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India's Foreign Exchange Reserves: A Shield of Comfort or an Albatross?

Though the market value of volatile foreign capital deployed in the country is uncertain, the current magnitude is likely to exceed India's foreign exchange reserves by a significant margin. Even if the authorities follow conservative fiscal and monetary policies, the country can still face a balance of payments crisis. Moreover, the foreign exchange drain, highly volatile and mainly on account of profit-taking by foreign institutional investors, is currently very high in relation to India's gross domestic product, prompting a comparison with the tribute extracted by the British during the latter part of the colonial era.

SPECIAL ARTICLEEconomic & Political Weekly EPW april 5, 200839India’s Foreign Exchange Reserves: A Shield of Comfort or an Albatross?Nirmal Kumar ChandraThough the market value of volatile foreign capital deployed in the country is uncertain, the current magnitude is likely to exceed India’s foreign exchange reserves by a significant margin. Even if the authorities follow conservative fiscal and monetary policies, the country can still face a balance of payments crisis. Moreover, the foreign exchange drain, highly volatile and mainly on account of profit-taking by foreign institutional investors, is currently very high in relation to India’s gross domestic product, prompting a comparison with the tribute extracted by the British during the latter part of the colonial era.I am grateful to Amiya Bagchi, Ashok Dhareshwar, Sushil Khanna, Rajani Desai and students at the Indian Institute of Management Calcutta for many probing questions and suggestions, and to Maharathi Basu of the CMIE for supplying data promptly with a smiling face. The paper was completed before the Union Budget 2008-09, and submitted on March 6.Nirmal Kumar Chandra ( retired as a teacher in economics from the Indian Institute of Management, Calcutta. On India’s foreign exchange reserves, there is a wide-spread view, shared by policymakers and a large cross-section of economists and journalists that the country is in a comfortable situation, and can weather a storm in the inter-national financial markets. This paper contests this view in the light of recent developments, considering that the macroeconomic para-meters have changed beyond recognition since the early 1990s. Leaving aside smuggling and other illegal activities, the state in the earlier era exercised control over all aspects of foreign trade and investment. Shortly after 1991, transactions on the cur-rent account of the balance of payments were liberalised; under the rules of the World Trade Organisation (WTO), India since 1995 virtually abdicated her right to impose restraints on import in times of foreign exchange shortage. At the same time, the foreign institutional investors (FIIs) were invited to invest in our stock ex-changes with few restrictions and tax incentives not available todomestic entities. As for foreign direct investments (FDI), the entry rules were made easier to attract them in larger numbers. Once allowed into the country, foreign investors enjoyed almost all the advantages of capital mobility. As the inflows became larger, Indian firms or individuals desirous of investing abroad also got a fillip, with the barriers steadily lowered. The country has travelled a considerable distance towards making the rupee convertible for current as well as capital account transactions, as Nachane (2007) and Subramanian (2007) have noted. Still, the goal of full convertibility, announced by the prime minister three years ago, remains elusive as domestic businesses are hemmed in with certain restrictions that their foreign rivals do not face.In India today, the adequacy of reserves as against the actual or potential size of volatile foreign capital deployed in the coun-try is a matter of crucial importance. The issue is examined in Section 1. Next, I pose the same question as was raised byThe Economist: Is India risky for foreign investors? The policy to at-tract FII inflows is leading to a big drain of resources from the country, and the tentative numbers (given in Section 3) are com-parable to the colonial tribute siphoned off during the British raj. In conclusion, I highlight some of the major shortcomings of the post-1991 Indian polity and explore alternatives. 1 Reserves and Volatile CapitalWhat makes our officials comfortable about the size of the dollar reserves? Table 1 (p 40) reproduces the official data. In the Report on Foreign Exchange Reserves (2007, p 9), the Reserve Bank of India (RBI) uses two yardsticks for the adequacy of reserves. The first is the traditional import cover of reserves; at end-March

liability dollarisation” as a risk factor. Most banks, after all, allow premature withdrawal against a small reduction in the interest rate.

2 2.5 3 3.5 4 4.5 log (sensex)

How can one forget India’s experience in 1990-91?5

1.5 1


0 1979 1983 1987 1991 1995 1999 2003 2007

Curiously, RBI’s Annual Report 2006-07 (Box VI.11) briefly touched upon the recent literature on ‘3S’ (systemic sudden stop), that lists “domestic [Nguyen 2007: 12].

