BY Prabhat Patnaik, Economist
THE “Black Monday” when the rupee tumbled to as low as 63 per US dollar and the Sensex took a further fall after already having plunged the day before, is indicative of the seriousness of the malady that afflicts the Indian economy. Three main kinds of explanation have been offered by economic commentators for this malady. Let us examine these seriatim.
The first, put forward by no less a person than Raghuram Rajan, prior to his recent appointment as governor of the Reserve Bank of India, traces it to the fact that the era of “quantitative easing” is coming to an end in the US. The prospect of this happening was announced by Ben Bernanke, chairman of the Federal Reserve Board, on May 22. Till now the Federal Reserve was pursuing a policy of buying government bonds in the market, and in the process keeping the long-term interest rates low in the US economy, while pumping liquidity into the system. This also meant that finance was flowing into other economies where interest rates were more attractive, and thereby shoring up their currencies. In the wake of Bernanke’s announcement, of no more than merely an intention, the long-term interest rates are already hardening in the US, causing an appreciation of the US dollar vis-a-vis the rest of the world’s currencies, especially those of “emerging markets economies ” like Brazil, South Africa, Indonesia and India.
The problem with this explanation however is that the collapse of the rupee did not begin with May 22. In fact, the rupee has been going down for quite some time. True, there has been a sharp fall in its external value in the more recent period, as has been the case with several other currencies, but focussing only on Bernanke’s statement on May 22 as an explanation for its travails is seriously misleading: it glosses over the declining tendency of the currency operating over a longer period.
The second explanation also focuses on the strengthening of the dollar, but traces it to a revival of growth in the US economy. In fact the episode of the rupee’s tumble and the fall in Sensex by 700 that occurred prior to the “Black Monday” was attributed by many to the release of US unemployment figures which showed a decline in this rate. Wealth-holders, it was suggested, were now beginning to move back to the US from several “emerging market economies”, buoyed by the prospects of a revival in its growth, and this fact underlay the depreciation of the latter’s currencies.
This explanation too, like the first one, misses the longer-term tendency for the rupee’s decline. Besides, this explanation runs counter to the first explanation. If long-term interest rates are hardening in the US then that would snuff out its growth prospects. Even the growth that is alleged to be occurring in the US is a matter of dispute, since there has been a change in the GDP estimates of that country, which, many argue, has spuriously overestimated recent growth. In addition, however, such growth as has been occurring is likely to be related to the policy of “quantitative easing” whose end will certainly put a damper upon it. In fact, the best description that has been offered of the state of the US economy is that it “is bumping along the floor”. When it bumps up a little, a lot of noise is made about its recovery; but this noise subsides when it gets back to the floor. This has been happening for quite some time now.
The third explanation for India’s current economic woes focuses on India-specific factors. The most important of these of course is the massive current account deficit, of 4.8 percent of GDP. Since the government itself, committed to attracting foreign investment of all descriptions, thinks that capital inflows can at best finance a current deficit of only 2.5 percent of GDP, a deficit of 4.8 percent is bound to put pressure on the rupee.
WIDENING CURRENT ACCOUNT DEFICITS
But, as already seen, the depreciation in currencies is not confined to the rupee alone; and if the wave of depreciations across countries has to be explained in terms of a widening of the current account deficits in all these countries, then two questions immediately arise: first, why should there be such a widening of deficits across countries? And second, why should there be such a wave of massive depreciations everywhere even though there are major differences across them in the ratio of current deficits to GDP? The pressure on the rupee owing to India’s widened current account deficit in short, while indisputable, needs to be located within a larger context.
Then there are other kinds of India-specific explanations: Pranab Mukherjee’s stint as finance minister, when he presented a budget that ( by trying inter alia to plug the “Mauritius route” for the entry of foreign direct investment ) undermined the “confidence of investors” about India’s commitment to “reforms” (!); Chidambaram’s loss of nerve in pursuing “reforms”; the recent “desperate” measures consisting of a clutch of capital controls and import restrictions that the government has introduced for shoring up the rupee which have frightened investors; and so on. But these explanations, usually picked up from random gossip, or stray reactions of speculators, are both intellectually unconvincing in themselves, and also oblivious of the depreciation of currencies vis-a-vis the US dollar that is occurring across the world; they need not be taken seriously.
