IMMIENT FINANCIAL CRISIS – NOVEMBER 21ST, 2007

By Namit Varma

As the United States grapples with recession, the Joint Economic Committee of the US Congress began taking stock of the Bush administration’s policy decisions, including the Iraq Occupation and expenditures and growth-sapping hidden costs there of. Associated Press reported on 14 November 2007 that “hidden costs such as interest payments on the money borrowed to pay for the wars, lost investment, the expense of long term health care for injured veterans and the cost of oil market disruptions,’ stood at US $1.6 trillion. Not factored in these, are “hidden contributions’ to the US, of $50 billion in treasury support activity and additional monetarist support of $2 billion in interest subsidies, made available by secret ally India. It is time, we in India, took stock of these surreptitious moves by the Congress led UPA government to support and subsidize the Occupation-of-Iraq efforts of the United States; all the while keeping parliament and the nation, in the dark.

This startling reversal of time honored Congress policy, whereby the late Rajiv Gandhi stopped even the re-fuelling of American warplanes in Mumbai during the first Iraq War, is made worse by the conspiratorial violations of statutory provisions of monetary and fiscal discipline.

The implementation of this conspiracy against Indian interests is being supervised by Ambassador David Campbell Mulford of the United States, whose connection with the Stock and IPO scams as Chairman International of Credit Suisse First Boston (CSFB) are on record. Unfortunately, this connection was glossed over by the government of India, despite evidence that Ketan Parekh merely duplicated the methodology of CSFB’s Frank Quattrone; Parekh was arrested and credited (wrongly) of being the mastermind, while CSFB officials were allowed to go scot free! Interestingly, the directions passed after investigation by SEBI, against the Ketan Parekh Group and Credit Suisse First Boston (I) Securities Pvt. Ltd (a wholly owned subsidiary of CSFB and reporting to then Chairman International David C Mulford at the London office) are identical, “Debarring the entities from undertaking fresh business as Merchant Banker / Stock Broker …” Even more significant, in today’s context, is the well documented role of David Mulford and his chum Domingo Felipe Cavallo, an American acclaimed economist, bureaucrat, Central Bank Director and Minister of Economy of Argentina (track record sounds somewhat familiar). The American inspired (should one say ordered?) dollarization of the Argentinean Peso in the 1990s, in the name of keeping inflation in check, backfired and the debacle only increased Argentina’s indebtedness. Then Domingo Cavallo was elevated to Minister of Finance riding on the back of US and World Bank-IMF acclaim. His first decision on the day he became Minister, was to invite his friend, the redoubtable David Campbell Mulford, Chairman International of CSFB, to arrange a debt-swap. Within half an hour of this meeting Mulford had arranged the $29.5 billion great Argentinean debt-swap! Interest earnings apart, Mulford walked away with $125 million in commissions for lead manager CSFB for sewing up the deal!

Interestingly, almost an identical policy initiative is being followed in India today. RBI Governor Yaga Venugopar Reddy has not called his policy dollarization, but he has effectively pegged his rupee to a nearly fixed parity with the dollar and is spending a fortune in hard earned Indian income (approximately 6% of our GDP) to keep supporting and buying the US dollar and maintain this near fixed parity. Like Cavallo, RBI Governor Yaga Reddy, Finance Minister Palaniappan Chidambaram and Prime Minister Manmohan Singh are all citing the twin goals of low inflation and a weak rupee despite the reality of huge foreign investment inflows and our open capital account norms.

Daydreaming by these three so-called great economists apart, pursuing these twin contradictory agendas is impossible and therefore wrong in principle. Even an undergraduate student of monetary economics will attest as much. When a mistake of this magnitude is deliberately unleashed on an economy, there will be costs. In the Cavallo-Mulford Argentinean experience, the costs have been described thus by wikipedia: “Domingo Felipe “Mingo” Cavallo (born July 21, 1946) is an Argentine economist and politician. He has a long history of public service and is known for implementing the Convertibilidad plan, which fixed the dollarpeso exchange rate at 1: 1 between 1991 and 2001, and the corralito, which restrained savers from withdrawing their own money from bank accounts and was followed by the December 2001 riots and the fall of President De la Rua.” Finance Minister Chidambaram would have us believe that economic theory notwithstanding, he has achieved the impossible: a weak rupee, low inflation and an open capital account economy with immense absorption of foreign investment. He pretends to do so by cooking up inflation figures, a fact which even illiterates can attest too. But we shall rely instead on the evidence of the RBI Governor V V Reddy who admits that the present dispensation of Wholesale Price Index (WPI) and Consumer Price Index.(CPI) calculation “renders the assessment of inflationary pressures difficult which, in turn, complicates the process of monetary policy formulation.” Does this admission mean that the entire Monetary Policy of the triumvirate of great economists is based on inaccurate assessments? The principle cost of flawed monetary policy in the recent past has been that growth has slowed down and unemployment has increased. The government’s 3 month lag in putting together statistics will reveal this in January 2008, but workers made redundant in the agriculture, textile, handicraft and BPO sectors, already knows as much. Growth has been curtailed by a flawed monetary policy which has seen interest rates soar despite global financial capital begging for deployment in the Indian economy. The paradox is that there is a surfeit of money but it has become too expensive. High lending rates of banks are driving small entrepreneurs away from new ventures. Caps and ceilings on external commercial borrowings (ECBs) motivated by flawed policy or blatantly antinational designs, is forcing big business to forego expansions and new ventures. In short the government has done  everything in its power to turn around India’s growth story into recession misery. What can be the motivation behind this?

