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defeat of the NDA in the last elections was a source
of consternation in international financial circles.
The Wall Street Journal even asked editorially: "Why
should developing countries like India have such frequent
elections?" And it went on to add that if a country
like India does have elections, then surely the outcome
can not be left entirely to the Indian people; "foreign
investors" too must have a say since they have
a "stake" in the Indian economy. Similar views
were aired in public and private in Washington DC among
the Fund-Bank staff and among the financial bureaucracy
and the "financial class" within India. Nerves
were soothed only when it became clear that policy-making,
at least in economic matters, would be entrusted to
three persons who had been closely associated with the
induction of "neo-liberal" policies, namely
Dr.Manmohan Singh, Mr.Chidambaram and Mr.Ahluwalia.
Even so, Mr.Chidambaram had to miss the first session
of Parliament for some days during which he made a trip
to Mumbai to reassure the leading lights of the stock-market
regarding the new government"s adherence to the
"liberalization" agenda.
It is important to understand the reasons behind the
financial circles" consternation. On several issues
ranging from Employment Guarantee to disinvestment in
PSUs, to social sector expenditure, the Congress Party"s
Manifesto, many of whose proposals subsequently found
their way into the National Common Minimum Programme,
had a thrust very different from that of the "liberalization"
agenda. Perceiving the popular mood, it envisaged a
more active role for the State in promoting employment
and welfare. And this is anathema for international
finance capital which is interested not in a "retreat
of the State", as is often claimed, but in a transformation
of the State into an instrument for promoting its own
exclusive interests.
The reason for its opposition to State activism in matters
of employment and relief for the people however lies
not just in its preference for a different, and from
its point of view "better", State. It opposes
such "State activism" for two other basic
reasons. First, such activism destroys its own social
legitimacy. Even capitalists engaged in production,
who stand to gain, by way of larger profits, from the
boost to economic activity that comes from larger State
investment, invariably oppose the existence of a public
sector (they want public ownership of any profitable
unit to be only a transient phenomenon), because it
undermines their legitimacy: if it becomes clear that
the State too can run enterprises, then a class of capitalists,
whose necessity is supposed to lie specifically in their
exclusive ability to perform this task, becomes palpably
superfluous. This fear is even greater for finance capital,
which essentially represents rentier interests, with
very little involvement in production, and which therefore
sustains, in Lenin"s words, a class of "coupon-clipping"
"parasites". The absurd myth that the state
of the stock-market determines the pace of accumulation
and hence the vigour of a capitalist economy, and the
conclusion that everything must be done to keep the
stock-market buoyant even to achieve social goals, which
finance capital so self-servingly promotes through its
various mouthpieces including the media, will cease
to be sustainable if the State steps in for providing
employment and relief. Finance capital therefore opposes
such State activism at all costs.
Secondly, the rolling back of dirigisme has the added
advantage, from the point of view of finance capital,
that it unleashes a process of "primitive accumulation"
of capital through the privatization "for a song"
of public enterprises. On the other hand if the State
were to be more active in providing employment and relief
to the people, then not only would this bonanza be denied,
but there might even be heavier taxation of capitalists.
Modus
Operandi of Deflation: FRBM Act
The
modus operandi of imposing expenditure cuts on the government
is through legislation such as the Fiscal Responsibility
and Budgetary Management Act, which had been passed
under the NDA government, and which the UPA government
promptly owned upon assuming office, even though the
Act constitutes an extraordinarily irrational piece
of legislation. The Act provides for a reduction, in
a manner stipulated by itself, in the magnitude of the
fiscal deficit to a ceiling of 3 percent of GDP. When
there is no legislation stipulating the minimum tax-GDP
ratio, when there is no legislation stipulating the
minimum ratio of social sector expenditure to GDP, when
there is no legislation stipulating the minimum expenditure
on anti-poverty programmes to GDP, why there should
be a law that stipulates the maximum ratio of fiscal
deficit to GDP is baffling to start with, when there
is absolutely no theoretical reason to believe that
a fiscal deficit is necessarily harmful. Matters become
even more bizarre when it is recalled that this ratio
is supposed to hold good under all circumstances, whether
there is a recession or not, whether there is a collapse
of employment or not, whether there is massive poverty
or not. And the bizarreness only increases when it is
recalled that a rise in the fiscal deficit does not
necessarily mean a rise in the government"s net
borrowing.
