Economics has lost its way

MA Oommen
Admittedly, economics is a social science engaged in the ‘ordinary business of life’. It is the only social science that attracts a Nobel-like award —the Sveriges Risbank Prize in economic sciences in memory of Alfred Nobel’ instituted by the central bank of Sweden from 1969 onwards. The award is given by the Royal Swedish Academy of Sciences according to the same principles and procedures as for the prestigious Nobel prizes that have been awarded since 1901. To be sure, the knowledge economic ‘science’ creates must not be sophistries, but something relevant and useful to humanity.

People pursue any scientific study “to learn something about the riddle of the world in which we live and the riddle of man’s knowledge of that world”, as the great British philosopher of natural and social science, Sir Karl Popper, puts it. 

Know the world

The basic purpose of the scientific universe — being the project of understanding the riddle of the world, the portrayal of market system by mainstream economics as immutable, inescapable and natural, while it helps to safeguard any effort to subvert it — turns out to be an epistemological incongruity. Copernicus and Galileo proved to the world despite severe odds on the basis of logic, mathematics and facts that the received belief systems were utterly wrong. Since economics has a mission in building useful knowledge for the benefit of society, the persistent pursuit of the discipline to create sophistries to appear ‘scientific’ needs to be continuously interrogated. 

During the latter part of the 1970s, I examined economics syllabi of 26 major universities in India and found that they were dominated by neoclassical economics with Marxian epistemology being kept out as poison and propaganda and even subjects such as economic history treated as redundant. 

This is true of several universities in other parts of the world today. I wonder why critical scholars are not making it a social issue. It is illogical to dismiss alternate schools of thought as irrelevant. There is a pertinent need to re-articulate economics teaching by bringing together diverse streams of thought which can challenge the hegemony of market-centered economics. 

This is precisely what you miss when you uphold competitive pricing based on self-interest of buyers and sellers as logical as Euclid’s geometry as underscored by Harvard Professors such as Paul Samuleson and Gregory Mankiw. Interestingly, economics does not have a theory of distribution and proceeds as if the word exploitation is irrelevant for the discipline. So long as wage is the price of labour and all factors of production (land, entrepreneurship, capital, etc.) are compensated according to their marginal product, exploitation is not raised as an issue to be considered. Several relevant policy issues are ruled out in this manner. 

Wrong numbers

It is instructive to recall what Kaushik Basu, former economic advisor to the Government of India admitted in his Beyond Invisible Hand (2010): “The free market proposition is a powerful intellectual achievement and one of great aesthetic appeal, but its rampant misuse has had huge implications for the world in particular in the way we craft policy, think about globalisation and dismiss dissent”.

Continuing to pursue “powerful intellectual achievements” and “aesthetic appeal” is a serious limitation in developing a discipline that is basically policy-oriented. Although 77 professors in economics have become Nobel laureates, many of them won their awards for mathematical formulations. True, there are conspicuous exceptions such as Gunnar Myrdal, Amartya Sen and a few others. John Nash, a great mathematician shared Nobel prize in 1994 with two other mathematicians “for their pioneering analysis of equilibrium in the theory of non-cooperative games”. 

Kenneth Arrow (Nobel in 1972) and Gerard Debreu (Nobel in 1983) are honoured for their contribution to the application of the mathematical theory of convex sets to the general equilibrium theory. 

The very first chapter of Debreu’s Theory of Value: An Axiomatic Analysis of Economic Equilibrium is captioned ‘Mathematics’. My simple question is: can physics (economics has borrowed heavily terms from physics evidently to appear scientific) or for that matter any other science where quantitative calculations are involved start like this and then earn a Nobel prize? 

Not only that, the rigorous assumptions and deductive methods on which several economic theories are based are not falsifiable. As per the “falsifiability criterion” of Popper a scientist seeks to discover an observed exception to his/her postulated rule. Freudian psychoanalysis for example is not an empirical science because of its failure to adhere to the principle of falsifiability. 

What Robert Solow (Nobel in 1987) observed recently (2014) while probing ‘inside the minds of 12 Nobel laureates’ is worth citing: “The fundamental goal of economics as a discipline is to bring organized reason and systematic observation to bear on both large and small economic problems (and to have some intellectual fun on the way)”.

Losing focus

I wonder how can the creation of ‘intellectual fun’ and intellectual game be the vocation of a social science. To be sure, the knowledge that you produce and the intellectual and empirical basis that you build must be useful to human beings. 

Thomas Piketty, whose proficiency in mathematics is well acknowledged, reminds his fellow economists in his famous book Capital in the twenty-first century (2014): “To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in”.

Economics is a cipher if it ceases to be a human science. While efficient allocation of resources is important, one cannot ignore the question: ‘efficiency for whom and for what’? Robert Fogel (Nobel laureate in 1993) along with Stanley Engerman (see their Time on the Cross), legitimises Negro slavery on the basis of efficiency.

Modern economics as a discipline is the outcome of industrial capitalism. But we cannot forget that economic activities originated from the pursuit of human beings for food, shelter, clothing and other necessities of life. With the shift of emphasis from creating useful things for society to producing commodities in exchange for profit the discipline has lost its innate character as a human science. Education is the practice of freedom and all social sciences, especially economics have a key role to critically engage in the transformation of the society where people live.

(The writer is an honorary fellow at CDS, Thiruvananthapuram)

Taxing times for Indians

Nissim Mannathukkaren 
When the government released detailed income tax data a few days ago, it gave us an opportunity to study one of the vital areas of our economic life, hitherto hidden from public scrutiny. It expectedly generated commentary on the implications of the data for the economy and so on. But what it has not generated is moral and political reflection on the data.

If we consider the data from the latter point of view, two things emerge. One: the data cannot be termed as anything but shocking. And two: more, importantly, the data gives the lie, in a searing fashion, to the recent discourse of nationalism, sponsored by the ruling party and the government, and amplified by the elite classes.
How is it that in the year 2012-13, there were, believe it or not, three individuals who paid a tax of Rs.100 crore or more? In the same year, there were 46 dollar billionaires in India who were collectively worth $176 billion, or Rs.11.61 lakh crore; that is ten times more than the Rs.1.14 lakh crore collected from all the individual income taxpayers in the country! How is it that there were only 18,358 individuals who had an income over Rs.1 crore, and only a million people with incomes over Rs.10 lakh? This is when, as a report put it, in 2011-12, four luxury carmakers alone sold 25,645 vehicles with an average price of Rs.40 lakh.

