December 15, 2019

The Perversity of the Neo-Liberal Fiscal Regime-II

Prabhat Patnaik

THE second way, apart from defrauding the states of their legitimate share of resources, in which the centre is attempting to cope with the fiscal squeeze, which it has become subject to under the neoliberal regime, is by privatising a whole range of public sector enterprises.

Not a day passes without the government announcing some measure of privatisation. Minister Hardeep Puri claims that Air India has to close down if it is not privatised, a remarkable statement by a senior government functionary for two reasons: first, if the private buyer is supposed to be able to revive the company (for otherwise why should anyone be buying it), then why can’t the government do the same? Secondly, even if one accepts for argument’s sake that what Puri says is correct, his saying so is most bizarre because it amounts to a signal to potential buyers to scale down their bids for it. A large number of public sector enterprises in the Asansol-Durgapur belt of West Bengal are being sought to be privatised, riding roughshod over the demands of the trade unions. BSNL employees are being more or less forced to accept voluntary retirement, so that the company can no longer remain viable and would have to be sold off. Such examples can be multiplied.

Of course the BJP government, with its total lack of understanding of the significance of the public sector and also with its closeness to the corporate-financial oligarchy, is prone to dismantling the public sector anyway. But now it feels an added urgency for doing so in order to cope with the fiscal squeeze that the economic downturn has brought in its wake.

To stimulate privatisation, international finance capital (and its leading institutions like the IMF and the World Bank) have resorted to a fiddle, namely to exclude the proceeds from the sale of public sector assets from the fiscal deficit; the government can therefore show a smaller fiscal deficit figure, one conforming to the “fiscal responsibility” target, by selling public sector assets. This is a completely illegitimate practice, but it is done for ideological reasons, for effecting privatisation.

The reason why it is illegitimate is quite simple. A fiscal deficit of course has none of the ill-effects on the economy that spokesmen of finance capital claim it has, in a demand-constrained economy, ie, in an economy where there is unemployment and unutilised capacity: it neither leads to any “crowding out” of private investment (since there is no “fixed pool” of savings from which the private sector gets less because of the fiscal deficit, as savings themselves increase with the rise in income that occurs in response to the rise in aggregate demand that is generated by the fiscal deficit); nor does it lead to any inflation, since the economy is characterised by unemployed resources so that a rise in aggregate demand causes an output increase rather than a price-level increase. But even assuming for a moment that a fiscal deficit has all the ill-effects that spokesmen for finance claim it has, the proceeds from privatisation do not eliminate those ill-effects.

If for instance there were indeed a “fixed pool” of savings, from which, if the government borrowed more to finance a fiscal deficit, less would be left for the private investors leading to a “crowding out”, this “fixed pool” will not increase an iota by the privatisation of public sector assets. Likewise, suppose the fiscal deficit would indeed be causing inflation by creating excess demand, then privatising public sector assets would not reduce this excess demand an iota, since the buyers of these assets would not be skimping on their demand for goods and services for purchasing public sector assets.  Thus the sale of public sector assets does not actually close any fiscal deficit; and yet finance capital which vigorously opposes a fiscal deficit is perfectly willing to accept the sale of public sector assets as a means of closing it, ie, as being on a par with taxation.

Put differently, there is a distinction in economics between “flows” and “stocks”. A fiscal deficit which is the difference between the government’s income (a “flow”) and expenditure (another “flow”) is itself a “flow” item; it can be closed through some “flow” adjustment, either larger tax revenue (a “flow”) or reduced “flow” of expenditure. On the other hand the sale of public sector assets refers to a “stock” transaction, involving a property transfer and hence balance sheet adjustments all around, which does not impinge on any “flows”, and therefore cannot possibly mitigate any ill-effects of a fiscal deficit. The fact that the IMF and other institutions of finance capital accept the sale of public sector assets as a supposedly-legitimate means of closing a fiscal deficit only shows their bad faith, the fact that their intellectual position is dictated not by any scientific considerations, but rather by an opportunistic desire to push the ideological agenda of privatisation.

The intellectual dishonesty does not end there. When a private company buys public sector assets, it does so not with resources raised through skimping on its expenditure like some petty shop-keeper, but through borrowing or through foregoing the purchase of some other assets, all of which amount to balance sheet adjustments. Now, if the government has a fiscal deficit of Rs 100, then it would be borrowing this sum from, say, a bank to finance this deficit. But if it privatises public sector assets to the same extent, then the private buyer of these assets would instead be borrowing Rs 100 from the bank to purchase these assets. To say that a fiscal deficit is “bad” for the economy but the sale of public sector assets is “okay”, amounts therefore to saying that expenditure financed by the government’s borrowing Rs 100 from the bank is “bad” but the same expenditure financed by a private entity borrowing from the bank is “okay”! This is totally without any economic rationale whatsoever.

The matter can be looked at in yet another way. A fiscal deficit entails an increase in government debt; it is financed by selling IOUs by the government. Privatisation of public sector assets entails selling government equity to private entities. To say that privatisation is harmless but a fiscal deficit is not, amounts therefore to saying that selling government equity is harmless while selling government bonds (IOUs) is not, which again is totally without any justification, a mere ideological ploy to effect privatisation.

The public sector was set up as a bulwark against the hegemony of metropolitan capital. It was a part of the agenda of unshackling the economy from imperialist domination. Under the neoliberal dispensation of course governments go wooing metropolitan capital; nonetheless the public sector can still play a role by way of putting a limit to the extent to which metropolitan capital and the domestic corporate-financial oligarchy utilise their monopoly position to fleece the country. A government concerned with the interests of the nation, even when it gets caught in the web of neoliberalism, would nurture the public sector to defend national interests against the depredations of foreign and domestic monopoly capital; but not so our Hindutva votaries who denounce all their critics as “anti-national” but hold dear the interests of precisely these monopolists as against the nation. They have no compunctions about dismantling the public sector built up with such effort in the teeth of fierce opposition from imperialism.

The modus operandi of neoliberal fiscal policy is clear from all this. Neoliberalism makes fiscal policy “pro-cyclical” rather than “anti-cyclical”. Revenues drop when the economy experiences a downturn. And to maintain its expenditure, the central government can neither tax capitalists (even though doing so would not hurt post-tax profits one iota compared to what it would otherwise have been if government expenditure had been cut), nor enlarge the fiscal deficit; it resorts to squeezing the states, with dangerous consequences for federalism, and to privatising the public sector which makes the nation further vulnerable to the depredations of foreign and domestic monopoly capital.