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OPEN LETTER No 1 Imminent Financial Crisis - November 21, 2007

By Namit Varma

As the United States grapples with recession, the Joint Economic

Committee of the US Congress began taking stock of the Bush
administration's policy decisions, including the Iraq Occupation and
expenditures and growth-sapping hidden costs thereof. Associated
Press reported on 14 November 2007 that "hidden costs such as
interest payments on the money borrowed to pay for the wars, lost
investment, the expense of long term health care for injured veterans
and the cost of oil market disruptions,' stood at US $1.6 trillion.

Not factored in these, are "hidden contributions' to the US, of $50

billion in treasury support activity and additional monetarist support of
$2 billion in interest subsidies, made available by secret ally India.

It is time, we in India, took stock of these surreptitious moves by the

Congress led UPA government to support and subsidize the
Occupation-of-Iraq efforts of the United States; all the while keeping
parliament and the nation, in the dark.

This startling reversal of time honored Congress policy, whereby the

late Rajiv Gandhi stopped even the re-fuelling of American warplanes
in Mumbai during the first Iraq War, is made worse by the
conspiratorial violations of statutory provisions of monetary and fiscal
The implementation of this conspiracy against Indian interests is being
supervised by Ambassador David Campbell Mulford of the United
States, whose connection with the Stock and IPO scams as Chairman
International of Credit Suisse First Boston (CSFB) are on record.
Unfortunately, this connection was glossed over by the government of
India, despite evidence that Ketan Parekh merely duplicated the
methodology of CSFB's Frank Quattrone; Parekh was arrested and
credited (wrongly) of being the mastermind, while CSFB officials were
allowed to go scot free! Interestingly, the directions passed after
investigation by SEBI, against the Ketan Parekh Group and Credit
Suisse First Boston (I) Securities Pvt. Ltd (a wholly owned subsidiary of
CSFB and reporting to then Chairman International David C Mulford at
the London office) are identical, "Debarring the entities from
undertaking fresh business as Merchant Banker / Stock Broker ..."

Even more significant, in today's context, is the well documented role

of David Mulford and his chum Domingo Felipe Cavallo, an American
acclaimed economist, bureaucrat, Central Bank Director and Minister of
Economy of Argentina (track record sounds somewhat familiar).

The American inspired (should one say ordered?) dollarisation of the

Argentinean Peso in the 1990s, in the name of keeping inflation in
check, backfired and the debacle only increased Argentina's
indebtedness. Then Domingo Cavallo was elevated to Minister of
Finance riding on the back of US and World Bank-IMF acclaim. His first
decision on the day he became Minister was to invite his friend, the
redoubtable David Campbell Mulford Chairman International of CSFB,
to arrange a debt-swap. Within half an hour of this meeting Mulford
had arranged the $29.5 billion great Argentinean debt-swap! Interest
earnings apart, Mulford walked away with $125 million in commissions
for lead manager CSFB for sewing up the deal!

Interestingly, almost an identical policy initiative is being followed in

India today. RBI Governor Yaga Venugopar Reddy has not called his
policy dollarisation, but he has effectively pegged his rupee to a nearly
fixed parity with the dollar and is spending a fortune in hard earned
Indian income (approximately 6% of our GDP) to keep supporting and
buying the US dollar and maintain this near fixed parity.

Like Cavallo, RBI Governor Yaga Reddy, Finance Minister Palaniappan

Chidambaram and Prime Minister Manmohan Singh are all citing the
twin goals of low inflation and a weak rupee despite the reality of huge
foreign investment inflows and our open capital account norms.
Daydreaming by these three so-called great economists apart,
pursuing these twin contradictory agendas is impossible and therefore
wrong in principle. Even an undergraduate student of monetary
economics will attest as much. When a mistake of this magnitude is
deliberately unleashed on an economy, there will be costs.