In total, there were 2.87 crore individual income tax returns in 2012-13 (out of a population of 125 crore), out of which 1.6 crore assessees did not actually pay any tax. So, effectively, income tax payers amounted to 1 per cent! To give a comparative sense, Canada (of course, a G8 country), had the same — 2.88 crore returns, out of a population of 3.5 crore! 

Amazingly, the tax-GDP ratio has remained almost constant even after two and a half decades of spectacular growth and wealth creation in which the GDP increased 4.5 times (the recent social media buzz was that India is now the fastest-growing economy in the world, overtaking even China). In the mid-1990s, there were only two dollar billionaires with a combined worth of $3.2 billion. But in 2016, there were 111 billionaires with a net worth of $308 billion, or Rs.20.48 lakh crore. 

The statistics are evidence of shocking levels of tax evasion, fraud and also legally sanctioned tax breaks on income and wealth favouring the richest classes. What does this mean for the discourse of nation and nationalism? What kind of a nation are we talking about when vast numbers of its middle and upper classes, the so-called wealth creators, are the very sections that eviscerate the economic vitals of the nation by not contributing to the national cause? 

The new ‘nationalism’
The “drain of wealth” theory was one of the greatest economic and moral weapons of the Indian nationalists against colonial rule. Ironically, the nation is subject to the same drain of wealth now. Around $450 billion has gone out of India, illegally, from 2002. In the same period, the FDI inflows into India were around $150 billion. As Frantz Fanon, the philosopher and anti-colonial revolutionary, noted many decades ago, in the wake of independence from colonial rule, the colonial exploiter is replaced by the native exploiter. Nationalism thus becomes an “empty shell, a crude and fragile travesty of what it might have been”.

The current nationalist/anti-nationalist binary is the most potent example of this travesty. An anti-national is one who refuses to chant “Bharat Mata ki Jai”, not the one who refuses to pay tax. One can indulge in the grossest forms of economic corruption and participate in shoring up an exploitative economic order, but that does not make one anti-nationalist. As economists have shown, India is an extreme case when it comes to relying overwhelmingly on indirect taxes, with its catastrophic consequences for the poor, unlike the developed countries, which rely overwhelmingly on direct taxes on income and wealth. 

Why any of this does not cause any moral outrage is because nationalism has been reduced to a symbolic/cultural entity unyoked from its material underpinnings. That is why we see the exaggerated and virulent battles around the emotive idea of the nation, rather than its material organisation. While the Prime Minister of Iceland resigns over his name figuring in the Panama Papers, there is hardly a ripple in India regarding the Indian names in them. While the “nationalist” government is proactive in jailing “seditious” students, it is hardly serious about investigating the 1,200 powerful Indians in the Swiss Leaks. As Fanon would have put it, it “provides nationalism alone as food for the masses”. 

Benedict Anderson had shown that the nation is conceived as a community; that is, despite the huge disparities between people within the nation, it is imagined as a comradeship. As he put it, “ultimately it is this fraternity that makes it possible, over the past two centuries, for so many millions of people, not so much to kill, as willingly to die for such limited imaginings.” In the India of the present, the burden of such sacrifices is exclusively placed on the marginalised and the oppressed castes and classes, while the powerful and the wealthy, leave alone sacrificing for the nation, do not even pay what is simply due from them. 

This is the conceit of nationalism that no one who profits from it wants to address. By joining the circus supposedly exposing corruption perpetrated by politicians, the privileged conveniently ignore their own participation in the economic fraud perpetrated on the nation. Their rapturous singing of the national anthem, wittingly or unwittingly, becomes a mask. Evading taxes is not an aberration; it is a mundane activity. If “no taxation without representation” was the rallying crying of the American Revolution, in India there is representation without taxation. 

While releasing the tax data, Prime Minister Narendra Modi said that it should “lead to enhanced insights for policymaking on taxation.” What he did not say was that it was a scathing commentary on the nation. 

Unless the cultural idea of the nation as comradeship and fraternity is complemented by material and economic arrangements that realise this, the nation will remain only in name. It will be Frantz Fanon’s empty shell. 

(Nissim Mannathukkaren is Chair, International Development Studies, Dalhousie University, Canada.)

Make in India: Ball lies in govt’s court

Bandi Ram Prasad

Why does industrial development continue to be sluggish in India? The country has one of the oldest stock markets in the world, a long tradition of trading and entrepreneurship, a wide network of global and regional commercial links and relationships, a history of innovative financial instruments, a robust risk-taking culture, and a well-developed domestic banking system.

Following Independence, newer themes (achieving commanding economic heights), extensive plans (Five-year Plans), and elaborate policies (several rounds of industrial licensing policies) formed the critical framework for the nation’s industrial development. Countries with similar levels of development at the time of India’s independence, marched far ahead in terms of industrial development. It is this context that has given rise to the call to ‘Make in India’.

Can grow more

It is not that India has lacked in industrial development. The concern is more about pace and depth. A report of the UN Industrial Development Organization echoed the prospects for India as “Global manufacturing has been shifting from developed to developing economies even faster, with economies such as China, India and Taiwan Province of China building strong manufacturing sectors”.

India also derived benefits from ‘Trade in Tasks’, an outcome of the globalisation that disaggregated production of individual components and spread various tasks of the global manufacturing process to different countries in accordance with climate, costs and competitiveness that led India to register remarkable gains in sectors such as information technology, telecom and pharma.

Statistics support this. Manufacturing value-added in India rose from a yearly rate of 6.9 per cent during 1992-2002 to 8.2 per cent during 2002-2012. Per capita manufacturing value added (MVA) in India rose from $116 in 2006 to $158 in 2011 and per capita manufactured exports from $90 to $202. Share in the world MVA rose from 1.70 to 2.25 per cent and share in the world manufactured exports from 1.17 to 2.01 during the period 2006-11.

The growth of MVA in India enabled the country to emerge as the second-leading manufacturer among industrialising economies, superseding Mexico and Brazil. Indian corporates entered big-ticket global acquisitions with the Tata group buying Corus (2007/Luxembourg) in a $12.2 billion deal, Bharti taking over Zain Africa (2010/Africa) for $10.7 billion and Hindalco buying out Novellis (2007/USA) for $6 billion. The pace of growth, however, has not been promising, given more than two decades of reforms and liberalisation. The share of industrialised economies in world manufacturing value added declined from 73 per cent in 2007 to 70 per cent in 2011.

