimism to correct for the natural human instincts of greed and domination. The next four
decades — roughly, as I have said, from the death of Shastriji — there has been increasing social
and political rot. I have to wonder if and when a monetary collapse will follow.
Posted in Academic fraud, Accounting and audit, asymmetric information, Corporate Finance,
Corporate fraud, Corporate Governance, Economics of information technology, Ethics, Good
and Evil, Government accounting, India's bureaucracy, India's corporate finance, India's
corporate governance, India's corruption, India's Government Budget Constraint, India's
Government Expenditure, India's Industry, India's Macroeconomics, India's Monetary & Fiscal
Policy, India's nomenclatura, India's political lobbyists, India's pork-barrel politics, Lal Bahadur
Shastri, Mendacity, Mendacity in politics, Political corruption, Political cynicism, Power-elites
and nomenclatura, Principal-agent problem, Professional ethics, Satyam corporate fraud, Zombie
companies. 1 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” :
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?
Posted in Big Business and Big Labour, Economic Policy, Economic quackery, Government
Budget Constraint, India's Big Business, India's Government economists, India's Banking, India's
Budget, India's bureaucracy, India's Capital Markets, India's corruption, India's Economy, India's
Government Budget Constraint, India's Government Expenditure, India's Industry, India's
inflation, 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
Public Finance, India's Reserve Bank, India's State Finances, Interest group politics, Manmohan
Singh, Mendacity, Mendacity in politics, Political corruption, Political cynicism, Political
mendacity, Pork-barrel politics, Public Choice/Public Finance, Public property waste fraud.
Leave a Comment »
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.
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!
Posted in Big Business and Big Labour, Economic Policy, Economic quackery, Economics of
Public Finance, Economics of Unemployment, Government accounting, Government Budget
Constraint, Government of India, India's Big Business, India's bureaucracy, India's corruption,
India's Economy, India's Government Budget Constraint, India's Government Expenditure,
India's Industry, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy,
India's political lobbyists, India's Polity, India's pork-barrel politics, India's Public Finance,
India's Reserve Bank, India's State Finances, Inflation, Interest group politics, John Maynard
Keynes, Manmohan Singh, Mendacity in politics, Political corruption, Political cynicism,
Political mendacity, Politics, Public Choice/Public Finance, Public property waste fraud. Leave a
Comment »
Will the Government of India’s new macroeconomic policy

dampen or worsen the business-cycle (if such a cycle exists at
all)? No one knows! “Where ignorance is bliss, ‘Tis folly to
be wise.”
I began a two part article published in The Statesman last year (September 23-24 2007) titled
“Against Quackery” saying:
“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…. 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 cheap money policy announced yesterday and now the so-called “fiscal stimulus”
announced today may be a case in point. Dr Manmohan Singh’s main economic policy aide said
the aim was for Government to act in a “contra-cyclical” manner, presumably referring to an
attempted “counter cyclical policy” to dampen the amplitude of a business-cycle.
But has anyone asked — let aside, does anyone know — where precisely, in terms of phase,
period and amplitude, India’s macro-economy happens to be on its presumed business-cycle? Of
course not. No one has the faintest clue. There are no models of such a cycle existing and there
are no data which have been fit to such non-existent models. Not in Delhi, not in Mumbai, not
with any international agency.
[Inspector Gregory (Scotland Yard detective): "Is there any other point to which you would wish
to draw my attention?"
Sherlock Holmes: "To the curious incident of the dog in the night-time."
Inspector Gregory: "The dog did nothing in the night-time."
Sherlock Holmes: "That was the curious incident."]
A cheap money policy and a so-called “fiscal stimulus” may in fact, for all that anyone in the
Government of India or outside it really knows, exacerbate the amplitude of a business-cycle —
making it worse, not better.
In such a state of ignorance, it is odd for policy-makers to go about glibly formulating and
announcing so many policy-changes at once. (It may all add up to be just incoherent waffle.)
Such has been the typical pattern to emerge from the process of political lobbying by “well-
informed, moneyed, mostly city-based special interest groups”. Organised capital and organised
labour (as well as of course bureaucrats and politicians) will likely do very well from all this as
usual, at the expense of “ill-informed, diffused anonymous individual citizens” of India.
Posted in Big Business and Big Labour, Economic Policy, Economic quackery, Economic
Theory, Economics of Public Finance, Government accounting, Government Budget Constraint,
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inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's political lobbyists,
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Political corruption, Political cynicism, Political mendacity, Politics, Pork-barrel politics. Leave
a Comment »
The Indian Revolution