In the Cavallo-Mulford Argentinean experience, the costs have been

described thus by wikipedia: "Domingo Felipe "Mingo" Cavallo (born
July 21, 1946) is an Argentine economist and politician. He has a long
history of public service and is known for implementing the
Convertibilidad plan, which fixed the dollarpeso exchange rate at 1: 1
between 1991 and 2001, and the corralito, which restrained savers
from withdrawing their own money from bank accounts and was
followed by the December 2001 riots and the fall of President De la

Finance Minister Chidambaram would have us believe that economic

theory notwithstanding, he has achieved the impossible: a weak rupee,
low inflation and an open capital account economy with immense
absorption of foreign investment. He pretends to do so by cooking up
inflation figures, a fact which even illiterates can attests to. But we
shall rely instead on the evidence of the RBI Governor V V Reddy who
admits that the present dispensation of Wholesale Price Index (WPI)
and Consumer Price Index.(CPI) calculation "renders the assessment of
inflationary pressures difficult which, in turn, complicates the process
of monetary policy formulation." Does this admission mean that the
entire Monetary Policy of the triumverate of great economists is based
on inaccurate assessments?

The principle cost of flawed monetary policy in the recent past has
been that growth has slowed down and unemployment has increased.
The government's 3 month lag in putting together statistics will reveal
this in January 2008, but workers made redundant in the agriculture,
textile, handicraft and BPO sectors, already knows as much.

Growth has been curtailed by a flawed monetary policy which has seen
interest rates soar despite global financial capital begging for
deployment in the Indian economy. The paradox is that there is a
surfeit of money but it has become too expensive. High lending rates
of banks are driving small entrepreneurs away from new ventures.
Caps and ceilings on external commercial borrowings (ECBs) motivated
by flawed policy or blatantly antinational designs, is forcing big
business to forego expansions and new ventures. In short the
government has done everything in its power to turn around India's
growth story into recession misery. What can be the motivation behind

Assuming that the triumvirate of economists running this country

aren't abject idiots, the only rationale could be swapping some of the
US's recessionist troubles by absorbing them in the growing Indian
economy. Significantly, that is precisely the assurance that
Ambassador Mulford gave to the US Senate Foreign Relations
Committee, "Just as Indian products and services have done well in the
United States market, a vibrant growing, Indian economy should be a
magnet for increased US exports and investment. This can happen if
the pace of economic reform in India gathers steam. It will happen if
India accelerates its willingness to open its markets to greater foreign
trade and investment.” Going by policy initiatives, this is the precise
reforms agenda of Dr Manmohan Singh and Mr Chidambaram.

In line with Ambassador Mulford's stated policy, huge quantities of US

investment are flowing into India and the government is doing
everything to absorb these funds; rather than impose curbs on inflows,
the government of India is spending a fortune to sterilize the additional
liquidity through the flawed Market Stabilization Scheme (MSS) regime.

On 1 November 2007 The Economic Times reported "India is receiving

huge capital inflows. These dollar inflows are mopped up by RBI
instead of being allowed into the forex market directly, to keep the
rupee, which has already appreciated by about 12%, under check. This
keeps dollars relatively scarce and pricey in terms of rupee. However,
to keep rupee exchange rate at a certain level, RBI injects additional
rupee currency into the system, feeding the existing liquidity overhang.
Then to suck out this liquidity, RBI opts for sterilisation, which entails
mopping up excess liquidity by issuing securities. The dollars that RBI
had bought from the market are invested in US treasuries. .. .. The
apex bank, which has bought over $61 billion from the open market
since January, has had to sterilise a lot of liquidity (local currency)
released into the system. It loses about 3% on such sterilisation efforts
-- the difference between what it earns on deploying reserves in mainly
US trea
suries and the interest it pays in the domestic market for sucking out
liquidity through the issue of government securities."

Thus Government of India's irrational 3 to 4 per cent subsidy to foreign

capital inflows helps solve the US Treasury's problem of capital flight,
while lining the pockets of the army of American funds which rotate
money by dumping US Treasury securities and buying 3 month or
longer Indian securities; while RBI buys near-zero-yield short-term US
securities which the entire world is now offloading. The net offloading
of US Treasuries by almost all foreign Central Banks from mid July to
the first week of September stood at $48 billion; it could have been
worse but for white knight RBI stepping in!

Thus we exported the Indian growth story to the US enabling them to

add 166,000 jobs in October, while we imported the US recession
laying off some 2 million workers. Making matters worse, we squeezed
credit availability to unleash stagflation in our economy.

