People's Democracy

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


No. 40

October 07, 2012


Economics and Authoritarianism


Prabhat Patnaik


WHEN a khap panchayat prevents a young man and woman from getting married, the demand is that the State must intervene to overturn its writ. When female foeticide is practiced, the demand is that the State must intervene to prevent it. When someone mobilises a mob to demolish a religious structure to denigrate another religious community, the demand is that the State must act to prevent this happening. The State is thus expected in a democratic polity to go beyond the “rationality” that activates these private entities, and to prevent or regulate their actions on the basis of a higher “rationality”. The State in short is considered an agency of “social rationality” in a democratic polity. The Liberal democratic view of the State actually sees the State as the agency of social rationality; the State may do things wrong because it is unaware of the demands of “social rationality”, but that is an intellectual shortcoming, not one of character or motivation.




The Marxist view of the State sees things differently. It sees any attempt by the State to act as an agency of “social rationality”, even if the State were to make such an attempt, as being constrained by the prevailing property relations in society. Only in a society where the constraints imposed by private property relations are overcome, i.e. only where there is social ownership of the means of production, can the State act as an agency of “social rationality” (and in the process of doing so get increasingly  “dissolved” in society, and hence “wither away”). But even while struggling for such a society, where the means of production will be socially owned, the Marxist position still demands of the State within the existing order, in the form of what Lenin had called a set of “transitional demands”, that it should act as an agency of “social rationality”; and in certain instances, where property relations are not directly impinged upon, or where the predilections of the propertied classes may be overruled with impunity even within the confines of the prevailing property system, the State may even play this role, in a certain very limited manner.


Both the Liberal-democratic and the Marxist views, however, would concur on one point, namely that the State must not be allowed to become a prisoner of the private “rationality” of any one particular group, that it must, at the very least, remain democratic in the minimal sense that no particular social group or class should be able to appropriate it as its exclusive agency, i.e. as the agency for the exclusive implementation of what it considers “rational”, or what its “private rationality” demands.


This perception of the State, as the agency for the realisation of “social rationality”, continued interestingly, at least to all outward appearances, to hold sway within the State itself, including within its executive arm, even after the introduction of neo-liberal “reforms”. These reforms were considered essential for the introduction of “social rationality” itself, since the so-called “quota-license-permit raj” that preceded them was supposed to be incapable of ever achieving social goals. The conceptual argument behind the introduction of reforms in short was that a transition was being made not from the “State-as-an-agency-of social rationality” to the “State-as-an-agency-of-some-particular-private-rationality”, but from an economic regime that was not capable of achieving social goals to one that was.


Even when the red carpet was unrolled for foreign capital, even when the economy was made open to global financial flows, and hence to the whims and caprices of globalised finance, the argument always given was that it would help achieve social goals, and hence was demanded by “social rationality”. This argument, of course, was a bogus one, as the critics had pointed out even then; but, bogus or not, the argument took as its premise the proposition that the State was an agency for serving “social rationality”.


The latest set of measures announced by the Manmohan Singh government, and the arguments given in their favour supposedly to clinch the case for them, represent a fundamental departure from this proposition. While Anand Sharma may parade fake arguments on the benefits of FDI in multi-brand retail, and Manmohan Singh may defend the diesel price-hike by invoking banalities like “money does not grow on trees”, it is well-known that the real reason underlying these measures is to improve India’s “credit-rating”, and build “international investor’s confidence” in the Indian economy, so that there is an inflow of external finance to shore up the rupee (and, it is presumably also hoped by the government, to start a new “bubble” which can revive growth). Siddharth Varadarajan (The Hindu September 22) quotes a senior cabinet minister in the Union government giving precisely this reason for the recent measures, viz. the need to shore up the rupee.


An attack on the people via a diesel price hike, a threat to the viability of lakhs of petty traders through the opening of multinational retail outlets, are all supposed to be justified by the paramount need to keep a group of globalised financiers happy. What keeps them happy, what satisfies them, is what the Indian State must do; i.e. it must cater exclusively to their “private rationality”. The Indian State must thus abandon the conceptual premise of a democratic State, of being the agency for the realisation of “social rationality”, by elevating the “private rationality” of the guardians of footloose global finance above any conception of “social rationality”, or, what comes to the same thing, by making “social rationality” synonymous with the “private rationality” of global finance.