The Indian Revolution
by
Subroto Roy
Prefatory Note: This outlines what might have happened if (a) Rajiv Gandhi had not been
assassinated; (b) I had known at age 36 all that I now know at age 53. Both are counterfactuals
and hence this is a work of fiction. It was written long before the Mumbai massacres; the text
has been left unchanged.
“India’s revolution, when it came, was indeed bloodless and non-violent but it was firm and
clear-headed and inevitably upset a lot of hitherto powerful people.
The first thing the Revolutionary Government declared when it took over in Delhi was that the
rupee would become a genuine hard currency of the world economy within 18 months. This did
not seem a very revolutionary thing to say and the people at first did not understand what was
meant. The Revolutionaries explained: “Paper money and the banks have been abused by all
previous regimes ruling in Delhi since 1947 who learnt their tricks from British war-time
techniques. We will give you for the first time in free India a rupee as good as gold, an Indian
currency as respectable as any other in the world, dollar, pound, yen, whatever. What you earn
with your hard work and resources will be measured by a sound standard of value, not
continuously devalued in secret by government misuse”.
The people were intrigued but not enlightened much. Nor did they grasp things to come when
the Revolutionary Government abolished the old Planning Commission, sending its former head
as envoy to New Zealand (with a long reading-list); attached the Planning Commission as a new
R&D wing to the Finance Ministry; detached the RBI from the Finance Ministry; instructed the
RBI Governor to bring proper work-culture and discipline to his 75,000 staff and instructed the
Monetary Policy Deputy Governor to prepare plans for becoming a constitutionally independent
authority, besides a possible monetary decentralization towards the States. India’s people did not
understand all this, but there began to be a sense that something was up in Lutyens’ Delhi
faraway.
The Revolutionary Government started to seem a little revolutionary when it called in police-
chiefs of all States — the PM himself then signed an order routed via the Home Ministry that
they were to state in writing, within a fortnight, how they intended to improve discipline and
work-culture in the forces they commanded. Each was also asked to name three reliable
deputies, and left in no doubt what that meant. State Chief Ministers murmured objections but
rumours swirled about more to come and they shut up quickly. The Revolutionary Government
sent a terse note to all CMs asking their assistance in implementation of this and any further
orders. It also set up a “Prison Reform and Reconstruction Panel” with instructions to (a) survey
all prisons in the country with a view to immediately reduce injustices within the prison-system;
(b) enlarge capacity in the event fresh enforcement of the Rule of Law came to demand this.
The Revolutionary Government then asked all senior members of the judiciary to a meeting in
Trivandrum. There they declared the judiciary must remain impartial and objective, not show
favoritism even to members of the Revolutionary Party itself who might be in court before them
for whatever reason. The judges were assured of carte blanche by way of resources to improve
quality of all public services under them; at the same time, a new “Internal Affairs Department”
was formed that would assure the public that the Bench and the Bar never forgot their noble
calling. When a former judge and a former senior counsel came to be placed in two cells of the
new prison-system, the public finally felt something serious was afoot. Late night comics on TV
led the public’s mirth — “Thieves have authority when judges steal themselves”, waxed one
eloquently.
The Revolutionary Government’s next step reached into all nooks and crannies of the country. A
large room in the new Finance Ministry was assigned to each State – a few days later, the
Revolutionary Government announced it had taken over control under the Constitution’s
financial emergency provision of all State budgets for a period of six months at the outset.
Now there was an irrepressible outcry from State Chief Ministers, loud enough for the
Revolutionary Government to ask them to a national meeting, this time in Agartala. When the
Delhi CM sweetly complained she did not know how to get there, she got back two words “Get
there”; and she did.
There the PM told the CMs they would get their budgets back some day but only after the
Revolutionary Government had overseen their cleaning and restoration to financial health from
their current rotten state. “But Prime Minister, the States have had no physical assets”, one
bright young CM found courage to blurt out.
“That is the first good question I have heard since our Revolution began,” answered the PM.
“We are going to give you the Railways to start with – Indian Railways will keep control of a
few national trains and tracks but will be instructed to devolve control and ownership of all other
assets to you, the States. See that you use your new assets properly”. There was a collective
whoop of excitement. “During the time your budgets remain with us, get your police, transport,
education and hospital systems to work for the benefit of common people, confer with your
oppositions about how you can get your legislatures to work at all. Keep in mind we are
committed to making the rupee a hard currency of the world and we will not stand for any waste,
fraud or abuse of public moneys. We really don’t want to be tested on what we mean by that. We
are doing the same with the Union Government and the whole public sector”. The Chief
Ministers went home nervous and excited.
Finally, the Revolutionary Government turned to Lutyens’ Delhi itself. Foreign ambassadors
were called in one by one and politely informed a scale-back had been ordered in Indian
diplomatic missions in their countries, and hence by due protocol, a scale-back in their New
Delhi embassies was called for. “We are pulling our staff, incidentally, from almost all
international and UN agencies too because we need such high-quality administrators more at
home than abroad”, the Revolutionary Foreign Minister told the startled ambassadors.
Palpable tension rose in the national capital when the Revolutionary Government announced that
Members of Parliament would receive public housing of high quality but only in their home
constituencies! The MPs would have to vacate their Delhi bungalows and apartments! “But we
are Delhi! We must have facilities in Delhi!”, MPs cried. “Yes, rooms in nationalized hotels
suffice for your legislative needs; kindly vacate the bungalows as required; we will be building
national memorials, libraries and museums there”, replied the radicals in power. Tension in the
capital did not subside for weeks because the old political parties all had thrived on Delhi’s
social circuit, whose epicenter swirled around a handful of such bungalows. Now those old
power-equations were all lost. A few MPs decided to boycott Delhi and only work in their
constituencies.
When the Pakistan envoy was called with a letter for her PM, outlining a process of détente on
the USSR-USA pattern of mutual verification of demilitarization, both bloated militaries were
upset to see their jobs and perks being cut but steps had been taken to ensure there was never any
serious danger of a coup. The Indian Revolution was in full swing and continued for a few years
until coherence and integrity had been forced upon the public finances and currency of a
thousand million people….”
Posted in Academic economics, Academic research, anarchy and governance, Economic Policy,
Economic Theory, Economics of exchange controls, Governance, Government accounting,
Government Budget Constraint, Government of India, India's 1991 Economic Reform, India's
balance of payments, India's Banking, India's bureaucracy, India's Capital Markets, India's
Constitution, India's currency history, India's Democracy, India's Economy, India's Foreign
Policy, India's Government Budget Constraint, India's Government Expenditure, India's History,
India's Macroeconomics, India's Monetary & Fiscal Policy, India's Politics, India's Polity, India's
poverty, India's Revolution, India's Rule of Law, Rajiv Gandhi, Rajiv Gandhi's assassination.
Leave a Comment »
How the Liabilities/Assets Ratio of Indian Banks Changed

from 84% in 1970 to 108% in 1998
This graph was created by me in 2002 from Reserve Bank of India data published until 1998.
Although I had been “full professor” at the time for six years at something known as an
“Institution of National Importance” in India, I had received not a rupee by way of any research-
assistance, and had to be assisted in the creation of this graph by two very elderly lay persons,
one aged 87 and another aged 77, who read out over many hours (despite frail eyesight) long
columns of RBI data which I then typed into an Excel file. The graph came to be published for
the first time to accompany my two-part article “Indian Inflation” published in The Statesman
April 15-16 2008, and available elsewhere here.
The Prime Minister of India has today spoken in India’s Parliament of how sound India’s
banking seems to him compared to that in the rest of the world at present. I trust he has
available to him vast amounts of fresh data since 1998 which the many members of his “Dream
Team” of government and other establishment economists in Delhi and Mumbai have analysed
adequately to justify his confidence. The data in my RBI graph end at 1998 but they do cover
all the years of the PM’s own career as India’s top economic bureaucrat up through his tenure as
Finance Minister in the Narasimha Rao Government.
As it happens, I do think India’s banks are relatively insulated from the world economy and its
present financial crisis but the reason for that insulation has nothing to do with any purportedly
better bank governance in India; rather it has to do with the fact the rupee is not a hard
convertible currency and therefore there has been a vast and continuing distortion of relative
prices (including interest rates and wages) from world prices.
Subroto Roy, October 20 2008