How did this come to pass despite the stringent safeguards in our
system of government? Fraud, deception, violation of statutory
provisions: in short, the Market Stabilisation Scheme (MSS): whereby
the RBI violated the Reserve Bank of India Act 1934, which does not
allow RBI to accept interest bearing deposits from Banks or to indulge
in any form of speculative activity.

Governor Reddy and his colleagues have been pretending that the
Memorandum of Understanding (MoU) that they signed with the
Government of India on 25 March 2004, authorizes them to flout the
provisions of the RBI Act 1934. Since the government of India itself
cannot overrule the Act without following due constitutional.
Amendment process, the MoU is nothing more than evidence of
wrongdoing and intent to subvert constitutional safeguards.

Governor Reddy and Finance Minister Chidambaram are liable to

judicial answerability for this misdemeanor, in the light of the loss of
investible funds to the Indian economy to the tune of over 200,000
crore rupees; and additionally, for the effective interest subsidy to the
US government to the tune of 8,000 crore rupees.

As admitted by US Congressmen themselves, every last disputed dollar

of the burgeoning US Federal Debt is ending up financing the US
Occupation of Iraq. Political ramifications of this rupee 8,000 crore
subsidy in calendar year 2007, to an imperialist war which is widely
opposed by the Indian public, will only be judged by future elections.

In his address to the All India Congress Committee (AICC) on November

17, 2007, Prime Minister Manmohan Singh admitted that the
Development that we want is not materializing; yet the political
economist in him glossed over this and changed tack to secular

The Finance Minister was more forthright on September13, 2007 when,

for once, he admitted that the biggest economic problem before the
country is that though gross investment is rising, production is falling!

The problem is that RBI has been hijacking investment into the MSS
account. Under these circumstances, the economist triumvirate can be
absolved of guilt only if they admit to never having realised that
Ambassador Mulford was leading, nay ordering, them up the garden
path; but then, there will be competence issues.

Immediate action may help avert a deepening of recession in the

Indian economy. The stock market has begun its slide. Interest rates
are going up. If these trends continue, people's faith in the system will
erode and soon the circumstances of Argentina 2001 or of the South
East Asian crisis will be visiting the streets of our country.
This open letter hopes to alert all Indians to the nature of the calamity
which is overtaking us. Suspending MSS operations is a first step, but
even this will not absolve India of the liability of the 250,000 crore
rupee debt-bubble which we have run up in the last 18 months.

Ordering an investigation into this scam and relieving its perpetrators

of the reins of the nation and the economy is a necessary second step
to retain investor confidence and people's goodwill and faith in the
system of governance in India. If the present leadership doesn't do
this, posterity surely will; and if Domingo Cavallo's fate is anything to
go by, it will not be forgiving.

Given the seriousness of the impending financial crisis that our

government has been lured or duped or connived-with to unleash, a
reworking of the polity, RBI, and foreign policy is immediately required.

As Congress President and Chairperson of the United Progressive

Alliance, you are the only individual who can make the necessary
corrections in time. It is an onerous responsibility and your tryst with
destiny. For the sake of one billion Indians, please act.

OPEN LETTER No 2: Government violating laws and robbing India of

resources, employment and growth

Namit Verma

23 December, 2007

Namaskar. Serious violation of laws and constitutional process by the

Manmohan Singh led United Progressive Alliance (UPA) government
have recently come to light. These actions of the government and its
agencies, commonly referred to as the Market Stabilisation Scheme
(MSS) Bond Scam, have drained over two lakh crore rupees of
investible funds from the Indian economy and robbed our economy of
enormous growth and development potential.

This scam also includes unauthorized diversion of tens of thousands of

crores of budgetary resources towards meeting interest cost on illegal
market borrowing by Reserve Bank of India (RBI) and Government of
India (GoI) to raise resources for subsidizing the United States of
America and its occupation of Iraq efforts.

The primary misdemeanors which are the defining features of the MSS
Bond Scam are (i) violations of the RBI Act 1934 by the present
Governor RBI and the Central Government under the tutelage of
American Ambassador David Campbell Mulford, (ii) fraudulent transfer
of precious Indian resources to the United States of America, (iii) covert
funding of the US Occupation of Iraq, and (iv) conspiracy with foreign
governments, banks and financial institutions, to damage the
economic security of India and to steal our resources.

