Can you spare us your dollars?

When Indira Gandhi devalued the rupee in 1966, she had to do it almost furtively, in the face of opposition across the political spectrum for what was seen as acquiescence to US strong-arm tactics.

Today, when the rupee falls to unprecedented levels, we blame the Government for not doing enough to get us more dollars. In 1966, most political parties and a swathe of Indian industrialists wanted the Government to continue its quantitative restrictions as a vital part of a policy aimed at import substitution. Today, we want the US government to stop tapering its quantitative easing.

Between these two historically-located attitudes to economic problems, we can gauge the change in the self-perception of the Indian middle-class and its economic leaders. What we have acquired is a perverse self-importance — perverse, because contrary to our fervent hopes, the QE by the US Fed was not meant for Indians or anyone else other than the SMEs in the American economy.

In the RBI memorial lecture this January, Joseph Stiglitz pointed out a reverse effect of Bernanke’s monetary easing, where the liquidity caused by QE II and III did not spread through the American credit systems to local businesses , but to emerging economies where the returns were high. “Money has been going where it’s not needed and not going where it is needed.”

Alarmed by the expansionary effects of the US Fed’s policies after 2009, some emerging economies toyed with the idea of capital controls — South Korea, for instance. Others such as Turkey, too weak to stem the flow, watched their currencies rise and justified their inaction by swallowing the line that controls do not work.

India’s reaction was, of course, more pristine. It simply rejoiced in the flood of portfolio investments because they lubricated the equity markets, real estate and other asset price-based spikes that we identify with “growth”.

For policy makers, leaders of the organised economy and the middle class, the return of capital flows after 2009 and the Fed’s QEs were advertisements for the robustness of the Indian economy betokening a return to its pre-2008 salad days.

All through the decades of high growth, foreign capital flows had been actively wooed and wooed indiscriminately.

The complicity of the political elites, middle class and the RBI in the redefinition of FDI made it that much more easy for India to turn into a virtual tax haven for funny money.

Bending over backwards

Various studies show how policymaking eased FDI norms to the point where the distinction between foreign direct investments in the real economy and investments in stocks were blurred.

Regulators even turned a blind eye to the nature of capital flowing into stocks and real estate and land banks: capital that emerged from “shadow banking” in the form of hedge funds, venture capital and private equity funds re-christened as FDI.

Less than half (48 per cent) the total inflows in the three years to 2008 were genuine foreign direct investment; the rest was “hot money” from entities within the shadow banking world, with 10 per cent being Indian slush money that returned via tax havens, white as driven snow.

The promise of glitter

One reason no one cared about what was essentially fickle or funny money, was its impact on the stock markets, on land and real-estate prices — that is, on asset prices.

Our sense of prosperity has been grounded in the appropriation of financial resources from around the world by sectors such as real estate and the capital markets that most of the world views as “speculative” and bubble-prone.

But monetary policy was no less vulnerable to the lure of global capital.

The RBI increasingly eased external commercial borrowing norms, with the result that Indian corporate debt has mushroomed enormously.

Amplifying myths

When we blame the RBI for allowing the interest burden to rise, we should remember the profligacy of the borrower in those days of high growth and exuberant expectations. If anything, New Delhi and the RBI allowed Indian firms to indulge in their expensive and un-hedged borrowing spree right up to the end of the last decade.

Part of the reason why middle-class Indians, egged on by large sections of the financial media, were so complicit in the build-up was, of course, the perpetuation of an image of India on its way to becoming an economic superpower, courtesy the blessings of funny money.

It was an equity analyst on Wall Street that threw the bait early 2000 of an India emerging from the shadows.

No one but its members and, most of all, India, cares for the BRICS — a motley crew of disparate nations and wildly contradictory agendas.

Most of the media and particularly television’s “talking hairdos” became the loudest amplifiers of three myths: India as the best destination for foreign direct investments —read the way policymaking had re-defined them; the stock and commodity and real estate markets as the barometers of economic robustness, and most perniciously of all, that the only ‘crisis’ was the falling rupee and shortage of dollars because the US Fed was turning the faucet off.

Instant gratification

Nothing shows up the self-delusions of that myth-making than the headlines on Wednesday joyously claiming the US Fed’s probable rethink on tapering and, most astonishingly, asserting the reversal of fortunes in our current account deficit, exports, hiring and Yes! the SENSEX!

But the organised economy is in deep trouble precisely because it dances to the tune of the portfolio investor as it will to the calls from the foreign creditors who lent so generously to Indian companies yearning to become transnational with global acquisitions they couldn’t afford.

And let’s not forget the banks that fell over each other to lend to firms optimistic about their capacity to stretch their dream run and luck indefinitely.

They may not say it aloud but they are probably happy for high interest rates that allow them the excuse of not lending in the manner they had.

Meantime, the RBI, under the new dispensation, can always think of shoring up the capital base of domestic banks and the rupee — if the US Fed would so much as oblige us with some more easing.