Statutory warning: Gurunomics is dangerous for mental and economic health

The day S Gurumurthy, Chennai based chartered accountant and right wing ideologue, was inducted as a board member of the RBI, you could see trouble brewing from miles away.  The renowned economist Jagdish Bhagwati famously said that if Gurumurthy is an economist, then he (Bhagwati) must be a Bharatanatyam dancer.  I am no fan of Bhagwati but in this instance, I have to agree.

Now is not the time, though, for pithy asides because the trouble that was once merely brewing has now acquired the proportions of a shitstorm.  For the past couple of weeks, an unseemly back and forth has ensued between the RBI and the Central Govt with the latter demanding that RBI part with their reserves which the Govt slyly continues to present as the demonetisation dividend.  This, in spite of RBI’s statement confirming 99% plus what-have-you-decimal points of old currency notes had been successfully lodged with the banks by the people, whether these pertained legitimate earnings or black money.  In other words, the black money is now officially white.  But that again is a subject for another day.

Having first frayed tempers, provoking an unusually candid riposte from Deputy RBI governor Viral Acharya, the govt sought to make conciliatory noises and cool the temperature, lest the remaining FII money also escaped India’s stock markets.  But as 19th November, the day the RBI Board is set to meet again, approaches, Finance Minister Arun Jaitley has once again urged the RBI to ensure liquidity.  In other words, if you won’t part with reserve, bring down the interest rate (thus, printing notes through the backdoor).  S Gurumurthy, ostensibly the chief architect of the note printing idea (and also a supporter of demonetisation, if I may add), has also given a lengthy speech at the Vivekananda International Speech.  Without saying that that’s his intent, he attempts to drum up support with the public for this note printing idea.

 

For the reason only that Gurumurthy’s words have now unfortunately acquired national importance, I sat through his speech on Youtube.  Trust me – and this has nothing to do with ideological differences – it is a difficult listen because, intentionally or otherwise, Gurumurthy refuses to present Gurunomics in a concise and crisp format.  Instead, he chooses to waste a lot of time talking about the decline of Indian civilisation, our lack of confidence in our own ideas and the attendant need for approval from international agencies established by the Western hegemony, about how experts got Trump completely wrong, so on and so forth.  There is also no structure to the talk as he drifts in and out of tangents until the tangents become indistinguishable from the crux.  I am going to say that I think these digressions are intentional because they are designed to mask the lack of substance in his central argument.  The argument being that India should give the IMF & co a wide berth and print notes as that is what everyone is doing.

Now who is this everyone?  Guru mentions USA and Japan as key examples.  Let us pause here.  USA, a country which until 1980 used to be the world’s biggest creditor and which, prior to Reaganomics (the irony), strongly believed in balancing its books.  It did so again at the end of Clinton’s second term by the way.  Why did USA print notes bigtime again?  Because there was no other way to bail itself out of the 2008 meltdown. Europe belatedly followed suit with its own version of Quantitative Easing (which is the technical term used these days for what is essentially note printing/flooding the market with dollars/euros).  Guru also mentions Japan, which is doing so as well under Abenomics.

As said earlier, extraordinary circumstances forced USA and Europe down this road.  Circumstances which caused the interest rate to nearly touch zero in these countries, with, obviously, low to no inflation.  Japan too has had deflation for many years and Shinzo Abe has only been trying to somehow reflate the economy back to life.

Does the Indian economy have comparable circumstances?  The answer is a vehement and unequivocal no.  India has long trended towards moderate to somewhat high inflation, thus forcing the RBI too to keep interest rates high.  It is not that RBI keeps interest rates high ONLY because the world powers say so.  Even if nobody cared what India did about its monetary policy, RBI would have no choice until India fixes its inflation issue.

I could now drift into a tangent about how govt’s own lethargic implementation of infrastructure projects further fuels this inflation.  Instead, I will stick to the argument that we are not in a position to do what USA and Japan do because our economic circumstances are different.  Now I will devote a few sentences to explain what would happen if India indeed printed notes in a big way as Guru suggests.  We have seen this movie before and I will get to it in a bit.

