A Dalit Straddles the financial world

Dr Narendra Jadhav is Principal Adviser and Chief Economist, Reserve Bank of India, and author of Untouchables : My Family's Triumphant Journey Out of the Caste System in Modern India. Jadhav is a Dalit and in the book he tells the story of his family's struggle for equality and justice. He has based the book on his father's diaries and family stories, and records the life of untouchables through humiliation, abuse and fear. Untouchables has also been translated into several languages.

Excerpts: This fast paced multi-topic conversation has three connected segments. One is on currency markets where Jadhav in his position as Chief Economist, RBI talks about how the rupee vs. dollar exchange rate has evolved over 60 years. He then talks about oil imports and price hikes. The conversation finally moves on to the controversial topic of reservations for SCs and STs. Jadhav is known for publicly advocating that private sector firms in India must implement reservations.

Let's talk about currency markets

Today, one dollar is equal to Rs 44.30. Some people wonder whether underlying the difference in currency between a dollar and rupee is a lot of injustice. What are the systemic reasons for why the dollar used to be Rs 10 before, then it became Rs 20 and then Rs 30, etc., and so on? Why is it always going this way, as opposed to the Chinese currency?

There are two issues here. One is the size of the currency; why is one dollar equal to Rs 44. That frankly is not relevant at all. There are historical reasons why that is the way it is; size does not depict strength; change depicts strength or weakness.

By that you mean?

Appreciation or depreciation – if the dollar is equal to Rs 10 now and it then became Rs 20, that change from 10 to 20 is important. But this fact that one dollar is equal to more than other one unit of other currencies is not relevant at all; strength of the currencies does not depend on size.

Like the Yen

Yes; the yen is a good example; the yen is much smaller than the dollar, and there are patches when the yen has been very, very strong. Even today the yen is strong, and yet is very small compared to the dollar. Size is a historical product and I'll tell you how.

After World War II, when all other countries were affected, the country which came out very strong was the United States. Britain was going down and USA was coming up. There was a deal made. The deal was that a few currencies like USD or pound sterling will be used all over the world for transactions and settling payments arising out of exports and imports. Because the rupee would not be acceptable in Timbaktu whereas the dollar will be acceptable in Coimbatore or anywhere else, they were called 'reserve' currencies, as a medium of payment for international transactions.

Now, when that happened, originally the system that came into being after the WW II (when the International Monetary Fund was born) required that every country declare their currency's equivalence in gold. And then comparing the gold points for each currency, the exchange ranges between currencies was decided; so if Indian rupee was equal to say 10 points of gold, and dollar was equal to say 50 points of gold, that meant that one dollar was equal to 5 rupees; so the conversion rate was decided like that.

But in return for the dollar becoming international medium of payment there was a commitment given by the US that it will be prepared to accept dollars. Now the question here is why should a piece of paper issued by the American government be the basis for settling a transaction between Zambia and India?

Why can't they use their own currencies?

They can't use their own currency because it has no acceptability. But why should this piece of paper issued by the US be acceptable then? To take care of that problem, the deal was that the US would stand ready to convert their paper currency into gold at a fixed ratio; and that ratio was 35 dollars per ounce.

Suppose that India was exporting much more than it was importing. The rest of the world would then pay more dollars to India than India pays to others; India will accumulate dollar balances; but those dollar balances would be pieces of paper. Now why should the pieces of paper be important? They were important because there was a guarantee given that whenever any country does not want to keep a piece of paper called dollar, they could always return it to the US government and take gold instead. The paper was good.

And no other country was willing to do this kind exchange? Currencies for gold?

America was the only country willing to do this; this was in 1944 when the IMF and World Bank were established – the Bretton Woods institutions. And the US dollar became the principal currency.

For sometime after that everything worked out well; the US economy was strong and doing very well. But what happened from 1955 onwards was that the Americans started having a huge balance of payments deficit, because they were importing much more than exporting. As a result dollars were accumulating in other countries.

Gold liabilities you mean..

The pressure was mounting. Germany and Japan for example amassed lots of paper dollar currencies and they were getting worried because the gold stock of the US was not growing in that proportion.