In contrast, the share of emerging industrial economies (including China and India) rose from 27 per cent to 30 per cent. East Asia and Pacific increased their share in world manufacturing value-added, largely driven by China, from 14 per cent to 17 per cent, while in South and Central Asia — where India dominates — the share remained stagnant at 3 per cent throughout this period.

In the aftermath of the global economic crisis, the average growth rate of manufacturing value-added in East Asia and the Pacific declined from 11.37 per cent in 2003-07 to 9.08 per cent in 2007-12, whereas in South Asia it fell from 9.38 per cent to 5.61 per cent.

Many meanings of FDI

A programme of industrial development is not just about attracting foreign direct investment (FDI). It is also not right to assume that merely opening up the domestic economy will attract huge FDI.

True, FDI leads to higher exports and job creation apart from enhancing expertise and efficiency. However, evidence shows that the real benefits from it could more effectively be harnessed on the basis of policy pragmatism, prevalence of productive firms, effective forward and backward linkages, fair competition and tax laws, investor protection, and an infrastructure and legal framework that will work at the required speed. A 2011 study by the German Development Institute discussed certain hindrances to the pace of growth. The study analysed the experiences of seven countries with certain common features (such as state-driven development, heavy handed regulation of private business, limitations of central planning) with respect to industrial policies. It highlights factors such as (a) top-down decision-making in regard to industrial policy, (b) unwillingness to relax direct control of strategic industries, (c) interference in investment decisions, (d) neglect of entrepreneurship and competition, and (e) lack of proper coordination between different development agencies as affecting the pace of growth notwithstanding the FDI flows. India needs to watch these factors and amend them appropriately.

UNIDO, in its latest report, sums up the key features that make an industrial policy successful. “Industrial policy — the main objective of which is to anticipate structural change, facilitating it by removing obstacles and correcting for market failures” should seek to promote such change at each stage of development, in four main ways: (a) as a regulator establishing tariffs, fiscal incentives or subsidies; (b) as a financier influencing the credit market and allocating public and private financial resources to industrial projects; (c) as a producer participating directly in economic activity through, for example, state enterprises; and (d) as a consumer guaranteeing a market for strategic industries through public procurement programmes.

India has enough architecture in the form of a well-developed democratic system, a wide range of policymaking institutions, robust regulatory authorities, extensive financial markets, risk assuming and risk transfer instruments, and enterprising people. That makes it much easier to stir and stimulate growth with sound policy interventions.

State must act

Finally, the state plays a great role in creating a pathway for industrial development. A joint study of ILO and UNCTAD, ‘Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development (2014)’ brings out this aspect forcefully.

“History shows that in all cases of successful catching up, the State has played a proactive role, be it in building markets, in nurturing enterprises, in encouraging technological upgrading, in supporting learning processes and the accumulation of capabilities, in removing infrastructural bottlenecks to growth, in reforming agriculture and/or in providing finance. However, this is not to say that such successes all follow a uniform model; on the contrary, they encompass a variety of different institutional arrangements and policies”.

Thus the state in India has to play a proactive and pragmatic role in stepping the scope, quality and reach of interventions.

After the first wave of reforms, global interest in India has now reignited . It is a great opportunity for the country, with domestic economic growth picking up and poised to emerge as one of the fastest growing, interest in China ebbing, slowing down of Latin America and Eastern Europe in conflict. Africa has a long way to go before becoming a formidable competitor. India should seize this opportunity.

(The writer is former chief economist of the Indian Banks Association)

New Development Bank : The new BRICS financial institutions

Business Line Editorial

The announcement by the BRICS countries — Brazil, Russia, India, China and South Africa — to establish a New Development Bank (NDB) with an initial subscribed capital of $50 billion, alongside a $100 billion Contingency Reserve Arrangement (CRA) fund for members to use during balance of payments crises, is an initiative with significant global economic implications. The NDB would essentially do what the World Bank presently does: extend loans, payable over 15-20 years, to fund infrastructure and other development programmes.

The CRA’s envisaged role is, likewise, similar to the International Monetary Fund’s (IMF): providing emergency assistance to members facing currency collapse or flight of capital. But the IMF and World Bank are largely western-controlled. The combined voting power of the five BRICS nations in the World Bank, at 13.09 per cent, is lower than the US’ 15.01 per cent. Nor do they have a real say in the IMF, whose loans are often conditional upon the borrowers undertaking extreme austerity measures.

The proposed NDB is expected to be a more democratic institution, with all the five BRICS countries having equal shareholding. While the bank would be headquartered in Shanghai, its first president will be from India. The CRA can similarly help members tide over payments problems through currency swaps involving potentially less onerous conditions. Thus, this fund could provide liquidity in dollars (or even yuan) in exchange for the currency of the borrowing member and the latter, in turn, buying back its currency at a future date at the prevailing exchange rates. But the NDB/CRA initiatives, above all, reflect the increasing role that emerging economies — the BRICS countries together make up 28 per cent of the world’s GDP by purchasing power parity and 42 per cent of its population — see for themselves in global decision-making. If nothing, it may force reforms in the existing Bretton Woods institutions; the industrialised powers that call the shots in these need to reconcile themselves to the new reality.

For all the lofty goals underlying the launch of NDB/CRA, one shouldn’t, however, ignore the influence that China will have in their effective running. With its $4 trillion-plus forex reserves — over three-fourths of the total for all BRICS economies — only China has the resources to make the new institutions count. It will obviously view this as an opportunity to make the yuan a reserve currency to rival the dollar — which it is already doing through currency swap deals with Brazil, Argentina, Indonesia and many other countries. Also, the NDB can be a channel for Chinese credit to be extended without inviting suspicion of underlying political motives associated with direct financing. Yet, for all the obvious Chinese interest in pushing for a ‘fairer’ global financial order under the auspices of BRICS, the project is worth it if the new financial institutions can offer competition to the IMF and World Bank.

Environment and Development

Ramaswamy R Iyer
There are some worrying signals from the new government in New Delhi that it could compromise on environmental concerns in the pursuit of more rapid growth: clearances could be given quickly (i e, environment protection requirements will be loosened), the Land Acquisition Act could be diluted and more.
It may be more useful if we shake ourselves free of the obsession with GDP growth rates and try instead to make India a caring, humane, compassionate, equitable, just and harmonious society.