Consider a simple example. Suppose the government borrows
from the banking system Rs.100 to spend on an employment
generation programme. Let us also assume for simplicity
that the only commodity for which demand is generated
through the expenditure on such a programme is foodgrains.
If there are plenty of foodgrain stocks in the economy
rotting in the godowns even as people go hungry owing
to lack of purchasing power, then it would be plain
stupid, indeed criminal, on the part of the government,
not to undertake this expenditure because the fiscal
deficit would increase thereby. But the stupidity in
such a case is even greater than appears at first sight.
The Rs.100 spent on the programme would accrue back
to the FCI which holds the foodgrain stocks, which itself
is a government-owned entity. The FCI may use the money
to repay its bank loans by Rs.100. In this case what
the government"s right hand (i.e. the budget) has
borrowed from banks is paid by its left hand (the FCI),
with no increase in the government"s net indebtedness
to banks. Indeed if FCI transactions figured as part
of the budget, as they used to do till the early seventies,
then the fiscal deficit in the budget itself would have
shown no increase. But the mere convention of not showing
FCI transactions in the budget would mean that government
expenditure on such an employment programme through
borrowing from the banks would be disallowed under the
FRBM Act. This Act therefore prevents the government
from increasing demand in the economy, including demand
in the public sector even when this sector is saddled
with unutilized capacity and unemployment. It ensures
both an eschewing of State activism for undertaking
investment, and providing employment and relief (and
hence an unrolling of red carpet for MNCs to undertake
investment in lieu of the State, even through offers
of guaranteed rates of return in foreign exchange),
and the perpetuation of "sickness" in the
public sector units which then is used as an excuse
to "privatize" them for a song. Professor
Joan Robinson, one of the outstanding progressive economists
of the twentieth century, called this self-serving argument
of finance capital against fiscal deficits the "humbug
of finance". The UPA is officially as committed
to this "humbug" as the NDA was, though under
the force of the circumstances it has both postponed
the target date for reaching the ceilings specified
under the FRBM Act, and used several subterfuges to
get around its stringency, as we shall see later in
the context of the 2005-06 budget.
While the considerations underlying finance capital"s
promotion of "liberalization" and the resulting
transformation in the nature of the State are thus quite
obvious, its being "international" gives the
efforts of finance capital a spontaneous effectiveness.
Any State that refuses to transform itself into a servitor
of financial interests would find itself faced with
a flight of finance from its economy, unless it imposes
controls on the free movements of capital into and out
of its shores, i.e. unless it reverses the "liberalization
agenda" and sets up an alternative dialectic to
that of "liberalization". It follows that
the so-called "liberalization with a human face"
is a contradiction in terms. If a "human face"
is to be put on the development process, through the
provision of employment and relief by the State, then
willy-nilly the process of "liberalization"
has to be reversed; on the other hand if the process
of "liberalization" is persisted with, then
one can forget about the "human face".
International finance capital is instinctively aware
of this. And that is why when the UPA government came
to power, it was stunned for a while, especially since
the dependence of the government on Left support meant
that it could not make a simple about turn with impunity
on the NCMP. There is in short a fundamental opposition
between the interests of the people and the interests
of international finance capital and the domestic big
bourgeois and financial class aligned to it. The entire
period since the UPA came to power has been a period
of intense struggle arising from this opposition. While
appeasing financial interests and soothing the nerves
of international financial capital, the government has
not been able to push ahead with the "liberalization"
agenda to the extent it would have liked; it has faced
stiff opposition at every step from the Left on whose
support it depends for its survival. At the same time
it has reneged on every one of the major promises made
in the NCMP, with the Left mounting intense pressure
against such reneging. Some of the critical areas of
such struggle are highlighted below.
The
Employment Guarantee Scheme
Perhaps
the most striking provision of the NCMP was the scheme
for giving 100 days of assured employment to one member
in every rural household. This itself was a comedown
from the Congress Party"s election promise of giving
100 days of assured employment to one member from each
household, both urban and rural. The idea of assuring
employment to only one member per rural household was
obviously discriminatory against women; and in any case
the scheme promised only paltry relief, since only 100
days of assured employment per household did not amount
to much. Even so, the scheme was important in the context
of the sharp deterioration in the living conditions,
including per capita food absorption, of the rural poor,
which had come about through the drastic curtailment
in rural purchasing power arising inter alia from the
cutback in rural development expenditure of the government.
