The Wiliness of US Monetary Policy and the Idiocy of Indian Energy Policy

The Chairman of the Federal Reserve Bank in the USA announced in June 2013 that the policy of Quantitative Easing, may be withdrawn soon. This was an exceptional announcement that broke with the convention that the Central Bank of a country should never give any indication of the monetary policy it was going to adopt before the actual official policy announcment. Through the policy of quantitative easing, which consists of buying of private long term bonds instead of just Government bonds by the Federal Reserve, the long term interests rates are kept low and the availability of liquid funds is increased so as to stimulate capital investment and industrial expansion in the US economy following the financial meltdown in 2008. Now the various financial institutions in the US have huge liquid financial resources with them because the whole world parks its excess finances with them. Thus, even after catering to the needs of the US economy there is a lot of money floating around with these US FIs. So once the quantitative easing was in place the US FIs put the excess funds they had in the stock and bond markets of the emerging economies where they hoped to earn a much higher rate of return than the rock bottom ones in the US. These economies then launched on an expansionist economic policy based on import led growth using these excess foreign funds that were being pumped into their economies by the US FIs. In India's case there was a huge increase in the fiscal deficit as the Government went on a spending spree and also a spree of subsidies given to industry and socially and economically poor sections leading to an inflationary spiral.

However, the announcement that the Federal Reserve might withdraw its quantitative easing policy spooked the US FIs. These FIs generally behave with a herd mentality. As soon as one FI sells its investments in the stock and bond markets the prices of these equities and securities tend to come down and then the other FIs too begin selling to book profits and move out before they make losses. Therefore a huge withdrawal of funds began from emerging economies. In India some Rs 60,000 crores were withdrawn since June upto September causing huge demand for dollars that resulted in a 22% decline in the value of the Rupee vis a vis the Dollar with an obvious hit on the already serious problem of excessive inflation.

The high inflation that has been plaguing the Indian economy is primarily due to three reasons - the high fiscal deficit of the Government and its tendency to force the Reserve Bank to print money and to borrow heavily to cover this ( public debt in 2012 was about 51% of the GDP), the high price of crude oil and the black money that is circulating in the economy. This black money is of two kinds - some of it is generated internally and the rest is brought back illegally from abroad where it is kept back as unreported earnings through under invoicing of imports. The black money is mostly used to speculate in the real estate and commodity markets and also to purchase gold which is a good way to store this black money. The high price of crude oil along with the high level of taxes on oil products cascades through the economy because it is the most important source of energy. The devaluation of the rupee only increases the inflationary burden especially on the poor who have meagre earnings, low consumption and non-existent savings anyway. Inflation further eats into their quality of life. The high fiscal deficit and the high level of public debt reduces the leverage of the Government to undertake productive capital investments both in the economic and social sectors and further reduces the capacity of the economy to absorb the higher level of liquidity resulting in higher inflation. After all deficit financing can be justified only if it leads to productive investments and not if it is used to pay interest and capital on public debt and finance revenue expenditures mainly in paying salaries and overheads.

Thus, over a three month period the emerging economies and even a strong economy like China and a crude oil exporting economy like Russia were severely affected due to this prospect of a withdrawal of quantitative easing. Then suddenly on September 19th 2013 the Federal Reserve announced that it was not withdrawing the policy of quantitative easing after all and immediately the US FIs pumped in about Rs 5000 crores into the Indian equity markets in a single day leading to a record increase in the stocks indices and a firming up of the Rupee vis a vis the dollar.

The question then arises as to why the Chairman of the Federal Reserve broke with convention and made a false announcement to spook the markets worldwide? Especially as the US economy has still not recovered completely and joblessness is still very high, especially among the less skilled population and a withdrawal of quantitative easing could very well push it back into recession. The overwhelming suspicion among people who have suffered as a consequence of this policy sleight of hand will be that the US purposely did this to bolster its financial control of the world. It must be remembered that a considerable part of the US economic and military might is based on the fact that the dollar is the world reserve currency which enables it to spend far beyond its means both economically and militarily. In recent times the European Union was trying to vie with the US in economic terms but that came a cropper due to the weakness of some of its economies which began overspending without the same facility of having the Euro as the reserve currency of the world or enough clout with the European Central Bank to get their profligacy funded by it. The emerging economies, especially the BRICS economies of Brazil, Russia, India, China and South Africa then began having ambitions of emerging as an alternative power group on the world stage and so the US has now dealt a body blow to them. Even China which normally takes a belligerent stance was forced to request the US government not to take internal monetary decisions that would adversely affect the world economy.

Well be that as it may our concern here is with what is happening in India. Ever since the oil price shock of 1974 the Indian economy has continually been plagued by the huge Current Account Deficit arising from the large crude oil import bill. Leaving out the difficult task of tackling of the ubiquitous phenomenon of corruption which is there to a lesser or greater extent in almost all countries of the world, one would have at least expected politicians, bureaucrats, technocrats and policy makers in this country to exercise their minds on how to reduce the oil import bill by finding substitute sources of energy. There were and still are many suitable options - abundant, efficient and green coal based systems, even more abundant, efficient and greener bio-mass based systems, micro hydel systems and finally solar and wind based systems. The viable technological solutions in all these four systems were available from the beginning and with time their efficiency and ecological sustainability have increased even more. Yet these alternatives are not being pursued and the Indian economy continues to be at the mercy of its huge oil import bill which continues to spiral. When you have the US pursuing its wily neo-imperialist designs through a blatantly unjust manipulation of the announcements regarding its monetary policy and the Indian elite failing to follow an economically and environmentally wise energy policy then the right to a decent livelihood of the vast numbers of poor in this country remains jeopardised.