The premise was then the Americans had a lot of gold stock?

No the premise was that America was a strong economy and the Americans would buy your dollars back in return for gold. And the rate that was decided was 35 dollars per fine ounce. And that was close to the market price at this time. And this was enshrined in law. Now when in 1955 onwards when US started accumulating deficits and deficits started growing, countries, particularly Germany and Japan started accumulating dollar balances very fast, but American gold stocks were not rising. So there were more and more question marks on whether the US would be able to honor its guarantee. The risk was there.

The worst of the fears came true on 15 August 1971, when under the Nixon administration, the US announced that it was unilaterally withdrawing from the commitment to give gold in exchange for dollars. " Bhaad me jao." (Go to hell.) They unilaterally withdrew. Nixon did it. They said that they were not willing to buy back dollars and give gold. That caused a big problem globally.

The fixed exchange rate system that was until then based on this rule started breaking down. Finally, in two years, in February 1973, the fixed rate system broke down.


Earlier because of the gold parity of dollar, and every country had a gold parity and that had decided the exchange rate, which was fixed.

So the currency exchange rates between countries were not changing then after 1944?

No the exchange rate was more or less constant in those times. The rate could be changed only when countries could demonstrate that there was a fundamental disequilibrium in their balance of payments and they needed permission of IMF to do this. So the exchange rate system was a fixed one. Very rarely changes happened, also because changes meant admission by the country making the change of the fact that its macroeconomic management was poor.

The fixed exchange rate system worked very well, from 1944-45 to 1971. But after this unilateral withdrawal of the US, the system became shaky; after a prolonged debate, in February 1973, the decision was to let currencies float.

Who took the decision?

All the major countries including the US were involved. IMF took the decision. India was a member of the IMF all along. The decision meant that the value of currency, for e.g. dollar, would not depend on gold parity anymore. It would be decided by the market demand and supply. Like any other commodity.

That effectively meant that major currencies including the dollar were independently floating. That is when the exchange rates started changing.

So at this time, what happened to the countries like Germany and Japan who had amassed reserves of US dollars? What happened to them compared to those with lesser reserves?

It would depend – if the dollar appreciates it would have some effect; if is depreciates it would have some other effect; but the important thing that happened was the fixed rate system broke down. The exchange rate value of any currency depended on the demand and supply of the currency. By individual actions, if there was too much demand for dollar, dollar would appreciate.

The original concern was that those countries would not be able to get gold back for their dollars. Was that allayed at all?

Earlier people had this assurance. Now they had to think whether could keep so many dollars; and they had the option to offload dollars in the international market and buy any other currencies that they wanted, and they did. Those who did not want too much dollar balances, did this, if they thought too much was not good for them. If German authorities for example were to sell dollars and some other country was going to buy, then it would neutralize. So the rates became a question mark. And this system was legitimized by the IMF in 1978.

This is the genesis. Now why is the rupee rate going in one direction only vs. the dollar?

First that factual presumption itself is wrong. It is true that for a long time there was a unilateral movement.

It used to be one is to Rs 10 when I was a kid.

It used to be one is to seven and a half rupees even earlier. Then it became 10. And then 20 and went on. And then after 1973 there was this change. When the fixed rate system broke down, in 1976 India attached the rupee with a basket of currencies. The value of the rupee would be decided not in terms of what of was happening to the dollar alone, but what was happening to the dollar, sterling and some others. Depending on what was happening in the market, our rates would change. They were reasonably stable, but there was a one sided movement. But in the recent past, things have not happened in the same direction. In the recent past the rupee went down to 49 per dollar. And now it is at 44+ which means it has appreciated considerably.

The more and more reserves we accumulate, (we have 145 billion dollars now) it puts pressure on rupee to appreciate. What will happen tomorrow, nobody knows. It all depends on demand and supply of dollar at a particular point of time.

But the original valuation changes for the rupee vs. dollar to go from Rs 10 to 20 to 30, what was the reason for that?

This is because India had always a balance of payments deficit. What does this mean? That you are buying from the rest of the world, more than what they are buying from you. Your demand for dollar will be more than their demand for the rupee. So there is a net demand for the dollar vs. rupee. So the rupee would depreciate and the dollar would appreciate.

