People's Democracy

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


No. 11

March 17, 2013


Neo-Liberalism Has Run Its Course


Prabhat Patnaik


NEO-LIBERALISM was always anti-people; it entailed the use of the State for the exclusive promotion of the interests of international finance capital, with which the domestic big bourgeoisie was aligned, at the expense of the people. Even during that phase of neo-liberalism in India when the country was supposed to have been “shining”, by having an unprecedented rate of GDP growth that entitled it to the status of an “emerging economic superpower”, there was an increase, not just in absolute terms but even relative to the population as a whole, in the extent of hunger and poverty.


Poverty is defined in India in terms of lack of access to 2100 calories per person per day in urban areas and 2400 calories (later scaled down, for no obvious reason, to 2200 calories) per person per day in rural areas. By this criterion, the proportion of population below the poverty line in urban India moved as follows: 60 per cent in 1973-4, 58.5 per cent in 1983, 57 per cent in 1993-4, 64.5 per cent in 2004-5, and 73 per cent in 2009-10. The corresponding figures for rural India, taking the lower “norm” of 2200 calories, were: 56.4 per cent in 1973-4, 56 per cent in 1983, 60 per cent in 1993-4, 69.5 per cent in 2004-5, and 74.5 per cent in 2009-10. Both in urban and rural India clearly there has been an increase in absolute poverty during the period of neo-liberal policies, and this increase has been particularly pronounced in the current century, precisely during the period of acceleration in GDP growth.




The fact that higher GDP growth has been accompanied by growing absolute poverty should not cause any surprise. This period of high growth has witnessed a process of dispossession of petty producers, peasants, petty traders, artisans, and craftsmen, and hence also a displacement of those employed by them (such as agricultural labourers), without any corresponding expansion of the active army of labour employed in the capitalist (and State) sectors. The annual growth rate in “usual status” employment according to the National Sample Survey between 2004-5 and 2009-10, for instance, was a mere 0.8 per cent per annum, which, let alone absorbing those dispossessed by the on-going process of “primitive accumulation of capital”, was way below the growth rate of the work-force itself. Those dispossessed therefore simply added to the ranks of the “reserve army of labour”, appearing in official statistics as “informal sector employees” or “casual employees” or “self-employed workers” earning a pittance. Not only did the real incomes of this vast segment of the population decline as a consequence, but the real wage rates of the organised sector workers too were kept down by this growing reserve army of labour, through a reduction in their bargaining strength vis-a-vis capital. All this contributed to an increase in absolute poverty. Besides, even when the petty producers, peasants and petty traders were not actually dispossessed of their assets, but lingered on instead in their traditional occupations, they did so at much lower levels of real income than before, which also meant an increase in absolute poverty.


The fact that neo-liberalism, even at its most “successful”, has still entailed an increase in the extent of absolute immiserisation, implies that it is historically obsolete, that it necessarily constitutes only a passing phase in an epoch when the people have been historically on the move to control their own destiny. But Lenin once drew a significant distinction between a phenomenon being “historically obsolete” and its being “practically obsolete”. Neo-liberalism, even though historically obsolete could in principle still linger on for years before it became “practically obsolete”; but, as a consequence of the world capitalist crisis, it has now become even “practically obsolete” in countries like ours; it has run its course.   


The neo-liberal growth phenomenon in India was the outcome of two “bubbles”. There was the “housing bubble” in the United States that sustained a boom, not just in the US economy but in the world economy as a whole; and India, like several other “emerging economies”, was a beneficiary of this world capitalist boom. In addition, the inflow of globalised finance into the Indian economy produced a stock-market bubble within India that stimulated larger domestic expenditures by the rich and added to the magnitude of the boom.


Both these bubbles have now collapsed, and there are little prospects of any new bubbles appearing in the foreseeable future. Since under the neo-liberal dispensation, the formation of bubbles is the main basis for growth (as Keynesian-style State spending is eschewed under this dispensation and “austerity” apotheosised), what this means is that the world economy will continue to remain submerged in crisis in the foreseeable future (with at best fitful “recoveries”); and so will the Indian economy as long as it is straitjacketed by a neo-liberal regime. This is already evident in the fact that industrial growth in India for April-January 2012-13 has been a meagre one per cent (over the corresponding period of the previous year), compared to 3.4 per cent (itself a paltry figure) during the same period a year ago.


This slowing down of growth, visible also in the GDP figures, may raise the question: if the earlier growth acceleration had been accompanied by an increase in the percentage of the absolutely poor, shouldn’t the slowing down in growth have the opposite effect of decreasing this percentage? Should we not be welcoming this deceleration as being in the interests of the people? The answer is an obvious “no”, because the effects of acceleration and a deceleration in growth rates of GDP are not synonymous.