Posted in Academic freedom, Academic research, Economics of exchange controls, India's
Banking, India's bureaucracy, India's Capital Markets, India's Economic History, India's
Economy, India's Foreign Exchange Reserves, India's Government Budget Constraint, India's
Government Expenditure, India's Macroeconomics, India's Monetary & Fiscal Policy, India's
nomenclatura, India's Reserve Bank, Manmohan Singh. Leave a Comment »
Monetary Integrity and the Rupee

September 28, 2008 — drsubrotoroy
Monetary Integrity and the Rupee:Three British Raj relics have dominated our macroeconomic
policy-making
First published in Business Standard 28 September 2008
Taxation via inflation “does not require detailed legislation, and can be administered very
simply. All that it requires is to spend newly created notes. The resulting inflation automatically
imposes a tax on cash balances by depreciating the value of money”. Philip Cagan said this in a
pioneering 1956 study of hyperinflations worldwide. Britain’s Hugh Dalton observed how
government deficits could be met by “use of the printing press to manufacture legal tender paper
money” to pay government creditors either directly “with new paper money specially printed for
the purpose” or indirectly “out of loans to itself from the Central Bank”. Milton Friedman and
Anna Schwartz pointed to America’s wartime resort to inflation.
Government debt held by a central bank quickly filters through to appear as an asset in balance-
sheets of commercial banks, causing expansion of bank-lending and hence of bank-deposits and
broad money. After the attack on Pearl Harbour, the US Treasury could get from the Federal
Reserve or commercial banks “any funds that it needed beyond those secured by taxation and by
borrowing from non-bank sources”. America’s wartime banking system became “a mechanism
for providing funds to finance government expenditure” — deposits grew because “bank buying
of government securities increases bank deposits”.
In RF Harrod’s words: “There is a well-known aphorism that ‘bank loans create deposits’…. if
the central bank has an increase of assets, whether through a gold inflow or its own increase of
‘lending’ (including the purchase of bills or bonds), some commercial bank will have an increase
of assets of equal amount, in the form of claims on the central bank (deposits at it or notes issued
by it) and an increase of deposit liabilities of equal amount to its customers”.
India has followed in peacetime over six decades what the USA 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.
Almost 50% of annual public revenues in real terms may have been arising from inflationary
finance in recent decades. To take a specific example, during Dr Manmohan Singh’s tenure as
Finance Minister, Union Government expenditure net of operational income was some Rs. 1.3
trillion (Rs 1.3 lakh crore) in 1994-1995. Some Rs. 675 billion (1 bn= 100 crore) was raised from
all taxation that year, Rs 183 billion from direct taxes. The remaining Rs. 620.8 billion was
borrowed on behalf of future generations of citizens using the Government of India’s credit.
What is termed “Gross Fiscal Deficit” is this additional or marginal annual borrowing — it adds
itself to the ongoing stock of public debt every year and has been continually monetised insofar
as our mostly nationalized banking system annually comes to hold government securities to that
additional amount.
India’s inflation-history shows a first phase from the 1870s until the Second World War when
money prices fluctuated in response to real shocks, positive and negative, domestic and
international. E.g., the US Civil War and First World War caused demand surges for Indian
manufactures like cotton textiles and steel railway-tracks, while the Great Depression saw Indian
prices crashing with world prices.
During the Second World War, money prices in India rose at their fastest rate ever, caused by
deliberate British policy to pay for war expenditure by printing money. The British resort to
inflationary wartime finance saw the highest money supply growth rates in India ever to occur to
date. This pattern came to be adopted and institutionalised by independent India’s socialist
authorities, so there has been a third phase of steady inflationary finance from the 1950s until
today, along with negative shocks like military and civil conflicts, droughts and oil price-rises, as
well as happier developments like technological progress leading to growth of real income (see
graph).
Two more relics from the wartime British Raj continue to dominate Indian macroeconomic
policy to this day. One is unlimited spending on vast standing armies — our supposed adversary
itself being a political remnant of the Raj with similar macroeconomic problems to ourselves.
India’s army has some 19 divisions facing Pakistan, Pakistan’s army has 19 divisions facing
India!
The other relic has been the Indian rupee becoming inconvertible as a world money ever since
import quotas were imposed across the Sterling Area in 1940-1942. Lack of convertibility has
made all government finance in India unlike that in modern Western economies. US government
bonds are held freely in foreign portfolios so a Swiss household or Japanese bank may trade
these as they please. Bond prices vary inversely with interest-rates, and yield curves would be
attempted to be defined reflecting the maturity-structure and state of expectations. Competitive
arbitrage in international capital markets may succeed in ensuring government debt is priced
accurately.
A central bank with a convertible currency sells debt to raise monetary interest rates and attract
capital flows, buys up its debt to lower rates and cause capital outflows. Money growth
unwarranted by real growth depreciates the currency under floating exchange rates; a partial
export of inflation occurs under fixed-rates. Debt instruments are liquid near-moneys, and it is
because US Government debt has been liquid that debt instruments of its sub-sovereign divisions
like States or municipalities are almost as liquid. If sovereign debt is not liquid, nor will be sub-
sovereign debt.
In India, bank assets may be liquid domestically but are illiquid internationally. Government debt
is not held by domestic households as voluntary savings nor has it been a liquid asset held
worldwide in foreign portfolios. The same holds *a fortiori* for debt issued by more than two
dozen State Governments. “Mutual funds” created in recent years do contain government debt on
modern principles of portfolio-selection but amounts involved are small. The Rupee achieving
monetary integrity after more than six decades of governmental misuse would be indicated only
when any ordinary Indian resident can freely hold or trade India’s money for foreign moneys or
precious metals as he/she pleases. India’s economy and money can begin to move towards
coherence and integrity only when we put to rest the three relics from the wartime British Raj
which we unthinkingly have allowed to dominate our macroeconomic policy-making ever since.
Posted in Anna Schwartz, Bangladesh's economy, Britain, Britain in India, Economic Policy,
Economic Theory, Economic Theory of Growth, Financial markets, Government Budget
Constraint, Government of India, India's Banking, India's Budget, India's Capital Markets, India's
Economic History, India's Economy, India's Government Budget Constraint, India's Government
Expenditure, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's
Polity, India's Public Finance, India's Reserve Bank, Interest rates, International monetary
economics, Macroeconomics, Milton Friedman, Monetary Theory, Money and banking,
Pakistan's economy, Philip Cagan, Public Choice/Public Finance, RF Harrod, US Federal
Reserve System. Leave a Comment »
“Rangarajan Effect”
Dr C Rangarajan stepping down from chairmanship of the PM’s official economic advisers is,
fortunately, not a sign that his role as a policy-maker is coming to end;he has become a Rajya
Sabha MP and it has even been speculated he may be invited into the Cabinet. India has been
experiencing high recorded inflation in recent months. The most disconcerting aspect of this may
be that it seems to be accelerating Business Standard 24 August 2008
Posted in C Rangarajan, Economic Policy, Economics of Public Finance, Financial Repression,

