Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts
Friday 5 April 2024
Wednesday 21 February 2024
Friday 19 May 2023
Saturday 17 September 2022
Friday 22 November 2019
Thursday 12 September 2019
Central banks were always political – so their ‘independence’ doesn’t mean much
The separation of monetary and fiscal policy serves the neoliberal status quo. It won’t survive the next crash writes Larry Elliott in The Guardian
‘The Federal Reserve is coming under enormous pressure from Donald Trump to cut interest rates.’ Donald Trump with Jerome Powell, then his nominee for chairman of the Federal Reserve, Washington DC, November 2017. Photograph: Carlos Barría/Reuters
Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.
And when the global economy came crashing down in the autumn of 2008, it was central banks that prevented another Great Depression. Interest rates were slashed and the electronic money taps were turned on with quantitative easing (QE). That, at least, is the way central banks tell the story.
An alternative narrative goes like this. Collectively, central banks failed to stop the biggest asset-price bubble in history from developing during the early 2000s. Instead of taking action to prevent a ruinous buildup of debt, they congratulated themselves on keeping inflation low.
Even when the storm broke, some institutions – most notably the European Central Bank (ECB) – were slow to act. And while the monetary stimulus provided by record-low interest rates and QE did arrest the slide into depression, the recovery was slow and patchy. The price of houses and shares soared, but wages flatlined.
A decade on from the 2008 crash, another financial crisis is brewing. The US central bank – the Federal Reserve – is coming under huge pressure from Donald Trump to cut interest rates and restart QE. The poor state of the German economy and the threat of deflation means that on Thursday the ECB will cut the already negative interest rate for bank deposits and announce the resumption of its QE programme.
But central banks are almost out of ammo. If cutting interest rates to zero or just above was insufficient to bring about the sort of sustained recovery seen after previous recessions, then it is not obvious why a couple of quarter-point cuts will make much difference now. Likewise, expecting a bit more QE to do anything other than give a fillip to shares on Wall Street and the City is the triumph of hope over experience.
There were alternatives to the response to the 2008 crisis. Governments could have changed the mix, placing more emphasis on fiscal measures – tax cuts and spending increases – than on monetary stimulus, and then seeking to make the two arms of policy work together. They could have taken advantage of low interest rates to borrow more for the public spending programmes that would have created jobs and demand in their economies. Finance ministries could have ensured that QE contributed to the long-term good of the economy – the environment, for example – if they had issued bonds and instructed central banks to buy them.
This sort of approach does, though, involve breaking one of the big taboos of the modern age: the belief that monetary and fiscal policy should be kept separate and that central banks should be allowed to operate free from political interference.
The consensus blossomed during the good times of the late 1990s and early 2000s, and survived the financial crisis of 2008 . But challenges from both the left and right, especially in the US, suggest that it won’t survive the next one. Trump says the Fed has damaged the economy by pushing up interest rates too quickly. Bernie Sanders says the US central bank has been captured by Wall Street. Both arguments are correct. It is a good thing that central bank independence is finally coming under scrutiny.
For a start, it has become clear that the notion of depoliticised central bankers is a myth. When he was governor of the Bank of England, Mervyn King lectured the government about the need for austerity while jealously guarding the right to set interest rates free from any political interference. Likewise, rarely does Mario Draghi, the outgoing president of the ECB, hold a press conference without urging eurozone countries to reduce budget deficits and embrace structural reform.
Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay. Employers prefer higher unemployment because it keeps wages down and profits up. Central banks side with capital over labour because they accept the neoliberal idea that there is a point – the natural rate of unemployment – beyond which stimulating the economy merely leads to higher inflation. They are, Palley says, institutions “favoured by capital to guard against the danger that a democracy may choose economic policies capital dislikes”.
Until now, monetary policy has been deemed too important to be left to politicians. When the next crisis arrives it will become too political an issue to be left to unelected technocrats. If that crisis is to be tackled effectively, the age of independent central banks will have to come to an end.
Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.
And when the global economy came crashing down in the autumn of 2008, it was central banks that prevented another Great Depression. Interest rates were slashed and the electronic money taps were turned on with quantitative easing (QE). That, at least, is the way central banks tell the story.
An alternative narrative goes like this. Collectively, central banks failed to stop the biggest asset-price bubble in history from developing during the early 2000s. Instead of taking action to prevent a ruinous buildup of debt, they congratulated themselves on keeping inflation low.
Even when the storm broke, some institutions – most notably the European Central Bank (ECB) – were slow to act. And while the monetary stimulus provided by record-low interest rates and QE did arrest the slide into depression, the recovery was slow and patchy. The price of houses and shares soared, but wages flatlined.
A decade on from the 2008 crash, another financial crisis is brewing. The US central bank – the Federal Reserve – is coming under huge pressure from Donald Trump to cut interest rates and restart QE. The poor state of the German economy and the threat of deflation means that on Thursday the ECB will cut the already negative interest rate for bank deposits and announce the resumption of its QE programme.
But central banks are almost out of ammo. If cutting interest rates to zero or just above was insufficient to bring about the sort of sustained recovery seen after previous recessions, then it is not obvious why a couple of quarter-point cuts will make much difference now. Likewise, expecting a bit more QE to do anything other than give a fillip to shares on Wall Street and the City is the triumph of hope over experience.
There were alternatives to the response to the 2008 crisis. Governments could have changed the mix, placing more emphasis on fiscal measures – tax cuts and spending increases – than on monetary stimulus, and then seeking to make the two arms of policy work together. They could have taken advantage of low interest rates to borrow more for the public spending programmes that would have created jobs and demand in their economies. Finance ministries could have ensured that QE contributed to the long-term good of the economy – the environment, for example – if they had issued bonds and instructed central banks to buy them.
This sort of approach does, though, involve breaking one of the big taboos of the modern age: the belief that monetary and fiscal policy should be kept separate and that central banks should be allowed to operate free from political interference.
The consensus blossomed during the good times of the late 1990s and early 2000s, and survived the financial crisis of 2008 . But challenges from both the left and right, especially in the US, suggest that it won’t survive the next one. Trump says the Fed has damaged the economy by pushing up interest rates too quickly. Bernie Sanders says the US central bank has been captured by Wall Street. Both arguments are correct. It is a good thing that central bank independence is finally coming under scrutiny.
For a start, it has become clear that the notion of depoliticised central bankers is a myth. When he was governor of the Bank of England, Mervyn King lectured the government about the need for austerity while jealously guarding the right to set interest rates free from any political interference. Likewise, rarely does Mario Draghi, the outgoing president of the ECB, hold a press conference without urging eurozone countries to reduce budget deficits and embrace structural reform.
Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay. Employers prefer higher unemployment because it keeps wages down and profits up. Central banks side with capital over labour because they accept the neoliberal idea that there is a point – the natural rate of unemployment – beyond which stimulating the economy merely leads to higher inflation. They are, Palley says, institutions “favoured by capital to guard against the danger that a democracy may choose economic policies capital dislikes”.
Until now, monetary policy has been deemed too important to be left to politicians. When the next crisis arrives it will become too political an issue to be left to unelected technocrats. If that crisis is to be tackled effectively, the age of independent central banks will have to come to an end.
Thursday 15 November 2018
Ease of Doing Business - How Dena Bank, CIBIL Harass Ordinary Indians
By Giffenman
India may have climbed the global scale in 'Ease of Doing Business'. But this letter below shows the extent of harassment a small Gujarati businessman, domiciled in India, faced from Dena Bank and CIBIL as he tried to run his business and educate his daughter with a non delivered educational loan.
The case in a nutshell:
Vipul Vora took a business loan from Dena Bank which was repaid in full. However Dena Bank held on to the ownership documents.
Vipul Vora's daughter took an educational loan to be paid directly to the college his daughter was studying in abroad. The loan never reached the daughter's college. Dena Bank insisted that Vipul Vora should repay the non-delivered loan amount. To coerce him to pay up the educational loan Dena Bank impounded the business documents used as collateral in the earlier business loan.
CIBIL has used the Dena Bank's version of events to lower Vipul Vora's credit rating causing him great monetary and emotional distress.
Vipul Vora has been paralysed as he cannot grow his business without the impounded ownership documents and with no hope of the case being easily resolved.
------ Copy of Legal Notice sent by Vipul Vora to Dena Bank and CIBIL (Sic)
RVD/OG/MD ___October, 2018
To,
1. The Chief Manager,
Dena Bank,
Vashi Sector 19 Branch,
K-34, Masala Market,
APMC Market – II, Vashi,
Navi Mumbai 400705.
2. The Zonal Manager
Dena Bank, Zonal Office,
272 Amrut Industries, Gokhale Road
Opposite Gokul Society Bus Stop,
Gokul Nagar, Thane West 400 602
3. The General Manager
Mr. Sanjeev Dhobal
Dena Bank, 5th Floor,
C-10, Dena Bank Building,
G block, Band BKC, Bandra East,
Mumbai 400 051.
4. TransUnion CIBIL Limited
(Formerly: Credit Information Bureau (India) Limited)
One Indiabulls Centre, Tower 2A, 19th Floor, Senapati Bapat Marg, Elphinstone Road, Mumbai - 400 013.
Dear Sirs,
Sub: Deficiency in service, loss of reputation and claim for damages
----------------------------------------------------------------------------
We are concerned for our clients Mrs. Jagruti Vipul Vora and Mr. Vipul Vora and Ms. Shayali Vora, all residing at E-38, 1:2 Shanti Niketan CHS, Sector 4, Nerul – 400 706, who have instructed us to address to you as under:-
1. Our clients state as under:
a. Our client Ms. Shayali Vora was at all material times in or about 2010 to 2016 pursuing her M.B.B.S. course through Crimea State Medical University, Ukraine[Till 2014] and then Federal Medical University, Russia. (“the University”);
b. On account of annexation of Crimea by Russia in or about 2014, Crimea came under the control of Russia and consequently the University was at that material time then on May 2016 is governed by the laws of Russia;
c. Our client Ms. Shayali Vora received an invitation letter from the Crimea State Medical University for completing her 12 semester MBBS course with the Crimea State Medical University on or about September 2010;
d. Our client Ms. Shayali Vora(“the Borrower”) applied to you No. 1 for granting her an Education Loan of Rs.1,95,000/- (Rupees One Lakh Ninety Five Thousand Only)in order to enable her to complete her final semester at the Federal Medical University, Russia which was then governed by the laws of Russia;
e. The Borrower’s application for an Educational Loan was sanctioned by you No. 1 under the DENA VIDYALAXMI LOAN SCHEME. The Borrower had to leave for the University on September 2015 and you No. 1 insisted that in order to pay the amount of the Educational Loan to the University, the Borrower would have to execute a DENA VIDYALAXMI LOAN AGREEMENT (“Loan Agreement”) with you. You handed over a printed standard form of the Loan Agreement to the Borrower, who only signed without filling in the blanks in the Loan Agreement including the date of the Loan Agreement. Our client Mr. Vipul Vora handed over to you the signed copy of the Loan Agreement and your representatives promised Mr. Vipul Vora that they would fill in the blanks in the Loan Agreement in terms of the application of the Borrower and thereafter provide a copy of it to our clients. The Borrower was required to report to the University on or before 15th September 2015 and therefore she left India on 12th September 2015;
f. After constant follow up, your representatives provided to our client Mr. Vipul Vora copy of the Loan Agreement. Our client Mr. Vipul Vora noticed that the date of the Loan Agreement signed by the Borrower was 6th December 2015. Our clients were shocked and surprised to see that your representatives had inserted a sum of Rs.2,35,000/- instead of Rs.1,95,000/- as the amount of loan sought by the Borrower in the Loan Agreement signed by the Borrower. Our client Mr. Vipul Vora immediately brought the above mistake of the amount in the Loan Agreement to the notice of your representatives, however, your representatives informed him that they could not lend a small amount for educational loan to the Borrower as it was not commercially feasible. Our clients required the loan amount and in view thereof did not raise any issue at that time;
g. Our clients submit that while applying for the Education Loan, the Borrower was asked to fill A2 Form, as per Crimea State Medical University as indicated in their invitation letter and the Borrower pointed it out to the representatives of you No. 1., Before filling Form A2, our clients informed the representatives of you No. 1 about the sanctions by the USA against Russia and Crimea territories under the control of Russia which included non-transfer of US dollars to the above mentioned Region. Our clients also informed your representative No. 1 that Crimea, Ukraine where the University was located is under the control of Russia and that payment could not be made in US dollars. In view of the aforesaid our clients requested you No. 1 to transfer the Educational Loan Amount either in Russian currency or Indian currency to the Borrower’s savings account so that the Borrower can withdraw the same from ATM in Russia Main Land and pay her fees;
h. On and after 4th January 2016, our client Mr. Vipul Vora enquired with you No. 1 regarding the status of the transfer of the loan amount to the University. Your representative No. 1 informed him that the loan amount is being processed. Finally, in or about 5th January 2016, your representatives No. 1 informed our client Mr. Vipul Vora that they had Processed the Transfer through their associate Bank Citibank to pay the loan amount to the University in US Dollars through Bank of New York Mellon, New York[ Diversion of Funds other then the intended Purpose as per Indian Law, Clause 9 of Agreement, as loan was applied as per the Indian Laws] and that in terms of the international process of the transfer of US Dollars the loan amount required the License of the OFAC, US Treasury, USA. Bank of New York Mellon had stopped the transfer to the University under the instructions of OFAC Treasury, USA on account of the sanctions by USA against Russia and made Fixed Deposit in the name Of DENA BANK, Sender Bank.;