The dispossession of petty producers, and the income loss suffered by them and by the labourers employed by them, is not a reversible process. What is more, this process of “primitive accumulation of capital” will not come to an end as a consequence of the slow-down in growth; on the contrary, for reasons we shall discuss shortly, its tempo is likely to be accelerated. The slowdown in growth therefore, while not effecting any amelioration in the condition of the people, and indeed worsening it through a further reduction in the meagre growth of the active army of labour that had been occurring, will additionally bring even the urban educated middle class youth, which had witnessed some increase in employment opportunities till now, into the fold of the sufferers.


But it is not just the growth slowdown that expresses the “practical obsolescence” of neo-liberalism. The economic crisis of the capitalist world has resulted inter alia in a massive widening of India’s current account deficit on the balance of payments, which is now in excess of 5 per cent of GDP. India’s exports,  and inflows like remittances, have been hit by the world crisis, while imports, consisting to a significant extent of essential inputs like oil and hence being less sensitive to the domestic growth rate (which itself continues to exceed that of the advanced capitalist world), have been more inflexible. In addition, given the extraordinarily high rates of inflation, which, in the case of retail prices, have been in double digits for the last three consecutive months, there has been a tendency on the part of the domestic affluent to shift to gold as a form of asset-holding, in lieu of money or money-denominated financial assets; this has led to burgeoning gold imports, compounding further the deficit on the balance of payments.




Under neo-liberalism, which eschews import controls or even any  significant increase in tariffs, there is no easy way of closing this deficit, and the recent budget detailed no attempts at doing so. The government is reportedly planning to raise export subsidies, in the form of duty drawbacks to the tune of Rs10,000 crores per annum, to boost exports; but even government officials admit that this would only put some extra money in the pockets of exporters, who would resort in addition to over-invoicing of exports, rather than actually earning more foreign exchange for the country. Indeed the government’s concern has been more with financing the deficit than with closing the deficit, in the hope, which is without any basis, that the revival of the world economy will occur soon and cure the deficit problem automatically. And for financing this deficit, the government’s thrust has been to draw foreign capital flows.


The recent budget accordingly was aimed essentially at the financial markets, to maintain a good credit rating for India by signalling that India was a “well-behaved” country from the point of view of finance. This explains why even the standard ploy of all bourgeois governments, of increasing in the last year before elections some expenditures of benefit to the poor (who are totally ignored till then), has been eschewed in this budget: financial markets do not take kindly to any such gestures.


The contradiction here is the following: the measures for financing the deficit are precisely the ones that preclude a closing of the deficit, or any solution to the basic problem of the deficit. Financing the deficit within a neo-liberal regime requires wooing international finance capital so that it can flow in adequate quantities; this requires an even stricter adherence to the tenets of neo-liberalism: controlling the fiscal deficit and avoiding any additional taxation of the rich, both of which inevitably lead to expenditure cuts; and effecting still freer cross-border flows of commodities and capital. Such freer flows however not only prevent any closure of the payments deficit but also make the economy vulnerable to capital flight in the event of inflows being inadequate over some stretch of time and thereby setting off fears of a currency depreciation. In other words, if adequate capital in any period does not flow in, then this very fact will cause substantial capital to flow out. True, India has accumulated large foreign exchange reserves, which it may be thought, can be used to prevent such a dire predicament; but these reserves, built out of financial inflows in the past rather than any current account surplus as in the case of China, are such that any significant depletion in them would create expectations of a currency depreciation and stimulate capital flight.


Neo-liberalism has thus brought the country to the brink of a precipice; and even the belief that it would not topple over this precipice rests on the hope of a revival of the world economy which is far-fetched. The twelfth five-year plan document itself defines the “normal comfort level” of the current account deficit as 2.5 per cent of the GDP, beyond which there is a risk of non-availability of external finance. It can be imagined therefore how utterly unrealistic it is to rely on such inflows to finance a current deficit in excess of 5 per cent of the GDP!


The people will be squeezed in the very attempt to attract financial inflows, both because of government expenditure cuts, and also because of the push for further neo-liberal measures (of which FDI in multi-brand retail, permitting foreign banks and moves to privatise postal services are obvious examples). And they would be squeezed even further, and to an immeasurable degree, if finance does not come in despite such blandishments, for in such a case a financial crisis will be precipitated leading to a further fall in the rupee, which would accentuate inflation, and a desperate plea for an IMF bail-out, which would bring draconian “austerity” in its train.


The pursuit of neo-liberal policies in a period of word capitalist crisis is fraught with obvious adversity. But the government of the big bourgeoisie has no alternative course to follow. It is for the working class and its political formations to provide the leadership for a transition to an alternative economic trajectory.