Government of India, India's Banking, India's Budget, India's Economic History, India's
Economy, India's Government Expenditure, India's inflation, India's Macroeconomics, India's
Monetary & Fiscal Policy, India's Public Finance, India's Reserve Bank, Manmohan Singh,
Sukhamoy Chakravarty. 1 Comment »
Reddy’s reckoning
Reddy`s reckoning
Where should India’s real interest rate be relative to the world?
Business Standard 10 August 2008
The Governor of the Reserve Bank of India has made a curious, possibly fallacious remark.
continued at
Posted in Banking, Economic Policy, Economic Theory of Interest, India's Government

economists, India's Capital Markets, India's Economic History, India's Economy, India's
inflation, India's Monetary & Fiscal Policy, India's Reserve Bank, Inflation, Interest rates,
Macroeconomics, Monetary Theory, Money and banking. Leave a Comment »
Growth of Real Income, Money & Prices in India 1869-2008

I have warned against a “monetary meltdown” in India for more than a decade and a half now. I
said it to Rajiv Gandhi (who listened with care and respect) and after he was gone I have said it
to Government economists in India, to IMF/World Bank bureaucrats in Washington, to academic
audiences in India and the UK and to India’s general newspaper reading public.
Obviously I hope such a meltdown does not come about. But inflation, or the decline in the
value of money, presently is in double-digits even by the Government’s own admission. (As a
general rule, I think the decline in the value of money has been higher by several percent than
what the Government says at any given time.) Hence I am publishing again some results of my
macroeconomic research on India over the years. You are free to use them and communicate
with me about them but please acknowledge them properly and do not steal.
The first graph of 1869-2004 data was published in print to accompany my Growth and
Government Delusion in The Statesman February 22, 2008; it had also accompanied other
similar articles, e.g. The Dream Team: A Critique in January 2006. The second graph of 1935-
2008 data was published in print to accompany my article Indian Inflation in The Statesman of
April 22 2008.
Subroto Roy
Posted in Academic economics, Academic freedom, Academic research, Economic Policy,
Economic Theory of Growth, Government Budget Constraint, Government of India, Growth
rates (economic), India's Banking, India's currency history, India's Economic History, India's
History, India's inflation, India's Macroeconomics, India's Monetary & Fiscal Policy, India's
Public Finance, Inflation, Macroeconomics, Monetary Theory, Money and banking, Rajiv
Gandhi. Leave a Comment »
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
Posted in Accounting and audit, Economic Policy, Financial Management, Government

accounting, Government Budget Constraint, Government of India, India's Budget, India's
bureaucracy, India's Economy, India's Finance Commission, India's Government Expenditure,
India's Macroeconomics, India's Monetary & Fiscal Policy, India's Public Finance, India's
Reserve Bank, India's State Finances, Public Choice/Public Finance, Public property waste fraud.
Leave a Comment »
Assessing Manmohan: The Doctor of Deficit Finance should