With the advent of the Narendra Modi government, there is much talk of a quick approval of projects held up for environmental clearances. The big corporates, their champions among the economists, and those who believe that gross domestic product (GDP) growth and “development” ought to be our over-riding goals, are convinced that among the impediments to growth and development “green clearances” are the worst.

One View of ‘Clearances’

Let me present a caricature of a particular view: project clearances should be had for the asking; similarly land for industry should be had for the asking and should be taken by the government from farmers and other people and handed over to corporate houses (whether for high or low priority industries or for speculative investments in real estate). “Free, informed prior consent” for land acquisition, fair compensation for land acquired, and generous rehabilitation packages are luxuries that we cannot afford. “Social Impact Assessment” or SIA is a newfangled and dangerous idea. The society that we should aim at building is one in which the stock market soars to ever new heights and foreign investors want to invest: that is the ultimate test of success. This is in fact not too much of a caricature of the industry view and of neo-liberal alliance economic thinking. It carried much weight with the United Progressive Alliance (UPA) government – but not, one hopes, with the new government.

Unfortunately, there seems to be a strong continuity between the erstwhile UPA government and the new Bharatiya Janata Party government on an impatience with environmental concerns. The redoubtable Sunita Narain is reported to have said that what we need is not rhetoric but tough action on the environment. Tough action is very likely, but alas, not necessarily in the direction that we would approve of.

Returning to project clearances, please note that the focus is on “projects”. However, projects are only the embodiments of approaches and policies. When a new government comes into power, one would expect it to examine the approaches and policies – the kind of thinking – underlying the pending projects, and consider whether it wishes to persist with that thinking or would like to bring new thinking to bear on the matter. In the latter case, it may wish to abandon some projects, redesign some and push ahead with some. Instead, the call is to “clear pending projects quickly”. This unthinking preoccupation with projects prevents serious thinking about policies.

Further, any requirement of a clearance implies the possibility of a denial of clearance, but no one is talking about rejections. Let us suppose that the examination of projects and the processes of decision-making are speeded up, and that out of 10 projects six are promptly rejected and four are promptly cleared. Would the corporate world and the protagonists of development be happy? Hardly. When they talk about “quick clearances” they mean positive clearances, not negative ones. What they want is that the whole business of a clearance under the Environment (Protection) Act (EPA) and related Acts should be reduced to a formality to be got through very quickly, and that all projects should come through unscathed.

At the Cost of the Environment?

There used to be complaints about delays in clearance even earlier, when the examination was confined to techno-economic and financial aspects, but with the onset of what are called “green clearances”, i e, clearances under the EPA, the Forest Conservation Act, and other related enactments, the complaints have become shriller. The reason is that project proponents were willing to accept the need for a techno-economic-financial examination, but resent an environmental clearance as a needless imposition. Concern about the environment and ecology is limited to a small number of people. Most people are willing to pay lip service to the environment because that has become the prevailing practice, but have no real belief in it, and would be seriously upset if it interferes with what they consider to be development. That is also the attitude of big business, and this point of view is quite strong in the so-called “developmental” ministries in the government. The Ministry of Environment and Forests (MoEF) is unpopular with these ministries; it is regarded as a “negative” force impeding development. A development-environment dichotomy is posited, with the former being accorded primacy and the latter relegated to a secondary position. The holders of the “primacy of development” argument would say “yes, the protection of the environment is important, but not at the cost of development”. Let us reverse that proposition: can we really have development at the cost of the environment?

It is interesting that the ardent advocates of what they call “reform” (which means a full changeover to free-market capitalism) sometimes describe “green clearances” as a return to the discredited “licence-permit raj”. As no one is currently in favour of licence-permit raj, the use of that term functions as an argument-stopper. However, can any government function without permits and licences? A passport is a permit. A driving licence is a licence. Boilers have to be periodically certified for safety. Building plans cannot be passed without a clearance from the fire department. Vehicle exhaust has to conform to certain specifications. In that haven of free enterprise, the United States, there is strong anti-trust legislation and there are powerful regulatory agencies such as the Securities and Exchange Commission and the Federal Drugs Administration. In that country, dams can be built by private agencies but they need a licence; and if the conditions prescribed are not adhered to, the licence can be cancelled. It follows that if we wish to protect and conserve mountains, forests, rivers, wildlife, the air that we breathe and the water that we drink, and indeed our habitat, the Planet Earth, we must have laws and rules and these must be enforced. Large interventions in nature will necessarily have to be carefully examined for their impacts on these things. Describing this kind of examination dismissively as licence-permit raj indicates a mind disabled by ideological prejudice.

Disturbing Signals

Dare one hope that the negative attitude to environmental concerns will not continue in the new government? Unfortunately there are disturbing indications. The new environment minister is reported to have said that the environment ministry will not be obstructionist. That is a revealing statement. It implies that any minister who implements the EPA faithfully and effectively is being obstructionist and that he or she should moderate the implementation to avoid being so. It is also a defensive statement seeking to reassure everyone that he will try not to give trouble to anyone.

Why does such a reassurance become necessary? The reason is that the EPA seriously tries to protect the environment and contains provisions for the purpose, which means that if rigorously implemented, the Act is bound to bite in some cases. If it did not, the Act would be worthless. It follows that the bland statement often heard that there need be no conflict between the environment and development is not true. An effort needs to be made to reconcile the requirements of the Act and the demands of development, and it will not be an easy effort.

Compromise on the Environment

It is in that context that the advocates of development glibly talk about a “balancing” of environment and development. What they mean by balancing is of course a compromise on environmental concerns, never a moderation of developmental activities. The development chariot must roll on, and environmental concerns must be sacrificed.

There are reports that time limits will be set for environmental clearances, and that there might be a provision for an automatic clearance if the clearance is not forthcoming within a certain period. These are of course media reports and one does not know what the exact instructions will be. However, these indications show which way the wind is blowing and that is indeed worrisome. Please note that the onus is entirely on the MoEF. They are responsible for delays; they must abide by the time limits; if they do not, there may be clearances by default. What responsibilities are cast on those who submit for clearance projects which are simply not fit for clearance? Is there any recognition that the projects must be well-prepared, fully documented and supported, and ripe for a clearance in every possible way; that the vast majority of Environmental Impact Assessments (EIAs) are extremely poor and shoddy and many downright dishonest; and that EIAs need to be fully professionalised, distanced from project formulators, approvers and implementers, and placed under the supervision of the National Environmental Regulator (if one is established)? That is a rhetorical question that needs no answer. Under the circumstances, the only way in which the MoEF can abide by the time limits would be to reject promptly the vast majority of projects. Would that be acceptable?

