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.
courtesy :
People's Democracy
