Revisiting FRBM Act 2003 and RBI Act 1934


The present Central Government, run by the Bharatiya Janata Party and Narendra Modi, is making so many mistakes in money policy that one can be sure they will lose the next Parliamentary elections; - unless of course the Hindutva propaganda machine trumps the common sense of the voters' every day experiences.

It is to be hoped that the BJP are defeated however. And that the Indian National Congress that has exactly the same economic policy as the BJP is left with zero seats in the 2019 Lokh Sabha elections too.

The Indian elites dominate most political parties in India including the BJP, and they accept unreservedly the Reserve Bank of India Act 1934 and the Fiscal Responsibility and Budget Management Act 2003. For example, the Indian National Congress Vice-Presidential candidate Gopalkrishna Gandhi who terms himself non-political wrote in the Wire online magazine:

"As farmers were being fired upon, jailed, beaten, we heard of the RBI's governor speaking of the 'moral hazard' of loan waivers and of 'fiscal rectitude' in not giving the waivers. Urjit Patel is not to be faulted. He was doing the dharma of an RBI governor. But others in the country who are trustees not of currency but of life, not state budgets but of domestic livelihoods, have their own dharma to perform. They must think of the moral hazard of farms turning into doormats and farmers into helots. They must think of the ethical rectitude of letting our food providers languish. Are the chief ministers of UP, Punjab, Delhi, Tamil Nadu and other states taking upon themselves the onus of repaying banks and waiving loans doing something that is void of morality or rectitude? Making fiscal deficit figures a priority in a drought-exacerbated year of agrarian distress is akin to painting the horns of a bullock that is dying of thirst. And saying, as we polish it, 'Look how they gleam!' "

On the surface, this looks like a damning critique of fiscal austerity and a call for monetising fiscal deficits at Centre and State in order to waive farm loans. But who are these "others" the INC Vice-Presidential nominee thinks will monetise the deficits if not the Governor of the RBI and the so-called governors of state budgets? It is precisely the RBI and the Governments at Centre and State that have to take the political decision to abandon austerity politics. But the Indian elite which includes Gopalkrishna Gandhi is adept at providing excuses to its members when they are doing harm in the name of national duty, even as the effects of doing such national duty are criticised. This is why nothing ever changes in India.

The communist parties know somewhat better but they too are staffed by the upper castes and their compromises with industry have left them with a legacy of Stalinism they are yet to shake off.

In short, the Indian elites after 70 years of Independence are to be blamed for the poverty, malnutrition, lack of education, and ill health, of the 95% of Indians who are too poor even to pay taxes.

India ranks 121 out of 130 of countries surveyed for their ability to provide employment to women. It is a profoundly inhumane kind of sovereign that makes rules to manage money that condemn a country of 1.3 billion people to such a condition. In terms of healthcare access and a quality index based on mortality from causes amenable to personal health care, India ranked 154 out of 195 countries from 1990–2015. The burden of disease is the single most important reason for poverty in India.

In the India of today, we poor are at best a kind of natural resource of labour against which the economy of India in the hands of the elites unfolds; in reality, we are not even that. We are not valued even as a labour force. We are a natural resource that can live and die on our own terms, in our own cultural, ecological and social milieu with barely an acknowledgement from the elites except that we must be kept voting to perpetuate the illusion of democracy. We are not tax payers nor are we expected to be. Our currency notes can be expropriated at will. Government spends just a bit more than what was taken away from us to keep the illusion of a State going. We are the collateral damage of capitalism and of the destruction they have done to nature. In Marlene Dietrich's immortal words, "Our Future is All Used Up".

To counter this horrible state of affairs, the Reserve Bank of India Act 1934 and the Fiscal Responsibility and Budget Management Act 2003 should be challenged as unconstitutional as they make it impossible to uphold any of the Fundamental Rights in India including Right to Life, Right to Livelihood, Right to a Clean Environment, Right to Education, Right to Food and Right to a Stable Climate. There is no question of excusing anyone who continues to inflict austerity on Indians, and no excuse for those who excuse such behaviour.

The opening sentence of the Report by the Committee on the Fiscal Responsibility and Budget Management from January 2017 points to the political assumptions informing the committee's views, reflecting precisely the views of India's elites and setting the scene for everything to follow in their report. The committee says "The maxim that "you cannot spend your way to prosperity" is now widely accepted." One should straight away ask one's self the following: what is money other than currency spent into circulation? Policy-makers such as N.K. Singh and the future Reserve Bank of India Governor Urjit Patel and others who wrote this report are blinded by their own elite education and their links to the global elites which is why they unreservedly subscribe to the Banking Theory of Money and have no problems with the Reserve Bank of India Act 1934 and the Fiscal Responsibility and Budget Management Act 2003.

The Banking Theory of Money which underlies both these Acts is the theory that money is a debt owed to a bank, and therefore spending it is subject to the rules of bankers and fraught with risk because of the need to repay the debt and service the interest. The theory is promoted by private bankers in their own interest, and enforced by governments who are their borrowers. Central Banks are designed as mirror images of private banks and are expected in this scenario to do their accounts as if they were private banks banking for profit on behalf of the public.

500 years ago, the merchant bankers of Rotterdam, Lisbon, Barcelona and London managed to pull off the biggest heist of all times and persuade borrowers including their governments to borrow money from them they didn't have, - on the mere strength of the trust that the bankers could club together as a group if necessary and get hold of money from each other as needed.