The IMF should have known that the SEBI order was just an extension to the PNs of another, dating to 2005, requiring a resident Indian to declare the PAN assigned by the income tax authorities for each transaction in the stock exchanges; it was a means to prevent money laundering, and did not affect the volume of transactions by domestic players. The IMF intervention makes a mockery of the grandiose declarations at G-8 summits to root out money laundering. Nor can it be reconciled with the claim of Williamson (2006: 1848), a leading Washington figure, that the pressure on emerging countries for freer capital mobility comes, not so much from the IMF, as from the US treasury. May be the IMF got a nudge from the US Treasury, but Williamson’s attempt to depict the two as separate actors does not hold water.

2000-01 “to include, besides equity capital [the old practice-NKC], reinvested earnings (retained earnings of FDI companies) and ‘other capital’ (inter-corporate debt transactions between related entities). Data on equity capital include equity of unincorporated entities (mainly foreign bank branches in India and Indian bank branches operating abroad) besides equity of incorporated bodies.” Still, the

The Indian government has already announced a series of fiscal sops for exporters, and more may be in the pipeline, aggravating the fiscal imbalance.

6 8 10




0 1980 1983 1986 1989 1992 1995 1998 2001 2004

The Economist ( November 15, 2007) sounded an alarm bell, looking at the fundamentals: “

The inflation rate in India does not appear to have crossed the danger level. The annual rate (measured by the Consumer Price Index (CPI) for industrial workers) during the past six years averaged 4-5 per cent. Normally, inflation is accompanied by devaluation of the currency, mitigating, wholly or partly, the impact on exports. In India today labour-intensive goods and services constitute the bulk of exports and carry a price tag in dollars; thanks to the inflation, and an appreciation of the rupee by 15 per cent over the past 18 months, the unit cost 6 for exporters should have gone up by 4 about 20 per cent. The adverse conse-2 quences for manufacturing exports owing


to a large inflow of speculative capital -2 into a developing economy were high--4 lighted in the literature, for instance, by -6 Stiglitz (2000) and Subramanian (2007). -8

