Economic Perspectives 2012 - INDIA

By Youvraj B

Last year in March 2011 a confident FM presenting union budget forecasted Indian economy to grow at 9%. One year after that and we see the growth rate plunged to 6.5%, way below what was anticipated an year before. This year’s economic survey puts it as:

“For the Indian economy this was a year of disappointing growth performance. During each of the previous two years, 2009-10 and 2010-11, India’s gross domestic product GDP (at factor cost) grew by 8.4 per cent per annum. Further, in 2010-11, the GDP at market price grew by a remarkable 9.6 per cent. This performance, coming in the wake of one of the biggest global recessions in history, was outstanding. It fed expectations that India’s short economic downturn in 2008-9, when the GDP grew by 6.7 per cent, was behind us and the economy was on its way to full-fledged recovery. That did not happen.”

Notwithstanding hype created by bourgeoisie economist and media, all the available facts that are now emerging has completely rubbished the so called decoupling theory as responsible for the India’s economic performance in FY10 and FY11 (FY – Fiscal Year). Instead it was the temporal factors like dollar carry trade, fiscal stimulus that led to cushioning the economy. Subsequently when these factors waned out the economy grew at 6.5%, lowest in past 9 years starting 2003-04 (except obviously FY09).

What propelled the growth?

One needs to take a look at the very process of growth to analyse the current juncture. There were broadly two aspects that scripted the Indian growth story. One is private capital investment. Very act of India signing SAP (Structural Adjustment Program) implied policies pursued would be all about promoting investment of private capital. Neo-liberal reforms are nothing but steps that make terms of investment favourable to big corporations. This agenda was carried out diligently by subsequent governments irrespective of their political affiliations. More and more sectors of economy that were till then reserved for public investments or cottage industries were thrown open to private capital, framework of regulation was replaced by policy formulations that enticed private investments. Soon sectors like mining, communication saw private capital gushing in. State steadfastly anchored and committed itself for the protection of private capital at any cost.

Credit system was reworked by a spate of banking reforms by liberalizing it and one could see auto loans available at 7% to buy brand new Mercedes-Benz while farmers ended up paying 60% interest to buy agricultural inputs. Fiscal policy too was revamped and export industry hosted in SEZ granted tax holidays to ‘attract’ private investments. As a result private investment both domestic and foreign soared up leading to higher growth.

But where did demand or consumption come from? Capitalist would not invest into anything that could not be sold. That is second aspect we need to consider. Demand came from roughly 3 quarters. One is foreign demand. Services like IT and the spurt in mining were mainly meant for foreign consumption. Export of these commodities (in addition to tax incentives) saw their traders becoming billionaires. Rest of the consumption however is domestic (measured as PFCE – private final consumption expenditure), something much touted by bourgeoisie economists who declare the growth as ‘robust’ one based on domestic consumption.

A detailed analysis of PFCE dispels the notion though. PFCE analysis of 2004-05 to 2007-08 (above figures) indicates as much as 18.8% i.e. just less than 1/5 of expenditure on ‘Transport and Communication’. In fact 3 headings of this segment viz. Personal transport equipment, Operation of personal transport equipment and purchase of transport services put together accounts for whooping 17.09%. Just to put this in perspective, this was 12.97% in 1999-00 and soared to 18.09% in just 5 years. This indicates what types of expenses are fuelling economic growth. Now in the country where millions are impoverished or to go by Arjun Sengupta committee 77% of people live on Rs. 20 a day, can we say it is mass consumption propelling economic growth? Well, the answer is simple.

It is elite consumption on trendy cars, SUVs and extravagant foreign tours that is the driving force and not mass consumption. But is it just elites? What about the budding middle class? That is the third source of demand though with a caveat attached. Availability of cheap credit had played a major role here. In years before 2007 interest rates had been much lower and boom in many sector thrived on it. Construction that had 8% share in GDP last year is one of such debt-driven sector that witnessed boom. Thus on the basis of demand from sources discussed above and a gush of private capital investment in response to government’s ‘business-friendly’ approach resulted in Indian economy growing at 9% or higher.

What went wrong?