But for the 2500 years before that great coup that changed world affairs for the next five hundred years, money was currency, spent into circulation by the sovereign who created it. Spending your way to prosperity was precisely what sovereigns did, by creating a currency their subjects were bound to use to pay taxes, thus making it impossible for the subjects to avoid using it. The prosperity of the sovereign was made possible thanks to the issuance of currency and it was generally the view that a sovereign who managed his currency well was also creating prosperity for her citizens, by allowing them to trade with each other using the currency of the realm. Lending by private parties was strictly a subset of money creation by the sovereign and was strictly controlled and frowned upon. Jain money lenders for example imposed vast webs of rules on themselves to make sure their lending did not harm a tree or a fly. Literally. Currency Theory of Money, which was what sovereigns practiced before bankers usurped their place, was also the foundation of the socialist money practices of the early Congress Governments after Independence, and it understands money as real money, also called positive money, or Vollgeld in German. It is money that the sovereign spends into circulation and uses and taxes at her will to control the subjects and control inflation.

Of course, the early Congress governments were constrained in implementation of Currency Theory of Money by the colonial Reserve Bank of India Act 1934 that was taken over from the colonial masters without substantial change after Independence. The accounting practices of private banks are embedded in Reserve Bank of India accounting under the Act. Governments are borrowers from the RBI. But the Congress governments got around the assumptions of the Act by monetising deficits: by not really paying much attention to deficits at all. The ostensible crisis that triggered fiscal reform and budget management was nothing to do with domestic money creation, which obviously is the single most important economic act a Government can do. Rather the so-called crisis that triggered austerity politics was the dependence of Indian elites on imports. What undermined India's sovereignty in short was not profligate government spending but elite greed. We got into trouble not because of wrongly labelled deficits, which is in fact nothing but currency, but because of the colonial legacy of the international system that India's elites were all too happy to make Independent India a part of.

The Currency Theory of Money is in historic conflict with the Banking Theory of Money. The Banking Theory of Money which underlies the RBI Act and the FRBM Act is imposed by banks and the militaries of the governments they have funded for the past 500 years. By hook or by crook bankers in the West became the richest and most powerful agencies on earth. They have their tentacles in the heart of India through the RBI Act. Thus, it is a bit difficult to question their constitutionality, let alone overthrow it. Their powers are enshrined in statutes.

Thus, one is really forced to go back to the fundamentals of politics.

As far as India is concerned, it is the argument of the author of this paper that the Reserve Bank of India Act 1934 and the Fiscal Responsibility and Budget Management Act 2003 make it impossible to uphold the principles of fraternity, equality and liberty. Despite the fact that the Supreme Court has generally held that economic policy is unassailable, the two statutes should be challenged in court with the aim of persuading Parliament to pass a new Reserve Bank of India Act that is based on New Currency Theory of Money and therefore fit for purpose to allow Indians to create some wealth and resilient systems to face up to the coming crisis of man-made climate changes in the 21st century.

On page 15 the committee's report on Fiscal Management and Budget Responsibility states: "There is no doubt that domestic policy must reckon with an increasingly challenging, uncertain and volatile exogenous environment." But the so-called "challenging, uncertain and volatile exogenous environment" is not the main challenge Indian domestic monetary policy should take into account. In fact, this exogenous environment in any case has been invited by Indian elites onto India's territory. The whole set of assumption about so-called macroeconomic conditions are left totally unquestioned and unchallenged in the report.

Then on page 73, the authors acknowledge that the cost of reducing the fiscal deficit target is a reduced fiscal space for social expenditures. This is unbelievably inhumane in a country that happens to be a socialist Republic. But these elite authors just gloss over such a vital downside to their entire edifice of austerity politics. Finally, they come out with their inevitable recommendation plucked out of thin air and totally out of keeping with the needs of the country, that the fiscal deficit shall be brought down to 2.5% of GDP for centre and States, a total of 5%, by 2023.

Is this domestic policy taking into account Indian conditions including the rise in population? India's population has grown 40% since 1990. In Bihar and many other States, 1 hectare of land must provide employment for ten people. How is this to be done? Employment on the land cannot on any account manage to pay back capital let alone pay interest as bankers want. Any surpluses that labour manages to create must stay in people's homes in the form of money to provide resilience to disease, resilience to arsenic in water, resilience to climate change, and to pay for education and information: and the ecological surplus must stay on the land in the form of organic input for soil improvement and local ecosystem renewability.

Those of us who are opposed to Banking Theory of Money and its enactment in Fiscal Austerity, Neo-Classical Economics, and Capitalism, thus have a 180 degree opposite view from the committee on Fiscal Management and Budget Responsibility on what the Indian Government's Sovereign policy with respect to legal tender should be in the 21st century. We may end with three illustrations with reference to the Health, Education and Power Sectors.

The Health Sector is woefully underfunded as the index of burden of ill health showed as cited above. The education budget in Bihar in 2017-2018 was Rs 25,251 crores, just Rs 2121 per person. And the situation in the power sector sums up the entire fiscal austerity madness best of all: there is now so much so-called stranded power generation capacity in India that the power sector is going bankrupt, and this for the simple reason that there is no demand; and there is no demand because the government is not creating enough money to allow people to create jobs for themselves to use the electricity. Observers say the situation is likely to become more challenging as 'must-run' renewable capacities come online.

In conclusion, the RBI Act and the FRBM Act have become the single most outdated statutes in India, preventing adaptation to climate change and its concomitant necessity viz., full employment. Without full employment, we will be incapable to face the challenges of a climate system that is set to heat up bare land that is devoid of trees by up to 10 degrees Celsius in the next decade or two. Are we to die simply because the Government had some mad Banking Theory of Money that deprived us of the currency to trade with each other, plant forests and conserve water and soils?

Reference: FRBM Review Committee Report Volume I, Responsible Growth: a Debt and Fiscal framework for 21st Century India, FRBM Review Committee January, 2017

Anandi Sharan was born in Switzerland, lives in Bangalore, and worked in Araria District in 2016. She mainly writes about India and how we need a better money policy to help agricultural labourers and women especially to adapt to man-made climate change.


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