i. Our client Mr. Vipul Vora was shocked and surprised at the aforesaid grossly negligent conduct of your representative No. 1 (which they termed it as erroneous). He asked your representatives No. 1 about the manner in which you No. 1 intended to get back the loan amount to which you replied that you were considering applying for a license to OFAC Treasury, USA to get the refund of the loan amount. It has been over 2years 9 months since the grossly negligent transfer of public funds of Bank Loan by your representatives No. 1 to the USA, but you have not taken any steps to get the loan amount back, save and except to harass our clients as stated in sub-paragraph k. below;
j. In view of the aforesaid shocking disclosure made by you No. 1 about the non-transfer of the loan amount to the University, our clients had no option but to pay to the University from their own funds after taking a gold loan from Greater Bank;
k. Instead of obtaining refund from the USA of the loan amount negligently transferred by you No. 1, your representatives No. 1 started demanding payment of the loan amount from our client. Our clients informed you No. 1 that they were not liable to pay to you the loan amount, since the Loan Agreement was not honoured by you by paying the loan amount to the University[Agreement Clause No.8B], however, your representatives kept on harassing our clients. Your representatives No. 1 illegally and unauthorized withheld the securities provided in a Term Loan Account granted by you No. 1 to a Partnership Firm “Sai Pharma” (“the Firm”) in which our client Mr. Vipul Vora was a partner even though the Term Loan had been fully paid by the Firm;
l. On account of your illegal tactics aforesaid, the Borrower informed to OFAC Treasury, USA, for the release License[ Application made by Ms. Shayali Vora on 7th January 2016] to release the loan amount along with the Swift Report and also bought to the notice of OFAC Treasury, USA the above facts, which in turn led to conversion of the loan amount into commercial category and the License application was rejected;
m. After constant follow up and requests by our client Mr. Vipul Vora to your representatives, you No.1 informed our clients that you had in June 2018 finally applied to OFAC Treasury, USA, for a License for release of the loan amount from Bank of New York Mellon, USA. You also returned the securities of the Firm to the Firm which had been illegally and unauthorized withheld along with the funds in Sai Pharma and Vipul Vora’s Account, which were closed on 6th June 2017 by you No. 1;
n. Not satisfied with the shocking ordeal you had put our clients to, you No.1informed No.4that our clients were loan defaulters and consequently No. 4 even with the knowledge[By personal Visits to the Office and Mail Communications] of the above events have lowered the credit ratings of our clients. The aforesaid conduct of you No. 1 was malicious and made with the deliberate intention to harm the financial credit worthiness of our clients with No. 4 as also their reputation in society;
o. Our clients state that you No. 1 were grossly negligent in transferring the loan amount by US Dollars. As a banker you were aware or ought to have been aware that US Dollars could not have been transferred to the University on account of the sanctions of the USA against Russia. You were informed by our clients of the fact that US Dollars could not be transferred to the University and yet you did not pay heed to the warning and transferred the loan amount by US Dollars.
p. Our clients state that for about two years you did not take any steps to obtain refund of the loan amount from the USA. Your conduct is blameworthy in the sense that you were unconcerned about the public money of Indian Bank lying in the USA.
q. Our clients state that you illegally and unauthorised withheld the securities of the Firm (in which our client Mr. Vipul Vora is a partner) in spite of the fact that all the payments under the Term Loan granted by you to the Firm had been made to you and the account was clean and clear, in order to pressurise our clients to pay to you the loan amount even though you had not performed your promise under the Loan Agreement.
Our clients state that you No. 1 have defamed them by giving wrong and false information to No. 4 about our clients being loan defaulters and due to which No. 4 has lowered the credit ratings of our clients and Transmitted Electronically wrong information to Various Financial Institutions;
s. Our clients state that you No. 1 are a public sector bank. Public money is parked in your bank. You are required to utilize public money deposited with you for the welfare of society. You are required to act with utmost care and caution in carrying on your duties. Last but not the least, you required to act honestly and with integrity in dealing with your account holders, creditors including your borrowers and other stake holders. Our clients further submit that it has pained them immensely to be associated with you not to mention the losses, mental agony and harassment that have been caused to them.
2. In the circumstances aforesaid:-
(a) Our clients hereby request you No. 4, to remove the information provided to you No. 4 by No. 1 in respect of our clients’ being “loan defaulters” of No. 1, from your website and publish the correct CIBIL ratings of our clients on your website and, if you so desire No. 4, our clients are prepared to provide to you any information or document with regard to the above; and
(b) Call upon you No. 1 to pay to our clients individually and to company a sum of Rs. 5,00,00,000/- for breach of contract, loss, gross negligence, defamation, mental agony and harassment among other things within 15 days from the date of receipt of this notice by you, failing which our clients shall be constrained to adopt such legal proceedings against you as they may be advised at your entire risk as to the costs and consequences, which please note.
Yours faithfully,
Malvi Ranchoddas & Co.
Partner
--------End of letter.
India may have climbed the global scale in 'Ease of Doing Business'. But this letter below shows the extent of harassment a small Gujarati businessman, domiciled in India, faced from Dena Bank and CIBIL as he tried to run his business and educate his daughter with a non delivered educational loan.
The case in a nutshell:
Vipul Vora took a business loan from Dena Bank which was repaid in full. However Dena Bank held on to the ownership documents.
Vipul Vora's daughter took an educational loan to be paid directly to the college his daughter was studying in abroad. The loan never reached the daughter's college. Dena Bank insisted that Vipul Vora should repay the non-delivered loan amount. To coerce him to pay up the educational loan Dena Bank impounded the business documents used as collateral in the earlier business loan.
CIBIL has used the Dena Bank's version of events to lower Vipul Vora's credit rating causing him great monetary and emotional distress.