1986 1987 1988 1989 1990 2002 2003 2004 2005 2006 PVT STB CAB MTB
SPECIAL ARTICLEapril 5, 2008 EPW Economic & Political Weekly44(STB) from an average of 0.28 during 1986-90 to 2.41 in 2002-06, and in workers’ remittances or private transfer (PVT) that rose from 0.83 to 3.12 over the same years. Consequently, the CAB improved greatly; from an average of (-)2.44 in 1986-90, it became negligi-ble at (-)0.02 in 2002-06, and was positive in 2002 and 2003.With such low deficits inCAB, how can one consider India risky? Now, the trend inSTB reflects primarily the success of India’s information technology enabled service (ITES) industries, includ-ing “business process outsourcing”, and is likely to continue unless something unforeseeable intervenes. That may not be the case withPVT. If the countries where migrants work remain economically buoyant, the remittances are likely to increase. One may notice that prior to the crisis of 1991, PVT fell from 0.98 in 1987 to 0.65 in 1990. If, however, there are portents of a financial crisis owing, for instance, to a slowdown inFII inflow, the Indian migrants may postpone remittances or seek an alternative, unofficial channel for the same. Hence one needs to examine trends inCAB, netting out PVT; the balance for the last five years, 2002-06, at (-)3.14 was marginally better than (-)3.27 in 1986-90; but in 2005 and 2006 it has been worse at less than (-)4.0.Thus on the BOP side, contemporary India remains as vulnerable as she was in 1991, exposing again the hypocrisy of the IMF’s con-cern with twin deficits (inGFD andBOP) in that year. The Indian mandarins on their part faithfully followed the policy script laid down byUS presidents Reagan, Bush Sr and Bush Jr, unmindful of the long-term consequences in the fond belief that America’s (and, by extension, India’s) Goldilocks economy would be eternal.One month after The Economist’s piece appeared, the RBI governor responded by claiming that “India is not risky”.7 Admitting that the numbers cited showed risk, he maintained that “the report ought to have taken note of the mitigating factors, namely, the policy response to the risks”. India, he pointed out, had never defaulted on international obligations. Actually, in most cases during the last 25 years, including India in 1991, a financial crisis means that a country is on the verge of a default that was averted by anIMF bail-out operation.The Economist refrained from predicting a crisis for India in the near term. The RBI governor was no doubt right in highlight-ing the “contribution” of our present policymakers in this con-text. However, the question of whether India is risky or not can hardly be settled through debates; it is one of perception by the foreign investors, above all the FIIs. So far there is net inflow into the country as seen earlier. As for the future, though the big play-ers have their own teams of in-house analysts, they are all strongly influenced in their investment decision by the global credit rating agencies (CRA). The latter evaluate continuously the “safety” of investment in equity shares of international firms, and bond papers of different kinds issued by these firms, other public or private institutions and governments, national or sub-national. Hence it is the judgment of the CRAs that is of crucial importance. When they suspect a default in expected payments, they down-grade an individual firm or an industry or a country, including most of the domestic firms. All major international financial crises since the early 1980s affecting developing countries as wellasthelatest one owing to sub-prime lending byUS financial institutions, witnessed sudden downgrading by the CRAs. Though no sensible person has attributed the crises to the CRAs, several questions remain.One, there is a handful of globalCRAs among whom the two US-based S&P’s and Moody’s are the most prominent. EachCRA is supposed to work independently. How is it that in times of prosperity and of crisis, they tend to act in concert? For any other industry, such conduct would call for stringent action under anti-trust laws. Why are the CRAs treated with a velvet glove by the authorities in leading OECD countries?Two, the downgrading usually takes place quite suddenly and across the board. The “fundamentals” cannot change at the speed of light. The recent US crisis over sub-prime lending had been brewing for several years, but none of the CRAs took note of it. Why? Typically, a CRA is invited to evaluate a company and is paid a fee; but the client can reject the rating, and approach another CRA for a better rating. On the other hand, the CRA is at liberty to downgrade a company subsequently. But no CRA exer-cises that option for a large number of clients before a crisis erupts. The investors in the CRAs’ client companies may suffer, but the CRAs are not penalised. Do the CRAs at the time of initial rating tend to work more for their clients, rather than the poten-tial investors in the client firms?Three, in view of the pre-eminence ofS&P’s and Moody’s, are the ratings coloured by political factors? Shortly after the BJP withdrew support to V P Singh’s government in 1990, India’s credit rating fell with consequences described earlier. The other glaring example is that of Korean chaebols for whom the rat-ings nose-dived between October and November 1997. Acting through theIMF, the US treasury forced the Korean government to assume responsibility for private debts for the first time in recent history; the draconian IMF conditionalities included “firesale” at bargain basement prices of chaebol assets inside and outside the country.Nevertheless, the globalCRAs continue to flourish. The financial institutions need a rubber stamp from an “external authority” to justify their choice of portfolio. Rating a country, more precisely, its sovereign bonds, is one of the major functions of a CRA for which, however, it gets no fee. For post-1991 India betting on a regular stream of capital inflows through the FII, the country rat-ing byCRAs is crucial, though India does not float sovereign bonds; but it would affect the rating of all Indian firms with a ripple effect onFII inflows and on Indian firms seeking external funds.To rate a country, the globalCRAs send annually large teams to assess the whole range of macroeconomic (like GDP growth, fiscal and monetary policy) and microeconomic (anti-trust laws, labour reforms, taxation, etc) issues. The teams are treated with as much deference as the official delegations from the IMF or the World Bank that descend into developing countries as part of annual “consultation” or “surveillance”. So long as the Indian authorities keep within the policy parameters or “Lakshman rekha”, of the Washington consensus, the country is unlikely to be deemed as risky by the FII and other foreign investors.In fact, we have gone further. After 1991, India’s public sector financial institutions created two CRAs, namely, Crisil andICRA. According to the respective company web sites, the former turned into a subsidiary of S&P’s, while in the latter Moody’s became the

Shortly after assuming power in 2004, the prime minister to import goods and services for modernising the country’s infrastructure. Nearly four years later, the idea remains in limbo, while the reserves have shot up till mid-January 2008 by more than $ 150 billion. Of late, one hears about a “special purpose vehicle” to be created with an annual contribution from the government of $ 5 billion as capital, to be supplemented by loans, domestic and foreign.8 The

