India’s ON and OFF Policy

 

India’s Info tech Glory and Visionary Jawaharlal Nehru

Indians have the extremely bad habit of not giving the credit where it is due. Take the example of its InfoTech Industry – now on the lips of every technocrat all around the world. It’s main creator and originator is forgotten as “Cause” and the “Result” is worshipped like a demi-god.

The seeds of high end Info tech were sawn by its first and most charming Prime Minister, Jawaharlal Nehru, a great visionary. With extremely limited sources at his command in early 50s, he maneuvered to obtain the great alliance with prestigious MIT in the United States, to set up 4 finest technical institutes – Indian Institute of Technology. And in remaining 60 years, the successive governments with almost 50 times monetary and ample human resources at their command could set up only 3 such institutes. He made the technical and engineering education so cheap and affordable, that India could produce talents at the cheapest cost.

His investment by way of subsidies in education, basic industries and oil refineries returned 100 times return in recent years. What he spent in millions on IIT brought in billions of dollars in Forex through thriving Info Tech industries. Even this author got 4 degrees for just Rs 4000 or $80 in 4 years.

When the British left India in 1947, they built 9 platforms at Bombay VT railway station when India’s population stood at 300 million; whereas in next 60 years, the successive Indian governments could build only 4 platforms at Bombay’s Church gate railway station with over 1 billion population! It is said that India is always on “Auto Pilot”. No one knows how it runs – it just walks in the wilderness.

Nehru dynasty gave leadership in the form of Jawaharlal Nehru itself, then Mrs. Indira Gandhi, Rajeev Gandhi (Son of Indira Gandhi) and now Mrs. Sonia Gandhi, head of ruling Congress party, and wife of Mrs. Gandhi’s elder son Rajeev Gandhi.

Even the Kennedy dynasty nowhere stands near the Nehru dynasty. The greatest contribution that Mrs. Indira Gandhi made was the green revolution and killing of all strength of pre-1947 Pakistan into two separate nations – Pakistan and Bangladesh.

And yet, all credits are given today to the likes of BJP Leader Vajpayee, the charismatic Prime Minister who merely exploded the Nuclear Bomb (It was built only with the vision of Nehru and Mrs. Indira Gandhi), Man Mohan Singh, the Prime Minister and P Chidambaram, the Finance Minister today for doing nothing substantially positive and lots of negative.

India has come a long way since 1950. Knowledge is no longer a power of a few. However, the kind of progress expected has not been achieved by India, and in fact, it is on the verge of losing major advantage if nothing is done now.

India’s disastrous policy measures in past, its effects and how that can be reversed with ease?

India’s de facto Central Bank – Reserve Bank of India – similar to FED in USA or Bank of England in UK, is a most revered institution in India. So also, Security and Exchange Board of India known as SEBI, equivalent of SEC in other countries, and stock exchanges like Bombay Stock Exchange – BSE and National Stock Exchange (NSE). They are given the status of demi-god by the admiring and ignorant semi educated urban class in India. The result is that these institutions, with possible exception of NSE in some cases, have become monolithic and inefficient organizations, with RBI leading the pack.

The officials of these bodies do not have experience in global money market, how certain powers manipulate the word market with ease, and therefore are very dogmatic in their views. They blindly follow the theories and practices of western and eastern world. As result, the economic, monetary and social policies fell far short of desired goals in last 50 years.

They do not realize that if certain standards with reference to which their policies are tailored are not yielding desired result, the standard itself must be wrong. As result, the measures initiated to adjust the imbalance often fail. Let us see the measures that failed India:

Belief, Policy Measures, Expectations and Final Result with Causes

Actuator: Finance Ministry, Reserve Bank of India, SEBI

Policy: Exchange Rate

BELIEF & PARADOX (In Blue prints)

1. Weaker Rupee helps exports and earns FOREX

2. Domestic Industries are protected against excessive and expensive imports

3. Jobs in domestic industries are protected and also promoted

4. Foreign Debt reduces due to FOREX earnings out of exports

POLICY MEASURES: Switch ON

Weaken Rupee by all means

1. RBI: Reduce NRE deposit rates – pay them much less than domestic deposit rates (6% less)

Even if NRI came to the country’s rescue in 1992 FOREX crisis, when India had to pledge Gold to Bank of England. NRI were treated like disposable towel

2. RBI: Do not let FII to buy Rupee from the market. Let them come to RBI directly to reward them with much higher rupee rate as enticement not to go to the market.

