A Monetary Drain due to Excess Liquidity. Why is the RBI Playing Along


And so we thought demonetization was not a success. Let me begin with the Socratic irony to assume that it was indeed a success, albeit not in arresting black money for sure. Yes, the tax net has widened and the cruelty of smashing down the informal sector to smithereens to be replaceable with a formal economy, more in the manner of sucking the former into the latter has been achieved. As far as terror funding is concerned, it is anybody’s guess and so let them be with their imaginations. What none can deny is the surge in deposits and liquidity in the wake of demonetization. But, what one has been consciously, or through an ideological-driven standpoint denying is the fact that demonetization clubbed with the governmental red carpet for foreign direct investment has been an utter failure to attract money into the country. And the reason attributed for the same has been a dip in the economy as a result of the idiosyncratic decision of November 8 added with the conjuring acts of mathematics and statistics in tweaking base years to let go off the reality behind a depleting GDP and project the country as the fastest growing emerging economy in the world. The irony I started off with is defeated here, for none of the claims that the government propaganda machine churns out on the assembly line are in fact anywhere near the truth. But, thats what a propaganda is supposed to doing, else why even call it that, or even call for a successful governance and so on and on (sorry for the Žižekian interjections here).

Assuming the irony still has traces and isn’t vanquished, it is time to move on and look into the effects of what calls for a financial reality-check. Abruptly going vertically through the tiers here, it is recently been talked about in the corridors of financial power that the Reserve Bank of India (RBI) is all set to drain close to 1.5 lakh crore in excess liquidity from the financial system as surging foreign investments forces the central bank to absorb the dollar inflows and sell rupees to cap gains in the local currency. This is really interesting, for the narrative or the discourse is again symptomatic of what the government wants us to believe, and so believe we shall, or shall we? After this brief stopover, chugging off again…Foreign investments into debt and shares have reached a net $31 billion this year, compared with $2.7 billion in sales last year, due to factors including India’s low inflation and improving economic growth. This is not merely a leap, but a leap of faith, in this case numerically. Yes, India is suffering from low inflation, but it ain’t deflation, but rather disinflation. There is a method to this maddening reason, if one needs to counter what gets prime time economic news in the media or passes on as Chinese Whispers amongst activists hell-bent on proving the futility of the governmental narrative. There is nothing wrong in the procedure as long as this hell-bent-ness is cooked in proper proportions of reason. But, why call it disinflation and not deflation? A sharp drop in inflation below the Reserve Bank of India’s (RBI’s) 4% target has been driven by only two items – pulses and vegetables. the consumer price index (CPI), excluding pulses and vegetables, rose at the rate of 3.8% in July, much higher than the official headline figure of 2.4% inflation for the month. The re-calculated CPI is based on adjusted weights after excluding pulses and vegetables from the basket of goods and services. The two farm items – pulses and vegetables – have a combined weight of only 8.4% in the consumer price index (CPI) basket. However, they have wielded disproportionate influence over the headline inflation number for more than a year now owing to the sharp volatility in their prices. So, how does it all add up? Prices of pulses and vegetables have fallen significantly this year owing to increased supply amid a normal monsoon last year, as noted by the Economic Survey. The high prices of pulses in the year before and the government’s promises of more effective procurement may have encouraged farmers to produce more last year, resulting in a glut. Demonetisation may have added to farmers’ woes by turning farm markets into buyers’ markets. Thus, there does not seem to be any imminent threat of deflation in India. A more apt characterization of the recent trends in prices may be ‘disinflation’ (a fall in the inflation rate) rather than deflation (falling prices) given that overall inflation, excluding pulses and vegetables, is close to the RBI target of 4%. On the topicality of improving economic growth in the country, this is the bone of contention either weakening or otherwise depending on how the marrow is key up.

