Ten key highlights from RBI board member S. Gurumurthy’s lecture on the Indian economy

File photo of S. Gurumurthy | Facebook

RBI board member S. Gurumurthy believes Indian economy was destroyed between 2004 and 2010, and India must take a leaf out of Donald Trump’s book to fix it.

New Delhi: S. Gurumurthy, part-time director on the board of the Reserve Bank of India and co-convener of the RSS-affiliated Swadeshi Jagran Manch, has advocated a clean-sweep approach to India’s existing economic policies.

In a lecture delivered Thursday at the Vivekananda International Foundation, of which he is chairman, Gurumurthy addressed various aspects of economic policy, including what the Narendra Modi government has been doing in India, the decisions of US President Donald Trump, and what ought to be done to benefit the Indian economy.

Excerpts from Gurumurthy’s lecture have been reproduced below. They have been edited for clarity and conciseness.

On Donald Trump and his policies

What happened when Trump came to power? He shook America and world. The third day, he terminated the trans-Atlantic partnership. The seventh day, he said these people should not have sent refugees into America, and then in June, he withdrew from the climate accord, shook the world. Climate is such an important thing, he said “hell with it, we have to make America strong”.

The country which drove the very process of globalisation now says “my interest is important”; it is not globalism, it is Americanism that is important. Many people began calling him almost a madman, but he was working to a plan — he was correcting the distortions for America.

The dollar index rose by 5.6 per cent, the stocks rose by 38 per cent in 22 months, a historic rate of return for America by any standards. And 75 million Americans became rich because of that. Against all of the experts’ prognosis that America will collapse, the world will collapse if Trump comes in, he said “I will give you 3.5 per cent GDP growth”. In the second quarter of 2018, he achieved 4.2 per cent. In the third quarter of 2018, 3.5 per cent.

He stopped the experts from commenting on his policies and he is creating 223,000 jobs per month and the unemployment rates have come down by 3.8 per cent, which is an 18-year low.

The entire expertise of the world failed against policy-making by Trump.

On America’s relationship with China 

A 30-year settled relationship between China and America has been completely broken and reversed, and China is now running for cover. There was a fear among Americans — in political, military and economic terms — that “what will we do without China? How will we maintain our price levels? How will we maintain our standards of living?”

China had become a factory for America, for the world in fact. They would produce 100 units and consume only 46 units, the other 54 units they would export. They are overdependent on globalisation, and they trusted globalisation to continue, with the result that they trusted the World Trade Organisation is going to be there, the straight preferences are going to be there. But they never expected someone like Trump to come.

Now, if everything goes Trump’s way, he is going to impose 25 per cent duties from January on $500 billion import from China. Afterwards, what will happen to China, no one knows, because China has established factories for America. The foundation of globalisation has been shaken.

On printing currency

America printed $4.5 trillion in six years, 2008 to 2014. By doing this, they saved the local economy, they funded the global economy, and no one said the US Federal Reserve System was wrong in doing it. But if any other country had done it, they’d say that you will die of inflation. We (India) gave up our right to print our own currency in 2002, through a law called the FRBM (Fiscal Responsibility and Budget Management) law.

When we passed the FRBM law in 2002, the whole world thought there should be no printing of currencies and that it should all be taken care of by banks in the market. That has become outdated economics because Americans themselves have printed $4.5 trillion. The Japanese began printing (the equivalent of) $40 billion every month from October 2015. Today, they have increased the size of printing to $70 billion per month.

There is a liquidity problem — can the government of India go and say “I will give you 100,000 crore worth of securities, you give me the cash”? The government of India cannot do it because it has passed a law giving up that power. Our economic theoreticians will say “no, printing of currencies is wrong. You cannot give it to the politicians. It has to be only the Reserve Bank”. How will the Reserve Bank print currency? Only if the dollar comes in. Can you have national economics based on the inflow of foreign exchange?

There are two kinds of polarised economics — America withdrawing the dollar, Japan printing yen. America raising interest rates, Japan working on negative interest rates.

In a family-based society (like Japan), people don’t spend because the government wants them to spend. In America, people’s spending is based on credit cards; Japan runs on debit cards.

So, we have a world monetary order in which one country is printing its currency and distributing it for free. They (Japan) are spending Rs 5 lakh crore on our high speed railways at 1.1 percent interest for the next fifty years because they print the money.

On the other hand you have America withdrawing the dollar, raising the interest rates and the IMF and the World Bank can’t do anything about it. They are complete failures, they are onlookers today. They are only rushing to the help of countries which are in distress. They have become distress lending institutions, they are no more the world monetary authority.

Phoney money

You are earning money, putting it in stock, putting it in real estate, putting it in gold, banks — this is real money. But the value of this money is not decided by any real money. The value of this is decided by phoney money, which brought about the downfall of the world economy in 2005.

In 2010, real money — printed money — was $6 trillion. Phoney money was $600 trillion. This is money built on money which had no relevance to the real economy.

The world GDP today is $90 trillion. Phoney money is $900 trillion. This is generated by the financial system. And that will invest in a country and withdraw the money. And this is not real money. But that will decide the fate of the nations.

Now, cryptocurrencies have come. I don’t know how many of you are familiar with the idea of a cryptocurrency; even the best experts will not be able to explain. All that I can say is that it’s like a private currency. There are at least 900 private currencies which are going on. In Japan itself, there are about 100 private currencies. You can create a private currency and circulate it amongst yourselves.

New world order

The impact of Trump on the US and the world will last beyond Trump. The second globalisation is now a matter of the past. The World Trade Organisation is in ICU. No one now even talks about WTO, but it is still an obsession for us (Indians). All these institutions which are fashionable at a particular time have a shelf-life; they lose their relevance because they were not founded on the firm foundations of collective behaviour. You cannot have a ruling elite saying that we will have globalisation from today onwards without the people wanting globalisation. Even the American people did not want globalisation, as Trump has found out.