Even if it costs national exchequer hundreds of crores of rupees

3. FM, RBI: Sterilize any rise in the market by buying back dollar against rupee

Even at the cost of higher money supply leading to inflation

4. FM, RBI: Allow Indian Businessmen to invest overseas so that they buy dollars and sell rupee to cause it weaker and weaker.

While Foreign Investors were keen to invest in India, India was telling its businessmen NOT to invest in India but invest overseas, as though India had become one of the richest countries in the world. Even China after receiving almost $500 billion never thought of stopping the inward money flow and permitted Chinese to invest overseas

5. FM, RBI: Allow Indian citizens to remit overseas US$ 100,000 without RBI approval, so that pressure on rupee is reduced by letting them sell rupee and buy dollars.

While permission was not given to individual foreign investor to invest into Indian stock market as logical step further to widen the Indian markets or for direct investment, domestic Indians were asked to invest overseas, even when India was facing dearth of capital for building power plants, ports, Airports, national artery roads, sewerage, water filtration plants to reach every nook and corner of the country

6. SEBI, RBI: They introduced P-Note measures to scare away the foreign investors from India so that upward pressure on rupee is diminished.

7. SEBI: introduced arbitrary circuit breakers for market and individual stocks in the name of maintaining order which again scared the foreign investors who were faced with illiquidity in the invested counters. Some stocks had 5, 10, 15 or 20% up or down circuits that were fixed arbitrarily.

SEBI forgot main principle of free market that every investor has right to invest or disinvest in any stock at any time without hindrance. Even in market crash such as now, and in January 2008, the foreign and domestic investors were not able to sell the stocks at market because there was no market.

8. FM, RBI, SEBI: prohibited short selling on selected counters to arrest the market fall

If there were no restrictions on Long Buying of any stock, that lead to huge rise in Sensex from 2800 to 21000 (over 700%) in 5 years, why should there be ban on Short Selling of stocks or index?

Dogmas, False Policies and Misplaced Priorities

I have said often that if certain policies do not work with reference to standard for long time, there is something wrong with the standard itself. Such erroneous standard has to be abandoned. However, most of the policy makers and economists have been groomed in high end business schools that rely on outdated textbooks. These guys are not wise men but guys, who never worked on the front line, gained first hand experience, always sat behind the back bench, followed the books in full literary sense, and almost forgot that they too have common sense that was distributed by the God equally regardless of class, religion or nationality.

Why Rupee should be allowed to appreciate?

The weaker rupee policy did not work for 60 years, and yet the Prime Ministers, Finance Ministers, Reserve Bank of India’ Governors, followed the same policy 247365 or 24 hours a day, 7 days a week and 365 days a year for over 60 years. Rupee was devalued from Rs 4/$ to Rs 50/$ today with no tangible result.

Currency is an Ambassador of a Nation – it has to be strong

Currency is the first sign of strength of any country. Currency is a child of the nation by which a nation is recognized, same way the parents are recognized by their own children. Ask your self – Do you want strong children or weak children? You always say my son is this; my son is that, my daughter did well here; my children became engineer, doctor or MBA who will get us decent life from their earnings.

And what the same guys are doing while in charge of the country? They want their currency Rupee weak, so that it earns less, expends more, exports undersells country’s assets, imports overpays for the good, and the external debt soars only because of depreciation of the currency. These smart guys in RBI, SEBI, Finance Ministry and Prime Minister’s office know nothing, absolutely nothing. They are monkeys imitating blindly the western world, who want your national currency weaker so that they can buy cheaper from you and keep their inflation in check.

Weaker Rupee may help Exports, what about Imports?

Oh no, it will hurt exports! Really? What about imports? Are you not overpaying for the gigantic oil bill. Are you not overpaying for debt servicing? If Rupee is at Rs 45 and foreign debt is $100 billion, the national external debt is Rs 450,000 crores. If the rupee goes to Rs 39 as it did, the national debt reduces to Rs 390,000 crores. If rupee was allowed onward journey, it would have gone to Rs 26, and in that case, national debt would have come down to Rs 260,000 crores. You therefore saved Rs 190,000 crores just by letting the Rupee getting stronger.