To be sure, this conceptual abandonment of the premise of a democratic State, this ideological counter-revolution against a democratic State, was immanent in the reform process itself, as the Left had pointed out emphatically and presciently when the reform process was inaugurated; the point nonetheless is that it has happened. And once we are on the slippery path of allowing the State to become an agency of the “private rationality” of global financiers, the denouement that awaits us can be seen in the fate of countries like Greece, Spain, Portugal and a host of others.  


Nowhere is this ideological counter-revolution as apparent as in the government’s policy on applying GAAR (General Anti-Avoidance Rules) against aggressive tax avoidance strategies of MNCs. The rationale behind the reforms, it may be recalled, i.e. the argument for the view that reforms served “social rationality”, was that they would pave the way for the elimination of poverty and for a general economic betterment of the entire population. This was sought to be established initially by invoking the “trickle down” effect, but later, after the spuriousness of “trickle down” had been exposed, by suggesting that the higher growth that reforms would generate would garner larger tax revenues for the government to spend on the welfare of the common people. To do so, however, higher tax revenues had to be garnered in the first place, and, for this, the various loopholes through which monopolies and MNCs managed to avoid taxes had to be plugged. This is exactly what GAAR which was announced in the current year’s budget was meant for.




A classic case where it could be applied for instance was related to the “Mauritius route”. It is an international joke that one of the largest sources of FDI for India was the tiny island of Mauritius. Mauritius was a “tax haven” but India happened to have a double-taxation-avoidance treaty with it, so that foreign companies investing in India, no matter where they actually came from, came via Mauritius: they claimed tax exemption in India on the plea that they were paying taxes in Mauritius, and in Mauritius they were hardly required to pay any taxes at all. GAAR suggested that, even if a transaction was legally valid, if it was undertaken with the sole purpose of tax avoidance, then the tax authorities should insist on getting the appropriate tax amount, notwithstanding the apparent legal validity of the tax-evading transaction. In the Mauritius case, this would have meant taking no cognizance of the fact of a company routing its investment through Mauritius. It would have had to pay its tax either in its authentic parent country or in India.


Not surprisingly the MNCs were up in arms against GAAR. And the Government of India, instead of sticking to the announcement made in its own budget, used the change of guard at the finance ministry (with Pranab Mukherji’s elevation as president), to postpone the implementation of GAAR ad infinitum. What is more, it has even suggested, via one of those “slot machine committees” (whose recommendations are pre-arranged when the committee is set by the government), that it would do away with the long-term capital gains tax altogether. If fiscal reasons were the decisive ones for raising diesel prices, as Manmohan Singh disingenuously suggested through his “money-does-not-grow-on-trees” remark, then the government should not be scuttling GAAR and abolishing long-term capital gains tax. And it would not have given away an estimated Rs Five lakh crores of annual tax concessions to the corporates, cumulatively over the last few Union budgets.


The point is that the measures announced by the government cannot be justified by any criteria of “social rationality”; they only express the fact of the government’s becoming a prisoner of the “private rationality” of global finance. They can be claimed to be “socially rational” only in a world where “social rationality” has been made spuriously synonymous with the “private rationality” of global finance, i.e. where the basic premise of a democratic State, viz. that the State must not become an agency for the exclusive promotion of the “private rationality” of a particular group, has been abandoned.


We are in short witnessing a critical moment. The fact that democracy is incompatible with the pursuit of neo-liberal policies is well-known. This incompatibility however manifests itself over time, and as a process. An important moment in this process is when the logic of neo-liberalism compels an abandonment of the ideological premise of a democratic State. That moment is precisely what we are witnessing today, which is why the moment calls for decisive struggles.


It is often argued that under globalization, there is no alternative to such an undermining of democracy, to such a jettisoning of the basic premise of a democratic State. But that is precisely the point of the critics. Instead of this argument justifying the undermining of democracy, as is usually supposed by government spokesmen, it justifies a de-linking from globalisation, a withdrawal from neo-liberal policies, a recapturing of the policy space by the State, through judicious controls over capital and trade flows, such that the minimal requirement of a democratic State, viz. that the State must not exclusively promote the “private rationality” of a particular group, can continue to be met. Any government that thinks such undermining of democracy to be unavoidable in the present “era of globalisation” is implicitly rejecting the constitution it has sworn to serve; it has no business to continue at the helm of affairs.