Dilution of Land Acquisition Act

Another source of worry is in relation to land acquisition, displacement and rehabilitation. There is a tendency on the part of many commentators, particularly the champions of free-market capitalism (who hold a view similar to the old American slogan that “what is good for General Motors is good for America”), to regard the Land Acquisition and Rehabilitation Act of 2013 as extremely bad and a serious impediment to development. The thought that a national policy was needed on development-induced displacement and the rehabilitation of project-affected people, as also a drastic overhaul of the colonial Land Acquisition Act, emerged in the 1980s. After protracted debates and a series of drafts (repeatedly diluted), a weak Act was finally passed in 2013. Many feel that it is defective and deficient in several respects, but such as it is, it exists and offers some limited protection against unfair alienation of agricultural land, and a modest rehabilitation provision. In the drive for the quick implementation of “developmental” projects, one hopes that the government will not be unduly influenced by the neo-liberal economic view of this Act.

Going beyond project clearances, it has also been argued by some commentators that institutions of accountability such as the Comptroller and Auditor General (CAG) and institutions against corruption such as the Central Vigilance Commission (CVC) are responsible for the economic slowdown. The inference is clear. It would be wonderful if there were no CAG, no CVC, and no EPA, but if that ideal situation is not possible, we should at least render these agencies, laws and procedures as weak and innocuous as possible. Corruption, fraud and financial irregularities are no doubt regrettable, but reporting on them in detail in public documents such as the CVC’s or CAG’s reports makes them visible internationally and affects “investor confidence”. A bit of corruption, fraud or irregularity is a price we may have to pay for a better inflow of foreign direct investment (FDI). These things will exist, but must be hidden from public view. That represents the thinking of several commentators, though they may not say so explicitly. That view found much resonance in the UPA government. One must hope that it does not find an echo in the new government through some of its advisers. Prime Minister Modi is probably too shrewd a person to be unduly influenced by that kind of thinking.

Reports to the effect that the new government proposes to restore the Ganga to a pristine condition are encouraging, but one must hope that it will not be a cosmetic exercise like the “revival” of the Sabarmati in Gujarat. The Sabarmati has not been revived; it is as dead as ever. All that has happened is that in a 10 km stretch of the 370 km-long river, Narmada waters have been put in, treating the Sabarmati bed as a conduit or a pipeline for those waters. An artificial “river” of 10 km has thus been created for the city of Ahmedabad. The only lesson to be learnt from that experience is that it should be avoided.

River Interlinking Project

More disturbing is the fact during his election campaign, the present prime minister talked about the interlinking of rivers (ILR) project. That is a very controversial project which has many supporters but also many critics. The fact that the prime minister is predisposed in favour of the project is hardly reassuring, but one fervently hopes that he will study the weighty objections that many critics have raised before taking a decision on the project. The ILR project is an ill-conceived project and will be an unmitigated disaster. However, that subject cannot be discussed in this article. The reader’s attention is drawn to two articles by this writer on the subject in EPW (“River Linking Project: A Disquieting Judgment”, 7 April 2012; and “Linking of Rivers: Judicial Activism or Error?”, 16 November 2002).

Perhaps one is being unduly alarmist. One hopes that the Modi government will be as earnest about environmental and ecological concerns as about what goes by the name of development. One hopes further that there will be an agonising reappraisal of what constitutes true development. A word needs to be said about this.

As already mentioned, the prevailing idea of development is a booming stock market, an inward rush of foreign investment, and a GDP growth of 8% to 10%. However, 8% or 10% growth would imply a huge draft on natural resources, a high potential for pollution requiring remedial measures, and an immense generation of waste needing disposal. Is it possible to pursue 8% or 10% growth without damaging the environment and Planet Earth? However, let us leave such radical thinking aside for the time being, though we may be forced to face that logic in due course. In practical terms, what can be done?

Need for Focus on Specifics

May one suggest that we refrain from adopting targets for growth, and focus instead on specifics such as food inflation, farmers’ suicides, poverty, jobs, illiteracy, disease, infant mortality, safe and reliable water supply, appropriate sanitation arrangements, safety of women in the streets and workplaces, and so on, and above all corruption, leaving growth to look after itself. This is a subject that will need to be discussed at length. One can only offer without proof the statement that such a piecemeal approach is possible without adopting ideologies of the right or the left. In particular, it is necessary to shake ourselves free of the obsession with GDP growth rates. It is also necessary to stop being bemused by visions of India as a super-power, and try to make India a caring, humane, compassionate, equitable, just and harmonious society.

One shares the widespread hope that a single-party majority and a decisive prime minister will mark a new beginning. The prime minister’s statement from his new website says: “Let us together dream of a strong, developed and inclusive India”. That phrase needs to be expanded to include ecological sustainability and harmony – not only between groups/states/countries, but also between generations, and between humanity and Nature. In the hope that the new government is engaged in serious thinking about these matters, these reflections are offered to it for whatever they are worth.

(Ramaswamy R Iyer (ramaswamy.iyer@gmail.com) is with the Centre for Policy Research and is better known for his extensive writings on issues related to water.)

A flaw in the CSR design

Tulsi Jayakumar

Corporates can undertake social spending only where they are invested. The benefits go to already industrialised regions

Section 135 of the Companies Act 2013 and the resultant Corporate Social Responsibility (CSR) rules 2014, issued by the ministry of corporate affairs came into effect in April 2014. The activities listed which may be included by companies in their CSR policies appear ‘confusing’.

They include eradicating hunger and poverty, promoting education, promoting gender equality and empowering women, reducing child mortality and improving maternal health, and combating HIV virus, AIDS, malaria and other diseases.

For one, these activities are traditionally supposed to be undertaken by a welfare state. Is this then an admission of the Government’s abrogation of responsibility?

It has been argued by some economists that such CSR spends are a drop in the ocean of overall government spending on the social sector. The question is: Can this make a difference to the provision of essentially public goods that the Government has so far not delivered?

A more disturbing aspect of Section 135 relates to the linking of a company’s profit-making with the development of local areas.