Since mid-2007, a new category of “sovereign wealth fund” (SWF) has attracted much attention in international circles. Instead of investing reserve assets in low-yield foreign government bonds, etc, several emerging countries that are large exporters of natural resources like UAE, Kuwait, Saudi Arabia or Russia, or have large CAB surpluses like Singapore or China, have set up SWFs to invest in the international financial markets for a higher return. These funds are in many ways like the hedge funds or private equity funds, except that they are state-owned. According to an IMF estimate, more than 20 countries have such funds totalling $ 2-3 trillion in assets, and these may rise to $ 10 trillion by 2012 [Johnson 2007]. In September 2007, China Investment Corporation was formally launched with an initial corpus of $ 200 billion out her reserves of $ 1,400 billion. Earlier in May, $ 3 billion was invested in Blackstone, a leading private equity fund from New York, while China Development Bank bought a

3.1 per cent equity stake in Barclay’s, a major British bank. SWFs from other countries have struck a number of significant deals and many more are likely in view of the liquidity crunch in the wake of the crisis over sub-prime lending in the US and parts of west Europe. From the high neoliberal “moral” ground that the state must not run “businesses ventures”, the American critics are apprehensive that these funds as embodiment of “state capitalism” may capture some of the “commanding heights” of “free enterprise” in the west. The

call “for the IMF to take a role in policing” them.9

The outburst was an act of despair by the spokesman of an imperial power in decline that is saddled with the highest external debt and CAB deficit in the world. Paulson would like countries with surplus funds to continue investing in treasury bonds of the US. If the US cannot rein in such nations, how can the IMF police them when it has to depend on them for cash injection for its own resources? But the warning had a salutary effect on two countries with large reserves, namely, Taiwan and India, because of their “vulnerability” – military in the former case, and financial in the latter. India’s finance minister has ruled out the SWF option. The RBI governor was more forthcoming: India is vulnerable to various international shocks as well as fluctuations in foodgrain production having implications on the economic situation.10

In the present context, India’s policy response appears to be “wise”. If a substantial part of the reserves is put into an SWF, the ratio of “free reserves” to the stock of vulnerable foreign capital will decline, affecting adversely the country’s rating by the CRAs and hence the FII inflows. As shown earlier, volatile foreign capital exceeds by a significant amount the size of India’s reserves. Regarding our prime minister’s scheme to finance infrastructural projects, why should foreign or domestic investors welcome it? A state-owned company, even in our present context, could still be more vigilant about the “public interest” than various ministers doling out concessions to private companies. It is more lucrative for the latter to have tax concessions and subsidies for projects under their control, rather than act as junior partners in a joint venture.

looked at the transactions during 2005-06 at the stock exchanges and estimated the tax loss (owing to the new law) at Rs 20,000 crore. Since the volume of transactions and the Sensex rose steeply after April 2006, the tax loss should have been heavier.

These figures are far from negligible; it could be much higher if trade in futures of shares and indexes are considered. Of immediate concern to me is the fact that since the STT is on the sale value, no one has any notion of the quantum of capital gains by the FIIs or domestic players. As for short-term capital gains by an FII, I do not know if it has to disclose the gains while claiming tax exemption as a

Following Amaresh Bagchi’s tentative estimates, should Parliament not demand a thorough examination of the issue by the Comptroller and Auditor General? Can one not invoke the Right to Information Act to compel our authorities to collect and publish the data on capital gains, short- and long-term by domestic and foreign investors?

Table 3 provides SEBI data on the purchase, sale and net purchase by the FIIs from 2000 to 2007.

