February 21, 2016

A Government at the End of Its Tether

Prabhat Patnaik

THREE main factors explain why the effect of the world capitalist crisis that erupted in 2007-08 and is still continuing was not felt by the Indian economy for a long time. Each of these three countervailing factors, however, has now run its course, leaving the government with no means of coping with the ongoing crisis. On the contrary, whatever it can do now will only compound the crisis.

The first countervailing factor was the fiscal stimulus that was introduced immediately in the wake of the crisis, which, though nowhere as large as that of China, had nonetheless an anti-recessionary effect. But the fiscal stimulus meant an expansion in the size of the fiscal deficit relative to the GDP. This brought forth  opposition from finance capital which does not like fiscal deficits, because inter alia they undermine the social legitimacy of capital, and of finance capital in particular. They inevitably give rise in the public mind to the question: if the system cannot function without substantial intervention by the State, then why do we need private capital at all? Why shouldn’t the State itself increasingly have its own enterprises, thereby supplanting private capital altogether? And this question gets raised with particular force in the case of capital-as-finance, which has a pure rentier function and for whom even Keynes himself had used the term “functionless investors”.

Capital, especially finance capital, therefore is always keen to maintain the “spontaneity” of the system, and to channel all State intervention for reviving the economy through a promotion of the interests of capital, through providing greater “incentives” to it, rather than through the State itself playing any role independent of capital. Hence larger State expenditure, other than as transfers to capitalists, which is what fiscal deficits typically entail, are always frowned upon by finance capital.

Not surprisingly therefore the “fiscal stimulus” package in India was attacked by neo-liberal economists and by the spokesmen of finance capital who tendentiously attributed the entire malaise of the economy to “fiscal profligacy”, and demanded “fiscal responsibility” instead. The cutback in government expenditure which Arun Jaitley’s budgets have instituted as a result, of which the cuts in MGNREGS are but one manifestation, have thus removed from the scene the first factor that provided a prop to the economy against recession.

The second countervailing factor was an asset price “bubble”, especially a stock market “bubble”, which continued in India even after the collapse of the housing “bubble” in the US. One can even argue that the very collapse of the US “bubble” created the conditions for the emergence or strengthening of “bubbles” elsewhere in the world, including in India.

This occurred for two reasons: first, finance that now no longer had the opportunity of making a “killing” in the US, through short-term speculative gains, started migrating elsewhere in search of such gains, and this very fact created “bubbles” elsewhere. Secondly, owing to the recession in the real economy in the US which followed the collapse of the housing “bubble”, there was a dramatic lowering of interest rates within that country, with both the short-term and the long-term interest rates being driven close to zero. This provided an additional reason for finance to migrate out of the US in search of profitable opportunities; and such emigration gave rise to “bubbles” elsewhere, including in India.

Any asset-price “bubble” has an impact on the real economy by increasing the level of aggregate demand. The apparent increase in wealth which a “bubble” causes increases consumption (via a “wealth effect”); and to the extent that financial asset prices increase, there is a reduction in the cost of borrowing by those wishing to undertake investment which has a stimulating effect upon investment. The Indian economy was no exception to this general phenomenon; and the asset-price “bubble” acted here too as an anti-recessionary factor.




But this has also come to an end. The Sensex which had crossed the 30000 mark on March 4, 2015, following a cut in the “repo” rate by the Reserve Bank of India, experienced a big fall in August. Whatever recovery was staged thereafter has been further reversed of late. In fact on February 11, 2016, there was an 800 point (3.4 percent) fall in the Sensex; and market analysts are predicting that the secular fall would continue, taking the Sensex below 20000 in the coming days.

This fall is partly an expression of a world-wide trend: the continuation of the world capitalist crisis is both leading to, and also being accentuated by, an increase in what is called “bearishness”, ie, the desire on the part of wealth-holders to hold money instead of financial assets. The February 11 fall for instance was a world-wide phenomenon. But additionally, the rise in the US interest rate that has recently been effected by the Federal Reserve Board, which has the effect of sucking in dollars from the rest of the world (ie, discouraging the emigration of dollars mentioned earlier), has an adverse effect on stock markets like India’s which had benefitted from low US rates earlier. The second factor underlying the so-called “resilience” of the Indian economy to the world capitalist crisis therefore has also now run out of steam.