Moving on…The strong inflows have sent the rupee up nearly 7 per cent against the dollar and forced the RBI to buy more than $10 billion in spot market and $10 billion in forwards this year – which has meant an equivalent infusion in rupees. Those rupee sales have added liquidity into a financial system already flush with cash after a ban on higher-denomination currency in November sparked a surge in bank deposits. Average daily liquidity has risen to around Rs 3 lakh crore, well above the RBI’s goal of around Rs 1 lakh crore, according to traders. That will force the RBI to step up debt sales to remove liquidity and avoid any inflationary impact. Traders estimate the RBI will need to drain Rs 1 lakh crore to Rs 1.4 lakh crore ($15.7 billion to $22 billion) after taking into account factors such as festival-related consumer spending that naturally reduce cash in the system. How the RBI drains the cash will thus become an impact factor for bond traders, who have benefitted from a rally in debt markets. The RBI has already drained about Rs 1 lakh crore via one-year bills under a special market stabilisation scheme (MSS), as well as Rs 30,000 crore in longer debt through open market sales. MSS (Market Stabilisation Scheme) securities are issued with the objective of providing the RBI with a stock of securities with which it can intervene in the market for managing liquidity. These securities are issued not to meet the government’s expenditure. The MSS scheme was launched in April 2004 to strengthen the RBI’s ability to conduct exchange rate and monetary management. The bills/bonds issued under MSS have all the attributes of the existing treasury bills and dated securities. These securities will be issued by way of auctions to be conducted by the RBI. The timing of issuance, amount and tenure of such securities will be decided by the RBI. The securities issued under the MSS scheme are matched by an equivalent cash balance held by the government with the RBI. As a result, their issuance will have a negligible impact on the fiscal deficit of the government. It is hoped that the procedure would continue, noting staggered sales in bills, combined with daily reverse repo operations and some long-end sales, would be easily absorbable in markets. The most disruptive fashion would be stepping up open market sales, which tend to focus on longer-ended debt. That may send yields higher and blunt the impact of the central bank’s 25 basis point rate cut in August. The RBI does not provide a timetable of its special debt sales for the year. and if the RBI drains the cash largely through MSS bonds then markets wont get too much impacted. This brings us to close in proving the success story of demonetization as a false beacon, in that with a surge in liquidity, the impact on the market would be negligible if MSS are resorted to culminating in establishing the fact that demonetization clubbed with red-carpeted FDI has had absolutely no nexus in the influx of dollars and thus any propaganda of this resulting as a success story of demonetization is to be seen as purely rhetoric. QED.

Where Hegel Was, There Deconstruction Shall Be: The Dialectical Calculus Between Lukács and Laclau & Mouffe. Thought of the Day 81.0


Lukács would be the condensation of everything that is deemed politically regressive about the social theory of “the rationalist ‘dictatorship’ of Enlightenment” (Ernesto Laclau New Reflections on the Revolution of Our Time), of just about everything that the new social logic of postmodern culture brings into crisis. In this context – which is theoretically and politically hostile to the concept of totality – Laclau and Mouffe’s recasting of the Gramscian concept of hegemony is designed to avoid the Lukácsian conception of society as an “expressive totality”. For Lukács, a single principle is “expressed” in all social phenomena, so that every aspect of the social formation is integrated into a closed system that connects the forces and social relations of production to politics and the juridical apparatus, cultural forms and class-consciousness. By contrast, Laclau and Mouffe insist that the social field is an incomplete totality consisting of a multitude of transitory hegemonic “epicentres” and characterised by a plurality of competing discourses. The proliferation of democratic forms of struggle by the new social movements is thereby integrated into a pluralistic conception of the social field that emphasises the negativity and dispersion underlying all social identities. “Radical and plural democracy,” Laclau and Mouffe contend, represents a translation of socialist strategy into the detotalising paradigm of postmodern culture.

