Vol. XLIII No. 20 May 19, 2019

Modi’s Feet of Clay

Prabhat Patnaik

NARENDRA Modi has been strutting around the country boasting about his muscularity. But he has feet of clay. In fact no previous prime minister in post-independence India has been as subservient to the US at the expense of the country’s interest, as Modi has been.

Indira Gandhi, whatever her other faults, had stood up to the US, especially during the Bangladesh War when Nixon had contemplated using nuclear weapons against India. Such was her independence that Nixon himself had admitted later that he felt scared of Indira Gandhi and could not look her directly in the eye. Likewise, when the US had once bombed Gaddafi’s house in Tripoli, killing one of his children, India’s then External Affairs Minister B R Bhagat had led a delegation of non-aligned country representatives to visit Tripoli and express solidarity with Gaddafi. Even Chandra Sekhar, who was prime minister for a short time, had asked the US to stop using India as a base for bombing Iraq during the first Iraq war, when he had found that opposition to such action was growing within the country.

Modi however lacks the guts to stand up to US bullying. This is clear from the fact that when Trump announced on Monday,  April 22 that the six-month exemption given to some countries from complying with the unilateral US-imposed sanctions on their buying oil from Iran would expire on May 2, Modi promptly announced that India would stop buying Iranian oil from that date. Such a move is clearly against the interests of the nation, not just its foreign policy, since Iran has traditionally been a friendly country, but its economic health as well; but Modi has no compunctions about kow-towing to the Americans.

The sanctions imposed by the US on Iran are entirely unilateral, a direct consequence of Trump’s unilateral withdrawal from the US-Iran nuclear deal that had been reached under Obama. India is under no obligation to comply with such unilateral sanctions. Indeed External Affairs Minister Sushma Swaraj herself had declared earlier that India would comply only with those sanctions which have the backing of the United Nations but not others that are unilaterally imposed. And yet when Trump cracked the whip, the Modi government tamely jumped.

India is not the only country that is affected by the US decision not to extend the exemption period. There are seven countries which buy sizeable amounts of oil from Iran of which three are particularly important. Apart from India they comprise China and Turkey. But while both China and Turkey protested against the US decision and refrained from accepting it, India did not even utter a word of protest. Modi is often likened to Erdogan of Turkey because of the authoritarianism practiced by both these figures, but even Erdogan showed more spunk than Modi. Since Erdogan is no less neoliberal than Modi, this shows that the acceptance of US diktat is not just directly attributable to the pursuit of a neoliberal strategy per se.

The Modi government has announced that it has made alternative arrangements to obtain oil, as if this fact alone would prevent the country’s economy from being adversely affected by our complying with the US sanctions. If India does not get oil from Iran, then it will have to buy oil from the spot market at much higher prices. The scope for getting oil from other oil producers without having to pay a higher price for it, is limited: OPEC and Russia have reached an agreement about the output that each of them would be producing, and in the absence of fresh negotiations no oil-producing country would unilaterally alter this agreement for fear of causing a free-for-all that would hurt each one of them. Hence even if India manages to import the same quantity of oil as before, it will have to pay a much higher price for it.

This will have two obvious consequences. One is on the rate of inflation which will go up for obvious reasons. And if the oil companies are asked to absorb some of the increase in the imported price of oil in order to temper the cost-push inflationary surge, then this would affect government revenues adversely. The government would then either have to raise larger revenues through other measures, and this would typically mean larger indirect taxes hurting the common people; or it would have to lower its expenditure which would typically entail cuts in welfare spending that would also hurt the common people. Hence whether there is cost-plus inflation arising from higher domestic oil prices or fiscal measures to obviate the need for higher domestic oil prices, the common people will suffer.

The second effect of higher imported oil prices is on the balance of payments. The oil import bill will go up not just because spot oil prices are higher than the prices at which Iran would have supplied oil to India, but also because the spot oil prices will go up owing to India’s larger purchases in the spot market. Since India depends on Iran for as much as 10 per cent of its total oil requirement, the rise in import bill arising for both these reasons will be quite considerable. And to the extent that some other countries too get bullied by the US into not buying Iranian oil and hence also enter the spot market, the spot prices will go up even more, causing further damage to India’s import bill.

At the same time, as the rise in oil prices will have a contractionary effect on the world economy, there will be a corresponding contractionary effect on India’s exports. This, apart from its adverse impact on employment, will also compound the balance of payment problem.

India can ill-afford any additional strain on its balance of payments at this moment. Not only is our current account deficit widening alarmingly, but financing it is also becoming increasingly difficult because of the uncertainty over financial flows into countries like India in the present situation. The US is raising its interest rates which lowers the incentive for finance to move to the “periphery”; besides, Trump’s protectionism, which has put a question mark over the future of the neoliberal order, has also created a tendency for finance to flock to the US, its home base, rather than venture out to the “periphery”.

If the current account deficit becomes difficult to finance then the rupee will depreciate. Indeed in such a situation the very anticipation of a depreciation in the value of rupee can give rise to an exodus of finance, which ironically would cause an actual depreciation. When any such depreciation occurs the fall in the rupee can be quite steep before a semblance of stability is brought about; and such stability within a neoliberal order is typically achieved by introducing deflationary measures involving cuts in the purchasing power in the hands of the people.

In fact some months ago there had been such a fall in the value of the rupee; and that experience can well get repeated at the slightest provocation. Every such fall in the value of the rupee will of course cause an acceleration in the rate of inflation through the cost-plus effects of higher rupee prices of imported inputs, including of oil itself. (This is quite distinct from the cost-plus effects of buying oil at higher spot prices in dollar terms, which we discussed earlier).

When the country’s balance of payments are in such a precarious situation, to impose upon it, quite gratuitously, the additional burden of a higher oil import bill by caving in to American demands for not importing cheaper oil from Iran, represents the height of folly.

The Modi government’s kow-towing to the US thus entails an increased burden upon the people immediately, through higher inflation arising from higher dollar prices of imported oil (or higher taxation as an alternative); in addition it also entails a higher burden upon the people in the future, because of the balance of payments problem we have just discussed. Modi’s timidity in short is going to extract a heavy price from the Indian people.