Geopolitically-influenced global economics will be the future. This is the ‘2+2’ model — it’s not only about economics, we will also talk about security. It will not only be the finance secretary, the defence secretary will also be in the discussion.

We are not going to build economic alliances, we are going to build security alliances, civilisational alliances, social alliances, political alliances. Nothing will be in India. You will be only talking about NPAs, you’ll be only talking about recapitalisation of banks.

Indian economy between 2004 and 2010 

Between 2004 and 2010, India saw 9.8 per cent GDP growth and our foreign exchange reserves shot up from $140 billion to $310 billion. This is supposed to be the golden period of the Indian economy.

From 1999 to 2004, the GDP growth was 5.4 per cent, between 2004-2010, it went up to 9.8 per cent — almost double. Stock prices rose by 32 per cent between 1999 and 2004, 311 per cent in the next six years. Gold prices 38 per cent in the first five years, 320 per cent in the next six years. Land 21 per cent in the first five years, 200-2100 per cent in the next six years.

Jobs generated — 60 million in the first five years, 2.7 million in the next six years. This was a period of the destruction of the Indian economy, not its growth.

The foreign exchange went from $140 billion to $310 billion and that transformed into rupees. The banks were saddled with money. At that time, Dr Y.V. Reddy said don’t allow this money to come in, because you will not know how to use it. He wanted it taxed. But the finance minister said the whole world wants to put money in India, why are you spoiling it.

The money came into the stock market, transformed into rupees, became bank deposits. If banks gained this kind of deposit, what will the bank do? It has to lend. But there is no borrower, you know why.

You know what the government of India did. It brought down the import duty of the capital goods to zero. And made the banks lend, with the result bank deposits went up from 12 per cent to 20 per cent, credit went up from 15 per cent to 27 per cent. We imported capital goods which we did not need, and all this money went to China.

We allowed money to come in which we did not need, and afterward, it got converted into rupees and we didn’t know how to use it. The banks were asked to lend it, and for which customs duty was brought down, and that money is the NPA today.

Demonetisation saved India from collapse

I told you how the asset price went up by 10 times, 15 times. How did this asset price rise? It was because of the high denomination currency that was printed. In just 18 months prior to demonetisation, the 500 and 1000 rupees rise was 4.8 lakh crore.

That is what funded this gold and real estate prices. And if it had gone the same way, what had happened in America in 2008 because of subprime lending would have taken place in India because of high denomination currency. If anybody wants to have a debate with me, I will be able to prove that but for demonstration, the Indian economy would have collapsed.

It was a corrective measure. But in India there is no economic discourse, there’s only a political discourse. The people of this nation should be congratulated — 50 crore people stood in queue to collect Rs 2,000, Rs 3,000, Rs 5,000, because they put faith in the government, that it is doing the right thing. No commentator, no economist, no media would welcome this. They all said there will be riots. Even the Supreme Court said there will be riots, but people were not rioting.

Then came GST — two powerful decisions, one corrective and the other reformative. I don’t think any other government would have taken this measure. (But) there is no reasoned appraisal of government actions. It’s all fault-finding. Of course, you can find fault; in politics you find fault. But experts don’t do it, media should not do it, intellectuals should not do it.

Japan is our partner, America not appropriate

We create problems for ourselves. Where problems do not exist, we create them. And then we are praised for that all over the world. The Financial Times will write an article on how great an institution you are, how independent you are. We are not independent. We do not have any original thinking even today.

For example, this government has taken a far-reaching original step by a $75 billion swap with Japan. No one has even understood what it is. The dollar-rupee relationship is working against the rupee for the last several decades. Now we are moving towards yen. The government is probably well-advised and is thinking that we should move more towards yen because yen has a natural hedge against the dollar, because it is running a current account surplus with America and it has $1 trillion investment in American securities.

So, our natural partner must be Japan — financial partner, investment partner, trade partner. But our mind is hooked to America. I am not saying America is wrong, but it is not appropriate for us. Even if a solution is available, your mind is blocking it. We have to rework our relationship; America isn’t necessary for us. It is necessary for various geopolitical purposes, but it is not necessary that we should have this kind of dollarised integration with them.

Micro, small and medium enterprises

Without understanding the MSME sector, we will not be able to understand the Indian economy. The entire corporate sector — listed or unlisted — put together constitutes only 15 per cent of India’s GDP. It is the non-corporate sector, the MSME sector, which contributes to 50 per cent of India’s GDP and 90 per cent of India’s employment. And the economic census 2014 says that the number of people employed in this sector are 128 million, whereas in the entire corporate sector, public and private, only 12.8 million people are employed.

The MSME sector has been hit by both demonetisation as well as GST. It is this sector that has been robbed of the credit. In any other country, it would have collapsed, but it has survived because of community support. It cannot survive for long. That is one of the issues which the media is supposed to highlight, but if the government says that this sector should be funded, the media says the government is now working against the independence of the Reserve Bank.

Standoff between RBI and govt

The government is not allowed to borrow from the Reserve Bank, except for basal means purposes. So, the question of borrowing from Reserve Bank is not an option for the government.

The standoff between the Reserve Bank of India and government is not a happy thing at all, but this a part of the overall thinking of the ecosystem of India — to look only at America. It is not only an issue with the Reserve Bank of India; it is with the economists, it is with the media, it is with the intellectuals, because you do not think of an alternative.

But I think that an alternative is necessary, and exists — that is part of an overall correction of the Indian mind. You cannot point to any one institution as the one which has to bring it about.