Former President Abdul Kalam recently stated that India must give up the ‘Fifth Nation syndrome’ of merely following the lead of other countries and must instead lead the world by being the first nation to launch various missions. This advice is true in the field of economics as well where India unquestioningly follows the West and adopts the policies created by western politicians and institutions.
For the past six decades, India has modeled its economy after the economies of other countries and its monetary policies have been based on the systems created in the West. Indian policymakers have contributed no ideas during this period but have submissively accepted the rules and policies created elsewhere.
They have also displayed no evidence of being capable of unilaterally moving away from the flawed system that is in place today.
The situation was radically different before the British left India. At that time, Indian leaders refused to meekly accept every idea that originated in the West and actively opposed bad ideas. In the 1920s, when the British sought to pass the Reserve Bank bill in the Legislative Assembly, Indian leaders voted against it. As London’s Financial Times reported in 1927, the intent of setting up the Reserve Bank of India was to provide gold at a rate that would “make it unprofitable for dealers or the public to demand it for non-monetary purposes”. The British wanted to make it an almost impossible task to redeem the rupee for gold by allowing its redemption only in London.
In response, the Swaraj Party demanded that a sound monetary system be put in place and its member Jamnadas Mehta articulated the party’s position on the gold market, “We shall insist in the select committee that an automatic system shall be provided for the expansion and contraction of currency following a free inflow and outflow of gold in a free gold market.” Similar demands have sprung up in the West only in recent times after the occurrence of economic crises in the US and Europe.
Jamnadas Mehta also rejected the claim that the bank’s board would be elected by an “independent” body of shareholders and stated, “We say that as the executive of the bank owe their existence to the government, they will simply carry out the government mandate in the running of the bank; the directors will have no control whatever.” In the past few decades, his prediction has come true not only in India, but also in other countries where central banks are supposed to act independent of the government.
Another Swaraj Party member, Ramadas Pantulu, explained the reason for defeating the Reserve Bank bill in the Legislative Assembly and pointed out that central banks in even self-governing countries had not worked economic wonders and had failed to bring about monetary stability. According to Pantulu, if ‘securing of the stability of the monetary system of India’, which was stated in the preamble of the Reserve Bank Act, meant keeping the currency at par with gold, that objective could be achieved by the gold standard. He also added that “no central bank [could] maintain internal prices at a particular level” and that it was “meaningless to have raised extravagant expectations and credited the Reserve Bank with all possible and impossible things.”
Today, India’s leaders and policymakers lack such clarity of thought, and a few days ago, the Reserve Bank even announced that it would stabilise the rupee’s exchange rate, an impossible task as rightly pointed out by Ramadas Pantulu. India’s policymakers seem to have very little understanding of the economy and it is for this reason that India is unlikely to be the first country to move to gold as its currency despite India’s population preferring gold over the government’s paper money. It is also certain that if other nations bring back the gold standard or start using gold as the currency, India will once again exhibit the “Fifth Nation Syndrome” and follow their example.
The current economic downturn in many countries is an opportunity for India to lead the world by adopting an “automatic system” in the gold market as its erstwhile leaders had demanded. Such a move will insulate the country from the economic crisis that has enveloped the European Union and the US. It will also make the economy stable and protect the savings of the people while setting an example for the rest of the world to follow.
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