realise the currency is at stake
Assessing Manmohan:
The Doctor of Deficit Finance should realise the currency is at stake
by Subroto Roy
First published in The Statesman, Editorial Page Special Article, April 25 2008,
The best thing that may be said of the Manmohan Singh premiership is that when it began in
May 2004, it seemed, for a short while, refreshing in comparison to the dysfunctional arrogance
and brutality displayed by its predecessor. By the last months of the Vajpayee-Advani
Government, there were party appointees who had ended all pretence of purportedly Hindu
values and were raking it in shamelessly. The Golden Rule of Democracy is “Throw the rascals
out”, which is what Indian democracy upheld as it has done time and again. By 2009, India’s
electorate will have the chance to decide whether the incumbent government deserves the same
fate.
Lok Sabha
Manmohan Singh was seriously discussed as the Congress’s putative nominee for PM as early as
2001. The idea brewing at the time with the party’s next generation of wannabe leaders (in their
50s and 60s, where Manmohan was near 70) was that they needed to maintain good relations
with the Great White Queen and wait out one term of an inevitable Singh premiership before
having a shot at the top job themselves.
What is surprising is Dr Singh appeared never to feel it necessary to educate himself privately on
how to retool himself for the necessary transformation from being the archetypal bureaucrat he
had been in his working career to becoming the national statesman he wished to be after
retirement. It is doubtful, for example, if he ever stood in front of a mirror and practised an
extempore political speech in Hindi in preparation for the highest executive post in the country,
let aside writing a clear-headed, original vision or mission statement of substance as to where he
wished to lead it. As Narasimha Rao’s Finance Minister, he could meekly take orders from his
PM; it seemed he wished to continue in the same mode even when PM himself.
Jawaharlal Nehru is supposed to have been a hero of Dr Singh’s ~ but Nehru was a thorough
parliamentarian, among the finest anywhere, and someone who always respected the Lok Sabha
immensely. Dr Singh, after he lost to VK Malhotra for the South Delhi seat in 1999, made not
the slightest effort to enter the Lok Sabha again, even when the Akalis indicated they might not
oppose him in a Punjab contest. When asked specifically at a large press conference about not
entering the Lok Sabha, Dr Singh murmured words to the effect he had better uses of his time ~ a
display, if anything, of the misplaced arrogance of many New Delhi academics and intellectuals.
Dr Singh may be the first PM in any parliamentary democracy never to have won a seat in the
lower house nor felt a need to do so.
Dr Singh’s bureaucratic expertise assisted him well in the first national crisis that came his way,
which was the Tsunami of 26 December 2004. There appeared to be an air of efficiency about
the Government’s response and he seemed in his element as commander of bureaucratic forces
while working with Pranab Mukherjee in enlisting the military. George W. Bush (not a great
geographer or historian) was apparently impressed to see on a map that India had naval forces
deployed as far as the Andamans.
By 2005 though, Dr Singh’s bureaucratic mindset had its negative impact. Montek Ahluwalia
had been his Finance Secretary when he was Finance Minister. Mr Ahluwalia’s spouse had been
a main supporter of Dr Singh’s unsuccessful Lok Sabha attempt. During the Vajpayee
Government, Mr Ahluwalia remained a Planning Commission Member for several years before
moving to Washington. With Dr Singh as PM, Mr Ahluwalia returned from the USA in mid
2004 to become Deputy Chair at the Planning Commission. Simultaneously with his return, the
idea that the American nuclear industry would like to sell “six to eight lightwater reactors” to
India arose.
That is as much as is presently known in public. Dr Singh and Mr Ahluwalia may in the national
interest want to frankly and precisely explain to the Indian people the full story of the sudden
origins of this idea. Certainly, none of the lessons of the Dabhol fiasco a decade earlier seemed
to have been learnt, and the Maharasthtra Government (and hence the Government of India)
ended up paying some $300 million to General Electric and Bechtel Corporation for Dabhol
before any nuclear talks with the USA could begin. Nor had any serious cost-benefit analysis
been done or discussion taken place comparing nuclear energy with coal, hydro and other
sources in the Indian case.
Indian foreign policy became frozen in its focus on nuclear negotiations with the USA, swirling
around Dr Singh’s fife-and-drum welcome at the White House and President Bush’s return visit
to India. At the same time arose the issue of Paul Volcker’s UN committee mentioning the name
of India’s foreign minister. As The Statesman put it, regardless of the latter’s involvement, “the
damage to India’s diplomatic reputation in the world” was done and it was inevitable a new
foreign minister would be necessary. After dilly-dallying and much 10 Janpath to-and-fro, Dr
Singh followed Nehru’s mistake of becoming his own foreign minister. The idea was that this
would be temporary but it became almost a year.
Instead of transforming himself towards Indian political statesmanship, Dr Singh advanced other
retired bureaucrats’ ambitions on similar career-paths. Foreign policy went out of the MEA’s
control and seemingly into the control of the new “National Security Adviser”. Dr Singh,
sometimes with MK Narayanan beside him, travelled a large number of countries from Brazil to
Finland and Uzbekistan to South Africa and Japan. Dr Singh also found time and willingness to
accept honorary degrees from British and Russian universities during these short months.
While Dr Singh seemed thus preoccupied, two of India’s main neighbours underwent massive
democratic revolutions (leave aside magnificent Bhutan). Nepal’s people practically stormed
their Bastille while Dr Singh and Mr Narayanan visited Germany to discuss BMWs. Pakistan’s
democratic forces could hardly believe the cold indifference shown to them by a New Delhi
merely following Bush’s support for Pervez Musharraf. While Pakistan and Nepal, and to lesser
extent Bangladesh, saw movements towards better governance, Sri Lanka descended towards
civil war ~ India’s PM remained obsessed with the magic wand that the nuclear deal was
supposed to be.
Inflation
Then suddenly the magic vanished ~ Dr Singh seemed to finally come to a silent private
recognition that the economics of the nuclear deal simply did not add up if it meant India
importing “six to eight lightwater reactors” on a turnkey basis from the USA or anywhere else.
Dr Singh seemed to come out of his self-imposed trance and return a little better to reality. By
the time he visited China, although he was as deferential to Hu Jintao in his body language as he
had been to Bush and Musharraf and even accepted an indoor guard of honour, he also seemed
willing to stand up for India. The Arunachal visit was a reality-check.
Now there is inflation ~ and one year left in the UPA’s term. What the country needs is tough
sensible macroeconomics and clean public finance. A pandering profligate budget in February
was not a healthy sign. Instructing Mr Ahluwalia to close down the Planning Commission and
make it a minor R&D wing of the Finance Ministry would be instead a good step. Instructing the
RBI to clean up its bureaucratic wastefulness and prepare itself for institutional independence
from the Finance Ministry would be even better. Getting proper financial control over every
Union and State government entity spending public money and resources would be most
important of all. Such major institutional changes in the policy-making process are what an
economist might expect of an economist prime minister who wishes to lead India in the 21st
Century. India’s currency is at stake.
(Of related interest: ”The Politics of Dr Singh”.)
Posted in Atal Behari Vajpayee, BJP, Communist China, Congress Party, Dabhol/Enron fiasco,
India's Budget, India's corruption, India's Democracy, India's Economy, India's Electorate,
India's Foreign Policy, India's History, India's inflation, India's Lok Sabha, India's
Macroeconomics, India's Monetary & Fiscal Policy, India's Politics, India's Polity, India's Public
Finance, India's Reserve Bank, India-United States business, India-US Nuclear Deal, Inflation,
Jawaharlal Nehru, LK Advani, Macroeconomics, Manmohan Singh, Nepal, Pakistan's politics,
Politics, Sonia Gandhi. Leave a Comment »
Indian Inflation: Upside Down Economics from New

Delhi’s Establishment
Author’s Note: 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.
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.
Posted in Economic Policy, Economic Theory, Economic Theory of Growth, Economics of

