The India View


I met a foreigner last week in Mumbai. One of his questions to me was “what do you think about the current wave of political scandals sweeping India ?”.

I thought about it for a minute and provided a response which he was least expecting. I said “nothing much”.

He prodded me for some amplification, and I explained the background to my rather nonchalant philosophy of viewing the state of affairs afflicting the country. I said that things will move on from here, and it is no surprise that corruption and black money are on the forefront now. There always has been corruption, only the scale is hugely different now. Should we catch the thieves and punish them, of course, yes. Should we bring back the black money, no it would be counter productive to the competitiveness of the Indian economy and collapse it.

Oh, wow, how come ? I explained that, in simple terms, that corruption does exist in most countries, including the mightiest nation on earth, the U.S. Let us not forget the power of the lobbying firms of Washington which constantly influence the senators’ thinking and persuade them to vote for special interests. Is that not corruption ? Is money not changing hands ? So, let us be clear that it is not only the problem in India alone. Of course, it is not good for the health of the economy and it sets a very bad precedent for aspiring youth who get an idea that money can solve their problems. But, let the investigators and the courts have their way. No point in precipitating matters by agitations.

On the black money issue, there is no economic sense in trying to get back all that trillion dollars from Swiss banks. It is better to let that money trickle back via the Mauritius route. Let me explain. If the entire black money is brought back into the Indian banking system, that would be equivalent to minimum 4 times India’s current FOREX reserves with the Reserve Bank of India. Such a huge infusion of dollars into the economy will cause the Indian Rupee to appreciate dramatically, and may be the Indian Rupee will be worth at least 3 times what it is now, that would mean 1 USD will depreciate from INR 45 to INR 15. Just for argument’s sake, folks. Don’t take me literally, and I am no economist and what I am saying here could be entirely wrong from an economic theory perspective.

This would mean that India will immediately become totally uncompetitive in the world markets. The IT industry outsourcing market will die completely. Our manufactured exports will cease, and huge unemployment will be created. In a nutshell, our economy, which today is the world’s second fastest growing economy, will sputter and collapse within a few months of the black money coming back into the Indian banking system.

I may be right or wrong here, but such a scenario will be catastrophic for India, we all should agree. Huge economic damage will be caused. So what should we do with the black money matter ?

Don’t bring it back ! It is not going to help. But exposing the folks who own that black money deposits in Swiss banks – well that takes political courage and strong will, which the current government, already affected by many scandals, does not have in abundance at this moment.

Think about this unique challenge to India !!

Cheers,

Vijay Srinivasan
12th June 2011
Mumbai

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One comment

  1. Satish

    Economy is given a positive spiral by government spending – all that black money can be brought back to enhance the infrastructure – physical, educational, medical, food supply chain, and assist in eradicating poverty etc. areas which the economy currently does not fund sufficiently. Sudden change can be chaotic and therefore I would suggest that if the bringing back can be made into a steady stream ( which is more likely considering the fact that we may want it back but I am sure the process will have its own delays and pitfalls to ensure this comes in slower than expected) it should definitely be done for the economy. Inclusive growth which has eluded us so far will at least have a chance backed by all that money that we will be able to spend. Goods and services bought by the money can be predominantly local and help industry pay better wages and improve the lot of all the employed too. With regard to the impact to export oriented industry – I would beg to differ – the fundamental reason for business to survive today is because business has nowhere else to go – India continues to be a large low cost labor market and will continue to be so even if all the money comes back. Uplifting crores of Indian lives ten percentage points will take more money than what will ever come back – attempting this without the money will take much longer on our own and delay the process of India’s growth as a world power.

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