Vipul Vora has been paralysed as he cannot grow his business without the impounded ownership documents and with no hope of the case being easily resolved.
------ Copy of Legal Notice sent by Vipul Vora to Dena Bank and CIBIL (Sic)
RVD/OG/MD ___October, 2018
To,
1. The Chief Manager,
Dena Bank,
Vashi Sector 19 Branch,
K-34, Masala Market,
APMC Market – II, Vashi,
Navi Mumbai 400705.
2. The Zonal Manager
Dena Bank, Zonal Office,
272 Amrut Industries, Gokhale Road
Opposite Gokul Society Bus Stop,
Gokul Nagar, Thane West 400 602
3. The General Manager
Mr. Sanjeev Dhobal
Dena Bank, 5th Floor,
C-10, Dena Bank Building,
G block, Band BKC, Bandra East,
Mumbai 400 051.
4. TransUnion CIBIL Limited
(Formerly: Credit Information Bureau (India) Limited)
One Indiabulls Centre, Tower 2A, 19th Floor, Senapati Bapat Marg, Elphinstone Road, Mumbai - 400 013.
Dear Sirs,
Sub: Deficiency in service, loss of reputation and claim for damages
----------------------------------------------------------------------------
We are concerned for our clients Mrs. Jagruti Vipul Vora and Mr. Vipul Vora and Ms. Shayali Vora, all residing at E-38, 1:2 Shanti Niketan CHS, Sector 4, Nerul – 400 706, who have instructed us to address to you as under:-
1. Our clients state as under:
a. Our client Ms. Shayali Vora was at all material times in or about 2010 to 2016 pursuing her M.B.B.S. course through Crimea State Medical University, Ukraine[Till 2014] and then Federal Medical University, Russia. (“the University”);
b. On account of annexation of Crimea by Russia in or about 2014, Crimea came under the control of Russia and consequently the University was at that material time then on May 2016 is governed by the laws of Russia;
c. Our client Ms. Shayali Vora received an invitation letter from the Crimea State Medical University for completing her 12 semester MBBS course with the Crimea State Medical University on or about September 2010;
d. Our client Ms. Shayali Vora(“the Borrower”) applied to you No. 1 for granting her an Education Loan of Rs.1,95,000/- (Rupees One Lakh Ninety Five Thousand Only)in order to enable her to complete her final semester at the Federal Medical University, Russia which was then governed by the laws of Russia;
e. The Borrower’s application for an Educational Loan was sanctioned by you No. 1 under the DENA VIDYALAXMI LOAN SCHEME. The Borrower had to leave for the University on September 2015 and you No. 1 insisted that in order to pay the amount of the Educational Loan to the University, the Borrower would have to execute a DENA VIDYALAXMI LOAN AGREEMENT (“Loan Agreement”) with you. You handed over a printed standard form of the Loan Agreement to the Borrower, who only signed without filling in the blanks in the Loan Agreement including the date of the Loan Agreement. Our client Mr. Vipul Vora handed over to you the signed copy of the Loan Agreement and your representatives promised Mr. Vipul Vora that they would fill in the blanks in the Loan Agreement in terms of the application of the Borrower and thereafter provide a copy of it to our clients. The Borrower was required to report to the University on or before 15th September 2015 and therefore she left India on 12th September 2015;
f. After constant follow up, your representatives provided to our client Mr. Vipul Vora copy of the Loan Agreement. Our client Mr. Vipul Vora noticed that the date of the Loan Agreement signed by the Borrower was 6th December 2015. Our clients were shocked and surprised to see that your representatives had inserted a sum of Rs.2,35,000/- instead of Rs.1,95,000/- as the amount of loan sought by the Borrower in the Loan Agreement signed by the Borrower. Our client Mr. Vipul Vora immediately brought the above mistake of the amount in the Loan Agreement to the notice of your representatives, however, your representatives informed him that they could not lend a small amount for educational loan to the Borrower as it was not commercially feasible. Our clients required the loan amount and in view thereof did not raise any issue at that time;
g. Our clients submit that while applying for the Education Loan, the Borrower was asked to fill A2 Form, as per Crimea State Medical University as indicated in their invitation letter and the Borrower pointed it out to the representatives of you No. 1., Before filling Form A2, our clients informed the representatives of you No. 1 about the sanctions by the USA against Russia and Crimea territories under the control of Russia which included non-transfer of US dollars to the above mentioned Region. Our clients also informed your representative No. 1 that Crimea, Ukraine where the University was located is under the control of Russia and that payment could not be made in US dollars. In view of the aforesaid our clients requested you No. 1 to transfer the Educational Loan Amount either in Russian currency or Indian currency to the Borrower’s savings account so that the Borrower can withdraw the same from ATM in Russia Main Land and pay her fees;
h. On and after 4th January 2016, our client Mr. Vipul Vora enquired with you No. 1 regarding the status of the transfer of the loan amount to the University. Your representative No. 1 informed him that the loan amount is being processed. Finally, in or about 5th January 2016, your representatives No. 1 informed our client Mr. Vipul Vora that they had Processed the Transfer through their associate Bank Citibank to pay the loan amount to the University in US Dollars through Bank of New York Mellon, New York[ Diversion of Funds other then the intended Purpose as per Indian Law, Clause 9 of Agreement, as loan was applied as per the Indian Laws] and that in terms of the international process of the transfer of US Dollars the loan amount required the License of the OFAC, US Treasury, USA. Bank of New York Mellon had stopped the transfer to the University under the instructions of OFAC Treasury, USA on account of the sanctions by USA against Russia and made Fixed Deposit in the name Of DENA BANK, Sender Bank.;
i. Our client Mr. Vipul Vora was shocked and surprised at the aforesaid grossly negligent conduct of your representative No. 1 (which they termed it as erroneous). He asked your representatives No. 1 about the manner in which you No. 1 intended to get back the loan amount to which you replied that you were considering applying for a license to OFAC Treasury, USA to get the refund of the loan amount. It has been over 2years 9 months since the grossly negligent transfer of public funds of Bank Loan by your representatives No. 1 to the USA, but you have not taken any steps to get the loan amount back, save and except to harass our clients as stated in sub-paragraph k. below;
j. In view of the aforesaid shocking disclosure made by you No. 1 about the non-transfer of the loan amount to the University, our clients had no option but to pay to the University from their own funds after taking a gold loan from Greater Bank;
k. Instead of obtaining refund from the USA of the loan amount negligently transferred by you No. 1, your representatives No. 1 started demanding payment of the loan amount from our client. Our clients informed you No. 1 that they were not liable to pay to you the loan amount, since the Loan Agreement was not honoured by you by paying the loan amount to the University[Agreement Clause No.8B], however, your representatives kept on harassing our clients. Your representatives No. 1 illegally and unauthorized withheld the securities provided in a Term Loan Account granted by you No. 1 to a Partnership Firm “Sai Pharma” (“the Firm”) in which our client Mr. Vipul Vora was a partner even though the Term Loan had been fully paid by the Firm;
l. On account of your illegal tactics aforesaid, the Borrower informed to OFAC Treasury, USA, for the release License[ Application made by Ms. Shayali Vora on 7th January 2016] to release the loan amount along with the Swift Report and also bought to the notice of OFAC Treasury, USA the above facts, which in turn led to conversion of the loan amount into commercial category and the License application was rejected;
m. After constant follow up and requests by our client Mr. Vipul Vora to your representatives, you No.1 informed our clients that you had in June 2018 finally applied to OFAC Treasury, USA, for a License for release of the loan amount from Bank of New York Mellon, USA. You also returned the securities of the Firm to the Firm which had been illegally and unauthorized withheld along with the funds in Sai Pharma and Vipul Vora’s Account, which were closed on 6th June 2017 by you No. 1;