Companies are required to spend 2 per cent of their average net profits in the preceding three years and focus on local areas, around which they operate. This is an absurd proposition.

Local development 
This would increase inter-state disparities in social indicators. For instance, states like Gujarat, Maharashtra and Andhra Pradesh (as also Odisha in 2013), with their large number of industrial proposals, are likely to see greater social development on account of higher CSR spend by the private sector.

Odisha was the most attractive state for investment in 2013. It accounted for over one-fifth of project proposals in the first 10 months, valued cumulatively at ₹4.7 lakh crore, according to data from the department of industrial policy and promotion (DIPP).

Of the 30 districts in Odisha, the three relatively more developed districts of Ganjam, Jajpur and Jagatsinghpur, which attracted the largest investors, already have an industrial presence. With literacy rates of 81, 80 and 87 per cent respectively, their development indicators were better.

On the other hand, a ministry of home affairs (MHA) report identifies six districts as Naxal-affected. The most backward — Malkangiri — with a literacy rate of 49 per cent and almost 80 per cent of the population belonging to the SC/ST communities, is not likely to attract investments. What hope is there for communities in such districts?

Dealing with losses
What happens to development projects when companies make losses? According to an estimate, of the 5,138 firms listed on the BSE, the total number of companies qualifying under Section 135 has come down from 1,500 in FY2010 to 1,372 in FY2012. So has the number of total qualifying companies with Profit After Tax greater than zero — from 1,457 to 1,265.

While the total estimated CSR spend of such companies increased over the period (from ₹7,609 crore to ₹8,343 crore), such figures may be misleading. This macro-picture masks the reduced CSR spending on account of the companies concerned running losses.

Also, it is during recessionary times, when the need for such expenditure may be highest among vulnerable groups, that CSR spend may actually be unavailable.

Presently, most companies spend on projects relating to education, health and livelihood. These areas have synergies with business interests and sustainability. The rules in the Companies Act 2013 would make it difficult for companies to pursue strategic CSR — aligned to business strategy — since any expense which can be traced back to financial profits may have to be set aside for CSR as indicated by the law.

We may then see companies preferring to spend on activities specified in the Act which, however, may have a lower long-run social impact --- such as protection of national art, heritage and culture, promotion of sports, and contributing to the Prime Minister’s National Relief Fund. But what about addressing the problems of inter-regional inequality?

(The writer is a professor of economics at the SP Jain Institute of Management and Research, Mumbai.)

Corporate Social Responsibility (CSR) as an anti-poverty instrument

Tony O. Elumelu

In 2000, the United Nations made the historic announcement of eight Millennium Development Goals (MDGs). They were very specific and had a timeline of 15 years for delivery. Progress on most of these objectives has been encouraging, but as we look towards the next round of development goals, we must recognise how the world has changed since 2000.

The global financial crisis had a devastating impact on both individuals and the public sector. Conversely, the rise of the BRIC economies and Africa’s emergence mean that aid is simply not needed on the same scale as it was before.

Therefore, we in the emerging economies need to reconsider not only the substance of the new development framework, but also the implementation process. In the original MDGs, the private sector was noticeable mostly by its absence. This time, we must step up as part of the solution and pioneer new approaches that could hold the key to a more innovative and inclusive way to deliver development.

Take, for example, India. While its economy has expanded impressively over the past decade and half, so has income inequality. Improvements on social indicators such as malnutrition and hunger have not kept pace with its growing prosperity, primarily because public spending to tackle these challenges was simply inadequate.

CSR – a game changer

But now the Indian government has introduced the first step of a potential gamechanger, and we in Africa have taken note. A new law enacted this month makes it mandatory for private corporations to invest at least 2 per cent of their profits in corporate social responsibility (CSR). The private sector in India now has a unique opportunity to respond to the collective aspirations of an entire country and accelerate action towards achieving the MDGs on hunger, health and sustainability. We applaud India for this.

My own group of companies also contributes 2 per cent of pre-tax profits to social development. Yet we go beyond this, and seek to create social impact through all the businesses we operate. While the Indian government now requires Indian companies to contribute towards social development, I challenge the Indian private sector to go further. Take up the challenge and strive to balance economic prosperity and social wealth which helps ultimately to create more gainful jobs and all inclusive nation.

In framing the new development agenda, the private sector must focus on tackling unemployment and job creation on a massive scale, and on dramatically improving access to electricity. These goals are critical to both lives and quality of life, and cannot be accomplished without collaboration with the private sector.

Development framework

For example, much of the mandated and voluntary private sector investments could go into creating many of the 100 million new jobs India will need over the next decade.

Lack of access to electricity is also a major challenge that will prevent us from eradicating poverty. Millions of mothers are giving birth in the dark, life-saving vaccine deliveries are challenged by lack of power to support their cold chains, and 90 million children go to school without electricity.

If we agree that access to electricity and improved livelihoods are vital components for the success of the post-2015 development agenda, then the private sector must have a key role to play in its design and implementation.

For governments, achieving the goals of the post-2015 development framework will mean enacting reforms and creating new policies to build more competitive business environments. We in the private sector must act with integrity, making sure that markets drive development, not oppose it.

We must focus on creating and multiplying value in the societies in which we source, supply and operate, and integrate this into our corporate governance, our operations, our project development and our profit calculation, across the value chain.

To truly combat poverty, we must combine the best qualities of all sectors: the political will, resources, and convening power of governments; the compassion, selflessness and dedication of non-profits; the innovation, expertise, and financial capital of the private sector; and the drive, creativity and entrepreneurial spirit of the people we seek to help. Only then can we hope to take on the challenges of the post-2015 development agenda.

(The writer is chairman of the Heirs Holdings group, Lagos)

Raghuram Rajan needs to think fast

One of India’s most astute Central bankers, Y.V. Reddy, once said that when faced with a very complex macroeconomic and political environment, what really matters is your intuitive capacity to take the right decision based on experience and knowledge. Some of these intuitive calls may even go against the grain of what well-established technical templates of economics might dictate. After all, “rational policy” has been conspicuous by its absence since the world economy went into a slump in 2008. Every conventional rule of economics has been turned on its head over the past five years.

Indeed, the big challenge for Raghuram Govind Rajan, who will be among the youngest governors of the Reserve Bank of India when he assumes charge on September 4, will be to hone his intuitive ability to do the right thing in the crisis-like situation that has engulfed the economy.