Purchase Sale Net Cumulative Market Purchase Stock Value

(1) (2) (3) (4) (5)

Cumulative* 2007 5,01,750 4,35,421 66,329

Annual 2007 1,96,463 1,79,228 17,235 66,329 2,55,400 2006 1,04,048 96,055 7,994 49,094 1,27,511 2005 64,871 54,170 10,701 41,100 83,360 2004 40,593 32,074 8,519 30,399 49,477 2003 20,442 13,847 6,595 21,881 31,131 2002 10,148 9,408 740 15,286 12,525 2001 711 659 52 14,545 11,920 2000 14,493 na

SPECIAL ARTICLEapril 5, 2008 EPW Economic & Political Weekly48of more or less free inflow of FDI into developing countries, but a large number of them are critical about the inflows of speculative or volatile capital. The estimates just presented take this perspec-tive into account. However, I do not share the mainstream econo-mists’ view on inwardFDI nor endorse the current Indian policy. China seems to have a better grasp of the underlying issues of national sovereignty, and of industrial and competition policies. Although she attracts huge volumes of FDI to the envy of policy-makers in India and elsewhere, in many ways China is more restrictive than any other country, developed or developing. Besides, Deng Xiaoping envisaged the open door policy as a means of raising the efficiency of domestic enterprises so that the latter would eventually invest abroad. That dream materialised in the last decade with Chinese multinationals in different product lines making their presence felt in western markets. In the last few years a number of Indian firms, without government support comparable to that in China, have also ventured abroad on a significant scale with issues of ADR/GDRs as well as acquisi-tion of foreign businesses. For the sake of consistency, I do not discuss the costs and benefits of India’s outward FDI. The subject of FDI needs a separate enquiry. Besides, existing literature provides no evidence that FDI and portfolio investment flows are organically linked, which validates my approach in this paper.I must add that from the inception of the reform, the Indian left movement, including major parliamentary and extra- parliamentary parties and political groups and an array of social organisations working for the aam aadmi objected most vehemently to the entry of speculative foreign capital through theFIIs. The apprehension seems to be fully vindicated. From a wider, historical perspective, it is instructive to com-pare the drain as estimated above with the tribute extracted by the British during the latter part of the colonial era. Nineteenth century scholars like Dadabhai Naoroji (1901) and Romesh Chun-der Dutt (1904) took pains to establish the magnitude of the drain and how it impoverished India. Their findings had an enormous impact on India’s nationalist movement, and inspired many other scholars to update the figures. The pro-imperialist writers from Britain and US hotly contested the very notion of a drain. I cannot go into the debate. But a leading historian today on the international economy, Maddison (1989), while focusing on the economic rela-tions between the Netherlands and Indonesia, used for compara-tive purposes the contemporary experience of Britain and India. He considered the outflow from India on account of “home charges” to cover the administrative expenses incurred in Britain and the consistent surplus of India’s exports over imports, includ-ing precious metals, that was siphoned off by the rulers. Looking at the official trade statistics of Britain and India, Banerjee (1990) showed a gap varying from 14.5 to more than 40 per cent between Indian exports (fob) to Britain and Britain’s import (cif) from India in the late 19th century, after allowing for “normal” costs of trans-port, insurance, etc, Amiya Bagchi (2006) made two alternative estimates of profits made by European shippers, insurers, and ex-porters. To this he added the “home charges” using the same sources as Maddison, to calculate the surplus extracted from India.
SPECIAL ARTICLEEconomic & Political Weekly EPW april 5, 200849Maddison covered the period, 1838 to 1938 (with several breaks), while Bagchi’s series spanned the years, 1871-1916. For 1868-72 the former put the total surplus from India at an annual average of £ 10.9 million, rising to £ 21.9 million during 1911-16, and £ 33.9 million during 1921-38. Bagchi’s estimates are much higher; these ranged from £ 25.4 million to £ 27.7 million during 1871-76, and from £ 46.6 million to £ 53.4 million during 1911-16. Maddison put the surplus extracted as a percentage of India’s NDP at 1.3 for 1911-15, and at 1.7 for 1921-38. The percentage, going by Bagchi’s figures for 1911-16, would be close to 4.0.Even the higher percentage of Bagchi lies within the range shown in Table 4. Are we back into the dark age of colonialism, as radical critics of globalisation have long argued in different parts of the world?Two differences must be noted. One, while the colonial tribute was more or less steadily rising, the drain from India today is highly volatile.Two, while the drain during the autocratic British raj could be estimated from published data, our democratic government after 1991 skilfully camouflaged profit-taking by theFIIs. At the same time, the number of Indians in the Forbes magazine list of the global super rich keeps rising from year to year, thanks to the Goldilocks economy in which the FIIs play a catalytic role.4 ConclusionsLet me first recapitulate the earlier discussion. India’s foreign cur-rency reserves fall significantly