Friday 23 August 2013

US dollar sinks India’s economy (PO)

M D Nalapat
Friday, August 23, 2013 - During 1977-79,when a State of Emergency was in force across India, LK Advani said about the media that “when they were asked to bend, they began to crawl”. The same can be said about India’s Prime Minister, the reticent economist Manmohan Singh and his response to any “request” from Washington. In the past, Delhi would often sway to the beat from Moscow, thereby refusing to condemn even egregious acts of high-handedness such as the military conquest of Czechoslovakia in the 1950s and the occupation of Afghanistan in 1979.

What took place in Czechoslovakia was a particularly horrible crime, given that this small but gallant country had been occupied by Hitler just two decades before Soviet tanks rolled into the streets of Prague. Three years later, more than four million German soldiers streamed across the USSR border and sought to subjugate that nation, a huge miscalculation on Hitler’s part, because the people of the USSR fought the Nazi armies to a standstill on the outskirts of Moscow within five months of the invasion. The world owes a lot to the people of the then Soviet Union for having battered into pulp the Nazi war machine.

Interestingly during World War-II, the leaders of India’s freedom movement adopted a policy of non-alignment between the Allies and the Axis, the single biggest factor in the post-1942 (“Quit India Declaration”) embrace by London of Mohammad Ali Jinnah and his concept of a separate state for the Muslims of India. Manmohan Singh is therefore in exalted company when he takes decisions that are less than optimal from the viewpoint of India’s national interest. One of the most significant has been his repeated rejection of offers by Iran to enter into long-term contracts for the supply of oil to India at concessional prices. Had this offer been accepted, with its corollary of the medium of exchanging being not dollars but rupees, the Indian currency would not have entered into the free fall that Manmohan Singh’s dogged dedication to following the dictates of Washington has caused.

Any sane individual without a vested interest in the US dollar would testify that the currency is in the same position as the British pound was during the 1920s,an international medium of exchange whose fundamentals did not support such an exalted role. As the US is doing now, during the 1920s London borrowed — in effect — from itself, because British pounds were the international medium of exchange. The inherent weakness of the currency and the distortions caused by its widespread use in international commerce helped create the 1929 Great Depression, which gave way only after the world was plunged into a reflationary war.

If in the 1920s it was the British pound that was hugely overvalued and overused, since the 2008 financial crash that place has been taken by the US dollar. The crash of the financial system in the US during 2008 showed that those responsible for the health of the dollar were not to be trusted with such a sensitive task. Rather than ensure that the US dollar was anchored on sound fundamentals, Wall Street looked only at its own profits, and at the expense of the rest of the world.

Those credulous enough to believe in the US dollar have paid a huge financial price for their trust, and yet are in no hurry to move away from a currency that is hugely overvalued in terms of the huge debt that the US has. While the previous NDA government headed by A B Vajpayee was also influenced by the dollar, it can be said that Manmohan Singh and his team have been dominated by the dollar. From the start, the PM and his economic team have concentrated on multiplying the benefits earned by those who ran away from the rupee and clung on to the dollar. Thus, those in India who trusted the rupee have been losers on a catastrophic scale, while those who shared Manmohan Singh’s affinity for the dollar have prospered. Those making dollar deposits in the Indian banking system get returns of 20% and more in dollars, while those unwise enough to have placed their confidence in the rupee have seen the real value of their capital fall sharply.

This year itself, the rupee has lost nearly 40% of its inherent value through the fall in the value of the rupee (by 25% this year alone) and relentless inflation. Had the Prime Minister been less deferential towards the US dollar, he would have taken advantage of BRICS by spearheading a move to get these five countries (Brazil, Russia, India, China and South Africa) to use their own currencies while trading. He would have instructed the Ministry of Petroleum to source as much as possible of India’s oil imports from producers willing to give discounts, such as Iran and perhaps even Iraq, were that country to accept India as a reliable strategic partner. Instead, the PM has shunned Tehran and has so annoyed that important capital that an Indian ship has been impounded by Tehran on the grounds of “oil spill”. Clearly, the PM’s bending over backwards, forwards and sideways to please the US has been noticed in Teheran, as it has in most other capitals of the world.

Next month, Manmohan Singh travels to New York for the exalted purpose of making yet another forgettable speech at the UN General Assembly. Much of his staff has been engaged in begging the Obama administration to spare 20 minutes of the time of the President of the US to have a meeting with India’s PM. Reports are that the Obama team is insisting that Manmohan Singh meet Pakistan PM Nawaz Sharif in New York as a condition for President Obama meeting him. Given the hunger of India’s PM to follow the advice dished out to him by Washington, it may be that Manmohan Singh ignores the political risk involved in a meeting with Nawaz Sharif and schedules a meeting, just so that he himself can get some face time with Obama.

That such a summit will get him zero extra votes is a slice of political reality that is ignored by the bureaucrat who became Union Finance Minister in 1991 when I G Patel refused the job. Those close to Patel say that the latter’s private comment on Manmohan Singh was that he was “over-rated as an economist and under-rated as a politician”. The collapse of the Indian economy under Manmohan, combined with the PM’s success in continuously holding on to the PM’s job longer than any other incumbent save Jawaharlal Nehru, shows that Patel was spot on target.

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