n. Not satisfied with the shocking ordeal you had put our clients to, you No.1informed No.4that our clients were loan defaulters and consequently No. 4 even with the knowledge[By personal Visits to the Office and Mail Communications] of the above events have lowered the credit ratings of our clients. The aforesaid conduct of you No. 1 was malicious and made with the deliberate intention to harm the financial credit worthiness of our clients with No. 4 as also their reputation in society;
o. Our clients state that you No. 1 were grossly negligent in transferring the loan amount by US Dollars. As a banker you were aware or ought to have been aware that US Dollars could not have been transferred to the University on account of the sanctions of the USA against Russia. You were informed by our clients of the fact that US Dollars could not be transferred to the University and yet you did not pay heed to the warning and transferred the loan amount by US Dollars.
p. Our clients state that for about two years you did not take any steps to obtain refund of the loan amount from the USA. Your conduct is blameworthy in the sense that you were unconcerned about the public money of Indian Bank lying in the USA.
q. Our clients state that you illegally and unauthorised withheld the securities of the Firm (in which our client Mr. Vipul Vora is a partner) in spite of the fact that all the payments under the Term Loan granted by you to the Firm had been made to you and the account was clean and clear, in order to pressurise our clients to pay to you the loan amount even though you had not performed your promise under the Loan Agreement.
Our clients state that you No. 1 have defamed them by giving wrong and false information to No. 4 about our clients being loan defaulters and due to which No. 4 has lowered the credit ratings of our clients and Transmitted Electronically wrong information to Various Financial Institutions;
s. Our clients state that you No. 1 are a public sector bank. Public money is parked in your bank. You are required to utilize public money deposited with you for the welfare of society. You are required to act with utmost care and caution in carrying on your duties. Last but not the least, you required to act honestly and with integrity in dealing with your account holders, creditors including your borrowers and other stake holders. Our clients further submit that it has pained them immensely to be associated with you not to mention the losses, mental agony and harassment that have been caused to them.
2. In the circumstances aforesaid:-
(a) Our clients hereby request you No. 4, to remove the information provided to you No. 4 by No. 1 in respect of our clients’ being “loan defaulters” of No. 1, from your website and publish the correct CIBIL ratings of our clients on your website and, if you so desire No. 4, our clients are prepared to provide to you any information or document with regard to the above; and
(b) Call upon you No. 1 to pay to our clients individually and to company a sum of Rs. 5,00,00,000/- for breach of contract, loss, gross negligence, defamation, mental agony and harassment among other things within 15 days from the date of receipt of this notice by you, failing which our clients shall be constrained to adopt such legal proceedings against you as they may be advised at your entire risk as to the costs and consequences, which please note.
Yours faithfully,
Malvi Ranchoddas & Co.
Partner
--------End of letter.
Thursday 1 November 2018
Big Business Strikes Again, this Time Through Modi Government's Assault on RBI
The unprecedented invocation of Section 7 is not in enlightened public interest – it is a brazen move to force the RBI to open bank funding to desperate corporates.
Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui
M K Venu in The Wire.In
Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui
The business cronies of this government have done it again. And they manage such coups each time with unfailing precision. This time, the Centre has taken the unprecedented action of sending a direction to Reserve Bank of India (RBI) under Section 7 of the RBI Act, the first step in a process of virtually issuing a diktat that the central bank must do whatever is necessary to resolve the potential credit freeze in the non-banking finance sector and relax norms for lending to small business.
The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.
I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.
But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.
It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.
Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports
These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?
These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.
Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.
Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret
So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.
RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.
There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.
If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.
The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.
I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.
But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.
It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.
Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports
These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?
These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.
Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.
Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret
So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.
RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.
There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.
If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.
Thursday 22 September 2016
Is the Indian economy on Autopilot?
Pulapre Balakrishnan in The Hindu
The Modi government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario
As the Narendra Modi government inches towards its halfway mark, its economic philosophy stands revealed. This appears to consist of aiming at some ideal institutional architecture while leaving economic forces to play out on their own. The criterion of macroeconomic stability, defined mainly by inflation kept within a range, completes the picture. Underpinning such an approach is the premise that the potential of the economy, reflecting the chosen acts of private agents, not only cannot be improved upon by the government but its realisation could actually be stymied by intervention. This is a well-known position in the canon of Anglo-American economics tending towards the view that market outcomes are the best. The maxim ‘minimum government is maximum governance’ could legitimately claim to be its progeny.
Life in the slow lane
How, it may be asked, has this philosophy served the economy? We could start with growth. Since May 2014, growth has accelerated but at a much slower rate than that it already had commenced upon in 2013-14. India today is the world’s fastest growing economy but this we owe to the fact that China has slowed more than India has. India has not exactly surged to number one position. But more importantly, the government has not so far been able to achieve the substantial quickening of the economy that Mr. Modi had promised at election time. The government has on occasion extolled its record in maintaining macroeconomic stability. This is indeed correct. Inflation has declined but this only reflects a downward trend that had started in 2013-14. The government would also no doubt like to take credit for sticking to the pre-announced fiscal consolidation path. The fiscal deficit has steadily declined since May 2014. The Finance Minister’s public statements suggest that he treats this as a significant achievement of his government. Actually, it typifies the search for the ideal architecture without sufficient concern for outcomes. The truth is that this government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario. The promised resurgence has not materialised.