short of the total amount of vola-tile foreign capital, if the latter is correctly measured. Foreign in-vestors’ risk from investing here has been increasing thanks to the persistence of deficits inGFD andCAB, and over-dependence on capital inflows in theBOP. The extent of profit-taking by the FIIs, though it is not revealed in official statistics, depends among others on the market capitalisation of their stock, and should vary over time. Adding to it the costs of ECB by Indian firms, the foreign ex-change drain is currently very high in relation to India’s GDP. Standing at the threshold of bankruptcy, India has lost auton-omy in fiscal and monetary policies. Even if the authorities follow theIMF prescriptions to the last detail, they can still face a crisis. There is a distinct possibility that the US Federal Reserve Bank would not be able to avert a recession. The liquidity crunch in the wake of the sub-prime lending scam has compelled some of the leading financial institutions to search feverishly for “white knights” from abroad to bail them out. Big multinationals outside theUS as well as theSWFs have swung into action. Only time can tell us how large a chunk of US-owned assets within or outside that country, passes into foreign hands. How can one expect the US-based FIIs to pour fresh capital into India’s stock exchanges?So far, the Indian authorities have maintained the old set of policies in a bid to keep the Sensex at a high level and induct more FII investments. From mid-October 2007 to mid-February 2008 the Sensex went up mildly, though with significant fluctua-tions from day to day; yet sales by the FIIs exceeded purchases by $ 3.6 billion over the same months – as against a net purchase of $ 16.7 billion during the first 9-1/2 months of 2007. India’s capital account showed an inflow of $ 44.9 billion inFY2006, $ 50.4 billion in the first half ofFY2007, and has recently been projected by an official committee at $ 52.8 billion for the second half [EAC 2008, Table 8]. The forecast is likely to go haywire with the US crisis spreading from the market for house mortgages to new ones like municipal bonds. If net purchase or sale by the FIIs is moderate in the near term, the Sensex should remain stable, and the resource drain from India would continue as in Table 4.A second possibility is that the FIIs, in order to meet their cash needs elsewhere, would gradually reduce their Indian holdings – at a higher rate than witnessed during the last few months. Sooner or later, the Sensex will fall, affecting all players, foreign and domestic; the impact could be more severe for big Indian firms. As their credit rating falls, it will be harder for them to raise fresh funds from capital markets, and their investment plans within or outside the country would have to be curtailed, shattering their dreams of becoming world-class players.Can India escape the tequila effect of a US recession by emulat-ing president Bush’s fiscal “stimulus plan” of lavish tax cuts for the rich individuals and sops for the corporate sector, totalling $150 billion? Two leading mainstream economists, Krugman (2008) and Reich (2008), a formerUS secretary of labour, have trashed the plan on the ground that the tax cuts would hardly raise overall consumption or investment, while the rich would capture the lion’s share of benefits to reduce their debts or add to their savings.14 Their alternative proposals included tax cuts for the low income groups, higher wages at the bottom, more generous unemployment benefits, large-scale public outlays on health, ed-ucation and social infrastructure, etc – in short, a return to a variant of Roosevelt’s New Deal economy.India may well offer a slew of new fiscal incentives, including the creation of more SEZs, an extension of tax holiday for the IT sector, sops for exporters of labour-intensive goods (the bulk of our exports) to counteract the appreciation of the rupee, reduc-tion of indirect taxes on goods and services with a sluggish de-mand, concessions for property developers, etc. Few of these are likely to have a positive impact on the real economy variables like aggregate consumption or investment, but the fiscal deficit would certainly escalate. If, at the same time, FII inflow dries up, the Sensex can hardly be maintained at its current level.Let me for a while look at the scene from the view point of India’s aam aadmi. Most observers agree that the fruits of high growth have not trickled down. Social tensions are escalating. Successive governments since 1991 have been lavish in offering a plethora of fiscal and other gifts to the rich and the big corpo-rates, while social sector outlays on health, education, and wel-fare remain niggardly to this day despite the rhetoric of inclusive growth and the common minimum programme of the ruling United Progressive Alliance coalition. Moreover, the “unorganised sector”, providing livelihood to over 90 per cent of the nation’s workforce, has been adversely affected in a variety of ways after1991. In particular, the access to institutional credit has been curtailed so that private moneylenders have become more active than before [NCEUS 2007]. All these adverse changes fol-low directly from one or other facet of the neoliberal fiscal and credit regime that I hope to substantiate in a subsequent paper.As for the neoliberal turn in 1991, the dominant media has cre-ated the impression that it has widespread support in the country.