So in order to balance the books, the value of the rupee will be decreased? And you're saying that was done with at fixed intervals and times with respect to this basket?

Right, and this went on until 1994.

You're saying that we were anyway importing a lot those days and we were having a balance of payments situation.

Right, we were importing more than we were exporting.

So despite the the Nehruvian era of protections, customs duties, more indigenous focus, etc., we were importing more than exporting?

Of course. Oil imports were a big chunk. Out of our total oil needs, we import 75% today.

We made a mistake. In the 1970s there was big debate on whether to go for export promotion or whether to go for import substitution. All the East Asian countries opted for export promotion; India went the opposite direction; we went for import substitution; in other words, rather than focusing on selling more abroad, we tried to focus on creating production within our country, even if it was inefficient, i.e., producing goods ourselves, and substituting for imports. This was a policy that drove us to make a closed economy.

But in 1991, we had a ridiculous situation where we were 15% of the world's population and 7% of the worlds land, and our share in the world's trade was one half of one percent. (Our share of exports plus imports as a proportion of total trade.) A lot of people in India believed that the imperialist powers and capitalist countries were cornering us. That was stupidity. If our share was 0.5% why would the countries with 99.5% of trade share come together to corner us? We were a closed economy.

And still despite low trade share our BOP deficit was very high?

No economy can be completely closed. In the limited trade that we were doing, we were exporting little and importing a lot more than we were exporting. But the levels of both were very small.

So this is what happened. In 1994 we made the rupee convertible on the current account. So for certain transactions -- which are day to day kind of transactions the rupee became convertible. We introduced a double exchange rate system of different rates for different transactions; and then eventually we combined the two to bring it down to one rate.

Today the RBI's official position is that the rupee is completely market determined. RBI does not set the rate anymore. We are saying that the rate is decided by the market. We do intervene in the market, but when we intervene, our declared objective, and a lot of people don't believe this because they think we intervene to guide the rate to a particular level, is that we will not try to reach a band. If there is too much volatility due to speculation, then we intervene to curb the volatility and stabilize the currency; this the stated policy as mentioned several times by the RBI governor; but a lot of people feel otherwise.

So there is no ideal rupee vs. dollar rate you are targeting.

You will never hear from any central banker anything different from what I am saying; we do not target a particular level or a band. If there is no volatility, RBI will not intervene. If there is too much demand for the dollar, and the rupee is under pressure to depreciate, we may start selling dollars.

That strategy is also followed by other countries' central banks as well and it's part of currency markets now.

Right, and this is monitored on minute to minute basis in a dealing room in RBI. We also make it public as to how much we intervened after a certain gap. We announce the numbers. People try to infer our stance. A large number of people constantly monitor RBI's interventions to predict the exchange rates. But no one in the world can predict the exchange rates; because if you can, then you can make an enormous amount of money.

It's like trying to predict stock market prices.


Let's move on to oil.

You mentioned the whole oil dependency factor on imports; right now (2005) there has been a situation where the Indian oil companies screamed that the oil prices have gone up but the government is not letting the pump prices go up and so on. They are forced to absorb the gap that should be their profits. As an economist concerned about social justice, do you agree with the view that the government should just let the market determine the pump price despite the retail price impacts? Or do you think, in terms of the guiding principles in the Indian context, this direction, where we're asking the oil firms to take the hit and not the people themselves, is OK?

How should the average citizen think about these questions?

Very relevant question. Let me say that I am not all for economic Darwinism. Leave it to the market and let people have to face what the markets say. I don't think we can do that, at the stage at which we are. Full play of market forces is important as a policy but not always and not all cases, because there is a very famous quote of one of our governors who said that the market is very useful as a servant but very bad as a master. We should not leave everything for the market to decide.

Let's look specifically at oil prices. Imagine what would be the social impact if the government raises the market price of kerosene by say, 50%. Kerosene is fuel for many millions of households; it will break the backs of many poor people. Although from an economic standpoint it may correct to do let prices rises, you cannot do that because you have to take social factors into account.