Things started changing since 2007 both globally and domestically. Inflation as indicated by WPI (Wholesale Price Index) touched 7% following price rises in global market. Government pre-occupied with growth kept on ignoring it until late 2009 when it reached threatening proportion. Only then RBI kicked in and increased interest rates 13 times since Jan 2010 in an attempt to cool down inflation. On one hand, this hampered credit driven consumer expenditure while on other hand cost of borrowing went up for capitalists making a dent into their profitability. Its impact on consumption and hence demand cannot be missed.

2011 census data released by Census directorate indicated as many as 3.7 million houses in Maharashtra lying vacant, with Pune alone accounting for 5,78,090 houses. Growth rate of construction sector too reflects the trend. It must be noted that this sector has been key driver of growth in boom period (FY04-08). Along with this, a slump in US, Eurozone and other parts of world has resulted in reduction in foreign demand and exports have gone down as well reflected in worsening of BOP (Balance of Payment) situation. It directly impacted merchandise export and subsequently trade deficit has ballooned from $32.52 bn Q3 FY11 to $47.72 bn in Q3 FY12.

This is just a part of it. Another important and an overriding factor is mobility of capital in search of profits & higher profits. Its frantic inward movements especially in emerging economies create an illusion of growth inflating investment bubbles while its exit only bursts it. In past 2 decades economies ranging from erstwhile 7 South-East Asian Tigers (Malaysia, Indonesia etc) to eastern European countries have experienced this. The precarious situation in Europe resulted in foreign investors pulling out funds in favour of safer heavens – US treasuries bringing down inflow of foreign capital. Statistics released by RBI show that net portfolio investment fell dramatically from $6.299 bn in Q3 FY10 to $1.898 bn in Q3 FY11. It must be borne in mind that such speculative money has always played a key role in driving India’s growth. When economy sank in FY09 following global meltdown, the gush of speculative money (made available by US Federal reserve throwing dollars at negative interest rates in real terms) in the form of dollar carry trade propped up the economy and boosted elite consumption creating an illusion of growth. And this is what made the Indian bourgeoisie prematurely cheer success of ‘decoupling theory’ that only stands shattered in the wake of recent events. Domestic investors too sought out for safer investments. These investors and wealthy sections of the society turned to precious metals especially gold for their investments. Subsequently Import of gold zoomed up to $61.5 bn recording a growth of 44.4%. (http://www.indianexpress.com/news/indians-import-gold-worth-rs-3.41-lakh-cr-in-fy12/960771/). This in itself led to worsening of trade deficit that surged from $118.7 (in FY11) to $184.9 bn (in FY12). Gold along with silver and petroleum products contributed as much as 44.4% of total imports. All this i.e. plunge in global demand lowering exports, investment into precious metal leading to whooping increase in imports and global investors pulling out funds (indicated by depreciation of INR) has culminated in BoP crisis. Thus the crisis of Indian economy is of its own making.

Capital, State and Class power

The capitalists in the country are frustrated; what looked like (or they imagined like) an unstoppable dream run of their gravy trains has its wheels log-jammed. For them it was an era of unprecedented loot and current downturn in Indian economy increasing threatens to eclipse it. They are flush with money but downturn has changed terms of investment for them. Consequently rate of GCF is dwindling. On 27th Dec. 2011 Economic Times reported ‘Ajay Piramal has got tons of cash but nowhere to invest’. It laments that Piramal sitting on a mountain of cash ($3.8 bn) is struggling to find ways for investment.

That’s what is the real question for capitalists. It doesn’t mean they are not investing or not earning enough profits. That’s not the point. The point is dealing with ever increasing stock of capital. Process of capital accumulation is a fundamental to capitalism and along its journey it only multiplies – in a geometric progression first and then exponentially. It haunts the capitalists like a dreadful ghost. Capital can survive only as long as it grows; if it ceases to grow its existence is seriously threatened.