Exchange Rates, Financial markets, Financial Repression, Gold standard, India's Budget, India's
Capital Markets, India's Economic History, India's Economy, India's Exports, India's Foreign
Exchange Reserves, India's Foreign Trade, 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, Inflation, International monetary economics, Macroeconomics, Microeconomics,
Monetary Theory. 1 Comment »
India’s Budget Process (in Theory)
February 29, 2008 — drsubrotoroy
(This was a front-page signed editorial article in The Statesman on Budget Day 2008; it had been
preceded by How to Budget: Thrift,Not Theft, Needs to Guide Our Public Finances, and by
Growth & Government Delusion a few days earlier. Other related articles published over the last
year in The Statesman include India’s Macroeconomics, Fiscal Instability, Fallacious Finance,
Against Quackery, etc.)
Budget process, in theory
by Subroto Roy
First published in The Statesman, February 29 2008, Front Page, www.thestatesman.net
India follows the British system of public finance ~ except it is very far from having followed or
even being aware of numerous deep improvements the UK made in its system in recent decades.
Government accounts are divided between the “Consolidated Fund of India”, “Contingency
Fund” and “Public Account”. The first is most important and credits all revenues received and all
loans raised by issue of government debt, and all moneys received in repayment of loans. The
second is for unforeseen expenditure pending subsequent authorisation by Parliament. The last
includes “trust funds” and is where all transactions relating to debt, deposits, advances,
remittances are made.
The annual financial statement of the Union government presented to Parliament is popularly
known as “the Budget”. Parliament’s “Vote on Account” is to enable estimates to be considered
more carefully.
There is a “Revenue” Budget referring to expenditures and receipts of an annually recurrent

nature; for example, staff-salaries of a school is revenue expenditure. There is a “Capital Budget”
referring to investment expenditure “incurred with the object either of increasing concrete assets
of a material and permanent character or of reducing recurring liabilities”. Spending today on a
new school-building or setting aside a sinking fund to reduce the stock of extant public debt is
supposed to be what capital expenditure includes. Capital expenditure should be met
“generally… from receipts of a capital, debt, deposit or banking character as distinguished from
ordinary taxes, duties….” but the government is also allowed to meet it from ordinary current
revenues when these are “sufficient”.
In addition there has been in the Indian case large outright direct annual lending undertaken by
the government to chosen recipients, bypassing normal capital markets. All three types of
expenditure, “Current”, “Investment” and “Loan”, are of spending decisions made at the same
time about the same or a similar set of activities. Yet nowhere in the Government of India’s
accounts today is to be found clear actionable data that public expenditures on e.g. the power
sector in a given year happens to include “Loans for Power Projects” under Account Head 6801,
current expenditure on “Power” under Account Head 2801 and capital expenditure on “Power
Projects” under Account 4801. It is only when these are added can a picture emerge about total
expenditure on the power sector. Government accounts remain on a cash and not accrual basis,
unlike the best practices adopted internationally in recent decades.
The process includes preparation of the Budget by the Executive; its consideration and adoption
by the Legislature; its implementation by the administration and government agencies; and post-
evaluation of achievement and performance by the Public Accounts Committee, Estimates
Committee, Committee of Public Undertakings etc of Parliament.
In addition, there is Audit. Where private sector audit systems show how much profit may be
properly “put into the pockets of the proprietors”, government audit is supposed to find the least
cost to taxpayers in providing necessary public goods and services “to enable Government to
determine how little money it need take out of the pockets of the tax-payers in order to maintain
its necessary activities at the proper standard of efficiency”. That maxim of India’s Auditor-
General in 1930 captures part of the normative intent of public finance in any country at any
time. The office of “Comptroller & Auditor General” is charged with independently assessing
and evaluating the effectiveness of outcomes generated by the fiscal process, 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”. That is the
theory at least.
Similar processes on smaller scales are supposed to get carried out in our more than two dozen
States, though there the role of the (extra-constitutional) “Planning Commission” has been
prevailing while that of the (constitutional) Finance Commission has been diminished.
The crucial variable to look out for in Mr P Chidambaram’s speech will be how much interest
expenditure the Government of India has to make on its debt already incurred. That may be
nearing Rs 2 trillion (or Rs 2 lakhs of crores) – and could be more than 100% of the Gross Fiscal
Deficit! It is an amount “charged” directly to the Consolidated Fund of India and not submitted
to the vote of Parliament though Parliament has a right to discuss it. If you want to know who in
Parliament is awake and aware of our nation’s economic and financial good, look for anyone
who discusses or wants to discuss the size of that amount! It may be best to ignore all attempts at
joking and poetry as distractions because the situation is grim ~ although of course there is such
a thing as “gallows humour”.
Posted in Academic economics, Academic research, Accounting and audit, Economic Policy,
Government accounting, Government Budget Constraint, Government of India, India's Budget,
India's Constitution, India's Democracy, India's Economy, India's Government Expenditure,
India's Macroeconomics, India's Monetary & Fiscal Policy, India's Parliament, India's pork-
barrel politics, India's Public Finance, Macroeconomics, Public Choice/Public Finance. Leave a
Comment »
How to Budget: Thrift, Not Theft, Needs to Guide Our
Public Finances
How to Budget:
Thrift, Not Theft, Needs to Guide Our Public Finances
By Subroto Roy
First published in The Statesman, Editorial Page Special Article, www.thestatesman.net,

