People's Democracy

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


No. 23

June 10, 2012

The End of the “Shine”


Prabhat Patnaik


“NEO-LIBERAL” economic policies had three major features in the Indian context. The first was the withdrawal of support of the State from petty producers, leaving them to the mercy of the world capitalist market and to direct relationship with multinational giants engaged in agri-business on both input and output side. This amounted to a going back on the promise of our anti-colonial struggle which had drawn the support of crisis-hit peasants in the 1930s by placing before them a picture of free India where the State would protect and promote their interests; but “neo-liberalism” had no qualms over reneging on it. The second was obtaining access for Indian goods and services, especially the latter, in advanced country markets, where the relatively lower Indian wages could give a boost to exports; and this is what underlay the growth in software and IT-related service exports. The third was creating an environment in the country that would draw global financial inflows and cause a domestic bubble; this was a major factor behind the high rates of GDP growth.


These three features together shaped our economic experience in the recent period. The growth in software and IT-related service exports created employment for educated middle-class youth, contributed to the GDP growth story, and acquired prominence because of the expansion of cities like Bangalore. But the far more serious factor underlying the growth story was the inflow of finance. By preventing the exchange rate from appreciating, the Reserve Bank of India acquired huge foreign exchange reserves, which boosted the lending capacity of banks, even as the financial inflow was causing a stock market bubble. The result was burgeoning luxury consumption, not just by the very rich but also by an upper-middle class that was becoming affluent, and feeling even more so; and burgeoning investment for meeting this consumption demand. All this brought about high growth, and euphoric expectations about a “shining India”.


The very fact of substantial foreign exchange reserves, which temporarily allayed fears of a rupee depreciation, and euphoric expectations about India being, alongside China, the new “happening place”, kept bringing financial inflows to sustain the growth “bubble”; and whenever any dark clouds appeared on the horizon, the union government took measures to keep the euphoria going, for instance by virtually eliminating capital gains tax, and permitting capital inflows routed through tax havens like Mauritius.




The fact that this growth was accompanied by an increase in the magnitude of absolute poverty should cause no surprise. The agrarian crisis, acute penury of petty producers, the increasing impossibility of even simple reproduction on the part of large sections of peasants which has caused till now over two lakh peasant suicides, and distress migration from the countryside to the cities in search of non-existent jobs, which only swells the reserve army of labour, camouflaged as “informal sector employment”, are all phenomena associated with growing absolute immiserisation.


The most palpable manifestation of this growing absolute immiserisation is growing hunger. The proportions of population accessing less than 2200 calories per person per day in rural areas and 2100 calories per person per day in urban areas, which still constitute the official benchmarks for poverty, accepted even by the Planning Commission, were 69 per cent and 64.5 percent respectively in 2004-5; in 2009-10, the latest year of large sample NSS, the figures have increased to 76 per cent and 73 per cent respectively. “Neo-liberal” policies, while causing high growth by attracting financial inflows to sustain a bubble, also caused increased absolute impoverishment, since the employment created by such growth was woefully inadequate to absorb the labour being released because of the crisis of petty production effected under the same policy-regime.


The neo-liberal chickens however, are finally coming home to roost. The kind of growth India was experiencing was by its very nature fragile. The bubble that had developed could easily collapse and that would bring the growth story to an end; and any tendency for finance to flow out could cause such a collapse. This is exactly what is happening now.


This may appear odd at first sight: do we not have enough foreign exchange reserves to weather any sudden outflows of finance? Do we not have a sound economy that would ultimately retain “investors’ confidence”? To understand the fragility of our growth, two points need to be noted: first, any inflation in India, relative to other countries and in particular to the US whose currency is still considered “as good as gold”, creates expectations of a depreciation of the rupee. If prices in India rise, say, by ten per cent, while they are constant elsewhere, then wealth-holders would generally expect a ten per cent nominal depreciation in the rupee, so that the “real effective exchange rate” remains unchanged, and with it the country’s competitive position (otherwise the current account deficit would widen). But any expectation of a depreciation in the nominal exchange rate is enough to make wealth-holders move from rupees to, say, US dollars, causing an actual depreciation in the nominal exchange rate. When we recognise the additional fact that any nominal depreciation, by raising the prices of imported essentials like oil, generates under a neo-liberal dispensation where price-controls are eschewed, inflation in the domestic economy, we get a vicious circle: a chance depreciation in the nominal exchange rate generates inflation, which causes an expectation of a further depreciation in exchange rate, which causes a further actual depreciation, leading to further inflation, further expectation of depreciation, further actual depreciation, and so on.