This cutback in turn was a consequence of the reduced
tax revenue and the compressed fiscal deficit that neo-liberal
policies had engendered.
From the very beginning however the scheme aroused fierce
opposition, first in the name of a resource constraint,
and subsequently, when even the Planning Commission
found that the total expenditure for running such a
scheme would be no more than Rs.25000 crores annually
at present, which is no more than 1 percent of the GDP,
in the name of administrative difficulties. When even
this failed to carry conviction, the opposition to the
scheme took up the familiar refrain: "why waste
money providing what in effect would be a dole when
that money could be better used for increasing the growth
rate and providing more meaningful productive employment
through that route?" It was conveniently forgotten
that if high growth could provide more productive employment
in adequate quantities, then the very fact of rural
distress and the very need for an employment guarantee
scheme would not have arisen in the first place.
The real objection to the EGS was the fact that it went
against entire thrust of neo-liberalism, promoted by
international finance capital, of rolling back State
activism in matters of employment and relief for the
people. And this objection was reflected in the Draft
Bill that was presented to the Parliament. The Draft
replicates the basic flaw inherent in the original NCMP
provision itself, namely, that by taking the household
as the unit it ignores the claims of all individual
adults for employment guarantee, and thereby also implicitly
discriminates against women. In addition however the
Draft reneges on the NCMP itself in at least three crucial
ways: first, it does not provide for the extension of
the scheme to cover the entire country within a specified
period of time; secondly, even in areas where it is
to be introduced the Draft allows the government to
withdraw the scheme at will; and thirdly, the scheme
according to the Draft is supposed to be targeted towards
"poor households", which is a clear violation
of the NCMP promise of a universal employment guarantee
that is so essential, both because of the gross underestimation
of poverty and the woefully inadequate identification
of the "poor", and because universality confers
a right and is therefore a means of empowerment of the
working masses. In addition, the Draft does not ensure
employment at the statutory minimum wage, and, by insisting
on a narrow definition of "productive work",
effectively ensures that most people covered under it
would be entitled at best to some unemployment insurance
which would be no more than a pittance. In short, instead
of the significant action on the employment front, notwithstanding
all limitations, that was envisaged in the NCMP, what
we have is a damp squib.
The Draft is before the Standing Committee, and the
coming days will see an intense struggle between the
democratic and progressive forces on the one hand pressing
for a worthwhile EGS, and a recalcitrant government
on the other resisting this pressure. Afraid to alienate
finance capital, the government may attempt to split
the progressive forces by demanding a price for a larger
EGS in the form of cutting some other relief expenditure;
and, if pushed, it may even consider associating the
World Bank and other such organizations in the financing
of it. Since these organizations typically demand their
"pound of flesh" for such financing and then
quietly drop the scheme after having obtained this "pound
of flesh", associating them would mean not a departure
from the "liberalization" agenda but, on the
contrary, an active promotion of it under the false
pretense of introducing a "human face".
The Financial Sector
A second area of struggle has been the financial sector.
A precondition for any relief to the people, it follows
from the foregoing, is control over financial flows,
which obviates the need for pursuing policies catering
to the caprices of finance. The Left has been asking
for such controls for a long time. But matters have
come to such a pass, with foreign exchange reserves
crossing $140 billion, and as much as $10 billion being
added in the mere space of four weeks ending March 11,
that even the Governor of the Reserve Bank of India
asked for some checks on financial inflows, which, as
he had expressed it once earlier, were using India "as
a parking place for dollars". Within minutes of
his having asked for such checks, he was asked by the
Finance Minister to eat his words, which he duly did
at a hurriedly-convened Press Conference rather late
at night. In short, the government is adamant on maintaining
liberal financial flows into and out of the country,
and this is extracting a heavy price from the economy,
apart from precluding any relief for the people owing
to the constant need to retain speculators" "confidence".