February 26 2008
For most family households in India as elsewhere, the time for weekly or monthly budgeting and
accounting is a time of sobriety ~ when reality must be faced about which goals and desires can
be achieved and which cannot, about how incomings and outgoings of family resources are
going to be matched. The same holds for corporations when their managements must face their
boards, shareholders or workers, though individual stakeholders in large corporations may be so
ignorant of the facts or so small and insignificant in size that top management can get away with
a lot of bluff.
When it comes to entities the size of countries, the scope for feeding illusions to the general
public becomes enormously large; hence there is need for scientific honesty in government
accounting and finance, and when that is lacking as it often is in any country, there is need for
intense public awareness and vigorous criticism of what the government of the day may be up to
with the public purse.
‘Seignorage’
Mao Zedong once said “Thrift should be the guiding principle of our government expenditure”.
Those who govern fiscal and monetary processes, whether autocratically or democratically, have
a general duty to be frugal or economic in using resources that have been forcibly raised from the
public and which could have been spent privately in other welfare-enhancing directions.
“One must not take from the real needs of the people for the imaginary needs of the state” said
Montesquieu. National Governments “take” from the people not only via direct taxation (e.g. of
income) and indirect taxation (e.g. of expenditure) but also via inflation ~ invisibly reducing the
purchasing power or value of paper money and other paper assets by exploiting the government’s
monopoly over currency-printing (a process that economists traditionally termed “seignorage”
from the debasing of metal coins that kings historically indulged in to pay for wars).
In providing public goods and services, if a government does what it need not do it may end up
failing to do what it must and which only it can do. “That part of the public expenditure, which is
devoted to the maintenance of civil and military establishments (i.e., all except the interest of the
national debt), affords, in many of its details, ample scope for retrenchment. But while much of
the revenue is wasted under the mere pretence of public service, so much of the most important
business of government is left undone, that whatever can be rescued from useless expenditure is
urgently required for useful” (JS Mill).
Such an idea that “whatever can be rescued from useless expenditure is urgently required for
useful” was used in Gordon Brown’s 2004 rhetoric as Britain’s Finance Minister when, for
example, he said 40,000 jobs would be reduced in the UK civil services to release resources to
enhance “frontline” public services like schools and hospitals.
From such a practical point of view, three questions must be typically addressed by any
Parliament or Government trying to optimally align public expenditure and income in a budget
placed before it:
(1) Is public expenditure allocated efficiently in given circumstances, in a manner that enhances
the public interest to the greatest degree possible? If not, how may it be made to do so?
(2) Can income from government operations be enhanced in given circumstances? What taxation
should be imposed, raised, lowered or abolished, why so, and at what least cost to the
population?
(3) If government expenditure exceeds income from taxation and operations, how should the
borrowing be financed at least cost? Is the government’s existing portfolio of assets and
liabilities of different liquidity and term-structure efficient, or can it be improved?
Unfortunately, we do none of this in India and have not done so for decades. Indeed New Delhi’s
establishment economists and the media have not ever even been thinking on such practical
lines. Instead, each bureaucratic department tries to maintain or enlarge its own size and claims
on public funds every year. What New Delhi does, in a nutshell, is to allow every Ministry
(especially the military) to add a 10-20% inflation-premium to its previous year’s expenditures
and assert a new claim during the Budget season. (The most accurate measure of inflation in
India may be that involved in growth of nominal expenditure on Government’s bureaucracy).
Organised business, organised labour, exporters, importers, farmers, women, and every sundry
political lobbyist then assert their claims to subsidies and concessions as well ~ and some
gargantuan number comes to be added up.
To that number must be added the vast annual expenditure on interest payments by Government
on the public debt accumulated from previous years and decades ~ payments which keep afloat
the entire banking system in India because our nationalized banks hold such debt-instruments as
their main assets where customer-deposits are their main liabilities.
A crucial question in relation to the convertibility of the rupee has to do with international
valuation of that vast public debt (hence valuation of the asset side of our banking system) in the
event the rupee became freely exchangeable into gold and foreign exchange for the general
public, not merely city-based super-elites and NRIs.
Once interest payments have been added to other government expenditures, some humongous
number comes to be reached. That number, and how it breaks down between interest
expenditures, military expenditures and other expenditures, is among the key variables to look
out for in Mr Chidambaram’s forthcoming Budget-Speech. From it will be subtracted the total
taxation and non-tax revenues of the Government ~ each after it has been subjected to its own
political lobbying process by different interest groups who have managed to obtain access to the
Finance Minister. The residual (government expenditure minus government income) is the
“Gross Fiscal Deficit” which is how much the Government of India says it plans to newly
borrow from the (mostly captive) domestic financial markets. That residual in turn will add itself
to next year’s accumulating public debt on which interest payments will have to be then made.
The Finance Minister and his spokesmen typically quote the Gross Fiscal Deficit as some
percentage of GDP figures; a better ratio to look for may be the size of Government interest
payments per head as a percentage of tax revenues per head.
Corruption
The Union Finance Ministry no longer appears to exercise effective managerial control over the
budgets and accounts of the innumerable publicly funded institutions, entities and projects in the
country, nor even remembers how to do so. Everyone knows that the eventual aggregate result of
public financial processes will be more deficit-finance paid for by silent and unlimited money-
printing. Thus, for example, we see enormous building and construction plans being requested
and granted for public institutions and agencies to indulge in ~ if the private builders and
developers involved in such public contracts throw in an urban apartment or two for the heads of
such institutions, who are powerful enough to be making the spending decisions with their
friends, what does it really matter? Deficit-finance, arising from an abysmal state of government
and public sector accounting, makes government corruption quite simple and straightforward if
one thinks about it.
It is sad to say that the principle guiding our public finances may have become theft, not thrift,
because political and administrative decision-makers throughout the system, instead of being
sober, remain drunk when it comes to spending India’s public resources.
Posted in Academic research, Accounting and audit, Economic Policy, Government accounting,
Government Budget Constraint, Government of India, India's Government economists, India's
Budget, India's Economic History, India's Economy, India's Monetary & Fiscal Policy, India's
Parliament, India's political lobbyists, India's pork-barrel politics, India's Public Finance, John
Stuart Mill, Macroeconomics, Mao Zedong, Microeconomics, Monetary Theory, Montesquieu,
Political Economy, Public Choice/Public Finance, Transparency, Welfare Economics. Tags: Add
new tag, Economics of principal-agent problems. Leave a Comment »
Growth & Government Delusion