Take the case of cooking gas. If cooking gas prices are increased by 100%, what will happen? The middle class will go up in arms.

That happened a few years ago when the BJP government tried to remove LPG subsidies. But this is a different point.

Okay. Now, look at it this way. When oil prices are going up, what options do we have? First option, pass on everything to consumers. And force them to adjust. Second, let the oil companies take the hit. And the third one is the government absorbs the difference in the budget. There is no fourth alternative. We can't say we won't let this happen and that happen.

So you are saying there are three options. The second and third are linked in the sense that eventually the government might have to bail out the oil companies anyway, with public money.

Exactly. There are three stakeholders, public-consumers, oil companies and the government. Typically, we apportion the losses between these three, combining the socio political considerations with the market considerations. This has been our strategy. If you look, between April 2004 to September 2005, roughly speaking, the Indian variety of crude has increased in price in the range of 80-85%; of which we have passed on less than 40%.

So some price hikes were passed on.

Right, there again, in some cases we have passed on more, and in some cases less. For e.g. if you take the aviation turbine fuel, the pass through is much more; for kerosene, the pass through is virtually nothing.

How is the government able to do this?

These are administered prices; the government can also reduce taxes; they can reduce the excise taxes on oil for example. This way they can keep prices faced by people not go up as much.

But the taxes on these fuels are also considered to be important for public transportation expenses and the like. Would you recommend that the government reduce taxes on oil to keep prices low?

I am saying that these are a few things that you can do. From the monetary policy point of view, when there is a supply side shock (this is one), then fiscal policy should be playing a role.

That is what we did in the beginning. Last year when inflation starting going up because of oil prices, we took fiscal action first. In terms of cutting excise duties and changing formulas. We did all that, but we also realized that high and volatile oil prices are going to stay, it also creates inflationary expectations. People say, " arre bhai ye aaj nahin hoga tho kal hone hi waala hai." (If inflation does not happen today, it will happen tomorrow.) If inflationary expectations go up there is a problem because then it finally gets converted into actual inflation.

So we geared up and took some measures; right now on an average, about 40% pass through has been achieved. The rest of the price hikes are being shared by oil companies and the government. All three are in play. You know sometimes I see friends from the Left of the ideological balance say that they will not let the pass through. Then they should also not say that we will not let the budget deficit go up. You can't have both. We are juggling with the choices and it is a tough situation.

On the note about there being these three choices and there being no alternative, if you take the monetary policy bit out of the picture and the move to the question of less dependence on oil itself, what is your view as an economist?

In the short run these are these three options. In the medium to long term we need to do more oil exploration, increasing production, but second is oil conservation. Do you realize how poor our performance in oil conservation is? In India we talk about oil conservation as if it was someone else's problem.

The fuel efficiency standards...

Zero. What is the fuel efficiency we have achieved? That is the disadvantage/side effect of heavy subsidies. If you had passed on the prices to people, then they would be forced to conserve.

But the automakers in India, even the MNC ones selling cars in India, seem not use the same fuel efficiencies as they have in the West.

Why? Because, putting more fuel efficiency into cars would be more expensive, they will add to the price and people are not willing to pay those prices..

But if they are developing those better fuel efficient technologies in the West anyway and they are not making those available in India, one argument given for that is the Ministry of Petroleum is not pursuing fuel efficiency standards in India with the same vigor it is pursuing emissions standards. As a result we are not achieving the conservation targets we may otherwise be able to. This is one criticism leveled at the Ministry.

Look at conservation itself. In India, you have been in Mumbai. Have you noticed every auto rickshaw carries a small board, "save fuel, check auto emissions," etc.? Is that the way to conserve? By writing it on the back of an auto? Have you see a serious conservation effort? Everyone thinks it is someone else's problem. Due we realize how much fuel inefficiency is there in the government's usage of vehicles?

(At this point Dr Jadhav gave a telling anecdote of fuel misuse in government, and asked not to be quoted.)

We do not have that sense of conservation at all. But that has happened because, when you give it cheap... look at power in some states, cheap or free.

Free electric power goes to the wrong farmers sometimes.