Insight

Mr. Rajan is credited with having displayed a sharp, contrarian insight in 2005, in the middle of the global economic boom, at a function held in honour of the then awe-inspiring Federal Reserve Chairman, Alan Greenspan. In the midst of the Greenspan-led liquidity and credit boom in America, Mr. Rajan had raised the question of whether banks will be able to provide adequate liquidity to the financial markets in the event of large-scale credit defaults. He had also asked whether in such an eventuality “how financial positions would be unwound and losses allocated in a manner that the consequences for the real economy [would be] minimized?” This question remains valid today as large-scale socialisation of losses continues to weigh down sovereign balance sheets, causing social unrest across the developed world, especially Europe. While losses have been socialised, private bankers are fully back in business.

Mr. Rajan, a Professor of Finance at the Booth School of Business, University of Chicago, came as an honorary economic adviser to Prime Minister Manmohan Singh in early 2008. In that year itself, he headed a 13-member committee which recommended far-reaching reform of the financial markets as well as the banking and regulatory system. Some of the big ideas generated by this committee, including fuller capital account convertibility, had lost intellectual support after the 2008 global financial meltdown when reigning market theologies underwent a big change. The role of central banks also altered fundamentally.

For instance, the Rajan Committee in mid-2008 had recommended that the RBI should confine itself to formal inflation rate targeting for the economy as some western central banks do. The job of regulating banks should be done by a different authority. However, the RBI resisted this idea and D. Subbarao publicly declared that the global consensus after the 2008 financial crisis was that central banks must pursue multiple objectives, including overseeing financial stability. Mr. Subbarao had implied that in Indian conditions, the narrow mandate of inflation targeting would not work. The RBI indeed went on to pursue multiple objectives. The governor was supported by reputed former RBI Governors like Bimal Jalan, Y.V. Reddy and even C. Rangarajan in this argument. This debate remains inconclusive. Mr. Subbarao’s stance was seen by critics, including members of the Rajan Committee, as the RBI’s reluctance to give up its turf.

However, it will be interesting to see how Raghuram Rajan, as RBI governor, views his own recommendations of the past. He cannot bring about any radical change in the bank’s functioning without taking the RBI bureaucracy, which seems quite formidable, into confidence. The RBI has institutional credibility flowing from its history and is known to have fought successful intellectual battles in recent times to preserve its core mandate.

For instance, Pranab Mukherjee as finance minister created an overarching financial stability body called the Financial Stability and Development Council (FSDC). This body, headed by the finance minister, was meant to supervise all regulators, including the RBI. The RBI resisted this idea vigorously and managed to get Mr. Mukherjee to considerably dilute the idea. As a result, the FSDC exists largely on paper today.

Interestingly, the idea to create this body came from the Raghuram Rajan Committee. Will Mr. Rajan, as RBI governor, try to breathe new life into FSDC? If he were to pursue some of the bigger ideas he has espoused personally and through formal committees, he would end up whittling down the RBI’s current mandate. 

Task ahead

In any case, in the immediate short to medium term, Mr. Rajan will be fully preoccupied in the firefighting exercise to stabilise the currency market which is the single biggest challenge for the central bank and the United Progressive Alliance (UPA) government. The rupee’s value has gone down from Rs.45 to a dollar in May 2011 to Rs.60 plus today. In just over two years, the rupee has lost over 30 per cent of its value. The rupee’s value crossed the first psychological threshold of Rs.50 in 2011 and stayed mostly above Rs.50 in 2012. This year, it breached the second psychological barrier of Rs.60 and, in spite of all efforts by the government and RBI in recent weeks, the downward pressure on the currency continues.

The RBI today is caught between a rock and a hard place. Economic growth has collapsed and the central bank wants to ease interest rates to boost the economy. If the RBI eases interest rates, it is feared the rupee may weaken further causing a spiral effect. Currently, the RBI cannot address growth and its sole focus is on curbing the rupee’s volatility and letting it come back to its fair value. C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister, reckons the appropriate value of the rupee based on the commonly accepted 6 country or 36 country trade-weighted basket is about Rs.59 to a dollar. Going by this metric, the rupee is clearly undervalued. The RBI’s challenge is to see that the rupee does not slide further to Rs.65 to a dollar, which many analysts predict.

 

Repayment

The government needs to pay about $172 billion of short-term debt within one year, by March 2014. Then there is a current account deficit of about $80 billion which needs to be met with capital inflows. It is estimated that Indian corporates have taken foreign loans of over $200 billion and over 50 per cent of this dollar credit exposure is unhedged. This means these companies have already suffered an extra $30 billion loss in their books because of 30 per cent rupee depreciation in two years. It must be remembered that the high corporate foreign currency loan defaults had primarily caused the East Asian currency crisis and capital flight in 1997.

Mr. Rajan will also have to grapple with the sharply deteriorating loan portfolio of banks. Since 2008, Indian banks have restructured loans of business houses which, if strictly accounted for, may take the non-performing loans to about eight per cent to 10 per cent of the total credit outstanding. This is another time bomb ticking. A large number of influential businesses have used their political clout to postpone repayment of loans even as their extravagant, personal lifestyles have not changed. Mr. Rajan may have to draw some ideas from his first book, co-authored with Luigi Zingales, titled Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity in dealing with future loan defaults by big corporates. All in all, he is walking into rather rough weather.

Is monetary theory dead?

S. GURUMURTHY 

The financial sector is many times larger than the global real economy. Yet inflation has not plagued the developed world. Why? The disproportionate growth of the financial economy will continue.
When the world economy plunged from ‘unprecedented prosperity’ into unfathomable crisis in 2008, most economists had conceded that it was not just an economic crisis, but one of economics itself.

Great economists, whose theories the world followed blindly, could not explain why they could not detect or prevent the crisis, nor suggest how to get out of it. They shied away from their (almost superstitious) faith that the market knew everything, and urged the State to intervene and to book trillions of dollars of losses to public account to save the spoilt brat — the financial market.

The result, the financial market, already flooded with semi-phony monies self-generated by banks and shadow banks, was invaded by a tsunami of real phony monies digitised by the central banks. The phony $5 trillion already pumped in, with $1.5 trillion in the pipeline, keeps the show going. And yet the economic thought leaders have declared real economic recovery.

