Steps like raising interest rate and CRR (banks’ deposits in RBI) to contain inflation in India show serious stress in our current fiscal and monetary management. 

Banks are now scrambling for funds.  Their current receipts from new deposits and collections from borrowers are not matching with obligations (to their lenders) plus fresh lending at least to the State.  Banks will now have to pay higher interest to attract new deposits. 

There are two monetary problems facing India now: inflation and credit crunch due to borrowing requirements of at least the State. The State will be happy if an appropriate restriction of credit supply to non-government agents (individuals and entrepreneurs) can contain inflation. The State will not face any credit crunch because on its beck and call our banks will raise funds at any rate as directed.  Banks will simply raise more funds at higher interest rates to fund the schemes and development projects of the State. 

What is wrong with the above monetary policy?  This monetary policy, adopted since independence, has been a failure for India because it does not account for the deleterious role of white junk money which is the money lent to the State that produces little food or industrial goods or service. This policy has prevented India from becoming as strong as possible with our globally proven nonpareil entrepreneurship. It has rather resulted in emigration of hordes of our talents, stifled our competitiveness with declining net exports and bouncing of foreign currency checks, and decimated our rupee value. 

The prosperity we see now is due to the impact of the immensely successful global Indian, directly, through funds plowed from abroad, and, indirectly, by motivating other skilled and talented Indians to work hard to compete globally.

Due to a fallen rupee value, the State has willy-nilly transferred monetary power to the talented and skilled people who really contribute to national productivity. The State should have done so naturally.  The State must similarly facilitate the farmer to receive, not a decreed price, but a price for his land or produce determined by market forces of supply and demand-conforming with our constitutional preamble of economic justice.  The State must likewise let public exchequers receive market prices of minerals that would facilitate building of schools and hospitals and planting of trees in mineral belts to save us from scorching heat, denuding forests, polluting water, drought and flood.  This is necessary for our non-renewable fertile agricultural lands and global warming.

It is very important for the State to wield enormous monetary authority to deliver defense and public service efficiently.  But the State should also nurture the immense national pride of monetary power vesting on skilled and productive Indians like farmers, workers and entrepreneurs.  It is unfortunate, though, that the State is still improvising colonial schemes, one after the other, to bite the hands that feed: (i) shooting people to grab their land, (ii) ordering farmers to sell their produce only to the FCI at below-market decreed prices while actors of the State rob the godowns to sell or export the loot at higher prices, (iii) create NRI Cells in states to collect kickbacks in the name of solving problems, (iv) blackmail skilled and talented entrepreneurs through protection money, etc.  Obviously the babus who are forced to support such colonial schemes want to share the booty or demand higher pays and perquisites through new pay commissions.  The State is thus continually printing more and more white junk money to avoid strikes by public servants.  When white junk money is created by decree, those who do not get it face only the brunt of increasing prices.  The deprived cannot demand higher pays.  They can only revolt by becoming outlaws.

Our banks have to lend (through government) to schemes like MLALAD and MPLAD and to the projects of the kith, kin and cronies of many netas and babus by borrowing at exorbitant rates of interest. Such schemes and projects rarely increase food supply or export growth.  The created money deployed in these schemes and projects are inefficiently squandered.  This money is generally spent in pre-election feting of voters with chicken and booze that run down the alimentary canals by the following day or it flows to unproductive real estate in urban areas with depleting ground water and worsening sewerage and drainage facilities.  This money, created and borrowed by decree, generates an increasingly large group of insatiable lethargic voters addicted forever to such pre-election doles. This is really white junk money. It is white because it is created and used by the State. An optimal monetary policy for India is to tighten this white junk money. 

Monetary economists forgot the role of white junk money while suggesting that inflation (a monetary phenomenon) can be contained by tightening overall money supply through interest rate and CRR raises.  But the interest rate on white junk money, being created in India without bounds, is really very small, if not ZERO, because this money, lent or allocated to unproductive projects, is rarely repaid, if at all. 

The fact that an apartment bought at Rs. 50 lakhs is rented for about Rs.50000 a year-as opposed to an annual bank interest of about Rs. 4.5 lakhs on these funds-proves the prevalence of white junk money in India.  The rent-interest ratio is generally one in developed economies.  When the rent-interest ratio becomes significantly less than one in a developed economy, it indicates a real estate bubble that is corrected quite fast.  But a rent-interest ratio of about 0.1 has been prevailing in India for a long time.  Tightening white junk money is thus the most important element of our optimal monetary policy. 

Our zombie banks and post offices are at the beck and call of the State to create white junk money by borrowing at exorbitant rates of interest.  These lenders facilitate creation of vast amounts of white junk money by borrowing from the public.  Once I asked a facilitator/lender where my deposits would be used.  His prompt response was that the State would borrow the same at a higher rate of interest.  But I know money lent to the State is being allocated to increase irrigable land on paper or to build schools without roofs and walls or to employ non-existent teachers (real teachers spend most of their time on non-teaching duties assigned by the State) or to squander in mid-day meals.  The public deposits lifted by the State are rarely used to raise agricultural or industrial production or exports. 

To ascertain the efficacy of white junk money, CFD would beseech the President or the Supreme Court to appoint an independent, private, reputed auditing agency to inspect and report on the actual number of schools and hospitals physically built or the quantum of production or export enhancing projects created and at what cost.

White junk money is the prime source of permanently high inflation and dismay in India.  Raising the interest rate or tightening the CRR will never contain white junk money supply.  The current RBI policy will thus hurt genuine entrepreneurs and hobble the process of creation of jobs in the economy.  The RBI is pressured to (i) increase the white junk money supply by raising interest rates for attracting new depositors, (ii) contain inflation without choking genuine entrepreneurs and farmers and (iii) enhance growth in employment.  We have to seek the help of our traditional Gods to alleviate real problems of governance bedevilling India today!   

Praying my Universal God will yield, though, an optimal monetary policy for India: to contain the white junk money supply, as pleaded by CFD in many different ways since 2003.  Increasing white junk money supply only creates an illusion of prosperity for the vast majority including most of the government staff and leads to social instability.   

Sankarshan Acharya