It is with respect to investment that the government’s record is uninspiring. Far from having been able to instil confidence among private investors, the government has been unable to stem a decline in capital formation — as a share of output — in progress for at least half a decade. On its part the government takes recourse to the figures on foreign direct investment (FDI) to signal the effectiveness of its policies. Data from the Department of Industrial Policy and Promotion show that in the year just passed, the economy attracted increased FDI up to 29 per cent in dollar terms. While this is impressive, and to be welcomed, it is important to have a sense of what it amounts to. In the year 2014-15, FDI amounted to a mere 4 per cent of total capital formation in India. So, while FDI is to be encouraged, its ability to make a significant contribution to growth is limited. On the other hand, over 75 per cent of capital formation is undertaken by the domestic private sector. Any significant change in the investment scenario would depend upon the actions of this segment.
Sticking to fiscal consolidation
Right now private investment is very likely being restrained by the weak balance sheet of firms. The flip side of this is the high level of non-performing assets (NPAs) of the public commercial banks. Forcing these banks to lend would be poor policy. But it is not clear whether everything that can be done to lower the lending rate is being done. After all, consumer price index (CPI) inflation, the Reserve Bank of India’s (RBI) preferred inflation index, is trending downward and there is a case for lowering lending rates. But the RBI has now been put into the straitjacket of inflation targeting and can no longer respond to considerations of output. This leaves fiscal policy as the only instrument with the government.
The government, however, is reluctant to use it to increase aggregate demand for fear of deviating from its fiscal consolidation path. It is of course possible to step up public investment by trimming subsidies. Here the National Democratic Alliance government’s approach is cravenly political, and no different from that of its predecessor, the United Progressive Alliance. It is reluctant to be seen as cutting subsidies even when it is clear that a rupee-for-rupee swap in certain subsidies for public capital formation is likely to be beneficial for both growth and welfare. The fertilizer subsidy presents the most obvious instance. It has done little to stem the rise in food prices while continuing to take up precious fiscal space. There is a strong case for reviewing its continuation, at least in the present form. Well-designed empirical research alone can settle the matter of its desirability, and one hopes the government will provide this in time for its third annual Budget.
Looking for inspiration
An object of this government’s admiration has been revealed to us in the choice of speaker for the first NITI Aayog Lecture on Transforming India. It chose Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore who was earlier its Finance Minister for close to a decade. A trained economist with considerable international exposure, Mr. Shanmugaratnam typifies the Singapore model, which recognises the value of high human capital in its leadership, something that India has not seen since the time of Jawaharlal Nehru. Prime Minister Modi is right to have invited this global leader to participate in a brainstorming on how to transform India, thus drawing much-needed attention to the achievements of Singapore. Though its cultural policies may not be to everyone’s taste, the economic transformation that this tiny state has so quickly wrought is most impressive indeed. There is an astounding presence there of public capital in the form of infrastructure, the most egregious of which is public housing which hosts over 80 per cent of the population. Along with its approach to political freedoms, Singapore’s record is closer to that of socialist planning rather than free-market capitalism. Its government has not hesitated to intervene in the economy but its interventions have been made with a finesse that has yielded substantial returns. It is ironic that a government that had so ceremoniously replaced the Planning Commission must simultaneously seek clues from the history of a country transformed by economic planning.
There is one specific area in which our own government may learn from the Singapore experience. The government there had instituted a provident fund to which all workers and employees have had to contribute. These contributions ensured a rise in the saving rate which in turn was a source of funding for public investment. In the muddled discourse on fiscal policy in India today, the reigning argument appears to be that a fixed private saving rate sets the limit for the attainable fiscal deficit. This overlooks the possibility of raising the private saving rate, which is precisely what the Singapore government had done early in its history, enabling it to achieve a scale of public capital formation that truly distinguishes it from India. All indications are that the present government of India is striving to replicate Singapore’s institutional architecture, as in laws governing business, rather than the transformative role of public investment that turned a fishing village into a global destination for FDI. What other conclusion can be drawn from the fact that in the Budget for 2016-17 the increase in the allocation for capital expenditure amounted to a mere 2.3 per cent, with inflation running at around 4 per cent per annum?
Bleak agricultural landscape
A sector that is unlikely to be well served by the philosophy than an economy left to its own devices will achieve its potential is agriculture. Three of the past five years in India have been years of poor agricultural performance, reflected in persistent food price inflation. We are very likely witnessing creeping climate change with direct consequences for production. The advisory from most funds in the financial sector is that the economic outlook this year will depend upon the monsoon. It is surprising that the imperative of drought-proofing an increasingly vulnerable Indian agriculture hardly figures in the public discourse on the economy when it is of no less importance than rolling out the Goods and Services Tax. Nothing short of a transformation akin to the Green Revolution can achieve this, and the States would have to be on board. The present government has had little to say on the matter so far. By disbanding the Planning Commission, the Centre has lost a long-standing conduit to the States whose planning boards did have at least a titular connection to the former.
The Modi government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario
As the Narendra Modi government inches towards its halfway mark, its economic philosophy stands revealed. This appears to consist of aiming at some ideal institutional architecture while leaving economic forces to play out on their own. The criterion of macroeconomic stability, defined mainly by inflation kept within a range, completes the picture. Underpinning such an approach is the premise that the potential of the economy, reflecting the chosen acts of private agents, not only cannot be improved upon by the government but its realisation could actually be stymied by intervention. This is a well-known position in the canon of Anglo-American economics tending towards the view that market outcomes are the best. The maxim ‘minimum government is maximum governance’ could legitimately claim to be its progeny.
Life in the slow lane
How, it may be asked, has this philosophy served the economy? We could start with growth. Since May 2014, growth has accelerated but at a much slower rate than that it already had commenced upon in 2013-14. India today is the world’s fastest growing economy but this we owe to the fact that China has slowed more than India has. India has not exactly surged to number one position. But more importantly, the government has not so far been able to achieve the substantial quickening of the economy that Mr. Modi had promised at election time. The government has on occasion extolled its record in maintaining macroeconomic stability. This is indeed correct. Inflation has declined but this only reflects a downward trend that had started in 2013-14. The government would also no doubt like to take credit for sticking to the pre-announced fiscal consolidation path. The fiscal deficit has steadily declined since May 2014. The Finance Minister’s public statements suggest that he treats this as a significant achievement of his government. Actually, it typifies the search for the ideal architecture without sufficient concern for outcomes. The truth is that this government had inherited an economy with quite rapidly accelerating growth and steadily declining inflation. It has barely managed to maintain this scenario. The promised resurgence has not materialised.