It follows then that the standard explanations which have been advanced by commentators to explain India’s current economic travails are unconvincing. While the India-specific explanations do not reckon with the similar experience of other countries, the more general explanations, relating to all countries experiencing currency depreciations, focus only on short-term factors, and lack any structural location. What is needed is a general explanation (to which some India-specific factors may be additional contributors) which is located in the structure of contemporary capitalism. And any such explanation has to reckon with the deep and protracted crisis that world capitalism is currently experiencing.
The talk of the US coming out of this crisis, is, as we have seen, unfounded. Europe continues to be enmeshed in it with no end in sight. And now even the hitherto rapidly-growing third world economies are coming under its impact. The growth rate is palpably slowing down in China; it has slowed down in India; and the Chinese slow-down is beginning to affect Brazil and other Latin American countries which are major commodity exporters to China. In short, the world recession is now spreading. There was a period when because of the domestic fiscal stimulus, non-metropolitan economies gave the impression that they would escape the recession. They might have done so if the recession itself had been a brief affair; but given its protracted nature it has eventually affected them too. And the modus operandi of this spread is the widening current deficit.
If the growth rate slows down in the advanced capitalist economies but does not do so in these third world economies, then their imports continue to grow rapidly even as their exports dwindle. This has two effects: one, a reduction in their level of aggregate demand; and two, a widening of their current account deficit. (Some countries like China may escape such widening of current deficit but others are bound to be affected by it). Even if domestic fiscal stimuli can counter the first effect they cannot counter the second. Continuing recession in the advanced capitalist world therefore worsens the current deficits of the hitherto rapidly-growing third world economies.
GREATER DISTRESS TO THIRD WORLD PEOPLE
At the same time however, it tends to dry up the flow of finance from the metropolitan economies to these economies, because of the general loss of exuberance among speculators which a recession inevitably engenders. For a while, no doubt, such drying up may not happen because of the formation of property-price or stock-market “bubbles” in these economies, but as these “bubbles” begin to collapse, the flow of external finance too dries up. The combination of larger current deficits and drying up financial inflows inevitably puts pressure on the currency; and to put a restraint upon the depreciation of the currency domestic expenditure is curtailed, which chokes off growth. The combination of currency depreciation, accelerated inflation (because of such depreciation), and choking off of growth that we find in India and a host of other “emerging-market economies” is a fall-out therefore of the world capitalist crisis.
This is not a new story. World capitalist crises inevitably bring greater distress to the people of the third world, even compared to the pre-crisis levels of acute distress. This is exactly what had happened in India in the 1920s and 30s when the peasants and agricultural labourers had experienced acute declines in their incomes. The move away from the free market, the entrusting of the responsibility of protecting the people against the vicissitudes of the market, the delinking from the world economy through capital controls and trade restrictions so that the State could discharge this responsibility, had been a result of that experience.
In short, neo-liberalism is not a new discovery of wisdom. Economies in the world, including in particular the Indian economy, had experienced “economic liberalisation” with a vengeance in the colonial period, until some halting departures were made in the wake of the crisis in the late twenties and the thirties. It is only after independence that a full-scale dirigiste regime was introduced. But its rationale lay in the experience of the crisis of the inter-war years.
As the world economy was growing in the nineties and the first few years of the current century, neo-liberalism which had replaced dirigisme appeared to many, especially to those from the urban middle class who benefited from it (though not to the workers and peasants who were victims of it), as the acme of wisdom. But now with a prolonged crisis reminiscent of the 1930s once more engulfing world capitalism, the dangers of neo-liberalism, the fact that it makes both its earlier beneficiaries and its earlier victims, worse off, are beginning to become clearer.
A struggle between two contradictory positions therefore is going to dominate economic discourse in the country in the days to come. The first of these, which offers little hope, presses for sinking deeper into neo-liberalism as the means to overcome the crisis; the second of these, the only one that offers any hope, presses for extricating the economy from its clutches as the means to overcome the crisis.