I had raised these issues at length in my earlier Open Letter dated

November 21, 2007 addressed to you. Thousands of fellow citizens
including several individuals in government and even some
parliamentarians responded and shared their angst and concerns for
the safety and economic security of the country.

Day of the Institute of Development Studies, Jaipur on June 30, 2007;

the speech was titled "Evolving role of the Reserve Bank of India:
Recent Developments."

The MSS facility flagrantly violates the Reserve Bank of India Act 1934,
but was launched because RBI felt that "a deposit facility becomes
essential to afford more flexibility to RBI in using the repo facility as a
signaling device while not sacrificing the objective of the provision of a
floor to the movement of short-term interest rates."

RBI officers responding to the first Open Letter of 21 November 2007

pointed out that the Working Group was faced with tremendous
pressures from foreign banks for a deposit facility which "would also be
useful in mopping up any surplus funds emanating from settlement
balances of banks."

The RBI Working Group report of 2 December 2003 had admitted that
"the Group explored the feasibility of instituting a standing deposit
facility. However the Reserve Bank of India Act. 1934 in its present
form does not permit RBI to borrow on clean basis from banks and pay
interest thereon." With a view to dissuade adventurers, who were
willing to violate the RBI Act at the behest of the foreign banks, the
Working Group included the transparently clear reminder, "therefore,
institution of such a deposit facility distinct from CRR for banks would
necessitate a suitable amendment to the RBI Act."

On 20 December 2003 India's foreign exchange reserves surpassed US

$100 billion. Since the dollar was weak, there was immense 'pressure
on the government of India (GoI) to offload dollars and keep its forex
reserves in other currencies, notably Euros. As this issue became first a
subject of public debate and, eventually, a subject of popular anxiety
about erosion of our national resources, the government of the day
was forced to offload dollars.

Government of India offloading US dollars weakened by the

unmanageable US national debt, from the Indian forex reserve
portfolio, led to increased lobbying by the Americans to prevent this.
This situation was also responsible for the choice of David Campbell
Mulford Chairman International of Credit Suisse First Boston, one of
the21 official dealers of US Treasury Bonds, as US Ambassador to India.
Further pressure was brought to bear on the Reserve Bank of India and
the Government of India to serve American interest at immense costs
to the Indian exchequer by maintaining unrealistically high proportion
of dollar and US treasury bond balances: these pressures were
observed on the sidelines of the visit of the American team to Mumbai
under the leadership of Assistant Secretary of State Christina Rocca on
11 February 2004, and again during the 16 February 2004 talks in New
Delhi between GoI and US Trade Representative Robert Zoellick.

Surrendering to this American pressure and unmindful of his legal

obligations, Governor Y V Reddy chose to announce the Launching of
the Market Stabilization Scheme (MSS) on 23 February 2004 in blatant
violation of the RBI Working Group's advice as well as the Reserve
Bank of India Act 1934. With the notification of the Fiscal Responsibility
and Budget Management Act in August 2004, the MSS would soon be
in conflict with this act as well.

In his Budget Speech on July 8, 2004 Finance Minister P Chidambaram

told the nation, "The Fiscal Responsibility and Budget Management Act
(FRBM) 2003 has streamlined the Budget presentation process. The
Government has demonstrated its commitment to prudent fiscal and
financial policies by notifying the Act and the Rules with effect from
July 5, 2004….Under the FRBM Act I am obliged to wipe out the
revenue deficit by 2007-08….I am committed to implementing the
FRBM Act. The elimination of revenue deficit will open up fiscal space
up to 3 per cent of GDP for enhanced public investment without
undermining fiscal prudence." Instead, the MSS Bond Scam made 6.5
per cent of the GDP unavailable to public investment! [One presumes
that in his Budget speech Mr Chidambaram wasn't promising to free up
3.5 per cent of Indian GDP for US public investment.]