When pie of economy expands, the process of capital accumulation marches like a the procession of victorious warriors. Crumbs off the table of capitalists are fed to starving, destitute masses who are told that trickle would grow thicker and thicker. Its advance looks like a secular and benign march. However matter of time and pie beings to implode under self-weight of inner contradictions of capitalism. It throws the spanner in the process of accumulation; whole dynamics of the process changes. As multiplication of capital is obstructed, its very survival is endangered and system descends into chaos and crisis. That’s what is the current crisis of Indian bourgeoisie. And who they turn to in this period of crisis? State. Long back Marxists have pointed that capitalism can never rise beyond the straight jacket of the State.

Free market ideology of capitalism reduces state to the role of facilitator of private investment; rest everything is to be left to market forces that work to achieve equilibrium through the rules of demand and supply. State intervention is an absolute taboo as it interferes with market forces and distorts equilibrium. Pundits of neo-liberalism utter this mantra all the way but only until the boom period or bubble lasts. Once it bursts, they summon State in its service. But why State?

When victorious march of capital accumulation is obstructed it doesn’t stop instead turns violent. For its survival it must crush all obstacles along its path though but it means increasing confrontation with working class. That is where it requires State. If State bound by its compulsions to ‘keep the struggle within bounds’ pleads for restraint, capitalist class unleashes flurry of fury against it. That’s what is happening now. Prime Minister Manmohan Singh, once a blue-eyed boy of investors all over the world, has turned into whipping boy with none to shed tears for him.

Article mentioned above (Economic Times, 27th Dec) moves on stating: “The frustration of India’s business elite with corruption, political paralysis, log-jammed approvals, regulatory flip-flops, lack of access to natural resources and land acquisition battles – to pick a few of the top complaints – has reached a pitch perhaps not heard since India began liberalizing its economy in the early 1990s.”

On one side they are not happy with that State that is not pushing forward neo-liberal reforms (paving the way for further expanding their sphere of free rein of capital) while on other it has failed to crush what they perceive as irritants like mass resistance against land acquisition or day-light plundering of resources. The discontentment among capitalist class played its role in last year’s Anna Hazare campaign when corporates liberally sponsored it and media controlled by them turned it into ‘second struggle of independence’. Equally conspicuous is Indian entrepreneurs including Azim Premji, Anu Aga, Deepak Parekh writing two open letters to Prime minister expressing their concern at ‘growing governance deficit’. Notwithstanding their insipid attempts to acquire high moral ground, it did contribute in creating fervour over a failed State.

With the passage of time this trend has only strengthened; domestic and global investors are now openly and fiercely stinging Indian government hard accusing it of ‘policy paralysis’. The Economist carried a cover page story ‘India losing its magic’ in March 2012 stating ‘the muddle at the top’ could make economy go back to auto rickshaw rate of growth. It lists an array of issues obstructing growth and then moves on to convict “Every one of these problems involves the state, still huge and crazy after all these years”. James Lamont, a columnist in an article ‘India: Direction Uncertain’ in The Finance Times (dated 16th April) laments how they misjudged Manmohan Singh when in 2009 his re-election led to much euphoria amongst investors. He further expresses his deep shock at having failed to imagine Singh, a man who ushered through era of neo-liberalism and presided over a five-year period of unprecedented growth of 9 per cent is now presiding over a rapid fall of Indian economy. In fact he discovered ‘left instincts’ in Sonia Gandhi that allegedly underestimates Singh’s authority.

Another round of criticism was hurled in last week of May when Q4 estimations showed growth having dipped to 5.3%. HSBC termed India ‘a gasping elephant’. Commercial media in India too have adopted aggressive stand and every other tom, dick and harry in it is crying hoarse over ‘policy paralysis’. Credit rating agencies, an organ of global capitalist system too have joined the band-wagon with S&P threatening to downgrade India’s ratings.

Making Working People pay for the crisis

If things are to move further, the process of capital accumulation has to turn violent. Capitalist class’s call for another wave of reforms needs to be seen in this context. They loudly demand cutting interest rates and we saw RBI yielding to the pressure when on 16th April it cut rates by 0.5%. Now they are calling for cutting it further arguing inflation has already come down. Notwithstanding their malicious claims inflation has not ceased its northward march and any further cut in interest rate could only spur it. (Even from capitalist point of view it is not an easy decision. Stagflation is now being openly discussed and that would be a dreadful situation for capitalism).