This heavy price is because of the fact that while the
country hardly gets any return on these reserves (the
average rate of return is supposed to be around 1.5
percent), those whose inflows have contributed to these
reserves are getting huge returns (inclusive of capital
gains), well over 20 percent, on the funds they have
brought in. Since holding reserves is analogous to lending
abroad (since it entails holding "IOU"s of
foreign governments and banks) the country in effect
is borrowing dear to lend cheap which is both silly
as well as ominous for the future. On the other hand,
not holding these reserves would make the rupee appreciate
in the face of such inflows, which would mean a de-industrialization
of the economy paid for by short-term borrowing. If
for instance $100 flow in, then, if reserves are not
held, the rupee would appreciate until a current account
deficit of $100 has been created through an increase
in imports at the expense of domestic output; this would
mean a shrinking of domestic activity and unemployment.
The country"s debt in other words would have increased
in order to finance its own ruin through de-industrialization,
or it would have experienced what one can call a "debt-financed
de-industrialization". If this is to be avoided,
as well as the silly and ominous piling up of reserves,
then the only way is to control financial inflows, which
are being used entirely for speculative purposes. The
RBI governor, by no means a radical or Leftist, had
suggested just this. The government obviously however
has no intention of getting off this perilous course.
Indeed on the contrary it is attempting two further
steps which are exceedingly dangerous: the first is
to move ahead towards capital account convertibility,
and the second is to push financial liberalization even
further so that the economy gets even more closely enmeshed
in the vortex of globalized finance. A whole series
of measures, such as merging public sector banks; enlarging
the equity base of the public sector banks, apparently
for satisfying the "Basle norms", through
attracting private holders; allowing foreign banks to
take over private sector banks; the shift away from
development banking; the permission given to specialized
development finance institutions (IDBI being the latest
example) to start banking operations; the permission
given to banks to operate on stock exchanges and commodity
exchanges; the tolerance shown to banks which flout
priority sector lending norms; and indeed the attempt
to cover up banks" transgressions in this regard
by expanding the definition of "priority sector";
are but a few illustrations of the government"s
determination to detach the financial sector in India
from its obligation to serve the needs of the productive
national economy, and to make it instead an integral
part of the world of international finance.
The era of planning and of the pursuit of a strategy
of relatively autonomous capitalist development had
seen a transformation of the financial sector in India
from serving the needs of a colonial economy and of
a few monopoly houses that had developed in the interstices
of the colonial economy (especially after the grant
of "discriminating protection" in the twenties
and thirties) to facilitating accelerated and a broader-based
capitalist development, including in agriculture through
the "Green Revolution" (after bank nationalization).
This transformation, starting with the nationalization
of the Imperial Bank of India and the setting up of
specialized financial institutions like IDBI, IFCI,
ICICI, and SFCs, and ending with the nationalization
of large private sector banks, had created the basis
for building up the productive base of the economy in
all its diversity.
What we are seeing now is yet another transformation.
The case for the merger of public sector banks in terms
of economies of scale is entirely unfounded. And as
for the argument that such merger is necessary to make
Indian banks withstand foreign competition in the new
environment, it is amusing that this argument is being
advanced not by the banks themselves groaning under
the impact of some presumed un-competitiveness but by
Mr.Chidambaram and Finance Ministry bureaucrats, who,
day in and day out, preach the virtues of State non-intervention!
The real idea behind this merger and allowing foreign
banks to take over private Indian banks (that is so
at present, but later no doubt they would be allowed
to take over public sector banks as well) is to have
a limited number of large players, led by foreign banks,
in the banking sphere who would then go global, engage
in speculative and high profit activities, detach themselves
entirely from the "messy" business of lending
to a host of peasants and petty producers, and get monopoly
control (especially the foreign banks) over the debt
of the government (or what is called "sovereign
debt") which is a highly prized plum even today
as it was in Lenin"s time. The result would not
only be the end of the era of banks serving the needs
of production, but the creation of an ambience where
financial crises of the East Asian kind would occur,
resulting in a stagnation of the economy and a de-nationalization
of its assets.
The Bank Employees are already struggling hard to prevent
such a denouement. The Left is aware of the dangers
of the course being advocated by the Finance Ministry.
The coming months would see intense struggles over these
measures.
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