It is pertinent to note here, that in his 30 June 2007 Jaipur address,

Governor Yaga Venugopal Reddy admitted, "automatic monetization
through ad hoc Treasury Bills was discontinued since April 1.997. The
Fiscal Responsibility and Budget Management (FRBM) Act, 2003,
further strengthened the position by prohibiting RBI from participating
in primary issuances of all government securities."
Earlier, questions about the legality of the launching of the MSS
scheme on 23 February 2004, had also forced Governor Reddy to go
back to the lame duck Union Government (Lok Sabha having been
dissolved on 6 February 2004 and elections being underway) for
authorization. The conspirators decided to pretend that a
Memorandum of Understanding (MoU) with the Ministry of Finance was
adequate authorization for them to overrule the Reserve Bank of India
Act 1934. As we all know neither the RBI nor the Ministry of Finance --
the two signatories of this MoU -- is competent to authorize violation of
the RBI Act: therefore the entire scheme remains illegal exactly as had
been warned by the RBI Working Group.

Significantly, the original text of this Memorandum of Understanding

which should have been available in public domain under the
provisions of section 4(1) of the Right to Information Act 2005 is
nowhere to be found; forcing me to requisition a copy under section 6
of the RTI Act: this copy is still awaited.

Sources inside Reserve Bank of India suggest that the Memorandum of

Understanding signed between the Ministry of Finance and the Reserve
Bank on 25 March 2004, only details the rationale and operating
modalities of the illegal Market Stabilization Scheme, there is no
authorization clause in it! After all you don't expect clever joint
secretaries in the Ministry of Finance to authorize violations of the law
and set themselves up for jail terms: these privileges are reserved for
those who seek Constitutional responsibilities. For confirmation of this;
we will have to wait till an exact official copy of the Memorandum
surfaces. Meanwhile, let us examine the developments from 25 March
2004 onwards.

Such a far reaching policy decision should have been brought to the
attention of parliament at the first available opportunity: this would
have been in keeping with the sentiments expressed by Finance
Minister Palaniappan Chidambaram when he wound up his Budget
speech on July 8, 2004, by quoting the great sage Tirvalluvar, "Aran
Izhukkathu Allavai Neeki Maran Izhukka, Maanam Udayathu Arasu."
(They are good rulers who observe ethics, commit no crime and walk
the path of honor and courage.)

Instead, Finance Minister chose to leave the MSS issue out of his
Budget Speech, and to merely include it in the section on Receipts
Budget 2004 - 2005 under the head Debt Position of the Government
of India, with the vague explanation, "Government of India has
launched Market Stabilization Scheme (MSS), in consultation with
Reserve Bank of India, since April 2004. The scheme envisages issue of
treasury bills and/or dated securities to absorb excess liquidity, arising
from significant foreign exchange inflows."

The Finance Minister willfully misled parliament by refusing to disclose

(i) that the MSS came along with an interest cost to be borne by
subsequent budgetary expenditures and (ii) that the Reserve Bank of
India Act 1934 prohibits the RBI from borrowing from the market on
interest. The Finance Minister's failure to make these crucial
disclosures, surely adds an altogether new dimension to his espousal
of sage Tirvalluvar's concept of "Maanam Udayathu Arasu" (walk the
path of honor and courage).

Misrepresentation leading to subversion, subversion which unleashes

blatant violation of laws, illegalities which facilitate the loot of the
nation's coffers, bleeding the nation to benefit foreigners and to
unleash recession and poverty at home: this is treason.

The above charge was virtually admitted by Governor Y V Reddy in his

30 June 2007 address where he confessed. "It is significant to note that
the RBI Act. Section 19 precludes RBI from performing certain business
which protects the integrity of the institution such as drawing or
accepting bills payable otherwise than on demand. Because of the last
provision the RBI evolved the Market Stabilization Scheme through an
MoU with the Government for undertaking stabilization operations."
Honest government employees point out that signing an illegal MoU
with the Government of India cannot authorize the RBI Governor to
violate the very Act from which he draws all his powers. First, the
Government of India signing an illegal MoU is bad enough; second, this
signing was done by a lame duck government on March 25, 2004 when
the country had gone to polls, the code of electoral conduct was in
operation and the government of the day had no business making such
policy departures, leave alone
violating existing Acts. Governor Reddy, a 1964 batch Indian
Administrative Service (IAS) officer, should have known better than to
either follow or issue illegal orders.

As we observed in detail in the first open letter of 21 November 2007,

this conspiracy was hatched by the foreign institutional investors, their
backers in the US government and their stooges inside the government
of India.

