The perils of Montek-Aiyar economic policies

The perils of Montek-Aiyar economic policies

By M.D. Nalapat | 17 July, 2011
Montek Singh Ahluwalia (R) and former finance secretary Ashok Chawla during a book launch in New Delhi on Monday. PTI

Consider the policy prescriptions of those fixtures of Lutyens' Delhi, Montek Singh Ahluwalia or Swaminathan Aiyar. India's equivalent of the Washington Beltway has long had an unshakeable confidence in the advice given to them by policymakers in the US. In 1966, L.K. Jha persuaded Indira Gandhi to go through with a savage devaluation of the rupee. In common with other former, present and future governors to date of the Reserve Bank of India, Jha believed that the wisest course for India to follow was to accept and implement any prescription suggested by the US and its key European allies. He brushed aside the reality of inflexibility in imports and the absence of a large-scale private sector that could ramp up exports after a devaluation.

All that Indira Gandhi "achieved" in 1966 was to begin the process of debauching of the rupee that has led by 2011 of ten times more rupees being needed to buy a dollar than was the case pre-Jha.

Luckily for those obsessed with the race between the Elephant and the Dragon, those now in charge of finances in China seem no different from India in its belief in those of its citizens who, through study and work, have been steeped in the interests and attitudes of the US and its major European allies. In Beijing, the one sure path to progress within the bureaucracy is a degree from a prestigious US or European university, which is why so many children of Communist Party bigwigs head there for study and work. These followers of what may be termed the Montek-Aiyar line of fealty to "suggestions from afar" have ensured that almost all of China's immense trade surplus now rots as dollar and euro deposits, rather than most of it getting spent in picking up physical and other assets in markets of the future in Africa, South America and Asia.

By its policy of placing its financial future in the hands of US-EU bankers, China has followed the Arab world, who too have sunk almost all their oil wealth in institutions headquartered in those locations.

The Chinese Central bank has followed the Reserve Bank of India (RBI) in regularly raising interest rates on loans and in cutting back credit to the private sector. As a consequence, both countries may be on the cusp of major slowdowns that would bring their rates of growth closer to the anaemic figures of Europe and the US, in both of which a policy of denial appears to be entrenched. When some rating agencies — who have since their inception helped through their inaccuracy to give an unmerited advantage to developed rather than emerging economies — dared to point out that finances in Europe and the US were less than robust, they were met with blasts of rage from Brussels and Washington. Today, EU finances approximate a confidence trick, designed to lure votaries of Montek-Aiyar policies into pouring their surpluses down the limitless hole that is the Eurozone banking system.

Dropcap OnThat people from India have over a trillion dollars of financial assets held abroad is established. Given the situation facing financial institutions in the US and the EU, it would make sense to bring such funds back to India. A government less committed than the UPA to the welfare of US-EU financial institutions (at the cost of its own people) would have made it possible for this to be done, most likely through a one-time amnesty. However, as in China, decision-makers here have been trained through education and experience to consider the interests of US-EU institutions, rather than their own. As a consequence, what is likely is that such funds will remain where they are, and melt away in the next crash.

In the absence of an amnesty, the best course would be vigorous pursuit of those secreting funds abroad. Sadly, the Union Finance Ministry and its agencies seem incapable of other than cosmetic gestures to get back such funds. The so-called "High Level Committee into Black Money" comprises the same officials who for decades have comprehensively failed to even scratch the surface of the problem. Like the proverbial dog in the manger, those in power seem unwilling to do what is needed, even while they spend their energy fending off challenges to their monopoly over policy and its implementation. The recent Cabinet reshuffle has ensured that Vilasrao Deshmukh will be joined in the government by Rajiv Shukla. The two together should certainly be capable of rooting out Black Money, seeing their vast expertise in the subject, and ought to be incorporated into the "High Level Committee".

By 2 August, the US will go into default, unless the Republican Party can be persuaded to abandon its scorched earth policy towards President Obama. Representative Eric Cantor and the Tea Party sect believe that it is sinful to ask the very rich to pay taxes or to provide heathcare to those below the median income level. Should Cantor have his way, the US financial system may be in for a ride as rough as that of 2008. Pity the Chinese, who put their savings into institutions and instruments that are anything other than sound. China's public finances and India's private foreign wealth may be the biggest casualties of a 2012 US-EU financial meltdown.


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