It is with respect to investment that the government’s record is uninspiring. Far from having been able to instil confidence among private investors, the government has been unable to stem a decline in capital formation — as a share of output — in progress for at least half a decade. On its part the government takes recourse to the figures on foreign direct investment (FDI) to signal the effectiveness of its policies. Data from the Department of Industrial Policy and Promotion show that in the year just passed, the economy attracted increased FDI up to 29 per cent in dollar terms. While this is impressive, and to be welcomed, it is important to have a sense of what it amounts to. In the year 2014-15, FDI amounted to a mere 4 per cent of total capital formation in India. So, while FDI is to be encouraged, its ability to make a significant contribution to growth is limited. On the other hand, over 75 per cent of capital formation is undertaken by the domestic private sector. Any significant change in the investment scenario would depend upon the actions of this segment.
Sticking to fiscal consolidation
Right now private investment is very likely being restrained by the weak balance sheet of firms. The flip side of this is the high level of non-performing assets (NPAs) of the public commercial banks. Forcing these banks to lend would be poor policy. But it is not clear whether everything that can be done to lower the lending rate is being done. After all, consumer price index (CPI) inflation, the Reserve Bank of India’s (RBI) preferred inflation index, is trending downward and there is a case for lowering lending rates. But the RBI has now been put into the straitjacket of inflation targeting and can no longer respond to considerations of output. This leaves fiscal policy as the only instrument with the government.
The government, however, is reluctant to use it to increase aggregate demand for fear of deviating from its fiscal consolidation path. It is of course possible to step up public investment by trimming subsidies. Here the National Democratic Alliance government’s approach is cravenly political, and no different from that of its predecessor, the United Progressive Alliance. It is reluctant to be seen as cutting subsidies even when it is clear that a rupee-for-rupee swap in certain subsidies for public capital formation is likely to be beneficial for both growth and welfare. The fertilizer subsidy presents the most obvious instance. It has done little to stem the rise in food prices while continuing to take up precious fiscal space. There is a strong case for reviewing its continuation, at least in the present form. Well-designed empirical research alone can settle the matter of its desirability, and one hopes the government will provide this in time for its third annual Budget.
Looking for inspiration
An object of this government’s admiration has been revealed to us in the choice of speaker for the first NITI Aayog Lecture on Transforming India. It chose Tharman Shanmugaratnam, the Deputy Prime Minister of Singapore who was earlier its Finance Minister for close to a decade. A trained economist with considerable international exposure, Mr. Shanmugaratnam typifies the Singapore model, which recognises the value of high human capital in its leadership, something that India has not seen since the time of Jawaharlal Nehru. Prime Minister Modi is right to have invited this global leader to participate in a brainstorming on how to transform India, thus drawing much-needed attention to the achievements of Singapore. Though its cultural policies may not be to everyone’s taste, the economic transformation that this tiny state has so quickly wrought is most impressive indeed. There is an astounding presence there of public capital in the form of infrastructure, the most egregious of which is public housing which hosts over 80 per cent of the population. Along with its approach to political freedoms, Singapore’s record is closer to that of socialist planning rather than free-market capitalism. Its government has not hesitated to intervene in the economy but its interventions have been made with a finesse that has yielded substantial returns. It is ironic that a government that had so ceremoniously replaced the Planning Commission must simultaneously seek clues from the history of a country transformed by economic planning.
There is one specific area in which our own government may learn from the Singapore experience. The government there had instituted a provident fund to which all workers and employees have had to contribute. These contributions ensured a rise in the saving rate which in turn was a source of funding for public investment. In the muddled discourse on fiscal policy in India today, the reigning argument appears to be that a fixed private saving rate sets the limit for the attainable fiscal deficit. This overlooks the possibility of raising the private saving rate, which is precisely what the Singapore government had done early in its history, enabling it to achieve a scale of public capital formation that truly distinguishes it from India. All indications are that the present government of India is striving to replicate Singapore’s institutional architecture, as in laws governing business, rather than the transformative role of public investment that turned a fishing village into a global destination for FDI. What other conclusion can be drawn from the fact that in the Budget for 2016-17 the increase in the allocation for capital expenditure amounted to a mere 2.3 per cent, with inflation running at around 4 per cent per annum?
Bleak agricultural landscape
A sector that is unlikely to be well served by the philosophy than an economy left to its own devices will achieve its potential is agriculture. Three of the past five years in India have been years of poor agricultural performance, reflected in persistent food price inflation. We are very likely witnessing creeping climate change with direct consequences for production. The advisory from most funds in the financial sector is that the economic outlook this year will depend upon the monsoon. It is surprising that the imperative of drought-proofing an increasingly vulnerable Indian agriculture hardly figures in the public discourse on the economy when it is of no less importance than rolling out the Goods and Services Tax. Nothing short of a transformation akin to the Green Revolution can achieve this, and the States would have to be on board. The present government has had little to say on the matter so far. By disbanding the Planning Commission, the Centre has lost a long-standing conduit to the States whose planning boards did have at least a titular connection to the former.
Thursday 23 June 2016
The Raghuram Rajan syndrome
Ashok V Desai in The Hindu
The other remarkable fact about this incident is the sympathy this man has evoked in the media. Suppose Deepika Padukone declared tomorrow that she was retreating to Madeira to grow camellias; many might like to join her, but I am not sure there would be such lamentation. Mr. Rajan is going to retreat to the shores of Lake Michigan to grow ideas. It is an enviable life for an economist; no one need feel sorry for him. True, Mr. Rajan looks enviably winsome; I do not think anyone else in the government comes anywhere near him. But that is not the reason behind the outbreak of grief; it is that he is by common consensus the best man for the job, and even people who never gave a thought to the exchange rate think that it is a bad idea that he should have been eased out in such an unceremonious manner.
The outrage following Raghuram Rajan’s decision to leave the RBI in September reflects the degree to which India’s politicians have turned civil servants into note-takers.
These are exciting times — and not just for economists. Raghuram Rajan is just governor of the Reserve Bank of India — a satrap sent by the Badshahi of Delhi to rule a colony on the western seashore. It has been doing this for 80 years. Getting rid of a minion, putting another in his place — this game of patronage is being played all the time. There are governors for 29 States and seven Union Territories as well, most of them men and women of little distinction; they are installed in ornate mansions and then removed every once in a while, and no one gives it a thought. This governor, perched in a skyscraper looking out on the Bombay harbour, he has not even been dismissed. All he has said is that he does not want to be reappointed. The entire media have gone crazy about his self-abnegation.