As a consequence, the philosophy and discipline of monetary economics are being turned upside down. And, what was admitted in 2008 as the cause of the crisis is now touted as the way to prosperity. Here is an illustration of how phony money is perceived as the future driver of global economy.

Global Capital Pyramid

Some six months ago, Bain & Company, the leading global business consulting firm, came out with a report titled A World Awash In Money (November 14, 2012), which studied the relation between financial economy and real economy in the last two decades. As for its credentials, Bain, ranked first among global consulting firms, claims that its clients have outperformed the market by four times.

Bain’s report ‘discovers’ that the rate of growth of world output of goods and services has seen an extended slowdown over recent decades, and yet the volume of global financial assets has expanded rapidly. Bain adds that the relationship between financial economy and underlying real economy has reached “a decisive turning point”.

The report said that by 2010, global capital had swollen to some $600 trillion, tripling over the past two decades, against which the real economy stood at $210 trillion — almost one-third of the financial economy. And today, the total financial assets of $600 trillion (with largely matching financial debts) are nearly 10 times the value of the global output of all goods and services (the global GDP) of $63 trillion. Bain concludes that for the balance of the decade 2010-20, markets will be awash with monies — read phony monies.

It says that the fundamental forces that inflated the global financial balance sheet since the 1980s, that is, financial innovation, high-speed computing and reliance on leverage, are still active. The total global capital, Bain report says, will expand from $600 trillion, by half again, to $900 trillion by 2020 (at 2010 prices and exchange rates).

More than any other factor on the horizon, Bain says, the self-generating momentum for capital (read ‘phony capital’) to expand — and the sheer size the financial sector has attained — will influence the shape and tempo of global economic growth going forward.

The Bain study builds the Global Capital Pyramid pictorially, where the financial sector stands on top with the real economy at the bottom. The pyramid shows that “total financial assets”, which stood at $600 trillion in 2010, will expand by $300 trillion in ten years to $900 trillion in 2020. In the same period “financial holdings” will increase by $165 trillion, from $335 trillion to $500 trillion. What Bain calls as “financial assets” is gross financial assets. The debts on the other side which is out of the radar is in itself a huge topic.

Upside Down

Now, back to the main story. What, according to Bain, is total financial assets and financial holdings? Total “financial assets” ($900 trillion) which is the sum total of ‘financial assets of the financial sector and non-financial sector’ includes direct “financial holdings” ($500 trillion) of the non-financial sector, namely, households, corporations and governments and other direct owners. As against the rise of financial economy by $165 trillion by 2020, the real economy (or the underlying ‘Asset Base’) will rise by $90 trillion, from $210 trillion to $300 trillion.

The Asset Base (or real economy) represents the “accumulated tangible and intangible assets of all sectors”, namely, the sum of all factories, farms, infrastructure, intellectual property and the like — and everything that might appear as non-financial asset on a balance sheet”.

Thus, against the total underlying Asset Base of $300 trillion (in 2020) at the lower end of the Pyramid, the financial economy at the top will swell to $900 trillion by 2020. The two sub-sets of the asset base of the economy are Total GDP, at the middle of the real economy in the Pyramid, and Annual Economic Savings last at the bottom. The Total world GDP will grow from $63 trillion to $90 trillion, that is by $27 trillion and the Annual Economic Savings will grow from $15 trillion to $23 trillion, that is by $8 trillion.

Total GDP is the annual total real output of good and services. The annual economic savings is “the annual economic output not immediately consumed”, which is “derived from gross world savings (the sum of gross national savings at the country level) that “represents the underlying free GDP available for investments” and “does not include depreciation as some of these amounts needs to be reinvested to maintain a constant asset base”.

See how the ratio works. The real assets of the economy grow by $90 trillion against the financial savings of $8 trillion — showing a leverage of more than 10 times. Against the additional equity of $8 trillion generated during 2010-20, the additional monies/debts self-generated by the financial system will be $82 trillion. The apparent prosperity ($900 trillion) is three times the real asset base ($300 trillion) and ten times the real growth ($90 trillion).

The disproportionate growth of the financial economy over the underlying real economy is what led to the 2008 crisis. And Bain’s report makes it clear this will not only not abate, but continue and intensify. The report says that it has turned the world of capital upside down. Not just that. This has turned monetary economics upside down.

Milton effect evaded

The first principle of monetary economics is that variation in money supply has a major influence on national output in the short run and on the price level over long periods. Milton Friedman, Nobel Prize winner for monetary economics in 1976, theorised that “inflation is always and everywhere a monetary phenomenon” and advocated that the central bank must pursue a policy to keep the supply and demand for money at equilibrium and limited to the growth in productivity (GDP) and demand.

Along with economist Edmund Phelps, who was a Nobel Prize winner later, Friedman found that policy makers could not maintain low unemployment by permitting higher inflation. Milton’s prescriptions were followed by Paul Volcker who, as Chairman of the US Federal Reserve System (1979-1986) adopted money demand and supply targets that first drove the interest rates high and the economy into recession but ultimately brought down inflation and also unemployment.

This proved Friedman and Phelps right on the need to correlate the demand for money and the growth in the real economy.

Milton Friedman suggested that governments must statutorily limit the rate of money expansion to the rate of growth of the real economy. That is, there must be direct correlation between money and growth. But now, post 1990, the financial economy has grown 10 times the real economy.

The Friedman norm has been violated ten times over, but still there is no correspondingly high inflation in the Euro West.

His view has been frontally challenged today. Japan is doubling its monetary base in 18 months, yet, assumes that inflation rate will not be 100 per cent but just 2 per cent. How could, with money expanding at 200 per cent, inflation be just 2 per cent?

To make it worse the outstanding derivatives, which represent underlying assets, have gone up from $100 trillion in 2000 to over $632 trillion in December 2012 against the underlying asset value of just $24.7 trillion — less than 4 per cent of the derivatives in the market. Is Friedman’s celebrated monetary economic theory then dead?

No. The Friedman effect has been evaded by the developed nations by two financial innovations. One, large-scale de-territorialisation of convertible currencies by cross-border currency circulation, foreign investment and forex-holdings forced by currency internationalism.

This has virtually limited the application of Friedman’s monetary theory only to nations with currencies which are not convertible. And two, unlike commodity prices, re-defining inflation to exclude asset price rise caused by money supply. Each of them an independent topic by itself.

(The author is a commentator on political and economic affairs, and a corporate advisor)