Exactly. What happens then? If there are lot of diesel pumps being used, people take out water like crazy and that leads to the water table going down. All kinds of other problems come up. So giving things under priced is also having side effects. So you have to weigh the pros and cons.

You're saying that nothing is really free.

Of course. I have gone on record that, if you sell something below price to someone, you have to charge more price to someone else for the same commodity. In the ultimate analysis nothing comes free. If a bank officer is getting Rs 30,000 salary per month is doing only Rs 10,000 rupees of work, somebody is paying for that Rs 20,000 of work that he is not doing. Who pays for it? The reflection is that then you find on the street in scorching heat there is a woman breaking the stones and for the days work in the hot sun, she is being paid 60 or 70 rupees. She is paying the salary of this man, ultimately, because everything is connected.

On this particular point you are making, let's move to the topic of opportunities and caste.

In your talk at Cornell University you were saying that education for Dalit groups and even broadly for the under privileged groups is the way to go. But people are exploited today for a day's work and cheated of that day's wages; their son might be going to school, and their third generation might come out better. But the Dalit adults/parents have to endure continuing misery. Do you think that there is only a long term way out for the next generation of Dalits, or is there something the government can do today?

The government can certainly implement the reservation policies far more effectively that currently being done; what has happened is while there has been a big debate going on over expanding reservations into the private sector, nobody is talking about implementation of the existing reservations. Do you know that a lot of people, if you take opinion polls, you will see that many people think that Dalits are being pampered too much; that is the general impression.

That there is already a lot of reservation?

Yes, that Dalits are being pampered and there is also the vote bank talk. But you also see that systematic studies have been done to show how much benefits have been passed on. I have a somewhat older study; it is a paper on the status of the disadvantaged; it has stylized facts about the population. It looks at literacy rate, drop out rate, sex ratio, gross enrollment, poverty ratio, access to credit, political representation, representation in the bureaucracy, in the Ministries and so on. The question is, what has happened to SCs and STs along these indicators? You'll find that the situation changed for the better, but it changed very little.

The degree of change is very little, you mean.

What I mean is that the benefits of reservation are not penetrating. I am on the management side and you will not believe, I have seen in banks and other institutions, officials have devious ways of showing that reservations are being met, even though they are not.

Why do people do that?

Because of the complex that they have.

(At this point Dr Jadhav narrated some telling examples of prejudice getting the better of good sense during hiring in public sector, and asked not to be quoted.)

So there are holes in the whole system of existing reservations.

In the annual reports of public institutions we are supposed to give a statement, how many vacancies are there, and how many were filled by reservations. The organizations rarely give the break up of class I, class II, class III, and class IV vacancies. So you will see that in the class IV category, more than 100% are filled and in class I jobs, 10% or less was filled. But the average looks alright, when you don't give the break up.

There are devious ways of getting around the even the good parliamentary check systems we have in this country for reservations.

So you are saying even if what was in place was implemented the way it was supposed to be, that itself would do a lot of good.

That itself would be a great achievement. That is what you were asking right? How will this generation benefit? I am talking about implementation. Do you know that for the first time, and this is an interesting development, for the first time, Dalit MPs of various persuasions from different parties all came together and 100 of them went to meet Prime Minister Manmohan Singh recently to tell him to implement reservations. And I was happy about that. Manmohan Singh has given them a promise that reservation provisions would be implemented upto 80% by end of next year.

Which is an acknowledgement that whatever is there now is simply not working.


During the Mandal commission commotion, the riots were seen as an upper caste reaction to reservations. Your view is anyway that what was to be implemented was never done.

Yes and then we say that "unko pamper karthe hain." (We pamper the Dalits.) That is not true.

Let's take the question of reservations in the private sector; you have openly said today that private sector should have reservations. Do you mean saying that if two people are equal otherwise, then a job must be given to the Dalit candidate in the interview process?

No what I am saying is this: Reservation for jobs is not like railway reservations; please understand this. Reservation, the need for it is coming from the inability of the system as a whole to be fair. It is to guard against that. What reservation means is that if you are a Dalit and I am biased man and therefore I will not give you the job, it is to prevent the kind of injustice which is there because of the psychological problems in non-Dalits towards Dalits; that is the genesis.