For Lukács, the objective of a new conception of praxis is to establish the dialectical unity of theory and practice, so as to demonstrate that the proletariat, as the operator of a transparent praxis, is the identical subject-object of the historical process. The subject of history is therefore the creator of the contents of the social totality, and to the extent that this subject attains self-reflexivity, it is also the conscious generator of social forms. This enables Lukács to emphasise the revolutionary character of class conscious as coextensive with revolutionary action. Laclau and Mouffe’s concept of discursive practice has the same effect – with this difference, that Laclau and Mouffe deny that discursive practices can become wholly transparent to social agents (Ernesto Laclau, Chantal Mouffe Hegemony and Socialist Strategy Towards a Radical Democratic Politics). By reinscribing the concept of praxis within a deconstruction of Marxism, Laclau and Mouffe theorise a new concept of discursive practice that “must pierce the entire material density of the multifarious institutions” upon which it operates, since it has as its objective a decisive break with the material/mental dichotomy. “Rejection of the thought/reality dichotomy,” they propose, “must go together with a re-thinking and interpenetration of the categories which have up until now been considered exclusive of one another”.

Critically, this means a fusion of the hitherto distinct categories of (subjective) discourse and (objective) structure in the concept of “hegemonic articulation”. This theoretical intervention is simultaneously a decisive political advance, because it now becomes clear that, for instance, “the equivalence constituted through communist enumeration [of the alliance partners within a bid for political hegemony] is not the discursive expression of a real movement constituted outside of discourse; on the contrary, this enumerative discourse is a real force which contributes to the moulding and constitution of social relations”. In other words, the opposition between theory and practice, discursive practice and structural conditions, is resolved by the new theory of hegemonic articulation. The operator of these discursive practices – the new agent of social transformation – is at once the instigator of social relations and the formulator of discourses on the social.

The most significant difference between Lukács and Laclau and Mouffe is their respective evaluations of Hegelian dialectics. Where, for Lukács, a return to dialectical philosophy held out the prospect of a renewal of Marxian social theory, for Laclau and Mouffe it is “dialectical necessity” that constitutes the major obstacle to a radical postmodern politics. Laclau and Mouffe’s fundamental objection to dialectics is to the substitution of a logically necessary sequence for the contingency of the historical process. They applaud the dialectical dissolution of fixity but deplore the supposed inversion of contingency into necessity and the imposition of a teleology of reconciliation. Hegel’s work, therefore, “appears as located in a watershed between two epochs” and is evaluated as “ambiguous” rather than simply pernicious. On the one hand, Laclau and Mouffe reject the Hegelian notion that “history and society … have a rational and intelligible structure”. This is regarded as an Enlightenment conception fundamentally incompatible with the postmodern emphasis on contingency, finitude and historicity. On the other hand, however, “this synthesis contains all the seeds of its own dissolution, as the rationality of history can only be affirmed at the price of introducing contradiction into the field of reason”. Once the impossibility of including contradiction within rationality is asserted, it then becomes clear that the “logical” transitions between historical “stages” are secured contingently:

It is precisely here that Hegel’s modernity lies: for him, identity is never positive and closed in itself but is constituted as transition, relation, difference. If, however, Hegel’s logical relations become contingent transitions, the connections between them cannot be fixed as moments of an underlying or sutured totality. This means that they are articulations.

This is not a rejection of Hegel but a re-interpretation. Interpreted in this light, Hegel’s “logical” relations are the language games that frame social practices – rather than formally rational structures deducible a priori – and their “transitions” are only the contingent connections created by political articulations. In opposition to the logically necessary sequence of closed totalities, Laclau and Mouffe insist on a historically contingent series of open discursive formations. Resolutely contesting the category of the totality, Laclau and Mouffe declare that:

The incomplete character of every totality leads us to abandon, as a terrain of analysis, the premise of “society” as a sutured and self-defined totality. “Society” is not a valid object of discourse.

So where Lukács once declared that “the category of the totality is the bearer of the principle of revolution in science”, Laclau and Mouffe now announce, by contrast, that totality is an illusion because “‘society’ as a unitary and intelligible object which grounds its own partial processes is an impossibility”. Where Hegel was, there deconstruction shall be – or so it would seem.