The aam admi is waiting for a rainbow coalition of left-leaning social movements and parties that will not only reverse a good part of the post-1991 policies, but also take energetic steps to reduce the vast socio-economic disparities.

2 The Hindu Business Line, November 4, 2007, p 6. 3 ‘Private Equity Pours into India’, Business Week, June 20, 2005.

8 The Hindu Business Line, November 6, 2007, p 1.

10 ‘No Move to Have Sovereign Wealth Fund’, says Chidambaram, The Hindu, October 3, 2007. ‘Still Time for Stabilisation, Sovereign Funds: Reddy’, Business Standard, October 8, 2007.

11 Roy Campbell, Poems of Baudelaire, Pantheon Books, New York, 1952.

12 Currently, FII investments in short-term debt instruments also form part of short-term debt. Though the amount is not published, it is likely to be small and I ignore it.

13 See, for instance: Editorial, ‘Closing in on Hedge Funds’, The New York Times, October 20, 2006; W Bogdanich and G Morgensten, ‘SEC Inquiry on Hedge Fund Draws Scrutiny’, The New York Times, October 22, 2006; J Anderson and A R Sorkin, ‘Tax Gap Puts Private Equity Firms on Hot Seat’, The New York Times, June 16, 2007; ‘The Trouble with Private Equity’, The Economist, July 5, 2007; and ‘Hedge Funds: Capitals of Capital’, The Economist, August 31, 2006.

14 The stimulus plan, according to Hafner (2008), ‘Aids Buyers of High-Priced Homes’, as the plan offers many benefits. The market prices of such houses remain steady, while those for other types of houses have crashed.

15 In Germany, the “class” of top managers has lately been held responsible for expense-account sex (Volkswagen), systematic bribery (Siemens) and subprime self-abuse (IKB and the state banks of Saxony and Bavaria). Trust in the social-market economy – Germany’s mix of capitalism, welfare and workers’ rights – is endangered by “a not inconsiderable section of the economic elite”, frets the conservative interior minister, Wolfgang Schäuble, ‘German Tax Scandals: The Disgrace of Germany AG’, The Economist, February 21, 2008.

16 These issues are discussed at greater length in Chandra (2004).

Bagchi, Amaresh (2007): ‘Rethinking Tax Treatment of Capital Gains from Securities’, Economic & Political Weekly, January 27.

Bagchi, Amiya K (2006): Perilous Passage: Mankind and the Global Ascendancy of Capital, Oxford University Press, Delhi.

Banerjee, D (1990): ‘An Appraisal of the Profitability of the Indo-British Commodity Trade during 18711887’, Journal of Development Studies, Vol 26/2.

Chandra, N K (2004): ‘Imperialism and Globalisation: Outlines of an Argument: To the Memory of Feroze Ahmed and Hamza Alavi’, Frontier, Autumn Number.

Dutt, R C (1904): An Economic History of India, London.

EAC (2008): Review of the Economy 2007-08, Economic Advisory Council to the Prime Minister, New Delhi.

EPWRF (2007): ‘ “Surplus” of Resources in External Sector’, Economic & Political Weekly, July 21.

Ganesh, K R and R Venkatesh (2007): ‘Taxation of Gains from Transfer of Capital Assets’, The Hindu Business Line, November 17.

Hafner, K (2008): ‘Stimulus Plan Aids Buyers of High-Priced Homes’, The New York Times, February 23. Johnson, S (2007): ‘The Rise of Sovereign Wealth Funds’, Finance & Development, IMF, September.

Little, I M D and J A Mirrlees (1991): ‘Project Appraisal and Planning Twenty Years On’, proceedings of the World Bank Annual Conference on Development Economics 1990, World Bank, Washington.

Krugman, P R (2008): ‘Stimulus Gone Bad’, The New York Times, January 25.

Williamson, J (2006): ‘Why Capital Account Convertibility in India Is Premature’, Economic & Political Weekly, May 13.

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