Growth & Government Delusion:
Progress Comes From Learning, Enterprise, Exchange, Not The Parasitic State
By Subroto Roy
First published in The Statesman, Editorial Page Special Article,
February 22 2008, www.thestatesman.net
P Chidambaram, Montek Ahluwalia and Manmohan Singh, like their BJP predecessors, delude
themselves and the country as a whole when they claim responsibility for phenomenal economic
growth taking place. “My goal is to continue to maintain growth but at the same time the
government reserves the right to make rapid adjustments depending upon the evolving
international situation” is a typical piece of nonsensical waffle.
Honest Finance Ministers in any country cannot take personal responsibility for rates of
economic growth nor is any government in the world nimble, well-informed and intelligent
enough to respond to exogenous shocks in a timely manner. The UPA and NDA blaming one
another for low growth or taking credit for high growth merely reveal the crude mis-education of
their pretentious TV economists. There are far too many measurement and data problems as well
as lead-and-lag problems for any credibility to attach to what is said.
Per capita real GDP
Indian businessmen and their politician/ bureaucratic friends seem to think “growth” refers to
nominal earnings before tax for the corporate sector, or some such number that can be sold to
visiting foreigners to induce them to park their money in India: “You will get a 10 per cent return
if you invest in India” to which the visitor says “Oh that must mean India has 10 per cent growth
going on”. Of such nonsense are expensive Davos and Delhi conferences made.
What is supposed to be measured when we speak of economic growth? It is annual growth of per
capita inflation-adjusted Gross Domestic Product (National Income or Net National Product
would be better if available). West Germany and Japan had the highest annual per capita real
GDP growth-rates in the world starting from devastated post-War initial conditions. What were
their rates? West Germany: 6.6 per cent in 1950-1960, falling to 3.5 per cent by 1960-1970, and
2.4 per cent by 1970-1978. Japan: 6.8 per cent in 1952-1960; 9.4 per cent in 1960-1970, 3.8 per
cent in 1970-1978. Thus, only Japan in the 1960s measured more than 9 per cent annual growth
of real per capita GDP.
Now India and China are said to be achieving 9 per cent plus routinely. Perhaps we are observing
an incredible phenomenon of world economic history. Or perhaps we are just being fed
something incredible, some humbug. India’s population is growing at 2 per cent so even if the
Government’s number of 9 per cent is taken at face-value, we have to subtract 2 per cent
population growth to get per capita figures. Typical official fallacies include thinking clever
bureaucratic use of astronomically high savings rates causes growth. For example, Meghnad
Desai of Britain’s Labour Party says: “China now has 10.4 per cent growth on a 44 per cent
savings rate… ” Indian savings have been alleged near 32 per cent. What has been mismeasured
as high savings is actually paper expansion of bank-deposits in a fractional reserve banking
system induced by runaway government deficit-spending in both countries.
Real economic growth arises from spontaneous technological progress, improved productivity
and learning-by-doing of the general population. World economic history suggests growth occurs
in spite of, rather than due to, behaviour of an often parasitic State. Technological progress in a
myriad of ways and discovery of new resources are important factors contributing to India’s
growth today. But while the “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. The vast growth of bank-deposits has been misinterpreted as indicating unusual
savings behaviour when it in fact signals vast government debt being held by nationalised banks.
What Messrs Chidambaram, Ahluwalia,Manmohan Singh, the BJP et al have been presiding
over is annual paper-money supply growth of 22 per cent! That is what they should be taking
honest responsibility for because it certainly implies double-digit inflation (i.e. decline in the
value of paper-money) perhaps as high as 14 or 15 per cent. If you believe Government numbers
that inflationis near 5 per cent you may believe anything.
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.
Risk and enterprise
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.
Posted in China's Economy, Dynamic competition, Economic Policy, Economic quackery,

Economic Theory, Economic Theory of Growth, Economics of Public Finance, Enterprise and
entrepeneurship, Frank Hahn, Governance, Government accounting, Government Budget
Constraint, Government of India, Growth rates (economic), India's savings rate, India's Banking,
India's Budget, India's bureaucracy, India's Capital Markets, India's Economy, India's
Government Budget Constraint, India's Government Expenditure, India's inflation, India's
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Bank, Inflation, Macroeconomics, Manmohan Singh, Political mendacity, Power-elites and
nomenclatura, Public Choice/Public Finance, Technological progress, World economy, World
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India Plus & Minus, Bravo India! Bravo Delhi!

From Facebook October 23 2010:

From Facebook: October 14 2010 etc:

From Facebook Aug 14 2010:

ar tomra korle Kargil, Mumbai ettadi! Ki bola jay bolo? Suby

Two Different Models for India’s Political Economy: Mine

Did the GoI’s MoF’s CEA certify India’s fiscal health

You are unaware of that of which you wish to speak.

Posted in Academic research, Economic Policy, Economic quackery, Economic Theory,

Apropos your reported predictions, I have had to say at Facebook:

Posted in Academic economics, Academic research, Economic Policy, Economic quackery,

A Small Challenge to the RBI’s Governor Subbarao

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

With cordial regards

Posted in Academic economics, Academic research, Government of India, India's Government

(Another) Memo to Dr Kaushik Basu

Posted in Academic economics, Economic Policy, Economic quackery, Economic Theory,

On the blissful innocence of the RBI

Posted in Academic economics, Academic research, Banking, Deposit multiplication, Economic

Reflections on Mr Zoellick’s reported claim

Thoughts on Indian Governance

Finance Minister Mukherjee deserves a cheer for connecting

From Facebook today

Posted in Academic economics, Academic research, America's mortgage crisis, Economic

Could someone please sketch India’s Rupees 35(? 70?)

[From Facebook July 31 2010

(1 trillion = 1 lakh crore ie. 1,000,000,000,000 = 100000,0000000)

Ten thousand dollars:

1million dollars (i.e. ten lakh dollars):

One billion dollars (i.e. one hundred crore dollars):

One trillion dollars (i.e. one lakh crore dollars):

Subroto Roy, Kolkata

Postscript: Of course, most of this exists intangibly as deposits or accounting-entries, not as

Q: What is common to swine flu, a weak monsoon, climate

Subroto Roy, Kolkata

Protected: The Case of the Missing Princeton PhD Thesis

Posted in Academic economics, Academic fraud, Academic freedom, Academic research,

Does the Govt. of India assume “foreign investors and

Mistaken Macroeconomics: An Open Letter to Prime

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

Prime Minister of India

Respected Pradhan Mantriji:

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

1. Germany & Japan

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

Perhaps we are observing an incredible phenomenon of world economic history. Or perhaps it is

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

3. Logic of your model

It be the level of real investment

St be the level of real savings

St = sYt 0 < s <1

In equilibrium ex ante investment equals ex ante savings

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

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

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

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

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

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

5. Technological progress and the mainsprings of real economic growth

During the 1989 perestroika-for-India project-conference, Professor Friedman referred to his

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

With my warmest personal regards and respect, I remain,