1. When the govt prints notes, it essentially means money is available more easily and at a cheaper cost to people at large.
2. What do people do with this easily available money (it’s actually called easy money policy)?  They buy more stuff than before because they have the money to.  More food, more cars, more houses even.
3. What happens when more money chases the same stuff?  The price of that stuff increases. I.e. inflation.
4. There’s more.  To compensate for this inflation, manufacturers now have to pay more salary to their staff. That means it now costs more for manufacturers to make the same stuff than it did prior to note printing.
5. When product ABC is now exported at a cost of say rupees 110 instead of rupees 100, what do you think happens?  People don’t want to buy, simple.
6. When people don’t want to buy your exports, you lose foreign exchange.  You keep losing until eventually you reach a crisis situation.  Alternatively, you stop defending your currency with the US dollar reserves you have and let it drop.

Folks, as I said, we have seen this movie before.  What is the name of this movie?  It’s called UPA2.  At the behest of both our industrialists rattled by the meltdown as well as Western powers who suggested India and China should pick up the tab while the developed nations fixed their house, the Indian govt followed an easy money policy and also offered tax cuts to industry.  For a few years, all was well as India experienced some of its highest ever GDP growth.  But the consequences of such steroid-fueled growth caught up very quickly with us.  Imports kept going up (obviously as everybody had money to spend and with US weakness, the Indian rupee strengthened) and inflation first crept up and eventually began to soar.  Property prices too soared, eventually reaching unsustainable levels, particularly in Mumbai. There was much outcry too over the soaring prices of vegetables, fruits and foodgrains.  By 2012, the economy seemed to be in disarray.

And then, in 2013, the US Federal Reserve announced it was going to taper off Quantitative Easing.  The mere announcement triggered panic in emerging markets.  Why?  Because tapering meant those easily available dollars were going to go back to US.  The rupee crashed even as D V Subbarao, the weakest of our RBI governors in terms of being unable to resist Central Govt pressure, left office on an unhappy note.  With some out of the box thinking, the UPA govt appointed Raghuram Rajan as the RBI governor in spite of him not previously holding any position with that organisation.  His exemplary forex management arrested the rupee’s slide and, more importantly, cut down volatility sharply. But all that is history as we know RR too had to go and can perhaps guess why.

That brings us to today and to Guru’s speech.  Guru blasts the UPA govt for allowing what he called bogus foreign money to flood the Indian markets.  He is referring to the inflow of QE dollars into India.  It is not clear what India could have done to just stop that money from entering the economy short of following tighter monetary policy which they should have.

But if they ought to have followed tighter monetary policy then, when there was actually a glut of dollars, why exactly does Guru recommend note printing today?  Today when US interest rates have increased and are set to increase and the dollar is going from strength to strength.  Should the RBI cut interest rates now and the govt actually just take RBI reserves and spend it on projects (possibly including but not limited to gigantic statues), there will be a further exodus of dollars from India, pushing us closer, again, to a forex crisis.  Guru praises India and Japan’s currency swap agreement as something we ought to have done long ago.  We have been, actually. The previous arrangement was for a currency swap of $50 billion.  It has now been hiked to $75 billion.  All good. The only problem is our imports from China alone are $68 billion!  Japan is only our 15th largest trading partner.  You can get around the rules of the economic jungle for only so long.

It beats me why, having criticised UPA 2 correctly for pumping up the Indian economy artificially, Guru proposes exactly that as the cure NOW.  Is it yet another attempt to cover up the govt’s colossal failure with the demonetisation experiment?  Or is it in fact, contrary to his pleas for original ‘Indian civilisation’, nothing but a slavish attempt to imitate Japan just because?

However it may be, and I don’t have a CCTV planted in Guru’s mind, the short point is the prescription, if implemented, would be a complete disaster for the economy.  I see, from the Youtube comments, that Guru, though, is winning favour with his talk.  You see, all it takes is for someone to speak with an appearance of confidence, of knowing what he’s talking about.  It doesn’t matter whether he really knows.  We have seen THIS movie(s) too before and they go by the initials of NM or DJT depending on your choice of language. Guru talks a lot of crap in the midst of some valid observations about experts getting predictions wrong or that there is no universal theory of economics.  But it doesn’t SOUND like crap and that’s all that matters.  Poor Urjit Patel’s introverted reticence is no match for Guru’s confident bluster.  It’s Dravid v/s Srikanth and who would you pick as the more confident batsman if you didn’t know their records?

In order, therefore, that the gullible public is not taken in by a mere appearance of authoritative expertise, I posit that every S Gurumurthy speech on economics should be preceded by a statutory warning.  The warning is as follows: Gurunomics is dangerous for mental and economic health.  Enjoy it but do not ingest it.

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