The aims of the several conspirators are distinct but necessarily

synergetic. The foreign institutional investors want profits, they were
desperate to avoid losses that remaining on the dollar implied; through
the MSS Bond mechanism they got first, a reprieve from the weakening
dollar, and second, a safe and guaranteed channel to recycle their
holdings in a weak dollar into a strong resurgent rupee with sovereign
guarantees of high returns.

The American government got a channel to swap some of its

recessionary tendencies for the robust growth tendencies of Indian
economy: this was enabled by RBI mopping up and withdrawing 2.5
lakh crore rupees of investible resources from the Indian market thus
creating a credit squeeze in the Indian economy. This 2.5 lakh crore
rupees of investment was then diverted to the US economy which saw
them add jobs at the height of recession!

While the investible resources represent cash flows which will have to
be compensated at some date in the future, the American government
also got veritable donation / subsidy of tens of thousands of crores
from the government of India. How and why did this happen?

In the present global economy, India is one of the few growing

economies offering positive returns on investment. As a result, the
Indian economy is the target of global investment flows. In contrast,
the US economy is in deep recession, offering little or no returns on
investment; therefore global investment is fleeing the US.

When the Reserve Bank mopped up the investible funds flowing into
India, it was forced to pay compensatory interest / yield of at least as
much as the global investor was assured of earning through
investments in the free Indian economy: effective yield on the
compensating MSS Bond was between 7.5 and 8.25%

When the Reserve Bank bought short term US treasury securities, it

got no yield out of this investment. In effect, the RBI bought at high
interest and lent at near zero interest: legal violations apart, terrible
business sense!

This difference between high borrowing cost and non-existent

investment yield was the effective cost of diverting global investment
flows from a growing economy to a recession-hit economy. With every
passing day, the interest burden on the government of India is
increasing since the rush of foreign institutional investors to ride the
gravy train that their stooges in the Indian government have arranged,
continues unabated. As of today, Indian government subsidy to the
American Treasury stands in excess of rupees 15,000 crore rupees!
Needless to add that these are precious funds going to fund that last
ever escalating head on the American government expenditure list: the
Occupation of Iraq!

The credit squeeze and increasing interest rates resulting from RBI's
MSS Bond based credit mopping/sterilization and unwarranted market
stabilization, has imposed a virtual ban on domestic investment in the
world's most attractive investment destination, India.

The fallout of this is, that our growing market is no longer available to
fuel our economic growth; instead, growing Indian demand without
commensurate growth in investment and production in the economy, is
unleashing the new problem of increasing indebtedness and loan
defaults in the economy. Credit Card and Equated Monthly Installment
(EMI) based consumers unprepared for the sudden spurts of interest
rates to over 40% per annum on card based credit are trapped: unable
to repay dues, they suddenly find themselves in a debt trap. Worse, as
the conspiratorial anti-national monetary policy of the government
unleashes sterilization and recession, cash flow tapers off, forcing debt-
ridden borrowers to offload property or default. In the event of a
default, once again, it is the aggressively lending foreign banks which
will collect, thanks to the securitization act.

The scenario described above, whereby increasing consumption in the

Indian market is coexisting with a situation of reduced incremental
investment and production is bizarre. Economists don't normally study
such phenomena because nobody imagines governments to be
conspiring to destroy their own economies. But here is a case whereby
monetarist jugglery has been successfully used to overturn growth
trends and unleash stagflationary symptoms. Given that this has
happened at a time when the nation has a government headed by an
ostensibly great economist, whose understanding of such monetarist
jugglery is not in doubt, one is left with no option but to question the
motivations of the Prime Minister and the RBI Governor. The brazen
violations of laws goes against the oaths of office sworn to by all the
aforementioned gentlemen.

I request all my fellow citizens to do whatever their capacity permits,

to exercise the various legal mechanisms in the country, to fix
responsibility for this treasonous conspiracy.

Also, immediate corrective action is necessary to prevent the

deepening of the stagflationary tendency in the economy, and to
prevent this from developing into a full blown recessionary crisis. We
also need to be aware that in our country, a huge percentage of the
consumption is comprised of necessities like food and healthcare. For
the vast majority of Indians, this means that if a recessionary situation
is unleashed, the cut in incomes and consumption will assume life
threatening proportions including starvation and denial.

God save our country.