Why the grief?
The other remarkable fact about this incident is the sympathy this man has evoked in the media. Suppose Deepika Padukone declared tomorrow that she was retreating to Madeira to grow camellias; many might like to join her, but I am not sure there would be such lamentation. Mr. Rajan is going to retreat to the shores of Lake Michigan to grow ideas. It is an enviable life for an economist; no one need feel sorry for him. True, Mr. Rajan looks enviably winsome; I do not think anyone else in the government comes anywhere near him. But that is not the reason behind the outbreak of grief; it is that he is by common consensus the best man for the job, and even people who never gave a thought to the exchange rate think that it is a bad idea that he should have been eased out in such an unceremonious manner.
But then, he is being eased out by luminaries whom the people of this country gave a massive majority; if they trusted these politicians only two years ago to rule them wisely, why can they doubt that their representatives have acted in their best interests? For one thing, people do not elect rulers to think for them; they only create institutions and procedures which permit rulers to take decisions when there are different opinions. It is common amongst rulers, especially inexperienced ones, to think that an electoral victory was a vote for their wisdom. But even in a democracy, a majority vote is the last resort. Democratic institutions are mechanisms of consultation and debate; they are intended to give voice to reason.
Mr. Rajan’s decision to leave is just one instance of the breakdown of this mechanism of consultation. Admittedly, he has been expressing opinions that do not fall strictly within the purview of monetary policy and can be taken to be critical of government. Free expression too is a part of democratic government. It happens that past governors of the Reserve Bank have been economical in resorting to free expression. Most of them spent their working lives serving ministers silently; by the time they came to Mint Street, most of them had lost the art of free expression, and those who retained it in some measure thought it irreligious to venture beyond the most conventional and boring statements. The sensation that Mr. Rajan has caused is more a reflection on the way politicians have turned civil servants into slaves. All democracies are governments in the making. In theory, the discretion of those in power is constrained by propriety as much as by law. But there is no foolproof mechanism for drawing the line between discretion and propriety. The conventions in this country are so fragile that propriety is overwhelmed by impunity.
Central bank vs Finance Ministry
The conflict between political discretion and economic circumspection sharpened in the last years of Mr. Rajan’s tenure. Politicians in power tend everywhere to be expansionist; they would prefer to spend more and borrow without interest. If they do so without restraint, the country can have inflation which, if not controlled, can turn into hyperinflation. In a world of open economies, excessive spending by governments can also result in payments problems. This is why, in recent decades, better-run countries (Editor's comment - which one?) have freed central banks from finance ministries and given them power to control money supply, influence interest rates and regulate financial markets.
The conflict between political discretion and economic circumspection sharpened in the last years of Mr. Rajan’s tenure. Politicians in power tend everywhere to be expansionist; they would prefer to spend more and borrow without interest. If they do so without restraint, the country can have inflation which, if not controlled, can turn into hyperinflation. In a world of open economies, excessive spending by governments can also result in payments problems. This is why, in recent decades, better-run countries (Editor's comment - which one?) have freed central banks from finance ministries and given them power to control money supply, influence interest rates and regulate financial markets.
That power was not used in this country when governors were sent from Delhi to the Reserve Bank. They were too subservient to finance ministers. As a result, we had a payments crisis at least once a decade; and we had chronic inflation. When I was taken into the Finance Ministry in 1991, I was shocked to see how much power we had, and how casually we exercised it. We transferred some of the powers to the Reserve Bank and Securities and Exchange Board of India, and tried to exercise self-control in fiscal management. It did not work immediately. Finance ministers were amateurs; they took some years to learn the ropes, by which time they were often defeated or removed and replaced by new ones. But slowly, under the long rule of Manmohan Singh, conventions began to take shape — including induction of outside intellectuals in government. I was the first. Manmohan Singh readily accepted invitations to academia, and knew many academics. So his government had no difficulty in attracting intellectuals into the government. Mr. Rajan was one of them. Manmohan Singh heard him when he went to inaugurate a conference in Neemrana, liked what he saw and heard, and lured Mr. Rajan into government.
Return to nativism
Not surprisingly, no leader of the Bharatiya Janata Party has such rapport with academics and intellectuals. Its leaders believe that knowledge is hidden in ancient Hindu scriptures. More important, they do not believe that knowledge emerges and grows through contention of ideas and testing them against facts. After coming to power, the party’s new appointees have tried to replace the long tradition of contention with a new one of indigenous faith. (Editor's comment - Market Economics is also faith based). Mr. Rajan is a worshipper of a foreign economic faith. He turned the Reserve Bank into a temple of western-style independent monetary policy. Monetary policy must be retrieved from the heretic, and be brought back into the ideological pantheon. Mr. Rajan would not be handled roughly like Kanhaiya Kumar, but sedition will be dealt with without mercy.
Not surprisingly, no leader of the Bharatiya Janata Party has such rapport with academics and intellectuals. Its leaders believe that knowledge is hidden in ancient Hindu scriptures. More important, they do not believe that knowledge emerges and grows through contention of ideas and testing them against facts. After coming to power, the party’s new appointees have tried to replace the long tradition of contention with a new one of indigenous faith. (Editor's comment - Market Economics is also faith based). Mr. Rajan is a worshipper of a foreign economic faith. He turned the Reserve Bank into a temple of western-style independent monetary policy. Monetary policy must be retrieved from the heretic, and be brought back into the ideological pantheon. Mr. Rajan would not be handled roughly like Kanhaiya Kumar, but sedition will be dealt with without mercy.
But — what will be the new monetary policy? It is too early to ask that. The shastra of monetary policy, like all shastras, has been suppressed by agents of the western civilisation. It will take some time to be rediscovered and reinvented. It is not possible at this moment to appoint a monetary mahant. What will be done, however, is to appoint someone with the right faith, who will work in harmony with the holy powers in Delhi. Everyone will remember the victory Arun Jaitley declared in March in the nationalism debate. The monetary policy debate too will be won just as easily, without argument, contention or persuasion.
This is not the first time faith has triumphed. It did so once before, in the 1950s; dissenters were thrown out of the government, and the nation progressed on a planned path — to the famine and payments crisis of 1966. This time, though, the exit will not be so straightforward; the economy is doing too well.
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