So reservations (for jobs) are not like railway reservations. The only way you can make reservations happen is make sure there is no hanky-panky in terms of actual implementation, like playing with the rooster, etc.

So are you saying no need for actual booking of slots?

No no, this is where judgement has to be used. For example, sometime back I had gone to a function where I was the chief guest. The girl who topped had 95% marks in SSC; my son was also 95%. But I don't compare them, I don't think they are identical. That girl, her father is alcoholic, her mother is a sweeper, and there is no light (electricity) in their house. It get's dark after 6 or 7 o'clock. Against all those odds she has come up; it is not the same, and does not show the same ability. This is where you have show judgment.

When I was younger I used to take a coaching class on how to take a bank exam. It is a technique. In the Indian system of education, it is only a technique of cramming, retrieving and reproducing. If someone has first class and another person does not have first class, it is no indication. We go by the polish they have in behavioral terms in a 15 minute interview and we go by their marks, which are cramming abilities. One has to be open minded and fair. And that is happening now in the private sector.

So you are saying in the private sector when they hire, if they broadly understand the background of the person they can make a judgement call of the giving the job to someone who might be qualified, has come through a difficult background, scheduled caste perhaps, etc..

Exactly; they have to have that open mind to see that.

So it's not that a company, say Infosys, has to announce a policy that 5% of their jobs is being reserved.

No, if they announce it shows a commitment; a commitment is always useful. But what I am saying is why should reservations be denied to people in the private sector? It was part of the scam that when it was implemented it was only done for the public sector. You know what Dalits feel? Dalits feel that this whole privatization thing is being done to deny them the jobs in the future.

It is the feeling among a lot of Dalit people. I am severely criticized because on the one hand I am defending globalization and privatization, but I am also defending reservations. They think privatization is not being done for reform but to take away jobs from them. And this notion that efficiency is more among Brahmins and less among SCs and STs is itself very seriously flawed and is a faulty proposition. I am saying that talent is independently distributed and you just need to be open mind to recognize that. Don't start with the presumption that just because this person a Dalit that he is an idiot. Inefficient people are everywhere.

As randomly distributed as efficient people.

Exactly. I'll give a funny example to explain this. In Maharashtra I have seen, if there is an inefficient person and if his same is Phadke or Apte, these are all names of the high born, they will be looked upon as inefficient individuals. But if there is a Kamble who is inefficient, you know what is the immediate reaction? It is to the blame the caste and then say "inko tho reservation miltha hai na." (They get reservations.)

I always tell my friends; you have to be doubly efficient; you have to not only show that you are as good, but you have to be better than others. You have to be running to stay in the same place; that is the challenge.

Which itself is an injustice.

It is; but because of the mindset of the rest of the world. This mindset is changing now, slowly. I made one very strong statement in my talk today at Cornell, that we (Dalits) are not for reservations, we are for de-reservations (the defacto ones in place for upper castes).

In the Tata companies for example, a very large proportion of jobs were given to Parsis earlier. Many of them were incompetent; but there was an "apna hai" feeling. But today you see, the proportion of Parsis in the Tatas has come down. Nowdays it is: "Apna aadmi koan hai? Jo kaam kartha hai or paisa badaatha hai. Khali jaat ka aadmi hai tho kaam nahin hota hai." (Who is our man? The one who does work and helps us profit. Merely because someone is a man of our caste, work will not get done.) This realization, this is globalization; making the change.

I asked you this because not a lot of people are openly favoring private sector reservations as you are. Especially people in monetary policy and markets. It is considered to be a sort of anti-market approach to tell private sector firms to implement reservations.

Yes, that's why all corporates react badly when I say this; I have said this on corporate platforms.

Are their reactions because of lack of understanding?

Prejudices are there. They are difficult to erase. These are otherwise very capable people. But whether we hire someone or not should not depend on whether they are Dalit or Muslim or not. Whether they are fit for the job must be the factor. It is to guard against those possibilities that you need reservations.    


More by :  M. H. Ahsan

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