Last week at the Vivekananda International Foundation, the organisation’s chairman S Gurumurthy, also Editor of Thuglak magazine and RBI Board member, touched upon a variety of topics in a lecture titled ‘State of the economy: India and the World’. The second part of a collection of excerpts from the lecture follows:
The failure of the IMF
The International Monetary Fund was constituted to find a common currency for the world. It failed in its main objective. The dollar became the main currency. Dollar became the necessity and that become the strength of the dollar. The US, which held the responsibility for the world, is withdrawing from that central position. We need to have an extensive discussion on how it will impact the world and India.
Now, we have cryptocurrencies. They are private currencies. There are about 100 private currencies in Japan. You can create and circulate it among yourselves. These private currencies are based on actual trade. There is a group of people admitted into a club. They began investing, trading... The demand and supply based on actual transactions will decide the price. Nobody has control over it. There is an attempt to get it regularised in India.
Demonetisation & GST
Phoney money unbacked by production and investments turned the economy into NPAs and saddled it on this government. The only fault of this government is it did not come out with a white paper saying this is what happened. Asset prices rose because of high denomination currencies. In just 18 months prior to demonetisation, Rs 500 and Rs 1,000 notes were worth Rs 4.8 lakh crore, which funded gold and real estate prices. What had taken place in 2008 in America due to subprime lending could have happened due to high denomination currency in India.
Indian economy could have collapsed if demonetisation hadn’t happened. It was a corrective. People who stood in queues to collect money should be congratulated as they put faith in the government. Many people said there will be riots. Even the Supreme Court said there will be riots. People died of heart attacks and still, people weren’t rioting. Then came GST. Two powerful reforms – one is corrective and the other is reformative. I don’t think any other government would have taken this measure. There is no reasoned appraisal of government actions. You can find faults. Opposition parties can do it as they can say there is a wrong even when there is nothing. But, what about the media and the intellectuals?
We need to understand that we are a bank-driven economy and not a market-driven economy. In America, 75 per cent of the money comes from the stock market. In India, only 3 per cent of savings goes into the stock market. We are not the only fools. The Japanese invest 9 per cent of savings in stocks; 51 per cent of Japanese savings are held in bank deposits. The most modern instruments are traded in the Japanese stock market. But mostly, foreigners trade in them. This is the character of a family-based society. Therefore, in India, banks are the lifeline. But, Indian banking policies are based on the American model in which stock market is the prime mover and bank is the subordinate player. In India, the bank is the main player. So, if you restrict the banks, then you are restricting the economy and the flow of funds into the economy. There are certain norms prescribed for banks on capital requirement. The Basel institution, which created this model, laid down rules that applied for commercial banks and international banks, but not for banks that are not internationally active. We do all kinds of activities, but the same Basel norms are imposed on all banks. We create problems for ourselves where they do not exist and you are praised for it all over the world. The same thought guides us and we are not independent.
The importance of MSMEs
We see stock markets and say India is at the top of the world. All listed companies put together contribute only 5 per cent of India’s GDP. The entire corporate sector, listed and unlisted, put together constitute 15 per cent of India’s GDP. It is the MSME sector that contributes 50 per cent of India’s GDP and 90 per cent of India’s employment. It is the MSME sector that was hit by both demonetisation as well as GST. It is this sector that has been robbed of credit. In any other country, this would have collapsed. They are surviving because of community support. They cannot survive for long. When the government said this sector should be funded, the media said the government is now working against the independence of the Reserve Bank. So, a sector that is driving India and constitutes 70 per cent of India’s exports, 90 per cent of employment, 50 per cent of GDP of India, is starved of money. Once the money is released, the growth rate will pick up along with the consumption, investment and savings.
RBI Board member and Editor, Thuglak
(Read part one: 'Indians in the grip of thinking that was foisted upon us')