It would take extreme effort for Raghuram Rajan to do a worse job of ensuring economic growth than his immediate predecessor Duvvuri Subbarao, who will leave behind a banking and industrial wasteland by the time his extended term concludes in a few weeks’ time. Given that he has been a loyal chela of the economic adviser to the Prime Minister, C. Rangarajan, it would be understandable if he were to expect to be given the Padma Vibhushan at the next investiture ceremony. Odder choices have been known to occur, no doubt inspired by the Nobel Peace Prize awarded to Henry Kissinger or the European Union. More apt than simply a national award would be the gifting of a ministerial-level commission chairmanship to Subbarao. This body could be given the task of boosting economic growth in India. Given the skill of Subbarao in ensuring the opposite, all that would be needed to speed up growth in the country would be to implement the polar opposite of the committee’s recommendations.
Except to the “experts” at the Reserve Bank of India (RBI) and at the Ministry of Finance, there is no mystery about why the Indian rupee has been diving in recent months. All that the mandarins have to do is to go to — for example — Singapore and get hold of some of the brochures being put out by banks there to attract NRI dollar deposits. These explicitly promise an annual return of about 20% in dollars for any money invested. Indeed, it would make sense for an NRI to take a loan from a Singapore bank and place the loan as an NRI deposit, taking advantage of the more than 5% spread between the cost of the loan and the interest on the deposit.
The (already high) assured return of 20% is subject to the rupee falling to about Rs 72 to the US dollar, but the more adventurous investors can get a higher return by accepting a higher risk. The number of “get rich quick” NRI deposit schemes based on the absurdly generous incentives given by the Manmohan Singh government to such investors has multiplied, with banks advertising such offers and even provoking lawsuits on the part of those angry at being denied access to the India Gravy Train because they are not NRIs. However, despite the several heady mentions given to individuals such as Raghuram Rajan (who, thus far, has been conspicuous only in being part of a team that has crash-landed a once soaring economy), the geniuses in Mint Road and North Block seem unable to comprehend the correlation between the high returns given to those making dollar deposits in Indian banks and the fall of the rupee.
Any hawala operator can tell them how those holding huge hoards of cash — mostly politicians and officials — are flocking to hawala operators in order to exchange their hoards into dollars. This is then sent to destinations such as Singapore or Dubai, where otherwise unemployed relatives are packed off as NRIs. These are then supplied with dollars which can be placed in NRI deposits, although in many cases, these big depositors have no known source of income except remittances from mysterious channels. It has become such a nightmare to operate in India, and so easy to make money out of the system if one is an NRI, that there has been a huge increase in this category, several of whom have made large NRI deposits to get the massive dollar denominated returns that such deposits bring. This is in contrast to the domestic investor, who gets a pittance, that too in a depreciating rupee that is plunging towards the Rs 100 to a US dollar mark, thanks to the PM’s hand-picked economic team.
It is this legal and illegal conversion of rupees into dollars that is the primary cause of the falling value of the rupee, not the esoteric reasons being trotted out by a section of pink press commentators who are PROs for the IMF and the World Bank. Unless this unhealthy concentration of effort on getting short-term funds through the NRI route get replaced with schemes for an amnesty for foreign funds held abroad and investment in physical assets rather than in hot money destinations. Raghuram Rajan, with his attention fixed to the needs of those influential in Chicago rather than Kolkata, is unlikely to make a positive difference to an economy which has been almost destroyed thanks to giving foreign money and foreign capital way, way more value than the rupee and domestic investors. Hopefully, this “Craze for Foreign” (as V.S. Naipaul once put it) of the Indian policymaker will cease before the streets of India erupt in fury.