20/4 Fiscal & Monetary | India.pdf
Conclusion
1. Independent India was largely undeveloped given ‘British Raj’ misgovernance leading to the socialist Five Year Plan Model being adopted
2. The Rupee INR was pegged at an unrealistic rate to USD with an autarchic ‘Licence Raj’ control regime meaning continual forex difficulties
3. The inevitable Balance of Payments Crisis led to the ‘Transition Period 1991 – 1994’ with the Rao/Singh Reform liberalisation being made
4. India has reverted partially to Global Number Four, but fiscal policy remains loose and monetary policy is accommodative and conflicted
AR Research and Opinion
Discussion
The collapse of the Mughal Empire 1526 – 1720 meant India coming under the exploitation colonisation of the East India Company, a British chartered trading company, covering the subcontinent being the now Bangladesh, India and Pakistan, either directly or indirectly through the princely states. The Indian Mutiny against the Company 1857 forced Britain to bring the governance of the subcontinent in house: the ‘British Raj’. However, the old trade exploitation, misgovernance and famines continued. On independence in 1947 India was notably backward and the Congress Party under Nehru followed the USSR path of Five Year Plans to accelerate agricultural and industrial development. The ‘British Raj’ was replaced by a ‘Licence Raj’: the Ministry of Finance MoF and the Planning Commission bureaucratically administering the plans in a framework of autarchic forex controls. The result was MoF deficit financing and the Commission’s poorly performing investment leading to an inflationary environment, forex difficulties and finally the Balance of Payments BoP Crisis of 1991. The forex rate had been initially pegged against GBP with the INR/USD pegged rate 4.76 on independence 1947, devalued to a 7.50 pegged over 1966 – 1967 until the 1971 – 1973 move to floating rates with end 2019 being 71.31. The 1991 Crisis meant the Rao/Singh ‘Transition Period’ 1991 – 1994 implementing the Washington Consensus liberalisations as the policy conditions for the IMF bailout made. The result was the PPP USD GDP per capita data trend: 1990 1,169.2, 2000 2,026.3, 2010 4,423.5 and 2019 8,483.7 (IMF). The strong performance for 2010 at a fertility rate 2.6 and 2019 at a fertility rate 2.2 (WB) and a rising relative population size given the strong natural increase by demographic statistical momentum has meant India reverting partially to its historical ranking (see 15/0 + 19/0 for the Statistics Analyses). However, fiscal policy continues to be loose and the independence of monetary policy is compromised by the idiosyncratic policies of the Hindutva BJP Modi Cabinet with MoF setting a high inflation target rate given the fiscal looseness. Progress has been made, but plain sailing it certainly is not: notably the surprise resignation of the Reserve Bank of India RBI Governor on Modi governance erraticism 2018.
AR Research and Opinion
Chronology
1857 |
Indian Mutiny occurs: the outsourced East India Company governance is brought in house by the Crown, the British Raj, but misgovernance continues with major famines |
1930 |
Gandhi leads the Salt March etc in non violent resistance, announces Nehru to be his heir 1941, calls for British to ‘Quit India’ with a boycott 1942, is assassinated 1948 |
1947 |
Independence for the subcontinent partitioned between India and Pakistan with Nehru as PM of India promoting a secular, socialist and integrated republic policy model |
1951 |
First Five Year Plan 1951 – 1955 covers seven key socioeconomic areas irrigation, infant mortality etc and the Second Plan 1956 – 1960 promotes heavy industry projects |
1961 |
Third Plan 1961 – 1965 a failure, Nehru dies 1964, planning continues but under a political cloud with Congress Party out of power for the first time defeated by Janata 1977 |
1970s |
The planning bureaucracy is a ‘Licence Raj’ burden on the economy and this starts to become apparent, but without any remedy there is the Balance of Payments Crisis 1991 |
1991 |
Washington Consensus bail out loan conditionalities lead India to the Rao/Singh ‘1991 – 1994 Transition Period’ reforms parallel to Deng Reform in China in the late 1970s |
2014 |
RBI compromises on a conflicted and limited monetary policy reform with inflation targeting of 4% ±2% on a Five Year Plan basis as decided by MoF in overall fiscal outline |
2016 |
RBI Act 1934 is amended for a Monetary Policy Committee MPC with the RBI Governor having a casting vote in a show of some restraint on deficit financing and its inflation |
2018 |
RBI Governor Patel resigns by implication over the appropriate MPC response to Modi Cabinet large banknote demonetisation, MoF fiscal looseness etc economic impacts |
AR Research and Opinion
Glossary
British Raj |
The British Crown’s rule over India from 1858 |
Queen Victoria assumes the title Empress of India Kaisar i Hind 1876 to regularise the situation as regards titles |
Congress Party |
Party of Government Founded by Nehru + Gandhi |
Nehru as political leader and Gandhi spiritual leader achieve independence but with a crippling MoF Licence Raj |
Deficit financing |
The budget deficit is covered by public bond issues |
Modern Monetary Theory proposes an unemployment vs inflation balance but inflationary if not properly balanced |
Forex control |
Post War Gold Exchange Standard measures |
Common practice to protect the Bretton Woods currency pegs 1945 – 1973: forex flows subject to strict licensing |
Hindutva |
Hinduness as in Bharat India vs Islamic India |
Coined by Savakar 1923, given expression by RSS that Hinduism means a Hindu cultural cum ethnic hegemony |
Licence Raj |
A moribund planning bureaucracy under MoF |
An economic burden leading to the Balance of Payments Crisis 1991 resolved by Rao/Singh radical deregulation |
Modi |
Narendra Damodardas 1950 – PM 2014 – BJP |
Associated with the RSS since age 8, Chief Minister of Gujarat, but controversial given his nativist Hindutva drive |
Rao |
Narasimha 1921 – 2004 PM 1991 – 1996 |
Congress Party Given the BoP Crisis and IMF loan conditionalities he directs Singh to undo the Licence Raj 1991 |
Rupee INR |
Based on Mughal Empire silver rupiya Ag 11.5g |
Gold Exchange Standard INR/GBP rate 15.0 (INR Sterling 1s 4d) or an INR/USD cross rate 3.09 is adopted 1899 |
Singh |
Manmohan 1932 – PM 2004 – 2014 |
Finance Minister 1991 – 1996 under PM Rao and responsible for managing the detail of the liberalising reforms |
AR Research and Opinion