There have been periodic demands, the latest being from Baba Ramdev, that “black money” from India which is stashed in Swiss banks should be “brought back” and used for development purposes. This money of course does not have to be physically brought back; all that is required is a nationalisation of those deposits, ie, a change in the ownership of deposits in certain accounts in Swiss banks from their current holders to the government of India. When the government obtains ownership over those deposits then it will have to transfer this ownership to the Reserve Bank of India (since the deposits are in foreign exchange) and obtain rupees in return, which it can spend as it likes.
But as is obvious from this process, there is no difference in terms of macroeconomic consequences, apart from just one which will be discussed shortly, between the government’s spending money acquired from the Swiss Banks and its spending money freshly printed by the RBI against government securities (or what is called “deficit financing”). The one and only difference between the two cases is that Swiss bank deposits are in foreign exchange, and hence they will be available with the RBI for future imports, while the government securities against which deficit financing is undertaken are incapable of financing any imports.
True, these securities too can be converted into foreign exchange: if the government floats an equivalent amount of securities in foreign financial markets and uses the foreign exchange proceeds to draw down the securities it has with the RBI, then it would have substituted foreign exchange in the place of government securities in the RBI’s portfolio. But even in this situation, a difference between the two cases will still remain, since the foreign exchange acquired from Swiss Banks will be the government’s own property, while the foreign exchange obtained by floating government securities abroad will be only borrowed money.
If the government does acquire this foreign exchange from Swiss Banks in a crackdown on black money, then the situation is exactly analogous to its obtaining reparations from a foreign government, like Britain and France had got from Germany after the first world war. The rupees obtained by the government against this foreign exchange, which it will sell to the RBI, are available with it for development expenditure. When they are spent they increase aggregate demand in the economy. On the other hand this foreign exchange lying with the RBI can be used for imports; or putting it differently, domestic nationals can go to the RBI with rupees, purchase foreign exchange with them and use them for importing, which would augment supplies in the economy.
The money obtained from Swiss Banks therefore can boost both aggregate demand and aggregate supply, which is why it need notaggravate inflationary pressures in the economy. By contrast, if government expenditure had been met through deficit financing, that would have raised only aggregate demand, and unless the economy was demand-constrained to start with (so that an increase in demand would itself bring forth supplies), inflationary pressures would have got aggravated.
Money obtained from Swiss Banks thus would appear to be a sound source of financing development expenditure. There are however certain problems even in this case that one must reckon with. The best way to appreciate what is a basic problem here is to imagine that the commodity for which demand increases as a result of increased development expenditure is one that cannot be imported because its supplies are meagre in the world market itself. In such a case, even while the use of the Swiss bank money for development expenditure increases demand for this commodity in the economy, its supply cannot increase, despite foreign exchange being available; this would aggravate inflationary pressures in the economy. Swiss Bank money in this case will be no different in its inflationary consequences from deficit financing.
In reality, there is indeed one such commodity, namely foodgrains. The expenditure of Swiss Bank money, if undertaken in a manner, as it should be, that puts purchasing power in the hands of the working people, will increase the demand for foodgrains. In the world market however not only are foodgrain stocks low, thanks to heavy US diversion of foodgrains for bio-fuels, but foodgrain prices are also rising rapidly. What is more, if India approaches the world market for imports, then this very fact will give a boost to speculation and send world foodgrain prices skyrocketing. The use of Swiss Bank money in this case, other things remaining the same, will only aggravate the already acute food price inflation in the country.
To say this is not to suggest that Swiss Bank money should not be used for development expenditure for the benefit of the people, but that other things must not remain the same. In particular, if Swiss Bank money is used for development expenditure, then there must be appropriate supply management measures for foodgrains that ensure that the people are not hit by any aggravation of food price inflation.
This entails at least two things: first, the increase in development expenditure that Swiss Bank money would enable the government to undertake must be so planned that it raises foodgrain output in the country within a short period. In other words, the projects financed by this money must have as their primary objective a rapid increase in the country’s foodgrain output, for which a whole range of disincentives for peasant production that have been created during the neo-liberal era must be reversed. Secondly, since an increase in foodgrain output will take time, no matter how quick-yielding the new projects may be, in the very short run inflationary pressures have to be handled through the use of domestic stocks, which in turn requires, both for this purpose, as well as for the long run, an extensive procurement-cum-public distribution system to be put in place.
In short, even if the government obtained Swiss Bank money through a nationalisation of the deposits of black money-holders, it would not ipso factobe in a position to spend that money with impunity, unless it took a number of steps undoing the damage to the peasant economy, and to the foodgrain economy in particular, that the neo-liberal regime it has been promoting has inflicted. And if it does take those steps, then it need not even wait for Swiss Bank money; deficit financing too will not have any greater inflationary consequences than Swiss Bank money in such a case.
The fact that the government does not have the least intention of either revamping the peasant economy or ensuring food security for the people is obvious from its actions. Throughout the current period of rapid food price increase, the government has resorted to foodgrain exports and continues to hold substantial stocks, which are rotting in the open, rather than distributing them among the famished poor, despite strictures from the Supreme Court. In 2008 for instance, when food prices were escalating steeply, 14 million tonnes of foodgrains were exported from India and another 17 million tonnes were added to government stocks! A total of 31 million tonnes in short were withdrawn from domestic availability in a year of acute inflation! With such an attitude on the part of the government, even if Swiss Bank money is obtained for expenditure, it will only end up aggravating the inflationary crisis.
Putting the matter differently, the “bringing back” of black money and its use for the purpose of development presupposes, on the part of the government, not only the courage and political will required for such “bringing back”; it also presupposes a retreat from neo-liberalism in crucial spheres. Baba Ramdev and his supporters talk only about “bringing back” black money; they never talk about the whole set of complementary measures, involving a retreat from neo-liberalism, that must be put in place if this “brought back” black money is to be used for development. To be sure, “bringing back” black money itself will require a degree of State activism that will be frowned upon by international finance capital; but making use of the “brought back” black money will require additional measures of State activism which are further anathema for it. But precisely for that reason, anyone who is serious about the confiscation of black money accounts in Swiss Banks must also ask for complementary measures, so that this demand for confiscation does not remain just hot air.
Government expenditure on development, incidentally, is never held up for the lack of something called “money”. Resource mobilisation by the government does not consist simply in the mobilisation of “money”. When “money” is raised through taxation, the presumption is that real resources are being released in the process. The command over such resources is coming into the hands of the government which can then use them as it deems fit. But it is these real resources that actually matter, not something called “money”. Because of this, Michal Kalecki, the renowned Polish Marxist economist, had said: “the financial problem of resource mobilisation is nothing else but the real problem of raising foodgrain output”.
When we talk of “bringing back” Swiss Bank “money” we must not fall into the error of looking at “money” as if it was the real resource. True, it represents command over real resources, but translating this command into actual real resources in the case of certain crucial commodities like foodgrains may be problematical, which is why State activism in foodgrain management may become necessary. The real obstacle to putting in place such a regime of foodgrain management lies in neo-liberalism. Overcoming neo-liberal constraints, rather than obtaining “money” as such, lies at the heart of the problem of increasing development expenditure. If these constraints can be overcome, then deficit financing too can generate the “money” for such expenditure, even if Swiss Banks yield nothing.
To be sure, tax evaders, black money holders, and all those who flout the law of the land, must be punished through a confiscation of their illegal wealth. But making proper use of this wealth will require an economic regime that breaks out of the neo-liberal straitjacket.
Prabhat Patnaik is a Marxist economist in India. This article was first published in People’s Democracy on 10 July 2011; it is reproduced here for non-profit educational purposes.
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