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 discipline. . 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 Rua." 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 this? 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 politics. 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 debtridden 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.