Assuming that the triumvirate of economists running this country aren’t abject idiots, the only rationale could be swapping some of the US’s recessionist troubles by absorbing them in the growing Indian economy. Significantly, that is precisely the assurance that Ambassador Mulford gave to the US Senate Foreign Relations Committee, “Just as Indian products and services have done well in the United States market, a vibrant growing, Indian economy should be a magnet for increased US exports and investment. This can happen if the pace of economic reform in India gathers steam. It will happen if India accelerates its willingness to open its markets to greater foreign trade and investment.” Going by policy initiatives, this is the precise reforms agenda of Dr Manmohan Singh and Mr Chidambaram. In line with Ambassador Mulford’s stated policy, huge quantities of US investment are flowing into India and the government is doing everything to absorb these funds; rather than impose curbs on inflows, the government of India is spending a fortune to sterilize the additional liquidity through the flawed Market Stabilization Scheme (MSS) regime. On 1 November 2007 The Economic Times reported “India is receiving huge capital inflows. These dollar inflows are mopped up by RBI instead of being allowed into the forex market directly, to keep the rupee, which has already appreciated by about 12%, under check. This keeps dollars relatively scarce and pricey in terms of rupee. However, to keep rupee exchange rate at a certain level, RBI injects additional rupee currency into the system, feeding the existing liquidity overhang. Then to suck out this liquidity, RBI opts for sterilization, which entails mopping up excess liquidity by issuing securities. The dollars that RBI had bought from the market are invested in US treasuries. .. .. The apex bank, which has bought over $61 billion from the open market since January, has had to sterilize a lot of liquidity (local currency) released into the system. It loses about 3% on such sterilization efforts — the difference between what it earns on deploying reserves in mainly US treasuries and the interest it pays in the domestic market for sucking out liquidity through the issue of government securities.”

Thus Government of India’s irrational 3 to 4 per cent subsidy to foreign capital inflows help solve the US Treasury’s problem of capital flight, while lining the pockets of the army of American funds which rotate money by dumping US Treasury securities and buying 3 month or longer Indian securities; while RBI buys near-zero-yield short-term US securities which the entire world is now offloading. The net offloading of US Treasuries by almost all foreign Central Banks from mid July to the first week of September stood at $48 billion; it could have been worse but for white knight RBI stepping in! Thus we exported the Indian growth story to the US enabling them to

add 166,000 jobs in October, while we imported the US recession laying off some 2 million workers. Making matters worse, we squeezed credit availability to unleash stagflation in our economy. How did this come to pass despite the stringent safeguards in our system of government? Fraud, deception, violation of statutory provisions: in short, the Market Stabilization Scheme (MSS): whereby the RBI violated the Reserve Bank of India Act 1934, which does not allow RBI to accept interest bearing deposits from Banks or to indulge in any form of speculative activity.

Governor Reddy and his colleagues have been pretending that the Memorandum of Understanding (MoU) that they signed with the Government of India on 25 March 2004, authorizes them to flout the provisions of the RBI Act 1934. Since the government of India itself cannot overrule the Act without following due constitutional.

Amendment process, the MoU is nothing more than evidence of wrongdoing and intent to subvert constitutional safeguards. Governor Reddy and Finance Minister Chidambaram are liable to judicial answerability for this misdemeanor, in the light of the loss of investible funds to the Indian economy to the tune of over 200,000 crore rupees; and additionally, for the effective interest subsidy to the US government to the tune of 8,000 crore rupees. As admitted by US Congressmen themselves, every last disputed dollar of the burgeoning US Federal Debt is ending up financing the US Occupation of Iraq. Political ramifications of this rupee 8,000 crore subsidy in calendar year 2007, to an imperialist war which is widely opposed by the Indian public, will only be judged by future elections.

In his address to the All India Congress Committee (AICC) on November 17, 2007, Prime Minister Manmohan Singh admitted that the Development that we want is not materializing; yet the political economist in him glossed over this and changed tack to secular politics.

The Finance Minister was more forthright on September13, 2007 when, for once, he admitted that the biggest economic problem before the country is that though gross investment is rising, production is falling! The problem is that RBI has been hijacking investment into the MSS account. Under these circumstances, the economist triumvirate can be absolved of guilt only if they admit to never having realised that Ambassador Mulford was leading, nay ordering, them up the garden path; but then, there will be competence issues. Immediate action may help avert a deepening of recession in the Indian economy. The stock market has begun its slide. Interest rates are going up. If these trends continue, people’s faith in the system will erode and soon the circumstances of Argentina 2001 or of the South East Asian crisis will be visiting the streets of our country. This open letter hopes to alert all Indians to the nature of the calamity which is overtaking us. Suspending MSS operations is a first step, but even this will not absolve India of the liability of the 250,000 crore  rupee debt-bubble which we have run up in the last 18 months. Ordering an investigation into this scam and relieving its perpetrators of the reins of the nation and the economy is a necessary second step to retain investor confidence and people’s goodwill and faith in the

system of governance in India. If the present leadership doesn’t do this, posterity surely will; and if Domingo Cavallo’s fate is anything to go by, it will not be forgiving. Given the seriousness of the impending financial crisis that our government has been lured or duped or connived-with to unleash, a reworking of the polity, RBI, and foreign policy is immediately required. .

As Congress President and Chairperson of the United Progressive Alliance, you are the only individual who can make the necessary corrections in time. It is an onerous responsibility and your tryst with destiny. For the sake of one billion Indians, please act.

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