The third factor is one that is usually less discussed. And this consists in the fact that the government encouraged large-scale investment in infrastructure. Since the fiscal deficit route was barred to the government for reasons just discussed, and       since taxing the rich would have been out of the question in a neo-liberal economy subject to significant cross-border capital flows, public investment in infrastructure could not be enlarged beyond a point; the focus therefore was on private investment in infrastructure, and to elicit private investment the government arranged loans for such projects from the nationalised banks.

The problem with any strategy of investment-led growth, however, including of infrastructure investment-led growth, is that even as investment expenditure adds to demand, it also adds to capacity after some time. While building a factory entails expenditure that creates demand, when the factory is completed it also adds to productive capacity. And unless demand keeps increasing continuously, the capacity that is piled up remains unutilised; and, when this happens, the rate of return on such projects falls, to a point where even paying interest on the loans incurred becomes difficult, let alone paying back the loans themselves.





The fact that in the last few days the newspapers have been full of news about the weight of non-performing assets increasing in the balance sheets of nationalised banks, should come as no surprise. These banks have been made to give loans to large corporate houses, particularly for infrastructure projects, and now that several of these projects which have been completed remain unutilised or fetch low rates of return, the repayment of loans has become a problem. And the position of the banks themselves has become precarious. Hence this route for countering the recession too has been closed.

These three factors in turn are also related to one another, which means that their collapses mutually complement one another. If the banks get into a precarious position, then this fact compounds the collapse of the asset price bubble: for instance the news of a sharp fall in the profits of the State Bank of India was a major trigger for a fall in the Sensex. Likewise the collapse of the asset price bubble makes the financial position of many companies precarious, which impairs their ability to repay loans to banks, making the latter even more vulnerable; and so on.

The main point that emerges from all this is that the props which had sustained the Indian economy till now despite the onset of the world capitalist crisis, have collapsed one after another, which is why the economy is now plunging into stagnation and recession. It is noteworthy that the Index of Industrial Production for December 2015 was 1.3 percent below  the level for December 2014.

Faced with this impasse the Modi government has embarked upon its “Make in India” campaign, the idea being to entice foreign capital to locate plants in India for producing goods for the international market; and towards this end all sorts of concessions and blandishments are being offered to foreign capital.

But this grotesque grovelling before foreign capital, whose removal from a position of hegemony in the Indian economy had been the objective of the anti-colonial national movement (and this grovelling is being done by people who are calling everyone else “anti-national” and attacking them with weapons ranging from sedition laws to physical assaults), does not just undermine our economic independence; it is doomed to fail as well.

We saw above that all over the world there is an increase in the degree of “bearishness”. Wealth-holders are keener than before to hold their wealth in the form of money rather than financial assets, and hence by implication in physical assets as well (since financial assets are nothing else but direct or indirect claims on physical assets). Investment therefore has dwindled everywhere and with it the growth rate of the capital goods producing sector. In India at present, within the overall negative industrial growth rate, the highest negative figure is recorded by the capital goods sector. Even in the United States, while the consumer goods sector has a somewhat higher degree of capacity utilisation, the capital goods sector continues to be saddled by large unutilised capacity. When investment as a whole is going down everywhere in the world, to expect that India will be able to get large amounts of foreign investment is a pipe dream.

What is needed for getting out of the crisis is to stimulate domestic consumption, particularly of the poorer segments of the population. This can be done either through a direct redistribution of income from the rich to the poor, or through fiscal means, ie, taxing the rich and using the resources garnered thereby for making transfer payments to the poor, either in cash or in kind, such as free health and education. Doing so however would require an escape from thralldom to globalised finance capital, hence a delinking from imperialist globalisation and a jettisoning of neo-liberal policies.

The “Make in India” campaign runs counter to this. The resources the government would forego on account of it would make the sustenance of even the existing transfers to the poor difficult, which would only succeed in compounding the crisis.