In short, any slight shock can destabilise an economy that is open to financial flows and indeed thrives on such openness. And here we come to the second point: even if the government has plenty of foreign exchange reserves, using such reserves to stabilise the currency can have the opposite effect of making speculators move away from it. Any use of reserves is ipso facto a reduction in reserves, and with every such reduction speculators become more conscious that the government’s ability to intervene in the foreign exchange market is declining, and hence become even more keen to leave the currency. Since the magnitude of sudden withdrawal of funds from a country can be enormous, even hundreds of billions of dollars overnight, the government finds itself in a bizarre situation: of sitting on top of a mountain of foreign exchange reserves and yet unable to do anything about a slide in the value of the rupee. This is exactly our current predicament.


The immediate trigger for the outflow of finance from India may have been provided by the Eurozone crisis, though of course, the rapid rate of inflation that the Indian economy has been experiencing for some time must be a major underlying contributory factor. Since the US dollar still remains “as good as gold” in the minds of wealth-holders, panic on their part in any part of the world, and hence a flight to dollar from any part of the world, triggers similar flight from other parts as well. There was, for instance, a brief period following the financial crisis in 2008 when there was an outflow of finance from India to the US, which should at first sight be surprising, since the US was where the crisis had broken out, but which is easily explicable by the fact that it was a panic flight to dollar. Hence the Eurozone crisis could well be a trigger. But even if the Eurozone crisis provided the trigger, both the context of inflation, and above all the basic fragility of the economy sitting atop a bubble and dependent upon speculative financial inflows to keep it going, are the real causes of our present crisis.




It is a hallmark of the crisis, that every effort the government makes to end it, within “neo-liberal” framework, will only succeed in worsening it. Since finance likes “austerity”, there is a move on the part of the government, loudly supported by a chorus of financial columnists, to cut back government expenditure to rein in the fiscal deficit, in the belief that this would revive “investor confidence”, i.e. entice finance back into the economy to keep the bubble going. But this will only succeed in accentuating the downturn in the economy, without reviving a collapsed bubble. Likewise, every effort on the part of the government to tighten monetary policy in the belief that this would curb inflation and revive “investor confidence” will only end up compounding the economy’s downturn.


The real remedy to the current economic malaise is to stimulate expenditure, especially government expenditure to offset sagging private expenditure. This, it would immediately be pointed out, would set off financial outflows, widen, other things being the same, the current account deficit, and accentuate inflation through imported-oil-cost-push. Yes, all these will happen if the government expands its expenditure within the neo-liberal policy framework. But if the government imposes a modicum of capital control, if it increases taxes on the rich and if it resorts to price control and public distribution of essential commodities, then it would be able to revive growth, and that too of a far more egalitarian kind, without having to kow-tow to finance capital to sustain a bubble. It is within a neo-liberal framework that growth can occur only through bubbles; and such growth is necessarily poverty-enhancing. Outside such a framework, there is no reason why growth cannot occur that increases people’s welfare, while controlling inflation and keeping the balance of payments on an even keel.


It requires, however, the removal of the hegemony of finance. All over the world, the consequences of the tyranny of finance are becoming clear by the day, and people are rising against this tyranny. Since the Manmohan Singh government, in thralldom to finance, will continue to pursue neo-liberal policies to the detriment of the people, the time is fast approaching for such a popular upsurge in India too.


A mistaken impression may arise that since the high growth phase in India was accompanied by increasing absolute poverty, a reduction in growth, such as we are witnessing today, may actually mean a reduction in poverty. This however is not true. The growth in poverty was because inter alia of the agrarian crisis, not only the crisis itself but also because it contributed to a swelling of the reserve army of labour which also kept down the real wages of the active army. The reduction in growth within the neo-liberal framework, will not make the agrarian crisis, or the crisis of petty production in general, go away. State policy, within this framework, will continue to promote the interests of big corporates and finance capital, while sacrificing the interests of workers and petty producers. If anything, reduced growth will only further reduce whatever employment was being generated, which will have a further detrimental effect on poverty; and it will also affect unfavourably the middle class, consisting of the salariat, the white collar employees, and professionals.