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Briefing paper on Monetary Policy for a Unity Government 2019

Peoples Voice on October 19, 2017 - 3:40 pm in Economics

Anandi Sharan
Writer, Climate Change Activist

The economic policy of the BJP has been blundering along in the footsteps of previous parties and exacerbating in a very short time all the very severe pre-existing problems built up over 80 years since the Reserve Bank of India creation, such that today in India 57 rich men own as much wealth as the poorest 70 per cent.

In view of this mismanagement of the economy it would be important to have a unity government to defend the constitution 2019 and for such an incoming unity government in 2019 and to have a clear idea of how to use the Rupee better to achieve its constitutional objectives.

The objectives in a nutshell are full employment, full health, education and water and sanitation coverage, full housing, full electricity coverage and full ecological reconstruction of the country on the basis of full agricultural self-sufficiency and ecologically appropriate design, i.e. taking into account local ecological and demographic reality.

These aims are mentioned as fundamental rights and duties in various parts of the constitution or in judicial decisions; but structural deficiencies due to the colonial legacy in banking and monetary policy, again exacerbated by bourgeois adherence to the Washington consensus (in other words the upper caste addiction to global bourgeois luxury), are preventing the good intentions of socialist Indians being translated into reality.

This short note reviews some changes that could be made in monetary policy by a unity government 2019 to allow the Rupee to be used to meet the constitutional objectives.

Let’s remind ourselves at the outset this is not a pious hand wringing exercise but an attempt to shake readers out of their complacent assumption that the “economic climate” damns India to remain a developing country forever. It does not. If pride prevents India learning from and developing the overthrow of capitalist Washington along with China, the time to swallow one’s pride is now.

Indigenous printing of paper notes, minting of coins and the issuance of digital fiat currency are the three important monetary activities based on three technologies to extend the reach of the Union government’s monetary relationship with its citizens to every Indian citizen and resident directly or indirectly.

The purpose of the relationship is not to collect taxes, or rather, collecting taxes is the way the state long ago persuaded Indians to accept the Rupee as their currency. We the citizens and residents now accept that we must earn, or have, Rupees because the state asks us to pay taxes in the sovereign currency. As well as paying taxes we use the Rupee to trade with each other.

The unity government 2019 should create the monetary infrastructure for money to be created and spent and taxes to be paid and collected at the central, state and PRI levels in the form of coins, paper motes and electronic fiat currency (DFC, herein e-Rupee).

A citizen and resident can pay the taxes at their Gram Panchayat Income Tax office at one go. The rate of tax must reflect the budgetary needs of each of the tiers of government and the need of the RBI to manage inflation. The budgets are fixed at all three tiers, in each GS/GP individually. The creation of of the Rupee is done by the branch offices of the RBI in each GP / town ward.

In a full reserve system money supply is not managed via the ridiculous means of interest rates. (Ref1) There is no need for interest rates in a full reserve system in which the state is the sovereign and sole issuer of the currency. Taxation therefore becomes the means to manage inflation. Some of the tax is used by the state to fulfil its statutory and constitutional duties, and the rest is retired to control inflation. To meet the aims of the constitution the third tier tax system must be activated to allow as much Rupee to circulate in the local economy as the citizens and residents in the GS need in order to trade with each other and make locally appropriate spending decisions at the GP level.

The fundamental change that the unity government should introduce in money policy compared to the present bourgeois system is the switch from commercial and nationalised bank issued private electronic Rupee and curbs on fiscal deficit of state and Union, to a system of full reserve sovereign issued Rupee, in which banks in pursuit of their business of lending will be lending digital fiat currency and notes and coins deposited in the accounts of the banks by the RBI. The role of lending and the role of creation of money will be separated and commercial banks will not longer be involved in creation of money via lending. The sole authority for issuing money in coin, note and electronic forms will be the RBI and the sole spending authority should be the Gram Panchayats, the state governments, and the Union governments that each have their own branch offices of the RBI. This system would for the first time in Indian history since the creation of the RBI provide a clear policy for money creation in India, its purpose and who should do it. (Ref2)

Please see the draft RBI Act 2017 for an idea of how branch offices of the RBI controlled by GS/GPs create the money and spend, it, and how.

