Last week in one of the dailies there was a news item that customs officials at Sahar Airport had nabbed some poor bloke trying to smuggle out foreign currency valued at Rs 4.5 lakh. Apparently, this smuggler had concealed foreign exchange in his rectum. Like any good Piscean, my imagination ran wild. How on earth did those customs fellows discover it in this mans rectum? Do they, in their shining white uniforms, with those little gold epaulettes stand around telling passengers to display their rectums? And how do people take foreign currency out in their rectum? Do they stuff their bottoms with rolled dollar bills or are these pure gold coins smuggled no doubt into India in other rectums.
The mechanics of this nauseating operation need not detain us for long. But the economics of it are fascinating. Let us assume for that is what fits the mechanics best that the man was trying to smuggle out gold. The gold was probably smuggled in having been purchased with dollars in Dubai. The smuggler then sells the gold for rupees perhaps to our villain who tries to smuggle the gold out to sell it in Dubai for dollars. Now put in this fashion the whole story seems bizarre. As far as the country is concerned gold has come in and gone out; which is the economic equivalent of no gold coming in. The person who smuggled the gold in was no doubt paid in rupees by the hawala operator; who then sold the gold at a profit to our villain who tried to smuggle it out to buy dollars in Dubai.
So the end result of all this rectal activity is that nothing has changed. The amount of gold in the country if our villain had been successful would have been the same as before, the amount of rupees circulating in the economy has not increased or decreased. The customs intervention has simply increased the gold in the economy which is what the original smuggler was trying to do in the first place. The reader should not be confused by the chain of transactions. He can change the example so long as he follows two simple rules. First, the transaction chain should be pursued to the end. Thus the reader is free to put in as many intervening actors as he wishes. Second, he should remember the self-evident proposition that for every buyer there has to be a seller.
Let me illustrate the argument by removing all the illegal steps that have been taken in the rectal trade. I hope to demonstrate that even when all is done legally there is no difference between what our villain tried to do and what the Reserve Bank actually does. The first step is to bring gold or dollars in to India. Imagine our patriotic NRI coming with his bag full of dollars which he declares to the customs officials. He is then advised to go and change the dollars into rupees with the State Bank of India, who in turn will try to sell the dollars in the foreign exchange market failing which they sell the excess to the Reserve Bank of India.
Now when the State Bank does that, the poor governor is put on the horns of a dilemma. Here are all these blasted lovely dollars coming in and he has to shell out rupees for them. He has to borrow the local currency at 12 per cent, and just for the present he has no immediate use for the dollars so he puts them into Indias reserves. Now what does that mean? The Reserve Bank will have to buy foreign assets like US Treasury Bills at a yield of 6 per cent, thereby incurring a loss. So far at least nothing different has happened than what our villain tried to achieve. All that has happened is dollars have come in through the NRI and have gone back to America, through all those official intermediaries. Prima facie what has been achieved economically is no different from all those gyrations that took place in the rectal trade.
But the astute reader will quickly point out the difference; in the one case Indias reserves have not been augmented while under the official route we have exchanged rupees for dollars. The authorities have borrowed more rupees, but we now have more foreign exchange for a rainy day. Indeed, if we continue to get this foreign exchange we will be able to achieve the Tarapore Committee nirvana of convertibility in three years.
But what will that signify? What is the value of this convertibility? All it means is that our villain will be able to buy his dollars by paying rupees, which is just what he is doing now through unofficial channels. He will no longer need to carry dollars in his rectum but he will be able to carry the money in his hip pocket; and to bring this change Tarapore needs three years!
The real mistake of the convertibility committee is not their tedious recommendations but their total failure to apply common sense economics to the task at hand. Convertibility is no big deal, the rupee is already convertible through illegal channels. It is this inability to face the facts that lands the people of this country into such humiliating postures as our poor villain at Sahar was put through. There are always economic arguments for perpetrating atrocities on society. In Hitlers Germany, Jews were sent to the gas chambers but not before gold from their teeth was extracted for State use.
For myself, I deplore these futile laws that make criminals out of ordinary economic activities. I also believe that the guilt lies with those who make and justify these laws.
And these evil laws have bred into our society a dangerous distortion of right and wrong. Some years ago a young Indian courier was caught at Heathrow airport for smuggling heroin. In England, it is a crime if you knowingly import prohibited drugs. At his trial the young man pleaded that he did not know what was in the packet. On cross-examination, he was asked why on earth would anyone have paid for his ticket and hotel expenses if the goods were not forbidden. He truthfully replied that he had indeed known the goods were prohibited but he had thought it was foreign exchange because that was what was forbidden in his own country.
It is a great mistake, and bad economics, to accord such a high priority to foreign exchange. It should be freely traded as any other commodity is. Those who sit on committees and perpetuate the myth of the importance of foreign exchange are as guilty of aiding customs officials in their rectal examinations as if they had been present themselves. And we, the people of India, to our shame, tolerate with servility this purposeless abuse of our rights as human beings.
