People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 48

December 02, 2007

Capitalism At Its Cruellest Best!


Sitaram Yechury


THE growing hiatus between the `shining’ and the `suffering’ India is manifesting itself in myriad ways. The agrarian distress continues to intensify with the latest studies showing on an average, distress suicides among the farmers being nearly 20,000 a year, over the past decade. In certain regions, P Sainath has shown (The Hindu dated October 26, 2007) such suicides taking place at an alarming rate of one every 30 minutes. However, the ruination of the `real’ India, as the `shining’ India gets stronger, is taking place, in yet another way, with the appreciation of the Indian rupee. A dollar that used to cost nearly Rs 50 in mid-2002 is now available at Rs 39.50 - an appreciation of nearly 20 per cent. In fact, it has dramatically appreciated by 11 per cent since March 2007.




There is legitimate euphoria in India Inc. on the sensex crossing the 20,000 mark. This has happened primarily because of a massive surge of foreign institutional investor’s (FII) funds into the Indian stock market. This year, so far, over $20 billion flowed into Dalal street – more than double of last year. More than the fact of suggesting that India is an attractive investment destination due to the strengthening of its economic fundamentals, this is mainly due to the fact that there are no long term capital gains taxes in India. Ironically, in a country like ours, there are no taxes on profits earned on the stock market.


An additional nearly $35 billion have flowed in as remittances under the head `invisibles’ in national accounts. Amongst others, this includes fund transfers by NRIs. This has contributed to the unprecedented foreign exchange reserves in the country of over $260 billion.


Another fairly plausible explanation for such huge inflows of ‘invisible’, that has a devastating impact on the Indian economy, is the following: With restrictions on acquiring foreign exchange removed and permission to export capital and hold bank accounts abroad permitted, much of the `black’ illegal money is being siphoned off abroad. This is now re-entering the stock market `officially’ through Promissory Notes; through the Mauritius route, etc., reaping superprofits, by making the sensex soar. Additionally, `black’ money is being legalised. As we shall see later, these superprofits are being made, by strengthening the Indian rupee at the expense of further impoverishing “suffering India”.


It would be erroneous to treat this rupee appreciation, as the Planning Commission and a dominant section of the officialdom seem to be doing, as an expression of the “Dutch disease”. This is a term that is normally used to describe situations where large inflows of foreign exchange take place usually as a result of discoveries of natural resources or massive foreign direct investment (FDI). Neither of these is happening in India. The FII flows are mainly, if not entirely, speculative flows seeking handsome quick profits. In this sense, this is “hot money” that cannot be used for any meaningful investment in the country. Therefore, our foreign exchange reserves will, for a large part, remain reserves only. Instead of being able to use this reserve for productive investment, the country is compelled to behave like a miser, content with counting his coins!




Normally, the Reserve Bank of India (RBI) buys up dollars from the market in order to protect the rupee and to keep the exchange rate stable. However, with such a huge scale of FII flows, even the RBI would not have been in a position to intervene in a significant way. Further, when the RBI buys dollars, the rupee supply in the economy naturally grows. This puts inflationary pressures on the economy. With the inflation rate reaching close to seven per cent (March 2007) and threatening to escalate further, the RBI was apparently restrained to intervene to stabilise the rupee. Hence the massive appreciation of the rupee since March, 2007.


The appreciation of the rupee means that Indian exports become more expensive while imports become cheaper. This, naturally, widens the trade deficit. This deficit which measures what the country actually gains from its exports and what it spends for its imports, grew by nearly 65 per cent compared to the same period last year --- $32.5 billion as against $19.9 billion. This would naturally impact on the current account deficit. According to the RBI, the short fall in the current account was $4.69 billion in the three months ending June 30, 2007, as compared with a surplus of $2.56 billion in the previous quarter. In other words, due to the strengthening of the Indian rupee, the capital outflow from India has been rising significantly. In other words, Indian economy is paying a heavy price for this rupee appreciation. And, this price is the profit for few in “Shining India”. This is bound to and is, in fact, adversely affecting our economic fundamentals.




The rise in the cost of India’s exports is already adversely affecting the livelihood of lakhs of people. Most of India’s traditional exports like textiles, chemicals, IT services, traditional handicrafts are labour intensive. Further, more than two-thirds of India’s exports come from the small and medium enterprises (SMEs) that enjoy thin profit margins. According to estimates by the Federation of Indian Export Organisations (FIEO), around 35 lakh people have lost jobs in these sectors as a result of this rupee appreciation in the recent months. India’s two top garment exporters have in the last three months cut between five to six thousand jobs. Tiruppur in Tamilnadu, considered to be the hosiery capital of India, is bracing itself for a 60,000 job cut by the end of this financial year.


Survey after survey conducted in the mainstream media is reporting a universal and significant decline in export related employment. Thus, while a section gloats over the 20K sensex, the consequences are resulting in India’s real trade earnings decline appreciably and, consequently, in the destruction of livelihood of lakhs of our people.


There is an additional adverse element in this whole scenario. Concerned with the rapid appreciation of the rupee and the alarming decline in exports, the Finance Ministry has, on different occasions, announced various relief packages aggregating Rs five to six thousand crores in this financial year so far. Notwithstanding this, it is now generally believed that the export target of $160 billion will not be achieved while the import value targets, on the other hand, will not be contained. In other words, if the rupee appreciation was contained and stabilised, then such relief packages of Rs five to six thousand crores could have been better utilised in schemes for improving people’s welfare and strengthening economic and social infrastructure.




Erroneously, it is argued that a stronger rupee would attract larger FDI to build India’s much needed infrastructure. What is missed in this reasoning is that FDI flows in search of higher profits. This, in turn, is crucially dependent on existing levels of quality infrastructure – both economic and social. Experience tells us – from United States of America to the People’s Republic of China – that the State is the main provider of such infrastructure. Private capital can at best supplement but cannot be the primary vehicle. This capacity of the Indian state is seriously eroded by this rupee appreciation (as seen above due to diversion of huge amount of resources for relief packages for exporters), and consequent fall in revenues. Yes, with an appreciating rupee, the takeover of foreign firms and resources would be cheaper for India Inc. The number of Indian billionaires will surely increase. But then at what cost to real India? Thus, on all counts, this strengthening of the rupee is resulting in a negative disastrous impact on our economy.


Once again, there is a need for us to learn from China. Those who argue that our bourgeoning foreign exchange reserves is causing this rupee appreciation must remember that the Chinese currency (yuan) has remained stable around eight per dollar for more than a decade. Remember again that China has a foreign exchange reserve of over $1.43 trillion, many times larger than our $260 billion. The Indian government must seriously consider a similar mechanism to prevent such a sharp appreciation of the rupee. However, if this is done, then, the superprofit bonanza for the privileged few would suffer. After all, in the final analysis, “Shining India” is the class base of the Indian ruling classes which can only further fatten itself by intensifying exploitation of “suffering India”. Capitalism, at its cruellest best!