(Ref3)

In summary, lending activity by banks will be controlled in order to avoid pollution be it global warming or biodiversity destruction or destruction of livelihood opportunities of the citizens and residents.

As GPs have sole authority for money creation and thus control the amount of money banks have for lending, it is expected that over time lending will wither away as it is gradually replaced with spending and taxing at the GP level. The need for GS / GP no objection for all economic activity will be properly enforced by means of its exclusive local power to create the sovereign’s money.

If citizens are illiterate in the first few years of the new system the GS/GP pays out the money issued to citizens in coins and paper notes. Thereafter the decision as to whether to issue the money in the form of notes or coins or e-Rupee is taken on a pragmatic basis.

Obviously the algorithms for creating the e-Rupee will be standard across India. (4) There is also an indigenous note printing press and mint in every District. The creation of money as well as the payments and settlements of e-Rupee as well as the notes and coins are accounted and the statements circulated electronically on a real time basis and daily decision made by the Directors of the RBI representing all the GPs of the country at the board level to manage inflation.

I think I will stop there. Obviously as was demonstrated during the horrendous demonetisation crime of the BJP, Indians are willing to support the state on monetary matters. Instead of punishing Indians for this faith in the constitution and the constitutional vesting of legal tender with the Union, the unity government 2019 should work hard on all the decentralised technological aspects of the new monetary system in all three forms to make it a reality in a way that makes India a developed country overnight. (Ref 5)

Everyone will have as much money as they need and want to fulfil their duties on the basis of their assured rights as the constitution of India requires.

References:

Ref 1:

In the USA today if we disregard coins and notes there is already a de facto full reserve money supply, in that banks have massive excess reserves over and above their required statutory fractional reserve.

But because the Fed is a private system the banks will not change the money system to a sovereign full reserve system because this would deprive them of their profits from the money creation and lending business. See:

https://seekingalpha.com/article/2484795-u-s-banks-are-now-operating-with-100-percent-reserves-is-full-reserve-banking-the-next-step

and

https://seekingalpha.com/article/4052052-week-u-s-banks-operated-100-percent-reserves-revisited

For the IMF’s argument for full reserve currency see Chicago Plan Revisited

https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

Ref 2:

See this article where the author points out how there is no policy in India and hasn’t been in the 80 years of the RBI’s existence on how large stock of money in the country should be and on what basis it should be created. But the author mistakenly assumes that the main change that should be made is to take foreign reserves and gold as the idle reserves and plough those back into the economy. In fact foreign reserves and gold have nothing to do with the Rupee. He also assumes that there needs to be a firewall between power to create money and power to spend money. This is absurd and is the bourgeois ideology that has led to half of Indians being undernourished and having no savings and no land and no education and ill health.  The aim of the unity government policy should be to achieve a situation like has been achieved or is about to be achieved with the Chinese RMB in which petroleum can be bought in INR. This can be done by monetising India by creating full employment and creating at least as much exportable wealth as oil producers wish to buy. If India does not make anything oil producers want it should not import petroleum.

 http://www.thehindubusinessline.com/opinion/how-much-money-should-rbi-create/article8999435.ece

Ref 3

Draft RBI Act 2017 by Anandi Sharan

https://www.academia.edu/34724759/Draft_Reserve_Bank_of_India_Act_2017

Ref 4:

See Watal Committee report Dec 2016. Sadly the left dubs this report as “presenting the government with an impossible roadmap to a cashless nirvana” (frontline). This is a sadly shortsighted judgement and condemns Indians to perpetual poverty.  For copy of committee report especially their praise for a digital fiat currency on page 51/52 see:

https://www.academia.edu/34895860/Copy_of_Report_by_Committee_on_Digital_Payments

Ref 5:

For the presentations at the International Telecommunications Union meeting where China’s plans for a DFC were presented along with those of other countries, see

https://www.itu.int/en/ITU-T/Workshops-and-Seminars/dfc/201710/Pages/programme.aspx

For the Central Bank of China paper on DFC last year, see Yao Qian:

digital currency and bank accounts. Since then both RBI and CBOC are continuing to investigate the DFC. The 2016 paper by Yao Qian is uploaded here:

https://www.academia.edu/34895951/By_Yao_Qian_Central_Bank_of_China_digital_currency_and_bank_accounts_central_bank_and_currency

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