Another point on neo-liberal agenda is what they call rationalization of (non-existent) petroleum subsidies. Acting in this direction on 23rd May OMCs declared whooping hike of Rs. 7.5 in petrol price. Not content with this, they are now demanding increase in diesel prices and that is a dangerous thing to do. Being a universal intermediary it would have profound effect on inflation that is already at much higher level. Yet another point on their agenda including permitting FDI in retail, a sector employing millions who would be thrown out of the labour market. Then it speaks of PFRDA bill prying on pensions of millions of workers. And most importantly they want ‘archaic’ labour laws to be reformed. Situation is alarming. All of this is bound to wreck havoc. While working class is already reeling under back-breaking inflation and there are no more jobs, with persistent calls for carrying out these reforms capitalist class is pouncing hard demanding ‘more blood, more flesh’. And all this so that astronomical amount of capital they have accumulated could be invested and they could reap higher and yet higher profits from it. Let us not underestimate this – It is akin to calling war against working class.

And how is Indian State fairing? Why is it not obliging to summons of its masters when it is being desperately called for? No one should have illusion that it is not. It is and it has been obliging to its commands all way along and would continue to do so. BUT, it is bound by its compulsion to ‘hold class antagonisms in check’ and its task becomes ever daunting in the times of crisis when very objective situations sharpens these antagonisms and interests of warring classes directly and irreconcilably confront each other.

It is not an easy deal for Indian state to inject another booster dose of neo-liberal policies. Very nature and timing of these ‘reforms’ poses the challenge and brings the State (representing interests of capitalist class) in direct confrontation with masses of the nation in general and working class in specific. In current scenario when political system is rapidly loosing its credibility and capitalist system is unable to create enough number of jobs, these measures could evoke wider discontent damaging the government trading on thin ice.

Inflation, unemployment and all other socio-economic ailments rooted in capitalist systems bites hard and deep to common ordinary men and women of the society. Now inflation has been at higher level for almost 4 years now and petrol prices have gone up as many as 13 times in past 2 years. The capitalist class and State would like to seek solace in the fact that previous petrol price hikes saw only sporadic protests and passionate outbursts from masses without culminating into any sustained campaign against it. And it has been often cited even by few on left to present a gloomy picture of masses being passive and unresponsive.

Point often missed is democratic political framework of the nation though not representative of aspirations of masses is not entirely independent of their plight as well. For example can State be fully relaxed and unconcerned on the eve of petrol price hike? No it can’t be. And more so when it primarily deals with urban working class. It is an easy deal for the state to brutally crush down resistance of marginal sections of the society be it tribals in jungle fighting against naked loot of their precious surroundings providing them with means of survival or to gloss over suicides of reorganized peasants doomed by the introduction of neo-liberal policies in agriculture. But it is qualitatively different when it comes to urban working class. Issues of diesel and cooking gas hike are as inflammable as the products themselves. Decision on FDI in retail too is not an easy one. The sector is relatively labour intensive employing millions. Also petty- sections of society that own many of small retail businesses have significant influence at local-level politics and they can’t be wished away just like that. PFRDA bill too would be strongly opposed by trade unions.

On other front one can see an array of big projects being strongly stalled by mass protests – be it POSCO, Jaitapur or Koodankulam. While it may take longer time for these various struggles of masses against land acquisitions or inflation or for higher wages to acquire shape of mass class consciousness against capitalist system as a whole, rapidly deteriorating economic and social situation is making ordinary man’s struggle for survival more acute and continued onslaught of neo-liberal reforms could only propel him to streets to fight back his very survival. The luxury of being blissfully ignorant of these repercussions can be enjoyed by bourgeois intellectuals or columnist crying hoarse over ‘stalled’ reforms but not by by their political agents in the parliament.

While it might be little early to declare, most likely the current crisis of Indian economy could be drawn out one lasting for longer period unless there is any dramatic revival of global economy. Presently what may appear as mere contradiction between capitalism and democratic framework may soon descend into class warfare. Not fantasizing a revolution, but certainly there would be an escalation in class antagonism in the coming period and we must prepare to intervene.